10

Market pricing

Market pricing is defined by the CIPD (2017) as ‘a system of collecting data on the pay rates for similar jobs in other organizations to establish their market rate and track movements in those rates. The aim is to set the organization’s own pay rates at an appropriate level to recruit and retain the staff it needs.’ It is based on market rate analysis.

The CIPD also comments:

Although the concept of a market rate for a job is common, there’s no such thing as an accurate single rate of pay for a job or role, and rates may vary within the same occupation and in the same location. It’s important for employers to consider carefully how to interpret the data collected and where the organization wants to position its salary and total remuneration levels in relation to the market.

It was reported by XpertHR (2012) that 95 per cent of respondents in the UK are now using market-linked pay comparisons in some form. A survey by WorldatWork in 2013 established that in the United States: ‘Market pricing continues to well outpace all other methods as the dominant form of job evaluation with between 67 per cent and 73 per cent prevalence, depending on job category. Point factor is the second most prevalent method, but is well behind at 15 per cent to 18 per cent.’

Market pricing can be used generally in the design of graded pay structures. Specifically, it is used to determine the rates of pay for jobs in a spot rate or individual job range system. A spot rate is a rate for a job or an individual, which is not fitted into a grade or band in a conventional grade structure and does not allow any scope for pay progression. An individual job range is in effect a spot rate in which there is a defined range for pay progression. Market pricing can also provide the basis for fixing rates of pay in a broad-banded structure (see Chapter 11) and for informing the design of market groups in a job family structure (also see Chapter 11).

In this chapter consideration is given to:

· the two applications of market pricing;

· the case for market pricing;

· the process of market rate analysis;

· the limitations of market pricing.

Applications of market pricing

The term market pricing is used in two senses. First, it generally describes the process of analysing market rates to ensure that the rates of pay for individual jobs are competitive and to inform the design of competitive pay structures. In this sense, market pricing may be associated with conventional job evaluation in order to develop a pay system that is internally equitable as well as externally competitive. This is a desirable aim but one that may be difficult to achieve. Paying the competitive rate for a job can easily upset internal relativities as established by job evaluation.

But market pricing has a second meaning. It can denote a method of directly pricing jobs on the basis of external relativities with no regard to internal relativities. This was called ‘extreme market pricing’ by Ellis et al (2004). As a means of valuing jobs this can be regarded as a form of job evaluation, as it is in the United States. However, a strict definition of job evaluation – the one adopted in this book – is that a job evaluation scheme is solely concerned with internal relativities. Market pricing in its first sense as defined above is used separately to determine external relativities.

The rationale for extreme market pricing can be expressed in the adage ‘a job is worth what the market says it is worth’. The only thing that counts is to be competitive and this governs the rates for individual jobs and the design of pay structures. Relativities within the organization reflect relativities in the marketplace. Extreme market pricing means that the organization does not need to bother with traditional job evaluation. As Zingheim and Schuster (2002) asserted: ‘The history of pay involves entitlement disguised as a nearly singular emphasis on internal equity.’ The future as they see it ‘depends on our ability to develop and implement a base salary system that is anchored in the marketplace’. One of the problems of extreme market pricing is that relying on information about job relativities in the marketplace to determine internal relativities can lead to transmitting inequities from the marketplace to the organization, for example, between jobs filled mainly by women and those carried out mainly by men. Organizations that adopt an extreme market pricing approach can be described as ‘market driven’ and 16 per cent of the respondents to the 2017 e-reward job evaluation survey stated that they were in this category. Extreme market pricing is more prevalent in the United States than in the UK partly because equal pay legislation is weaker in the United States and partly for the reason given by Zingheim and Schuster – a fundamental belief in the supremacy of the market.

However, concerns about the legitimacy of extreme market pricing do not obviate the need for market rate analysis.

Requirements for effective market rate analysis

Market pricing depends on good market data, the validity and reliability of which is affected by three factors:

1. Sample frame – the degree to which the sample of organizations from which the data has been collected is fully representative of the organizations with which comparisons need to be made in such terms as sector, technology or type of business, size and location.

2. Timing – the extent to which the information is up to date or can be updated reliably. By their very nature, published surveys, upon which many people rely, can soon become out of date. This can happen the moment they are produced – pay levels may have changed and people may have moved in or out since the date of the survey. Whilst it is not possible to overcome this completely, as data must be gathered and analyzed, surveys which aim to have as short a time as possible between data collection and the publication of results are likely to be of more use than those with longer lead times. Estimates can be made of likely movements since the survey took place, but they are mainly guesswork.

3. Job matching – the extent to which good job matching between internal and external jobs has taken place. Inadequate job matching is a major cause of inaccuracies in the data collected by market analysis. So far as possible the aim is to match the jobs within the organization and those outside (the comparators) so that like is being compared with like. It is essential to avoid crude and misleading comparisons based on job titles alone or vague descriptions of job content such as those contained in advertisements. It is first necessary to ensure that the sample frame is adequate – a broad match is needed between the organization and the types of organizations used as comparators in terms of sector, industry classification, size and location.

The various methods of job matching in ascending order of accuracy are:

· Job title: this can be misleading. Job titles by themselves give no indication of the range of duties or the level of responsibility and are sometimes used to convey additional status to employees or their customers unrelated to the real level of work done.

· Brief description of duties and level or zone of responsibility: national surveys frequently restrict their job-matching definitions to a two- or three-line description of duties and an indication of levels of responsibility in rank order. The latter is often limited to a one-line definition for each level or zone in a hierarchy. This approach provides some guidance on job matching, which reduces major discrepancies, but it still leaves considerable scope for discretion and can therefore provide only generalized comparisons.

· Capsule job descriptions: special surveys by groups of employers (pay clubs) and ‘bespoke’ surveys frequently use capsule job descriptions that define main responsibilities and duties in about 100 to 200 words. To increase the refinement of comparisons, modifying statements may be made indicating where responsibilities are higher or lower than the norm. Capsule job descriptions considerably increase the accuracy of comparisons as long as they are based on a careful analysis of actual jobs and include modifying statements. But they are not always capable of dealing with specialist jobs and the accuracy of comparisons in relation to levels of responsibility may be limited, even when modifiers are used.

· Full job profiles, including a factor analysis of the levels of responsibility involved, may be used in special surveys when direct comparisons are made between jobs in different organizations. They can be more accurate on a one-for-one basis but their use is limited because of the time and labour involved in preparing them. A further limitation is that comparator organizations may not have available, or be prepared to make available, their own for comparison.

· Job evaluation can be used in support of a capsule job description or a role profile to provide a more accurate measure of relative job size. A common method of evaluation is necessary and this is often provided through a management consultant’s scheme. A number of international and UK consultancies now claim to be able to make this link, either through a point-factor scheme or a levelling approach. This approach will further increase the accuracy of comparisons but the degree of accuracy will depend on the quality of the job evaluation process.

The process of market analysis

The process of market analysis consists of the following steps:

1. Decide on the benchmark jobs for which market rate data will be collected.

2. Identify potential sources of market rate data and select the most appropriate ones.

3. Assemble the data.

4. Analyse and interpret the data from the various sources.

Decide on benchmark jobs

The survey should aim to collect data on a representative sample of benchmark jobs. The jobs selected should be ones for which it is likely that market data will be available. However, there are usually some jobs that are unique to the organization and for which comparisons cannot be made. When conducting a market pricing exercise it is necessary to make a judgement on the positioning of these jobs in the pay structure on the basis of comparisons with the benchmark jobs. A point-factor or matching evaluation scheme, if available, helps to make these comparisons more accurate.

Sources of market rate data

There is a wide variety of sources of varying quality and it is advisable to select more than one to ensure that a spread of information is obtained. Because it is unlikely that precise job matching, a perfect sample, and coincidence of timing will be achieved it is best to obtain data from more than one source. The 2013 WorldatWork survey found that over 40 per cent of respondents used three or more sources.

Ultimately, a judgement has to be made about market levels of pay and this will be helped if a range of information is available that enables a view to be taken on what should be regarded as ‘the market rate’ for internal use. This is more convincing if it has been derived from a number of sources and when this occurs it is called a ‘derived market rate’. In choosing data sources it is important to take account of how easily replicable the analysis will be in future years. Trends can only be identified if a consistent set of sources is used and those sources are reasonably stable. A list of the main sources and their advantages and disadvantages is given in Table 10.1.

TABLE 10.1 Analysis of data sources

Published surveys that are readily accessible and are based on a large sample can be used to back up individual or club surveys. If the information can be obtained online, so much the better. But it has to be relevant to the needs of the organization and particular attention should always be paid to the range of data and the quality of job matching. General market data can be supplemented by specialist surveys covering particular jobs. Should the quality of job matching be important, an individual survey can be conducted or a pay club can be joined if there is room.

Market intelligence and published data from journals and associated sources should always be used as back-up material and for information on going rates and trends. They can provide invaluable help with updating.

Although the analysis of job advertisements has its dangers, it can be used as further back-up, or to give an instant snapshot of current rates, but it is risky to rely on this source alone.

Published surveys are of widely varying content, presentation and quality and are sometimes expensive. When selecting a published survey use the following guidelines:

· Does it cover relevant jobs in similar organizations?

· Does it provide the information on the pay and benefits required?

· Are there enough participants to provide acceptable comparisons?

· So far as can be judged, is the survey conducted properly in terms of its sampling techniques and the quality of job matching?

· Is the survey reasonably up to date?

· Are the results well presented?

· Does it provide value for money?

Assemble data

A market rate analysis exercise needs to be project-managed, especially when data from a number of different sources has to be collected. Account should be taken of the publication dates of surveys and the time needed to conduct a special survey or generate information from a pay club.

Interpret and present market data

Data needs to be interpreted by reference to the details provided from each source and by assessments of its reliability, accuracy and relevance. If data has been obtained from a number of sources these will also have to be interpreted to produce a derived market rate, which will be used as the basis of comparison.

Limitations of market pricing

The effectiveness of market pricing depends on getting the right data – accurate information on the rates for jobs in the marketplace that can be matched with comparable jobs within the organization. The problem with achieving this ideal state is the nebulous nature of the concept of a market rate.

Establishing what the market rate for a job is can be a matter of judgement rather than certainty. All too many managers and senior executives – and, indeed, many employees – commonly believe that it is not only possible, but relatively easy, to establish a ‘correct’ rate for any given job, in any industry, in any location, for any age or experience level, preferably to the nearest pound. But accurate market rate information may be difficult to obtain. Pay data is based on complex decisions. It is rare for two companies, even within the same industry and location, to be managed in the same way. Different corporate values, variations in the ‘pay stance’ adopted by organizations (where they want their pay levels to be in relation to market rates), perceptions of the contribution of each job to the effectiveness of the organization, and the experience and performance of the individuals holding the jobs all impact on the remuneration paid to people in apparently similar positions.

Ultimately those differences are reflected in the market. There is always a choice of rates. No survey is able, despite the claims of some surveyors, to provide a single ‘right’ rate of pay for any position, or range of positions. Employees in effect have their own market rate, depending on their expertise and ability and the degree to which their talents are unique. This individual ‘market worth’ varies widely and is often as much a matter of perception as of fact. When making comparisons between internal and external rates for jobs the aim is to compare like with like. But it may be difficult or even impossible to obtain precise matches between jobs in the organization and jobs elsewhere. ‘Like’ jobs may not exist. The comparisons may be approximate and the outcome is that the range between the highest and lowest levels of pay for a job as established by an individual survey can be as much as 50 per cent or more. Different surveys will produce different results depending on the sample of organizations covered, the quality of matching and the timing of the survey.

The translation of pay market data into an acceptable company pay structure or competitive pay levels for individuals is a process based on intuition, judgement and compromise. Advocates of extreme market pricing believe that the only required feature of a pay policy is that it should be competitive. Internal equity is unimportant. They assert that it obviates the need for spurious attempts to establish comparative worth through formal job evaluation. They claim that market rates are ascertainable facts not subject to the judgements made using job evaluation schemes. However, this claim is specious; judgements have to be made about market rate data just as they have to be made in any type of job evaluation. Market pricing cannot guarantee valid results.

Market pricing means striking a balance between the competing merits of the different sources of data and extracting a ‘derived market rate’. But the judgements will be more accurate if they are based on the systematic analysis of valid and reliable data gained from reputable published surveys, established ‘pay clubs’ or well-conceived surveys conducted by the organization.

Many people believe that a further limitation to market pricing is that it ignores principles of internal equity. They claim that a pay structure based on market pricing will distort internal relativities and lead to unequal pay. The counter-argument is that pay structures cannot ignore external relativities and the use of such devices as market supplements (payments in addition to the rate for a job as determined by internal equity which reflect market rates) will unavoidably create internal inequities. But when market supplements are used, at least the basic structure has been designed in accordance with the principle of establishing comparable worth and supplements can be identified as such and objectively justified. Moreover, it is generally recognized that reliance on market pricing is likely to reproduce within the organization existing inequities between the pay of men and women in the marketplace.

The facile assumptions of many of those who support extreme market pricing have been challenged by a number of commentators. Babcock et al (1996) highlighted the dangers with pay surveys of inaccurate matching of jobs and that the choice of pay comparators can carry the risk of ‘self-serving bias’, especially in formal negotiations over pay and conditions. Schmidt and Dworschak (2006) coined the term ‘mimetic wages’ to caricature the way many private-sector firms will seek only to mimic or match the wages of competitors without systematic analysis and primarily as a defensive retention strategy. Findlay et al (2013) noted that the choice of comparator significantly affects the outcome. And as Brown et al (2016) pointed out:

For those saying they have abandoned inflexible job evaluation methods in favour of external market pay determination, the whole question of how surveys compare and measure jobs in order to gather their pay level data, other than simple alignment of job titles, makes this a somewhat tautological argument.

Such attacks on the naïve assumption that extreme market pricing is an easy solution to the problem of maintaining a competitive pay structure may be justified. But it is still necessary to track market rates in order to take account of them when making decisions on pay levels and structures. What must be recognized is that it is essential to make every effort to achieve a good match when making comparisons and to set up an appropriate sample frame. It is also necessary to remember that market rate information will seldom if ever be definitive and that judgement and approximation are required when assessing the results of market rate surveys.

References

Babcock, L, Xianghong, W and Lowenstein, G (1996) Choosing the wrong pond: social comparisons in negotiations that reflect a self-serving bias, The Quarterly Journal of Economics, 111 (1), pp 1–19

Brown D, Bevan, S and Rickard, C (2016) A review of pay comparability methodologies, Institute for Employment Studies [Online] https://www.gov.uk/government/publications/a-review-of-pay-comparability-methodologies [accessed 1 May 2017]

CIPD (2017) Market pricing and job evaluation [Online] https://www.cipd.co.uk/knowledge/strategy/reward/market-pricing-factsheet [accessed 26 May 2017]

Ellis, C M, Laymon, R G and LeBlanc, P V (2004) Improving pay productivity with strategic work valuation, WorldatWork Journal, Second Quarter, pp 56–68

e-reward (2017) Survey of Job Evaluation, Stockport, e-reward

Findlay, J, Findlay, P and Stewart, R (2014) Occupational pay comparisons – easier said than done? Employee Relations, 36 (1), pp 2–16

Schmidt, W and Dworschak, B (2006) Pay developments in Britain and Germany: collective bargaining, ‘benchmarking’ and ‘mimetic’ wages’, European Journal of Industrial Relations, 12 (1), pp 89–109

WorldatWork (2013) Job Evaluation and Market Pricing Practices, Scottsdale, AZ, WorldatWork

XpertHR (2012), Using Market-pay Comparisons, London, XpertHR

Zingheim, P K and Schuster, J R (2002) Pay changes going forward, Compensation & Benefits Review, 34 (4), pp 48–53