MONITORING EXTERNAL RELATIVITIES

One of the most important pay policy decisions an organization must make is its competitive stance - how it wants its pay levels to relate to the market. Its stance may be to pay above the market, to match the market or to pay less than the market.

Information on competitive rates and trends can be obtained by means of pay surveys. These can be used to establish the extent to which pay levels are generally keeping pace with the market or whether any particular groups of employees are out of line. The information can be obtained from published, specialized or 'club' surveys and databases. Attention should be paid to trends as well as the distribution of market rates for individual jobs.

Care should be taken to include in the selection of benchmark jobs chosen for comparison purposes any occupations or market groups which are particularly sensitive to competitive forces.

The information on external relativities together with general data on current pay practices can be summarized and charted as illustrated in Figure 1. This shows:

• the pay practice line - the average of the actual pay of job holders in each grade;
• the pay policy line - the line joining the reference points in each grade;
• the median and upper quartile market rate trend lines applicable to the benchmark jobs which are used for pay comparisons.

 

Figure 1: Analysis of pay structure policy and practice in relation to market rates

Particular attention should be paid to the market relativities of key jobs in the various occupations or job families.

This analysis will indicate any need for general market rate increases or a case for looking at the competitive position of particular job families or individual jobs.

Whenever any action is taken to deal with market forces by, eg setting up separate market groups, paying market rate premia or deliberately paying high in the range for some market-sensitive jobs, the aim should be to make explicit and identifiable any compromises with internal equity that have been made in response to market pressures.

Market-place Matching

A decision has to be made on the point in the review period when the aim will be to achieve the chosen competitive stance. An organization is most competitive at the start of the review period and gradually loses ground as pay inflation inevitably takes place in the market. It is necessary for the organization to project the point in the review period where it wants to achieve its competitive position.

There are three basic approaches to making this projection:

1. Lead/lag - project the position to half-way through the review period, which means that the organization will lead the projected market for the first six months and lag the projected market for the next six months.
2. Lag/lag - select the start of the review period, in which case the organization will lag the projected market for the whole of the review period as the market pulls ahead of the policy.
3. Lead/lead - project the position to the end of the review period so that the organization will lead the market for the full review year as the market gradually catches up with the policy.

Clearly, the lead/lead approach is the most competitive but also the most expensive.