The overall purpose for collecting market data is to make informed decisions about the compensation program. These decisions involve pricing jobs, analyzing pay trends, identifying pay practices, and establishing a salary structure.
TYPES OF SALARY SURVEYS
A salary survey is a survey of the labor market to determine the going rates for benchmark jobs. The primary source of compensation data are salary surveys that take place on a regular basis, quarterly, annually, or biannually. These surveys are run by consulting firms and survey companies where they collect employee data from human resource departments based on benchmark jobs. The secondary, which are becoming more popular, are survey databases that purchase these surveys and then apply algorithms to come up with larger sample sizes and more specific data. For example, if a survey does not have data for a location, their logarithms take existing data and creates data that represents that labor market.
Salary surveys are either focused on general industry, geographic location, or specific industry. Technology and life sciences companies have the most robust data because the industry is so competitive, and jobs are ever evolving with the types of products and services they provide. Other common industry surveys are healthcare and financial services. Professional service organizations have limited industry specific surveys, and those surveys tend to be specialized (e.g., focusing on financial services consulting only).
Some salary surveys can be purchased without participation and others require participation. There is a trend of companies wanting the data but not wanting to provide their data (lack of time, resources, etc.). Because of this issue, it is often difficult to find a survey with a full scope of company’s direct talent competitors.
To capture the talent competitors for clients, in the past compensation consulting firms have conducted special, ad hoc surveys. The reason this is not used as often any more is because it is extremely time intensive and costly, and often does not yield the results desired due to the low response rate. The response rate is approximately 10%, so one would have to invite 100 companies to get 10 responses and those responding may not provide complete data on all the jobs in the special survey.
In any case, collecting data on what competitors pay, whether contacting them informally or conducting a formal survey is governed by the Sherman Antitrust Act of 1890, which was enacted to ensure competition and eliminate monopolies. It has been determined through the courts, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) that conducting one’s own survey could be deemed anti-competitive price fixing when the element of collusion to “fix the cost of labor” is present. Anti-trust safety zone steps established by DOJ and FTC are:
- An independent third party (consultant, academic institution, government agency or trade association) should manage the survey.
- Data provided by survey participants must be more than three months old.
- Use at least five survey participants, with no individual participant’s data representing more than 25 percent weighted basis of a given statistic.
- The results must be reported so recipients cannot determine specific participant data.
The other types of salary data that are available are self-reported surveys, in other words, the person in the job is reporting their own data. These surveys have no descriptions, just titles, and are not reliable because the data is crowd sourced and cannot be validated. Some examples of crowd sourced data include Glassdoor and job search sites like Indeed. People who report their own data do not align to job titles accurately whereas survey companies rely on benchmarks, and rigorous quality control to ensure data with integrity. The data is reported by Human Resource departments who are knowledgeable and report all employees in a job.
Salary structures are extremely common in companies of all sizes. The most prevalent way to develop a salary structure is with market data. Creating a strong foundation for building a total rewards program, communicating internal equity and fairness, and reinforcing company culture and values are reasons for having a salary structure. Salary structures greatly enhance a company’s operational effectiveness and provide a tool for management to make pay decisions.
The advantages of having a salary structure for the organization are:
- Clearly communicates compensation to new hires and prospects
- Ensures internal equity across the organization with a focus on the market
- Establishes the desired degree of consistency and flexibility in making pay decisions
- Ensures pay is effective in attracting the desired caliber of talent
- Enables better management of employee compensation relative to performance
- Employees understand what determines their base salary thereby increasing satisfaction with pay
- Defines the income opportunity in salary for current position and other positions of interest
- Employees feel that they are compensated fairly
- Ensures market competitiveness of positions
- Establishes pay guidelines for promotions, transfers, and special assignments
There are different types of structures that can be tailored to a company based on the need and culture. The most common is to align jobs with similar market medians to one grade. This means two vastly different functions have the same range because the market dictates the compensation.
Another approach is to have a unique range for every job. This is common for executive positions, and recently making a comeback for non-executive jobs. Lastly, companies may place jobs of a similar level in the same grade, e.g., entry level professional in the same grade even though the market data is quite different. This combined with individual job ranges can be used to communicate to employees that the grade is based on internal equity but the range is specific to the market.
Therefore, without market data and a structure it can be difficult to communicate the basis for the company’s compensation to employees. It is not a best practice for companies to share individual employee compensation, and so it can be difficult to demonstrate fair and equitable compensation to employees.