How to Determine Job Market Value

When it is time to make an employee an offer, many small and midsized companies find themselves at a loss about calculating employee compensation. Part of the problem is failing to determine the overall job market value and how that impacts pay.

Without a bona fide in-house compensation expert, lacking information on salary and benefits trends, and not knowing how to estimate employee compensation, they sometimes resort to guessing games based on insufficient data of questionable quality. This is likely to put them at a disadvantage when negotiating compensation.

“Many clients say, ‘I do not know what I need to be paying,’” says Barbara Schneider, director of staff sourcing for Oasis Outsourcing in Jacksonville, Fla. “Often a client is not offering competitive pay.”

What can companies with tens or hundreds of employees do to ensure that they are setting salaries that will bring in and keep the best possible talent, without overextending? We asked a few professionals who deal with these issues every day for their advice.

Typical Approaches, From Random to Research-Based

Companies with fewer than 1,000 workers often take one of three approaches to determine job market value and calculate employee salary, according to Al Lee, director of quantitative analysis at PayScale in Seattle:

• Employers may ask a recruiter what the most recent hire into a similar position was offered.
• They might simply choose a dollar figure, based solely on anecdote and instinct.
• They may look at employee compensation data from a broad range of sources to find an average salary, like from the Bureau of Labour Statistics, to free or inexpensive resources like information on Salary.com or PayScale.com, or they may use survey reports from major HR consulting firms that may cost thousands of dollars.

A lone recruiter’s anecdotal experience, however pertinent, is unlikely to provide broad enough information about labour statistics and trends and compensation planning. Executives who depend on this information risk poor hires on the one hand and excessive labour costs on the other.

The disadvantages of the second approach—essentially pulling a number out of the air—seem obvious. But this road is often taken by many executives at financially strapped firms. If you set a fixed salary for a hire with the attitude of “We will get the best techie that can be had for $40,000,” you may end up paying too much, especially if all you need is someone to set up and maintain a simple PC network.

But, setting an arbitrarily low starting salary, even in an economy threatening to workers, carries its own risks. “At any price point, you can always get somebody, but they may not be able to do the job,” says Lee.

Dig Deep for Meaningful Job Market Value Data

The most prudent approach to determine the broader value of the job market is based on research involving, at a minimum, hundreds of employers or thousands of workers. Salary surveys from blue-chip consulting firms like Hewitt or Mercer are one avenue, though not the cheapest.

Compensation information available online from companies like Salary.com is sufficient for many small to midsized firms. “Salary.com has a free offering that gives a really nice range from which my clients can work,” says Schneider.

When employers do delve into salary data, it is important that they go deep enough to emerge with a well-rounded perspective, according to Susan Schoenfeld, senior legal editor at Business & Legal Reports in Old Saybrook, Conn. “Many times small and midsized employers use generic numbers and get scared,” says Schoenfeld. “But if they drill down far enough in the demographics of their labour market, they will probably find that they do not have to pay as much as they feared.”

Interpret Data in the Context of Your Organisation

Some recruiters like to supplement their broad-based job market value and salary research with anecdotes from today’s labour market. “I sometimes look at Monster to see what real people are earning now,” says Schneider. “I will plug in the details and find out what candidates want and what they are making now. That, to me, is tangible here-and-now information that my clients need.” But anecdotal information such as this should only be used together with more broadly based data.

Unlike custom research, the relevance of standardised salary reports, whether presented online or in print, is limited by the categories used to create the reports. For example, “Job titles and their associated responsibilities are not always consistent across companies,” according to a market value article from Salary.com.

These sources typically attempt to determine employee compensation based on the value of specific academic degrees or other training, regional and local variations in pay, and other factors. But they cannot capture every variable relevant and necessary to calculate employee salary to every position that comes open.

Real-World Caveats for Compensation Research

Some experts say that the optimal employee compensation for a given job cannot be determined out of the context of a specific employer. “We believe in demand-driven pricing,” or setting compensation according to the value of the position in the organisation, says Jean-Pierre Sakey, president of Headway Corporate Resources in Raleigh, N.C.

In the real world, you might feel pressure to extend the salary range with which you began the talent search so it’s better aligned with current job market value. “You may need to make an adjustment if you want to land a top-ranked individual,” says Sakey.

But Schneider urges caution to the manager who is making a job offer to a star or overqualified candidate that is significantly above what incumbents at the same level are earning. “If you have several people doing the same job, you have to be careful with issues of discrimination,” she says.

And, of course, extraordinary situations like economic recessions can create large and unpredictable disruptions in pay scales in specific occupations. “Some investment bankers and analysts will see their compensation change dramatically,” says Sakey. “But in general, labour pricing is not that variable according to whether the economy is up or down.”

Regardless of the economic environment, it is important to keep employee compensation structures up to date. “Once you have set those compensation levels, make sure you reassess pay structures at least every three years,” says Schoenfeld. “Also watch those annual pay surveys to make sure you are competitive year to year.”

Match Your Job’s Market Value to the Best Candidates

The fact of the matter is that money talks—and job seekers are listening. But the challenge is finding that nexus point where job market value and qualified candidates meet. At Monster, we are happy to do the introductions. Our hiring tools have been helping employers like you find top performers regardless of the job market. Learn more about Monster’s hiring tools and how you can post a job for free today.