Market salary denotes a salary that a labour market pays for a particular job. The market salary can be categorised by various factors such as geographical location. From a company perspective, a market salary is often derived from what the company considers to be its target market position.
Market salary comparison
The only way to determine a market salary is to compare your pay to that of your target market. Employers frequently carry out market salary comparisons to remain competitive. Those that delay in carrying out the market salary comparisons find themselves doing "market catchup", often at a huge cost to the business.
Defining the market
When companies gather or purchase salary survey information, they do so because they want to remain competitive. My experience helping companies with market salary information shows that companies define the labour market differently to identify market salaries for various positions.
The most credible way to identify a true market salary for a role is to identify those sectors where you are losing the skills for a particular role and gather market salaries from that sector. Let us take an example of the Accountant role. While accountants can work in an organisation and any sector, an organisation may lose this skill to specific sectors such as the mining and banking sector. In defining the market salary for an accountant, it would make more sense for to gather data from these two sectors and then compare the salaries to what they are paying people in this role. This company can set competitive salaries for accountants to match the market salary offered by these particular sectors.
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Companies sometimes rely on generic surveys to gather market salary for an accountant, as already outlined above. Where companies are not concerned about where they are losing staff, it may be helpful to consider location. Let's talk about an example of a company wanting to hire an accountant to work in a particular geographical location. It makes sense to gather salary data from that geographical location to set a market salary for an accountant.
Geographical restriction in gathering market data helps in that such data factors in the cost of living for that area. Salaries vary by geographical location because employers consider the cost of living in that area when they pay staff.
You will not be able to accurately determine a market salary for an accountant without factoring in the geographical location where the role holder will work.
For that reason, when setting the market salary for any role, factor in the geographical location when gathering data.
What market salary is ideal?
When determining a market salary for a role, employers target various market positions depending on their ability to pay and sustain such salary. Sometimes employers are forced to adopt a high market salary position because the skill is in high demand and attracts a premium market salary. Sometimes, an employer is forced to set a high market salary for a role because of the high bargaining power the individual going into such a role may possess.
Employers often set pay policies that indicate what market salary position they would like to aspire for. The common market positions are the 25th, 50th and 75th percentile. We have seen others targeting market salaries around the 90th percentile.
The 25th percentile target
A market salary set at the 25th percentile aims to pay staff at the lower quartile of the target market. This means that when a company pays a market salary pegged at the 25th percentile, it pays better than 25% of the target market. This is the bottom 25% of the market. Companies that set a market salary at the 25th percentile are often poor performers who cannot pay competitive market salaries. If a company peg a market salary at this level (lower quartile), it is likely to face challenges in attracting and retaining employees. I am yet to see any company wanting to pay at this level deliberately. All the employers I have seen paying at this level are often forced by circumstances around their inability to pay at better target market salary positions.
The 50th percentile target
When an employer pegs a market salary at the 50th percentile or the median, they will pay better than the 50th of the target market.
You will still lose staff to the high payers at this level, but it is not as bad as what you would find at the 25th percentile. In practice, most employers aspire to pay at least around the market median. This market position is often referred to as the "middle of the road".
A company's target market salary position is often used to develop pay structures. For example, the company pay spine will reflect the market median. Salary ranges are derived from this pay policy line.
The 75th percentile target
A market salary set at the 75th percentile or upper quartile is competitive. We see many companies aspiring to pay this target market salary.
What most of them would do is to pay a market salary at the 75th percentile to those roles that are considered key skills. In reality, very few employers will be able to pay all their staff at this market salary position.
Market Salary: Who should get a market salary?
Who should get a market salary depends on how an employer positions themselves on the market. If the salary is set at the lower quartile, you would probably pay everyone in your organisation at that level because it is not a competitive market salary position.
When an employer pays at the market's median, I recommend you pay your consistently performing employees at this rate. Those new to the role and still learning should be paid below the median market salary.
For those employers targeting to pay a market salary around the upper quartile, I recommend that you only pay this market salary to your consistent top performers. It makes no business sense to pay a 75th-percentile market salary to a poor performer.
Market Salary adjustments
Employers periodically carry out market salary adjustments informed by market surveys. In carrying out market adjustments, employers must be guided by the rules that apply to pay structures. These rules say you pay your new and still learning employees below the market median. Pay your consistent performers around the median of the market. Only top performers can then be paid around the upper quartile of the market.
Conclusion
Market salary comparisons allow employers to set market salary targets for various positions. The choice of what market salary to pay largely depends on the employer's ability to pay such salaries. Employers must balance the need to sustain staff costs and attract and retain competent staff. It is inconceivable that an employer can ignore the market salary targeting and be able to retain and attract the right talent.
- Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 24 248 1 946-48/ 2290 0276, cell number +263 772 356 361 or e-mail: mnguwi@ipcconsultants.com or visit ipcconsultants.com.