Competitive Pay Is Simply Not Enough

You’ve seen your company’s want ads and heard the pitch from your recruiters; you provide competitive wages. That’s got to be a strong hook for attracting talent.

Big deal.

Pay structures are based on market trends, so the opportunities offered employees support your retention and motivation strategies.

Not enough.

With pay, does your company want to be average?

Companies routinely tout the practice (“we offer competitive wages”) and candidates in return expect this of potential employers. But what happens when your goal of offering competitive pay is finally achieved? Can companies rest in their efforts to attract, motivate and retain?

I’m afraid not.

What happens when you offer competitive pay is that your recruitment problems don’t suddenly disappear, your employees aren’t satisfied and your compensation programs have achieved little more than being … average? Is that where you want to be, the middle-of-the-road?

If your company does pay “the going rate,” that means that approximately 50 percent of the companies out there pay more than you. That’s what average gets you, with half doing more than you. Is that what your company aspires to?

No one leaves your company for less money, so what you’ll hear from employees is how so-and-so is making more somewhere else. And as most only hear what supports their own notions, they won’t pay attention to the broader rewards package — just the elements that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is being the premier paying company in your market – and can you afford the cost?

Actual pay vs. opportunity pay

Lest we forget, it’s important to differentiate between having a salary structure (grades, salary ranges and midpoints) that provides competitive rate “opportunity” and actually paying employees at those rates. Some describe this as whether the company is “walking the talk.”

For their part, employees relate to what they’re being paid, not the midpoint of a salary range or other such declared “opportunity.” To them the company’s “competitiveness” is more illusion than fact; especially if they’re experienced and have been with you for awhile. Thus, the company needs to keep its focus on actual vs. opportunity pay.

Why don’t employers pay the “going rate?” Typically it’s often not a strategy, but a series of practices that have evolved.

During difficult economic times some candidates will accept a lower rate than should normally be paid for their knowledge and experience , and managers tend to view this as a cost savings.
Once you’ve started down the slippery slope of paying below market rates, the practice can be compounded by internal equity. Managers don’t want to pay similarly qualified new people more than existing employees, so new hires may be offered less pay.
Pay-for-performance systems have a hard time keeping up with the increased marketability of employees. A minimally qualified employee hired at the minimum rate will gain knowledge and experience (marketability) faster than a company’s annual merit system can recognize.

Be careful claiming you provide competitive wages

So, what’s the answer? Management won’t agree to become a premier payer, so you should consider instilling flexibility into your pay practices. Consider targeting key jobs (highly skilled, difficult to replace, etc.) and make sure those job holders are well paid for the market.

Other positions less skilled and more easily replaceable could continue with your “competitive opportunity” strategy. Such a dual approach is akin to ring-fencing key talent, protecting them against poaching while recognizing/rewarding those with the most potential impact on your business.

Bottom line? Be careful when you claim how your company provides competitive wages.

You may not be correct, but even if you are – big deal.

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.