Mkt competitive pay - Does it work? - Depends on the market !!

And in India ( a developing mkt), it doesn't work.

In developed mkt we see have seen that salary rises for last few years has been nominal, in single digits, maybe just a few % points more than inflation. But in India the avg has been ~15% with mid-to-higher management levels witnessing 40%+ levels. More so in lateral hiring a doubling of pay is more of a norm! Thus in India atleast, we are still living a self fulfilling aspect of a short-on-talent and long-on-demand job mkt scenario.

Add to it the recent inflation and we see India witnessing the proverbial wage-price spiral! Given we are stil developing, we need to be aware that this mkt competitive pay concept is not at all working in India at the moment. A few more points to explain the current conundrum:

Firstly, compensation, is just a hygiene factor. What makes people stay in firms is content, people & lifestyle. These 3 things these days define the expectations of a successful, commited employee.

Secondly, India will continue to have the low-cost advantage for maybe next 5-10 years more before we get globally aligned and our job mkt matures.

Lastly, India is the next growth engine for the world (along with China or even Middle east) and its sectors like Retail, Financial and other professional services, IT (yes, scope still remains in applications in bio & energy domains) would continue to defy the norms of a mature job mkt. The War for Talent is on and so the exuberence will continue for some more time to come...

Market competitve pay and its dynamics

In todays world of rising attrition and increasing employee demands, I feel that market competitive pay makes sense. That can be said atleast of some industries. I work in marketing research and in similar industries wherein employee talent rather that employee numbers make more of a difference, i feel that this system might work a lot for corporations. In our industry, talented employees are generally the drivers for firms, as clients are always demanding and performance is guaranteed only with a quality workforce. We get direct client feedback, as well as cases where particular employees are demanded for by the clients. Hence in such cases the job satisfacion is immense, be it any organization. This does not change with different organizations, as your quality of work travels by word of mouth. In such as case, companies can lose employees easily purely on the basis of the remuneration that is awarded. And with the options available, it is easier to switch between jobs and find the satisfaction levels that are desired. The present jobs are also much more stressful. I spend almost regular 15 hour days regularly, and hence if i feel that the pay package does not match that which is given in the market, I would definitely be pushed to take a call.

I also think in a way, it is the way companies strategize. Some of the players in the market use that as a basic calling card. Their competency is the fact that they govern market pay and make their pay the comparable base. So although you might go for such companies, some thought is also given to the quality of work that is provided. But these are only a few cases. In most of the cases today, a large chunk of employees work for better remunerations and also decide on career paths on the sam factor. With the huge demand for quality labor in India, it has become a different scene from about 5-10 years back when you would think thrice before thinking of a switch.

In conclusion, with today's market dynamics it is important to go by market based pay. Quite a few industries are there where employees are driven purely by pay, as other factors that add to the job such as quality, satisfaction, learning etc. are minimal. Hence here i feel that market based pay works out as an important strategy. With jobs that are more involving and are more satisfying, one can do without this philosophy, but i think in many cases it might just backfire if you stay away from market competitive pay.

It depends on the market.....

A recent survey among the HBS Graduating class brought some interesting findings. Around 80% of the graduating class voted that they are happy with a salary of $100,000 if their peers are getting a salary of $80,000. But they are not happy with a salary of $120,000, if their counterparts are getting $140,000. This implies , it is not the absolute value of the salary that alone is sufficient but what matters more is how it is compared , vis a vis others. And this brings in “Market Competitive Pay".
Take the example of a homogenous set of employers; say Big-4 consulting firms or top-5 Indian IT Companies. These organisations are similar to a great extent, in terms of work environment, organisational structure, line of business and the skills they look for in an employee. Here market competitive pay becomes paramount importance if the organisation wants to retain its key employees. The other thing that works for employees here is the liquidity of their skills in the job market. An employee can demand a competitive pay package as other organisations need the skill set he possess and might pay him. This can be best described as a free market scenario for both employees and employers and Market competitive Pay is most prevalent here. If an employer cannot pay the industry bench mark levels, he won’t be able to retain its key employees. He cannot also pay significantly ahead of its peers as the line of business and the bottom lines are more or less same for them. No employee can also demand a pay package, comparably higher than his counter parts, because, the employer can find a substitute of his skill sets in a lesser price. The whole system leads to equilibrium in compensation which may be described as Market Competitive pay.
But things are not quite similar for the programmer of an out dated programming language. If there are not too many players in the market to recruit him for his skills, he cannot really demand a competitive package. Here the employer has the freedom to decide the salary. Now consider the case of a top notch neurosurgeon or country’s best criminal lawyer. There are not too many substitutes for his skills. So the employer may have to pay him significantly higher than the market to recruit & retain him as he is the critical success factor to his business and a very specific asset to the organisation with no immediate substitutes. What we can conclude here is market competitive pay does not work, in an oligopositic or monopolistic market. This can be vindicated if we take the case of IT Product companies like Google and Microsoft who thrives on innovation. They tend to pay significantly ahead of the market as they need the best of the talent pool and the bottom line of the business supports it.
To sum the above discussion, Market competitive Pay package works in a Free Job where there are immediate substitutes avaialble for both employers and employees available. But it is not seen incase of a monopolistic / oligopolistic market, where the substitutes are scarce.

( the author of this post is an employee of a leading IT Consultancy firm in India)

Retaining talent is more than just a matter of compensation

Having worked for an Indian IT major for close to 4 yrs, I can safely say Market Competitive Pay does not always work. I was offered a very lucrative package twice, but I declined to take up the offers simply because the trade off involved in terms of work profile and growth opportunities was too large.
As an employee, the work culture of an organisation, the job profile, learning and career growth opportunities which my workplace offers matters to me as much as, if not more than, my compensation structure. Pay is not the only factor.
While the jobs I was offered were paying almost 100% more than what I was earning at that time, I still decided to stick around. Factors like support of my co-workers; a healthy and competitive but non-threatening work atmosphere was what tilted my decision in the favour of not quitting.
But sadly this was not the case with some of my other colleagues who were swayed by the size of the package being offered. An year down the line those same people were back in the job market hunting for a new job. Dissatisfaction with the work culture was the primary reason cited when I asked them the Golden Question “Why so soon”. In such a scenario more than the employee it is the organisation who is loosing out, since they try to pay competitive and lucrative pay packages but do not follow it up a conducive work culture and other perks.

(the author of this post is a Senior Project Engineer in a leading IT company in India)

Organisational need which decides.....

Being an owner of an SSI in a small town I believe market competitive pay doesn’t work much in our case. I may pay an employee more than the market if I am in need of that employee and if I believe that the employee does has the capability & experience to handle the work. In some cases where the employee is less experienced I would pay him below the market rates and would assure him of a pay hike as per his performance. We appoint accountants, production head (operations controller) – though it is not done on a very large scale but we do face a lot of competitions from other small industries in the same locality. We do not go for surveys but we do keep in mind what the other industries in the same area are paying. So for any particular job we look at the so called “market rates”, experience of the employee and my need for that employee before deciding his final salary. Therefore in our case its my need which plays a more important role in deciding whether I should pay the employee as per the market rates or not.

(the author of this post is the owner of a Refractory firm in Jharkand)

Market Competitiveness of Pay is a topic that has generated a lot of interest in the last few years. A dynamic economic scenario and changing employee demographics forced Human Resource Professionals to relook at their compensation practices and utilize it for business advantage.

Compensation is definitely one of the strongest tools available to HR to attract and retain talent. For the last 4 years India Inc has witnessed an average yearly increase of 15% in compensation across sectors. The growth is expected to continue in double digits till 2011 atleast. But rising employee costs have been always a growing concern across Indian industries, especially for the service sectors which have been riding on the cost advantage. Coupled with high inflation figures that we are witnessing currently, companies are thinking hard about ways in which they can cut down on unnecessary employee costs.

Most of the service organizations have employee costs forming 50% of their opex. That is a substantial amount of money which can make an impact on the balance sheet of a company. Prudent usage of the same can help companies manage their talent pool better.

Pay for Performance

Most of the companies operate with a compensation philosophy which would define

a)The Market competitiveness of Pay – E.g. We want to be at the 50th percentile in compensation against our relevant comparator companies in the same market/sector

b)Pay for Performance: E.g We would pay at 80th percentile of the market for outstanding performers, 65th Percentile for people who exceed expectations and at the median for people who meet expectations and so on.

The above example illustrates how performance gets rewarded within a defined compensation philosophy and strict employee budgets. Most of the progressive companies adopt this approach wherein they reward superior performance within a conservative budget, thereby ensuring that their top performers are competitive with respect to Market Pay.

Guaranteed Compensation ( Cash – in hand)

Compensation practices have also underwent changes due to shift in employee demographics. Today, the average age of an employee in India Inc workforce is 25 years. S/he is mobile, tech savvy, achievement oriented, status conscious and has a progressive outlook which makes her/him comparable to his global peers. To cater to her/his need, companies are moving towards cafeteria approach to pay.

Earlier, lot of companies had benefit rich compensation structures. Company car, accommodation, club facilities, Retirement schemes etc were common practices adopted across sectors. These schemes were high on administrative efforts and expenses.

Today, majority of the companies are focusing on Cash rich compensation structure. Maximising the cash in hand seems to create a win win situation for both the employer and the employee. So companies are moving towards “Cafeteria approach to pay” wherein employees have a flexible basket and they can design their own compensation to suit their needs. Also, employers are focusing and improving on tax friendliness of compensation structure. Food Coupons, Car Leasing Schemes etc are very popular measures adopted in this regard. All these efforts are directed towards being competitive in the market with respect to guaranteed compensation.


Variable Pay

Variable Pay is another component which is increasingly gaining significance in determining market competitiveness of Pay. Most of the new progressive organizations run on 2 different schemes of Variable Pay – Bonus and Incentive Schemes. While bonuses are paid out to the top management and support staff like HR, Finance, IT, Admin etc, Incentive schemes become applicable to the Sales Force.

In sales oriented organizations, Incentives on an average can go upto 50% or even more of guaranteed compensation. This factor makes Variable Pay a very strong factor in driving performance. Companies look at market competitiveness of Variable Pay to attract and motivate a strong sales force.

Another factor which is increasingly forming a part of Variable Pay is Company performance. In such cases, Variable Pay will have 2 components – Individual Performance and Company Performance. The relative significance of company performance in the Variable Pay increases significantly towards Top management positions (Since a good year or a bad year is primarily determined by their decisions).

For eg: An entry level management graduate might have 10% weightage for company performance and 90% for individual performance whereas the CEO might have 60% for company performance and 40% for individual performance)

This practice helps companies manage their costs very well and reduces the risk of paying out a hefty bonus scheme in a lean year. It also helps the team move towards better performance for the whole organization.


Conclusion
It is definitely important to be competitive with market with respect to Pay especially in these turbulent times. But Pay is just another factor that helps to attract and retain talent. There are other factors like Culture, Learning Opportunities, Sense of Fairness, Quality of co-workers and Support of supervisors that help talent grow and reap the best out of their abilities. As an HR professional who is working in the area of compensation with a leading global consulting firm, we hear our clients resonate this belief that compensation cannot be the only factor. We might face lean years and thin budgets in the future, but if organizations develop internal capabilities for people development and provide a conducive environment to work, learn and grow that would be the real differentiating factor which keeps their people satisfied.

What does it mean to the current employees?

I was reading the last post on how market pay rates will attract and might not retain employees that something struck me. When a company keeps paying higher pay packages to justify the market rates, how about the current employees. There are companies who recruit experienced people by offering them pay packages which are much higher than the market rates depending on the changes in the so-called "Market" and many of us would have heard one story or another on these lines. Now this can be a highly de-motivating factor for the current employees who having spent long years in the organization and performing the same work and are paid lesser.I have heard of instances in which a new recruit's compensation package amounted to almost as his boss's pay. Now the current employees are not going to like this at any cost. During the time that I worked as a software engineer, I remember, how frustrated many of us were when we got to know that the new batch that has been recuruited has been offered a higher basic which would entitle them to the same salary that we were drawing at the end of an year. Though the HR department tried to convince us saying that they had to pay according to the going rate at the market, I am not sure how many of us were convinced.... So what can organizations do to retain or motivate these employees or rather how can they just explain this better so that it makes sense to both parties...
Another issue is how to compensate your employees who are situated in different geographies. When an organization expands, it is quite possible that it expands into new markets sometimes situated in various geographies. Now comes the new challenge.. There might be people working in different countries who are doing the same work, but paid very different salaries. The market rates of companies are different in different countries. Thus a marketing head's pay in US might be less than or equal to that of someone lower in rank might draw in Europe. This is usually explained by attributing it to the difference in cost of living expenses in various regions. But what about the kind of work done. The widely accepted principle that the same kind of work should derive the same compensation package is a myth!! And there is no concept of a logical market here...All that depends is where you are and how crucial your skill sets are at this point in time.

Money attracts..doesn't retain

First we need to understand what is Market Competitive pay.Is it a salary at par with all the other competitors or is it a notch higher than the others. And lets say there is a company X which pays almost like its competitors or may be higher, does it guearantee that the employees are satisfied?What is required to make any salary structure work is the feel of the pulse of the employees. One of the many ways could be periodic employee satisfaction surveys. Seeking active participation of employees in LSIPs or town-hall meetings could be another. Money can attract employees but not retain them. In today's era when employees are spending long hours in office they seek much more than salaries. A culture should be developed where an employee is free to ask anything to anybody without the slightest trace of hesitation. This is more easily said than done. The employees always have the sword of appraisal hanging over their heads and they would seldom raise voice. A muffled voice can create greater havoc than a loud voice. In a scenario where employees have become the core assets of firms, to neglect even the tiniest voice could be disastrous and that is what the efforts shuold be directed to. An employee should, apart from feeling great about his compensation, also feel at home in the company. She should see herself growing and achieving that dream which she has always cherished. They say people don't change jobs they change bosses! And, I agree to that completely.

( The author of this post is an employee of a leading financial research outsourcing company)

Market competitive pay: Can it be sustained in the long run?

Market Competitive Pay would work in an industry where an employee is considered a commodity, where there is not much scope for differentiation and there is perfect information flow. For e.g. Market competitive pay would work in a BPO/IT services industry where the employee ends up doing the same work, irrespective of a company. It might even work at the freshers level, in case of campus recruitment as more glamor is attached to how much you get, rather than the profile and the work one does.
I don't think paying 10%-20% more than your competitor would be sufficient to hire the required talent at the lateral level. There are too many other factors that one takes into account when considering a new job offer.. rt from the work profile to the company's brand name. Speaking from personal experience, I know of people (more than 1) in the financial industry who have compromised on the pay, accepting a pay 20% less than their current salary for a better profile and better visibility in the company.
Lastly, market competitive pay does work in the short term to attract talent, assuming all other factors remain constant but in the long run, this won't be sustainable, marginal players would be wiped out. Demand would come down, bringing the salaries down too.

Effect of Demand and Supply in the market

My understanding of the market competitive pay is: it’s just the compensation to match the demand and supply gap in the market and depending on the pay the compensation packages gets escalated, just as Neha has talked about in her case.
I would like to quote the industry of Charted Accounts and Company Secretaries in this regards. There was a time CAs were considered to be cream de la crème in the commercial sphere. Reason: there were not too many CAs getting into industry. Suddenly there was a flood of CAs into the market. The sheen was all gone and the pay packages got to such lows that people did not considered CA as a lucrative option any longer. People started exploring other avenues. The Institute of CA ,ICAI, woke up to this and renewed the structure and suddenly there was a change in the supply of CA with the high growth of the Indian economy the demand zoomed and so did the packages, back to old days of glory. Thus it’s not only the consumer who is involved in the dynamics of competitive pay but also the supplier.
CS, also, is undergoing the similar structural changes and in fact this is for the first time ever it has attained the sheen as the CAs market. There have been legislative changes by the government which propelled the course to its present glory.
A course is not considered good on the basis of knowledge but considered by the motivation provided by the market ,else why has ICWA, Cost Accounting, lost it sheen and not many are taking it up.
Competition is done to meet ones requirement but in the process it becomes the cause of existence for some while getting others extinct.

(the author of this post is a CA in a reputed credit rating agency in India)

It's all in the mind...

Market Competitive Pay - It's all in the mind! Bluntly put, an employee who believes that his performance would get him a better pay package in any other company other than his current one.
Ask this questions to someone "Do you think your pay package reflects your performance and the majority of the answers wud be a dissatisfied 'no' ". Job satisfaction and job insecurity have led to this concept of a market competitve pay.
One really cannot compare apples to oranges.It's a general or rather vague topic. Organizations have become pretty smart in realizing this and have come with various compensation benfits like health care, shares,etc, the mantra is to reward the employee for his contribution to the organization.
Who defines the market competitive pay? It's all in the mind. I for one have never believed that just because another organization was willing to offer me 10 or a 20k extra is a reason for me to be dissatisfied with my current organization.
Yes, you go on a recruitment drive and one see's all the "10% extra" demands as compared to market competition. I'm no HR, but I strongly feel there is no "market competitive pay". It could apply to fresh graduates

there was a time when young lawyers used to feel grateful if senior lawyers took them under their wings. They would most of the times work for peanuts. Sometimes even for free and felt pretty obliged to do so because they felt that they were learning the tricks of the trade from an established master which would help them in the long run to set up a flourishing practice of their own later in their career. It was more like the “guru-sishya parampara” of the early vedic ages. It was often said that a lawyers career started out after he hit 40.
Times have vastly changed in the post globalized world. Law is one of the most lucrative professions with start up lawyers drawing salaries which would put even the proverbial GOMBAs (grossly overpaid MBAs) to shame. To draw a comparison a law firm is different from a manufacturing unit which buys heavy machinery to manufacture their products. In a law firm the work is more on the intellectual side and the lawyers are the machines. Just as the best machines come for a price so do the best brains. And if you are not willing to spend enough to buy the best brains the end product, going to the clients is definitely going to be shoddy. Coupled with that is the imminent threat of the entry of foreign law firms in India with sky high retainer fees being paid to their associates which would definitely wipe out the old guard law firms which havnt changed with times. Either you pay according to the market standards or you perish in the competition. The writing is clear on the wall.

Given the perspective shown by Neha I would like to carry it forward. Being in the second year of my b-school life I have entered the stage where I need to decide on what kind of an industry I would like to go for. Though as a fresher it does keep playing in my mind that the so called “job profile” and “brand name” are THE most important things to consider but then invariably I tend to think about the pay package or CTC at times. Consulting our immediate seniors is the only solution in my case. Talking to various seniors in all kinds of field I realize most of them have already turned into a cynical lot. A few who were running after the job profile and refused a few lucrative offers, during the final placements believe that they were only chasing a myth. Now most of them plan to quit in another year or so obviously keeping in mind the pay package. A few with the highest salaries in campus have said though the job sucks the only solace for them is the bulk salary that they receive. So I guess for organizations capturing this lot would only be through the high market competitive pay.
In case of professions like journalism or media and law, poaching is the most common way of getting people with expertise. In the field of law the professional not only brings his experience with him but along with it he also gets some of his clients for this new organisation. In this case nothing else except the highest pay package works. They say, “ we work on the number of high profile clients that we have. We need to poach the right guy at the right time. At that point of time money is the least important factor for us.”
It seems market competitive pay is the order of the day and this is what works. It is definitely here to stay.

Taking it Seriously!

Giving a freshers perspective to the discussion, I would like to quote my personal experience on the importance of market competitive pay

Having completed my summer internship with one of the leading FMCG companies in India, I have been offered a Pre Placement Offer.

When I came to know of the offer, I was excited to know the finer details of my role and compensation. The company also seemed to be in a hurry to close the process of acceptance/rejection of the PPO's

However, 2 weeks have passed and I am still waiting to hear from the managers about the offer. On following up with them, I came to know that a "rethinking" of the salary offered to interns is being done this year. This was because of their experience with interns last year (they did not get any acceptances because salary was not at par with other FMCG's). Hence, the company was taking its time to decide our compensation so as to avoid the pain faced last year.

The HR manager had a newly found confidence on the offer they would be making to us in a weeks time . He said that the compensation now will compete with the other big names in the industry and will not be a reason for the interns to reject the offers.

I don't know whether the revision in their salary will give them more converts and acceptances, but it surely shows how seriously the executives of today are taking the market competition in pay to attract the talent that they want!

3 dimensions of compensation

Pay should not be viewed only in the strict sense of monetary compensation. Instead pay should be seen as an aggregation of 3 dimensions: a) Work impact and b) personal satisfaction and c) monetary compensation (obviously). Firms always try to maximize (not only competitive) this aggregate pay. The first two factors often reason out for the lower monetary compenation across various professions. Lets consider an example for each. Work impact - It is easier for companies to attract good talent with lower monetary compensation, if the job has potential to create huge impact. Agree? Example: Several of us would rather go for a job that has the potential to create a significant impact on society e.g., NGOs, consulting jobs etc. I heard a story of a consultant, who had recently completed a project with Bill and Melinda Gates foundation. According to him, the fact that he was able to mobilize one of the world's biggest charities to an appropriate channel for reaching the poorest in the emerging economies, compesated for more than 10 times its marginal lower salary compared to an investment banking job. Second case of personal satisfaction is much easier to relate to. Personal satisfaction has several components. One of the big ones is work-life balance. To make it more real. Oil refinining companies pay almost 3X to plain engineering gradutates as compared to average salaries to IIM pass outs. A major factor fo this being that the personnel have to stay in deep sea stations away from mainland for months.

Hence when we talk about market competive pay, we should look at all these factors together. A company would be able to offer a competitive pay only when it maximizes the sum total of these 3 aspects of compensation.

Market Competitive Pay + Elements of Psychological Contract = Equilibrium

In my experience as an HR professional, the term competitive pay is a mix of several factors- some obvious ones and the others that are more intrinsic in nature. Before delving into what these factors are, it is important to realize the reason for this dichotomy. It boils down to the basic psychological contract that employees have with their organizations. Despite getting a monetary offer of their choice, we still find employees griping about the fact that the company does not realize their worth.

To say that compensation is purely market driven would be like trying to put a gray area in black and white. Market compensation determines the value of a person's education, skills and abilities. However, this basket of competencies may be viewed differently by different companies. Let’s take, for example, an IT professional with great technical competencies. The worth of his skills is determined by the market. That, in my mind defines the threshold of what he will ultimately get.

Situation 1: He applies in a tech company that needs his skills because his skills add direct value in the services that the company offers. In addition, historically, tech companies have a high employee turnover. In such a situation the contract between the employee and the company needs to include other elements that will give this engineer a feeling of being valued. This could include performance incentives, retention bonus, perks, health benefits etc. On the flip side, if the company in question is a market leader, the employee will settle for less just because he is gets the advantage of a good brand name in his resume.

Situation 2: If the same engineer however applies to an opening in a manufacturing environment, things may change. That’s because although his skills remain the same, they now become tertiary to the actual business of the company. In such a situation, the engineer may get the market determined pay. However, for him to hope for something more than that may be a little too ambitious.

Therefore, in my opinion, like with stocks/ land, market determined rates play a role in ensuring that the economy maintains some sort of order. It just determines the opportunity cost of the skill sets of a person. By hiring someone, a company invests in a whole person and not just the skill sets. Therefore, it is a function of the psychological contract between the two parties that ultimately determine the point where they reach an equilibrium between what they give versus what they get.

Competitive Pay - An Illusion!

A Big Sale or Discount ad at a branded shop… a happy tune start playing somewhere inside you and u feel a strong urge to visit the place as soon as possible… May be u don’t need to buy anything special…Have you ever gone through this scenario??? When you actually reach that place u find out of dismay that there is a small phrase that u have missed earlier - “Conditions Applied” or “Upto” after a few asterisks. Isn’t it a very common scenario that all of us have faced sometime or other???? But it’s also true that once we have gone through this we got cautious next time.

It’s same with the Better Package offers from some other companies.

Being in the IT industry for almost three years, I have gone through hundreds of Adieu mails. Each of those mails contains the same old reasons of Goodbye, may be packed in some different covers!!! The most common factor which lures a person to change his job is some better Pay Package. Work Satisfaction, Job Security, or Brand Value comes after the Pay Package.

The different companies are using this trick to attract the employees and thus drain the talent from some rival company. This helps them to get Ready Employees and which in turn saves their Training Costs. Also it is a way to crack the backbone of the rival companies. This is from the company‘s perspective. From the employees view it’s quite normal that they got attracted to a better package!!! Always they don’t have enough reasons to leave the current job other than the appeal of the Package Offer. The “Conditions Applied” phrase works here also. The concept of the “Variable Pay” which varies according to the Profit of the Company is the hoax in this case. No one can get sure of the “Special Allowances” they will be actually getting until and unless they got the first salary. Also in many cases the percent increase of salary of a lateral employee is much lower than that of a regular employee during a salary revision cycle. I think ultimately in the long run the story remains the same.

So I think the Competitive Pay in the market looks genuinely attractive and the easiest way to get an increase in income at first. People fall easily into this trap. But with experience in the long run they learn the loopholes of the mirage and then they prefer the good will or reputation that they can earn sticking to a particular place for a long time.

Market pay really a deciding factor?

As we talk of the effectiveness of the market pay, an article in the newspaper (http://www.nerve.in/news:253500136950) talked of the sixth pay commission suggesting market-driven salaries to young scientists and professionals with the governement. It throws light on young scientists in particular and argues that emoluments should not be a bar for recruiting a scientist of merit whose services are considered necessary.


The problems that arise in an industry as niche as science is that of retaining the young talent with the present salary. Pay competetive to the market, will not only help retain but also bring many young scientists back from abroad, once they get salaries comparable to the industry. Thus to solve problems like reverse brain drain, industry pay sometimes becomes imperative.

However, the company's current financial situation and other perks associated with the job (specially important with respect to government jobs) does not make market pay necessary to get a selection pool of employees. Money may be a attraction factor, but the decision to join a job ultimately will depend on convenience and interest of the employee

Just a benchmark

I believe that Market Competitive pay is not universal. It is just a very vague benchmark that employees use to calculate the compensation that they think they deserve.
No matter what the Market Competitive Pay dictates, employees, especially when moving from one company to another, see to it that they receive a pay packet greater than or at least equal to their current packet. This trend is irrespective of the prevailing market competitive pay of the times. One's qualifications, years of experience, brand value of the company etc have higher precedence here.
However market competitive pay comes into saner focus with respect to freshers and brand new employees entering a particular workforce. The market dictum is usually adhered to in this case and the deviation happens at a much higher level in the workforce.

Value based compensation definitely

I am not an HR guy, but again private equity/ investment banking firms do not usually have separate HR teams and recruitment/compensation decisions are taken by operating people.

In my experience, a compensation is the bare minimum "value" that the individual will bring to the table. When i look to hire people and the level of compensation, the following determine compensation
a) The education (course and university) - "value of his basic skills?"
b) The work experience - "Value of on the job training for my company?"
c) reputation of institutions worked/studied at - "Can he bring me connections and business at the right level?"
d) positioning of my organisations - "What is the value of my organisation to his career?'
e) Market dynamics - "is it a hot job market?"

While none of us would define a value to each of these attributes, we do arrive at a overall number which justifies the above. To that expend I think this is "value based compensation".
A few may argue that this is market determined. But i think a few variables of this is in the individuals control and hence it may not be totally market determined.

let me quote some examples - a) An experienced Ivy league MBA with a top end IB experience, will get a compensation of his choice even in this down market
b) Some individuals with mediocre background/abilities who made it to good positions may loose jobs/ get paid less even in good job markets.

Again this is just a Private equity experience. these firms typically have small teams and each recruitment decision is critical. For a BPO/ IT services company, the above may not be relevant

Market may not be perfect but it works

Whether it is the stock market or the job market, Market does work, though they may not be perfect as yet and may not become perfect ever. Cost-benefit analysis may not be done consciously, either by firms or individuals, it is always done.

There are many direct and indirect costs and benefits involved. What is valued, how much it is valued is different for the firm and for the individual. For example, consider office location. I know many people who are willing to take a lower salary so that their travel time is reduced. Recently I met a lady who changed the job so that her travel time is reduced but after joining she learned that the new company is also shifting to a far off location shortly. I am sure that she is going to change her job shortly, once again.

Alternative to Market Competitive Pay is to fix the compensation based on the reservation prices of the firm and the candidate. Based on the value addition, company can calculate its reservation price and similarly candidate can come up with a reservation price based on her priorities. But consider doing this for yourself or the next candidate you want to hire. It is quite difficult in both cases and one immediately tends to fall back on the market information to benchmark. Apart from this the Market Competitive Pay is the BATNA (Best Alternative to Negotiated Agreement) for both the parties. Except in few cases where the company or the candidate has clear negotiating power, where we can observe negotiation happening and the compensation may not be comparable to market, in majority of cases Market Competitive pay works. Even in the minority cases, where one party can fix prices, it would lie somewhere in the bargaining zone, which is Market based.

Though HR Managers keep talking about intangible benefits, very rarely they succeed in bringing down the direct salary costs unless the claims are well accepted in the market and the candidates believe the claims to be credible. On the other hand money is credible in all circumstances and conveys lot of information when examined in combination with other information publicly available. This could be one reason, we observe that candidates tend to choose either a well-known firm or a firm that pays very well. Even the reputed firms can't go below a certain level in pay, which indicates that reputation of a firm is only marginally beneficial. Firms that are average in both pay and reputation finally end up with adverse selection issues.

The first two posts rightly identified that stage of career also affects choices of the candidate, we cannot simplify and generalize it. I have personally observed that even gender would play a part. But before we draw a conclusion, we have to verify whether these factors have statistically significant effect on choices or not.

This post clearly sounds a little (or too much) technical but I hope the readers got the essence of it. Feedback and comments would be greatly welcome.

Market competitive pay might be the strategy for some industries but is absolute myth for the other few... Its more about which company ... what brand name... also it might defer within the company itself... whats the job description ... some Jd's may require company to go with competitive market strategies some might not...

Just to be more clear companies which are the leaders in the industry might not have to go with the startegy as people percieve them as places with tremendous growth oppurtunity whereas startups might need it to attract the intial talent..

Also its more to do with the level.... after a certain point... and reaching a certain level in the career people really do not care about a hike of 50K they would be more interested in what kind of oppurtunities is on the offer..... whereas as ritwik said entry level BPO guys might jump for a mearge hike of 1-2K.... also its industry dependent... someone getting an oppurtunity at entry level in a consulting firm might not look at the pay package offered by the BPO's or other industry while considering this...

Finally I guess its always people dependent.... their thought process... their aspirations.... their needs..... I took a pay cut to join another firm in the same industry for the enlarged horizon and brand name....so guess for me it really didnt matter.....

Market Competitive pay always doesn't work

It is not true that paying as much as the market will get a company the desired talent pool. Other factors does come into play. For a fresh joinee the pay packet can be a major deciding factor - e.g we have heard of BPO employees jumping from one company to another for a paltry 1000-2000 rupees hike. But pay packet ceases to be a deciding factor for mid level to senior level employees. Factors like the growth opportunities in the company, the position, the city of posting, working hours, amount of travelling involved or personal committment affects the decision. People often move from one job to another with a pay cut for any of the above mentioned reasons. Similarly people may not like to move to a small city even though they would be paid as much as if not more than what the market pays. So competitive pay necessarily doesn't deter attrition nor does it assures a company of right talent pool.

Dumping Salary Surveys?

I agree with Joice that "Job Hopping" is a passion in media industry. However, It is not unique to media industry alone. Other sectors are also experiencing the pain of high attrition. Some surveys indicate that the average attrition level in emerging and fast growing sectors like retail is as much as 18 - 20%

Last year, the leading attrition figures were attributed to the job category "Customer Service Representatives" across various sectors. You won't believe that this job category registered an attrition rate as high as 40% in a few segments due to its demands.

Many people believe that companies leave no stone unturned in order to retain employees. Many companies have introduced a variety of HR practices, especially in compensation, to retain the employees which range from stock options to retention bonues.

Therefore, it makes it so difficult for the competitors to poach the employees from other organizations. Last year, Corporate Executive Board, an international professional services firm conducted a survey and found that on an average, employers in India pay a premium of 26% to poach an employee from the competitor compared the global average of just 16%.

The spiraling salary increase could also be attributed to the salary surveys done by various HR consulting surveys as well as individual consultants. I do not understand as how these organizations / consultants arrive at salary figures for various jobs. To add to the confusion, there are so many websites now provide salary information for various jobs without adequate information about the companies surveyed. For example, the following website provides salary survey information for finance professionals. http://www.careerfinance.com/salary.html

Recently, I came across one interesting piece of information in rediff.com that a leading banking and financial services organization dumped the salary survey report of a consultant.

A few years back, this organization had engaged a consultant to advise it on the industry salary levels for one of its top jobs. The consultant came up with astounding numbers. A little bit of enquiry found that the consultant has handpicked only a few new unlisted banks which pay top-drawer salaries just to poach people.

"I asked the consultant why he hasn't included other banks which pay lower than us. There was no answer and hence I dumped the report," Ram Kumar. Read the full report in rediff.com.

Should other organizations follow the trend?

Market competitive pay definitely is working right now but as the saying goes “all good things come to an end” so will this strategy die down. I believe there is a lot of demand for people with the right amount of expertise and experience but the point is to what extent will the companies go to attract such talent. At one point this has to stop. I see a lot of youngsters jumping jobs only to get minimal hikes. The increase in salary is the point of attraction for them. On an average I notice that people with 6 to 7 years experience have jumped 8 to 9 companies in a row, which is less than a year’s experience. How much will an employee learn during a period of one year or lesser is a question that can be debated on. And should the companies encourage such activities is for them to decide. Are they actually getting the talent that they hope to get? Many times its just eyewash and by the time the companies realize this, it is too late. But I firmly believe it’s the people who are looking for stability and a good job profile that will finally survive.

I feel the market competitive pay strategy is based on one basic flaw, no matter how much we think that there is a market standard for a level of expertise and experience, it is never the case. truth is, there is almost no market standard right now, and that creates a lot of confusion. I can only speak from the media industry's point of view. Everyday, a new company is being launched, and to attract new talent, they are giving higher salaries thatn the current market standard. Say, if a journalist gets Rs 10 lakh, and the market standard is Rs 12 lakh, the new company pays him at least Rs 15-18 lakh to attract him. A newer company raises it by another, say Rs 5 lakh. This not only creates a bubble waiting to burst, but existing companies have to raise their salaries of existing employees to a) compete with the new market standard, and b) to reatin their existing talent. It is a vicious cycle and soon, it is going to reach a point when most companies won't be able to sustain these salaries, and the smaller ones will close down, with only the ones with deep pockets remaining. In that scenario, there will be too much talent in the market with not enough jobs. From the employee's point of view, there will always be two types. One, that move from organisation to organisation to cash in on the salary boom, and second, the kind who want to settle for a good brand name and job profile. It is the second kind who would finally benefit when the boom goes bust.

On Market Competitive pay

"How much do we have to pay in order to attract new recruits to work on this assignment?"
"We make sure that we pay 10% above market rates"
"What the company is offering isn't even up to rise in the cost of living!"
"Do we need the most competent workforce or do we go in for average ones?

None of these questions/statements are anything new to an HR manager or to the top executives in an organization. All of them talk about the market competitive pay strategy followed by organizations. A web definition of “Market Based Compensation System” defines it as the use wage and salary rates for specific jobs that are determined by continual and consistent analysis of the competitive job market. A market based compensation system could also be called a "Value-Based Compensation System" in that an employee's salary rates are based on the value the market places on that particular job and level of expertise. It is widely accepted that compensation is the most vital ingredient that helps organizations to attract, retain and motivate employees. Compensation surveys benchmark the various jobs and indicate the pay range for various jobs in the job market. But how essentially does the market rate a particular job? Is it is justified that organizations devote a lot of time and energy into designing a robust compensation structure that is at par with those of its competitors.

Some questions that arise in this regard are; Is market competitive pay the last word in the compensation strategy of the organization? How important are the intrinsic elements of compensation? Those organizations who choose to pay below market rates try to make up for it by extending other benefits like Work Life Balance, career development programs etc. Do employees evaluate the culture, values and other intangible aspects of organizations while planning for a shift? These aspects might be considered by an employee who has been with a particular firm is considering to move to another , but what about people who have never experienced the organization?

Now its upto the organizations to analyze the data available and devise their modus operandi Organizations can follow various compensation strategies; lead, lag or pay at par with the market rates. How big are the costs attached with being below or above the market rate? Are the compensation strategies same for the entire organization or does it differ for various group of jobs or employees. Do companies pay the most challenging jobs below market rate by justifying the quality of work being given to the employee or will such jobs be paid above market rates?

These are some of the aspects that we would like to discuss in the forum. Please pen your thoughts on these issues and others which you think are relevant in this context. We look forward to a lot of learning and an enriching experience.