Why are market rates an important part of salary administration?

With direct market pricing and to a lesser extent with job content evaluation, salary survey data is used to create job worth hierarchies. In other words, salary survey data is used to determine which jobs are worth more than others and to create a listing of jobs that shows a continuum from "worth the most" to "worth the least."

There is, however, another use for salary survey data and that is to determine the wages or salary actually paid each employee. In direct market pricing systems, use of survey data is usually no different than the job evaluation process itself. Whatever the marketplace says a job is worth is usually what an employer using direct market pricing will pay. For an increasing number of employers, external comparisons must be made to determine compensation rates or it simply will not be possible to hire and retain good people.

Market rates in salary administration are important for a number of reasons.

Inflation. Inflation puts the focus on the external comparison. Maintaining competitive pay may, in fact, require adjusting the pay structure every 12 to 18 months.

Mobility of the workforce. As the educational level of the average employee rises, and more and more employees begin to work in jobs that involve handling information, the mobility of the workforce rises. It is, more than in the past, possible for the average employee to leave a low-paying employer, so meeting industry or area averages may be necessary if valuable employees are to be kept.

Smaller workforces. As a result of downsizings, the remaining tasks are given to a smaller number of individuals and the importance of each individual employee increases to the employer. Decreasing loyalty to the company and resistance to changing jobs removes past reasons employees did not seek other employment.

Credibility. Without salary survey data, it is impossible to construct a pay program that is sensitive to external equity issues (the need for people to feel that they are being paid fairly in relation to those who work for other companies). Salary survey data is the most accurate way to know what other companies are paying their employees.