17 June, 2011

Great news: Above-average pay for everyone!

Some days ago, I shocked you with the news that half of you are below average; yet I was prepared to make a small wager that, in just about any organisation, the average staff appraisal assessment is some synonym for “above average.“ In the same vein, I’d be prepared to make a small wager that, across most mid- and large-scale companies who undertake some form of payroll planning (and they all do), the average target salary range is “above average” too.

At pay review time or when you’re hiring someone, you need some idea of what the market rate is for your people. Most mid-scale and large organisations subscribe to one or more pay surveys relevant to their industry, location and job types. While you’ll have some stretch for lesser or superior skills and performance, your organisation almost certainly has set its job pay bands with midpoints linked to some benchmark percentile of market pay rates.
  • “We pay upper quartile salaries to attract and retain the best talent in our industry;” translation: midpoint set at 75th %ile.
  • “We pay competitive market rates;” translation: midpoint set at 50th %ile.
  • “We want above-average people who can deliver above-average performance;” translation: midpoint set at 65th %ile.
Outside of startups (which use equity deals to attract people), I can honestly say that in all the years I’ve been a manager, executive, director and advisor, I have only ever seen or heard of one established mid-size or large company that deliberately set out to pay below average market rates. They offered something else attractive - basically sun, fun and sex!

While it’s possible that bigger firms pay better than smaller ones on average, it also tends to be bigger firms that participate in salary surveys, nullifying that bias. Add all participating organisations together and I’ll bet that their combined target pay rates are above the market average.

Tracking the market has a ratchet effect, with employers chasing each other up in payroll costs. At first glance that looks great for employees, but it isn’t great for shareholders, customers and taxpayers, unless those increased costs are met by increased real value-add (productivity). Instead you get inflation and increased business failure. When the government issues an edict to its departments to lift pay rates to attract more IT staff as employees, it gets a temporary lift in recruitment, but the long term effect is simply to drive up the average cost of IT people across all sectors. As Stephen Franks points out, the ratchet effect is a major factor in top executive salaries too.

Right now it may not be a problem for you, but times will get better, and then watch out! Unfortunately, I have no easy solution. Just be aware of the danger in blithely tying your pay rates to some market benchmark.

First posted March 20th, 2009

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