Competitive Pay Ranges

Competitive offer matching is something a company can and should do to retain top talent.

With all that said, if a competitor really wants to hire an employee away from a company, then there is probably nothing said company can do to stop it. Even if a company has an equity hold over an employee, a competitor can either front load the equity in their own competitive offer, or else give a large upfront contingent (on continued employment) signing bonus that largely1. Even if the signing bonus offered is less in value than the unvested equity with the parent company, from a time value of money perspective an upfront bonus can be equally or even more lucrative than unvested equity.offsets whatever the employee has to leave behind to take the new position. 1

Counter offering up to the top of the pay range (while targeting a 100% compa ratio within the position/job family) is a good tool that allows a company to keep its top talent, but at the same time I think it’s important to establish ranges and stick to them… even if a competitor offers something to a key talent that exceeds the internal pay range for the position…

…And even if a company is a pay leader in its industry this will occasionally happen.

Why you ask?

It’s important to realize that even if two incumbents (at different companies) are doing the same work that said work may have different value depending on the business model of the company each incumbent works for.

As an example, let’s compare a hypothetical compensation analyst at a compensation consulting firm to a hypothetical compensation analyst at a manufacturing company.

Both employees’ primary job duties may require the same technical knowledge (and both employees may do similar work), but the comp analyst at the consulting firm may be a key revenue generator for the business (consulting firms often derive much of their revenue from client fees). Conversely, in the case of the manufacturing organization he / she may be part of a support function (and as such represent overhead). Ergo, while the employees in these cases have similar primary job duties and responsibilities, the value their work adds to each respective organization is different.

Even in instances where two jobs are both support (and represent overhead) there can be a difference in the value each adds to their respective business.

Sticking with comp, let’s compare a compensation analyst at a commercial/sales organization made up primarily of commissioned sales people to an analyst working at a widget production company whose primary work force is made up of unskilled labor. Comparing the workforce at the widget production company to the sales organization, the widget production company’s workforce is much less highly skilled. Consequently, the labor pool they can select from is larger (and as such is much less sensitive to market prices).

Further, as the commercial/sales organization’s labor population are salespeople paid mostly off of commission, managing the comp program required to retain key talent may require comparatively more skilled/experienced comp analysts. On balance, this means that although the comp analysts are doing similar work, in our hypothetical commercial organization the comp analyst is more valuable to his/her company.

This situation plays itself out in jobs across many functions and2. As another example we can look at when an in-house recruiting team can’t fill a position and reaches out to a 3rd party vendor to assist. The external vendor and recruiter may both be doing the same job, but the nature of the work is fundamentally different, as is its value. Consequently, the pay is different as 2 The jobs change but the fundamental principle still applies. 3

It’s important to understand that being a pay leader for a position in your industry means just that. Competing for a talent in situations where said coveted talent contributes substantially more value to the rival firm than your own (as a product of its business model or some other variable) makes little sense. You’ll be overpaying talent to do work that frankly isn’t as valuable to your organization as it would be to the company making the (in this case justifiably) higher offer.
3. I don’t mean to oversimplify the market for any particular job here. There are a host of factors to consider in how someone is paid beyond just what they know, what they do with what they know, and how their work impacts the business. Location, job safety, hours, the scarcity of a skillset and dozens of other factors all play a role in pay (looking at commission based jobs and how/why pay differs by firm should be its on post). Breaking down exactly how people are paid and why across a comprehensive list of scenarios is simply outside the scope of this article.
If a company finds itself in a situation where for competitive pay related reasons it is suffering high turnover (or matching offers outside the pay range) then perhaps it needs to review how it is evaluating the work its employees are doing (or work on developing a stronger bench to replace key talent if it leaves).

Ultimately establishing competitive pay ranges that adequately capture the value of the work employees do within an organization should be a critical component of any company’s business practices as it relates to pay.


Categories: Compensation