Do not pay in line with the market, pay above the market

How many times have you heard the term — we pay in line with the market. Or this line — we are in the top five percentile of the companies when it comes to pay. I have a problem with that — when organizations want people to go over and beyond in their performance, they should also pay over and beyond.

Salaries, or rewards, are the most important part of a job. It is one part of the contract that is made between organizations and its people. People do their job, and organizations pay them for it.

When the salaries are revised for their existing people or offered for a new hire, there is a lot of data that is crunched by the people operations team. They look at different benchmarks and different studies. They look at the salaries of the new hires and they look at the salaries of the people who left them.

There are some inherent problems with this data. It does not look at the softer aspects of a person like the college of graduation, the skills that person brings in, or the potential of the person. The salary of the person is benchmarked against a generalized category of aspirants. So much for personalization.

The salary reference data also includes many people who are searching for jobs. And most people search for jobs because of bad managers or because they are unhappy with the salary they get. Hence, the dataset includes a set of people who have a lower salary thus pushing down the average.

The third and most important thing that is wrong with the data is that really good performers leave an organization at lower rates than really poor performers. And poor performers are paid less than good performers. Hence, the data in the pool will not follow a traditional normal distribution but will follow a normal distribution which will be skewed significantly towards the side of the lower salaries. And thus, the overall average gets affected.

Many organizations forget one more thing also — they do not look at the living index and the associated increase in the same. An increase of ten percent in our salaries may not mean ten percent if the cost of living has also increased by ten percent in the last one year. But the cost of living index may also be not correct at all the times. Inflation of the key products may be a more relevant number.

Can organizations address all of this in a simple way? No, because most of these items are not really tangible in nature. But organizations can try. And make the salaries more realistic.

One-way organizations can make the salaries more realistic yet not exorbitant is by adopting a living wage index that can be adjusted every quarter. This living index can be used to multiply a base salary and the salaries for a quarter can be paid based on the same. This will help the people in the organization by making their salaries more relevant to the prevalent economy.

Another thing that organizations will have to look at is paying their best people well above the market. Make it so high that it becomes impossible for other organizations to recruit them. I know it is a cruel way, but it is also rewarding for the people. Even the good people, who may not be the best, need to be paid above the market.

So, go ahead and look at what you pay your people. And make sure you make them happy and feel valued by going over and beyond.

Originally published at http://simpleorganizations.in on July 23, 2021.