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Effect of using comparable salaries
To rely on comparable salaries as the only salary determinant is to rely on salaries as income to the employee rather than as costs to the employer. Comparable salary rates may represent entirely different levels of labor costs in different organizations.
Q: What might be the effect of setting salary levels strictly on the basis of "going market rates"?
A: It could impose severe hardships on one organization, but a much lower labor cost on another.
These difficulties are not insurmountable. Aligning to "the market" is usually possible, and following comparable salaries contains a good deal of economic wisdom.
Salaries are prices. One function of prices in a competitive economy is to determine the allocation of resources. Use of comparable salary data operates roughly to allocate human resources among employers.
Comparisons also simplify the task of decision makers and negotiators. Difficulties are minimized once appropriate comparisons are decided upon.
A salary level can be set when the salary:
- becomes satisfactory as income
-
AND
- operates reasonably well in its allocation function.
Salaries as costs are reflected in unit labor costs that can differ widely between two organizations having identical salary rates and can be identical in two organizations having widely different salary rates. Unit labor costs fluctuate more than salary rates and are capable of variation, as employer action permits satisfactory adjustment to some level within the range of going rates.
Comparable salaries also operate as a force for generalizing changes in salary levels, regardless of the source of change. Unfortunately, however, although changes in going salaries tell what occurred, they don't tell why it occurred.
More than economic considerations, the changes may represent one of these considerations:
- institutional
- behavioral
- ethical
On balance, however, comparable salaries probably operate as a conservative force. Why? Since salary decisions involve future costs, employers are understandably unwilling to outdistance competitors.
| Tight labor market | Normal labor market |
|---|---|
| A tight labor market may compel an organization to focus on getting and keeping a workforce (especially those with critical skills) by raising salaries. | In more normal periods, where unemployment exceeds job vacancies, employers will more likely focus on equalizing their labor costs with those of product-market competitors. |
In other words, comparable salaries are followed as long as other considerations aren't more compelling.
Memory Jogger
When setting salaries, comparable salaries are used for which of the following reasons?