Looking to Benchmark Pay?
SUMMARY
Organizations must be able and willing to pay salaries at particular levels.
The labor market tells the organization what others are doing, but the determination of what the organization will do is based on the factors of ability to pay and willingness to pay.
Ability to Pay
The ability to pay is a major influence on the salary-level decision and is influenced by:
- changes in the economic fortunes of organizations
- competition from foreign firms
Since the early 1980s, organizations have focused on relating the organization's salary level to worker productivity or some other measure of performance.
Willingness to Pay
Most organizations aren’t relying on the ability to pay as the only consideration in establishing the organization's salary level. Willingness to pay is also a factor in establishing the salary level.
Willingness is a matter of:
- equity in the marketplace
OR
- competition in the marketplace.
Organizations set salaries that are considered fair. Thus, they focus attention on salary surveys in terms of identifying comparable salary rates for their jobs.
A broader measure of fairness used in the late 1970s, during the 2008 Great Recession, and the more recent high-inflation period of 2022 to 2023, was the cost of living. This measure, while fraught with problems, is one which employees see and can readily use to make comparisons. In addition, through the Internet, employers and employees alike have ready access to labor market data.
From an organizational standpoint, the willingness to pay certain salaries is most likely a calculation that these pay levels are required to attract and retain the desired quality of employees. While cost-of-living and inflation rates factor into pay decisions, they are less important than what the market pays.