What are the advantages and disadvantages of using market-based pay versus job-based pay?

Vantagens: Competitividade: Ajuda a atrair e reter talentos ao garantir que os salários estejam alinhados com o que é oferecido por outras empresas no mesmo setor. Equidade Externa: Mantém a equidade salarial com o mercado externo, o que é importante para empresas que operam em setores altamente competitivos. Simplicidade: Mais fácil de explicar e justificar para os funcionários, pois os dados do mercado podem ser usados como referência objetiva. Desvantagens: Desalinhamento Interno: Pode criar disparidades internas se grandes diferen?as nos salários n?o forem bem gerenciadas.

Market-based pay uses external data to compare pay rates in the same/similar industry in a country/region Advtgs: 1)market competitiveness for talent attraction & retention 2)flexible: salaries can be adjusted, responding to market trends. Disadvtgs: 1)cost variability, compensation may increase following market 2)disregarding internal equity-creates disparity among employees 3)focus on external, may overlook individual uniqueness. Job-based pay: wages based on the job using internal data on scope, responsibilities and hierarchy. Advtgs: 1)provides a clear framework, ensuring consistency. 2)promote equity 3)easy to manage. Disadvtgs: 1)Rigid 2)outdated, uncompetitive with market 3)talent attraction issue 4)lack of performance recognition.

The key here in my views is the report quality that you get from your Salary survey provider, in the end it all depends on data entry during the collection phase, therefore when analyzing the data it needs to be taken with a grain of salt as sometimes the data are completely irrelevant, and other times it needs a bit of a tweak. and the issue is once you start to manually tweak then subjectivity plays a huge role, it's an endless loop.

Compensation analysis necessarily considers both internal and external factors when building pay ranges. Market-based pay emphasizes the latter, typically using a composite of market reference points (survey data), aged forward to a specific date. For market-based pay ranges to work, robust survey data are a prerequisite. Additionally, you have to target a percentile sufficiently high to attract and retain talent. The potential drawback of utilizing a market-based pay range development methodology is that groups of related jobs - job families - will not necessarily have a pay progression that makes sense. Due to statistical noise in the data sample, you should consider the relation of jobs within a job family to each other as well.

Market-based pay aligns salaries with external market rates, making it competitive and attractive to talent, especially in industries with rapid salary shifts. However, it can lead to pay disparities within the company and may not fully account for internal role complexities. Job-based pay, on the other hand, focuses on the specific responsibilities and value of a role within the organization, promoting internal equity and structure. Its downside is that it may lag behind market rates, making it harder to attract talent in highly competitive markets. Each approach has its strengths, and combining elements of both can help balance internal fairness with market competitiveness.

Vantagens: Alinhamento com a Estratégia da Empresa: Permite que a empresa defina a remunera??o com base em suas capacidades financeiras, objetivos estratégicos e cultura. Flexibilidade: Maior liberdade para recompensar desempenho excepcional ou habilidades únicas que s?o altamente valorizadas pela empresa. Equidade Interna: Facilita a manuten??o da equidade interna, pois os salários s?o estabelecidos com base na contribui??o relativa dentro da empresa. Desvantagens: Risco de Isolamento do Mercado: Pode resultar em salários que est?o significativamente abaixo ou acima do que é oferecido pelo mercado, dificultando a atra??o e reten??o de talentos.

This is the future of benchmarking in my views however it is still uncooked, lots of grey areas that needs to be fine-tuned, also it all depends on a reputable source of information to do a proper skill based benchmarking against.

Internal job based pay ranges are a way of determining the compensation for employees within an organization based on their job level, skills, experience, and performance. Internal pay ranges can help employers retain talent, reward high performers, and ensure internal equity and competitiveness. Job-based pay ranges typically utilize some relation among jobs as a basis of evaluation and differentiation. This can be quite simple, such as stacking jobs in terms of impact and differentiating pay accordingly. It can accommodate more complex job architectures as well by grouping jobs into logical levels or grades based on their similarities in terms of duties, responsibilities, authority, complexity, and impact.

the trick here is not to choose one, there is no one size fits all, any agile Compensation practitioner would recommend using both approaches depending on the situation, role, industry, wage gaps, etc...

"Market-based" or "job-based" is a false dichotomy. In reality, most compensation practitioners recommend a hybrid approach that leverages the strengths and augments the weaknesses of either approach. In today's market, employers need to be plugged into the market while also ensuring their pay practices align with their organization's goals and pay philosophy. A hybrid approach helps you balance internal job worth with external competitiveness.

Which option - market-based pay versus jobs-based pay - is best for you is likely a question of "both-and" rather than "either-or." If you stick with either option exclusively, you run the risk of ignoring important data that should inform your decision. Generally, smaller companies tend to lean more heavily on jobs-based ranges, while larger companies with a more defined structure and change methodology will focus instead on market-based ranges. Realize that no one method is perfect, and each has drawbacks that should be evaluated and compared.

Stay informed, stay competitive: The key to fair compensation! It's not a one-time thing. Effective compensation requires ongoing research. Regularly analyze both external market data and internal job characteristics. This lets you identify trends, pinpoint gaps, and tailor compensation plans to stay competitive. But it's not just about numbers. Transparency is key! Clearly communicate your compensation philosophy and policies to your employees. This fosters trust and understanding. And don't forget to recognize and reward their contributions! Feedback and recognition show your employees their value, boosting morale and engagement.

Market-based pay aligns salaries with industry standards, attracting and retaining talent by offering competitive compensation. It’s flexible and adjusts to market trends, ensuring fairness and competitiveness. However, it may overlook internal equity and create disparities within the organization. Job-based pay, on the other hand, focuses on the value and complexity of specific roles, promoting internal fairness and clear career progression. Yet, it can be rigid, less responsive to market changes, and might lead to challenges in attracting external talent if market rates rise.

The ideas around different types of pay determinants are interesting and topical. My concern with adopting any mechanism is how the organisation will ensure there is genuine pay equity. There have been a number of UK councils who were found to have paid inequitably - women doing work of the "same or equivalent value" were paid less than men doing similar jobs. The remedial cost of this is running into the billions of British pounds. Navigating this inherent bias in female-dominated roles (normally paid comparatively less) than male-dominated jobs is not trivial or easy. Adoption of any new comp structure should consider this point with great care to avoid such pay equity claims. Pay transparency will make pay equity more apparent.