What to consider when determining if your pay is competitive.

You hear this declared all the time: “we pay competitively” or “our strategy is to pay competitively.” But, the meaning is not the same for all companies, nor does it mean the same for all departments within a company. Today, “competitive” is being reshaped by AI, automation, and a faster-moving labor market. Organizations are facing pressure to do more with fewer people, which changes both how jobs are designed and how pay needs to be positioned.

Let’s look at how you can determine if you are paying competitively while still being connected to your business objectives and subsequent compensation strategy.

What does competitive pay mean?

Competitive pay refers to a salary or compensation package that is comparable to what other employers competing for the same talent are offering in terms of pay. The goal of competitive pay is to ensure fair compensation while also creating a recruiting and retention advantage.

Key Elements of Competitive Pay

There are 3 key elements when determining competitive pay.

1. Market-based compensation

2. Role and experience level

3. Geographic location

Market-Based Compensation

Competitive pay is determined by analyzing various salary data points in the market. This data comes from

• salary surveys
• industry benchmarks
• labor market data

Researching what competing companies pay for similar roles ensures offerings are in line with industry standards. If someone can make $10,000 more for doing the exact same job at a different company, and all other elements of the rewards package are equal, they will very likely pursue that offer. Not comparing market data can result in losing qualified candidates before you even get the opportunity to talk with them.

Role and Experience Level

Determining a competitive salary for an entry-level role is significantly different than determining a competitive salary for a senior management role. When determining competitive pay for a role, accounting for key aspects, including job title, job responsibilities, years of experience, education, certifications, skill set, and specialized expertise, is important.

Geographic Location

A competitive salary is impacted by cost of labor in a given geographic location. Cost of labor encompasses cost of living but is more impacted by the supply and demand of talent and skills in a particular area. Salaries in high-cost areas will typically be higher than in low-cost areas, except when the supply of a particular sort of talent or skill is larger in a given area. The day-to-day expenses of living in a commutable area like New York City versus living in a smaller city like Louisville, KY, should be considered when determining competitive pay for a similar role.

Understanding the meaning of competitive pay is the first step. Next, how do you determine whether your compensation offerings are competitive? Comparing your compensation package to that of your competitors in the labor market sounds simple, right? In practice, there are several factors to consider, and it starts with your compensation strategy.

Defining competitiveness for your organization

To determine whether your pay is competitive, you first need to define what “competitive” means for your organization. Once you have that definition, you can compare your pay data to the market and determine your competitive position.

In today’s environment, that definition should include not only external market pay, but also the pace of change in the work itself.

Here are some important considerations as you define competitiveness for your organization.

1. Establishing the ideal future state

As an employer, you first need to determine how you want to approach compensation and how you want your pay offerings to compare to that of your competitors. You may be confident that you can attract and retain the talent you need by paying at the median, or 50th percentile of salaries. However, another company might aim for the 65th percentile as more strategic. Furthermore, you might need to differentiate your target positioning based on the impact and criticality of certain roles and availability of skills.

To achieve this, you need to develop a compensation philosophy, followed by a more detailed plan for acting on that philosophy, which is typically known as a compensation strategy. If your organization still has not defined its compensation strategy, you can refer to this step-by-step guide for building a compensation strategy.

2. Choosing the right market data

To determine how you compare to your target market positioning, you must select the data to use in the comparison. The data is typically found in salary surveys. Knowing which and how many salary surveys to compare can sometimes feel like an overwhelming task.

Both general industry and industry-specific data are available. Your goal should be to select data that reflects who you compete with for employees, often referred to as your labor market competitors. Look for who is recruiting for the same types of roles, where did your employees come from, and where do they go when they leave your company? For some jobs, this could mean you select general industry data, because the experience and skills required for the role are transferrable from one industry to another. In contrast, for other jobs, you could select industry-specific data or even blend the two into a mix of general industry and industry-specific data.

Many compensation teams strategically document these decisions in a benchmark methodology. To keep current and accurately reflect your labor market, a benchmark methodology should also address emerging skills, AI-related role shifts, and situations where external survey data has not yet caught up to internal job change.

3. Benchmark compensation for your positions

Market pricing is the act of comparing your compensation to the market via readily available market data. After establishing your compensation philosophy, developing your strategy, and collecting the appropriate survey data, you must then determine your competitiveness against the strategy and market competitors.

But, the work does not stop at market pricing. You also need to assess whether the job has been redesigned, whether fewer people are now doing more work, and whether the role requires a different or higher level of skill than it did before AI became embedded in the work.

Calculate your competitive position

There are two key approaches to analyzing your compensation offering against the market: calculate the market ratio (a.k.a. market index) or calculate the market variance.

Let’s take this example: if the average pay for a job is $52,000 and the market data at the 50th percentile, or your target market position, is $50,000, you can follow the below calculations.

Typically, you would consider a compensation offering that’s within ±10% of the market as competitive. However, you may determine that a wider window of ±20% works for your organization. As long as you can document your decisions, communicate them effectively, and apply your policy consistently, you’ll be in good shape.

In a more AI-driven world, “competitive” may increasingly mean intentionally paying above market for critical roles, because the real constraint is not the number of jobs, but the scarcity and leverage of the people who can perform them well.

How AI is reshaping competitive pay and rewards

With the rapid pace of change in our jobs and generally how we work, the most beneficial impact AI can have on determining whether jobs are competitive is to identify directional shifts in pay in a timely manner. Most traditional salary surveys are published annually. With the rapid emergence of new jobs, employers must look for and assess new skills more frequently, and current jobs may become redundant; thus it would be beneficial to have early indicators of where the market is moving for particular roles.

However, as we described in AI without good data is like a car without fuel on the HR IQ® blog, the data that is available and is surfaced by AI through various methods is not a replacement for insights revealed by traditional salary surveys, but more of a way to detect shifts in the market.

Moving forward with your competitive positioning

Once you have a clear picture of how competitive your pay may or may not be as part of your overall compensation strategy across your organization, you can make decisions on how to adjust the rest of your total rewards package. Base pay is just the foundation of the total rewards pyramid.

Going forward, total rewards should also support skill development, internal mobility, workload sustainability, and the retention of the people who are carrying the most business-critical responsibilities.

There may be times when defining your compensation strategy and competitive position would benefit from a third-party perspective. This is where Marsh can help. We are one of the leading compensation consulting firms in the United States. We offer extensive salary data updated annually, including the largest general industry survey of its kind. In addition, we help businesses improve their performance by forecasting talent needs, engaging employees, rewarding performance, and developing employee skills.

We also help organizations adapt their job architecture, compensation philosophy, and rewards strategy to a world where AI is changing the value of work itself.

Explore our complete library of surveys and reports to find what works best for your business. You can also contact us at 866 605 1031 with any questions.