The importance of calculating competitive salaries
October 04, 2018
In some corporate cultures, limiting pay to employees can be seen as a cost saver, but according to many business experts, companies usually can't afford to pay anything less than competitive salaries to workers.
Competitive salaries are important for a number of reasons. In many ways, they set the stage for success by creating a positive relationship between the employee and the company. They also, in some pretty direct ways, “buy success.” That means if a firm doesn’t invest in its workers, it can really sink fast.
Let's look at some of the ways that competitive salaries function to support a growing business.
Showing You Care (Or, Your Company Cares)
Competitive salaries show people who are interviewing or researching a firm that the company cares for its employees, and has respect for their talent.
These days, competing in nearly any market means finding and attracting the best talent to your company. Businesses run on the talent of the people who make them run – and so the businesses that can attract the best and brightest are likely to outperform their competitors.
Old business models from the early 20th century were often hierarchical. Workers were interchangeable, and employers squeezed them, paying the lowest possible wage and extracting the largest possible amount of work.
In some key ways, business isn't really like that anymore. Whether it's production, service or knowledge work, the skills and abilities of employees increasingly matters. Much of the menial and general labor work that people did 100 years ago has been delegated to machines. So now, the average worker is more skilled, and adds more value to creative processes, whether that’s in manufacturing, seating restaurant guests, or working on a piece of technical writing.
With that in mind, offering competitive salaries allows the company to compete for the top talent base on which the company will build its success.
Penny Wise and Pound Foolish
This is a real pitfall in business today. Quite a few companies still try to pay employees less than what's considered competitive on the market. They’re thinking that they can use the extra money to fund operations in some way.
However, what happens usually involves some kind of negative cycle. For example, high turnover adds to the cost of educating and on-boarding new workers. Employee attrition causes gaps in a schedule, and productivity suffers. Low morale can also depress the productivity of the business and dull its competitive edge.
Seeing all of this in action has shown many managers that you can’t skimp on competitive salaries for your people. This Washington Post article goes into some of the related issues that come with tightening the purse strings in these ways.
They'll Know: The Open Data Age
In times past, companies tried to get away with offering lower than competitive salaries by simply withholding the information about the greater market from employees.
Now, though, we’re in the digital age. The Internet shows us a lot more information about our work and what we earn. In many cases, today's employees will find out eventually if they're not earning a competitive salary. That makes it even more important for companies to play ball and offer what's fair from the very start.
Perks, Etc. – Some Additions to Salary Bases
It's important to point out that companies do have some other tools to attract talent other than just base salary and commission. They’re not “replacements” for a good salary, in the same way that a candy bar doesn’t substitute for a holiday bonus. But they can help.
Some experts suggest that companies can benefit from a two-pronged approach where they offer competitive pay, but also offer unique perks or benefits to employees. For example, paid time off is an enormously valuable benefit to an employee that doesn't really cost the company much at all, at least not in capex cost. The same holds true for use of a company vehicle, or flexible scheduling. These things have value to workers, so they can augment a good salary in a positive way. That’s especially true when they’re not offered in patronizing or punitive ways (i.e. “you’ll only get (x) if you do (y)”), but freely, as recognition that the talent deserves it for the work that they do.
Benefits and Retirement
Beyond those kinds of perks, companies can also work insurance and retirement benefits into a compensation package.
In fact, companies may be able to rearrange aspects of their compensation and benefits plans to save themselves money, while also putting more money into the employee's pocket. Tax-free savings plans are one example. There's also some innovation in the 401(k) and retirement accounts that employees use to save for their golden years. Then there’s the value of health insurance – with big changes in federal policy that free so many people from job/benefits lock-in, there are synergistic opportunities for companies and their people. Somebody just has to find them!
With all of this in mind, a great corporate culture starts with rewarding the people who make your business go. Pay isn't the only thing that's important to employees – but it is one of the main things that’s important, no matter who you ask.
For more on how to succeed in business, talk to Cornerstone OnDemand about how to chart a positive course to the future.