Labor Market Data: A Foundation for Managing Pay

As an employer, it is critically important to pay competitive wages and salaries as a way to attract and keep competent employees.  The key is to define what “competitive” means for your company.  What is competitive is usually a function of a number of complex factors, including how relatively easy or difficult it is to fill open positions.

Many employers also find that payroll costs are the single largest expense item.  Therefore, it is essential that wages and salaries be neither too high nor too low.  Pay needs to be managed.  Without reliable labor market data on most of the organization’s jobs, employers find themselves in a position of being held hostage to employees’ demands, anecdotal information, and managers’ “knowledge” of the market.

You may be assessing your company’s needs for labor market data and should know that for any given job, the market rates will be different depending on location, company size, and/or industry, to varying degrees.  Executive jobs are particularly sensitive to company size.  Jobs that tend to be more sensitive to location include clerical, administrative, technical support, and some professional and middle management jobs.

Consider using multiple published surveys that provide data on jobs that are unique to your industry and/or type of endeavor.  Some will report data on generic cross-industry jobs and others will be industry-specific.  You may even consider conducting a custom survey designed to fill to your unique data needs.

By analyzing the labor market data for the positions in your organization, along with internal indicators and your company’s pay philosophy, you can begin to develop a plan to manage pay.

– Shari Dunn, Managing Director

CPI vs. COLA

Now, more than ever, it seems that everything costs more.  Gasoline prices hover near $4.00.  A loaf of bread or pound of butter can easily cost $5.00.  Bacon?  $8.00??  Most of your employees are probably feeling the squeeze (as we all are!) and many may be thinking, “I need a raise.”   They might hear that the Consumer Price Index (CPI) has gone up and be hoping you’ll give them a cost-of-living adjustment (COLA).

Although that may sound logical, the CPI is not the same as labor market inflation, or vice versa.

The Consumer Price Index (CPI), measured by the Bureau of Labor Statistics, is “the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”  Basically, the CPI measures the increase of average day-to-day living expenses.

A cost-of-living index measures the purchasing power of consumers in maintaining a certain standard of living, and is often used in comparing geographic differences.  For example, it may be appropriate to provide a cost-of-living allowance to a relocating employee. 

Although some government entities, like Social Security and federal retirement systems, do tie COLAs to the CPI, it just doesn’t make sense that, as an employer, you be responsible for maintaining your employees’ standards of living, particularly as employees all have different “standards.”

Ultimately, you want to be sure that you are not overpaying or underpaying your employees, each of which has significant financial consequences.  Rather, you should base your pay decisions on your organization’s unique pay philosophy and internal indicators, as well as current, reliable labor market data.

– Sarah Johnson, Associate