Labor Market: What is the Relevant Labor Market?

We have discussed the differences, layers, and sub-sections of the labor market in the last few posts. Given these market elements, what is the best way to measure our labor market?  More than likely, the market that you will be the most interested in is your relevant labor market.  The relevant labor market is the market that you draw labor from and lose labor to on a regular basis.  It is the market that you have to compete in on a regular basis to attract and retain the best and brightest employees for your organization.

In your job, you have probably heard from employees that there are job postings somewhere that have starting salaries more than what you are currently paying.  I worked with a human resource director recently that described employees in her organization as “consummate researchers” and “selective innovators.”  She described how each time she released a pay plan there are at least ten employees that come to her office with a list of opportunities that would pay more than what her new range will offer.  However, these same employees never have suggestions on for operation innovations or other internal working groups.

There are three key questions that need to be answered before designing a relevant labor market survey:

• What is the organization’s strategy and position?
• What does the organization want to value?
• How precise do I want the data to be?

What is the organization’s strategy and position?

Every organization evolves over time.  While some organizations might simply allow the environment to dictate its direction and results, most of us would prefer to develop a strategy and pursue a specific path that matches our expectations.  In the simplest sense, business strategy takes into account where the organization is now and creates a plan for leading it to where it wants to be in the future.  In order to realize the desired future, an organization assembles specific resources that it believes will make that reality possible.  The strategy is important for determining the compensation philosophy or how the organization desires to respond to the labor market since the type and capability of its human resources are one of the most important factors for success.  The desired philosophy is influenced by the business strategy, desired performance level, level of competition in the marketplace, desired market position, and available resources.  As much as possible, an organization should design labor market surveys that target the groups that are embracing similar strategies to better align the relevant portions of the market.

What does the organization want to value?

Every organization values the work or contribution of its employees by internal, external, or both factors. Internal factors include job related elements such as experience, education, longevity, skills, relevant contribution, or performance.  Internal factors are combined to conduct job evaluation which provides job ranking or the job worth hierarchy.  The market rate for each job is the primary external factor.  Most organizations combine internal and external factors to value each job.  An internal factor focus necessitates careful attention to examining how other organizations reward and their characteristics while an external focus requires more focus on the breadth of the relevant market space.   In an organization that combines internal and external, organizational matching and market breadth are equally important.

How precise do I want the data to be?

Labor market surveys are used for different purposes.  The most common reasons include assessing and updating the market positioning of one of the following:

• overall pay structure;
• specific pay grades;
• job families;
• jobs; or
• pay levels.

The purpose of the survey determines what level data is collected and how precise the data needs to be. An organization that wants to focus on the entire structure needs to collect broad-based data on a statistically relevant sample of jobs while a more focused analysis would drill down on a subset of jobs.

Before you create a market survey, ask yourself the following questions:

• How can our compensation practices support our business strategy?
• What is our compensation philosophy? What do we want our market position to be?
• What do we value in the organization? Skills, performance, longevity, market competitiveness, or a combination?
• What am I conducting the survey for? Updating or verifying?
• What level of analysis do I need? Pay plan, pay grade, job family, job, or a combination?

Each of these questions dictates how you assemble the survey.  Next post I want to move on to selecting jobs and targets for the survey based on these factors.