APU Business Original

How to Make Strategic Decisions about Employee Pay

By Dr. Gary L. Deel, Ph.D., J.D.
Associate Professor, Dr. Wallace E. Boston School of Business

In a previous article, I described how pay is an important part of the overall compensation package that a company offers its employees. But an important question when employers consider the subject of employee pay is: How much should workers be paid?

Employers naturally want to pay enough to satisfy certain criteria. First, the pay should be enough that employees are willing to stay. If the pay is so low that workers are anxious to leave, then turnover will be high. As a result, the costs associated with onboarding new employees to replace those who leave can quickly surpass whatever savings are derived from low pay in the first place.

Second, employers want to pay enough that employees are properly motivated to do their jobs, at least to the minimum levels of expected efficacy and efficiency. The relationship between employee pay and motivation is a complex one, and more pay doesn’t always mean more productivity. But employers want to at least make sure that pay is sufficient to incentivize employees to do a decent job at work.

On the other hand, employers have a financial incentive not to pay a dime more than absolutely necessary to accomplish these two goals. In publicly traded companies, there is even a fiduciary duty among managers to avoid paying any more wages than they must in order to maximize profits for shareholders. This duty is why a lot of businesses have removed human labor and replaced employees with machines wherever the current level of technological sophistication has allowed.

Determining Proper Employee Pay Depends on Various Circumstances

But for those jobs that cannot yet be outsourced to robots or computers, the question remains: How do we determine what an appropriate pay rate is for a given job?

The answers to these kinds of questions are obviously dependent on a number of different circumstances. For example, the geographical location of the job matters greatly because the cost of living varies wildly across regions. The same job that might pay $8 or $10 per hour in rural Alabama might pay $20 or $25 per hour in San Francisco because the latter area obviously has a significantly higher cost of living than the former.

Another important consideration is time scope. The time during which a company is recruiting for a job can really affect appropriate pay schedules, because economic performance metrics cycle up and down over time.

For example, imagine that a company wants to hire employees during a recession, when unemployment is on the rise and applicants are desperately competing over a very limited number of open jobs. As a result, the hiring company may be able to reduce its pay offers and still find plenty of prospective employees willing to sign up. But while this tactic might be a financially strategic choice, that does not necessarily mean it would be an ethically defensible one.

But if we are talking about a defined area and a defined point in time, how then might businesses set about determining what pay rates are appropriate for their various positions?

One way to acquire this information would be to ask employees about their salary impressions and the gaps between reality and needs, which might yield some interesting insights. However, it’s important to point out that employees are highly motivated to be less than completely honest with such questions.

Less secure or confident employees who are unhappy with their wages might be disinclined to say anything contrarian for fear of ruffling the employer’s feathers. They won’t want to complain about pay and risk positioning themselves on the chopping block when the next round of firings or layoffs are carried out.

On the other hand, more confident employees might be tempted to challenge pay standards and overstate how much pay they believe they should be earning in hopes that the employer might follow such advice. But in either scenario, these kinds of answers offer little help to employers as they reflect subjectivity and bias that ignores that central question of appropriate employer pay strategy across the board.

So internal employees are not always the best measuring stick for employee pay strategy. But another way of attacking the problem of pay strategy might be to look at the competition and use competitor pay rates as a benchmark.

However, most private-sector pay is not publicly available information. So the only way to get such information might be to call and ask for it.

But that strategy has two serious problems. First, a competitor would obviously not likely be keen to simply give out such information for the asking, at least not without something in return.

Second, asking for that information could very likely lead to a potential violation of the Sherman Antitrust Act. The Sherman Antitrust Act of 1890 is a landmark piece of federal legislation which essentially holds that businesses cannot collude for the sake of forming a monopoly at the expense of other competitors and/or consumers. But how does that apply here?

I previously said that an employer would probably not be willing to give a competitor their pay rate information for free. Let’s suppose Ernie and Bert are competitors who each own a hotel chain. One day, Ernie calls Bert and asks Bert for information concerning how much Bert pays his employees.

We would probably expect Bert to decline. After all, why would Bert want to tell Ernie how much he pays his employees if he knows that Ernie will use the information against him to pay slightly better wages and steal away all his best workers?

But what if Bert could request something in exchange to make a quid pro quo out of the situation? For example, what if Bert asks for Ernie’s pay information in return? Let’s suppose Ernie agrees, and the two employers decide to simply exchange wage data.

But shortly after this trade, Ernie has a brilliant idea. Since Ernie and Bert are the two biggest employers in the hotel industry, what if they both agree to simply lower their pay rates for employees together? After all, Ernie and Bert essentially corner the market for hotel employees since their companies employ most of the hotel workers.

So if Ernie and Bert both lower their pay rates together, both companies will see more profitability. And the hotel workers will have nowhere else to go to find higher pay. They won’t be able to threaten leaving their jobs to compel higher wages. In essence, Ernie and Bert could extort their own employees by working together.

But this situation is precisely why the Sherman Antitrust Act exists. Under the Act, such collusion would be illegal. In addition, Ernie and Bert would be civilly – and possibly criminally – liable for illegal collusion and monopolistic activity.

Therefore, modern employers know that picking up the phone and calling competitors to ask about employee pay information is pretty much a non-sequitur. Even if such steps are taken with the very best intentions, they can still put companies under extreme scrutiny by regulators. So for all but the least scrupulous employers, this kind of tactic is off the table.

Other Ways of Legally Analyzing Competitor Data

But there are other ways to study and analyze competitor data without breaking the law. For example, private associations specializing in human resources and compensation sometimes organize consortiums of major players across different industries. They then aggregate data and report general trends and statistics to members.

For example, suppose Ernie and Bert are part of a collaborative group of 10 or 20 area hoteliers who confidentially report their employee compensation data to a mutual human resources support organization. That organization takes the data, removes any labels or identifiers that would make it traceable to a specific source, and then runs some statistical metrics such as average employee pay, median employee pay, and so on. The organization then publishes the overall statistics to the member hotels who participated and contributed to the datasets.

By using this approach, association members can benefit by getting a rough idea of what average hotel worker pay looks like in their area for different positions. But they cannot access company-specific information, so the Sherman Antitrust Act is generally not violated by these kinds of efforts.

Some of these sources of data come at a cost, and other sources may be free. For example, the Society for Human Resources Management (SHRM) Compensation Data Center offers reports on compensation statistics that cost a few hundred dollars.

On the other hand, the Bureau of Labor Statistics (BLS) also collects data across industries for similar purposes, and BLS data is generally accessible without a charge. The correct choice for different companies will come down to unique needs and how different sources of data can meet them.

Improved Transparency in Employee Pay Ranges Is Growing

Ultimately, a more effective means of understanding and analyzing competitor pay data may come from the wage transparency movement that is currently echoing throughout state legislatures. Wage transparency laws require employers to publish pay ranges for their positions or to make it available to applicants. These laws are only in effect in a few states at present.

However, the published data might give competitors in those states a viable opportunity to study each other and adapt their employee pay strategies accordingly. But because the disclosures are government mandates and because there is no direct communication or collusion between different companies on employee pay, the Sherman Antitrust Act is not violated.

Employers Need to be Smart About How They Strategize Employee Pay

One way or another, employers need to be smart about the way they strategize employee pay. Through the use of anonymous compensation surveys and publicly available data, companies can maximize their pay engineering efforts without breaking the law; these approaches are a safe but reasonably effective means of accomplishing pay goals.

Dr. Gary Deel is a Faculty Member with the Wallace E. Boston School of Business. He holds an A.S. and a B.S. in Space Studies, a B.S. in Psychology, a J.D. in Law, and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for the University, the University of Central Florida, Colorado State University and others.

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