Table of Contents
What is Competitive Pay?
Competitive pay attracts and retains talent based on hourly or salary wages. Within the industry, competitors battle for talent. The same idea is present between industries. How does a booming tech start-up compete with a multinational retail corporation? Whether businesses rely heavily on entry-level positions or a well-staffed executive team, pay is a major consideration for most employees.
Why is Competitive Pay Important?
There are two main reasons why having competitive pay is important: attraction and retention.
- Attracting new talent. Employees expect different wages according to their experience and education. Imagine yourself as a lifeguard the summer of your freshman year of high school at the local neighborhood pool. Does $8 per hour sound as competitive as the water park position paying $10 per hour? Or imagine yourself as a newly graduated college student who was working for $14 per hour. You begin to search for a salary position because you believe your work now has more value to it. Employers determine what skills or experience their employees need for the business to run successfully and set their wages to attract them to the company.
- Retention. Getting employees in the door is only a portion of the competitive pay battle. With the security of a job, some employees may passively look for open positions to see if there is something better. This is especially true if the employee feels they bring more value to the position than they are currently being paid. Employers must decide competitive starting wages, increases, frequency of raises, and progression opportunities to retain these employees.
Factors that Affect Competitive Pay
Three factors affect competitive pay in a significant way: competitors, inflation, and cost-benefit analysis.
According to Indeed, McDonald’s and Burger King have similar salaries in several positions. McDonald’s crew members average $10.29 per hour while Burger King crew members average $10.51. Shift managers average $12.21 and $12.14 per hour respectively. Cashiers average $10.06 and $10.56 per hour respectively. It is considered a competitive advantage in nearly every industry if a company can have a significantly higher wage than everyone else. Competitors hold one another accountable on wages.
SHRM shared how inflation drives ‘real’ wages down. As inflation rises, consumers pay more for services and products. This is why a gallon of milk in 1995 cost $2.48 while in 2022, the same gallon costs $3.55. The circuitous nature of inflation causes companies to raise the prices of their product or service to remain profitable, which causes employers to raise wages so their employees continue to take home a competitive wage, which causes companies to raise prices to afford higher labor costs and so on. This affects all companies and is constant.
Buc-ee’s, a chain of country stores that has stations across the southern states, is famous for its higher than normal minimum wage. While the U.S. Department of Labor minimum wage is $7.25, at the date of this article, Buc-ee’s starts their cashiers, food service, gift, or warehouse employees at $15-$17 per hour. Maintenance or car wash workers start at $16-$18 per hour. Team leaders start at $17-$20. Most positions do not require a college education or high school diploma. Buc-ee’s is able to offer higher pay compared to their competitors because they offer many services and goods rather than relying on gas revenue alone. Offering other services and goods with a higher markup percent can lower the price of fuel to attract more customers. This is an example of cost-benefit analysis or comparing the estimated cost to the benefit, such as competitive pay. Companies can perform similar exercises in how to lower operating costs or gain revenue in order to have competitive pay.
How To Calculate Competitive Pay for Your Company
Step 1: Research the Industry
The first and best step is to understand the pay range for the position that you want to be competitive in. This helps you determine your starting range and your top pay. Researching also ensures that your company is not unintentionally paying too far above the normal pay range.
Step 2: Determine the Required Staffing
Closely associated with evaluating pay is determining the number of staff required to fulfill customers’ needs. If a private school needs 10 teachers, does the combined wage of all 10 teachers fit into the budget? If not, does the wage need to be lowered or do other elements of the budget need to be altered to accommodate the higher wage? Providing higher wages is not an isolated decision and affects the company’s operation as a whole.
Step 3: Evaluate the Impact of Wage Increases
When an entry-level position has a higher wage, supervising employees or positions vertical on the organization chart will be affected. Dissatisfaction may occur as managers feel they should receive a wage increase as their subordinates’ wages increase.
The concept of pay compression also plays an important role. This is when newly hired, less experienced employees earn equal or more than current employees. This can lead to dissatisfaction and a sense of unfair treatment to loyal employees at the company. When entry wages increase, how much will the current employee wage increase?
A company should carefully consider how competitive wages affect all employees in the company, not just the position receiving the competitive wage.
Questions You’ve Asked Us About Competitive Pay
What is a competitive pay package?
Competitive pay depends on the industry the employee is in. Some consider a higher hourly wage competitive while others consider a high annual base salary plus variable compensation competitive. Other elements of packages can include stock options, 401(k) contributions, health benefits, profit sharing, and paid time off.
How should an employer negotiate with an employee over competitive pay?
One of the best questions to ask in the interview process is, “Based on the job post details, what are your pay expectations?” This early sign of transparency allows the employer and employee to reach common ground before a job offer is extended. Additionally, the company needs a clear understanding of the overall budget for a position. Combining these elements allows for the best fit for a new hire.
Are there any cons to offering competitive pay?
When companies improperly raise wages or are too aggressive on being competitive, it can hurt the company. If labor costs are too high compared to revenue, layoffs may need to occur to obtain profitability, which hurts the employer’s brand in the long run.
If employees work at the company exclusively for the wage, they can easily be persuaded to move on, resulting in a high turnover or lack of loyalty in staffing and operations.
Austin became the HR Manager at Nursa in 2022 where he is building a HR department in the company’s second year of operation. Before that he worked as an HR Director at Discovery Connections and an Account Manager for a Section 125 benefits and COBRA administrator. He graduated from Brigham Young University with a Bachelor of Science (BS) in Exercise Science in 2019 and from Southern Utah University with a Masters of Business Administration (MBA) with an emphasis in Organizational Leadership in 2021. At the end of 2021, he became certified with SHRM-CP.
Originally from Oklahoma, Austin enjoys trying new foods in new places he travels to, watching college football, and snowboarding at the local resorts in Utah. He has been married to his wife since 2019 and owns a cockapoo named Hershey.