Market Pricing Is a Trap: Unlock True Compensation Fairness

Welcome to the Built by People Podcast, where we share the stories and insights of the world's top HR leaders. Join us as we dive deep into the minds of HR executives, uncovering their strategies, challenges, and triumphs in shaping today's workforce. I'm excited to welcome Patrick to the Built By People podcast. Patrick, thank you so much for joining us. And as a starting question, I always love to ask if you could share a little bit more about your career journey.

Thank you, Dave, for the chance to join your podcast to become a convenient way to hear what smart people are thinking and have to say, which has always served me well. And I hope your listeners find our conversation thought-provoking and interesting. As a podcaster, I'm certain you appreciate that words matter and your choice of the word journey and your question, I think, is fitting. When I think of a journey, my mind typically pictures a passage from one place to another. And for some, career journeys do take us to live and work in different places. But in the metaphorical sense of the word, my journey has been very simple. I've had the good fortune of working at great companies with outstanding people and role models, and they've all been instrumental in helping me shape my career over the last 30 years. HR found me very early in my journey, and I leaned in to the pay side of the total rewards side of HR very early in those years. My introduction to all things employee benefits came later. Today, I am responsible for compensation and benefits for a battery recycling company called EcoBat. With operations throughout Europe and the United States, EcoBat is in the collection, recycling, production, and distribution of energy storage solutions, lead and polypropylene products, and other commodities that are essential to modern life. We are also leading the way on lithium battery collection and recycling management services to empower sustainability efforts around the world. Before joining Ecobat, I've had the good fortune of leading total rewards teams for several energy companies. I spent time in sales compensation, stock-based compensation, and executive compensation compensation roles in, in the technology services sector. So all of that to say that I'm very happy and proud to have spent most of my career as part of HR. And I find that total rewards in particular is an opportunity to contribute to the lives of employees and their families, and at the same time, make a difference in the performance of the companies for which we work.

Patrick, market pricing is widely used for evaluating pay programs. You've mentioned that there are some flaws in this approach. Can you elaborate on these limitations and what HR leaders should consider beyond market pricing data?

Dave, I can't tell you the number of times I've heard the question, you know, what is the market when being asked about the value of a job? It has been tossed around enough over the years to have become an easily recognizable part of the HR lexicon. So I want to start. With a story about the market. Early in my journey, I was serving as a compensation analyst for an independent oil and gas company. And by independent, I'm not referring to a fully integrated major oil and gas company such as Exxon. And the reason that distinction is important is because at that time, there were two key oil and gas compensation surveys with exclusive participation One survey limited participation to only major oil and gas companies, and the other was exclusive to independents. And because of some legacy exceptions, the company for which I worked was permitted to participate in both surveys. And as you may expect, my job was to analyze results from both of the surveys and compare and contrast the differences. Several benchmarking positions were common to both surveys, such as petroleum engineer and geologists. And I was tasked with reviewing the results and presenting findings to leadership over those functions. Well, in one year, the survey results for these positions were higher from the survey of the major oil and gas companies. So leadership for the company I worked for concluded that Hey, we're more like a major than we are an independent. So let's use the findings from the survey from the majors to set our pay policy. The very next year, the following year, results from the survey of the independents were higher than the results of the survey from the majors. Leadership in that year concluded, hey, you know what, we're more like those independents than we are the majors. Let's use the survey from the independents to set our pay policy. Well, I enjoy telling that story because of how how easy it was for leadership to change its identity to get what it believed would be a better outcome. But the often overlooked part of that story is the change in survey findings from one year to the next. It highlights, for me, it highlights the paradox of the overreliance on tracking market pay practices. Companies naturally want to know what their peers are doing and to keep up with industry trends. However, in that process, the opportunity for a company to create misalignment with their business becomes real. That story also spotlights the inherent limitations of market pricing. Using market pricing techniques to measure the marketplace, to set pay policy and evaluate the competitiveness of those policies is fundamentally a very good process., but it's misleading to suggest that it is anything more than a really good estimate. Let me put it to you this way. Market pricing inherently relies heavily on compensation and salary surveys to help leadership at companies regulate their pay programs and manage compensation. Yet the compensation data from surveys is unlike any other applications of statistical analysis and evaluation. Survey data is pay data that is a reflection of the pay of people whose age, tenure, experience, and performance all influence what they are paid. And to add to that, companies that submit responses to pay surveys, they have different pay philosophies, and surveys are conducted at different times too, so they may have different effective dates. And then there are decisions about which surveys to use. Do you use industry surveys or surveys in which particular peer companies participate? Do you use regional surveys, national or global? And if you use more than one to price jobs in the market, how do you weight the surveys? And are you comfortable with the sample size? My point in mentioning all of these factors is that market pricing involves multiple variables. If the objective of market pricing is to translate market data into actionable pay decisions, it's important to remember that your market pricing results will not replace the role of leadership judgment. It's our job to draw conclusions and reach decisions. Market pricing simply helps define a reliable baseline. While it's a useful source of competitive pay data and decision-making, market pricing is descriptive, not prescriptive. Statistical averages and medians serve as points of reference, not definitive pay levels. So let's say you work on a compensation team. You've priced a position, you're happy with the market value, it's consistent with your expectations, it's consistent with similar positions, and you feel like you could easily defend your work. You share the market value with a hiring manager and you probably hear something like, I can't hire a person at that rate of pay. It will no doubt cost more. Don't forget that two things can be true at the same time. While market pricing is used to set a hypothetical market rate for a given position, the rate of pay needed to hire a particular person may be higher. And if that person is a top performer, you can almost count on it. The, in reality, the, it is, it is very common to find wide differences between lower paid and higher paid individuals performing identical jobs at separate companies. It's HR's job to use market pricing to focus on how a position is paid. That is, making sure positions of similar scope and complexity are valued similarly. Leaders should focus on how individuals are paid. And Dave has mentioned earlier, I mean, it's common to be asked, what does the market survey say? But given the nature of market pricing and salary surveys, The answer to that question can easily be, what do you want the market survey to say?

Patrick, how do you recommend companies balance the mathematical aspects of compensation with other factors when making informed pay decisions?

Part of, part of the appeal of being a part of a compensation team, at least for me, is the math. It offers a sense of precision and there's pleasure in balancing equations and and figures ticking in time. However, as hinted to earlier, practicing compensation can be subjective. It's built on the illusion of certainty and accuracy, but with a few changes in assumptions, two comp people asked to market price the same position with the same data could reach different conclusions. That inexactitude is hidden behind the work product that we share with our HR colleagues and leaders, and they are often left with the sense that there is a precise market value for a job. In my experience, there is a perception among leaders that HR drives pay outcomes to that market value. Companies that construct their pay ranges using market pricing generally set the middle of their pay range to approximate market values, which creates a march to the middle pay practice or phenomenon. But it is incorrect to believe the way to pay competitively is to pay at the middle of a pay range or at a calculated market value. Keep in mind, market values and salary ranges midpoints represent where a company wants to manage pay for a given set of jobs. It does not represent where employees should be paid. Two people, for example, in the same position need not necessarily be paid the same. There may be significant differences in experience and capability. One person may be new to the position and settling in while the other may be heavily experienced.

And with pay transparency laws becoming more prevalent, what unexpected outcomes have you observed when companies transition from guarded to open pay practices?

It's interesting to me that in the US, we live and work in a time of mixed pay transparency. There are examples of pay transparency all around us. Labor unions publish their rates of pay in collective bargaining agreements. The rates of pay and increases unions are often negotiating are featured in news stories and articles in order to generate public sympathy and support. Rates of pay for civil servants are public for purposes of transparency and accountability in government spending. And for publicly traded companies, executive pay for select individuals is required to be disclosed to investors by the Security and Exchange Commission. And lastly, I mean, if you're interested, you can find out how much your favorite athletes are earning from their latest contracts by tuning into the local sports talk radio show. But in the context that we're discussing today, when we say pay transparency, generally we are talking about communicating information about compensation where it was not typically available. And I'm sure your listeners are very familiar and very aware of the statutory requirements related to pay transparency. It's— pay transparency is here. It's not an option and it's spreading. But again, outside of public sector and unions, there has been a practice to be secretive. And it is for this group that pay transparency legislation matters. Of course, it will be important to comply with those regulatory requirements and equally, if not more important, to tell employees what they can expect. However, I would submit to you that employees in general will accept and be okay with pay transparency. There's already empirical evidence that they can handle it. And who would not appreciate knowing how much the job they want is paid? I think that's going to be a no-brainer. The expected outcome, or, or the unexpected outcome, I should say, or resistance, I believe, will come from two groups. First, Some leaders will resist pay transparency because it exposes their decisions. Leaders will be forced to explain and defend their decisions. There will be no more cover. And if their decisions are based on factors other than performance or experience, it may invite criticism. And that's where the rubber will meet the road. HR can help leaders get in front of potential issues by having open conversations about problems leaders would have if they were required to post pay, and then they can help course correct. But the key to getting this right will be through managers being able to talk about compensation, being able to explain their decisions, and making people believe that they're being paid fairly, that their pay is competitive, their pay was determined through a rigorous process, and that they can influence their pay through their performance. The second group that may have a bit of trouble could be HR. Transparency represents a change. And so the, we've always done it this way crowd in HR may struggle. Plus HR has had the comfort and security of kind of pulling the strings behind the curtain. And with transparency, that curtain will be open and HR people may not feel as special as they once did.

Patrick, how do you approach creating compensation strategies that work across multiple countries and markets?

I think my formula is simple. Developing strategy starts with a core foundation or a set of guiding principles. At Ecobank, that foundation starts with the belief that our pay does not have to be the highest, but we want to be better than average. After all, no one wants to be average. And if our objective is to hire the industry's best, we need to be prepared to pay for it. We reward based on individual contribution and company results. We emphasize differentiation through incentives. We prioritize fairness and communication. We promote flexibility by being responsive to market norms, and we evaluate cost-to-benefit relationships of our programs, and then we support data-driven decision-making. That model is applied across Ecobat's divisions and across countries in which we operate. And our pay programs are adjusted as needed to acknowledge and respect the differences across borders. For example, just over a year ago, the company wanted to expand participation in a common annual cash incentive plan for purposes of unifying how rewards are determined and paid for similar work and for purposes of providing insight on how much the company was spending. This required changes to over 30 existing bonus schemes across 9 countries. Where we landed was a single bonus structure with a common set of financial and operational measures, with adjustments to the metric weightings to account for local country differences and customs, and then common bonus percentages for common jobs. But we could not have done that without that foundation and without the cooperation of the leadership in-country. So part of that job involved developing relationships with those leaders and meeting with them on a regular basis to understand the nature of the change and how it was going to impact themselves and their employees.

Patrick, what parting advice would you like to share with our audience?

One of the executives I worked with years ago wrote a popularized version of a Henry David Thoreau quote in permanent marker on a whiteboard that has become one of my favorites. It's not what you look at that matters, it's what you see. The actual quote is, the question is not what you look at, but what you see. The meaning from both versions is the same. It emphasizes the importance of interpretation over simple observation, and that we can uncover ideas and solutions that are not immediately obvious. So my advice to your listeners is this: the environment in which we work today is growing in complexity. The degree of difficulty is, is increasing and time is shrinking, which makes it more important now to get it right. So keep an open mind when you interact with others and ask yourself what things are different than what we thought, and don't accept an outcome that isn't the result of an intellectual conclusion.

Patrick, thank you so much for joining us on the Built by People podcast. It was a pleasure to have you.

My pleasure. Thank you.