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What is a Market Adjustment Raise?

May 6, 2022

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Employee pay is among the most contentious issues in the current business landscape. It is, of course, vital to ensure workers are compensated fairly for their skills, perspectives, and commitment. But it is equally wise for businesses to be wary of extending their capital beyond a sustainable point. Many companies have been less scrupulous about maintaining a positive balance here. Pay that isn’t representative of worker efforts or costs of living is among the key causes of the Great Resignation, which has seen workers resign from companies in their droves.

It is clear that there is a social and commercial imperative for businesses to address such issues. Yet, there is a great deal of consideration that must go into establishing what is a fair wage rate for employees. One method to ensure workers are being compensated in line with the current economic and industrial standards is salary adjustments based on market fluctuations.

We’re going to examine the issue a little more closely. What is a market adjustment raise and how should you implement them within your business?

Understanding Market Adjustment Raises

Before you can effectively implement market adjustment raises, it’s important to understand them a little better. As opposed to performance-based raises, a market adjustment is specifically focused on the value of the employee’s labor in the current economic climate. There are various reasons the market might change in respect of pay. Some of these include: 

  • Demand for Skills

Skills demands are among the most common reasons for increase in salaries. Unfortunately, there are various influencers that cause skills gaps in industries. This can be an inconsistency between experienced workers aging out and new talent entering the workforce. Increasingly this is caused by the development and introduction of more advanced forms of technology. When skills gaps arise, the market rate for workers with those abilities tends to rise with the demand. 

  • Geographical Location

Location plays an important role in determining the salaries of workers. The market rate for professional positions in the city tends to be higher than a similar role in the outskirts. This is because businesses recognize that cost of living tends to be higher in these areas and retaining workers is dependent upon helping them sustain a lifestyle. Similarly, if a specific area of the country becomes a popular hub for an industry — as with Silicon Valley — the market rate for roles can be higher in these areas to maintain competition.

In fact, this is something that we’re seeing play out right now with the explosion of remote workers. There have been countless examples of employers small and large changing the payscale for remote workers, as they don’t absorb as many costs as someone going into a physical office to work. Rightly or wrongly, we have seen these conversations in companies like Google, Facebook, and Twitter.

  • Salaries of Competitors

Industry competitors play a significant role in market salary rates. The common standard of pay between businesses in an industry tends to be seen as a good informal gauge on the value of each role. However, wage rates may rise in order for each business to be more competitive and attract the best workers. As such, it’s important for businesses to regularly assess not just the value of the role and the skills involved, but also the direction their competitors are going with salary rises. It’s vital for organizations within an industry not to prescribe wage rates across the sector, though. This is tantamount to wage fixing, which is in strict contravention to federal antitrust laws.

  • Worker Engagement

Particularly at times where widespread worker satisfaction is low, aspects of employee engagement can factor into the direction of market standards of pay. We’re seeing this at the moment during the Great Resignation, in which conditions across various industries have declined to the point that employees are willing to vacate positions. As such, the market value of positions can rise due to the need to keep workers actively engaged in their roles.

How Much Is a Typical Market Adjustment Raise?

Market adjustment raises are difficult to typify. This is because they’re dependent on a variety of factors. The average general pay rise at the moment sits around the 3% mark. However, that can change at times such as the present moment where there are economic factors that are likely to push the market rates higher across the board. Inflation contributing to the cost of living increase is particularly likely to make an impact soon.

While the 3% raise may be typical in the overall employment landscape, this is likely to be different in individual sectors. Industries such as manufacturing, logistics, and shipping are actively seeking to address their skills gaps. This could mean that the standard market pay rates for some positions in these fields could be likely to climb higher than average.

What Are the Challenges Involved?

As with most aspects of employee compensation, making market adjustment raises is not always straightforward. There are some hurdles that arise during the process, and it’s important to understand how to navigate these. 

Some of the key challenges include:

  • Salary Compression

A market adjustment raise may seem like a good way to compensate workers in line with their roles in the industry. However, simply sticking to these, particularly maintaining market averages, could result in salary compression. This is where entry level workers and those that have been with the company for much longer wind up getting paid similar rates. This may be in line with how the market values their roles and abilities, but it can still result in worker dissatisfaction and higher turnover. As such, businesses need to be aware of circumstances in which they need to go beyond the base market rate for some workers’ raises in order to aid retention.

  • Reliable Data

Good data drives market adjustment raises. Without solid information on the key influencers of pay rates, businesses are unable to make the most impactful and sustainable changes to salaries. Not to mention the data used needs to be reflective of the current conditions. Simply taking a look at the latest Bureau of Labor Statistics (BLS) statistics for a role generally isn’t going to cut it. As such, it’s important to have a strategy in place to gather and assess high-quality data on a regular basis. This may include utilizing business intelligence and data analytics consultancy services to conduct salary surveys of the wider market and your industry.

  • Market Position

The type of market position on salaries you choose to maintain can seriously impact the success of your business. Your choices need to be in line with a consistent philosophy on compensation and justifiable to your stakeholders. Market leaders can be more competitive in their industry, but this significantly eats into capital and may set unsustainable expectations for the future. Matchers seek to maintain salary levels in the middle of leaders and laggers. This might seem sensible but it can come at the cost of not attracting the best employees. Businesses who cannot afford higher wage rates might seek a market lag. To implement this, though, it’s important to utilize alternative forms of compensation such as rewards programs and benefits.

How to Communicate a Market Adjustment Raise

While market adjustment raises may come as a pleasant surprise for some, for others it is almost certainly going to be lower than they expected. You, therefore, need to take a considered and structured approach to communicating the decisions behind the raises to your employees.

Firstly, unless there is a general raise across the board, avoid communicating market adjustment raises via email. Wherever possible, human resources professionals and direct managers should talk to employees individually. This is a far more respectful approach and gives workers a chance to discuss the matter in full. It also leaves less room for miscommunications.

During meetings, take the time to clearly outline what information has factored into your decision-making. Provide your employees with the data that you have gathered to assess the market and how this has impacted the adjustment figure. Be as transparent as possible here. If your company has chosen to aim for a market lag, be open about the reasons for this and how the company has sought to compensate workers in other ways.

You should then set expectations for further action in relation to their pay rate. Talk about how their salary can change as a result of further development, progression opportunities, and merit-based activities. Talk about your commitment to monitoring the market rates and at what points they might expect further such raises.

Finally, and perhaps most importantly, give your employees opportunities to respond. Encourage them to ask questions about the process and answer these frankly. Give them opportunities to leave the meeting and consider the implications of the raise with an open door to return with further queries. Indeed, it can be worth setting up anonymous conversation feedback channels so workers are able to give constructive data on their thoughts, feelings, and concerns about your company’s approach to market pay adjustments. This gives you key insights into how engagement may have changed as a result of your adjustments and where you can make improvements.

Wrapping Up

Pay rises can have a significant impact on companies’ relationship with their workers and continued employee engagement. One approach to this is to base salaries on the current market for specific positions and making adjustments as this changes. This can seem like a fair way to approach the process. But determining the right rates can depend on various influencing factors. Not to mention navigating challenges surrounding gaining the right data and avoiding salary compression. It is also vital that businesses provide clear, data-backed, and empathetic communication about the reasoning behind taking this route for raises. With some research and respectful conversation, your salary decisions can help retain your workers and keep them positively engaged.