Competitive Pay: What It Is and How to Get Started

You can't guess at employee pay without consequences. Your employees will talk about their pay, do research, or get offers from other companies. If you don't offer competitive pay, your employees will find out, and they’re not going to thank you for it.
Whether you're a small business or a large company, you need a clear, competitive compensation strategy, or your employees will simply pack up for new jobs. In our 2022 Compensation Trends report, 75% of employees said they'd consider leaving their current job for a salary increase.

So how can you go about creating a solid compensation plan to make sure your top talent sticks around? We dig into why competitive pay matters, including:

• How a total compensation package can help raise your competitive profile (without raising salaries)
• 6 tips on competitive pay, plus why you need to do pay equity reviews

Need help figure it all out? In BambooHR, everything works together to help you manage compensation and benefits, recruit and onboarding talent, and build an exceptional employee experience. Best of all, it's easy and intuitive for busy HR teams! Try it free today.

What Is Competitive Pay?

Competitive pay usually means paying employees a wage that closely tracks what other companies pay for a similar position.

How Do You Determine Competitive Pay?

Here are the criteria to use to determine competitive pay for a position:

• The market rate for that position (e.g., from salary surveys)
• Employee experience, skill level, and location
• State pay transparency and anti-discrimination laws

Why Is Competitive Pay Important?

Recruiting and Retention

Competitive pay is key to recruiting and retaining employees:

• 60% of employees rule out employers who aren’t transparent about salary while job searching.
• 75% of employees would consider leaving their current job for a salary increase.

Pay Conversations

Employees are also being strategic about competitive pay for their current position. The vast majority of employees (75%) prepare for formal compensation conversations at work, and they’re doing some of the same market research we mentioned above:

• Researching similar roles online (32%)
• Basing their desired compensation on past job history (30%)
• Asking other people in their industry about their compensation (28%)

Legislation Affecting Competitive Pay

Competitive pay is also becoming the law of the land, largely through pay transparency legislation. In California, for example, employers with 15 or more employees have to include pay ranges in all job postings and publicly report how much certain groups of employees are paid.

As another 15 states consider passing similar laws, being upfront and up to date with pay up is becoming less of a frill and more of a must.

Competitive Salary vs. Compensation Package

A competitive salary means paying someone at or above the market rate for a given role. A compensation package, or total compensation, takes into account all the direct and indirect ways an organization pays its employees.

Direct compensation is the money you pay directly to an employee (e.g., salary or hourly pay and bonuses), and indirect compensation is what your organization pays for on behalf of the employee, including benefits, paid time off, and other perks.

Here are examples of indirect compensation:

• Health and life benefits: Health and vision insurance, retirement contribution match, and life insurance
• Paid time off: Unlimited paid time off, paid vacation time, and paid sick time
• Perks: Company car, free gym membership, and free lunches
• Flexible work arrangements: Remote or hybrid work, four-day workweeks, and compressed workweeks

» Learn More: Which Benefits Do Employees Really Want? (10+ Companies With the Best Benefits)

How Can You Use a Total Compensation Package to Gain a Competitive Advantage?

The good news for employers is competitive pay isn’t all about offering more money—a comprehensive total compensation package is also a crucial part of attracting and retaining top talent.

Benefits top the list of priorities for both potential and current employees, with health insurance being the most important.

What Job Seekers Look For in a Potential Employer

1. Benefits offerings (68%)
2. Workplace culture (61%)
3. Total compensation details 59%

Source: BambooHR 2022 comp trends

Employees Would Take a Pay Cut For These

1. Health insurance benefits (41%)
2. Paid time-off benefits (38%)
3. Flexible work locations or hours (37%)

Source: BambooHR 2023 hiring trends

Aside from these examples of indirect compensation, the list of possibilities are endless. Here are other examples:

• Online therapy
• Pet-friendly office
• Casual work attire
• Public transportation passes or discounts
• Sabbaticals
• Stock options
• Childcare reimbursement

Whatever you decide to offer, tailor your benefits and total compensation package to what your specific employee population needs and what fits with your employer brand.

How Can You Educate Candidates About Your Total Compensation Package?

The most straightforward solution is to give candidates and employees a total compensation statement, which shows a detailed breakdown of direct and indirect compensation. List the dollar amounts for each item, and make sure you create an individual statement for each employee or candidate.

A total compensation statement can help you create more trust and transparency with employees, but you have to frame the conversation in those terms for it to have the right impact.

What to Include on a Total Compensation Statement

For direct compensation, simply list the exact pay amount. For indirect compensation, list the value of the benefit or the amount the organization is contributing to the benefit.

How to Research a Market Rate Salary

In order to understand what competitive pay looks like for a position, you need to figure out what the going market rate is for that job role and where you want to land: below, at, or above market. This is also referred to as salary benchmarking, which usually involves the following steps:

1. Research market rates, using government or consultant surveys.
2. Develop a pay range or pay grade for a position, e.g., using the market rate as your midpoint.
3. Regularly analyze employee pay and market data to make sure you’re keeping up with market fluctuations.

Competitive Pay in Practice

Let's imagine you're narrowing down your final candidates to fill an open HR role at your organization in Orlando, Florida.

According to the PayScale salary calculator, here is the market range for an HR generalist in Orlando, FL:

• Tenth percentile: $43,000
• Median: $53,000
• Ninetieth percentile: $64,000

Budget will obviously play a role in the kind of salary you’re able to offer. Offering the median is safe, but it’s not going to snag the more qualified candidates.

For example, if you need an absolute rockstar HR pro who can fly solo and won’t need a lot of training, you’ll likely want to shoot for higher in the pay range. This kind of strategy costs your company more upfront, but someone with years of experience will also be bringing more to the table than your average HR generalist.

6 Tips for Offering Competitive Pay

1. Gain Executive Support

As an HR representative, you’ll need to get your executive team on board with creating or updating your compensation plan.

Generally, this is as simple as helping executives understand that if employees aren’t getting paid what they’re worth, they will look for jobs elsewhere. Keeping top talent engaged and happy should be a priority for every organization.

2. Define Your Compensation Strategy

This will mostly come down to how competitive you want your base pay to be with the market value of a position and how you want to determine raises. Ask yourself how performance, skill, and job function will tie into establishing these.

Additionally, Anita Grantham, Head of HR at BambooHR, emphasizes the importance of pay equity as an integral part of any compensation strategy.

“Pay inequity is a culture killer!” says Anita. “As soon as you bring in someone new making more than someone already existing, you’re going to kill performance and incentive for that long-time performer, and it’s just not fair.”

As you determine your compensation strategy and how you’ll go about offering competitive pay, be sure to do the following:

• Stick to a clear pay philosophy.
• Decide if your benchmarks will be at, above, or below market value.
• Make sure you bring in all hires within that range.

3. Gather Market Data

You will want wage information from your market which is other employers who are trying to hire employees of the same type and caliber, taking into account a few basic criteria:

• Industry
• Company size
• Location

So what’s the best source for market research? Steer clear of self-reported data, warns Anita. “You need to use data reported by an organization into a system.”

Instead, Anita recommends looking for surveys that you participate in, share your own pay data, and then get the final data back. If you have more budget to spend, you can also look into data sources like Bradford and Payfactor.

» Learn More: Pay Equity Conversations Don't Have to Be Uncomfortable

4. Build Pay Ranges

As in our HR generalist example, market data provides you with a salary range for each job your research, which includes:

• The minimum amount you would need to offer to hire an employee in this role
• The median amount you expect to pay most employees in this role
• The maximum you would be willing to or able to pay an employee in this role

“Pick the market median and build off of that,” recommends Karlan Evans, PHR and HR Director at Verisk. “This will help you figure out a higher and lower end of the scale and apply a grading structure.”

Pay grades are a common way of establishing pay ranges. In this model, each position is assigned a pay grade based on the following criteria:

• Level of responsibilities required to perform that role
• Amount of authority someone in that role has
• Length of time an employee has performed that role

5. Regularly Review Pay Raises and Promotions

Regularly assessing market values will help you stay competitive and fair when it comes time for yearly salary adjustments or when you’re ready to promote an employee.

“It’s good to have standard guidelines across the company,” says Karlan, “but then beneath those blanket guidelines, you may have specific and different benchmarks within teams, divisions, and departments.”

For example, an HR department and a sales department are going to have different benchmarks because an HR team member often doesn’t have the same quantifiable goals as someone in sales.

To ensure that you offer fair compensation and opportunities for pay increases across the organization, have teams tie their goals and benchmarks to the organization’s values. This ensures visibility for less quantifiable contributions and keeps the entire company aligned on the same path.

6. Ensure Your Organization Provides Pay Equity

Pay equity means paying employees with similar job functions comparably similar wages, regardless of their identity.

Pay Equity vs. Equal Pay

With pay equity, there will be circumstances where an employee has the same job title as another but is paid more because they have additional experience or expertise.

Pay equality, on the other hand, is more about identifying and correcting the wider systemic biases that prevent certain underrepresented groups from achieving the same positions as other demographics.

» Learn More: Pay Equity vs. Pay Equality: What’s the Difference?

Pay Equity Laws

Pay equity on the basis of sex is legally required by the Equal Pay Act, and many states have additional laws that include race and other protected characteristics. You should research all pay equity laws required by your state, but regardless, it’s best practice to provide equitable compensation for employees regardless of sex, race, etc.

Pay Equity Reviews

To keep your compensation fair overall, you will need to conduct pay equity reviews in addition to annual market reviews.

The goal of a pay equity review is to see where there are differences in pay that can’t be explained by legitimate reasons, such as:

• Skills and abilities
• Experience level
• Education or qualifications
• Tenure with the organization

Pay equity reviews are key to staying compliant and will prevent discrimination against employees populations that are more vulnerable to pay inequity.

Talking to Employees About Competitive Pay

While you don’t have to be completely transparent about pay, communicating your pay structure to employees, whether current or potential, is going to help you recruit and retain top talent. Similarly, understanding what types of compensation your employees really want will help you make smart decisions about benefits, base salaries, perks, PTO, and more.

“Even if you don’t want to tell employees their salary range, be transparent about how the business is doing and transparent with employees about how they are performing—especially if you are tying pay to performance,” says Evans.

Overall, it comes down to being consistent with your competitive pay and with your communication. This will give people a clear understanding of where they are now and how they can grow with your organization.