Market competitive pay may not be perfect but it works

I wrote this post as a contribution for another blog - http://marketcompetitivepay-pegasus.blogspot.com/ but decided to reproduce it here for the regulars

Whether it is the stock market or the job market, Market does work, though they may not be perfect as yet and may not become perfect ever. Cost-benefit analysis may not be done consciously, either by firms or individuals, it is always done.

There are many direct and indirect costs and benefits involved. What is valued, how much it is valued is different for the firm and for the individual. For example, consider office location. I know many people who are willing to take a lower salary so that their travel time is reduced. Recently I met a lady who changed the job so that her travel time is reduced but after joining she learned that the new company is also shifting to a far off location shortly. I am sure that she is going to change her job shortly, once again.

Alternative to Market Competitive Pay is to fix the compensation based on the reservation prices of the firm and the candidate. Based on the value addition, company can calculate its reservation price and similarly candidate can come up with a reservation price based on her priorities. But consider doing this for yourself or the next candidate you want to hire. It is quite difficult in both cases and one immediately tends to fall back on the market information to benchmark. Apart from this the Market Competitive Pay is the BATNA (Best Alternative to Negotiated Agreement) for both the parties. Except in few cases where the company or the candidate has clear negotiating power, where we can observe negotiation happening and the compensation may not be comparable to market, in majority of cases Market Competitive pay works. Even in the minority cases, where one party can fix prices, it would lie somewhere in the bargaining zone, which is Market based.

Though HR Managers keep talking about intangible benefits, very rarely they succeed in bringing down the direct salary costs unless the claims are well accepted in the market and the candidates believe the claims to be credible. On the other hand money is credible in all circumstances and conveys lot of information when examined in combination with other information publicly available. This could be one reason, we observe that candidates tend to choose either a well-known firm or a firm that pays very well. Even the reputed firms can't go below a certain level in pay, which indicates that reputation of a firm is only marginally beneficial. Firms that are average in both pay and reputation finally end up with adverse selection issues.

The first two posts rightly identified that stage of career also affects choices of the candidate, we cannot simplify and generalize it. I have personally observed that even gender would play a part. But before we draw a conclusion, we have to verify whether these factors have statistically significant effect on choices or not.

This post clearly sounds a little (or too much) technical but I hope the readers got the essence of it. Feedback and comments would be greatly welcome.