Making sure your wages stay competitive means focusing on the cost of labor, not the cost of living. And relying on old data or only occasional reviews just won’t cut it.
We talked with compensation expert Susan Pyles to put together insights on pay practices that meet market demands.
Cost of Living vs. Cost of Labor
Before we dive in, let’s clarify something important: When we talk about wages and inflation, it’s critical to distinguish between the cost of living and the cost of labor.
Cost of living covers everyday expenses like housing, groceries, and transportation.
Cost of labor, on the other hand, includes everything associated with employing someone—salary, benefits, employer taxes, training, and overhead expenses.
Susan emphasized that companies should shift their focus from cost of living and inflation data to the actual cost of labor when determining pay decisions.
Recent data from the U.S. Bureau of Labor Statistics (BLS) supports this view, showing that nominal wages are rising but often not quickly enough to match inflation. For example, wages might increase by 5%, but inflation in certain sectors can jump nearly 7% (BLS website).
This mismatch directly affects your ability to attract and retain top talent.
The Importance of Credible Compensation Data
Susan recommends that when benchmarking pay, companies should rely on credible market data surveys rather than employee-reported figures from sites like Glassdoor or Salary.com.
To stay competitive, Susan suggests reviewing market studies annually and whenever you hire or promote someone. Waiting three years for an update is no longer an effective practice.
How to Implement a Data-Driven Compensation Strategy
So, how can you translate these insights into action?
1. Invest in Quality Data
Choose a reputable compensation data provider or a compensation consultant with access to credible market data. This information is continuously updated and validated, providing a clear, real-time view of the labor market.
2. Establish Regular Review Cycles
Conduct annual market studies as well as additional reviews whenever significant events occur—like new hires, promotions, or creating new roles.
Susan emphasizes this approach, noting, “Today, it makes sense to review market data every year or whenever you hire or promote.”
3. Integrate Compensation into Your HR Strategy
Weave compensation reviews into your overall HR strategy, directly addressing challenges like employee engagement and turnover.
For example, if a specific department faces high turnover, use targeted compensation reviews to proactively address if compensation is the issue and help maintain a competitive advantage.
4. Continuously Monitor and Adapt
Regularly track key performance indicators such as turnover rates, employee engagement scores, and productivity metrics. Set clear goals—for instance, increasing engagement scores by 5-10% over the next year—and adjust these targets using meaningful benchmarks.
Why Staying Ahead Matters
Consistently aligning your compensation strategy with reliable market data isn’t just a nice-to-have—it’s important for any company’s long-term health. Competitive pay helps retain top talent, avoid costly turnover, and keep employee engagement high. Employees feel valued and motivated when their compensation reflects market realities.
What’s Next?
If you’re ready to take the next step, here’s what you can do:
- Commit to Annual Compensation Reviews: Shift from infrequent reviews to annual reviews and event-driven updates.
- Invest in an Accurate Market Data Source: Select a provider with access to accurate, reliable market data who can deliver a solution that meets your needs.
- Integrate with Broader HR Planning: Make competitive compensation central to your HR strategy.
- Schedule a Consultation: Contact ERC for a 30-minute compensation consultation to personalize your compensation strategy.
