Abstract
A well-defined labor market allows key compensation decision makers to examine the competitiveness of the organization’s pay plan. If the market is poorly defined, estimates of competitors’ pay rates will likely not be accurate. The vast majority of research on labor market definitions has been conducted in the for-profit sector; thus, there is a high need for examining how employers within the public sector define their labor market. A short questionnaire was sent to members of the National Compensation Association of State Governments to enquire about their respective states’ labor markets. Content analysis was conducted on the responses using three main components. These include statements of differentiated markets for types of jobs, a geographic region, and criteria for including an employer within the market.
State Government Labor Markets
A common theme in compensation research is there simply is not enough of it. Multiple academics and practitioners have called for research to fill the gaps where research is inadequate, 1 where it has been studied for the purposes of predicting motivation rather than merely compensation in itself, 2 or abandoned for other employment-related issues such as turnover and manpower. 3 The collective opinion is that compensation research has not kept pace with other interests in the field of industrial-organizational (I-O) psychology. 4
The definition of the labor market is a significant issue within the field of compensation management. Differences in market definition lead to differences in market wage levels. Determining the market has become more and more complex: MSAs have grown or shrunk, organizations are attracting employees from different areas due to new technology that facilitates telecommuting, and markets expand proportionately with skill level (i.e., more highly skilled occupations command higher salaries, and those employees are more likely to relocate for better pay). 5
A clearly defined market in public salary administration aids decision makers and legislatures to identify similar targets on the amount of appropriations, as the definition gives both constituents a starting point to examine the competitiveness of a pay plan. However, there is no research on exactly how a market is defined in state government. Given the unique nature of many state government jobs—states have many government-specific positions that have exact matches only in other states, for example, state forester or driver license examiner—and the special skills and experiences these positions require, guidance on how states are to define their markets is warranted.
A brief questionnaire was sent via email to 41 National Compensation Association of State Governments member contacts. The first question enquired as to whether the state had an explicitly defined labor market—as written in a compensation philosophy, policy, code or law. The second asked participants for the actual market definition or an explanation of the practice if there is no formal definition.
Participants’ response rate was relatively low (34%). The submitted labor market definitions were varied, ranging from a statement that the state has no market definition to multiple paragraphs of pay policies. Some responses were merely statements of how the labor market is identified, while others were explicitly written in a formal document. True market definitions were extracted from the longer responses for analysis. The criteria for extraction included statements of occupations (differing skills), geography and competitors for labor within the market.
Occupations
Given the unique nature of many state jobs, three categories of employees were identified as factors in defining the labor market. Many states differentiate their markets along the lines of skilled and nonskilled labor, with the addition of a category for state-specific jobs as mentioned above. There were no statements of where the line is drawn between skilled and unskilled. A few states narrowed down the skilled work into specific occupations such as information technology, engineering, professional/scientific and so on. These occupations were identified due to the difficult nature in recruiting and retaining employees within these areas of expertise.
Geographic Region
The responses relating to geographic regions were closely related to how the market definition identified different types of positions or skill levels. There are three groups of geographic areas participants reported: zero-order (in-state), first-order (states that participants share are border with) and second-order (areas beyond the bordering states). Nonskilled jobs are most often associated with an in-state labor market. Skilled state jobs that have matches within the private sector are most commonly compared to zero-order and first-order states. First- and second-order states are identified as competitors for state-specific labor.
A simple heuristic used in determining the geographic market is to ask the question, “What states touch us?” This makes sense for many of the land-locked states, especially with sparse rural populations. Respondents often cited a reason for their decision as bordering states have similar demographics and economies. Naturally, one would expect a compensation manager to expand to other states when surveying the market for state-specific jobs—but how far-reaching should the market go? One might find that market areas are smaller for more densely populated areas such as in the urban Northeast than they are in the rural Midwest. Using adjacent states within the market definition seems logical as they will have job matches.
Competitors
As expected, state governments cited neighboring states and others as competing employers within geographic regions. However, states should examine how likely human capital will move between two states. One can argue that an employee, such as a driver’s license examiner, will not move to a neighboring state for a similar job or for the respective supervisory position. These positions do not require specific knowledge or skills, nor do they likely provide the financial incentives to facilitate this move.
States are competing for human capital over borders for few jobs, certainly not all benchmarks. This contradicts the common practice of surveying other state governments on their benchmark jobs. To identify a true labor market, state compensation managers would benefit from recording the organizations with whom they gain and lose employees, as well as mileage between the two employers. Much of these data are discussed in water-cooler conversations, but it certainly is valuable when identifying competitors within the labor market.
It would be a statistician’s dream (and a compensation analyst’s nightmare) to include all employers within the relevant geographic areas. Few respondents to the survey gave sizes of employers or specific industries. What was not mentioned by any participant was an employer or industry to not include in defining the market. Organizations such as a mom-and-pop shop or the middle-of-nowhere charcoal plant may seem like unlikely rivals. However, the legislators from their respective districts will think otherwise. There are certainly political pressures that will influence identifying competing employers but including unlikely competitors for “political palatability” (Kenning, personal communication, 2013) may help sell the data to the legislature.
And what about the other end of the spectrum? States must responsibly manage taxpayer money, and a talented fiscal officer is needed to do so. The titans of the business world employ many of the most talented and experienced experts in many fields. Although states are not likely to attract the most talented individuals, including a blue-chip corporation in a survey may help justify “exorbitant” state executive salaries.
Discussion
As the analysis indicates, states generally follow the framework suggested by Milkovich and Newman. 6 Many of the reported market definitions included statements referring to differing occupations or skill levels, geographic regions and relevant competitors. To aid state compensation decision makers, it is more pertinent to examine how these decisions are made rather than what decisions are made.
Separating markets by types of jobs within state government is common practice when examining labor markets (especially when there known differences between public and private sector employers). Three groups emerge from the analysis: vocational/technical, professional and state-specific. The groups are not mutually exclusive. The recent economic recession has caused some jobs to fit into all three categories. Reduced budgets require states and their employees to do more work with fewer resources.
Many professional-level jobs within state government are specialized because they require incumbents to synthesize many different knowledge domains. These domains include general knowledge that is acquired through formal education and state-specific knowledge of social, political or natural landscapes that can only be acquired on the job. This phenomenon makes the job more difficult to define; thus, using it as a benchmark in a salary survey is not recommended. Dividing markets by specific occupations makes sense intuitively; however, is it realistic to set up separate salary structures to accommodate certain occupations?
State governments have implemented different salary structures for decades. The most common is for law enforcement; others include teachers, judicial branch positions, hourly and/or FSLA covered jobs. Separate structures originate for several reasons. In the case of law enforcement, history is the driving force as the police—depending on the state—were an autonomous entity. Some occupations are given separate structures to address recruitment and retention, as is the case with many professional jobs within the science and technology industries. Whatever the reason, different structures may lead to perceptions of inequity, especially if one structure associates pay increases with performance when others do not.
To address inequities, employees typically submit a request for reclassification or create a new classification to move to a pay-for-performance structure. Supervisors then have to think outside the box to conspicuously inflate job descriptions to justify a higher pay rate—while all along, it is the box that needs to be fixed. The abundance of job classifications perpetuates the structure problem. As employees begin to learn how to work within a broken system, classifications become so specific that they begin to resemble a person-based pay program. The practice of continuing or creating additional pay structures seems an ad hoc fix to a larger classification problem.
Some states are making progress in reducing classifications to a manageable number. The State of Florida experimented with a broad band classification system within the Department of Transportation, which reduced the number of classifications by 94%. Satisfaction with the system contributed to statewide adoption of the practice. This type of information reduction indeed facilitates easier communication and understanding of the system. It also allows for a clear placement of jobs within the system as the concept of the job becomes more nebulous. However, pay administration within broad banding is not consistent—or recommended—for the bureaucratic nature of state government. The responsibility for determining pay level would need to be shifted to the supervisor. The majority of public sector employees are not trained and experienced in making this type of decision, nor do they have the political authority to raise wages on their own volition. A major paradigm shift is needed to implement a broad band compensation system.
Political economic pressures influence both decisions of external competitiveness and internal equity. Government is far larger than the typical private sector employer; Bureau of Labor Statistics data confirm that larger companies pay more. However, government services such as prisons, and human services, and wildlife conservation are frequently operated as monopolies. The government agents who deliver these services do so under little to no competitive pressure from other organizations. Monopolistic operations have weak incentives to innovate. The public sector is dominated by organizations that provide services, which are less susceptible to productivity increases than in manufacturing. Thus, lower productivity and the service orientation of government should lead one to expect lower compensation for public sector workers. 7
The political ceiling that constrains the pay at the highest executive and management levels is a major contributing factor to an inequitable salary structure within state governments. Starting from the top, the chief executive officer—the governor—would be the highest paid state employee if the salary structure is to resemble a traditional corporate hierarchy. However, this is rarely the case in the public sector. There are a handful of governors that take little to no salary. Where the salary of a governor appears high, it is hardly comparable to CEOs of organizations even near the size and complexity of state government. Commonly, the highest paid state employee works in the athletic department of a college or university. Those appointees or senior executives that serve the state at the discretion of the governor are employed within a non-market-based salary structure. These positions are similar to others within state agencies, but typically remain unclassified to allow for differing pay rates.
The nature of public sector finances affects the movement of pay differently, as well. Within jobs, a raise in public employee pay does not equate to a raise in taxes (or vice versa). Economic growth leads to increased tax revenues; however, salaries are tied to budgets, which are fixed. Thus, appropriations must be made yearly for any pay adjustment.
Salary Surveys: Gathering Intelligence in the War for Talent
Labor-market models based on the assumption of profit maximization are clearly inappropriate for the government sector; alternative models must be developed. Public sector studies tend to stress economic, demographic, and political variables relating to the geographic area that the state is in, while typically ignoring the personal characteristics of the public employees. In contrast, the private sector studies stress the personal characteristics of employees and only occasionally incorporate characteristics of the employer or the industry (e.g., establishment size, concentration ratios, capital/labor ratios). 8 These pay decisions are made within the human resources agency, but depending on the level of centralization of government within the state, agencies actually create competing internal labor markets as departments, bureaus and state government offices battle for talent with each other, in addition to outside public and private sector employers.
States should—and typically do—examine pay rates for their benchmark positions. This is an essential practice to examine the competitiveness of a pay plan. A fundamental notion in compensation theory is that matching pay policy and business strategy affects organizational performance. Thus, high performing firms adopt pay strategies that are congruent with their staffing strategy. 9 These high performing employers will then likely have the resources to attract, hire and retain the talent they need to create a competitive advantage over other employers.
The use of off-the-shelf job evaluation systems within a pay strategy will help an employer to reach competitive parity with other employers within a specified labor market. However, these externally developed preexisting systems are not likely to bring about competitive advantage. When surveying jobs, the matching depends on three to four sentences on the task and behavioral profiles of benchmark jobs. Since these descriptions can be generalized across employers, the tasks and the knowledge, skills, abilities, and other attributes (KSAOs) and behaviors, the elements of human capital required to implement them, cannot provide a competitive advantage.
Human capital has become a prominent research focus in I-O psychology within recent years. The foundations of human capital have recently been studied for use within selection systems. If a selection system that is aligned with an organization’s strategic goals helps convey and reinforce the strategy to line managers, 10 then so should its subsequent compensation system. To address the increasingly nebulous concept of the job and/or the uniqueness of positions within state governments, is it reasonable—or even possible—to take a human capital perspective on markets? Doing so is challenging because individuals have unique mixes of KSAOs that are difficult to observe and evaluate. Thus, human capital markets are imperfect and laden with hazards. 11
The first hazard (or challenge if an I-O psychology is up to the task) would be to reverse-engineer firm-specific human capital into the enabling states and operationalize the complexities of task environments that bundle individual knowledge, skills and behaviors into competitive advantage. 12 I-O psychologists have the expertise to study micro-level KSAOs and translate these components into job factors that can be surveyed within the labor market. A second hazard is a competitor’s discovery of the internal emergence enabling process that bundles individual traits into firm-specific human capital. 13 Employers will need to develop a form of organizational counterintelligence to prevent such a breach of information.
The practice of compensating employees based on their behavioral contributions to competitive advantage would directly align pay strategy with organizational strategy. Some will argue this practice is already in place under the name of skill-based or competency-based compensation systems. I argue although they are similar, skill- and competency-based compensation plans are paying for general human capital rather than firm-specific human capital. 14 Productive firms would link compensation with task-specific human capital within the organization. Breaking down firm-specific human capital into its micro-foundations 15 can be identified in the market and may alleviate the troublesome classifications that are (a) not found in the private sector, (b) rapidly changing due to technological advances or (c) unique to the employer or state agency.
Conclusion
State governments, like any employer, must routinely compare their pay rates to their defined markets. States do conduct wage surveys; however, their market definitions should reflect the organizations and geographic regions with which they exchange employees for groups of classifications. Thus, they would benefit from collecting data on these organizations and the distance prospective employees move for new employment.
The descriptions of many jobs or classifications have expanded within the knowledge-based market. As such, these roles are staffed with incumbents who exhibit the requisite KSAOs, also described as human capital components above and in Ployhart and Moliterno’s article. 16 publication. The employee of today and tomorrow is likely to work in several organizations within different industries that required varied elements of human capital. These elements have been studied for use in recruitment, selection and development; they should be pervasive throughout the human resource systems as dictated by the organization’s human resource strategy.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.