Influence of market forces over individuals’ reward and likely legal pitfalls

Whereas the job evaluation exercise represents an effective and useful approach to assess internal relativities and, hence, reward which should be associated with any roles available within an organisation, market pricing is widely acknowledged as an effective method to determine and finalise internal pay systems taking into due consideration what actually happens in the external environment.

Indeed, there are two other additional approaches employers can have recourse to in order to develop more efficient, consistent and competitive pay systems. One of them is actually concerned with the internal environment and aims to achieve fairness, namely the felt-fair test, whilst the other is concerned with the external environment and is mainly directed at attracting and retaining particularly talented professionals in presence of particular circumstances, i.e. market forces.

In general, the impact of market forces is actually taken into consideration for technical and professional roles when employers find it particularly difficult filling some specific kind of jobs.

Market forces definition

Since market forces are actually concerned with the external environment, it could be argued that data gathered by means of updated and well devised market pricing investigations should already provide employers with the figures reflecting the current reward trends concerning the relevant position. However, whereas market pricing is an approach used to determine external reward trends in normal circumstances, market forces aim to reflect the impact that exceptional circumstances might have on reward with reference to the specific moment at which they are considered. It can be said that the former approach represents the rule, the method employers use as a matter of course, whereas the latter represents the exception, an approach to which business resort to, in fact, in exceptional circumstances.

Yet, market forces consideration requires a deeper knowledge and understanding of the current labour market conditions. Whilst data collected by means of market pricing could, in fact, be affected by widespread pay discrimination practices existing in the market, the impact of these should be identified and eventually removed when considering offering an individual a market forces supplement.

The impact of market forces in reward is practically reflected in the recognition of a money supplement in addition to the salary associated with the grade related to a given role or position. This sum of money, which is also known as market supplement, has to be granted as long as the exceptional circumstances justifying its payment persist.

Why

Substantially, the consideration of market forces materialises in granting a premium to one or more individuals in order to attract or retain him/her/them when exceptional circumstances have arisen. The existence of these exceptional circumstances will account for making it impossible for an employer attracting and/or retaining individuals with a particular expertise having recourse to the salary usually associated with the grade to which that role or position relates.

It is particularly important highlighting the fact that, as for the case of job evaluation, also in the case of market forces what matters is not the person in question but the role in question. To put it another way, the arrangement of the salary supplement has not be justified on the ground of who is filling the role, but on the basis of the difficulties that a particular role is causing the employer in order to properly be filled. Of course, the decision to offer the position to an individual, rather than to another, will be taken by the employer according to the outcome produced by the selection process carried out and hence of the individual’s qualities and skills.

Essentially, the reason for a business resorting to market forces supplements are, and should be limited, to attract and retain talented and particularly skilled individuals when the labour market is showing crystal clear signs that this result is everything but straightforward to achieve. So that, before considering paying market forces supplements, employers should, at worst, have previously tried the usual recruitment and selection procedures. An employer should seriously consider resorting to market forces additions only after having ascertained that the usual procedure has turned to be ineffective and unproductive.

When

A market forces supplement is essentially used to determine the total salary to be paid when labour market pressures, usually as a consequence of qualified applicants, skills and/or expertise shortage, are pushing salary rates for a determined role up. These situations will surely account for the “going rate” associated with the role in question to increase (Equality Human Rights, 2012). In such cases, if an organisation would refuse to consider the indications provided by the labour market it would clearly risk to remain with that particular role or position vacant or, alternatively, filled with the wrong person. And it would actually be rather tricky to determine which of these two options will be the worst for the employer (most likely the latter).

Obviously, the salary addition will be granted to the person as long as he/she: a) is covering that role and b) the pressure of the labour market will justify its payment. This consequently means that if the individual concerned would change his/her role within the organisation, he/she will no longer be entitled to receive the additional market forces element.

This also implies that employers should regularly monitor, review and assess the existence of the exceptional circumstances at the basis of the additional payment. In the event these should no longer be considered existent and justified, the employer will have to take action accordingly removing the supplement.

Regular reviews can also turn to be particularly important not only in order to remove the market forces supplement but also in order to take appropriate decisions on whether updating, increasing or decreasing, the amount initially agreed according to the eventually changed circumstances.

How

Since recourse to the market forces element can be considered justified only when particular reasons to pay above-the-grade salary level occurs, it would be really pointless and definitely counterproductive for an organisation offering, although to the right candidate, the market forces element on a permanent basis as part of his/her fixed salary.

This addition has to be granted, in fact, on account of exceptional circumstances only, so that it would be a massive blunder do not separately regulating the payment of this element. Market forces have, hence, to be considered as a separate supplement paid on a temporary basis.

As anticipated above, in order to decide if this supplement has to be maintained or modified, the market forces element has to be subject to regular review. A review should also be scheduled a few months before the end of the initial period agreed. The length of this period clearly depends on the different circumstances; nonetheless the total sum agreed is usually paid on a monthly basis.

In general, employers will renew the market forces element payment when two main factors basically still persists: the presence in the labour market of a higher than the internal grade salary for that position and a clear difficulty for the employer to retain or attract individuals capable to properly and effectively fill the position concerned.

Such a review should be conducted reasonably in advance vis-a-vis the expiration of the payment period agreed. So that, in the case the assessment should reveal that the circumstances on the basis of which the supplement has been granted do no longer exist, it will be possible giving to the individual concerned a reasonable notice. Notice has to be given either in the case the market forces supplement will be removed or in the case it could be reduced.

Legal aspects

As maintained by Bratton (2012), governments, by means of their legislative power, can in many cases exert a certain influence over reward management and market forces supplements payment clearly represent one of them.

Equal pay and pay equity legislation, in fact, respectively providing for employers paying the same salary for the same job and jobs of equal value, clearly limit employers’ latitude and capacity to differently reward individuals. In general, draconian job evaluation exercises can properly and effectively help employers to be compliant with equal pay and equal value legislation. It cannot necessarily be said the same, instead, for market forces supplements payment which, as anticipated above, can actually be offered only on the ground of exceptional circumstances.

In order to eventually properly and effectively support the grounds for which market forces additions have been granted to one or more individuals before a Court, employers need to gather and keep all the evidence they can. From a legal point of view, in fact, payment of market forces practically represents a case in which employers pay unequal salary for work of equal value on grounds of recruitment and/or retention-related issues. Providing evidence to the Court that before conceding an individual the salary supplement careful consideration to the issue has actually been given and that all of the possible options has been investigated and eventually tried, will clearly shows to the Court that the market forces explanation has not just been used by the employer as an excuse or a sham justification (Equality Human Rights, 2012).

In the event an employer who has offered market forces supplements should be brought before a Court on pay discrimination claims, this should not clearly conduct his defence on the grounds of what happens in the labour market, which could actually be affected by discriminatory practices. Employers could not, in fact, base their defence on the basis of the principle “this is what other businesses pay”, they should instead provide evidence that the additional element was necessary and determinant in order to attract or retain that particular individual for his/her qualities (Equality Human Rights, 2012).

It can be said that Courts, at least in the UK, openly recognise the effects played by labour market forces over pay. During the proceedings relating to the case Newcastle Upon Tyne NHS Hospitals Trust v Armstrong & Ors, in fact, Mr. Underhill (2010), Judge of the UKEAT, referring to Rainey v Greater Glasgow Health Board case, maintained that “it is well-established that a … defence based on market forces is admissible in principle.”

The same viewpoint was practically expressed by the European Court of Justice when examining the case Enderby v Frenchay Health Authority, brought before it by the Court of Appeal of England and Wales. The ECJ basically maintained that the proportion of pay increases attributable to market forces can be accepted provided that “the pay differential is objectively justified to the extent of that proportion.” The ECJ also upheld that it is the national Court which has to assess if and for which proportion salary differences can be attributable to market forces.

This court case clearly highlights the circumstance that when a higher than the related grade salary is granted on account of market forces it also needs to be determined if labour market pressures justify the whole additional payment. In other words, whenever market forces supplements are conceded they have to be proportionate to the recruitment difficulties and cannot be higher than reasonably suggested by the labour market pressures.

It can, then, be said that, in exceptional circumstances, jobs of equal value could be paid differently, by means of market forces supplements consideration. Nonetheless, employers should be extremely careful and ready to show and provide evidence, if and when required, of the objective grounds justifying this. As anticipated above, this will clearly reveal to be crucial in the event a salary discrimination claim should be brought before a Court.

Prior to conceding a market forces supplement employers should always strive to recruit and retain quality staff offering salaries included within the range of the grade relating to that particular job. Only once all of the attempts made have revealed to be unproductive employers should consider offering market forces supplements. Difficulties in attracting and retaining quality staff have to be verifiable, as well as the attempts to having had recourse to possibly improved recruitment and retention approaches.

The circumstance that the supplement is regularly assessed and reviewed will also turn to eventually be useful in front of a Court. This will, in fact, provide evidence that market forces defence is not an excuse to justify salary differences, but that it is actually a consequence of the labour market pressures, and that that is why the labour market is constantly monitored and the supplement regularly assessed and reviewed.

Another definitely important aspect, also emerged by the Enderby v Frenchay Health Authority case, is that employers should always be able to keep separate the salary related to the job grade and that associated with the market forces in order to eventually enable the Court to determine the impact of the latter over the former.

Checklist

Employers offering market forces supplements should both ensure that some activities will be regularly carried out and that others are, instead, constantly monitored.

First of all, as often anticipated above, the market forces element should be kept separated from fixed pay and of this should be given clear evidence in the salary slip of the individual concerned.

All of the possible evidence which have accounted for having resort to the market forces supplement have to be gathered and maintained. These have to be relevant and proportionate to the additional sum granted to the individual or to put it another way, they should be able to support the grounds for which the entire supplement has been paid and not just being able to justify part of it.

Evidence will include failure of the recruitment process, eventually tried also by means of external recruitment consultants, agencies and specialists, as well as the regular assessment and review of the conditions which have accounted for granting the supplement. If the exceptional circumstances persist, the addition will continue to be paid, differently it has to be proportionally reduced or completely removed according to the circumstances.

Finally, as a good rule of risk management, cases for market forces payment should be prepared according to two main characteristics, more in particular they should be both specific and measurable.

Longo, R., (2012), Influence of market forces over individuals’ reward and likely legal pitfalls, HR Professionals, Milan [online].



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