How to Set a Competitive Pay Rate

Pay is the hygiene factor every organisation has to get right. If you’re not competitive, you won’t get top talent through the door. But competitive pay isn’t just a figure in a spreadsheet or a promise of a competitive salary – it’s a system you need to manage with discipline, robust data and fairness. 

In this article, I’ll share the approach I use to set competitive pay rates that will keep you in the market and help you hold on to your best talent.

What is competitive pay?

Competitive pay means paying in line with what the market is offering for the same skills in your true competitor set. 

Your “competitor set” isn’t always who you think it is – but we’ll come back to that in a moment.

For employers, setting a competitive rate of pay means benchmarking against the right comparators and aligning salary ranges with the market.

Employees think of competitive pay from a different perspective. They’ll compare their pay to colleagues doing “similar” jobs internally, and they’ll also look externally – scanning job ads, recruitment surveys, even hearsay. 

The trouble is, those sources are often misleading, and employees can overestimate their market value. If you’re not clear and transparent, frustration quickly builds. Unless employers explain clearly how they’ve set pay, those mismatched perceptions can quickly create frustration and distrust.

How to set a competitive pay rate

Setting pay that’s both fair and competitive requires taking deliberate steps, backed by reliable data. Here’s how I suggest you approach it.

Step 1 — Define your comparator market

The first mistake I see companies make is assuming their competitors are simply industry peers. A coffee shop might think it only competes with Starbucks or Costa. But in reality, its true competitor market is wherever your potential hires can go. For a barista, that could just as easily mean a warehouse, a restaurant, or any other local employer paying a similar rate.

That’s why it’s so important to define your comparator market carefully. I suggest starting with a simple comparator checklist:

• Does the role require similar skills?
• Does it draw from the same labour pool?
• Does it fall within the same commuting distance? 

If the answer is yes, then you’re competing for the same people, and you need to know how your pay stacks up.

Step 2 — Use the right data

I’ve seen companies make multi-million-pound pay decisions on what I’d class as shaky data: data from out of date sources or data that is too patchy to be trusted. For example, salary surveys can give you depth – especially at senior levels where total compensation is complex – but by the time the data lands on your desk, it’s often six to twelve months old. And by then, the market has already moved on.

At the other end of the spectrum, you’ve got recruitment data or job ads scraped together from public boards. On the surface, these appear to provide a real-time picture. But dig deeper and you’ll see the flaws: 

• Roles might not be directly comparable
• Salary ranges are often incomplete
• Data is easily skewed by outliers

Without proper context, you can’t benchmark salaries with confidence.

What you really need is data that’s both robust and current. That’s why I founded HR Datahub: to create a salary benchmarking tool that draws from real-time, live job listings. It shows what organisations are actually offering today, across regions and roles, and it lets you spot market shifts early. 

We track over 30 million live job postings to give that level of accuracy and granularity, so you can make confident pay decisions, not guesses.

Step 3 — Market-price roles

Once you’ve defined the right comparators and gathered reliable pay data, the next step is to market-price the role itself. This means matching by job content, not just job title. Titles can be misleading – “analyst” might mean something entirely different from one company to another, so you need to look at the responsibilities, scope and required skills.

Then decide where in the market you want to position yourself. Most organisations position themselves on the median (50th percentile) of the market. That choice should tie back to your compensation philosophy and hiring strategy.

To test competitiveness, I use two simple formulas:

• Market Ratio = Base Pay ÷ Market Reference Point (MRP)
  
  
• Market Variance (%) = (Base Pay − MRP) ÷ MRP × 100

As a rule of thumb, a variance within ±10% of the market point is generally considered competitive.

For example: A Software Engineer role in Manchester has an MRP of £55,000. If you’re offering £52,000, your market ratio is 0.95 and your variance is −5.5%, which is comfortably within a competitive band.

But don’t assume this holds for long. Markets can shift in as little as six months due to inflation or demand spikes. That’s why continuous checking against live data is essential if you want to stay competitive.

Step 4 — Build salary ranges & bands

Once you’ve priced the job against the market, the next step is to turn those points into structured salary bands. I suggest grouping roles into job families or grades, then building ranges around the market reference point. The width of the range depends on the role – entry-level positions often have narrower bands, while senior or volatile markets need wider ones to allow for progression and market shifts.

Clear governance is essential. Define where in the range you typically hire – for example, new starters at 80–90% of midpoint – and set out the rules for exceptions. That way, you avoid ad hoc offers that undermine your structure.

The biggest pitfall I see is companies skipping ranges altogether and reacting to each hire or counteroffer in isolation. That might solve the short-term problem, but it quickly creates internal inequities, wage drift and long-term cost headaches.

Step 5 — Factor in geography

Geography plays a bigger role in pay than many organisations realise. I always advise using a sensible commuting radius, usually 20 to 40 miles, when defining the market for roles in a specific geographical area. Beyond that, you’re unlikely to be competing for the same people.

Remote and hybrid working have changed the equation. For some roles, the labour market is now national rather than regional, which can compress pay differentials. The challenge is knowing when to apply a location premium and when it no longer makes sense.

Too many companies still rely on blunt regional averages, i.e. “South vs Midlands”, which don’t reflect local hotspots. Live regional benchmarking data gives you a far more accurate view of what’s really happening in your area. The pitfall is making blanket assumptions about cost-of-living differences without evidence, which risks overspending or falling behind.

Step 6 — Address in-demand roles without damaging equity

Some roles are genuinely in high demand, but you need to be certain before adjusting pay rates. Look at the data: are you seeing higher attrition, longer time-to-hire, or rising vacancy volumes and pay trends in the market? If the answer is yes, you may need to respond.

My advice is to treat pay premiums as a defined strategy, not a quick fix. Set clear parameters, put an end date on the policy and monitor its impact. Otherwise, you risk inflating costs permanently.

The real danger is equity. Bringing in one person at 20% above the rest of the team almost always backfires – especially in pay-transparent cultures, where resentment and turnover can spike fast. The smarter approach is to validate demand with live market data, then manage premiums carefully within a structured plan.

Step 7 — Look at total compensation

Competitive pay isn’t just about base salary. When candidates weigh up offers, they’re looking at the total compensation package, and in some markets, a competitive compensation package matters more than base pay alone. 

In my experience, there are four levers that really shift decisions:

• Bonus – often the biggest factor beyond base pay.
  
  
• Hybrid or flexible work – now one of the first questions people ask.
  
  
• Holiday – extra days off often mean more than small cash perks.
  
  
• Car or allowances – still influential in many sectors.

The pitfall is trying to compete by layering on endless “perks” – cycle-to-work schemes, retail discounts, or gym memberships. Nice to have, but they don’t drive career choices.

The smarter move is to benchmark your total compensation mix against the market rate. With the right data, you can see whether you’re leading on the benefits that really matter, or falling behind where it counts most.

Step 8 — Safeguard internal equity & transparency

Employees don’t just compare their current salary to the outside market; they’re constantly looking sideways at colleagues. If they think “Bill or Jane is doing the same job for more money,” trust starts to erode. Transparency is the best antidote.

Good practice here is simple:

• Publish salary ranges internally, and ideally in job ads too.
  
  
• Explain your methodology so people know how benchmarks are set.
  
  
• Show your review cadence so they see that pay is reviewed regularly, not only when problems arise.

The pitfall is reactive decision-making. Giving in to whoever shouts loudest undermines fairness and leaves quieter, often high-performing employees behind. It particularly disadvantages women, who research shows are less likely to request pay rises.

I talk here about the benefits we saw at HR Datahub when we opted to implement a pay-transparent policy. And I’ve provided a step-by-step guide here on how to implement pay transparency at your organisation.

Step 9 — Review cadence & proactive adjustments

Too many organisations only look at pay once a year or, worse, only when an employee threatens to leave. By then, it’s often too late. I recommend checking market data quarterly and building in mid-year adjustments where needed.

One of the most powerful things I’ve seen is giving people a proactive rise. Imagine being told, “We’ve reviewed the market and your pay should be higher — so we’re increasing it.” That creates loyalty and trust in a way no counteroffer ever will.

The pitfall is waiting until employees find the data themselves and demand a raise. Even if you pay up, they’ll likely still feel undervalued and may leave anyway.

Using a real-time salary benchmarking tool, like HR Datahub, makes it easier to monitor shifts in the market and act early.

Here’s a quick proactive pay decision checklist:

• Review pay quarterly against live market data
• Identify high-potential or below-range talent
• Make proactive adjustments before issues arise

I have written a guide to pay reviews here that you may find useful.

Future outlook: AI & fluid compensation

The next frontier in competitive pay is AI-driven fluid compensation – systems that make micro-adjustments each month to keep employees aligned with the market. In theory, it means no one ever falls behind. In practice, it only works one way: up. No employee will accept their pay going down, so full adoption is unlikely.

What is certain is that AI and live data will transform how we manage pay over the next two to three years. Instead of relying on stale data, HR leaders will be able to monitor competitiveness continuously and act before problems arise. The insight available will be faster, sharper and more precise than anything we’ve seen before.

Offering Competitive Pay Is a Signal of Culture

Competitive pay isn’t just a number on a contract – it’s a signal of how much you value people. Get it wrong, and you’ll always be playing catch-up. Get it right, and you build loyalty. The only way to do that with confidence is to ground your decisions in live, accurate market data. 

With HR Datahub’s salary benchmarking tool, powered by over 30 million UK job postings, you can see the real market in real time – and make pay decisions that attract, retain and build trust. Explore the tool today →