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Labour Market Data in Developing Countries January, 2011

By Warren Heaps Partner A Birches Group White Paper

Labour Market Data in Developing Countries

As businesses expand globally, more and more organizations are now beginning to operate in developing markets. Many organizations used to rely on expatriates to fill key roles in these markets, but now it is increasingly common to rely on highly talented local national employees. One of the key questions for human resource professionals is how to set salaries for locally-hired staff in these locations. The answer is usually “pay according to the market.” But sometimes, “the market” is rather elusive. What is a Developing Market? In order to understand how best to measure the labour market in developing countries, it first requires some consideration of the develoing markets themselves 1. In general, countries can be categorized based on the following factors in the local economy, on a spectrum from less developed to more developed: •

Presence of multinational employers. In countries where many multinationals operate, the level of economic development is generally higher and more stable.

Availability of unrestricted foreign exchange. Unrestricted currency is a sign of economic growth and stability, and encourages direct foreign investment.

Stability. The existence of stable government, rule of law and a business environment free of corruption, coupled with the absence of war and civil unrest, improves the likelihood of economic growth.

The characteristics of labour markets in emerging countries also vary. In more developed emerging markets such as Thailand, South Africa, or Chile, a robust, multinational private sector market is present, along with international organizations, embassies and non-governmental organizations (NGOs). For less developed countries, for example, Laos, Chad or Turkmenistan, the private sector is present, but in smaller numbers, and there is a more significant presence amongst international public sector employers, such as development banks, and other multi1

For purposes of this article, developing markets are defined as any location in the world except North America, Western Europe, Australia and Japan.

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Labour Market Data in Developing Countries – A Birches Group White Paper – January, 2011 lateral organizations and NGOs. In the least developed countries, the major employers are likely to be government, NGOs, and other public sector organizations focused on development, with extremely limited multi-national private sector presence. Talent Management:

The Convergence of Public and Private Sector Employers One of the most important considerations in beginning to understand labour markets in developing economies is the convergence of public and private sector employers. In developing countries where smaller numbers of employers operate, there is a critical war for talent. Welleducated, local talent is in high demand from employers in both the public and private sector, supporting growth and the gradual weaning from reliance on expatriates. Finance MBA graduates from leading universities are recruited by major private sector financial institutions, as well as the World Bank and regional development banks. Communications and marketing graduates are ideal candidates for brand marketing jobs in leading consumer product companies, as well as public information officer positions within the embassy community. Engineers are grabbed up from universities as quickly as they are minted by natural resource companies, but also by the United Nations, other government agencies, and NGOs working on infrastructure projects or rebuilding efforts. In fact, nowhere in the global economy is the convergence of public and private sector employers so dramatic than in developing markets. The Survey Process in Developing Markets As in developed markets, employers must rely on market data to determine how to properly compensate their employees. But conducting surveys in developing countries with smaller markets presents many challenges. Here are some of the most common ones: •

Defining the labour market. How to decide which employers are relevant to your business, and with which organizations you should compare.

Depth of data. Ensuring that enough data is available to provide meaningful and reliable statistics.

©2011 – Birches Group LLC


Labour Market Data in Developing Countries – A Birches Group White Paper – January, 2011 •

Consistency . How to ensure that the job matching process is reliable and consistent, and that variations from year to year are being driven by actual changes in the market, not changes in the makeup of the survey participants.

Let’s take a closer look at each of these three challenges. Defining the Labour Market In developing countries, the leading employers essentially define the labour market. By leading employers we mean those employers who are well-established in the market, compete for the best talent, and are the recognized leaders in their industry sector. Most importantly, both private sector companies and public sector organizations are in this group. Many market surveys focus exclusively on private or public sector employers, and even on just one specific industry. This may be an acceptable approach in large markets with hundreds of data points. However, in developing countries, we believe this approach does not accurately reflect the market amongst leading employers. In fact, it is critical to have a multi-sector, publicprivate market reference in order to effectively manage human capital in developing countries. To exclude either public or private sector employers from your labour market analysis is a critical error. Depth of Data – Why “Average Actuals” Don’t Work The standard approach to salary surveys focuses on gathering actual incumbent market data for key benchmark jobs, and providing statistical summaries of this data. In large markets with many incumbents, this methodology can provide reasonably valid market data. Most of the data is both occupational-specific and sector-specific. In other words, data is provided for specific jobs, such as Accounting Manager or Wastewater Engineer; and for specific sectors or industries, such as consumer products or financial services companies. But in smaller markets, this approach provides just an illusion of precision.

©2011 – Birches Group LLC


Labour Market Data in Developing Countries – A Birches Group White Paper – January, 2011 In smaller markets, there is more limited incumbent data.

Depending on the degree of

specialization for the benchmark jobs, fewer matches may result. And if you limit yourself to just employers in your industry, there are fewer still. How many is enough? At what point does incumbent data become unreliable? With limited numbers of incumbents, the average reported for any particular benchmark job could move in the opposite direction from the market. Could this be right? Consider the case of two very experienced accountants, each with over 30 years of service with their employer, earning far more than entry-level professionals. Both of these accountants decide to retire, and are replaced with entry-level staff. In a survey with 10 accountant matches, the average might go down for the position – even though all indicators point to an increase in the market that year. After all, the two positions represent 20% of the 10 matches! The real challenge in small markets is finding enough data to make meaningful comparisons. Consistency Another reason averages could move in the wrong direction is lack of consistency. This can be caused by two common problems. One is the variation of participating employers in the survey from year to year. It’s difficult, especially in smaller markets, to substitute employers and not have a significant impact on the data. This is because not every employer has the same compensation philosophy or market positioning, and may not match the same jobs. The second problem is reliance on employers to match jobs. Each survey provider uses a different methodology for leveling survey jobs, and leaves it up to the participating organization to understand the methodology and apply it to their own organization. All of the providers do their best train their clients in their leveling techniques, and to validate the data submitted by their clients. But how can they guarantee the consistency of the matching performed by individuals they do not employ?

©2011 – Birches Group LLC


Labour Market Data in Developing Countries – A Birches Group White Paper – January, 2011 Solving the Problem - An Alternative to “Average Actuals” In developing countries, markets are defined by the leading 10 to 25 employers across all sectors. Within such a group, there is usually insufficient data to develop sector profiles.


surprisingly, many jobs exist across nearly all organizations, in all industries, public and private. For example, every employer has accountants, human resources staff, secretaries, and general services personnel, such as drivers and messengers.

For professional occupations, every

organization has entry-level professionals, experienced individual contributors, managers or authoritative specialists, and directors or renowned experts. These categories of professional experience cut across all occupations. Using this framework, it is possible to build a market reference model which is highly accurate for smaller labour markets, and also useful as a secondary source in larger countries. A model developed by Birches Group consultants uses salary ranges to supplement incumbent data to measure the market. In addition to the average actual data, we collect the salary ranges associated with each employer’s grades or bands, and record the appropriate grade for each job match. The statistics available in this model reflect the range in the market for each benchmark job, from the minimum or entry salary, to the maximum attainable rate. This provides useful “bookends” for the average actual results. For employers who position their organization at the median of the market, using this model, the survey provides not only the median incumbent data, but also the median minimum and the median maximum. This provides a good understanding the range of compensation for that job, and allows the employer to target their market position effectively. While this data is less precise than the traditional survey approach, we also strongly believe that it is much more reliable. Using the Birches Group survey methodology, we are able to ensure consistency of data as well. We engage leading employers to participate in our surveys with the aim to maintain a consistent group from year to year. This ensures that changes in the data truly reflect what is happening in the market, not variances due to changing the employer mix.

©2011 – Birches Group LLC


Labour Market Data in Developing Countries – A Birches Group White Paper – January, 2011 All employer job matches are performed by Birches Group survey specialists, not participating employers. Our survey specialists interview employers to gain a strong understanding of how they are organized and operate. This ensures the highest level of accuracy in the job matching process, across all organizations. In Summary Human resources professionals are faced with numerous challenges in obtaining and using market data in developing countries, especially in markets where more and more expatriates are being replaced with talented local staff. Traditional survey approaches relying on sector-specific participants and “average actual” data have many flaws. Alternative approaches, which include leading employers from all sectors, as well as the international public sector, are the best market proxy in smaller countries. Reliance on salary range data, in addition to incumbent data, is recommended, to ensure logical and consistent data from year to year.

About Birches Group Birches Group LLC is a specialized consultancy focused exclusively on assisting organizations in the management of human resources issues in developing markets. The firm maintains extensive compensation and labour market data for over 140 countries accessed through Indigo™, a proprietary software package which provides clients with access to survey data and analytic tools to validate their market position with other leading private and public sector organizations. Birches Group is an exclusive collaborative partner with Aon Hewitt, the world’s largest human resources and outsourcing consultancy. Birches Group is headquartered in New York City, with regional offices in Manila, Philippines; Umeå, Sweden; and Riga, Latvia. For more information about Birches Group, visit our website at

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Birches Group LLC provides compensation and benefits surveys in 148 high-growth and developing markets, including all of Africa. Learn abou...