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What Is a Market Reference Point? - Definition & Examples Video

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  • 0:00 What Is a Market…
  • 0:45 Examples of Market…
  • 1:54 Practicality
  • 3:15 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

Explore the concept of a market reference point. This lesson will define a market reference point and give practical examples of how the term is used.

What Is a Market Reference Point?

Perhaps you are familiar with a reference point. You have possibly heard the phrase 'as a point of reference…' A market reference point is similar to a reference point, but the term is often used as an indicator that orients you generally in the field of business.

Think if you were asking for the location of the nearest grocery store at a gas station. After asking, the clerk responds: 'You'll find the nearest grocery store two miles south. As a point of reference, you should see a widget factory on the right side of the road just prior to reaching the grocery store.' This is very similar to how a market reference point is used, except that instead of directions, other items - mainly compensation - are used as the indicator.

Examples of Market Reference Points

Market reference points are typically used in comparing and analyzing compensation. This can also be known as benchmarking. Benchmarking is a standard of excellence, achievement, etc., against which similar things must be measured or judged.

One college, for example, states that a market reference point represents the salary level of someone who has complete mastery of the subject matter. Each position then has a salary range based on its market reference point. A minimum is typically 80% of the market reference point and a maximum is typically 120% of the market reference point.

For example, the market reference point for Position Z may be $100,000.

Minimum of salary range = $100,000 x 80% = $80,000

Maximum of salary range = $100,000 x 120% = $120,000

The salary range for Position Z is then $80,000 to $120,000.

Practicality

Market reference points are typically derived from salary surveys. Numerous salary reporting websites exist, such as Salary.com, Payscale.com, Indeed.com, and SalaryExpert.com, to name a few.

From a potential employee's standpoint, it should be remembered when negotiating that salary is just one piece of the puzzle. Numerous other benefits can typically be negotiated as well, including paid time off and relocation costs.

It is important to keep in mind whether you are the employer or the potential employee that salary ranges should take into consideration geographic location when determining the market reference point.

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