Discuss and explain the considerations when building market-competitive compensation systems. A company that strives to be competitive in whatever market they belong to will always look for strategic and competitive advantages. Building a market-competitive compensation system is the first step needed to attract, retain, and promote high performing individuals who will help a company reach and maintain that edge over competitors, so it is imperative to get it right the first time: offer compensation that is far above the median wage and the company must lower its bottom line, leaving it less money to reinvest, pay stockholders, etc. Offer too low a compensation package and the company will not be able to attract the high performers it is looking for to drive the competitive advantages further. To build a market-competitive pay system a company must:
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Conduct Strategic Analyses – When a company conducts a strategic analysis of both the external market (industry profile, competitor information, long-term growth prospects) and internal factors (functional capabilities, financial situation) it is looking for the parameters or the limits that it can perform and grow with (Martocchio 146) . Assess competitor’s pay practices with compensation surveys – The textbook goes into depth the factors surrounding compensation surveys, much of which are better explained in a statistics class. It is understandably difficult for a company to develop an internal custom compensation survey, as training personnel who have never done this is difficult, not the mention a company’s competition is understandably resistant to releasing pay numbers to rivals! Published surveys do exist, however, and consulting firms are there, depending on the industry. The most important strategic considerations to develop in a survey are determining the relevant job market and choosing benchmark jobs within that market (150).
Integrate internal job structure with external market pay rates – Using regression analysis, which “describes the linear relationship between two variables (i.e. simple regression) or between the linear composite of multiple variables and one other variable (i.e. multiple regression)” (380). In simpler terms, it is finding the sweet spot for the company pay based on external markets and what they pay and factors internal to the company (relevant work experience, job value, etc). Determine compensation policies – A Company has three pay level policies to choose from: market lead, market lag, or market match. A market lead policy “leads” the way, establishing a pay which is higher than market trends but may result in reduced profits. This is, however, what a company may want to do to differentiate itself from the competition. Market lag policy has a company compensating employees less than the average. This is best suited to a lowest-cost strategy and the claim can be made that those low costs are passed to the clients or consumers. Market match policy ensures the company is compensating its personnel the same as current market trends. It is a safe way to go but does little to help a company distinguish itself from competitors, but if it fits within the strategic goals of a company it is the way to go.
Martocchio, Joseph J. Strategic Compensation: A Human Resource Management Approach 7th Edition. Upper Saddle River: Pearson, 2013.