Discuss and explain the considerations when building market-competitive compensation systems

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shake99 | Teacher | (Level 3) Senior Educator

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All companies face the challenge of attracting and maintaining an effective workforce. A market-competitive compensation system is a means of compensating employees at a rate that is similar to other companies with respect to specific positions within their industries.

One of the most important factors in building such a workforce is compensation. We usually think of compensation in terms of salary, and this is often the backbone of a firm’s compensation structure, but it is not the only factor. Other compensatory factors include the opportunity to earn bonuses, access to desired benefits such as vacation time and sick days, as well as the various perks that accompany certain positions.

When designing a market-competitive compensation system, companies must analyze their competitors. If a company wants to find and hire the best employees they have to make themselves attractive to those potential employees. To do this, they need information. What are other companies paying for similar jobs? What kinds of benefits are they offering? Companies can conduct their own surveys, or use information gathered by other companies such as World at Work.

Next, a company must decide how competitive they want to be. Everyone would like to be able to say they offer the highest compensation package in their industry, but not every company can afford to do so. Companies need money for many purposes, and every dollar spent paying an employee is a dollar lost to research and development, marketing, advertising, etc. Supply and demand is also important—if a company is looking for people to do a simple job that has few qualifications, they aren’t going to need to pay as much as they will for a high-level job that calls for advanced education and/or lengthy experience. If a company simply cannot afford to pay competitively, they will have to do something else to attract employees, such as advertise open positions aggressively to draw more applicants, or try to develop a reputation as a particularly enjoyable or rewarding place to work or offer the possibility of future advancement. Companies who do this are said to “lag” in their compensation policies, because they pay below current market rates for employees.

Finally, a company must consider the cost of employee turnover. When companies lose an employee to a competitor, often for higher pay, they have to bear the cost of hiring and training someone to fill his position. The cost is significant and should be considered part of the company’s overall salary structure. The more often an employee is lost because of salary, the more money the company spends to replace them. In some cases, it might be more cost effective to simply raise the salary offered for that particular position.

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