External competitiveness is an important part of compensation for several reasons.
First, it behooves employers to know what the market rate is for their employees and what local competitors are paying for the same positions. This helps them gauge where their company fits into the overall compensation structure of the industry and strategize how to both sell their company to new hires and retain current employees.
Second, external competitiveness can dictate internal changes. If, for example, an employer learns that companies A and B have improved their compensation packages (salary plus benefits), the employer might feel compelled to make a similar change, fearing that word of the changes will reach his or her employees. Conversely, if competitors lower compensation, an employer might want to raise his to attract new workers.
Third, external competitiveness provides a degree of accountability. When competitors' compensation packages are known, executives can use that data to compare financial figures and better determine how the company is performing vis-à-vis its peers—kind of like being able to look at baseball standings and see if you're in first place or fourth. Company leaders can factor compensation into other financials, such as revenues and profit margins, to get a clearer picture of competitors' structures and of their own.