BUILDING MARKET - COMPETITIVE
COMPENSATION SYSTEMS
Jayendra Rimal
THE BASICS OF MARKET COMPETITIVE PAY
SYSTEMS
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This type of compensation policy should be developed to fit
in with the competitive advantage of a company.
It has a role in attracting and retaining the most qualified
employees.
A well designed pay system should promote the attainment
of competitive strategies.
But paying more than necessary can undermine low cost
strategies as it is an undue burden. It also restricts the
company’s ability to invest in other strategic activities.
Hence companies that pursue differentiation strategy must
strike a balance between offering sufficiently high salaries
to attract and retain talented people and providing
sufficient resources to enable them to be productively
creative.
MAJOR ACTIVITIES FOR MARKET COMPETITIVE PAY
1.
Conducting strategic analysis
2.
Assessing competitors’ pay practices with compensation
surveys
3.
Integrating the internal job structure with external
market pay rates and
4.
Determining compensation policies
1. CONDUCTING STRATEGIC ANALYSIS:
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Examination of a company’s external market context and
internal factors.
External factors could include industry profile,
information about competitors, growth prospects ( short
and long-term)
Internal factors encompass financial conditions,
marketing capabilities, available human resources etc.
2. COMPENSATION SURVEYS
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Entails collection and subsequent analysis of competitors’
compensation data focusing on wage and salary practices.
These days all benefits, allowances, perks etc. are
collected and analysed as these are key elements in
market competitive pay systems.
Surveys enable companies to obtain realistic view of
competitors’ pay practices.
In the absence of surveys professionals would have to
use guess work to build market competitive pay systems
leading to wrong guesses resulting in noncompetitive pay.
Data is usually collected on base pay levels, incentive
award structures and mix and levels of discretionary
benefits.
In Nepal, companies have to take the initiative to conduct
compensation surveys as there is a lack of existing
compensation survey reports.
COMPENSATION SURVEYS: STRATEGIC CONSIDERATION
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Defining the relevant labor market:
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This represents the fields of potentially qualified candidates for
particular jobs.
Relevant markets are defined on the basis of occupational
classification, geography and product or service market competitors
Choosing Benchmark Jobs:
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Benchmark jobs are key to conducting effective job evaluation as
they play an important role in compensation surveys.
HR professional determine pay levels for jobs based on typical
market pay rates for similar jobs.
Benchmark jobs are (i) well known, stable and agreed by employees
(ii) common across different employers (iii) represent the entire
range of jobs that are being evaluated within a company and (iv)
these jobs are generally accepted in the labor market for the
purpose of setting pay levels.
3. INTEGRATING THE INTERNAL JOB STRUCTURE
WITH EXTERNAL MARKET PAY RATES
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It is important that companies set pay rates by using
market pay rates as reference points as paying well
below or well above the typical market rates can create
competitive disadvantage for companies.
Companies value jobs that possess higher degrees of
compensable factors (10 years of experience) than jobs
with fewer degrees of compensable factors (1 year of
experience) resulting in pay differences based on
compensation survey data.
4. DETERMINING COMPENSATION POLICIES
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Normally companies can choose from three pay level
policies:
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Market lead: This distinguishes a company from the
competitors by compensating employees more highly
than most competitors. Pay levels are above market
pay lines
Market lag: This also distinguishes a company but by
compensating employees less than competitors. Pay
levels fall below the market pay line.
Market match policy: This closely follows the typical
market pay rates as companies pay as per the market
pay. Pay rates fall along the market pay lines.
ANY QUESTIONS?