Once the market of choice is defined and the prevailing levels determined an organization must decide how it pays relative to that market.
Most organizations will define multiple markets, each selected for a specific skill set, occupation or category of employee. And the competitive posture may be different for different types of employees. It is common for an organization to identify core critical skills and to pay them more aggressively than other skills. There is rarely enough money to pay everyone aggressively, making it prudent to be selective in applying an “above market” posture.
If the organization decides to pay above market levels for specific skills the question is:
“by how much?”
Too often the stated posture is expressed in a way that is statistically unsound. When formulating a competitive posture relative to market it is necessary to understand both the economic and behavioral implications. Even paying at market average may be a challenge for an organization with a high labor component in its operating costs, particularly if it competes with capital-intensive organizations. A bank with 70% of its operating costs in workforce costs does not have the same latitude as an oil refinery, which typically has about 1% of its cost in pay and benefits. For jobs/skills that are transportable across the two organizations, such as administrative support jobs, the bank cannot expect to be able to compete based on compensation. So affordability is a major factor in deciding competitive posture.
Even if an organization can afford a premium posture relative to market it still must ask:
“is it worth it?”
If the extra cost does not increase the quality of the workforce it must be questioned. The related issue is whether employees will behave differently if they are paid somewhat above market. And if economics mandate paying above market for critical skills means the organization must pay other occupations below market the impact of that posture must be evaluated. If key people leave the savings may be illusory. Even if only a few leave the organization must analyze who does exit. If it is the best people than once again the “savings” may turn out to have such negative impact on workforce quality that it is a shortsighted strategy.
Paying “at market” seems to be a reasonable competitive posture. But pay must be defined, market must be defined and the posture must be defended. Organizations must devise a strategy that best fits its context and that is justifiable. Both the economic impact and the behavioral impact of the competitive posture must be evaluated and a balance achieved.
An excerpt from: Competitive Posture: Critical Element Of A Rewards Strategy
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Robert J. Greene | Reward $ystems, Inc. 