When employers are developing structures for internal compensation for their employees, it is important that they determine the way it wants their rates to compare relative to the existing markets. For instance, they could match, lead, or lag the market depending on their financial standing and performance expectations (Paul & Elder, 2012, pg. 347). Alternatively, they could employ a combination of the three options to match their performance needs.
Benefits of Leading the Market in Overall Compensation and Benefits
The strategy of leading the market entails paying rates that are in excess of what is prevailing in the marketplace. The benefits that accompany this strategy include an increase in the supply of top talents in the industry, high productivity and morale in the firms, decrease in the turnover of employees, high selection rates for the applicants that are qualified for the job, as well as decrease in the efforts for forming unions (Paul & Elder, 2012, pg. 362). The strategy is most important for the firms that are in the highly competitive markets that need the use of an up-to-date method of comparing pay rates in the market. The managers in the firms that use lead-the-market strategy must always monitor and determine whether the expected benefits are all realized in the same manner that the high pay rates are being maintained.
Benefits of Meeting the Market in Overall Compensation and Benefits
Meeting the market is a common strategy for compensation where many employers set the pay levels matching and relative to those that are already in the market. The benefits of matching the pay rates of competing firms by a firm are that it will remain competitive and also in a position to attract as well as retain the talent at the top in the industry. The strategy of meeting the market in overall compensation is important since the managers of the firm are able to manage their labor costs more effectively. However, the managers using this strategy must be on the look to play catch-up and make huge adjustments when the labor markets tighten up.
Benefits of Lagging the Market in Overall Compensation and Benefits
The internal compensation strategy of lagging the market is used by employers who prefer to pay less than what the existing marketplace offers. The strategy, despite being the most recommended, is important for firms that have no financial resources to pay the high rates (Paul & Elder, 2012, pg. 348). As such, the strategy is important for startup firms and those undergoing a financial crisis. It is able to survive the market by use of nonmonetary rewards to the employees to cap their turnover and dissatisfaction. The managers that seek to benefit from paying low rates to build up their firms’ financial standing must be on the outlook for fluctuations that hit the labor market (SHRM, 2015). They must also be able to avail nonmonetary rewards to retain and attract the candidates that are highly qualified. Finally, they must monitor the performance of the employees which deteriorates due to the use of the lag-the-market strategy.
Appropriate Strategy
While leading the market will result in taxing payroll expenses, lagging the market while pursuing top talent in human capital rich industries will result in a barrier from competing for a market share against the existing competitors. On the other hand, meeting the market translates to average pays that do not attract the top talent in the industry. Additionally, while meeting the market, the firm will not enjoy the labor-cost savings available to the strategy of lagging the market. Despite these shortfalls in each marketing strategy, the most appropriate strategy would be leading the market (SHRM, 2015). As such, the firm will be in a position to retain both its market share as well as the top talent in the industry, making it able to meet its payroll expenses and be shielded from extinction that faces the firms that lag the market. A firm that leads the market would also be preferred since, unlike that which meets the market, it offers the best quality since it attracts top talents in the industry (Paul & Elder, 2012, pg. 359). As a result, the firm adds value to its brand name making the lead-the-market strategy the most preferred.
References
Paul, R., & Elder, L. (2012). Critical Thinking: Tools for Taking Charge of Your Learning and Your Life (3rd Ed). Upper Saddle River, NJ: Pearson.
SHRM. (2015). Planning & Design: Compensation Philosophy: What Are the Advantages or Disadvantages of a Lead, Match or Lag Compensation Strategy? Society for Human Resource Management. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/cms_024253.aspx
