In this video, learn how pay comparisons outside an organization influence decisions about how to pay and how much to pay in total compensation. Learn how tight versus loose labor markets; product or service markets; and organizational factors, such as size and employee preferences, help managers decide whether to lead, lag, or match the market.
- Always remember that the objectives of any compensation system are to attract, retain, and motivate talent. This is the arm concept. At the same time, every organization wants to control costs and increase revenues. When it comes to attracting and retaining talent, it's critical that your pay package is competitive. To do that, it's important to look at what competitors are paying for the same skills. Then, you can choose whether to match what they're paying, or to design a package that differs from theirs, but better fits your business strategy.
At a broad level, it's important to look at three things. The first is the availability of qualified people, and the demand for that talent. The interaction of availability and demand produces a going rate for a given job or skillset. The second is the profit margin of the products or services you're selling. Over time, an organization must generate enough revenue to cover its expenses, including compensation.
So, an employers pay level is limited by its ability to compete in the market. Take items like milk and eggs. The profit margins on them may be only a few percentage points. Contrast that to items like luxury cars or jewelry where profit margins may be several hundred percent or more. Third, are the characteristics of your organization, including its size, and employee preferences on issues such as health care, bonuses, or pensions.
Employers can then choose to lead, lag, or match the going rate. Employers choose to lead or pay more than the going rate when they want to attract top talent to key positions. They will match the going rate for jobs that are not as directly tied to their success. For example, in a cutting edge tech company, software development engineers are critical. And so, the company may pay above the going rate to attract the most creative minds.
At the same time, entry level administrative support staff do basic administrative functions, and so are paid the going rate. But when would an organization choose to lag behind or offer less than the going rate? Often, this happens in startup firms that don't have the cash flow to match the going rate. Instead, they offer long-term incentives like grants of company stock before they go public. If the company is able to go public, as a result of its success, its early hires can become wealthy overnight.
Think Google or Facebook. So, to attract, retain, and motivate talent, think carefully about the kinds of talent you need to hire, and your ability to pay that talent. It's about developing a labor budget and a pay structure that will allow you to compete.
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- Explain and demonstrate how to approach internal compensation
- Demonstrate how to build a competitive strategy and total compensation strategy