Absolute HR Group

The first step in this process is to decide how your pay rates are going to compare to the rates of pay in the market.  You will have several options to consider in determining your pay philosophy.  The first is whether you want to match the market.  This is one of the most common strategies because it will ensure that you remain competitive in today’s job market.  If you adopt this option, you will need to review the market every year or so to ensure that your pay rates are keeping up with the market.  You will need to allow for adjusting pay rates increases to keep aligned with the market.

 

Another option you have is to lead the market.  This means that you will set a pay rate more than the market.  By doing this, you may increase the number of qualified job seekers and decrease employee turnover.  This option is widely used for companies faced with “the war for talent” when there is a shortage of qualified job-seekers.   Another reason for adopting this philosophy is that employees will be less likely to leave your company for pay reasons if you adopt this philosophy.  However, the downside to this approach is that this strategy leads to an increase in your labor cost and you will need to monitor whether you are realizing these benefits.

 

You may decide to choose to establish pay rates below the market.  This is referred to a “lag the market”.   Some companies simply do not have the resources to pay at the same rate of the market.  This could cause a decrease in qualified job seekers.  However, you can supplement your compensation program to include other “perks and benefits” that are attractive and where job seekers are not so focused on the pay instead of the entire compensation package.  One of the companies I worked with always paid below the market, but made up for it in employee medical benefits, company culture and employee development programs.  They also implemented a bonus program tied to the overall success of the company.  Therefore, when the company profited, so did the employees without jeopardizing the company’s financial position by having large fixed labor cost.

 

You may decide to implement a combination of options.  For example, you may choose to lead the market during a tight labor market, but and change your philosophy as the market changes.  You may need to individually decide to select key positions where you want to lead the market and others that you will match the market.  Regardless of what you choose, the most important factor is to keep a pulse on the compensation trends so you can adjust accordingly.  The last thing you want is to wake up one day and realize your employee turnover rate has significantly increased due to one of your key compensation components.