Developing compensation systems that are both internally consistent and market competitive is not easy, but it is possible. The overarching factors a firm has to take into account when creating their compensation system is the labor market, product market, and organizational circumstances. Under each factor there are subcategories that need attention to make decisions that align with the goals of an organization. Analyzing the external market in an industry and internal variables in an organization is what will make it possible to be consistent and competitive.
One challenge in creating a market competitive compensation system is the availability of relevant and timely data and information. Firms don’t readily give endless amounts of data regarding their strategies because these assets are what set them apart in the labor market. Also, information from surveys may be outdated causing discrepancies in accuracy for the firm looking to use the data.
Internal consistency with regards to the compensation system refers to the belief from employees that all jobs within a firm are paid what they are worth. (Reference for Business) A challenge here is creating a culture of employees who appreciate what they are earning in their role as well as what other people earn because of the differences in tasks and job scope.
For both internal consistency and external competitiveness, employee satisfaction with their pay is highly dependent on their perception of internal and market rates. Firms should definitely have a strategy with regards to pay rates to decide if they are want to put more importance on internal consistency or external awareness and if it aligns with their goals to match them up.