Developing compensation systems takes a lot more work than one might think. That said, I believe it is a big challenge to create a compensation system that is both internally consistent and market competitive. Despite how difficult it might be, it is best for any company to take the steps to do so, in order to attract and retain the most talented employees. First, in order for the compensation system to be internally consistent, the company has to conduct a job analysis and then a job evaluation. Both processes are timely, but necessary for internal consistency. Creating a market competitive compensation system takes even more steps. The company, specifically the HR professionals in charge, must first conduct a strategic analysis of the internal and external factors of the company. Then, they must observe competing businesses pay practices through compensation surveys of some sort. Then, they most commonly use a regression analysis calculation in order to match the companies internal job structure with the external market’s compensation rates. This process should provide them with the best fit compensation policies for their business. The company may face some major challenges when trying to come up with a pay system that aligns internally and externally. There are a few challenges that may occur regarding the data found in compensation surveys. First, there will be excessive amounts of data that will be hard to organize. Additionally, the data will be outdated and will need to be updated before being used for the compensation decisions. Another challenge is deciding whether or not they should create their own compensation surveys that will allow them to tailor their questions to get themselves the best information. However, customization poses its own problems, as it is costly, sometimes ineffective, and requires specific skills to create. Another challenge might occur when choosing the pay level policy, specifically for companies with a differentiation strategy. Knowing whether to choose a market lead policy versus a market match policy will be difficult and might depend on current and future business prospects. As for low-cost strategies, the choice will most likely be a market lag policy, which is expected. Overall, it is very important for a company to have a compensation policy that is both internally consistent and market competitive. Despite the challenges and costs it might impose on the company, the benefits always be worth it if it is done thoroughly and accurately.
Martocchio, J. J. (2017). Strategic compensation : a human resource management approach (Ninth edition.). Pearson. (chapters 6 & 7)
MGMT 449 Week 4 Lectures