An Employee Compensation Program Has A Number of Benefits

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

Reasons Why An Employee Compensation Program Is Useful

Why would we even do this? The first is to implement the employee compensation philosophy. That’s a fancy way of saying, to ensure that we pay market competitively. The reason is it phrased those terms of an employee compensation philosophy is that we may define our labor market in a very generic way or in a very specific and unique way.

For example, the plain vanilla approach, which is pay at the median of the market. That’s the point in which half of organizations pay more and half pay less. It says on a scale of 1 to 10 we’re going to be at the five. We’re going to be right at the middle of the market. Or we could be the top payer in the market where nobody can possibly leave our organization for more money, but we’re also not going to be the bottom payer in the market.

The plain vanilla approach would be to say, “We’re not going to be the Anheuser-Busch, we’re not going to be the Wal-mart, we’re going to be somewhere in the middle.”

It also helps us to effectively allocate resources. This is particularly true in today’s economy. In the current economy there are very few clients that are saying, “You know what, we have excess money. And so, we don’t have to be careful with our limited salary dollars.”

Just the opposite is true. We have a limited pool, we aim to make sure that we don’t overpay some positions and underpay other positions. A compensation system helps to effectively allocate those limited dollars. It also allows us to provide a rational basis for pay decision. Another way of saying this is that we could be proactive to the market as opposed to reactive to the market. A compensation system will also allow us hopefully to make data driven decisions as opposed to just what the rumor on the street is.

Edited Remarks from “How to Set Pay Ranges That are Fair and Effective” by Edward Rataj

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