Data can be considered as one of the primary building blocks to
establishing a market competitive pay system. Data can be gained from
compensation survey across peer organizations. Compensation surveys
avail “snap-shots” of competitors’ pay practices and act as
reference points for the development of pay level policies. Compensation
professionals should make sound judgments that ensure that the
recommendations fit with the company’s competitive strategies (Mayes &
Wood,2007). Successful utilization of metrics and analytics
necessitates proper gathering and objective analysis of competitors’
pay practices, so to ensure that the company does not incentivize
excessively risky compensation policies.
The other building block towards the establishment of a market
competitive pay system centers on analytics. Research has shown that
many businesses fail to utilize analytics to drive decisions, and
despite the accessing data and metrics, intuition and business
experience still tip the scale during decision making. The failure to
utilize analytics and elevation of intuition played a role in
encouraging excessive risk taking. Compensation programs have partly
been linked to (rightly or wrongly) the 2008 global economic crisis.
This arises from the assertion that compensation programs within the
financial services industry may have backed excessive risk-taking by
executives, as well as other employees (Earle, 2010).
Equity may be externally driven by market forces, or it may be
internally driven by the employer’s appraisal of the job. In order for
businesses to operate effectively, they should establish a compensation
strategy that delivers the two objectives of paying fair wages while at
the same time availing financial return on investment to the employer.
Various studies have revealed that market based pay is the best practice
approach, which can be employed in designing compensation policy within
the competitive market segments. This means that employees are paid at
a competitive age relative to rates offered to people within similar
positions in peer organizations. Compensation policies may also be
driven by the employer’s perception of fairness (internal equity)
detailing a measure of internal worth based on job autonomy and
responsibility. Internal equity plays a critical role in the evaluation
of unique and hybrid job titles, especially in instances where external
benchmarks do not exist.
Earle, J. E. (2010). Executive Compensation: The emerging role of
clawback policies for manging risk in compensation programs. Benefits
Law Journal, 23 (1): 72-79.
Mayes, D. G. & Wood, G. E. (2007). The structure of financial
regulation. New York, NY: Routledge.
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