Advantages & Disadvantages of Competitive Pay Policies

Competitive pay is a common approach to setting employee salaries by matching or exceeding the industry standard compensation for a particular job, according to career website Indeed. Companies that follow this method periodically review their jobs and descriptions and compare them to similar jobs at competing companies. The goal is to offer salaries that are fair relative to the industry to attract and retain top talent, explains Manage HR magazine.

While the importance of salary and wages is critical to track in your employees, limiting your attraction and retention efforts to compensation isn’t enough to manage staff effectively.

Providing Employees with Stability

Companies not only want to attract key employees, but also keep them by offering more stability in a competitive pay setting. Reducing employee turnover helps save search and on-boarding costs, lost of productivity and efficiency during the replacement process and reduces morale problems among other employees, and is one of the key benefits of paying employees more. When employees have satisfying pay and benefits, they spend more time on their work and less time scoping out better-paying opportunities.

Realizing their pay is fair compared to other companies and similar jobs makes it easier for employees to work through challenges of their work. This stability in employment helps the company maintain better organizational knowledge and the employee can find opportunities for internal development and promotion.

Periodic Compensation Reviews

Companies that use a true competitive pay policy have human resources professionals review jobs and pay annually, or even more often. This helps the company keep up with increases in pay in the industry that result from changes in supply and demand of employees and responsibilities of jobs.

This benefits employees, because the value of their job is more regularly reconsidered. This offers a greater feeling of hope than jobs with stagnant income because its value to the organization is rarely reassessed.

Addressing Other Job-Satisfaction Concerns

Companies that place too much emphasis on competing with pay may lack in organizational culture or other forms of motivation. Pay can attract qualified employees, but over time, it usually takes other tools to motivate top performance.

Responsibility, training and development, incentive pay and social activities are also important to motivating a workforce. Without these additional motivating tools, companies that only compete on pay may lose employees after a few years to better workplaces.

You can improve your employment offers with better job titles, voluntary benefits that cost you nothing and reduce your payroll taxes, employee recognition programs, flex time, an onsite employee gym and other no- or low-cost perks.

Providing Internal Equity

Competitive pay may offer external equity, but it lacks some of the motivation of pay-for-performance schemes. It does little to distinguish between employees working the same job but performing at different levels. Since each job is assigned a salary based on the job itself and not the individual, managers need to find ways to still encourage individuals to give their best. Some employers overcome this drawback by offering bonuses or sales commissions on top of base salaries.