Discuss competitive pay policies.

Question

What will be an ideal response?

Answer 1

Given the choice to match, lead, or lag, the most common policy is to match rates paid by competitors. Managers historically justify this policy by saying that failure to match competitors' rates would cause dissatisfaction among present employees and limit the organization's ability to recruit. Many non-unionized companies tend to match or even lead competition to head off unions. A pay-with-competition policy tries to ensure that an organization's wage costs are approximately equal to those of its product competitors and that its ability to attract applicants will be approximately equal to its labour market competitors. Although this policy avoids placing an employer at a disadvantage in pricing products, it may not provide an employer with a competitive advantage in its labour markets. Classical economic models predict that employers will meet competitive wages.
A lead policy maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay. A lead policy can have negative effects, too. It may force the employer to increase the wages of current employees to avoid internal misalignment and murmuring against the employer. Additionally, a lead policy may mask negative job attributes that contribute to high turnover later on (e.g., lack of challenging assignments or hostile colleagues). Remember the managers' view that high turnover was likely to be a managerial problem rather than a compensation problem.
A policy to pay below market rates may hinder a firm's ability to attract potential employees. However, if pay level is lagged in return for the promise of higher future returns (e.g., stock ownership in a high-tech startup firm), such a promise may increase employee commitment and foster teamwork, which may increase productivity. Additionally, it is possible to lag competition on pay level but to lead on other returns from work.