Compensation Purpose and Strategy
Compensation can be defined as the various forms of financial returns or tangible services alongside benefits offered to employees as part of a relationship between them and an organization or company (Sturman & McCabe, 2006). Organizations must determine how they wish their rates of pay to compare to the relative market’s rates of pay. As such, organizations could consider match the market strategy, lead the market strategy, or lag the market strategy. Leading the market is where the organization (employer), embraces a compensation strategy deemed to be in excess of the pay rates in the prevailing market. The benefits of this strategy are that it increases the supply of candidates for employee positions, decreases employee turnover, contributes positively to the morale and productivity of employees, and increases the selection rates of applicants qualified for employee positions. However, the risk of this strategy is that it could increase overall labor costs in an organization (Sturman & McCabe, 2006). Matching the market is a strategy where the employer sets pay levels that match or are relative to those in the existing marketplace, and this is a common strategy for several employers. The benefit of this strategy is that it ensures the competitiveness of organizations, which increases the retention and attraction of top talent. Also, this strategy allows better management of labor costs. However, matching the market strategy may place the employer in a catch-up position. This implies that in the case of tight labor markets, the employer will be tasked with making significant adjustments to the compensation structure (Brown, Sturman, & Simmering, 2003). Lagging the market remains the least recommended strategy, and it is where an employer chooses to pay less than what is paid to employees in the prevailing marketplace. In the case where an employer does not have the financial resources to pay the expected market rates, this strategy is beneficial. However, it risks increasing an organization’s susceptibility to fluctuations in the labor market. It could also make it hard for an employer to retain or attract highly qualified candidates (Brown, Sturman, & Simmering, 2003).
Melon Company is a new company whose mission is to provide distinctive beverage products that are of high quality accompanied by incomparable and unique customer service. As much as Melon Company aims at being competitive, it may not have the financial strength to compete with existing household names in the market. The most appropriate compensation strategy for Melon Company is meeting or matching the market. This means that Melon Company will begin by setting pay levels that match those in the prevailing marketplace. This strategy will contribute to the gradual competitiveness of Melon Company. Of course, it cannot decide to set pay levels higher than those in the prevailing marketplace as it is new and may not match the financial strength of companies that have been in the marketplace for a long time. Moreover, setting pay levels lower than those in the prevailing marketplace would have serious impacts on the company’s competitiveness (Bruce, 2012). Being new, Melon Company must be on the search for employees. Therefore, with low pay levels, it would find it hard to attract employees. Even if it succeeds in attracting employees, Melon Company may find it hard to retain its employees at a later time. Also, this strategy would increase the likelihood of dissatisfaction among employees paving the way for turnover and poor performance in the marketplace.
Brown, M. P., Sturman, M. C., & Simmering, M. J. (2003). Compensation policy and organizational performance: The efficiency, operational, and financial implications of pay levels and pay structure. Academy of Management Journal, 46(6), 752-762. Retrieved December 8, 2017, from http://amj.aom.org/content/46/6/752.full
Bruce, S. (2012, July 23). Should You Meet, Lead, or Lag the Market? HR Daily Advisor. Retrieved December 8, 2017, from http://hrdailyadvisor.blr.com/2012/07/23/should-you-meet-lead-or-lag-the-market/
Sturman, M. C., & McCabe, D. (2006). Choosing Whether to Lead, Lag, or Match the Market. Retrieved December 8, 2017, from http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1338&context=articles