I’m working on a writing multi-part question and need an explanation to help me understand better.
Before one can discuss the basic building blocks of developing a market competitive pay system, including the relationship between internal and external equity, one must first have a clear and concise understanding of a market competitive pay system. According to Martocchio (2017), market competitive pay systems represent companies compensation policies that fit the imperatives of competitive advantage. Market competitive pay systems play a significant role in attracting and retaining the most qualified employees. With that being said, there are four basic building blocks of developing a market competitive pay system: conducting strategic analyses (an examination of an organizations outside market setting and internal features); assessing competitors pay practices with compensation surveys (gathering and examining the competitions compensation information); integrating the internal job structure with external market pay rates ( a combination of pay rates that mirror the organization as well as other markets assessments of employment); and determining compensation policies (suggesting compensation pay policies that tailors their organizations competitive actions). Ultimately, management and the HR department will collect information to determine the best market competitive pay system. Depending on the decision derived internally regarding the compensation pay system, will determine the external impact. The reason being is if the right market competitive system is developed, it will appeal to the right market and attract the right people for the job.
Martocchio, J. J. (2017). Strategic compensation: A human resource management approach (9th ed.) Pearson.
Human resource managers (HRM) serve many roles, and developing an effective and equitable competitive pay system is essential to the retention and satisfaction of employees. To attract the best talent requires developing a compensation pay plan that meets or exceeds the market standard. The building blocks of developing a market competitive pay system: core compensation and employee benefits. According to Martocchio (2017), core compensation is base pay and base pay adjustments over time. Employers determine competitive base pay by researching the PayScale Index to see how others pay their employees based on location, industry, and job category. The next step is benchmarking job positions and paying the top employees the right pay for their jobs. HR set salary must range for jobs because employees are now more informed about salary than before. They need to know if they can pay their bills and have some money to spend, which is no different for employers. According to Doyle (2019), HR has many resources to research the pay worth of job positions, such as Payscale.com, Salary.com, and Indeed Salary Search to gain further insight.
As HR design the competitive pay system, they also must consider internal and external equity. According to Chron Contributor (2021), external pay equity refers to comparisons with other competitive pay structures, and internal equity means to pay employees working in similar jobs fairly. The relationship between the two must be carefully balanced because employers should meet the industry pay standard or exceed it but still pay everyone equally. Employees that receive fair pay are more likely to stay with the company and have higher job satisfaction.
Job evaluations are critical exercises for organizations. The job evaluation allows the organization to ensure they are hiring for their needs. This tool also allows the organizations to ensure they are covering all necessary areas and to determine if additional roles are needed. The Society for Human Resources Management describes the job analysis as the process of studying a job to determine which activities and responsibilities it includes, its relative importance to other jobs, the qualifications necessary to performance of the job and the conditions under which the work is performed (SHRM.org, 2018). Compensable factors are significant aspects of job evaluations. These factors indicate the level of pay appropriate for specific jobs. Establishing the appropriate pay is critical to attracting and retaining talent in order to drive organizational performance. Common compensable factors include experience, education, responsibility, complexity, supervision, potential consequences of error, working conditions, mental physical and visual demands and confidential data (Bruce, 2010). One great example is an operations manager role I previously held. When I think back on this role, there are many factors that should weigh into determining the appropriate level of compensation. While the position was relatively complex with respect to the intense scrutiny from the FDA and the DEA on controlled substances, perhaps the greatest would be the potential consequences of error. We were shipping approximately $250,000,000 dollars worth of heavily regulated product every week from my distribution center.
The vast majority of organizations implement some sort of job evaluation into their practices. However, some smaller businesses do not have the knowledge or ability to do so. Crystal Doucette (n.d.) wrote that a lack of a job analysis may result in wasted employee expertise, Unrealistic performance standards, a lack of human resources planning and unnecessary job requirements. This creates wasted efforts, lost time and a poor sense of direction. The combination of these potential pitfalls makes it incredibly difficult to succeed in an already challenging marketplace.
Bruce, S. (February 24, 2010). 10 critical compensable factors in job descriptions. HR daily advisor. Retrieved
A job evaluation is utilized to establish the difference in pay levels within a job position, it also recognizes the differences when it comes to job duties. The initial steps of the job evaluation an analyst determines the knowledge, skills, and attitudes required to perform the job. They also help in processing updates and ensuring the job descriptions are up to date and reflect the accurate job duties of the position which can also be used to help determine salaries and wages. Overall, the job evaluation is a useful tool to review job qualifications in order to set up a pay scale. According to Martocchio (2017), job descriptions consist of a job title, summary duties, and worker specification which will allow companies to recruit and put employees in the right jobs based on their qualifications. Once a job evaluation is completed there are many other factors an organization must consider to determine compensation. Those things are market standards, geographic location, government laws and regulations, and affordability. The pay scale for any given position in the organization will be based on the job content and the activities an employee will perform while on the job. In many cases having a proper job evaluation in place can help a business apply similar strategies to help maintain a pay equity. It is important for organizations to recognize that it is only fair to pay employees for the work they do, and the pay should be fair. Organizations who abide by pay inequity, i.e. equal pay for equal work will allow them to avoid being fined or the possibility of potential lawsuits.
One organization I worked for years ago has experienced higher than normal turnover rates with our customer service representatives. Our HR team decided to conduct a market analysis which led them to interviewing several employees to get their opinions on the current pay structure based on their job. This process involved surveys, interviews, and market studies. A new pay structure was implemented for all customer service representatives which included a new job title, classification, and job description. This change has allowed the organization to align customer service reps to market standards and provide them with competitive wages. Making these changes has helped to decrease turnover rates because fewer employees are leaving the company for higher-paying jobs, the overall morale has increased, and we have been able to retain some of our top talent. The organization realized a trigger was causing employees to leave the organization and the main factor was due to pay. All employees are aware of the program and the progression process that has been put in place. This program provides details of the KSA’s needed to effectively perform their job duties. Some of the pitfalls that exist for organizations that do not follow this process are higher turnover rates, low employee morale, loss of productivity and production numbers, and low revenue for the organization. It is important to maintain a competitive advantage by offering fair wages and ensuring the organization is meeting market standards. An organization that doesn’t provide benefits and equal pay as required by law take the chance of exposing themselves to expensive lawsuits,