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Соmреtіtіvе Compensation Рlаnѕ: Hоw Tо Dеѕіgn Рlаnѕ Thаt Effortlessly Attract & Rеtаіn Star

Updated: Dec 10, 2021

Employee voluntary resignation rates haven been on the rise since 2010. bееn on thе rіѕе ѕіnсе 2010. And if the data from the bureau of labor statistics (BLS) is to be taken seriously (it should!), poor compensation gripes rank among the highest causes of the ever-increasing employee attrition rate, according to SHRM. A great retention rate can help your organization maximize profits by up to 400% while saving you the high costs of replacing trained employees. You need to get your compensation plans right to prevent good employees from leaving.

It is very important that firm has a deep knowledge of the basis of designing market-based compensation plans. This will not only make firm's workforce immune to poaching from competitors but also support the organization's strategic business goals.

What Dоеѕ Іt Mеаn Whеn A Salary Іѕ Соmреtіtіvе?

For anyone who's spent time searching for a job, you may have come across the same hiring buzzwords over and over again. A phrase commonly used in job descriptions to attract top talent is "competitive pay." While these two words are enticing to those looking to level up their earning potential, it's not always clear what it really means. When it comes to compensation, the label "competitive" refers to pay that is comparable to or better than the market value of a position. In human resources, a competitive salary is the average market rate for the role, plus a percentage of that rate. This percentage may vary depending on a company's pay philosophy. It also means that compensation is competitive in relation to what other companies might offer for a similar position in the same industry and geographic area.

Why Is Соmреtіtіvе Compensation Іmроrtаnt?

One of the common mistakes for employers is overlooking the importance of providing a competitive salary to their employees. This is because they see it as an expense when supposedly, it is an investment.

First of all, what doe sit mean to pay a 'competitive' salary? This basically means the salary you pay to your employees is comparable to the market. For instance, for a similar job, a competitive salary is equal to or above the standard offered by companies in the same industry or geographical area. A common HR practice offers within 10% above or below the market average for a job as a basis for competitive pay.

Here are some of the major reasons why paying your employees a competitive salary is important.

  • Рауіng lеѕѕ tеndѕ to be mоrе соѕtlу

Іt is essential for employers to consider that one of the primary reasons for employee turnover is salary. Employees who feel they are not well compensate tend to look for higher-paid work elsewhere, quit and move on. And this costs companies a huge amount of money because it is costly to recruit and train new employees for replacement. Therefore, the cost of hiring a new employee exceeds the amount of money you think you saved by offering lower salaries.

  • Low pay could dеmоtіvаtе еmрlоуееѕ

Salary is a primary extrinsic motivator for employees. And no one can deny that people work and want to be paid fairly. Workers that feel they are being paid fairly are more likely to stay motivated and go the extra mile to help their company achieve its goals. So when employees feel they are paid less than others who have a similar job to theirs, they can become demotivated and less invested in their work.

  • Hіgh рау іmрrоvеѕ mоtіvаtіоn аnd productivity

On the other side, employees are heavily motivated with higher pay. By having a competitive compensation, employees often feel valued and appreciated, which is often tied to enhanced performance and productivity. A happy and motivated employee treats clients with passion. In turn, employers can demand a higher quality output from them.

  • Tор tаlеntѕ аrе аttrасtеd tо hіgh salaries

Talented employees know what they are worth. When your company is not offering a competitive salary, the candidate won't likely accept the offer. Not having a competitive salary can hinder companies from being able to attract talented employees, even though there may be many candidates in the market. It is important to be aware that if their values do not meet with your salary offer, then they will likely end up with your competition. And this could become a threat to you because their capabilities can enhance the competitors performance over yours.

  • Hіghеr рау іmрrоvе thе соmраnу’ѕ stakeholders

So, when employers invest in their employees, they will have more economic opportunities to improve their lifestyle. Employees who have more money tend to spend more money boosting not only their well-being, but also making a positive impact in the community where your business may operate. It is a win-win for businesses to have a positive employer brand, and as an old adage says, what goes around, comes around. This cycle applies to your business as well.

Whаt Аrе Thе Fоur (4) Activities Mаrkеt Соmреtіtіvе Pay Ѕуѕtеmѕ Аrе Bаѕеd Оn?

Generally, the market competitive pay systems are based on some activities. Here are the major ones you a firm should adopt:

  • Identify rоlеѕ within уоur оrgаnіzаtіоn (сurrеnt and future)

One of the first things to do will be to identify and analyze all of the job roles within your organization. This includes both current roles and future roles. This is necessary to help begin your strategic and comprehensive approach to competitive compensation. After identifying roles, you will want to set salary brackets for these roles with regard to the job titles and descriptions.

  • Fоllоw up wіth an extensive competitive analysis

To design a great compensation plan, it either has to be on par with the market or higher than it, whichever makes sense. This is where a thorough competitive analysis comes in. The competitive analysis will help uncover what competitors pay for similar job profiles. This data will include what similar employees are being paid per hour, per week, monthly, or annually by other organizations similar to yours.

  • Consider grоuріng rоlеѕ іntо jоb fаmіlіеѕ

After identifying and analyzing current and future job roles, it makes sense to then group jobs into families or classes rather than adopt a singular pay grade system across different positions. Some organizations choose to group jobs into administrative, management, technical and executive job families, etc. It might also make sense to group jobs based on geographic locations, among others.

  • Аnаlуzе ѕuррlу and dеmаnd dуnаmісѕ

The factors of demand and supply can impact what will be considered a competitive and attractive compensation plan for an employee. If for example, the organization is looking to fill a role with candidates with specific qualifications, with those candidates very few in the market, the organization might consider paying more to attract qualified candidates, even if this means going slightly above the market average.

  • Сrеаtе a policy fоr commissions and bоnuѕ

Payroll and hr should also work together to develop a policy for commissions and bonuses as well as for rewarding high performance. Commissions and bonuses might serve as a clever way to augment lower-than-market base pays, as well as keeping your current workforce motivated.

Fасtоrѕ That Determine Pay Competitiveness

The market value of a position can fluctuate depending on a variety of factors such as industry and location, so it's important to note that pay may vary, and it isn't necessarily by a specific amount.

Here are the major factors that can affect compensation:

  • Jоb tіtlе

When it comes to determining a competitive salary, the role itself will often have a baseline for market rates.

  • Experience lеvеl

Most positions will offer pay that corresponds to either your experience level or the experience necessary for the job. Whether the role is entry-level, mid-tier, or higher, often determines the experience level required and the associated salary range.

  • Іnduѕtrу

The industry your desired job is in has the power to affect the standard of competitive pay. Lucrative industries like tech and finance may have more competitive rates compared to other industries in order to secure top talent.

  • Geography

Location also affects the average market rates of a position. Places with a higher cost of living and higher minimum wage standards typically compensate more to account for these factors.

  • Job availability

Much like market prices vary based on supply and demand, salaries do too. When a job is in high demand but lack supply, pay is likely to be more competitive. On the other hand, if a position is in low demand but there are plenty of qualified candidates, this will likely decrease the market rate of the position.

Compensation Рhіlоѕорhу

(Create And Adopt)

Having a philosophy in place will help in navigating payment and rewards issues easily. This will result in the company choosing to lead, lag, or match the market's pay structure. Companies that want to design competitive and attractive compensation plans, however choose to either match or outdo the market average.

Also, having a compensation philosophy helps to guide the organization's approach to compensation. It allows stakeholders to make informed decisions on offering competitive pay in line with the company's beliefs and core pay practices.

It is critical for employers to remember that having a highly competitive compensation package does not refer to just a higher salary. Competitive pay means what is included in the entire compensation package. Below are other benefits that job seekers value when organization offer competitive pay such as paid time off, insurance, retirement plans such as 401k, and other bonuses.

  • Раіd time оff (PTO)

One important aspect of any compensation package is the amount of paid leave that's offered. Employees at all levels are interested in PTO, however employers may find that depending on the technical expertise required for a role, top performing talent will look to negotiate more PTO.

A recent 2021 XpertHR's Recruiting and Hiring survey found nearly 90 percent of the 325 organizations responded they are flexible about negotiating salary with job candidates — at least for certain positions. However, only 42 percent are open to negotiating bonuses, and just 32 percent are willing to negotiate benefits.

Other Benefits

While salary, and paid time off generally make up a standard compensation package, they're not the only benefits that job seekers consider when evaluating a job offer. Here are a few examples of competitive benefits to consider in your compensation strategy that lead to attracting and retaining talent:

  • Health insurance

  • Retire plans

  • Performance bonus

  • Relocation bonus

  • Stock options

  • Signing bonus

  • Profit-sharing plan

  • Career development


Designing great compensation plans might seem complex, but its one of those things you can't afford to flunk, if you want to build an organization that employees never want to leave. While there are a lot of moving parts involved in designing a competitive compensation plan, the most important thing will be the need to keep track of competitors and changing trends in your industry to update outdated plans that don't reflect the current market reality. This, in turn, will ensure your workers get competitive salaries at market rate which will help with attracting and retaining talent.

Take advantage of paying competitive compensation! Looking over its benefits and disadvantages, we can conclude that how employers pay employees play a crucial factor in the company's performance and ability to win the war for talent.

This article was written by Fawn Hentrel, Managing Partner.

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