Creating a Market Competitive Salary Structure

Compensation Strategy

Your organization needs to determine its compensation strategy to design an effective salary structure. The compensation strategy will determine if the entire organization or a segment of the organization will be paid:

• above market rate
• below market rate
• OR
• at market rate

Some organizations choose to pay the market rate across all jobs. Those that wish to pay above market typically desire to attract and retain the best talent. Those that pay below the market rate usually do so because their budgets are constrained, or because they have a strategy to build talent (e.g., hire inexperienced workers and train them).

The compensation strategy should also include a desired market position which defines the salary structure effective date. This decision determines the date the organization will be above, below and at the defined labor market.

There are three basic strategies for an organization's market position policy:

• lag the market
• lead-lag
• lead the market

Lag the market. The company will be competitive to the defined market at the beginning of the plan year. Assuming an annualized market movement of salaries of 10%, the company starts the plan year equal to the market, is 5% below the market by mid-year, and then is 10% below the market at the end of the year.

Lead-lag. The company will be competitive to the defined market at mid-year. Assuming an annualized market movement of salaries of 10%, the company starts the plan year 5% above the market, is equal to the market at mid-year, and is 5% below the market at the end of the year.

Lead the market. The company will be competitive to the defined market at the end of the plan year. Assuming an annualized market movement of salaries of 10%, the company starts the plan year 10% above the market, is 5% above the market at mid-year, and is equal to the market at the end of the year.

These three strategies are illustrated below.