Salary Increase Planning

STAYING COMPETITIVE

Traditionally, salary increase planning is conducted annually to ensure market competitiveness in the defined labor market. Many factors can affect the labor market globally such as economic prosperity, economic downturn, recession, inflation, deflation, a pandemic, and political turmoil. Other factors which influence salary planning are internal equity, market competitiveness, maturity of a business, specific needs of a business, legal requirements, labor relations, and the financial ability of a company. In countries experiencing a hyperinflationary environment, salary increases may take place multiple times during a year. Typically an organization will use the salary increase budgeting process to meet or improve its competitiveness to the external marketplace.

Later in the course, we'll show you how to retrieve labor market data on competing organizations' pay practices. Right now, we'll consider your organization's competitive strategy.

Competitive Strategy

Organizations differ in how they wish to respond to the labor market. Most organizations opt to use a compensation strategy of paying at 100% of the market median for their defined market, but some companies choose to pay above or below market. Here's why:

• Above market. Organizations pay above market salaries to attract and retain high-caliber team members. Here's the philosophy behind this strategy: although employees are more expensive, they are expected to be the best in the labor market - more knowledgeable, efficient, and harder working. This strategy typically is intended to reduce turnover since competing organizations pay less. The number of employees required may also be fewer since they are more productive.


• Below market. Paying below average salaries reduces costs. Firms that engage in this strategy either can't afford market rates or have simple, repetitive jobs with production systems and processes in place which utilize a labor supply that is plentiful in the marketplace. In this case, turnover is not typically an issue.

Different labor markets can pay different levels of compensation, so appropriately defining your labor market is important. For example, a restaurant chain may wish to compete within the restaurant industry, or a pharmaceutical company may wish to compete with similar size companies within the pharmaceutical industry. Some companies may wish to pay within the local labor market for jobs recruited from the local metropolitan area and pay specialized and management jobs based on the national labor market for the defined industry. Another way to define a labor market is based on a defined peer group of companies - typically those of similar size, industry, and even location. A best practices approach would be to pay within your industry and within a defined geographic area.