Compensation Philosophy
Introduction
Compensation philosophy refers to the approach that a company takes to determining compensation. Total compensation is a mix of pay and benefits, and the structure that the pay takes as well. The compensation philosophy should be aligned with the company’s overall strategy. For example, Wal-Mart pays at low rates in order to help it compete on a low cost basis – a lower cost of doing business is conducive to that approach. Costco takes a different approach, believing that paying above market for its employees will deliver higher workplace engagement, and a more experienced, efficient workforce. The gains in efficiency and engagement will offset the higher cost per worker, is the general thinking there. So the compensation philosophy can be different between two firms in the same industry, but the philosophy has to be aligned with the rest of the business, including the key business objectives.
Different Compensation Philosophies
There are three basic compensation philosophies – lead, lag or follow the competition. The sort of base philosophy is to follow the competition, which means to set compensation policies in line with the market (SHRM.org, 2015). Under this approach, the competition basically sets the bar for compensation for the different roles, and your company follows what they are doing. This is also known as a match strategy.
The lead strategy is when the company takes the lead, setting compensation. Other companies follow you. As the compensation leader, typically the company will focus on having higher compensation rates, paying more than competitors. This is often done to attract better candidates, and in many cases there are sound operational reasons for this. Companies with the best talent are often the best performing companies – having your pick of great applicants can be a source of competitive advantage for a company.
The lag strategy is to pay below the market for jobs. There are two ways that this works. First, the company can offer far superior things in other areas – the work environment,...
References
Bowman, Jeremy. “Why Wal-Mart will never pay employees as much as Costco” Motley Fool [Web]. 2016. Retrieved December 5, 2017 from https://www.fool.com/investing/2016/1
SHMR.org “Planning and design: Compensation philosophy: What are the advantages or disadvantages of lead, match or lag compensation strategy. SHRM.org 2015. Retrieved December 5, 2017 from https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/cms_024253.aspx
Sturman, Michael & McCabe, David. “Choosing whether to lead, lag or match the market” Scholarly Commons 2006. Web. Retrieved December 5, 2017 from http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1338&context=articles
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