One of the major factors that affect the development of a business organization is the compensation strategy in use. The compensation strategies implemented in a firm affect the motivation of employees which in turn affects the level of productivity. There are several compensation methods that organizations can use in the labor market such as leading, meeting and lagging the market. Leading the market is a strategy whereby the organization offers higher compensation levels than its competitors. On the other hand, meeting the market involves the organization paying the staff similar to the competitor's pay. Finally, lagging the market is where the organization offers its staff payments lower than the competitors.
Benefits of Leading the Market
Some of the major benefits of leading the market strategy are such as an increase in the number of qualified applicants with specialized skills who will help improve the productivity of the organization. Also, leading the market helps reduce employee turnover rates as they feel satisfied with their pay (Society for Human Resource Management, 2018). Other benefits of leading the market compensation are such as the morale of the staff improves and also increases the number of candidates.
Risks of leading the Market
Despite leading the market compensation strategy having numerous advantages, there are risks associated with it such as increased overall labor costs which are taxing like payroll expenses which affect the company financially (Society for Human Resource Management, 2018). Another risk is that mismanagement in this strategy can cause the profits margins of the firm to reduce.
Benefits of Meeting the Market
When it comes to meeting the market, it is evident that it is the most adopted method many firms across the globe use. The meeting the market compensation is very beneficial because through matching the competitor's compensation levels, the firm is able to remain competitive. Meeting the market compensation enables the firm to retain the market's top talent (Shawn, 2010). Another benefit of meeting the market compensation is that the employers will be able to better manage the labor costs.
Risks of Meeting the Market
There is a downside of using the meeting the market compensation strategy which is the firm will not be able to attract top talent in the market and thus the level or quality of production may be affected (Shawn, 2010). This compensation strategy makes labor cost savings difficult when compared to lag the market compensation strategy.
Benefits of Lagging the Market
The lagging the market compensation is often adopted by firms which do not have adequate financial resources and may end up rewarding employees with nonmonetary methods. Businesses which implement the lagging the market compensation strategy enjoy benefits such as labor cost savings due to the low compensation rates (Compensation Café, 2010).
Risks of with Lagging the Market
Lagging the markets eliminates the chances of a firm competing for market share with competitors. The firms using this strategy are prone to encounter fluctuations in the labor market with high employee turnover. Attracting talents is also another risk the lagging the market compensation strategy may have (Compensation Café, 2010). Poor employee performance and low productivity are some of the downsides of incorporating lagging the market strategy.
Appropriate Strategy
The most appropriate compensation strategy is the meeting the market strategy as it places the firm on an average level. The meeting the market strategy enables the firm to favorably compete with its competitors in the market and it is able to retain its staff. Meeting the market strategy is beneficial as it helps manage labor costs in the firm as the firm does not have to use a lot of resources which may affect it financially or use too little to trigger employee turnover.
References
Compensation Café. (2010). To Lag, or Lead, or Lead-Lag: Examining the Question in the Real World. Retrieved from: http://www.compensationcafe.com/2010/10/to-lag-or-lead-or-lead-lag.html
Shawn Driscoll. (2010). Lag, Match or Lead? Retrieved from: http://shawndriscoll.com/lag-match-or-lead/
Society for Human Resource Management. (2018). Planning " Design: Compensation Philosophy: What are the Advantages or Disadvantages of a Lead, Match or Lag Compensation Strategy? Retrieved from: https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/cms_024253.aspx
