Competitive Compensation Systems The market for labor can be quite competitive, and it is incumbent on human resource professionals to set the market appropriately, depending on their strategy. For companies that require the best professionals in order to thrive in the marketplace, they may need to come in at the top end of the market for total compensation, whereas a company with a strategy focused on delivering cost leadership might need to pay employees at the low end. However, there are times when low pay does not make for a more efficient workforce, so it is important to understand the market for labor in a sector. As an example, Costco pays at the high end, which allows them to skim the cream of the manual retail labor pool, which in turn allows the company to deliver a higher standard of service than many competitors. Those competitors paying at the low end ultimately receive higher turnover, lower quality of workers and less dedicated workers -- and there are costs associated with this that are not necessarily built into the calculation of total labor cost.

When considering the market for a competitive compensation system, a company needs to understand what the market demands and values, in order to create the best possible compensation system. As an example, many tech workers are younger, and prefer a work environment that supports their creativity. They are swayed by pay, but maybe less so by benefits, at least until they start to have families. So total compensation plans have to be oriented in a way that attracts the type of worker that...

If the company wants a slightly older worker, benefits might be a more important perk than the work environment, and maybe even more important that opportunities for advancement. These are different variables that need to be taken into consideration when designing a competitive compensation system.
Another basic economic factor that needs to be taken into account is the fact that the market is set depending on scarcity of critical skill sets relative to demand. The basic market dynamic of supply and demand definitely applies in labor markets. This is why unskilled workers seldom make much money -- they can easily be replaced. Those workers with unique skills that are hard to come by are in much greater demand, and their compensation will naturally reflect that.

When the company begins to understand what they are looking for, the compensation system needs to take into account the relative importance of several different variables with respect to what employees might want. The first thing that the company needs to do is understand the level of demand in the market, and the level of supply. There are stories about companies that cannot fill a position for years -- this means that they are not offering a market-competitive level of compensation for that position. They either need to develop that talent in-house, or buck up and pay the market price for that talent. There are a few different ways for a company to gauge what the market is for labor. Employees will often demand what they feel is a fair market rate, including…