Monday, April 28, 2008

Lead, lag, or match the market?

The market is at a constant change, while most employers analyze their pay strategies once or twice a year. So how exactly do employers deal with this very important issue? Employers have to establish a pay policy. A pay policy’s main purpose is to illustrate in detail how an organization intends to react to the expected market changes and pressures. An organization has three pay policies that can be implemented to deal with expected market changes, which include: whether to lead, match, or lag the market.

When a company chooses to lead the market, the pay level should be above the market at the beginning of the year and equal to the market ant the end of the year. Leading the market usually results in the retention and/or attraction of top candidates for the specific position offered or/and secured. The match policy puts the pay level above the market for the first half of the year and below the market level during the second half of the year. The lag pay policy puts the pay level below the market all year round. Employers might have to take the lag approach because they simply cannot afford to pay above or match the market; might be able to pay below the market due to an abundance of labor; or, they are willing to tolerate the cost of paying below the market. The process of originally establishing pay levels involves balancing internal equity; what the job is worth to the organization; and, the external competitiveness of an organization’s pay compared to the pay of other organization in the same industry. In my opinion, I never realized how much emphases and analysis on pay strategies and structures was needed in order to make an organization succeed. Now that I think about it, pay is probably the highest operating cost of an organization.

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