External Competitiveness & Internal Equity in an Effective Compensation Program. The ability to create a successful market-based compensation program is contingent on a number of key variables. Yet none is more important than gaining a clear understanding of what it takes to have a compensation program that is externally competitive, while at the same time internally equitable.In this assignment:1. Discuss what is meant by a market-based compensation program.2. Explain how an organization can balance external competitiveness with internal equity to achieve a successful market-based compensation program. Be specific.3. Illustrate with actual examples of employers achieving this balance. Also, provide examples of organizations failing to achieve one or both and illustrate what might result.Bring in at least 5 library sources to help strengthen and support your discussion.
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Market-based compensation program
That much of an organization’s budget goes into employee compensation means that compensation program is a crucial part in an organization’s human resource management plan. There are several types of compensation plans including traditional, broadband and market-based compensation programs (Biro, 2016).
The recent past has seen many companies shifting to a market-based compensation program as opposed to the traditional and broadband compensation programs which were popular in the past, according to the 2012 Survey of Salary Structure Policies and Practices. This is because “they combine the more well-defined parameters of a traditional structure with the range spread flexibility of broadbands” notes Kerry Chou a Certified Compensation Professional with WorldatWork (Rataj, nd). Most organizations that have successfully adopted the market-based compensation program are those offering consulting, professional and scientific services such as SAS, Boston Consulting Group, John Hopkins University and University of Arizona.
The basis for a market-based compensation program is market pricing. Market pricing is an external factor in an organization that looks at the labor market to determine what employees in an organization will get (Flannery, 2002). An organization with a market-based compensation program pegs its salary and other rewards to what other organizations are paying. Apart from salary, the other constituents of employee compensation include variable pay, benefits and equity. An effective market-based compensation program balances the external equity with internal equity to ensure that not only are the employees rewarded well, but that the organization is sustainable by consistently achieving its Return on Investment (ROI).
A market-based compensation program requires market data for more than half the jobs in an organization and for three quarters of the organization’s employees. A compensation program with data for less than half the jobs is not based on the market but on internal equity (Feldman, 2002).
While a purely market-based compensation program may compare favorably with an industry’slabor market hence attracting top talent to an organization, its major setback is that it does not determine the actual value of the compensation to an organization’s Return on Investment (ROI). Consequently, it is important to balance external competitiveness with an organization’s internal equity for an effective market-based program.
Balancing external competitiveness and internal equity
For some companies, it is not possible to balance between external competitiveness and internal equity. For example, for an industry’s big market leader, the internal equity is often the industry’s external competitiveness or the jobs are so diverse compared to the rest of the industry that any comparison would be meaningless………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………Internal Equity in an Effective Compensation Program
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