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Market-Based Compensation Program Effectiveness


This memo is about market-based compensation program effectiveness. It offers a working definition of a market-based compensation program and then uses that definition to describe features of the program that a firm would consider when planning and implementing it. The definition and arguments offered are based on secondary scholarly research sources. The memo shows that getting the best out of employees and fulfilling employees’ requirements for the perception of fairness are the two biggest factors affecting the success of a given compensation program in an organization. The memo also shows the way market factors can influence different approaches to market-based compensation by using examples of companies in the manufacturing and non-manufacturing industry. It discusses a company that has done well and another that has done poorly in implementing the program.

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Defining Market-based Compensation Program

Market-based compensation refers to a total compensation philosophy that focuses on current market value conditions for attracting and retaining desired labor skills. A market-based compensation program is specific to a firm and captures the knowledge of the organization about the options for getting new employees and the risks of losing employees to rival firms. Firms have the option to offer all compensation in monetary terms or to offer it indirectly by paying for worker expenses and privileges (Hippie & Stewart, 1996). Besides, the firm has to communicate effectively to ensure that workers and other stakeholders understand the compensation offered, and they can compare it with the competitor’s offer to make an informed conclusion about equity.

Firms use market rate data effectively and reliably when coming up with market-based compensation. Many firms use an arithmetic average and the median value of data collected in the market (Armstrong, 2012). They will then consider existing legal and policy provisions for offering a particular pay to employees. The eventual pay offered, which is the total of actual salary and any job-related benefits, must attract, retain, and motivate employees to perform at best. The intention of market-based pay is to allow employees to balance work and life and be able to take care of their needs and their family needs while being able to support their organization’s goals. Often, knowledge workers and unskilled workers or semi-skilled workers will experience different compensation flexibilities, given that their jobs have different demand and supply dynamics (Armstrong, 2012).

Balancing External Competitiveness & Internal Equity

Firms have to balance their internal equity and external compensation so that the benefits offered do not affect productivity and happiness in a negative way (Boxall, 1998). Focusing on this aspect ensures that organizations’ compensation programs do not handicap the organization’s options for realizing its objectives. The option requires firms seeking both external competitiveness and internal equity to match the financial and non-financial compensation options offered to employees within the existing market range.

A firm may adjust its compensation options such that they fit its ability to offer them and to address employees need for the perception of equity. The financial compensation options can be direct, such as equitable wages, salaries, and market adjustment increases. Insurance plans, social security benefits, and retirement compensations are some of the indirect financial compensation options that directly affect the cost of doing business and achieving objectives of an organization. On the other hand, non-financial options for compensation can be about the job position or the work environment. They include the provision of interesting duties and responsibilities for employees. The challenges, authority, and autonomy features of a job are also under this category. A firm may offer alternative working arrangements or modified retirement options as examples for adjusting its compensation program to support employee perception demands for internal equity while it considers the costs of implementing the compensation program.

A successful compensation system must be fair. Workplace equity is about the perception that all employees in an organization are receiving fair treatment. Internal pay equity arises when employees in an organization perceive their pair as equitable given the roles they play in comparison to what their colleagues do at work. The perception regards the value that employees feel they offer for the firm. This internal equity element is the most important in a given organization’s compensation program. For organizations to realize internal equity, they must be using the same compensation guidelines for similar positions. All employee roles belonging to a criterion should determine where the employee would fall in the range of available compensation options (Dulebohn & Martocchio, 1998).

Organizations can realize compensation program effectiveness by working on appropriate job classification systems that are in line with organization and employee expectations. They can improve the outcomes by using organization tenure as part of the features affecting their compensation policy to promote employee perceptions of procedural and distributive justice (Dulebohn & Martocchio, 1998). Organizations can balance external competitiveness and internal equity by taking care of the elements mentioned above. Besides, they should use effective communication for their compensation program, allowing employee input such that they remain responsive to market forces affecting their operating conditions, as well as employees’ perceptions about job roles and compensation.

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Employer Examples

Google and Apple operate in highly competitive technology industries, and they are examples of companies using market-based compensation programs. The stiffer the competition in a particular industry, the more relevant the market-based compensation becomes. As an example, Google has a high employee turnover rate because employees have highly marketable skills. The problem of such turnover is that it increases the cost of recruitment and selection for the company and slows its progress at being innovative. Nevertheless, the high turnover is also attributed to external environmental features that are not related to market-based compensation (Dow, Morajda, & McMullen, 2006).

For example, the workforce is young consisting of Generation Y employees who have less inclination to work in the same jobs for long. Manufacturing companies have employees staying longer because of their age and associated benefits that are tied to their tenure. Another factor is that employees can easily compare what they are doing at the firm and what their colleagues are doing, which makes it easy for them to create accurate perceptions of compensation fairness and use that as a basis for interpreting their firm’s valuation of the given employee’s worth.

A company like DHL has been able to stay competitive by focusing on employee competencies as part of its compensation philosophy. The company also uses succession planning to take care of problems that would arise due to employee turnover when the company is less competitive than its rivals are, in its compensation program. The company also includes performance development plans for employees such that they can achieve their optimal potential. Therefore, they can earn the highest possible pay and benefits for their roles. This changes their perception about internal equity while ensuring that the organization can maintain its optimal operation benchmarks for competitiveness (Armstrong, 2012).

HRM511 Module 4 Case Study Checklist (Rev. 5-3-15)
INSTRUCTIONS FOR STUDENT:After you complete your references section in your assignment, copy and paste this grading rubric to your Word document and use it as a checklist to help make sure you covered all the required content, structure, and mechanical expectations.
Content (Student should structure the paper into sections below.)

Student should use mark the box below as a checklist.

Student Notes
Section 1- Introduction(← Use this header): describes what the memo is going to be about; it mentions the upcoming sections. Paragraph talks about what memo is about by mentioning upcoming sessions
Section 2- Defining Market-Based Compensation Program(← Use this header): Discuss what is meant by a market-based compensation program. Paragraph discuss what is meant by market-based compensation
Section 3- Balancing External Competitiveness & Internal Equity(← Use this header): Explain how an organization can balance external competitiveness with internal equity to achieve a successful market-based compensation program. Be specific. Paragraphs explain the way organizations can balance external competitiveness with internal equity to achieve a successful market-based compensation program
Section 4- Employer Examples (← Use this header):
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.
Section provides actual examples of firms achieving and failing to achieve this balance and illustrates what might result.
Section 5- References (← Use this header):has at least 5 peer-reviewed/scholarly references from the databases within the CyberLibrary. The references are also integrated within the paper. yes
Section 6- Grading Rubric(← Use this header): contains this grading rubric. yes
Organization / Development
Student should use mark the box below as a checklist.
Student Notes
The 6 required sections are organized separately in sequence as listed in the Content section. yes
The memo is at least 4 full pages in length (excluding references and headers) size 12 Times New Roman font with double spacing text. yes
Each section is labelled with the header prescribed above. yes
Student should use mark the box below as a checklist.
Student Notes
Formatting or layout and graphics are pleasing to the eye (font, colors, spacing). yes
Rules of grammar, word usage, punctuation, capitalization, and spelling are followed. yes
Sentences are complete, clear, varied, and concise with proper syntax. yes
Used size 12 Times New Roman font for main body text and References. yes
Used double spacing between sentences and in References section. yes


Armstrong, M. (2012). Armstrong’s handbook of reward management practice:Improving performance through reward. Philadelphia, PA: Kogan Page.

Boxall, P. (1998). Achieving competitive advantage through human resource strategy: Towards a theory of industry dynamics. Human Resource Management Review, 8(3), 265-288.

Dow, S., Morajda, D., & McMullen, T. D. (2006). Evaluating pay program effectiveness. World at Work Journal, 15(2), 50-­59. Web.

Dulebohn, J. H., & Martocchio, J. J. (1998). Employee perceptions of the fairness of work group incentive pay plans. Journal of Management, 24(4), 469-488.

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Hippie, S., & Stewart, J. (1996). Earnings and benefits of contingent and noncontingent workers. Monthly Labor Review, 119(20), 22-30.

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