Identify and describe the four steps for establishing market competitive pay systems

What will be an ideal response?

Answer: Compensation professionals create market-competitive pay systems based on four activities:

• Conducting strategic analyses
• Assessing competitors' pay practices with compensation surveys
• Integrating the internal job structure with external market pay rates
• Determining compensation policies

First, a strategic analysis entails an examination of a company's external market context and internal factors. Examples of external market factors include industry profile, information about competitors, and long-term growth prospects. Internal factors encompass financial condition and functional capabilities (e.g., marketing and human resources).

Second, compensation surveys involve the collection and subsequent analysis of competitors' compensation data. Compensation surveys are important because they enable compensation professionals to obtain realistic views of competitors' pay practices. In the absence of compensation survey data, compensation professionals would have to use guesswork to try to build market-competitive compensation systems.

Third, compensation professionals integrate the internal job structure (Chapter 6) with the external market pay rates identified through compensation surveys. This integration results in pay rates that reflect both the company's and the external market's valuation of jobs. Most often, compensation professionals rely on regression analysis, a statistical method, to achieve this integration.

Finally, compensation professionals recommend pay policies that fit with their companies' standing and competitive strategies. Compensation professionals must strike a balance between managing costs and attracting and retaining the best-qualified employees. Top management ultimately makes compensation policy decisions after careful consideration of compensation professionals' interpretation of the data.