How Compensation Strategy Strengthens Sustainable Competitive Advantage

The competitive advantage is a necessary component for the modern organization. The competitive advantage has to be in products, services, internal and external processes and in Human Resources Management. The employees are the assets of the organization and the competitive advantage in Human Resources Policies can generate a huge impact into the net profits and overall performance and profitability of the organization.

The competitive advantage in compensation area usually generates a huge portion of the overall competitive advantage in HR Management.

What is competitive advantage in compensation?

The competitive advantage in the compensation area (more on Competitiveness and Competitive Advantage) is not about beating the pay market by paying higher salaries and bonuses to all employees. The managers tend to think, the better the pay of employees, the more competitive the organization is. It is not true, the organization has to carry the higher personnel expenses and during the crisis or the recession, it can be a huge competitive disadvantage in the compensation and the compensation strategy has to be redesigned quickly as the organization can continue in its operation and it has a destroying influence on the overall employee satisfaction.

The competitive advantage can be built by using two general approaches:

  1. General competitive position on the pay market
  2. Competitive pay market position for key job positions

General competitive position on the pay market

Setting the higher position than the median on the pay market is quite common competitive advantage setting in smaller companies, who have to fight for the best talents with the big organizations in the same industry.

It is quite dangerous to set the pay market position too high as the organization has to carry the increased costs and eats more from the margins on the products and services. The organization cannot make quick changes and the recession can be deadly dangerous for the organization as it carries higher costs to keep the processes operating and functional. The competitors have a better and bigger space to decrease the personnel costs in bad times.

The higher competitive position on the pay market can be used in the time, the organization grows dramatically and it needs the best talents from the job market and there is no time to decide about the key job positions in the organization and all employees are treated to be of the same importance.

Keeping the long term higher pay market position is suitable just for the companies in the modern industries, with high margins and the companies with the excellent brand name being known for employing the best of the best.

Competitive advance through strategic pay market position for key job positions

The competitive advantage in compensation can be set just for the key job positions in the organization. This solution is cheaper as the rest of the population can be kept in line with the median of the pay market or it can be below the median as the whole organization keeps the median in general. But, the organization has to be able to reach the consensus about the key job positions in the organization.

Setting the key job positions is the painful procedure for Human Resources getting the consensus from the top management is a bit mission impossible, but HR has to accomplish this procedure successfully as the key job positions are identified and Human Resources can set the right compensation strategy for the key job positions.

The differentiation in the compensation strategy and setting the different pay level for the key job positions is quite usual for the larger organizations as they save the personnel expenses and they are able to protect the key employees. It does not protect the key employees automatically, but it support the managers and other HR Processes as the employees feel pretty satisfied with their salaries.

The competitive advantage for the key job positions is usually the best pay strategy for the mature organizations, which does not grow aggressively and are purely focused on the product innovations. The key employees bring the innovations and the rest is paid fair enough for their job content.