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HRM Essay Example: Compensation Philosophy

3 pages
648 words
Vanderbilt University
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A compensation and reward program is a tool that is often used by many employers to motivate, attract, and retain employees. One of the major factors to consider when designing a compensation program is the organization's compensation philosophy (Gomez-Mejia et al., 2014). A compensation philosophy refers to a set of guiding principles that regulate the compensation of workers within a given institution or business (Yanadori, 2015). In other words, it controls the complexity and design of all compensation programs. In this regard, a consistent philosophy provides the employees and organization with a strong foundation for growth and development. It is in the light of this background that this paper highlights the risks and benefits of the lead, match, and lagging compensation philosophies, and identifies the most appropriate approach for my chosen firm.

Benefits and Risks of Leading the Market

Organizations that choose the leading market strategy often have their pay levels above the market at the beginning of the year and equal to the market at the end of the year. This approach is most appropriate for businesses that are located within a highly competitive labor market. One advantage of using the leading the market strategy is that it attracts competent employees, increases morale and productivity, and minimizes employee turnover (Yanadori, 2015). On the other hand, it has the greatest propensity of increasing overall labor cost, which can be quite expensive for many companies in the long run.

Meeting/ Matching the Market

The meeting or matching policy replicates what is being offered in the market. In other words, businesses that use this strategy design their pay rates level based on what other players or competitors in the market are offering (Yanadori, 2015). One benefit of using this method is that it ensures the firm's compensation structure remains competitive and effective, thus improving its ability to retain and attract top talents. It also allows business owners to manage their labor costs efficiently. However, adopting this policy may be challenging during tight labor markets and may require employers to make larger adjustments to the compensation structure.

Lagging the Market

The lagging pay policy puts the pay level rates below the market throughout the year. Many small businesses or start-up organizations may choose this strategy in case they lack enough financial resources or capital to offer their employees higher rates of payment(Gomez-Mejia et al., 2014). Implementing this policy, however, may result in employee dissatisfaction, lower productivity levels, and make it difficult for companies to attract or retain highly qualified candidates. Based on the information provided above, I will choose the meeting or match compensation philosophy for various reasons. First, it will allow my organization to remain competitive in the market. Secondly, the firm will be able to retain and attract highly qualified employees, thus enhancing its productivity levels. Lastly, managing the labor costs in the market will be much easier using the matching policy compared to the other compensation strategies.

In conclusion, choosing an effective compensation philosophy is significant when designing a compensation and reward program. In this case, the compensation philosophies can be categorized into three groups including leading, meeting, or lagging the market. The leading policy puts the pay levels above the market at the beginning of the year and below the market at the end of the year. On the other hand, the meeting policy sets the pay levels relative to those in the market place. In contrast, the lagging compensation philosophy sets it payment rates below the market throughout the year. In this regard, it is the responsibility of every manager or employer to ensure that they select the most suitable policy for their organization to remain competitive, retain, and attract talented workers.



Gomez-Mejia, L. R., Berrone, P., & Franco-Santos, M. (2014). Compensation and organizational performance: Theory, research, and practice. Routledge.

Yanadori, Y. (2015). Compensation and benefits in the global organization. The Routledge companion to international human resource management, 190-209.


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