A market lead policy is a compensation strategy in which an organization sets salary rates above those prevailing in the market to enhance recruitment and retention efforts. It is one of the three primary compensation strategies, the other two being matching the market and lagging the market.
Key Facts
- Definition: A market lead policy is when an organization sets salary rates above its competitors in order to improve recruitment and retention.
- Compensation Strategy: It is one of the options organizations have when setting pay in relation to the relative market. The other options include matching the market by paying comparable wages or lagging the market by paying lower wages.
- Benefits: Implementing a market lead policy can increase the supply of candidates, increase selection rates of qualified applicants, increase morale and productivity, decrease employee turnover, and discourage unionization efforts.
- Considerations: Before implementing a market lead policy, organizations should identify the expected benefits and consider the potential increase in overall labor costs. It is often most appropriate for organizations located in highly competitive labor markets.
- Combination Approach: Some organizations may choose to use a combination of compensation strategies. For example, they may lead the market during tight labor markets or for specific positions that are difficult to fill.
Benefits of a Market Lead Policy
Implementing a market lead policy can offer several benefits to organizations, including:
- Increased supply of candidates: By offering higher salaries, organizations can attract a larger pool of qualified applicants.
- Improved selection rates: With a wider pool of candidates, organizations can select the most qualified individuals for their positions.
- Increased morale and productivity: Employees who are compensated well tend to be more satisfied with their jobs and, consequently, more productive.
- Reduced employee turnover: When employees are paid above-market rates, they are less likely to leave their current employer for a higher-paying job elsewhere.
- Discouragement of unionization efforts: By providing competitive salaries, organizations can make it less appealing for employees to unionize.
Considerations for Implementing a Market Lead Policy
Before implementing a market lead policy, organizations should carefully consider several factors:
- Increased labor costs: A market lead policy will result in higher overall labor costs for the organization.
- Potential for financial risk: Offering salaries above the market rate can be financially risky, especially during economic downturns or unforeseen events that may reduce cash flow.
- Need for close monitoring: Organizations must closely monitor employee and financial performance to ensure that the benefits of the policy outweigh the costs.
- Suitability for specific circumstances: A market lead policy may be most appropriate for organizations operating in highly competitive labor markets or for specific positions that are difficult to fill.
Combination Approach
Some organizations may opt for a combination of compensation strategies. For instance, they may implement a market lead policy during tight labor markets or for specific hard-to-fill positions, while adopting a market match or lag strategy for other positions. This approach allows organizations to balance the benefits of a market lead policy with the potential financial risks.
Conclusion
A market lead policy can be an effective strategy for attracting and retaining top talent, boosting morale and productivity, and discouraging unionization efforts. However, organizations must carefully consider the potential financial risks and suitability of this policy for their specific circumstances. A combination approach, where a market lead policy is used in conjunction with other compensation strategies, may be the most appropriate option for many organizations.
References
- Lead-the-Market Compensation Strategy: Pros & Cons | Eddy
- Advantages and Disadvantages of a Lead, Match or Lag Compensation Strategy | SHRM
- Compensation Policies and Strategic Mandates – Strategic Compensation: A Human Resource Management Approach, 9/e [Book] | O’Reilly
FAQs
What is a market lead policy?
A market lead policy is a compensation strategy where an organization sets salary rates above those prevailing in the market to attract and retain top talent.
What are the benefits of implementing a market lead policy?
Benefits include increased supply of candidates, improved selection rates, higher morale and productivity, reduced employee turnover, and discouragement of unionization efforts.
What are the considerations for implementing a market lead policy?
Organizations should consider the potential increase in labor costs, financial risk, need for close monitoring, and suitability for their specific circumstances.
Is a market lead policy suitable for all organizations?
A market lead policy may be most appropriate for organizations in highly competitive labor markets or for specific hard-to-fill positions.
Can organizations use a combination of compensation strategies?
Yes, some organizations may opt for a combination approach, using a market lead policy for certain positions or during tight labor markets, while adopting a market match or lag strategy for other positions.
How does a market lead policy compare to other compensation strategies?
A market lead policy differs from a market match policy, where organizations pay comparable wages to the market, and a market lag policy, where organizations pay below-market rates.
What are some examples of organizations that have implemented a market lead policy?
Many technology companies, such as Cisco Systems and Microsoft, have adopted a market lead compensation strategy to attract and retain top talent.
How can organizations ensure the effectiveness of a market lead policy?
Organizations should regularly monitor employee and financial performance to ensure that the benefits of the policy outweigh the costs. They should also be prepared to adjust the policy as needed based on changing market conditions.