Lead or Lag Your Competitor’s Compensation Plans?

Friday, August, 31 2012

It is a fundamental question for every compensation practitioner, should the organization lead or lag competitors’ compensation plans? And if it is decided to lead or lag, by how much should the organization lead or lag the market? It may seem like a simple question and the simple answer is that an organization should merely match competitors rather than either alternative of leading or lagging. Unfortunately, it is not so simple. There is much riding on any one of the choices and all alternatives can have a dramatic influence on an organization’s viability as a business.

Businesses must decide what they are willing to pay for the goods and services required for them to operate and produce the goods or services they market to their customers, which includes labor. Few businesses are in a financial position to pay whatever is demanded of them without some serious thought being given to what effect those expenditures will have on their ability to remain a viable entity.

Organizations which require highly trained staff with hard to find skills and with a need to retain that talent for very long periods may find that they have to pay a wage that leads the market by 6 to 9 months and lag the market for the balance of the year in order to attract and retain the skilled workers needed. Another organization which requires no specific or special skills and willing to accept higher than average rates of turnover might be able to manage its talent even though its wages lag the market for the entire year. It would not be unusual for an organization to lead the market for their key jobs while lagging the market for those jobs where the demand is less critical.

While cash compensation is only one part of most organizations’ total compensation structure (even for those organizations who do not realize it), it is highly visible to workers and competitors. Although organizations generally do not publish their wage rates, most competitors have an idea of what rates each are paying and with whom they compete for labor and other resources.

Even after an organization has developed its compensation structure in terms of lead-lag and the market place, the marketplace has an uncanny habit of changing over time. Skills which were in high demand a few years ago are now out of favor and they have been replaced with skills which did not even exist 3-5 years ago. Thus, it becomes necessary to periodically revisit the lead-lag discussion. For many organizations this means an annual or a biannual review of job pricing, pay structure, market place movement, changes in labor competitors, and the overall mix of direct cash and benefits which makes up the organization’s total compensation structure.

Since the wage and labor markets are highly dynamic, wide swings in wage rates can occur from one year to another. Organizational change such as acquisitions, divestitures, new business lines, and products can create and/or eliminate the demand for labor skills very quickly. These changes dictate that an organization make necessary updates to its compensation structures in order to meet any new demands on the organization’s workforce resources.