Market Based Compensation Systems


Compensation programs are designed to improve organizational productivity. Human resource departments focus on employee retention. Every organization ought to streamline its objectives and goals in order to develop appropriate strategies of accomplishing them. Compensation is meant to reward and motivate employees for their work. Employees in any company usually desire fair compensation for their services. Compensation should, however, feature various factors highlighted below.

Compensation systems ought to be linked to various laws that guide relationships between employees and employers (Boxall, 1998). Labor laws should guide every intervention that companies adopt in order to entrench market based compensation structures. Organizations in the modern world face the challenge of gaining a competitive edge over their rivals. Market competitiveness for companies can only be achieved by organizations that uphold appropriate compensation mechanisms for their workers.

Market based compensation programs

Market based compensation programs continue to become popular among companies in the contemporary age. They refer to systems that companies use in determining the compensation they offer for the services that the workforce delivers to them. Organizations pay their workers in accordance to the volume of their input. Companies make compensation through finances and other forms. Financial compensation can be direct whereby a worker receives pay for the work delivered. Benefits that may not feature in the final pay may be given to the employee in form of leaves and pension plans.

Organizations offer non-monetary rewards like tours, educational and development forums to their employees. These rewards help companies to achieve organizational productivity through efficient services offered by a motivated workforce. Most international organizations are adopting a market based pay system due to its flexibility. Market based pay is easy to understand as compared to an internal compensation system. A market based compensation system offers dynamic response mechanisms to economic challenges that occur within the organizational context. For example, the Inditex Company usually trains its workers on ways of aggressive marketing in response to competitiveness in the clothing industry.

Organizations are developing ways of maintaining and exciting their employees. Organizations utilize a market based compensation system to ensure compliance with international standards of human resource management (HRM). Several factors determine market based compensations. The training and experience of a given employee may be linked to his pay. The working hours of an employee may also define his salary according to the market based compensation. Workers who are usually exposed to health risks should be entitled to health compensation according to the US Department of Labor.

Novartis Pharmaceuticals based in the US offers its workers a competitive health insurance package. Market based compensation programs uphold efficient communication mechanisms. They also continuously review the pay packages and job structures of employees in accordance to the external market to enhance competitiveness. Companies should adopt efficient pay strategies in accordance with technological changes. Market based compensation upholds dynamism in trends, economic and social issues.

HRM departments in companies should match external competitiveness with internal equity to attain a successful market based compensation program. Internal equity dictates that employees should perceive that their wage is directly proportional to their output when compared to other employees in similar organizations. Employees of Inditex and Walmart companies usually compare their salaries based on a competitive textiles and fashion market. Inditex usually gains a competitive edge over Walmart because it employs internal equity and external competitiveness in its operations management.

Walmart does not usually uphold a market based compensation mechanism. It does not accord its employees adequate satisfaction. The Inditex Company attributes high performance of its workers to competitive remuneration. Internal equity in organizations ensures the minimization of conflicts. External equity occurs when employees of a given organization feel that they receive an average pay compared to other employees doing the same task in a different organization. Employees should feel that they receive fair pay in accordance to the market sector pay.

The multiple hats theory suggests that employees who perform multiple duties should receive more compensation than those who do not perform many duties. Organizations should review the effects of compensation to their employees. Companies should adopt realistic compensation programs. They should integrate appropriate strategies to ensure an efficient organizational culture (Murphy & Zabojnik, 2004). Organizations should adopt objectives that entrench competitive organizational culture.

An appropriate organizational culture incorporates relevant compensation philosophies in a given organization (Minow, 2012). Legal compliance to labor laws is crucial in achieving balance between external competitiveness and internal equity. The Novartis Pharmaceuticals Corporation complies with the Occupational Health and Safety Act, and the Human Rights and Labor Standards acts. The company ensures that its compensation structure conforms to the requirement of the US laws. The compliance to the law by the company makes the employees of Novartis feel that their pay is safeguarded by the law.

The Novartis Pharmaceuticals Corporation utilizes a pay structure that upholds a low and a maximum limit for employees’ pay. The company associates a worker’s pay with the level of his skills. It also provides incentives to its employees that include Novartis Annual Incentive Plan (AIP) that boosts the performance of its workers. The scheme sets achievable sales targets to its employees.

Large organizations have adopted the market based compensation programs that have improved their productivity (Jeppson et al, 2009). For instance, AVON, formerly California Perfume Company, has adopted a market based program. Other companies that have adopted the program include Electrolux and Tupperware. Companies that fail to adopt market based compensation systems perform poorly in the market. Organizations need to invest in their employees in order to realize success in their businesses. Companies need to train their employees on the appropriate skills and emulate the Inditex Company. The organizations must offer competitive remuneration schemes to their workers to avoid constant resignations and strikes that may be costly to the companies in terms of loss of business.


Companies need to adopt market based compensation programs to avoid losses as a result of high turnover of workers (Hale & Bailey, 1998). A market based compensation structure should be cost effective. A job classification system should align challenging jobs with additional pay. An appropriate grading system integrates education and experience into the organizational structure. Organizations should focus on improving their relationships with their employees. They should also work in accordance with the labor laws of the country.

Job descriptions should be clearly stated for employees to follow. Organizations must continue improving technology to accommodate innovation in their companies because it provides a foundation for developing competitive advantage among various organizations (Hale & Bailey, 2002). Organizations should develop competitive organizational management structures. The government should conduct additional research on internal equity and external competitiveness to improve the practice of market-oriented compensation.


Boxall, P. (1998). Achieving competitive advantage through human resource strategy: Towards a theory of industry dynamics. Human Resource Management Review, 8(3), 265-288.

Hale, J., & Bailey, G. (1998). Seven dimensions of successful reward plans. Compensation and Benefits Review, 30(4), 71-77.

Hale, J., & Bailey, G. (2002). Determining Base Compensation: Should you use Market value or internal equity? Employee Benefit Plan Review, 57(5), 4-6.

Jeppson, C. T., Smith, W. W., & Stone, R. S. (2009). CEO compensation and firm performance: Is there any relationship? Journal of Business & Economics Research, 7(11), 81-93.

Minow, A. S. (2012). Reasonable Compensation. California CPA, 80(7), 11-13.

Murphy, K.J., & Zabojnik, J. (2004). CEO pay and appointments: A market-based explanation for recent trends, The American Economic Review 94 (2), 192-196.