Advantages & Disadvantages of Competitive Pay Policies

by Luanne Kelchner; Updated September 26, 2017

Human resource professionals and management survey the pay rates of competing businesses to determine the competitive rate for employees in the industry. Businesses must strike a balance between paying a salary high enough to attract talented professionals to the company while controlling labor costs. Pay policies include salary, bonuses and scheduled increases.

Attracting Talent

Companies use competitive pay policies to attract talented and skilled workers to work for the organization. Businesses rely on the skills of professionals to ensure the company runs smoothly and remains competitive in the industry. Employees with the talent to help a company grow and move forward are in demand among competing businesses. A compensation and benefits package that includes a generous salary, bonuses and a schedule of salary increases can attract highly sought after employees.

Employee Motivation

A competitive salary package can improve employee motivation, reduce employee turnover and increase productivity. Employee turnover has a significant cost to businesses, which motivation can help reduce. While salary is not the only motivating factor for employees, it can help workers feel valued by the employer. Competitive pay policies that include regular salary increases and incentives motivate workers to perform at their highest level.

Cost

Start up businesses may not have the funds to pay competitive salaries to talented employees. New businesses that pay a competitive salary to highly skilled workers may not have the funds available to pay for general labor or unskilled workers. Talented professionals do help businesses grow and increase profit, but unskilled employees are also a necessity. A new business may find it difficult to balance the competitive pay packages with the requirement to keep labor costs low.

Private Companies

Private businesses may not have the ability to compete with the pay packages offered by public companies. Public businesses may offer talented employees a competitive salary and long-term incentives that depend on the worker’s performance over a longer period. Private companies may not have the ability to create a compensation package that competes with the resources of a public company.

About the Author

Luanne Kelchner works out of Daytona Beach, Florida and has been freelance writing full time since 2008. Her ghostwriting work has covered a variety of topics but mainly focuses on health and home improvement articles. Kelchner has a degree from Southern New Hampshire University in English language and literature.