What is Competitive Compensation Strategy? Examples & Types

A competitive compensation strategy is a long-term plan for setting pay and rewards to attract and keep employees. It guides decisions on salaries and benefits rather than focusing on one-time changes.

Setting pay without a clear strategy can lead to inconsistencies. A structured approach helps a company stay competitive and align with its goals. Learn what a competitive compensation strategy is, its types, and how to create one for your organization.

What is a competitive compensation strategy?

A competitive compensation strategy is an overview of how an organization will position its employee value proposition in the talent market. It provides a long-term vision for overall compensation efforts, often looking several years ahead.

Generally, a successful compensation strategy outlines the following:

• Talent acquisition and retention goals;

• Target employee demographics;

• Perceived value of total rewards; and

• Competitor compensation practices

When it comes to achieving a strong compensation strategy, having real-time job posting salary data is critical. Salary.com's newest AI-powered tool provides up-to-date insights into market pay trends, allowing organizations to benchmark salaries accurately and stay competitive in attracting top talent.

Types of compensation strategies: with examples

The three main compensation strategies that organizations need to consider when setting salary include leading the market, meeting the market, and lagging the market. Here are some distinctions with examples:

1. Leading the market

   A lead-the-market compensation strategy means paying employees more than the market rate. This helps attract top talent and increase employee retention by offering higher salaries than competitors.

   For example, if the market rate for software engineers is $100,000, a company using a lead-the-market strategy might offer $120,000. Paying above competitors helps attract top talent and improve retention.

   Pros: Attracts a larger pool of highly qualified candidates; improves employee morale, productivity, and retention; can discourage unionization efforts.

   Cons: Increases overall labor costs; requires ongoing monitoring to ensure financial sustainability; may not be feasible for all organizations, especially in less competitive markets.

2. Meeting the market

   A meet-the-market compensation strategy sets pay at the market average. Some employees earn more, while others earn less, but overall, salaries align with the midpoint. Lower earners may see faster raises, while higher earners receive slower increases to stay in line with the market.

   For example, if the market average salary for a marketing manager is $80,000, a company using a meet-the-market strategy might pay between $75,000 and $85,000 based on experience and performance.

   Pros: Keeps pay competitive for hiring and retention; controls labor costs; prevents overpaying or underpaying.

   Cons: May require big pay increases in tight labor markets; lacks a strong edge in attracting talent; does not boost morale significantly.

3. Lagging the market

   A lag-the-market compensation strategy means setting employee pay below the market average. Organizations may use this approach due to budget constraints and often offer nonmonetary benefits to retain employees.

   For example, if the market average salary for a software developer is $90,000, a company using a lag-the-market strategy might pay $80,000. To compensate, it may offer remote work, extra vacation days, or training programs to retain employees.

   Pros: Lowers labor costs; can work if the company offers strong nonmonetary benefits.

   Cons: Harder to attract and keep top talent; leads to more dissatisfaction and turnover; more affected by labor market changes.

How to create a competitive compensation strategy

Only 22% of organizations have advanced compensation strategies, showing the need for improvement. Using real-time data and AI-driven insights helps companies stay competitive by aligning pay with market trends.

Salary.com's AI-powered tool, the Real-time Job Posting Salary Data Solution, analyzes job postings, benchmarks salaries, and tracks industry trends to support better pay decisions.

Below are the steps to build an effective compensation strategy:

1. Set your pay goals: Before setting salaries, choose whether to pay above, at, or below the market rate. Higher pay attracts top talent, matching the market stays competitive, and lower pay helps with budget limits. Make sure your pay strategy aligns with the company's goals and compensation philosophy.

2. Find the right market pay data: Accurate salary data helps in setting the right compensation structure or pay system. Use Salary.com's Real-time Job Posting Salary Data Solution to track pay trends in your industry and location. This helps HR see what competitors offer and adjust salaries as needed.

3. Compare with competitors: Comparing pay with competitors keeps salaries competitive and supports pay equity. Consider total rewards like bonuses and benefits, not just base pay. This helps improve pay structures and adjust pay scales to attract and retain talent. Salary.com’s AI-match feature links job titles to similar roles by family, focus, function, and level.

4. Adjust pay based on location and industry trends: Pay varies by region due to living costs and skill demand. Companies should adjust salaries accordingly. The Real-time Job Posting Salary Data Solution provides updated insights for better pay decisions.

5. Plan for hiring and future needs: A comprehensive compensation strategy plans for now and the future. Tracking trends helps predict salary changes and attract talent. Salary.com's AI tool uses real-time data to help companies plan staffing and stay competitive.

Competitive compensation strategy examples

Many companies use competitive pay strategies to attract and keep top talent. Here are some examples:

Latham & Watkins

In 2019, Latham & Watkins, led by Rich Trobman, raised top performers' pay to over $20 million to stay competitive. This led to internal competition for credit on work. Despite fairness concerns, the firm grew financially and kept hiring, especially in the U.S.

KKR

KKR, a private equity firm, offers employees equity in the companies it acquires. Their investment in GeoStabilization International (GSI) gave employees ownership stakes, improving retention and motivation. This approach has created $1.6 billion in worker wealth across about 50 KKR companies.

Amazon

Amazon uses Restricted Stock Units (RSUs) as a key part of its employee compensation strategy or compensation plan. These shares vest over time rather than being given all at once. RSUs can make up a significant portion of an employee’s pay and are granted both at hiring and throughout their tenure.

FAQs

Here are some common questions about competitive compensation strategy:

What is meant by competitive compensation?

Competitive compensation refers to a total rewards package offered to employees that is equal to or greater than what other companies in the same industry and geographic area offer for similar positions.

However, competitive compensation does not mean having the highest base salary. It includes bonuses, stock awards, and benefits for health and future security. For example, Microsoft includes these in its compensation packages along with competitive pay based on performance.

Some companies use pay equity analysis to ensure fair and competitive compensation across roles, departments, and employee demographics.

What are the three main types of compensation strategies?

The three main types of compensation strategies are lag, match, and lead. In simple terms, lag means paying slightly below market value, match means paying at market value, and lead means paying above market value.

Why is competitive compensation important?

A competitive compensation is important because it attracts, retains, and motivates top talent. Despite economic uncertainty, U.S. workers still expect competitive, fair compensation, according to a recent report. Companies that fail to offer it risk losing employees, facing higher turnover costs, and struggling to attract talent.