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Lead the Market Compensation Strategy

Have you ever suggested paying an employee more than the going rate and gotten some pushback? When you set your salary ranges above the market rate, you are using a lead-the-market compensation strategy. While it comes with financial risk, it can have several benefits.

Continue reading to learn what a lead-the-market compensation strategy is, its advantages and disadvantages and how to know if a lead-the-market compensation strategy is right for your company.

What Is a Lead-the-Market Compensation Strategy?

A lead-the-market compensation strategy is when you pay your employees more than the identified market rate. You aggressively set salary rates above your competitors in order to improve recruitment and retention.

Lead vs Meet vs Lag the Market

There are three main compensation strategies: leading the market, meeting the market and lagging the market.

Leading the market is when you pay employees more than the market rate, whereas lagging the market is when you pay below it. Meeting the market is when you pay your employees the going market rate.

What Are the Advantages and Disadvantages of a Lead-the-Market Compensation Strategy?

Leading the market in your compensation strategy requires you to invest more in your employees than many of your competitors. The reward can be worth the financial risk, but it’s important to know the advantages and disadvantages that come with that choice.

Advantages

  • Compete in recruiting. By offering a higher salary range than the market, you are able to compete for top talent in your industry and establish yourself as the “employer of choice” within your market.
  • Improve retention. When employees are paid more, they are likely to remain with your company. Setting your salary range above the market rate lets your employees know that they won’t find a better salary elsewhere and will likely convince them to stay at your company.
  • Increase morale. Paying employees more than the market rate will make them feel like your company truly values them.
  • Boost productivity. Employees are more motivated to give their best effort when they feel that they’re paid adequately. A lead-the-market compensation strategy comes with the expectation that employees are performing at the best of their abilities.

Disadvantages

  • Puts pressure on staff to perform at a high level. While the boost in productivity is an advantage, earning a salary above the market rate comes with additional pressure to perform at a high level. If you choose to lead the market, you’re likely attracting the top talent in your industry—but that doesn’t mean they won’t feel the pressure to produce results.
  • Vulnerable to market volatility. It’s a financial risk to offer salaries above the market rate. Any unforeseen event can reduce your cash flow and put you in a bad position financially.
  • Need to closely monitor performance. Because of the monetary risk, you have to closely monitor employee and monetary performance. Any miscalculations could be devastating to your organization.

How to Know if a Lead-the-Market Strategy Is Right for Your Organization

Opting to lead the market in your compensation strategy can be a risky decision. Below are a few scenarios where leading the market could be the right choice.

You’re In a Competitive, Cutting-Edge Industry

If you operate in a cutting-edge industry that requires the brightest talent, you have to set the bar high. In order to keep up with innovation from your competition, you have to pay your employees above the market rate. Otherwise, your competitors will successfully recruit the top performers and you won’t be able to stay afloat.

You Want to Attract the Most Experienced and Qualified Employees

Even if you’re not in the most fast-paced, cutting-edge industry, if you want to land the most experienced and qualified employees out there, you will want to consider a lead-the-market strategy.

You’re a Large Organization with Financial Resources

Larger organizations have stability and more wiggle room when it comes to finances, and can choose a lead-the-market strategy with less risk than smaller companies.

You’re a Profitable Organization

If you are a highly profitable organization, no matter the size of your company, you may consider a lead-the-market compensation strategy. However, be extremely cautious and make sure that you understand the risk you’re taking if you don’t have the financial stability of a larger organization.

Why You Should Consider Mixing Compensation Strategies

You can use a combination of all compensation strategies to remain competitive in recruiting but reduce some of the risks that come with a lead-the-market strategy. Remaining flexible is important; you can shift between the three strategies depending on the circumstance.

You may consider a base strategy of meeting the market and adjusting as necessary. If you have highly specialized roles that require the most qualified and experienced talent, you can adjust your compensation strategy to lead the market.

Questions You’ve Asked Us About Compensation Strategies

What Are Examples of Companies That Use Lead the Market Compensation Strategies?
Many technology companies have a lead-the-market compensation strategy, including Cisco Systems and Microsoft.
Do I Need a Defined Compensation Strategy?
You should have some type of defined compensation strategy in order to consistently guide how you compensate your employees. However, you don’t have to stick to one type of compensation strategy. You can use a mix of different ones depending on your company’s needs.
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