Survey-generated pay data provides a benchmark for establishing base pay levels for specific positions relative to market rates for comparable jobs. The organisation must then choose whether, for each position category, it wishes to ‘lead’, ‘match’ or ‘lag’ the market. This is referred to as setting the ‘pay policy’. In essence, this involves having to make strategic choices about whether the policy should be to pay above, at or below the 50th percentile market rate for each position – and doing so while being mindful of the trade-offs necessarily involved with each of these three pay relativity options.

To deepen your understanding of the options and trade-offs involves here, review the following video and consider the strategic choice challenge below.

Gregg Learning, ‘Step 3: Pay policy’, https://m.youtube.com/watch?v=Bl0M_ORCr28 In chapter 2 we identified three main dimensions for strategic alignment, along with broad typologies for each. We identified three types of business strategy (‘innovation’, ‘quality enhancement’ and ‘cost reduction’), three types of employee value proposition (‘transactional’, ‘balanced’ and ‘relational’), and two types of work design (‘discretionary’ and ‘routine’).

Thinking about these eight broad types, see if you can identify any ‘natural’ alignment or compatibility between each type and one or other of the three pay policy approaches considered in the video (i.e. ‘lead’, ‘match’ or ‘lag’). For example, which pay policy option is likely to be most compatible with an ‘innovation’ business strategy, and why? Conversely, which pay policy option is likely to be least compatible with this business strategy?

You may find the following matrix helpful in thinking through the alignment/misalignment possibilities.

And just to complicate things, here is another pay policy teaser. Let’s say you are starting up a business that designs apps for university students. You have some kick-start funds from a venture capital investor but your cash flow at start-up is negligible and you need to hire in IT talent to scale up. What pay policy should you follow?

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Lead market Match market Lag market Business strategy Innovation Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Quality enhancement Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Cost reduction Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Employee value proposition Transactional Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Balanced Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Relational Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Work design Discretionary Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No Routine Yes/Maybe/No Yes/Maybe/No Yes/Maybe/No