What should employee compensation be based on?

Employee compensation should indeed be based on market competitiveness if the budget allows. This approach ensures that an organization remains attractive to potential hires and retains current employees by offering salaries that reflect industry standards. Competitive compensation is essential for recruiting qualified candidates and can significantly impact employee morale and engagement.

Market competitiveness takes into account various factors, such as geographical conditions, industry trends, and the roles' specific demands, helping organizations adjust their pay structures accordingly to remain relevant and fair in comparison to similar positions in the job market. This strategy also allows organizations to balance their budgetary constraints with the need to offer attractive compensation packages to help mitigate turnover and maintain a productive workforce.

While performance, historical data, and company policies are all important considerations in the broader context of compensation strategies, relying solely on them can lead to disparities and may fail to position an organization favorably in the competitive job market. Thus, integrating market competitiveness into the compensation framework provides a well-rounded and strategic approach to employee salaries.