The decision to pay above the market rate can be motivated by employers’ desire to increase efficiency and retain employees for longer periods of time. For example, Sturman and McCabe (2007) conducted a utility analysis and found that a newly-opened restaurant would have to opt for leading the market strategy. This would help it attract more potential applicants and decrease the number of those rejecting the offer. Brown et al. (2003) discovered that paying above the market rate can increase workers’ motivation and contribute to their performance. On the other hand, the lagging market strategy can be utilized in cases with specific types of jobs and employees lacking expertise.
Chen et al. (2020) found that below-market salaries in social-mission organizations can increase the individual performance of employees. This can be explained by the fact that people seeking jobs in such organizations prioritize their social contribution overpay. A strategy that implies paying either above or below the market rate depending on the job is the best option. As evidenced by one study conducted in a hospital, leading the market with skilled professionals and lagging the market with lower-skilled ones can maintain appropriate financial performance and organizational efficiency (Emerald). Thus, maintaining a balance between the jobs with the lagging pay and the above-average ones can save companies money without undermining effectiveness.
The research conducted by Klaas and McClendon (1996) demonstrates how the utility model can be an excellent tool for assessing the real impact of different payment strategies. The approach takes into consideration all parameters at play and lets one make a decision based on evidence and not intuition. Managers can safely rely on it when analyzing current pay policies at their organizations and interpret the received information to ensure more efficient use of resources.
References
Brown, M. P., Halbesleben, J. R. B., & Wheeler, A. R. (2010). Lead for demand and lag for supply: The use of pay level to predict hospital performance.Strategic Human Resource Management in Health Care, 9, 79–96. Web.
Brown, M. P., Sturman, M. C., & Simmering, M. J. (2003). Compensation policy and organizational performance: The efficiency, operational, and financial implications of pay levels and pay structure. Academy of Management Journal, 46(6), 752–762.
Chen, X. C., Pesch, H. L., & Wang, L. W. (2020). Selection benefits of below-market pay in social-mission organizations: Effects on individual performance and team cooperation. The Accounting Review, 95(1), 57–77. Web.
Klaas, B. S., & McClendon, J. A. (1996). To lead, lag, or match: Estimating the financial impact of pay level policies.Personnel Psychology, 49(1), 121–141. Web.
Sturman, M. C., & McCabe, D. (2007). Choosing whether to lead, lag, or match the market.Journal of Human Resources in Hospitality & Tourism, 7(1), 85–97. Web.