The modern business environment is a competitive one and competitive advantages have to be realized in all business areas such as products, services, Human Resource Management and in the internal and external business processes. Employees are often classified as organizational assets, which mean that anything that targets them positively can be a source of competitive advantage to the business. For example, compensation can generate a huge competitive advantage to the business as HRM policies can generate huge impacts on the overall business performance, net profits and profitability.
To start with, compensation influences organizational success as high quality workforce is only maintained through high wages. Compensation can be used as a method of employee satisfaction, which can be used in reducing turnover in any business organization. Scholars agree that high employee turnover is disadvantageous to the business as it adds costs and reduces quality workforce. Thus, it is not wrong to argue that compensation affects turnover and employee satisfaction, which are directly related to high competitive advantage for the business organization. Apart from this, compensation affects employees' willingness and flexibility. It also affects how employees learn new skills and how they accept innovations.
The labor market is competitive especially in countries where skilled labor is not enough. Because of this, compensation can be used as a competitive advantage since it can be used in the key job positions whereby organization sets competitive price to obtain the best employees for a certain position. The other job positions can remain the same with the market pay rates in order to make this solution cheaper and effective. Sometimes, the rest positions can even be paid cheaper than the rates in the market. However, the organization has to come up with an agreement about the best positions within the organization. This is because high rates can be paid in positions that are not worthy while low rates can be paid in positions that are worthy of high compensation rates (Milkovich, Newman, & Milkovich, 2014).
From 2007 to 2012, Google was named by Fortune as the best company to work for because of its competitive compensation strategies. In order to have such an honor, Google pays its employees well and also provides them with various benefits. Eventually, Google is highly innovative and it is able to make profit and still be competitive in its industry (Yanadori & Marler, 2006).
According to Milkovich and his fellow scholars, it is not always that compensation leads to a competitive advantage. Because of this, business organizations have to hit the nail on the head by determining how compensation will lead to competitive advantage when used. For example, the authors argue that the most common method of compensation that is known for its effectiveness is the aligning of the pay system to the organizational business strategy. This notion sees greater alignment leads to higher effectiveness (Milkovich, Newman, & Milkovich, 2014). For example, Google has fit compensation strategies to the higher strategy of innovation. Consequently, the organization has been able to achieve its main goal of innovation, earn profits and still satisfy its employees. Apart from Google, other companies are customer focused. Aligning compensation strategies with the customer satisfaction strategies has helped such companies in obtaining and retaining customers in highly competitive environments. In the process such companies have made it possible to earn profits and still satisfy their employees because of playing their cards well (Yanadori & Marler, 2006).
In conclusion, compensation can be used by businesses as a tool for competitive advantage. For example, businesses organization can obtained skilled workforce through effective compensation strategies, which leads them to higher profits. In order to make sure that the process is effective, business organization need to align compensation strategies with the business strategy. When this is done, organizations are able to achieve competitive advantage while earning higher profits at the same time.
- Milkovich, G. T., Newman, J. M., & Milkovich, C. (2014). Compensation 11th Ed. Burr Ridge, Ill.: Irwin/McGraw-Hill.
- Yanadori, Y., & Marler, J. H. (2006). Compensation strategy: does business strategy influence compensation in high‐technology firms?. Strategic Management Journal, 27(6), 559-570.