Compensation Market Strategy: Your Competitive Advantage Beyond Lead, Lag, or Match

At this point, it is common knowledge that your compensation strategy should align with your organization’s specific goals, values, and market position. But what does that look like in practice? While it may seem like a simple decision of "paying competitively," the reality involves a series of strategic choices that can significantly impact your organization’s success. 

Choosing to Lead, Lag, or Match the Market 

When positioning your compensation strategy, three options typically come to mind: lead, lag, or match the market. The table below provides an overview of each approach. 

Each of these approaches comes with its own set of opportunities and risks. In reality, most companies aim to leverage a combination that is tailored to their unique profile and needs. Determining the appropriate mix is where the real challenge begins.

The Reality: A Hybrid Approach 

Most companies choose a hybrid approach where they strategically lead the market in certain areas while matching or lagging in others. But how do you determine which roles you should pay above market? The key lies in collaborating with your leadership to determine your company’s competitive advantage and critical success factors. Once those priorities are identified and agreed upon, you can develop a compensation strategy that aligns. 

For example, in an accounting firm, accountants represent core roles that directly drive the firm's success. Therefore, it is logical to lead the market for these positions. However, the importance of a role isn't always tied to its core business function. That same accounting firm might also choose to offer above-market pay for cybersecurity and IT professionals. Because even though these roles aren't directly related to accounting services, they're crucial for protecting sensitive financial data and maintaining client trust—making them strategically vital to the firm's success.

The answer to what is considered a core and critical role can vary widely across companies and industries. Consider law firms—many prioritize hiring from certain schools because the status and alumni networks of prestigious institutions (e.g., Harvard Law) may help draw high-profile clients. In this case, they may choose to lead the market for graduates of specific institutions, while taking either a lag or match approach for others. 

Creating Value Beyond Base Pay

Most companies, if they can afford to, will try not to lag the market across all parts of the organization for extended periods. Doing so can greatly increase the risk of decreased morale and high employee turnover. However, in some cases where budgets are very limited, organizations may have no choice but to choose this approach. This doesn’t mean that your company is doomed to sub-par talent and continual poaching. With a compelling mix of non-monetary benefits and creative compensation structures, you can still create a holistic total rewards package that attracts and retains a talented workforce.

Leveraging Benefits 

Examples of non-monetary benefits may include generous vacation policies, flexible work arrangements, and a clear path to professional growth. Or if you are a mission-driven non-profit, employees who strongly connect with your mission may find meaningful job satisfaction, even if salaries are less competitive.

Organizations can also differentiate themselves by providing benefits that offer substantial value to employees who need them. Fertility benefits are a prime example. Just one cycle of IVF can cost $15,000-$30,000. Not every employee will need this benefit, but for those who do, it can be profoundly meaningful and often more financially valuable than a modest increase in base pay. Beyond boosting morale, targeted benefits like these can be cost-effective alternatives to increasing base salaries across the board. Other examples of benefits like these may include student loan repayment programs, mental health support, or housing stipends.  

Leveraging Short-Term and Long-Term Incentives 

You can also get creative with your compensation structures by leveraging spot awards,  short-term incentives, and long-term incentives. As the name suggests, spot awards are “on the spot” and examples of this include gift cards, company swag, social-media shout outs, and more. Short-term incentives are rewarded to employees within a year or less and examples include team performance awards or annual bonuses. Examples of long-term incentives (LTI) include restriction stock units and long-term performance shares. Leveraging these incentives can be an effective way to motivate your employees beyond just base pay. 

While these strategies can help organizations manage cash flow by paying out rewards later or tying it to certain performance metrics, it's crucial to ensure you are not disconnecting the incentive from performance. Heavily delaying payouts for achieving targets or offering irregular recognition can dilute the impact of the reward and blur the connection to performance. Remember, the goal is to keep employees excited and motivated, so these incentives should feel timely, relevant, and clearly tied to their contributions.

Benefits and incentives are not just levers for companies lagging the market. Base pay, while very important, is only one component of your total rewards package. All companies should consider the full spectrum of compensation strategies to create an attractive and sustainable total rewards package that keeps employees motivated and committed for the long term. 

Defining “The Market” 

In the context of compensation, we hear the term "the market" all the time—whether it's leading the market, lagging the market, or figuring out the market rate. The list goes on. However, it’s important to highlight that “the market” may look very different from one company to another because the market reflects the organizations your company competes with for talent. 

Using data sets and cuts that are relevant to your organization’s size, industry, and geography is essential to ensure you are making meaningful comparisons. For example, a small regional manufacturing company could be misled if it benchmarks against large global corporations operating in vastly different environments with significantly different budgets. So before you decide whether to lead, lag, or match the market, take the time to define what "the market" means for your organization.

With how fast the world of compensation moves today, having a clear view of the market through reliable data sources is a major competitive advantage. Aging your data appropriately helps provide a more accurate reflection of current market conditions. Modern compensation technology like BetterComp can also help you manage this data effectively by identifying patterns and outliers that reveal important insights for more precise, timely compensation decisions.

How often should you review and adjust your compensation strategy?

You should review your compensation strategy at least once a year. You may not need to make adjustments every time, but it at least provides an opportunity to reassess the impact of current strategies. Think of it like checking your car's speedometer—you need to know how fast you're moving to make a conscious change to your behavior. This is particularly important because once you start lagging the market, it can quickly become a cumulative problem that compounds over time. That small lag you have today could evolve into a significant competitive disadvantage by next year, making it increasingly difficult and expensive to play catch up. Implementing regular reviews can help you spot potential risks early so you can make proactive and strategic decisions about when and where to adjust. 

The Path Forward

There is no one-size-fits all approach to compensation today, and figuring out the right strategy for your company goes beyond simply choosing to lead, lag, or match the market. Success starts with deeply understanding the specific context of your market, company profile, and specific goals. Remember that competitive compensation goes beyond base pay. Partner with your HR and Benefits leaders to design a holistic rewards strategy that leverages incentives, benefits, and growth opportunities to create a competitive advantage. Leverage regular reviews, relevant data, and compensation technology to gain the insights you need to make compensation decisions that are both competitive and sustainable.