Determining the Optimal Compensation Strategy Chapter

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Compensation Purpose & Strategy

Each different compensation strategy comes with risks and benefits, and the company has to balance these. We do not know where Chatham sits in terms of strategy, or in terms of its compensation policy. To determine the optimal compensation policy, and understanding of the implications of each policy is necessary.

If the company lags in terms of compensation, it will struggle to attract candidates. The most qualified candidates will go elsewhere, and there is likely to be high turnover as well. The starting candidates will be weaker, and ultimately the company's productivity will suffer. There are few benefits to paying below market, because lower productivity offsets lower wages. If you pay the market, then the company has to differentiate itself in other ways to attract people. This is possible, and can be a cost-effective means of attracting and retaining good people. Paying above market, especially leading the market, is a strategy best-suited to a company that needs the best -- so a company that leads by innovation or requires the highest productivity rates in order to compete. For most companies, leading the market mostly means high cost -- to leverage this the company needs a plan to get the most out of the top talent that it will attract.

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There are other approaches -- for example leading the market on top creative talent that is hard to find (i.e. developers) while lagging the market on sales and service reps, who are much easier to find (Csizmar, 2010).

For Chatham, meeting market is the best strategy. With no real information about the company other than their size and industry, there is also at that point nothing to indicate that they should be leading the market. They are an IT consultancy, but at 7000 people are too large to genuinely lead the market. And the needs of most clients are relatively routine -- they need security, they need a good architecture, a good stack, and they need effective service. There is no indication that Chatham is differentiating itself based on superior service, or superior talent. So leading the market merely represents an added expense. If it bakes that expense into its billing, then it will price itself above competitors. When you think about what those competitors are, it's the large enterprise-level firms that can offer more, or smaller niche firms that are more nimble and unique. There is….....

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