In my experience as an HR professional, the term competitive pay is a mix of several factors- some obvious ones and the others that are more intrinsic in nature. Before delving into what these factors are, it is important to realize the reason for this dichotomy. It boils down to the basic psychological contract that employees have with their organizations. Despite getting a monetary offer of their choice, we still find employees griping about the fact that the company does not realize their worth.
To say that compensation is purely market driven would be like trying to put a gray area in black and white. Market compensation determines the value of a person's education, skills and abilities. However, this basket of competencies may be viewed differently by different companies. Let’s take, for example, an IT professional with great technical competencies. The worth of his skills is determined by the market. That, in my mind defines the threshold of what he will ultimately get.
Situation 1: He applies in a tech company that needs his skills because his skills add direct value in the services that the company offers. In addition, historically, tech companies have a high employee turnover. In such a situation the contract between the employee and the company needs to include other elements that will give this engineer a feeling of being valued. This could include performance incentives, retention bonus, perks, health benefits etc. On the flip side, if the company in question is a market leader, the employee will settle for less just because he is gets the advantage of a good brand name in his resume.
Situation 2: If the same engineer however applies to an opening in a manufacturing environment, things may change. That’s because although his skills remain the same, they now become tertiary to the actual business of the company. In such a situation, the engineer may get the market determined pay. However, for him to hope for something more than that may be a little too ambitious.
Therefore, in my opinion, like with stocks/ land, market determined rates play a role in ensuring that the economy maintains some sort of order. It just determines the opportunity cost of the skill sets of a person. By hiring someone, a company invests in a whole person and not just the skill sets. Therefore, it is a function of the psychological contract between the two parties that ultimately determine the point where they reach an equilibrium between what they give versus what they get.
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