A competitive pay policy contains guidelines for the administration of the company’s pay programs. Such guidelines specify criteria for maintaining both internal and external pay equity among employees. Therefore, a company’s pay policy could specify the criteria to be used by managers for placing an employee’s pay appropriately within the relevant market range of pay based on the value of the employee’s capabilities. Employees who demonstrate the criteria for “successful” performance of the job would have their pay placed at the targeted market level for that job.

Conversely, some companies have a pay policy that starts all new employees at the minimum of the pay range. While this may be appropriate for inexperienced candidates, it is inappropriate for experienced candidates. Paying at the minimum for all new employees will likely create recruiting problems, since the minimum is generally below market value for experienced people. In addition, the practice of hiring all employees at the pay range minimum will cause pay compression over time.

The recommended approach is to establish pay practices that reflect employees’ capabilities. When using this approach, an employee’s skills and competencies are evaluated through the interviewing process for new employees or through the annual performance evaluation process for current employees. The pay level would be determined with respect to the company’s competitive pay policy, the administrative guidelines of the pay policy covering employee capabilities, internal equity and budget constraints. This process results in employee pay being set at an appropriate value within the market range.