Discussion on External Competitiveness

Definition of external competitiveness
External competitiveness refers to how well an organization compensates its employees
in comparison with other organizations that hire the same type of employees (Milkovich,
Newman & Gerhat 22). It looks at two things. First is the level of pay or total compensation of
employees of competing organizations. Second is the mix of forms of pay or compensation of the
organizations being compared to.
Relationship of external competitiveness and pay level
External competitiveness has direct relationship with pay level. Pay level is the average
rate that an employer pays. Pay level is more than just base pay. It also includes other forms of
compensation such as options, benefits, and bonuses. Often, companies use external
competitiveness to determine pay levels in their organizations. Based on this comparison, they
may decide to have pay levels that are above, below, or equal to those of their competitors
(Milkovich et al. 22).
Importance of considering external competitiveness when deciding on pay level
It is very important for employers to consider external competitiveness when making
decisions about pay levels. Human resource is by far the most important resource in an

organization. It is employees that enable to an organization to achieve its objectives. If an
organization cannot attract talented employees and motivate them to perform well, it is unlikely
to achieve its objectives. Pay level is one way that organizations use attract and retain talented
employees. If an organization does not consider external competitiveness in making pay
decisions it risks making two major mistakes that may reduce its competitiveness.
First, it runs the risk of paying its employees compensation that is well below what other
similar organizations pay their employees performing similar tasks and possessing similar skills
and experience. Employees often judge whether or not their compensation is fair by comparing it
with one that competing organizations provide their employees. If they find that employees of
similar skills and experience and performing similar tasks in other organizations receive higher
compensation, they will consider their compensation to be unfair. Such employees are likely to
move to better-paying organizations when an opportunity arises (Milkovich et al. 22). Thus,
without considering external competitiveness, employers risk paying their employers lower
salaries which may make it hard for them to attract and retain talented employees.
Secondly, the organization may also pay its employees well above the market rate if it
does not consider external competitiveness when deciding on pay level. Granted, higher pay
above market rates may motivate employees. However, it has major downsides that a business
organization cannot afford to ignore. For instance, paying employees well above market rates
increases labor costs for the organization (Milkovich et al. 22). As a result, the organization gets
reduced profits. Secondly, such pay has the effect of keeping unproductive and ineffective
employees in the organization for far too long.
Another benefit of considering external competitiveness when making pay decisions is
that an employer gets to learn new ideas about the types and levels of benefits and compensation.

Through checking out how other organizations are rewarding their employees; an organization
can learn new and novel ideas that would potentially help it attract and retain top talent.
Thus, I strongly believe that organizations should consider external competitiveness
when making decisions on pay. Such consideration helps them to pay their employees fairly and,
therefore, makes it easy for the organization to attract and retain top talent.

Works Cited

Milkovich George, Jerry Newman & Barry Gerhart. Compensation. McGraw-Hill Higher
Education, 2016.