Certified Human Resource Professional (CHRP) Practice Exam

Which compensation strategy focuses on ensuring employees know how their pay compares to the market?

1. Internal equity

2. Market-based pay structure

3. Competency-based pay

4. Skill-based pay

The correct answer is: Market-based pay structure

The market-based pay structure is centered on aligning an organization's compensation with the prevailing rates in the external job market for similar roles. This strategy involves researching and analyzing salaries and benefits offered by competitors and other organizations within the industry, ensuring that salaries are competitive enough to attract and retain talent. When employees understand how their salaries compare to the market, it fosters transparency and trust in the compensation system, which can motivate them and enhance job satisfaction. Additionally, a solid market-based approach can help an organization remain competitive in recruiting efforts and retention strategies by adequately compensating employees relative to what they might earn elsewhere for similar work. The other strategies, while important, do not focus specifically on market comparison. Internal equity emphasizes fairness within the organization, making sure employees with similar roles and responsibilities are compensated similarly. Competency-based pay rewards employees based on their skills and competencies rather than external market rates, and skill-based pay compensates individuals for the skills they possess, regardless of their job position or market standards. Thus, these approaches don't prioritize the employee's awareness of how their compensation stacks up against market trends in the same way that a market-based pay structure does.