Although legal requirements and economic influences limit organization's choices about pay levels, there is a range within which organization's can make decisions. The size of this range depends on the details of the organization's competitive environment. If many workers are competing for a few jobs, employers will have more choice. Similarly, employers can be more flexible about pay policies if they use technology and work design to get better results from employees than their competitors do.
When organizations have a broad image in which to make decisions about pay, they can choose to pay at, above or below the rate set by market forces. Economic theory holds that that most profitable level, all things being equal, would be at the market rate. Often, however, all things are not equal from one employer to another. For instance, an organization may gain an advantage by paying above the market rate if it uses the higher pay as one means to attract top talent and then uses these excellent employees’ knowledge to be more innovative, produce higher quality, or work more efficiently.
This approach is based on the view of employees as resources. Higher pay may be an investment in superior human resource. Having higher labour cost than your competitors is not necessarily bad if you also have the best and most effective workforce, which produces more products of better quality. Pay policies are one of the most important human resource tools for encouraging desired employee behaviours and discouraging undesired behaviours. Therefore, organizations must evaluate pay as more than a cost, but also as an investment that can generate returns in attracting, retaining and motivating a high quality workforce, of course, employers do not always have this much flexibility. Some companies are under intense pressure to charge low prices for their products, and some companies are trying to draw workers from a pool that is too small to satisfy all employee needs.