Define pay policy. Which competitive pay policy would you recommend to an employer? Why? Does it depend on circumstances faced by the employer? If so, which ones? Answer Pay policy can be defined as rules and regulations made by the employer for compensating employees for their services given to the company. In this competitive market, employers need to match their offering with their competitions, therefore competitive pay policy that employer should opt is setting competitive pay by matching its salary with its competitors; this can be done by conducting salary survey which will help in gathering information about compensation paid by other employers in the industry. However, for this purpose relevant market competitors should be selected on the basis of different parameters such as geographic, production, technicians, managerial and executives. Competitive analysis and paying at par with competitor will help in higher employee retention, however if company pays lower than competitors salary, then it might cause low job satisfaction and high employee turnover; whereas paying too high than competitor might cause financial loss to the company. Employer needs to decide on policy mix, set ranges and bands, policy ranges for deciding final pay for employees. Different options that are available with marketer include lead the market, match or large the market, depending on environmental factors and organizational strategic objectives. Efficiency-wage theory is a theory that says high wages may increase efficiency and actually lower labor costs if certain aspects are met. Basically efficiency increases by hiring better employees or motivating the current ones [Mi104]. Yes, setting pay policy and structure depends on several internal and external factors faced by the employer and organization. Different internal organizational factor to be considered include