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The second implication is internal. The average compensation is a reflection of the total compensation bill of an organization. The size of the compensation and benefits in an organization is a reflection of who gets what within the organization.
How much an organization is willing to pay may end up being the most important pay decision any organization ever makes. A potential employee’s acceptance of job offer usually depends on this decision and a large part of the employer’s costs are determined by it.
Having compensation policies makes an organization attractive to potential employees. In addition, the employees who are already working for the organization continue to stay because of attractive compensation policies.
In most unsophisticated organizations, compensation policies (how much to pay and relationships to competitors) are made at the same time. However, administratively advanced organizations realize the importance of compensation policies and make individual decisions within a proper administrative structure leading to a more consistent, fair and cost-effective compensation.
Compensation policies have a lot of benefits. These policies are instrumental in an organization getting and keeping the desired quantity and quality of employees. If the compensation level is too low, the applicant pool will dry up and recruitment efforts will not be successful. In addition, low compensation levels may attract only efficient workers. Therefore, any organization wanting the benefits of compensation policies should take into account industry norms and then devise their compensation levels.
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An organization cannot function without compensation and benefits. These are derived from existing theories and at times modified to the suit the organization’s beliefs and systems. There are many compensation and benefits theories. 
