Employers receive compensation from a company in return for the work performed. Most people think the pay and compensation to be the same, but the fact is compensation is much more than just the monetary rewards provided by an employer. According to Milkowitch and Newman, “compensation is all forms of financial returns and tangible services and benefits employees receive as a part of an employment relationship”.
The phrase “financial returns” refers to an individual base salary, as well as short and long term incentives. Tangible services and benefits are such things such as insurance, paid vacations and employer discount.
Employers receive compensation from a company in return for the work performed. Most people think the pay and compensation to be the same, but the fact is compensation is much more than just the monetary rewards provided by an employer. According to Milkowitch and Newman, “compensation is all forms of financial returns and tangible services and benefits employees receive as a part of an employment relationship”.
The phrase “financial returns” refers to an individual base salary, as well as short- and long-term incentives. Tangible services and benefits are such things such as insurance, paid vacations and employer discount.
Any organization’s compensation practices and designing have far reached effects on its competitive advantage. According to Richard Henderson, to develop a competitive advantage in a global economy, the compensation program of the organization must support totally the strategic plans and actions of the organization. An organization compensation system can help to reinforce the key corporate values and facilitate the achievement of organizational objectives. It is important to give a lot of consideration to our business compensation structure because it ultimately reflects how employees are valued.
A host of laws such as The Equal Pay Act, Fair Labour Standards Act, and The Employment Retirement Income Security Act, regulate corporate compensation practices. Some pertain to pay issues such as discrimination, minimum wages and overtime pay, others pertain to benefits, such as pensions, unemployment compensation and compensation for work related injuries. An organization must understand and fully follow these laws in order to avoid costly lawsuits and design a competency based compensation structure.
The key in designing any compensation is to develop the understating of the forms, vision and direction. As well-designed compensation plan becomes one of many tools, a firm can use to help reach its strategic goals. Any failure in compensation design leads to failure to motivate any employee.
A guideline for designing a compensation plan begins at the top by examining the better strategy and ends with a model that is ready to be implemented. There are various steps that help as organization to design a performance-based compensation strategy and prepare the organizations design. Inadequate use of incentive plans and problems with compensation design and strategy often fails to motivate performance of an employee.
Behavioural scientists, employee and management surveys experience show that compensation can be a strong driver of employee behaviour under the right circumstances when properly designed. Also in jobs where significant variability in pay occur in compensation and when it is closely related to key performance factor, then pay can be a big motivator.
The good performers prior to new compensation plan implementation remain good performers and may not improve much because they are already giving close to 100% effort, but the middle and the bottom performers are where there is significant opportunity for change.
- Focusing on the Strategy Objectives:
The most important goal in designing a compensation system is supporting the strategic objectives of the organization and ensuring the system that fit in with the organization structure and strategy.
There are various questions which should be focused before designing compensation strategy such as:
- What is the rate and mission of the organization?
- Why does it exist?
- What are the strategic goals and objectives for the next five years?
- Whether current employees have the skills to meet these objectives? If so, will they be rewarded for having them? If not, will internal candidates be trained to gain skills or will the organization recruit externally to fill the goals?
- What is the organization’s strategy?
- Do employees work individually or in teams?
- Are employees seen as costs or investments?
- What is the cost to replace employees?
- What is the desired turnover rate?
- What should the organization’s compensation plan accomplish?
- How would you describe the current total compensation package, including benefits retirement time off etc., at the organisation?
- How does it compare with that of other employees in the market. What should the organization pay in relation to the market?
- What is the appropriate balance between external market equity and internal worth?
Once there is an understanding of the answer to these questions, the compensation can be developed, policy guidelines are prepared which reflects thinking, values, strategies and the company is set inconsistency by top management.
- Ensuring Commitment through Communication and Participation:
An organization must plan for making change to its compensation system.
Before beginning to tackle something, it is important that executive management is absolutely committed to the process, the result and the implementation. All important techniques for participation and communication by the clearly defined, advisory or steering committee. A compensation review committee could help identifying current issues with compensation, job clarification or salary administration. It could contribute ideas and feedback provides valuable advice.
- Analyzing Job Functions:
A job analyst develops a current and thorough understanding of the work that is being formed by the employee. It is important to undertake a job analysis before making changes to the compensation plan as job analysis provides a collection of relevant information on the type, scope and responsibility of each job. It is the foundation for job description and how they are in the market. It enables the organization to establish baseline information about a job level of responsibility and qualification, and to compare it to the market place. It also ensures and documents our compliance with legal requirement.
- Writing Job Description:
Once the information is collected through the job analysis process, it can be used for preparation of job description. A job description summarizes the important component like the general nature of the work, specific tasks, responsibilities and outcome competence required to perform the job. A written job description should be considered a final document. Before it is finalized, it should be received and accepted by both the employee and the supervisor.
- Determining Internal Pay Equity:
It determines fairness within the organization. Fair pay is pay that employees generally view as equitable. Internal equity is determined by job evaluation techniques such as whole job ranking method and factor comparison technique.
- Determining External Pay Equity:
It is the perceived fairness in pay relative to what other employees are paying for the same type of labour. An externally focused job evaluation method includes the market pricing slotting method. For maximum flexibility, using market pricing is recommended to that of market competitive pay rates. Market competitiveness is more flexible and adaptable than other methods.
To gather competitors, pay rates, a survey method is developed which includes the following steps:
- Establish a timeline
- Select bench-mark positions to survey
- Target survey participants
- Design questionnaire
- Use other available market data sources
- Follow up and verify answers with participants.
Designing Salary Structure:
Once collection of market data and determination of a hierarchical ordering of position, is done a salary structure can be designed. Salary structure consists of jobs of equal value that are grouped into grades with competitive salary ranges. Pay ranges are the rates from the minimum to maximum of each grade. Positions are assigned to grades and pay ranges based on job content, marketing or external equity and internal equity. Each salary range includes minimum, midpoint and maximum salaries, with the midpoint representing the market or going rate for the job.
Typical compensation design problems include:
- Failure to tie pay closely to achievement of objective and realistic performance measures.
- Failure to regularly measure and provide feedback on performance.
- Failure to design variances in pay-related to performance that are large enough to be perceived by the employer as worth the effort.
- Over reliance on salary as the only significant method of financial rewards.