Introduction
Compensation
is an important tool that is often under-utilized by managers in today's
workplace. Managers use compensation in
the workplace to inspire people to work, both individually and in groups, to
produce the best results for business in the most efficient and effective
manner. It was once assumed that motivation had to be generated from the
outside, but it is now understood that each individual has his own set of
motivating forces. It is the duty of the manager to carefully identify and
address these compensating forces. This paper will help managers become more
effective at creating a positive motivational environment.
Managers
may lack knowledge in implementing successful compensation programs that
increase production and create a positive work environment. Although there are
many types of motivation, management must identify with their associates
(employees) on an individual level for successful programs. The goal of every
manager is to increase production and efficiency to reach maximum results for
the organization. Motivation for better performance depends on job
satisfaction, achievement, recognition, and professional growth (Boyett and
Boyett, 2000). Providing a positive compensation work environment is a
challenging managerial activity. Therefore, managers must understand associates
and their professional needs.
Factors Affecting Compensation System
The primary
objective of a compensation system is to administer an effective and equitable
pay system. It can be affected by various factors which are as follows:
1.
Organizational Provisions
Organizational
provision states that the level of compensation largely depends upon
organizational operating policies and procedures. It is because the policies
serve as a guideline for formulating and implementing compensation plans and
programs. Moreover, organizational regulations, plans, objectives, ability for
pay etc. also affect the level of pay.
2. Government
Regulations
In order to
protect the working class from wage exploitation by strong employers, the
government enacts various laws ans judicial decisions. Such laws and
regulations affect compensation management. Because, they emphasize on minimum
wage rate, overtime rate, working hours, equal pay for equal work, payment of
bonus, etc. So, an organization has to design its pay system as per the
government rules and regulations.
3. Equity
Considerations
Equity
considerations hold the philosophy that the compensation system should be fair
and equitable. It means the compensation system should be similar for the same
type of work within the organization. Similarly, it should be fair relative to
what other people get for the similar job in another organization. It is
important because any imbalance between what the employees contribute and what
they obtain as return would lead to greater job dissatisfaction, employee
turnover and absenteeism.
4. Union
Pressure
Labor unions are
pressure groups that work in the interest of the workers. Such unions lobby the
management for the formulation of fair compensation plans. These organized
unions can ensure better wages for employees.
5. Job Analysis
And Evaluation Report
Job analysis is
a method through which necessary information about the contents and the contexts
of the job is made available to determine the value of each job. The job
evaluation is a process of determining the value/worth of a job so that a
payment system can be specified. Job analysis and job evaluation determine the
relative worth of job which ultimately assist for compensation management.
Hence, it is regarded as an important factor of compensation management.
6. Cost Of
Living
Compensation is
concerned with an overall return that an employee obtains from the organization
for rendering contributions towards organization objectives. Therefore, the
payment should be adequate to maintain the cost of living of the employees.
Hence, the employer should manage compensation viewing the cost of living of
each individual.
7.
Organizational Positions
Sometimes, the
organization itself evaluates where it is in order to prepare compensation
plans. The position of the organization is determined by its productivity i.e,
if the productivity of the worker is high, it assess itself as a higher
position. As a consequence of it, the compensation system is determined at a
higher level. Contrary to it, in case of lower productivity, wages/salary rates
tend to be low. Thus, any shift in productivity and employee performance has
direct impact on the wage level of the organization.
8. Productivity of
Workers
Another factor
of compensation management is the productivity of workers. This is the new
concept of linking pay with employee performance. Under it, if the workers are
highly productive, they get high compensation as compared to less productive
workers. Productivity is a key factor as it enhances organization's image and
status.
Six Steps to a Sound Compensation Strategy
Before you think
about designing and implementing a compensation plan, you must first develop a
clear and compelling compensation strategy. To develop a successful
compensation strategy you need to take the following steps:
1.
Define
your compensation philosophy.
2.
Link
compensation to your overall business strategy.
3.
Change
the culture and reinforce it with compensation.
4.
Reward
the behaviors that drive the results.
5.
Think
total compensation.
6.
Measure
your return on invested payroll £s.
1. Define your compensation philosophy
A sound
compensation programmed begins with a clear, focused compensation philosophy
that defines and answers fundamental questions such as:
- What do we want to pay for?
- How do we want to pay for it?
- What is our competitive posture?
- How will we split up the pie?
We recommend
developing a total compensation mission statement that clearly specifies the
results you want to accomplish, the behaviors necessary to achieve them, what
you will pay people for, and how you intend to position your company in the
marketplace. This lays the foundation for your entire compensation programmed.
It serves as a compass and a beacon to guide you through the difficult task of
creating and implementing the programmed.
Who creates the
total compensation mission statement? Depending on the size of the company and
the management structure, any or all of the following: board of directors,
board of advisors, CEO, top management team and representatives from others in
the organisation.
Your pay
philosophy should:
- reflect the values and beliefs of the owner/CEO/management team
- reflect the economic realities of your pricing structure and market share
- take into account "softer" issues such as corporate culture, industry standards and your growth strategy
- provide a foundation to make consistent hiring and promotion decisions.
2. Link compensation to your overall business strategy
Most organizations
know where they want to go and how to get there. Compensation provides a very
effective tool for getting employees to move in the same direction and follow
the same path.
For example,
suppose a young, growing company wants to increase market share. Its
compensation plan needs to reward people for bringing in new customers and
clients. In contrast, a more mature company might need a better balance between
growth and profit. Accordingly, its compensation plan should equally reward
activities that generate growth and profit.
Another company
might identify world-class customer service as one of its top strategic
objectives. It would need to reward the activities (in all areas of
the organization, not just the customer service department) that lead to
outstanding customer service.
If compensation
doesn't have a direct connection to corporate goals and objectives, employees
will take any direction because they don't know which one to take. Compensation
strategy starts with identifying your top strategic objectives, defining what
they mean in terms of organizational behavior, and designing your compensation
plan in a way that rewards and recognizes those behaviors.
3. Change the culture and reinforce it with compensation
A good
compensation strategy alone won't get the results you want. In order to get
permanent behavior change, you must first change the culture and the
environment. Then use compensation to reinforce those changes.
If all you do is
dangle money in front of people, you get short-term blips in behavior and then
people go right back to the old ways of doing things. You don't get sustained
productivity improvements unless you change the culture. That involves
identifying the results you want to achieve as an organization, identifying the
behaviors that lead to those results, and then designing a compensation programmed
to reinforce and reward those behaviors so that they become permanently
instilled in the organization.
Compensation
provides a very effective tool to reinforce organizational values. Too often,
CEOs talk about values but then don't walk their talk. For example, many
companies say they value teamwork but continue to reward individual
performance. Or they talk about customer service but reward only financial
performance.
Compensation sends
powerful messages to your employees about who you are as an organization, what
you value and what skills and results you reward. If you want to instill
certain values in the organizational culture, reward them through your
compensation programmed.
4. Reward the behaviors that drive the results
In order to reward
behavior that drives results, you have to know what creates value in your
company. Value gets created in two ways. First, as an organization you must do
the things your customers want, need and desire. This represents the
qualitative side of the business. Second, everyone in the company has to help
the company to do those things in a profitable manner. This represents the
quantitative side of the business. Without both, a company won't survive for
the long term.
To get the
customer's perspective on value, call your top 20 customers and ask two
questions:
- What are we doing now that is creating value for you and makes you feel good about doing business with us?
- What can we do to earn more of your business?
Asking these
questions will generate some amazing feedback. It will definitely change your
thinking, not just in the compensation arena but in almost every area of your
business.
Next, look
internally to see who is creating value on the financial side. Every employee
must do one of two things (or both): create or support sales (revenue side) or
keep expenses to a minimum (expense side). If you find that people aren't doing
either one, you have to question whether or not their function should continue
to exist.
Between the
quantitative and qualitative pieces, you can start to work out where value
really gets created in your company. Then you can design a compensation plan
that will get the results you want because you have identified the specific behaviors
that directly lead to those results.
5. Think total compensation
In today's
fiercely competitive labor markets, compensation provides a powerful tool for
attracting and retaining quality people. Yet, most employees think of
compensation as base pay plus the occasional bonus. They forget – or are never
told – that anywhere from 30% to 50% of their total compensation comes from
other areas, including:
- profit sharing
- retirement and pension plans
- benefits
- shares or equity
- incentives and bonuses
- recognition and rewards
- holiday and personal time off
- opportunity income (education reimbursement, professional development programmers, etc.).
If you don't
think, talk, market and sell total compensation, you're leaving a lot of money
on the table. Talk about compensation frequently and impress upon employees
that it includes a lot more than base pay. When comparing compensation for
potential employees, always use total compensation, because base pay never
tells the whole story.
We recommend
providing employees with an annual total compensation statement that lists the
complete package of rewards and recognition they receive for working in your organization.
A total
compensation statement surprises employees because the bottom-line number
always exceeds what they normally think of as their compensation. You can't
afford to lose employees who might get lured away by promises of a bigger base
pay. Make sure all your people understand and appreciate the full range of
compensation and benefits they enjoy in your company.
Don't stick the
compensation statement in the salary slip envelope. Instead, sit down with each
employee and say: "I want to show you the full extent of our commitment to
you." (Don't say: "Here's what you cost us", because that
insults the employee.) Thank them for doing a good job and go over all the
costs, answering any questions they may have.
This little
meeting will get you two weeks' mileage and then employees will forget about
it. The real value comes when competitors try to steal your people. They may
offer more £s above the line but not as much below the line. Once your
employees become aware of all that you pay them, they start to ask the right
questions when other employers come hunting.
6. Measure your return on invested payroll #s
How do you know
whether you're getting a good return on your invested compensation £s? The
answer is simple: measure it. Yet, far too many companies either ignore or
overlook this critical practice.
Most companies
don't even measure their return on compensation £s, much less determine whether
it is a good one or not. To measure your compensation ROI, decide up front what
you want to look at: productivity, bottom-line results, employee turnover,
ability to recruit and retain key people, morale, customer service or any
number of measures.
Identify the
measures that come from your overall business strategy, then define and track
them to see whether the return on your compensation £s matches your
expectations.
References
Boyett, H. Joseph,
and Jimmie T. Boyett. (2000). World-class advice on managing and motivating
people. Boyett and Associates. Available on the World Wide Web at
http://www.jboyett.com/managing1.htm. Date visited, March 25, 2002.
Howell, Heather.
(2000). Motivating and appreciating your staff. A Catanzaro and Associates,
Inc. website available on the World Wide Web at
http://v-p-c.com/catanzaro/mgtinfo/newsletter/spring2000/motivat.htm. Date
visited, March 25, 2002.
Kepner, Karl, and
Allen Wysocki. (2002). Class lectures and
notes from AEB 5757: Strategic agribusiness human resource management. Department of Food and Resource Economics,
University of Florida, Gainesville, FL.
Kovach, Kenneth.
(1999). Employee motivation: Addressing a crucial factor in your organization's
performance. Human Resource
Development. Ann Arbor, MI:
University of Michigan Press.