Compensation is a systematic approach to providing monetary value to employees in exchange for work performed.

Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction. Chapter Highlights 1. How is compensation used? 2. What are the components of a compensation system? 3. What are different types of compensation? How is compensation used? Compensation is a tool used by management for a variety of purposes to further the existance of the company. Compensation may be adjusted according the the business needs, goals, and available resources. Compensation may be used to:

recruit and retain qualified employees. increase or maintain morale/satisfaction. reward and encourage peak performance. achieve internal and external equity. reduce turnover and encourage company loyalty. modify (through negotiations) practices of unions.

Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertize those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expence of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels.

Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing. What are the components of a compensation system? Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures. The components of a compensation system include:

Job Descriptions A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. Job Evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Pay Structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre-determined through collective bargaining. Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical

regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company. Policies and Regulations

Principles of Compensation Discussed Compensation will be perceived as fair if it is comprised of a system of components developed to maintain internal and external equity.

What are different types of compensation? Different types of compensation include: Base Pay Commissions Overtime Pay Bonuses, Profit Sharing, Merit Pay Stock Options Travel/Meal/Housing Allowance Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes... What are regulations affecting compensation?

FLSA

Compensation Plans
Develop a program outline. Set an objective for the program. Establish target dates for implementation and completion. Determine a budget. Designate an individual to oversee designing the compensation program. Determine whether this position will be permanent or temporary. Determine who will oversee the program once it is established. Determine the cost of going outside versus looking inside. Determine the cost of a consultant's review. Develop a compensation philosophy.

Form a compensation committee (presumably consisting of officers or at least including one officer of the company). Decide what, if any, differences should exist in pay structures for executives, professional employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based versus noncontingent pay). Determine whether the company should set salaries at, above, or below market. Decide the extent to which employee benefits should replace or supplement cash compensation.

Conduct a job analysis of all positions. Conduct a general task analysis by major departments. What tasks must be accomplished by whom? Get input from senior vice presidents of marketing, finance, sales, administration, production, and other appropriate departments to determine the organizational structure and primary functions of each. Interview department managers and key employees, as necessary, to determine their specific job functions. Decide which job classifications should be exempt and which should be nonexempt. Develop model job descriptions for exempt and nonexempt positions and distribute the models to incumbents for review and comment; adjust job descriptions if necessary. Develop a final draft of job descriptions. Meet with department managers, as necessary, to review job descriptions. Finalize and document all job descriptions. Evaluate jobs. Rank the jobs within each senior vice president's and manager's department, and then rank jobs between and among departments. Verify ranking by comparing it to industry market data concerning the ranking, and adjust if necessary. Prepare a matrix organizational review. On the basis of required tasks and forecasted business plans, develop a matrix of jobs crossing lines and departments. Compare the matrix with data from both the company structure and the industrywide market.

Prepare flow charts of all ranks for each department for ease of interpretation and assessment. Present data and charts to the compensation committee for review and adjustment.

Determine grades. Establish the number of levels - senior, junior, intermediate, and beginner - for each job family and assign a grade to each level. Determine the number of pay grades, or monetary range of a position at a particular level, within each department. Establish grade pricing and salary range. Establish benchmark (key) jobs. Review the market price of benchmark jobs within the industry. Establish a trend line in accordance with company philosophy (i.e., where the company wants to be in relation to salary ranges in the industry). Determine an appropriate salary structure. Determine the difference between each salary step. Determine a minimum and a maximum percent spread. Slot the remaining jobs. Review job descriptions. Verify the purpose, necessity, or other reasons for maintaining a position. Meet with the compensation committee for review, adjustments, and approval. Develop a salary administration policy. Develop and document the general company policy. Develop and document specific policies for selected groups. Develop and document a strategy for merit raises and other pay increases, such as cost-of-living adjustments, bonuses, annual reviews, and promotions. Develop and document procedures to justify the policy (e.g., performance appraisal forms, a merit raise schedule). Meet with the compensation committee for review, adjustments, and approval. Obtain top executives' approval of the basic salary program. Develop and present cost impact studies that project the expense of bringing the present staff up to the proposed levels.

Present data to the compensation committee for review, adjustment, and approval. Present data to the executive operating committee (senior managers and officers) for review and approval.

Communicate the final program to employees and managers. Present the plan to the compensation committee for feedback, adjustments, review, and approval. Make a presentation to executive staff managers for approval or change, and incorporate necessary changes. Develop a plan for communicating the new program to employees, using slide shows or movies, literature, handouts, etc. Make presentations to managers and employees. Implement the program. Design and develop detailed systems, procedures, and forms. Work with HR information systems staff to establish effective implementation procedures, to develop appropriate data input forms, and to create effective monitoring reports for senior managers. Have the necessary forms printed. Develop and determine format specifications for all reports. Execute test runs on the human resources information system. Execute the program. Monitor the program. Monitor feedback from managers. Make changes where necessary. Find flaws or problems in the program and adjust or modify where necessary.

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Use Compensation Strategy as a Tool to Motivate Your People

Empowering People to Drive Productivity The main objective of compensation strategy is to give the right rewards for the right employee behaviors.

Compensation is an important motivator when you reward achievement of the desired organizational results. Ensure that management of compensation takes this into consideration. It is said "that money is a powerful source of motivation."

But it is also said that salary increase can only motivate until the next pay increase is due. Imagine what the impact is if an employee is at the maximum point of his or her salary range. such employee will not get any salary adjustment unless promoted. Achievement of the desired behaviors is important in order to enhance your organization's effectiveness. In turn, this increases the possibility of success. Compensation strategy can reinforce the organizational culture that you desire. This is an enabling organizational culture under which pay is linked to performance. Your compensation policy must reflect your strategic business objectives. This becomes all the more important when determining CEO compensation. You must clearly define the objectives of your organization so that you can achieve them by using compensation strategy. These are communicated to everyone soon after a decision is taken. It can happen that good decisions fail to achieve results due to poor communication. By providing the right combination ofbenefits which are non-cash compensation your organization can motivate employees and make them stay to help in its progress.

What is the strategy that we are talking about and how do HR strategies fit in? Click here to see the hierachical levels of strategy by Jack Welch. Types of Rewards There are two types of rewards, monetary and non-monetary. Monetary rewards include salary, bonus, commissions, medical and health benefits, holidays, and retirement benefits. Among the non-monetary rewards are meaningful and challenging works, recognition and career advancement, safe and healthy working environment, and fair treatment.

How You Can Make Good Use of Compensation Strategy You can use compensation to attract and retain competent people. This objective requires you to offer a salary that is not lower than the market rates. When you want better customer service, reward employee behaviors that produce superior service. Do not harp on the amount of salary you are paying yet at the same expect good performance. Your people may conclude that there is insincerity on the part of management.

Match the written policy with the right and appropriate actions that demonstrate to your employees that you are a fair and just employer.

Equitable Compensation Like employees working elsewhere in other organizations, your people are concerned with compensation equity. Take this into consideration in drawing up your compensation strategy. When people notice inequities, their morale and motivation will suffer. Do not make it worse by maintaining pay secrecy. This indicates that you may not have an objective and defensible compensation system. Researches had shown that pay secrecy generates mistrust, and reduces motivation and organizational effectiveness. Of course, you are concerned about competitors inducing your people to leave. These competitors may have the financial capability to pay better salaries and benefits. But by adopting a compensation strategy, you don't have to worry about your good people resigning. If they believe in yourmanagement's fair-handedness, it is very probable that they will not go away. Decision to leave an organization requires considerations other than or in addition to dissatisfaction with compensation.

Determining Rates of Pay Compensation strategy involves considering to adopt any of several ways in setting rates of pay. Pay increase based on employee's length of time spent on the job. This is seniority-based pay that is a good motivator in employee retention. But here, you are not rewarding performance. Performance-based pay is intended to motivate employees to perform better. Such a plan is becoming more common whereby the manager and employee agree on the job goals and performance criteria at the beginning of a specified period, usually at the beginning of the year. The effect of this as a motivator can vary from time to time and from situation to situation. You can give pay increases based on job-related skills and knowledge. This is intended to motivate your people to gain additional skills, acquire new competencies and knowledge. Under this method, you do not pay employees for the job they are-doing, their job title or seniority. This is competency-based pay.

The second method appears the most reasonable. But you can include the elements of seniority and competence.

An effective executive compensation is an important area of your organization's pay program. Executives are among your key employees.

Salary Increases Your compensation strategy needs to align your compensation objectives to your organizational business objectives. Salary increases are part of this plan. By this, you are recognizing employees' contribution to the accomplishment of your organization's objectives. Salaries are normally reviewed annually and an increase is given if the employee merits it. There are times when you feel your organization cannot afford to give any pay increase. So what do you do in order not to de-motivate your people? Consider implementing a policy whereby employees are given salary increases when your organization can afford to give them, in arrears. This ensures that good performers will continue to perform. They know that they will get what is due to them. In order to ensure that this is done properly, ensure that the annual performance appraisal is done as usual. You need the employees' performance data. Giving salary increase to an under-performer is not justified. There are organizations who have implemented a policy that employees who are in the last five percent of the performancebracket will have to go. Size of Merit Increase This usually consists of payment in respect of performance level. A merit increase that is perceived as significant by employees can motivate them to perform better. Make sure that your best employees are duly rewarded, the amount being sufficient enough to motivate. Ensure that your performance review is effective to reduce any possibility of wrong or biased decisions made. Pay Increase on Promotion When an employee is promoted, you may or may not give a significant pay increase. It is not justified to pay an overpaid employee a significant promotional increase. Consider all relevant matters before you make a decision. One important thing to consider is the pay parity with people in the same category and performing similar tasks.

General Salary Adjustment In performance-based pay, do not give across-the-board increases. Differentiate between outstanding, average and non-performers. If not, your employees will lose trust in the system, resulting in little or no motivational impact. Paying the right salary has impact on employee performance and organizational effectiveness. Automatic Salary Progression This has no relationship to performance. Avoid it as it does not encourage your employees to improve their performance. This is fairly common in the public sector. But there are now significant changes made in accordance with sound human resource management principles. The only occasion where you can consider giving some salary increase that is unrelated to performance is in respect of increase in the cost of living.

Anomalous Salary If you have any employee whose salary is below the minimum for the job or too low in relation to the employee's performance and experience, make the necessary adjustment. This is in addition to an increase based on performance merit. On the other hand, you may have an employee who is paid above the maximum point in the salary range for the job. You may freeze further salary increases until the relevant pay level is reached. Then give merit increase based on performance. Don't give increase if performance is unsatisfactory. Be careful in handling the situation where you do not see the reason for increasing an employee's salary. Conduct a salary survey whether your range maximum is lower than the markets rates. If so, you may want to adjust the maximum range. Communicate the results to the affected employees. It is also good if other employees know why this is being done. Do all of these as part of your compensation strategy.

Salary Reviews Compensation strategy requires that the appropriate salary review method is adopted. Fixed-date Reviews Such reviews are usually on 1st January each year.

A modified version is to fix the reviews every quarter for different groups of employees whose appointment fall within the respective quarter. For example, 1st January review for those who joined the organization between 1st January and 31st March. Under this method, there is widespread comparison of salary among employees. In many cases, this creates dissatisfaction. And it can affect employee morale. Anniversary Reviews Here, you review employees' salary at 12-month intervals from the date of their appointment. This is a good method to reward good performance. But it is time-consuming and needs a lot of effort. Flexible-date Reviews The interval can range from nine months to eighteen months. You can use this method to adjust the salaries of high-performing employees whose salary is low, say after nine months. You can give an under-performer less frequent salary increases, say after eighteen months. A non-performer gets no pay increase. Issue a letter cautioning the employee to improve his or her performance. This is required under the law. If this continues, issue a show cause letter for poor performance. Compensation and Strategic HR Management None of the compensation systems is perfect. Human judgment remains an important element. Try to reduce the subjectivity as much as possible. Provide the necessary skills training for assessors. Use compensation strategy to: monitor cost-effectiveness Are you getting good returns from the compensation methods that you have adopted? verify legal compliance Are there legislation that may prohibit the way your organization is managing its compensation scheme? determine pay equity Are you using strategy to minimize or eliminate pay disparity in order to achieve maximum employee motivation? and

link pay to performance Is a performance-based pay implemented in your organization?

Corporate Transformation and Compensation Strategy It is stated in a Report "Strategic Compensation: How to align performance, pay and rewards to support corporate transformation" that it involves four strategic elements in a closed loop, or continuous process. These are: translating business issues into compensation or HR interventions designing and delivering them with key objectives leading the resultant change process, and reviewing or evaluating the outcomes." (www.business-intelligence.co.uk)

The Report finds that strategic compensation is a significant contributor to different forms of competitive advantage, including better business results more effective performance stronger capability higher staff attraction and retention levels heightened motivation, and employee satisfaction.

But it cautions on the repercussions if it is poorly managed.If so, it can "de-motivate, is divisive, create upheavals among employees or force good performers to leave." In addition, you may find help from Martocchios' book ""Strategic Compensation: A Human Resource Management Approach". He mentions criteria in determining employee compensation, design of compensation system, among other things.

Necessity to Rethink Approach to Compensation Strategic compensation is the type of compensation that can achieve its intended purpose. Compensation strategy is the course of action taken to ensure that this purpose is attained. There is no excuse in paying salaries that make no difference in the performance of your employees. Brent Longnecker,a leading authority on compensation trends, planning and strategy in his book "Rethinking Strategic Compensation" believes we need to rethink our approach to compensation. He provides "all facets of attracting, retaining, and motivating employees through a robust compensation plan."

Forces Affecting Compensation

Effects of Market Forces on Compensation Strategy Organizations operate in a dynamic market environment. There are times of plenty and there are lean years. This matter does not fail to catch our attention especially the effects of economic downturns. Many people particularly corporate heads and leaders ask important questions how their organizations can continue to exist. One question that they cannot evade is on compensation. You want your organization to continue in existence. And reducing the headcount will quickly reduce your overheads. You need people in order to survive. However, maintaining the same number of employees can lead to bankruptcy. So what do you do? This is a difficult question to answer. Further, you need to ensure that your organization does not lose talent and needs to engage talent that you need to help during the hard times. You also need to pay attention to the retained employees so that they remain committed and focused. Thus, the importance of preparing a compensation strategy. You can consider the following: Differentiate between top performers and non-performers and even average performers. And reward them accordingly. Reward top performers only. This may motivate mediocre performers to contribute more. Check the market whether your compensation system is competitive. Clearly communicate to employees what their compensation package is worth. Then negotiate on possible reduction for certain heads such as noncash compensation. Don't say demotivating words like "You are lucky you still have jobs." Make plan to achieve continued employee motivation at least in the shortterm. Terminate non-performers, not good performers in sectors that are no longer profitable due to the downturn.

We read from publications or hear from broadcasts that some people are not too happy that organizations continue to pay incentives to executives during downturns. Some suggest that cost-cutting is not the answer but implementation of compensation strategy.

We need to remember that whatever the economic situation or your organizational financial performance is, formulating andimplementing a compensation strategy will ensure the ever-readiness of your organization. Once in place, it is necessary to review the strategy at least yearly and whenever there is a need to do so as dictated by events.

Compensation Legislation and Compliance It is necessary for people in HR and those in managerial positions to know and understand that the law affects your compensation and benefits system. In the public sector, practically every aspect of employee compensation is governed by legislation. In most cases, there is not much room for innovative ideas in formulating compensation strategy. The one good things about this is that the results are predictable at most times. But it can lead to a lot of dissatisfaction. Legislation specify job grades, salary band or range, salary increases, promotion, allowances, benefits and so on. When there are needs for changes, the legislation concerned is amended. Before any incentive or a new allowance is given or paid the law must allow it. If not, nobody will or dares to take the risk to go against the stipulated rules. Some government agencies are usually given some authority under a subsidiary legislation allowing their respective Board of Directors to make decisions. Such decisions must not go against the provisions of the incorporation instrument.

Role of Legislation in Private Sector Compensation Organization in the private sector are "free" to determine the levels and components of their compensation package. They are "free" to determine their own compensation strategy subject to legislation. Private entities are not free to follow their whims and fancies in compensation matters. National governments may enact laws forcing private organizations to change their compensation system and practices. This can happen during times of economic recession when sensitive matters such as compensation come under close public scrutiny. This will also happen in response to sensible public opinion. If this happens private organizations may not have much choice but to follow. This can bring both positive and negative results. Some argue that self-regulation is better and preferable. But some sort of basic framework is necessary.

An example in which legislation may determine private entities compensation policy is when a minimum wage is imposed. Here, organizations are "forced to agree". This affects you compensation strategy. This is a controversial issue. Employees at the lowest level and their unions look forward to it. Employers Associations orFederation dread it. Government officers may not know what further action they need to take. They are responsible for implementation in which case they cannot go against against government policies. Another real possibility where governments may intervene is when employees, unions, community leaders, commentators and others believe that the cost of living (COLA) is getting exceptionally high and they appeal for government intervention. Your organization may want to offer salary increase to help people cope during hard times. In this way, COLA become one of the factors in deciding the quantum of compensation. Further, anti-discrimination laws have impacts on compensation. We know that market forces impose "unwritten rules" on the compensation systems and thus compensation strategy. Accepted norms such as in salary systems affect decisions of organizations. Apart from the enacted laws, the "common law" can shape compensation decisions. When cases come before the law courts, judges interpret the law and refer to decided cases in deciding whether compensation is payable or not. And if payable, the courts will also rule on the quantum payable by the employer. A lot of these cases are on unfair dismissal or constructive dismissal. In many of these cases "compensation" specifically refers to the amount of back pay that the employer must pay to the former employee. The law courts will seldom award economic loss as compensation. The courts may also rule that the employer take back the former employee to resume duties in the same position and drawing the same salary. This may pose problems to the employer and other employees. Compensation Strategy and HRM An HR executive like you, will understand "how compensation plans must align with organizational design and corporate strategy." Whatever you decide to do, it is good to remember that compensation and compensation strategy are essential parts of a strategic human resources management plan.