Pay is one of the most important elements of any organization. It is what compensates, drives, motivates, and rewards employees for the work they do. Or it does the opposite of these things. What is a strategic compensation strategy? Simply stated, it is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives, philosophies, and culture of the organization (Bohlander &Snell, 2010. Compensation includes all forms of pay and rewards received by employees for the performance of their job. Employees desire compensation systems that they perceive as being fair and commensurate with their skills and expectations. An effective compensation and benefit system will contribute to organizational effectiveness. Holland Enterprises is one of the city’s largest employers. Your firm currently employs 3,500 employees. However, since 2007 the firm has lost 25% of its staff. From the research that has been presented, it is because your firm lacks an effective compensation and benefit system. In order for Holland to remain an effective organization, your compensation and benefit system needs a long overdue makeover. The current compensation system is being perceived as unfair and uncompetitive in the marketplace. An effective compensation and benefit system will contribute to the effectiveness of your organization. To survive and be successful in a global economy, an organization must be competitive (Henderson, 2006). In order for any organization to be effective they must attract and hire people who have knowledge, skills, aptitudes, and attitudes. An organization designs and implements a reward system to focus worker attention on the specific behaviors the organization considers necessary to achieve its desired objectives and goals (Henderson, 2006). A successful strategic compensation plan allows your business to compete in the market for the best employees in your industry. The compensation plan that you choose to utilize will play a huge role in attracting competent employees. Organizations that have a competitive base pay in your industry will allow you to demand workers with more experience. Employing more qualified workers leads to better results. Once you have found the right employees, a strategic plan should also include retaining those workers. Retaining quality workers requires a strategic plan for compensation that rewards employees for company loyalty. Compensation is the pay that is provided by an employer to an employee for services rendered. Organizations can offer fixed pay, also known as “base pay”. Fixed pay is nondiscretionary compensation that does not vary according to performance or results achieved (WordatWork, 2007). Fixed pay is determined by the organization’s pay structure.
Short-term and long-term incentives, benefits, and rewards are tools used to motivate employees. Short-term incentive pay is designed to focus and reward performance over a period of one year or less. Long-term incentives are designed to focus and reward performance over a period longer than one year. Typical forms include stock options, restricted stock, performance shares, performance units, and cash.
Benefits are becoming more important in compensation administration as they become a larger proportion of total compensation, representing close to 40% of the total cost of compensation (Atchison, Blecher &Thomsen, 2010). Benefits are programs that an employer uses to supplement the cash compensation that employees receive. These programs are designed to protect the employee and his or her families from financial risk. Social insurance includes: unemployment, workers’ compensation, social security and disability. Organizations can also provide group insurance, such as medical, dental, vision. The kind and amount of incentives and awards must be linked directly to desired employee behaviors, contributions, or results achieved (Henderson, 2006).
Organizations differ greatly in the composition of their work force and thus on the needs and desires of their employees (Atchison, Belcher &Thomsen). A benefits program should maximize employee’s needs. The cost of the total benefit package needs to be consistent with the ability of the organization to pay for the benefits. If the cost of a benefit rises is could affect employees salary. Some benefits, such as health insurance, can have a negative impact on other benefits.
Individual Equity is focused by the strategic criteria which is associated with the strengthening of performance. A short term incentive like share in the profits, costs, sales ROI, ROA can be used to evaluate the performance of the employees, who can kept engaged and committed to the company by these methods of rewarding them for their commitment. An organization therefore, has to design a compensation system which rewards its employees for their efforts if it decides to see the ROI for its most valuable asset (Henderson, 2006.). It also has to keep changing these indicators from year to year, which also would work as an incentive to better performance on the part of the employees (Henderson, 2006).
Creating a new compensation philosophy is very important when trying to attracted employees. Holland Enterprises new compensation philosophy is as follows: Our organization is committed to providing a total compensation package that enables our organization to attract and retain highly skilled and talented employees for all positions. A competitive total compensation package includes an effective salary and a comprehensive benefits plan.
For almost every employee, the job rate of pay is one of the most important issues. The pay relationships amongst the organizations is known as the external equity, where the organization should maintain a competitive scale of payments in order to attract and retain the qualified employees and the labor market is used to set the value of the jobs under the market price approach (Henderson, 2006).
An effective compensation strategy develops a clear link between the work required, performance demonstrated, and the pay provided to each employee. A base pay structure must: establish a pay policy line, design pay grades using pay grade minimum and maximum and desired range, determine overlap between pay grades, and determine if the organization needs more than one pay structure and why. Each organization must develop its own pay policy line, which is a trend line or line of best fit that best represents the middle value of jobs that have been evaluated or classified to have particular worth.
Organizations that are establishing a pay policy or trend line needs to identify the market rates for various benchmark jobs that cover the entire spectrum from lowest to highest rates of pay. By plotting on a chart the pay-rate information obtained through surveys, a scattered diagram or scatter plot can be developed. Different procedures are available for developing a trend line from a scattered diagram. There is line of sight or the two-point method. Another simple procedure is to obtain the market rate or going rate of pay for the lowest and highest paid jobs. Connecting these points can also provide a first approximation for a pay policy line.
A major reason for using multiple pay structures it that rates of pay for more advanced jobs increase geometrically rather than linearly. It is not unusual for large organizations to have at least three pay structure lines. The first being blue collar manual labor, craft, and trade workers. The second line is the nonexempt white collar salaried workers. The last is managerial, administrative, and professional exempt employees.
When it comes to identifying the lowest and highest rates of pay it is important to pay attention to legal requirements, the union scales in local markets, and all area wage scales. The highest and lowest average values should be the midpoint of the pay for those jobs assigned this rate when there is a range of pay available for each category. A basic design is one that determines pay differences in moving through a pay structure is the midpoint-to-midpoint differences. Midpoint-to-midpoint pay difference is the percentage change in the middle value from one adjacent pay grade to the next. Midpoint-to-midpoint pay progression range from as low as 3% to as high as 25%, and possibly higher in some cases.
Developing pay grades is nothing more than convenient groupings of a wide variety of jobs or classes similar in work difficulty and complexity requirements. Pay grades can be provided for a single rate, or it may allow for a range of pay within a certain grade. Organizations normally have different pay grades for the different levels of work.
The strategy of compensation should be modified in such a way that it demonstrates a balance of short- and long-term incentives and the organization should focus on the internal and external equity. The strategic compensation systems analysis for Holland Enterprises revealed that the compensation program does not include important components such as deferred compensation match or adequate health insurance. The analysis also indicated that pay rates are not sufficient for competing within targeted labor markets.
Deferred plans such as pension, retirement plans, 457 plans, 401 (k) plans, profit sharing, and stock option plans are beneficial to the employee and the organization. Two favorable tax treatments apply to deferred plans: 1) the employer can recognize the deferred payment as an expense in the period in which it was earned and interest earned by such payments as an expense in the period accrued; and 2) employees need not report qualified deferred compensation payments until actually or constructively received.
As part of a total compensation package, offering adequate insurance will help your business attract and retain high-quality employees. Also, your current health care plan is not recognized as a tax-deductible expense. If the organization implements a health plan that meets three eligibility requirements and one benefits nondiscriminatory requirement, the amount you pay toward employee premiums will be tax-deductible (Henderson, 2006).
The employees being the most valuable assets of the organization should be provided with the addition of the deferred compensations like the supplemental retirement savings for employees who intend on spending their career with your organization, as these kind of additional benefits help them to feel more valued for their contribution to the organization.
An effective compensation and benefit system will contribute to organizational effectiveness. In order for Holland Enterprises to establish an effective compensation strategy, the organization will have to increase compensation and benefits expenses. The organization needs to offer a competitive wages, along with long-term and short-term incentives. The changes being made will not only affect the employees but it will also make your organization more competitive. Change will have to take place in order to prevent the loss of future employees. So, remember that your organization is committed to providing a total compensation package that enables our organization to attract and retain highly skilled and talented employees for all positions. References
Atchison, T., Belcher, D., & Thomsen, D. (2010). Internet Based Benefits & Compensation
Administration. EMPLOYEE BENEFIT PROGRAMS. Retrieved August 22, 2012, from http://www.eridlc.com/index.cfm?fuseaction=textbook.chpt20 Bohlander, G., & Snell, S. (2010). Managing human resoures. (15th ed.). Mason, OH: South-
Western Cenegage Learning.
Henderson, R. (2006). Compensation management in a knowledge-based world. (10th ed.).
Upper Saddle River: Pearson Prentice Hall. ISBN: 0131494791
WorldatWork (2007). The worldatwork handbook of compensation, benefits & total rewards.
Hoboken, New Jersey: John Wiley & Sons, Inc.