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A Look at Compensation Systems

In: Business and Management

Submitted By mararakibble
Words 2114
Pages 9
NOVEMBER 05, 2015.

This report will cover compensation systems, some advantages and disadvantages of compensation benefits, comparable worth, and some polices. The information will be used to further understand all topics discussed and addressed for management's purpose.

KEYWORDS: Compensation systems, advantages and disadvantages of compensation systems, benefits, comparable worth, compensation policies
This report is to review Compensation and all related information to better understand the advantages and disadvantages of different compensation systems. Compensation and or the benefits worker's get are a reflection of the organization's value of the worker’s worth, and to the position or the duties required to accomplish the job duties. Compensation could and should provide motivation for the worker or applicant to perform to the best of their abilities, not simply clock in and clock out.

WHAT IS COMPENSATION The meaning of compensation is as followed, a fundamental component of employment and a critical issue for management and policies set in place. It traditionally refers to wages of employment, to include base pay or salary, bonus or incentives, benefits, and non-cash compensations. Organizations need to set and communicate clear principles by which workers are paid. In the least, they should ensure compensation policies adheres to employment standards and legislation. Some compensation elements governed by regulations are Minimum wage, holiday pay rates, overtime pay, payment methods and times, deductions, equal pay, and vacation pay. Also, many companies adopt compensation principles that ensure fairness and equity in pay rates and salary administration, and transparency in compensation practices.

COMPENSATION POLICIES: An effective compensation policy is based on objective and up-to-date job descriptions, effective job evaluation and performance management, and relevant salary administration. Salary administration includes establishing set salary ranges, decision making factors for increases in pay, and setting a time frame for payments and review. When establishing salary ranges, companies need to figure out where they want to pay certain jobs or job categories in reference to the industry or market, a regional compensation norm. Based on several factors like, availability of funds, employee qualifications, to options of non-monetary attractors, such as vacations, benefits, and or work arrangement alternatives. Companies may choose to pay at the end of the low market, in the middle, or at the high end. By conducting periodic reviews of salary ranges, companies can ensure they are in line with the current market, as well as their targeted position within the market. Some larger organizations conduct their own salary bench marking annually or on an on going basis. Smaller organizations may purchase salary surveys as needed to evaluate their systems. Large or small, organizations need to determine the number of salary ranges that best fit the company. For example, many companies have a number of job positions within one range like administrative positions. They may have another for specific jobs like director positions. Provisions much be made to allow the necessary increases between the position and the ranges from one to another, and should the ranges overlap. Again, this is where the market comparison is a useful tool in making policy decisions in this area. Compensation policies most likely set criteria for worker placement on the salary range. Basic criteria are, year's experience, time with the company, time in the position, knowledgeable skill set related to the position, and several other areas. Consideration should be given to how the company or organization wants to position new hires on the salary range, in reference to current employees.
SALARY INCREASES In order to ensure fairness and equitable compensation practices, companies need to be clear and establish, communicate and apply decision making criteria for salary increases. Decisions on salary increases can be based on a number of factors, such as seniority, cost of living increases, or performance (merit) based. The trend in compensation is toward performance based pay. Organizations choosing to use performance based pay need to ensure that they have a clear performance management policy that is applied equitably throughout the organization. Organizations may also implement re-earnable bonuses instead of salary increases. This compensation strategy serves to keep salaries and wages constant over time. This method may result in compensation falling below industry standards. A re-earnable bonus can be a useful tool to allow salary increases for workers who are at the top of the grid, without impacting the established salary range.

SALARY REVIEW TIMING Organizations need to establish regular time frames for salary review. Mostly all salary reviews are conducted annually, and often in conjunction with performance reviews. (Best practice organizations hold separate meetings with employees for performance appraisal and salary review.)
BONUS AND INCENTIVE PAY Bonus and incentive pay are not typical components of nonprofit compensation policies. Mainly, bonus and incentive pay are considered best practice in other sects and can be an effective tool in motivating and retaining top talent. This works best particularly at the director and executive director levels. As with base salary and salary increases, decision making criteria should be set and communicated for allowing bonuses and incentive pay. Typically this type of compensation is tied to specific performance results against pre-set goals and objectives at the individual and organizational level. Results that are measured can be quantitative and qualitative, such as quality of service to clients, number of clients served, effectiveness of programs, etc. When establishing bonus schemes, organizations often apply a balanced scorecard approach: looking at financial, human resources and customer results. In the voluntary sector this balanced scorecard approach could translate into examining results of funding goals and objectives, budget management, employee and volunteer recruitment and retention targets, and program development and client service achievements.

CORE AND FRINGE Core compensation consists of monetary compensation for work performed by an employee. It consists of base pay, but may also include cost-of-living adjustments, seniority pay, merit pay, incentive pay, and knowledge- or skill-based pay. Fringe compensation consists of nonmonetary rewards. They could include the following. Legally required benefits that promote employee health and safety and maintain family income in case the employee loses his or her job are fringe benefits. These benefits include Social Security and Medicare, federal and state unemployment insurance, and worker’s compensation. Discretionary benefits include family protection programs, paid time off, and services. Family protection programs typically include life and health insurance, savings programs, and retirement programs such as the popular 401(k) account. Services include tuition reimbursement and day care assistance to employees with small children. (AIU 2015)
MERIT PAY Merit pay is a salary increase awarded to an employee based on his or her individual performance. It becomes part of the employee’s base pay. Bonus payments are one-time payments that do not become part of base pay. There are several potential issues associated with merit pay. First, the effect of awarding pay raises across the board (without regard to individual merit) may actually detract from performance. Second, supervisors tend to minimize the differences in employee performance when computing merit raises. They give most employees about the same raise, either because of a reluctance to alienate some employees or because of a desire to give everyone a raise that will at least help them stay even with the cost of living. Third, almost every employee thinks he or she is an above-average performer, so getting a below-average merit increase can be demoralizing. (AIU, 2015)

COMPARABLE WORTH The meaning of Comparable worth is as followed, also known as sex equity, in economics, the principle that women and men should be paid equally for work requiring comparable skills, effort, and responsibilities. Those who agree with state women can perform jobs of the same status as men and should be paid the same, with the exception of legally allowable differences like, seniority, merit, and production based pay plans. Comparable worth is an issue all compensation professionals should be aware of so they can explain the potential impact of federal, state and local legislation for both private-sector and public-sector workers.

THE GOOD and THE BAD Comparable worth implies that work should receive comparable pay without regard to the gender of the workers. The emphasis on "comparisons" recognizes the reality that employers are constantly comparing work values; they price jobs based on both internal job evaluation factors and external competitive market values. One way or another, each organization properly puts its own unique price on its labor, and comparable worth advocates simply want that process to be unbiased. That moves comparable worth into the area of "pay equity." Sounds like a good idea, but there can be problems. Look tat this example: A company pays its truck drivers more than its secretaries. There is no equal identity of their skill, effort, responsibility or working conditions — the requirement for equal pay under the Equal Pay Act of 1963. The jobs involve different factors and features and thus, either cannot be compared or are compared by a job-evaluation plan that perpetuates historical female pay discrimination. Current U.S. law allows a small difference in job content to justify massive pay differences. The employer justifies its pay by claiming it relies on the competitive market. But despite a large surplus of drivers seeking work and a shortage of secretaries, the company holds the mostly male driver rate higher than necessary while refusing to raise secretarial pay. It instead seeks to eliminate the need for the scarce-skilled female job functions. It becomes easy for comparable worth advocates to suspect that a double standard is operating. Even if the company claims that it relied on a job-evaluation system, it may be pressed to explain why that system either devalues or ignores "women's work." School pay systems that declare that secretaries and teaching assistants are worth less than janitors and groundskeepers just don't make sense. Companies do not pay the market rate, because there is no one universally accepted, appropriate rate for any job. They pay selective versions of what they continually redefine as market-related targets, derived from competitive necessities and internal equity offsets. But those job ranking and pay classification dynamics are always biased against female-dominated jobs. That is where the real issue festers, because every job-evaluation expert knows there are problems hidden deep within their favored black boxes that they just don't want to discuss. Nevertheless, when the results of those secret practices can be proven to have a disparate negative effect on women (i.e., systemic discrimination), they should be subject to challenge.

COMPANY APPROACHES Every employer properly has its own unique value system. Comparable worth in each enterprise should mean whatever the employer's (not some outside agency's) actual value system says. As long as it's not systemically discriminatory (e.g., requiring a bushy beard for the highest pay), each unique value system should be applied consistently in a gender-neutral way. A level playing field will free the talent that has been suppressed by pay imbalances throughout history and will make our economy more vibrant and responsive. Other nations, notably Canada, Australia and the European Union, are far ahead of America in this sensible and overdue ban on gender bias in pay. If our people truly are the most valuable resource, we should pay the female majority in a way comparable to their true worth. In the United States, it is presently legal to discriminate against women in pay if their job is not precisely identical to the work performed by a man. Even the minimal protection of equal pay for equal work was only enacted in 1963 as the Equal Pay Act. For all the centuries before, women's work was always valued less than men's work. Although equal pay for equal work is the law of the land (subject to allowable differences, such as seniority, merit, production-based pay plans and other non gender-related factors like different locations), comparable pay for comparable work would be a major improvement. Advocates of pay equity feel that it is time to end systemic gender-based pay discrimination, just as the United States has outlawed slavery and child labor.

CLOSING Management has many factor to consider when reviewing compensation and the choice of systems. There are many factor to review on the side of the worker and what is best for the organization and remaining in legal standing.

Paul Weatherhead, “WorldatWork Journal”, Retrieved 11/06/2015. From:
E. James (Jim) Brennan ”ERI Economic Research Institute “ Retrieved 11/06/2015. From: WorldatWork Online Community.

Ann Bares, Altura Consulting Group. “HR blogs The Compensation Force and Compensation Café. “ Retrieved 11/06/2015. From: WorldatWork Online Community.
AIU, Libray resources

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