Compensation Strategy in HR - Research Paper Example

?Compensation Strategy Introduction Compensation serves as motivation for workers (Darlington 56). Not only does it represent the value of the services rendered by the employee, it also shows the capacity of the company to reward. Such that if the company is able to compensate its CEOs with hundreds of dollars a month, then it should also be capable of compensating their regular employees with the equitable value for their services. This should also include the fact that they should also be capable of compensating their high performing employees (Employers need to identify and reward high performers). Another point of concern in compensation is whether the employees are being given the commensurate compensation for the services they render. Yet, this brings us to another point of concern, which is whether those employees are right for the position or the work that they are being compensated. It is true that there are those who have been promoted as managers even without the proper degree because they have been in these companies for so long and they managed to move from bottom up. In some situations, they own the companies, and for this reason they are being given the preferential option to determine what part of the company they would want to be. In this case, the point of compensation would be in vain because they would not be really compensated with the work they render but rather with the position they occupy. Also, in the years when companies have been shifting from manual to IT based, they have recruited or pirated IT employees (Gullo). Since there were only a few IT employees they were able to demand their price or the ones who pirated them were of course generous enough to give them more than they expect or even deserve. The objective of this paper is to strongly communicate the importance of compensation strategy in the workplace for the benefit of both the company and the employees. This is achieved by presenting related literature on the need for equitable compensation and of course on the question of “How much is too much?” Review of Literature This review includes articles published from reputable scholarly journals searched from ProQuest and ScienceDirect databases. These articles were selected using the keyword compensation strategy and topics selected for inclusion in this review were based on their content and type – news articles were not included except for those that provide background on the issue. Factors considered in compensation strategy Several articles have discussed factors to be considered in compensation strategy. The usual practice would have been to determine what the company is able to give, what the prevailing rate for the given position and/or what the employee may demand. In the normal hiring process (no pirating or ownership involved), the employee does not usually have the chance to demand for his compensation. However, there are some situations where in the company has the discretion not to follow the given or existing compensations like for instance when they create a new position to address environmental and organizational concerns. It is in instances like these where the compensation process may go wrong - toward overcompensation or undercompensation. The following articles discuss the suggested factors to consider in compensation strategy. Brooks, in his article, presents that compensation should not be seen as a mere company expense. In reality this value changes the behavior of how employees dictating also whether they have the potential to be satisfied or not. As such he suggests that companies should look into these things in determining whether they are paying their employees well: What do the competitors pay? Meet them or beat them? How much should I pay for performance? What targets should I set? Like in the case of pirated IT employees, in the haste to invite them to the company, most have disregarded how much they should really be paid. Ferracone and Gershkowitz on the other hand focused on those who are in the executive compensation committees of companies. It has been prevalent for CEOs and other top executives to receive profanely high compensations. After the 2008 AIG fallout where they revealed that their executives have been raking in hundreds of thousands of dollars and even millions of dollars a year, it is a puzzle still how they were able to come up with such values for their compensation. Although this article is not directly related to this incident, it is a welcome move to suggest that there should be an alignment between the performance of executives and their compensation. It is indeed appalling to know that literally these executives have been ‘standing there and looking pretty’ and yet they receive these values. It could not be discounted that they make decisions, be held accountable for their companies and other top responsibilities but there is still a humungous gap between the workers who give so much for these companies like their time, effort, creativity and more and yet receive only a fraction of the pay of these executives. Ferracone and Gershkowitz said that it is important to educate the executives who make the decisions as regards compensation. This is not to discount their capabilities, knowledge and expertise but in as much as they are new to the committee they might as well be oriented to the organizational compensation practices. They have suggested these ABCs: “Articulate the company’s business strategy and performance and their link to executive pay; Bring in current information on the external executive compensation environment; Catalog the company’s executive compensation strategy and programs; Discuss the degree to which the company’s performance and pay are aligned; Explain the roles of the board, the committee, management and the compensation consultant” (38). Darlington also suggests his best practice for compensating showroom salespeople. He admits that different industries require different valuation for their compensation packages. He has also reiterated the slogan “First think system then think strategy” where he makes the needs of the company at the most important level. Of course, how can one give the best compensation when one is not capable to do so? Given this, he says that one would be assured of good outcomes which includes fair and equitable wage for the employees, payroll costs being in line with overall financial health of the business, and employees understanding the basic philosophy of the company (58). One interesting research was done by Westerman, Beekun, Daly and Vanka on compensation strategy and this was done both in US and in India. They determined whether certain personality types and culture were related to preferences of compensation packages. They used the Big Five personality measure to determine personality types and compensation strategy pay typology to determine and classify their compensation packages or pay types. These pay types were identifies as follows: work-life balance pay strategy, security/commitment pay strategy, performance-driven pay strategy and market match pay strategy. The study found out that in India, extroversion and neuroticism were associated with performance-driven pay strategies. In the US however, conscientiousness was identified as related to performance-driven pay but the relationship was not significant. Also in India, introversion was found to be significantly related with security/commitment compensation strategy. Thus the study concludes that personality and pay package preferences differ in relation to the cultural context (776). This shows that companies should also look into personality and cultural factors in coming up with compensation strategies and that there is no best way or no best compensation strategy that fits all companies. The compensation strategy should be tailored to the various factors already identified by literature from primary research as well as those compiled in secondary literature. The study also suggests that finding the best match between compensation and employee type would allow for better job satisfaction and therefore better retention of employees. This would somehow help in employee retention and thereby enabling the company to strengthen its most important resource which is human resource. Compensation strategy issues in various company/organization types It is important to look into compensation strategies of different organization types to know how different or similar these may be. In this review, compensation strategies of high tech firms and football league players are examined. Professional sports and the players are lucrative. Baseball and football professional players are known to earn millions each year of course depending on the team they are playing for and the sponsors that they have. Alex Rodriguez for example is in a 10 year contract worth $252 million with Texas Rangers in 2001. On the other hand, football players have a median yearly salary of less than $1 million. To quote Bart Scott “Its rich versus richer” in relation to the salaries of professional football players and he knows that this makes some people upset (Bishop). They are players and they are considered as a different breed of employees and they are being paid for different reasons. A study in their field in terms of compensation was done by Carey entitled A Resource Based Look at Compensation Strategy. He looked at salary caps of football players and their performances. Professional players are very competitive. They are hired because of what they contribute to their teams. They are also pirated by other teams because of their performances. But if these players are very talented and continue to be pirated by one company to another, their salaries would also continue to skyrocket in a very appalling speed. Although this is a hypothetical scene, it can happen. That is why there is a need for salary caps for these players as suggested by Carey. Salary caps are described as a control in the salaries of these players especially the free agents such that their salaries “must relate to player value or marginal revenue product (MVP)” or in other words, the performance of the player dictates his salary (133). Other companies may learn from this situation because compensation is largely performance based. It is of course very valid for professional players because playing is what they do. They play so that their teams can win and their team owners have invested in them such that they are resources. This practice of performance-based compensation is prevalent in other organizations but not so much at the executives level. It is probably a must now for companies to look into the compensation of these executives and how they perform for their tasks and as well as the tasks that they are performing. High tech firms are another type of company that have also embarked in studying their compensation strategies as reported in the research of Diaz and Gomez-Mejia. It is said that these firms tend to develop unique compensation strategies in relation to their environment as well as the people who work for these firms. These firms usually are staffed with people who are driven, willingly take risks and have weak allegiances (302). As an organization high tech firms are characterized as frequently changing, have uncertain tasks and fluid internal barriers, short product lifecycles and projects usually changing overnight, highly decentralized, minimal or no traditional personnel functions, high tolerance to failure and probable chances of being highly commercial depending on product success (303). As a result of this mix of individual and organizational characteristics, the study concurred that the focus for compensation strategy would be on the individual and not on the job. Primarily because of the fact that these firms jobs are not clearly delineated from one another and also for the fact that as an organization they always deal with uncertainty. The uncertainty is mainly brought about by the rapid changes in technologies especially for firms in the information and communications industry. However, focus on the individual is not the only consideration in this compensation strategy for high tech firms. The following are also included: risk sharing, external market orientation, substantial discretion in making pay decisions at multiple points within the firm, emphasis on aggregate incentives and a longer time orientation (311). For risk sharing, high tech firms allow the employees to share the company risk through less secure income, for example they may have high income but since they are project based they may not have the other perks given to those with more secure jobs. They may not be given the security of tenure because the company itself is unsure whether they will stay or not. For external market orientation, they compare their compensation with other industries similar to them, such that they will know what to give their employees so that they can retain them. What is important to know from this study is that compensation strategies may also differ per company type. Since these high tech firms are less secure, their compensation strategies should also reflect such . However, their situation can be related to the situation of professional players where individual contributions are given more emphasis rather than the job. For example, salaries of quarterbacks are not the same across teams but rather is dictated by the performance of a particular quarterback. Much the same as a quality control employee in one high tech firm may not be the same with the quality control employee of a different high tech firm. There is still the issue of resource or contribution to the company as basis for compensation. On a different note, an article from HR focus calls for the compensation of high performing employees (Reward top performers as economy recovers 12) especially during the recession. It is important to reward them to ensure high morale so that they will continue performing as they are. If this is the case then it becomes a positive cycle where in the employee can help himself as well as the company and to a macro level the employee helping the economy. In terms of compensation strategy this is a focus on individual performance rather than the job. It can be related to the previous compensation strategies discussed above. In another sense but of the same nature, Beaton discusses the compensation strategy labeled as revenue-based compensation. This is related to sales like in car sales or furniture sales or other similar industry. This would increase margins by compensating people who are highly productive and bringing to the company profits due to their hard work. However, Beaton also cautions the readers that this is not always a win-win situation because if done poorly, miscalculations can lead to alienation of salespeople. There can be situations where in the best performers are the only ones who are compensated and the rest are not. A best mix would be to employ percentage productivity bonuses where all performing employees may be ranked according to their performance and are rewarded certain percentages equitable to their performance. Another article from HRFOCUS reiterates the need to identify high performing employees and merit them properly. If for example they are not in sales where performance is easily measured, there should be a properly developed performance measure to properly identify the employees who do well. The following were identified as proper steps toward a good performance management program: involve more than just the immediate manager in determining pay increases; focus more on results rather than behaviors; focus on differentiating pay of high performers versus variable pay or lump sums; and take into account the competitive labor market (Employers need to identify and reward high performers). Compensation strategies for directors and executives CEOs and directors are given the highest incentive pays in all organizations because they are deemed the mind and soul of the companies. They make decisions and take risks for the company and so they need to be compensated well. However, many have questioned the value of what they are paid. In other instances, there are really unjustified pays for these which brought about the ire of other employees. There is no single answer as to how they can be compensated but here are some of the feedback from the literature gathered. Magnan, St.-Onge and Gelinas have embarked on a research to determine the best compensation strategy for directors and executives. According to them, compensation of directors and executives have started to move away from the traditional compensation strategy. At this time, based on their research the compensation of the directors already include full-value equity unit grants such that they can be given ownership and vesting grants of the company that they are working on. In this option, they are given the chance to be more participative in the value creation because they are also monitoring their equities. Still, like with other researches, this best practice is also dependent on the context of the firm as well as the capabilities of the directors. Schubert and Berenbaum support the equity based compensation proposed by Magnan, St.-Onge and Gelinas. However, they studied the different models of equity-based compensation and came up with the best deal for directors. They compared two models – the Absolute and the Relative model. Regardless of the differences in these two, the research concurs that there are differences in the effectiveness of the two models depending on the context and individual behaviors or values of the executives. Still, there is no best way for compensation strategy to work best in a particular organization. It still depends on so much factors. Cherry on the other hand would share that disclosing the amount by which executives are compensated can improve the situation. The IRS, and the Securities and Exchange Commission are already requiring companies – both publicly trading and non-profit – to be more open in disclosing the compensation of their executives. With this disclosure requirement, executives will be limited to what is really necessary and commensurate for their positions unlike before that they can demand or that the companies, in order to retain them, provide them with atrocious compensation that could not even be counted by a regular employee in his lifetime of work. Cherry also stresses the importance of having a compensation philosophy that is related with organizational philosophy in order for compensation strategies to work. Schramm cites the lowered executive compensations in Japan and Europe as attributed this more on the cultural factors rather than on the financial and economic aspects. The question is that would this be feasible in the US? The answer is for the HR department to mitigate the problem and determine the best compensation for executives. Of course, the HR should take to consideration the many factors that have been presented in studies and in other literature aside from their own experiences. Offstein and Gnyawali studied the compensation of executives of pharmaceutical companies in the US in the hope of determining what affects the ways in how they behave, decide and act in the company. They studied the variable pays given to these executives and determined whether these have made them more productive or otherwise. They have found out that both long term and short term incentives affect the firm’s competitive actions (216). This study also strongly communicates that even when other studies were not able to determine relationships between pay and CEO activity, they were able to present such and more. They show also that the higher the incentives the CEOs receive the better their performance. However, their study was on a high tech firm. Since high tech firms employ or attract performance driven employees, this may be the case for their samples. Since they are driven it is but natural for them to perform and be CEOs as CEOs and not as CEO in name. So this may not really be an effect of the pay but an effect of the personality of the said executives who took part in the study. Nevertheless, this doesn’t discount the fact that CEOs have bigger responsibilities and that they should be compensated as commensurate to their responsibilities. But the question remains, how high is high? Summary/Conclusions The above cited literature have presented varying viewpoints on compensation strategy - varying from executive compensation, high tech firms, professional football players, salespeople and more. It is understood that with the variations in company type, personality types, organizational types and environmental types, needs and performances may also differ. Supported by sufficient findings from researches and other articles it can be concluded that: a) compensation strategy may vary from one organization to another b) compensation strategy is not a one pill solution for all types of organizational compensation related problems; other factors such as individual, industrial, financial and environmental factors should also be considered c) different personality types may be attracted to different compensation strategies d) compensation strategies are also bound by culture e) compensation strategies are different for different levels in the organization f) compensation strategies are different for different performances of employees g) compensation strategies may lead to job satisfaction but may also lead to employee alienation Management is an art. What makes it an art is there is no single way of dealing with the issues under its realm, compensation strategies included. As such, common sense and intuition is also important in determining the best mix of pay for the employees. Recommendations In the light of the above cited literature and conclusions the following are the recommendations of this paper: a) for further research, it is recommended that more cultural and behavioral aspects be included in the study of compensation across companies b) for implementation, it is recommended that the commensurate pay for different employees be given References Anonymous, . "Employers Need to Identify and Reward High Performers. " HR Focus  1 Nov. 2010: ABI/INFORM Global, ProQuest. Web.  24 Apr. 2011. Anonymous, . "Reward Top Performers as Economy Recovers. " HR Focus  1 Dec. 2009: ABI/INFORM Global, ProQuest. Web.  24 Apr. 2011. Bishop, G. “Jets Players are Locked out but keep working out” The New York Times 20 April 2011. Web 24 Apr. 2011. Beaton, E.. "PAY FOR PROFIT. " Profit  1 May 2008: ABI/INFORM Global, ProQuest. 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