Setting the stage for strategic compensation and bases for pay - Term Paper Example

?Running Head: STRATEGIC COMPENSATION School: Topic: Strategic Compensation Lecturer: presented: Compensation DepartmentGoals Milkovich & Newman (2005) define compensation as the financial returns and benefits employees receive from employer in order to achieve a positive relationship between employer and employee. It is geared at enhancing employee’s performance and organizational effectiveness and consequently competitive advantage in the labor market. The compensation department is part human resource department as it is concerned with employee base pay and benefits administration. The main goals of the department are to attract, motivate and retain talented employees in the organization. To achieve these goals, an organization needs to align its compensation objectives with organization objectives (Ledford & Heneman, 2002). To attract high quality talent, its pay has to be competitive in the market. The compensation department carries out surveys to determine what the other organizations are offering for similar tasks and pay the same amount or higher than the competitors. The salary should reflect the value of the job being performed for an employee to be satisfied (Heneman, 2002).If the compensation an employee receives is not equivalent to the task performed or is not equivalent to what others performing similar tasks in the organization or in the job market, then the employee loses morale or is demotivated leading to poor performance and loss of productivity for the organization hence the compensation system should be internally equitable and externally competitive (Bohlander & Snell, 2010). Through job evaluation, salary structure and performance management systems, an organization can be able to motivate and retain high performing employees. Ledford & Heneman (2002) argue that performance appraisals can be used to justify increased pay rate (413). Higher pay rates then enable the organization to set high selection standards thus recruit better qualified employees. To retain the employees, the organization can offer pay based on performance or the currently new system of pay for skills (Bohlander & Snell, 2010). However, motivation depends on the value of rewards achieved after achieving the set standards or after good performance thus the rewards should be motivating so as to direct behavior towards high performance. Contextual Influence That Pose Greatest Challenge and One That Poses Least Challenge to Companies’ Competitiveness Organizations strive to achieve competitive advantage through its compensation system. According to Cardy & Leonard (2011), company gains competitiveness if its pay is fair compared to what is offered by other organizations. This can be achieved by developing strategies aimed at ensuring it remains competitive in the market such as cost leadership and differentiation. A strategic analysis of the internal capabilities and external market environment is required to establish the challenges to organizations competitive ability. Organizations attain efficiency by operating at low cost while at the same time producing high quality products. This has an implication on its inputs since the cost of production is determined by cost of inputs such as labor, capital and land. To attain efficiency, it thus has to ensure maximum utilization of its resources; in this case its employee skills, knowledge and interests. The competitiveness of the company is however challenged by various contextual factors such as; employment laws, labor unions, market influences and social factors. These factors affect compensation practice and consequently competitiveness (Milkovich & Newman, 2005). The employment laws may pose a great challenge to compensation practices. The wage laws determine the minimum and maximum wages an employee can receive and prohibit employment discrimination. If an employee perceives a practice such as performance pay or skill based pay as discriminatory, he/she can claim discrimination allegation. The base pay for employees performing similar activities thus has to be consistent to avoid discrimination allegations and this may inhibit motivation by those who feel their work is not valued if their efforts are not rewarded (Bohlander & Snell, 2010). The least challenge comes from the social factors since the organization can change its culture to accommodate employee needs as well as government goals to align with organizational goals. This will keep employees motivated by training and development hence improved quality and organization effectiveness. Subjective Vs Objective Ratings Objective ratings are used on items that are measurable. For example, in production of items such as garments one can be evaluated based on the pieces one has made within a given time or depending on output. The organization sets standards against which performance is measured such as making 100 garments in an hour. However, some tasks are immeasurable or unquantifiable such as in service industry. For example, if a job deals with public relations, how well the person relates with customers can only be observed and not measured. In such cases, subjective evaluation is required (Cardy & Leonard, 2011). Feedback is very important in staff motivation and skill development. When an employee receives feedback, he/she is able to determine his strengths and weaknesses hence the areas that need improvement. According to Cardy & Leonard (2011, p. 142), “objective evaluations do not tell the whole story”. In such cases, subjective evaluations are applicable since workers need to know how they are performing by getting feedback from various sources. 360 degree feedback performance appraisal is most appropriate since it involves feedback from all stakeholders. Subjective evaluations are also used for complex tasks as it’s difficult to evaluate objectively. Profit Sharing Plans The profit sharing plans are geared towards encouraging employees to identify with the organization by sharing in its success (Berger, L & Berger, D, 2008). Profitability is thus used as the standard for incentives and depends on success of the organization. Profits can be shared immediately after their determination or can be deferred to a later time such as retirement benefits or the employer can decide to pay cash immediately and defer part for retirement. The profit sharing plans depends on organization success. If the organization makes losses, it may induce wage cuts to avoid closure or layoffs. In this pay system, there is no link between job performed and the incentive since the incentive is for motivating employees to improve performance thus high returns and consequently attractive reward (Berger, L & Berger, D, 2008). The employees may lack motivation since the company returns don’t depend on them but on external factors beyond their control such as climate, competition, technology change among others. The employees are also not involved in designing the compensation system hence no motivation as they do not own the process. Lower level employees are also demotivated as they receive fewer bonuses if it is calculated as percentage of pay. Motivation may also lack when employees perceive the incentive as an entitlement and not a result of their efforts. They thus have no expected standards that drive their motivation. Wage cuts also demotivate workers. Pay-For-Knowledge Most employees pay employees based on their performance thus performance appraisals are carried out annually to effect salary review. Recently, organizations are using knowledge and skills as compensation strategy. This system is used to encourage development of different skills for competency and excellence and consequently high performance of the organization (Ledford & Heneman, 2002). An employee is evaluated based on attainment of all skills required for the job after which a certificate is issued that allows payment of incentives. Training and development is offered to employees to enable them to develop the skills required for accomplishment of tasks. However, this type of compensation system can only be applied to tasks that require different skills or in areas where job rotation is applicable. It involves on-the job performance and work samples supplemented by oral testing and live demonstrations (Cardy & Leonard, 2011). For these reasons, this pay-for-knowledge system is not applicable to service jobs such as customer relations, health care provision, and sales representatives. References Berger, L., Berger, D (2008). The Compensation Handbook: A State-of-The-Art Guide to Compensation Strategy and Design. USA: McGraw-Hill. Bohlander, G., Snell, S (2010). Managing Human Resources. USA: Cengage. Cardy, R., Leonard, B (2011). Performance Management: Concepts, Skills, and Exercises. 2ed. New York: M.E Sharpe, Inc. Heneman, R (2002). Strategic Reward Management: Design, Implementation, and Evaluation. USA: Information Age Publishing, Inc. Ledford, G., Heneman, R (2002). ‘Pay For Skills, Knowledge, and Competencies’. In: Robert, Heneman. Strategic Reward Management: Design, Implementation, and Evaluation. USA: Information Age Publishing, Inc. Milkovich, G., Newman, J (2005). Compensation. 8ed. New York: McGraw-Hill/Irwin. Read More