Compensation Models, Salary in Addition to the Percentage Production, Importance of Compensation - Essay Example

Name: Course: Tutor: Date: Compensation models Thesis: The topic of compensation is usually complicated, emotionally charged and also misunderstood in corporate governance. The effective implementation of compensation models catalyses individual and professional growth and inspires the enhancement of motivation, performance and morale in the workplace. I Introduction II Compensation Models III Flat salary model IV Straight Commission and the Percentage Revenue Generated V Salary in addition to the percentage production VI cost of hiring employees VII Importance of compensation VIII Compensation and motivating IX Factors influencing compensation X Importance of compensation XI Conclusion The top executives in business corporations contribute considerably to the success of the organizations that they work for. This is achieved through the provision of basic salary, bonuses, options, shares, among other benefits. There has been an increment in compensation of executives in the recent past that surpassed the average wage level of workers. This is an issue of importance in the corporate governance in the company and the determination of its implementation is the responsibility of the board of directors of the company. Typically, the majority of the companies’ CEO in addition to the rest of the top executives receives some short-term incentives as well as bonuses in addition to their basic salary. The combination of this compensation is the “Total Cash Compensation” (TCC) (Chingos 36). The short term incentives are associated with a performance criteria and are driven by a certain formula all based on the role that the executive play. For example, the basis of the bonuses of the Sales Director that are related to performance is the growth turnover of incremental revenue while that of the CEO is determined by the incremental profitability as well as the revenue growth. On the contrary, bonuses are not driven by formula but are discretionary and based on after-the-fact analysis (Chingos 39-42). Another form of compensation for the executives is a combination of cash with the company shares which in most cases are guided by the vesting restriction being long-term form of incentives. The qualification of these incentives is the achievement of a measurable period of not less than one year, 3-5 years being the most common. The implication of the vesting term is the time period required to be achieved by the recipient to acquire the rights of share transfer alongside realizing their value. The guiding factors of vesting are the performance of the executive, the duration of service, or a combination of both. Other existing components of compensation package of an executive are perks of the generous plans of retirement, health insurance, executive jet, chauffeuredlimousine, a loan that is free of interest, house purchase among others (Chingos 30-33). Compensation Models Various models of compensation are applicable in business organizations. They include; the annual flat salary, straight commission, percentage of generated revenue, the base salary in addition to the production percentage. Implementation of the guiding principles of compensation models is liable for alleviation of stress together with the upset that occurs due to poor models of compensation and motivation. This is in considerations of the approaches of rewarding and recognizing the efforts of the employee in the workplace. This is achieved through the right wages, expected benefits, rewards as well as incentives. Intrinsic rewards also play a vital role and their alignment is an issue of vital importance. The consideration of individual performance also bears positive impact. The motivational aspect of compensation depends on the appreciation of the demonstrated skills of the employee, abilities as well as their outcomes. The provision of equitable opportunities of compensation has the implication that all the employees performance is of an equal level. It is only the median average employees who should receive uniform plans of incentive and uniform increases in their salary. The result of this practice is the forfeiture of the opportunity of improvement of the underperformer accompanied with lack of celebration of the top achievers. This has important implication to the future of the organization due to the failure of introduction of a system of bonus that is guided by the monthly revenues (Chingos 54-8). The use of flat salary as a model of compensation is not an equitable model for the compensation of the output of an employee. The most conspicuous drawback associated is that all the risks are attached to the practice. If the employee does not meet the maximum potential of output in terms of generated revenue or the quality of provided services, there is no change in the salary owed to the employee by the employer. On the other hand, this model lacks the audacity of fully compensating the employees whose output is above the expected average. This model is only suitable for new employees whose performance is under evaluation for the purpose of determination of their future trends. The other model of compensation is the Straight Commission and the Percentage Revenue Generated that is based on the personal production of the employee. The actual compensation is based on the per-item commission or the percentage of gloss generated revenue out of the efforts of the employee. This model is associated with a low popularity because of the hesitation of the new employees to comply with the arrangements that are surrounded with a lot of factors that are beyond the control of the employees. They may not accept compensation based on their productivity because they do not have a clear reflection of the result of their output in the environment that they work in. The newly employed staffs are uncertain about the results of their contribution in production. This scenario is influenced partially by the individual and partially due to the influence of the environment surrounding the employee. The opportunities responsible for generation of finance also play a vital role in the success of this model. The model is also a cause of highlighting the qualities of the associates with no tangible benefit to the employees. This model is also responsible for rewarding of the employees on individual basis with less focus on the interests of the team play. There is a requirement for linking compensation to the sandbox play well because the activities in the team that does not necessarily contribute to production plays important role in the dynamics of the organization. This is important to the promotion of growth of the practices that improve the appearance of the teammates (Chingos 62-76). Another important model is the salary in addition to the percentage production. This is a favorite compensation strategy for employees who have not achieved a working experience of 3-5 years. It is one of the most common strategies of compensation since there is a combination of the guaranteed salary and a provision for the opportunity for financial earnings. The automatic qualification for the benefits associated with this strategy is an increase in the amount of the generated revenue in comparison to the revenue that was anticipated. The revenue that is required for the justification of the salary of the employee becomes greater relative to the payable base salary. The percentage production payment is the incentive given to the employee paid as a bonus on a monthly, quarterly or even semi-annually basis. This offers a possibility of increasing the salary of an employee from $ 100 000 to $ 280 000 (Chingos 113-54). However, there is a likelihood of a notion of some employee of the right to certain amount of salary without a clear understanding of the required role to meet the requirements of the salary. The net cost of hiring an employee incorporates the payroll taxes, benefits, fees, subscriptions, life insurance, malpractice insurance, workers compensation, among others to the state and the federal governments, all met by the employer. This makes it mandatory for the employee to perform at extremely high productivity levels for the purpose of offsetting the salary demanded by the employee. This model is responsible for the incorporation of the salary stability of the employees possessing some earning capacity which is questionable but through motivation of their outstanding character, they are in a position of capturing the extra income as a result of their improved performance (Chingos 278-89). With no need for a question, the productivity as well as the profitability practices of an organization is highly propelled by the extent of motivation of the team members to implement the right tasks in a timely manner. There is no leadership competence that can be applied to force the employees or even request them to become motivated. The most appropriate approach of dealing with the employees is the creation of a culture that facilitates the encouragement of the team members towards their growth. The culture should also enhance their training to elevated performance levels and a feeling of self value while they are also rewarded commensurately for the efforts they show towards the achievement of the goals and objectives of the organization. The starting point of the creation of the suitable environment is the creation of a link from motivation to compensation (Chingos 121-67). Financial remuneration is an important factor in the promotion of the feeling of value and recognition of the employee in the workplace. However, it fails in the prediction of motivation of team members. The important consideration in the assignment of the basic wage of the employees is the ability to meet the most basic financial needs. The basic wage is meant for the payment of the services assigned to the employees based on the scope of their duties and the responsibility level attributed to their job descriptions. Competitive wages are based on the consideration of the wages offered by other employers for the same talent. The promotion of self worth of the employee is therefore based on realization of a fair compensation in consideration of the knowledge, the skills and the abilities that are applied in the work place. Rewards and recognition comes later for the purpose of celebration of the efforts of the employee that are in addition of the expected duty. The employees who are self-motivated are in a position of adjusting their personal performance for the purpose of achievement of high standards. The implication of an incentive to the employees in form of a bribe has an inadvertent implication of difficulty or an unappealing nature of the task ahead. It is also consequential to the erosion of the confidence of the team members in as far as the implementation of the task is concerned. Compensation together with motivating the employees has got a positive impact on the performance of employees, there may arise an unintentional reward to the employees to slow down their productivity. This is through a continuous approval of overtimes and embracing the burden of offering solutions to the difficult problems that are encountered within the team members. There is therefore a requirement for the adoption of the best approaches of creating motivation alongside changes in the practices of the organization. The available options relates to the application of classic punishments, systems of reward and the encouragement of a culture of self-motivation. The implementation of punishments together with rewards has got a positive impact on the behavior of the employees. Employees are exposed to a situation of comparing their behavior to the success standards that are promoted by the model of compensation in an attempt of achieving positive adjustments. The best model of compensation therefore is one with an integration of pay to the validation of the needs of a person (Chingos 143-54). The following table 1 shows Average Annual Salary (USD) for a well compensated workforce Customer Service Position Management/Executive 2002 2002 2003 2003 % Position Title Low High Low High Change Vice President – Call Center $ 96,870 $ 122,528 $97,028 $ 128,654 5.1% Director – Call Center $70,528 $ 87,854 $ 72,345 $ 94,882 7.9% Manager – Call Center $ 52,910 $ 69,010 $53,010 $ 71,425 3.5% Assistant MGR/Supervisor $ 36,023 $ 45,025 $ 38,727 $ 47,726 5.9% Table 1 (Source: 2003 M.E.R. Salary Assessment Report) The above table is a sample benchmark for the management compensation in an organization. The figures in the table are averages and are unaccountable for certain geographical issues, the requirement for the advanced level of skills among others. There is a possibility for a great variation in the compensation figures based on the in-house environment of service and the outsource organizations of customer care. Most of the organizations have a perception of the services of the customer as a cost while others attribute profit to this service. These perceptions have got important implications to the view of the benchmarks of competitive compensation that is expected from the company (Chingos 175-94). The models of compensation are usually associated with varying degrees of difficulty. The process of their perfection is time intensive, they require patience, fine tuning and job modeling of significant magnitude. The organizations that aspire for success must device some mechanisms to create a balance between the overall priorities and the constraints of time. Most of the useful time of the organization is spent in the development of a model of communication that is liable for the facilitation of the real-time measurement; the observation as well as feedback connected to relevancy as well as the success of the plans for compensation. The models are responsible for change together with the continuous improvements. The most important consideration to succeed in modeling a plan for motivation is the influence of an individual to the management of compensation and the role played by the individual. The role of individual performance incentives in motivation or demotivation and the reason behind it is another consideration. The consideration of an organization that an individual has worked for in the past with a successful management plan of compensation is yet another consideration. There is also a need for the consideration of appropriate procedures applicable for the measurement of industrial competitiveness. The last time of the update of the plan of compensation is also worth consideration as well as the possibility of the facilitation of creative thinking and the input by the executive management. The willingness of complying to take part in a discussion of compensation in the organization also counts. The consideration and actionable implementation of the above concepts is the foundation of successful model of compensation. This is supported by a close collaboration with the most important stakeholders in the company. The model of compensation should be custom tailored to address the needs of the organization. The effectiveness and efficiency of the model of compensation in the company is an issue of great importance (Chingos 163-167). Majority of the positions incorporates base salary in a set range accompanied with a particular variable incentive. There is a significant variation in the range of the variable incentives in terms of dollars, percentages and the approach applied by the employees for the purpose of the achievements of the metrics. Majority of the organizations have ruled out the most elaborate perks like signing bonuses band on-top incentives of cash. They are however still in existence and their proper utilization is effective in the process of acquiring the most appropriate talent. The modeling of the operations of compensation for most of the organizations is based on: a defined base range of salary Indicators of performance or the bonus that is based on the achievements in relation to the objectives. The table 2 below shows a hypothetical base pay for an organization. USD Supervisors $35,000–$50,000 Managers $45,000–$60,000 Senior managers $80,000–$110,000 Directors $80,000–$110,000 Executive leadership $120,000+ Table 2 (Source: 2003 M.E.R. Salary Assessment Report) In most of the cases, most of the positions mentioned are associated with a variable component of pay or a bonus opportunity. Most of the employees who are rewarded by the companies with regard to the category have a successful record of satisfaction of the customer, increased customer retention, and new customers’ growth and development. The most possible occurrence is an increment of between 5 and 20 percent of the base wages on top of the extra bonus in dollars. The most important issue is the continuous monitoring and the measurements of the variable component of pay that are functioning in this category of employees. The continuous advancement in technology results to continuous changes in the work flows and an increase in the management-level skills. This therefore is consequential to the need of the company to evaluate the competitiveness of the management of the plans of compensation in a frequent manner (Chingos 215-54). The greatest extent of expenses in the sustenance of an effective strategy of CRM, “Customer Relationship Management”, in the organization is a factor of the company’s human element whereby employees and their compensation plays an important contribution. The approach of the organization to the compensation model is an issue of great concern to the performance of the company. It is the duty of the employer to look for the best applicable approach of the determination of the optimum balance of the base pay in relation to the variable pay. They are also responsible for the role of strengthening the relationship of pay to the performance of the employee. Most of the compensation packages in the majority of the organizations are guided by the base pay as their foundation. The base pay is the reflection of the portion of the wages that the employee is entitled to as a result of the performance in the work place in a manner that is consistent as well as effective. The base pay undergoes typical adjustments on annual basis as a result of the conducted reviews of performance and corresponding increase in wages. Variable pay may cover the bonuses, commissions in addition to the rest of the incentives that are offered to the employees based on the achievements of the objectives. Employers usually manipulate a diversity of techniques for the purpose of the achievement of the goals and objectives of motivating the employees through compensation these include cash compensation, signing of bonus, stock, benefits, relocation, executive perk, all aimed at securing the potentials of the employee. The only variable element in this situation is the employee value. The positions above the level of the director are associated with a high degree of flexibility as well as negotiation as regards to the contents of their final offering of compensation. There is a requirement for the reinforcement of the plan of compensation. After designing and writing of successful plans of compensation, there exists a vacuum of adequate strategy responsible for the reinforcement as well as the dynamic evaluation of the entire plan. Majority of the organizations have utilized sufficient amount of dollars for the purpose of a comprehensive design and the formulation of compensation plans with an ultimate result of failure. A compensation plan that has been poorly designed is ineffective and should be abandoned. The implementation of such a plan will not contribute to the motivation and the driving of the behaviors of the employees that the organization is anticipating to achieve. The most important consideration in the evaluation of the compensation plan includes the following: The availability of the resources that are needed for the implementation of the plan in the organization. The qualification of the resources in the measurement, monitoring and the enhancement of the plan. The availability of the system for the measurement, monitoring and provision of feedback. Lastly, the option to be taken in the case of the failure of the plan (Chingos 286-321). Conclusion The survival of the organization depends on the effectiveness of the applied models of compensation for the employees. The danger associated with an ineffective system of compensation is the magnification of personal issues like the respect, the self worth and validation of the individual. It is also a source of conflict, low morale and a performance of low standard. It s imperative that the pros as well as the cons of diverse models of compensation are comprehensively understood and the most appropriate package of compensation clearly understood to erode the daunts associated with the issue. It is therefore the duty of the organization to embrace the existing time and opportunity in the planning and development of a system of management of an effective strategy of compensation. The objectives of the employer and those ones of the employee share some common elements that must be achieved. Communication, modification and planning are the most important componentss for an effective model of compensation. The achievement of success in modeling a compensation plan depends on the extent of study, reading and evaluation of diverse ideas in consideration of the fact that there is no perfect model. Work Cited Chingos, Peter T. Paying performance: a guide for the compensation management 2nd Edition. NY: John Wiley and Sons, 2002. Read More