Compensation Management - Essay Example

Business Research Report Presented Assessment RWT1 ID: Mentor Table of Contents Executive Summary 3Introduction 5 Research Findings 6 Finding Number 1 7 Based on the study on the area of strategic compensation, the first point to be noted is that, as mentioned above, reward strategy is basically incumbent on three factors – pay, benefits and career prospects (Chingos, 2002). 7 Finding Number 2 8 Finding Number 3 9 Recommendations 11 Conclusion 12 Executive Summary The present study attempts at finding out various compensation strategies available to an organization. Compensation is indeed an important aspect from the organizational context and this it is truly essential that the right compensation strategy be devised so as to ensure that the employees are paid the amount they owe in lieu of the work done by them. Among the major strategies of compensation management found to be of major importance as well as relevance to our firm, the models of pay, benefits and career prospects; the model of gain sharing as compared to profit sharing; and the competency based models of compensation have been discussed at length along with the fitment of these approaches with that of our firm in order to determine the likelihood of success as well as which among these is likely to yield the best results. Among the findings of the present study, it was found that gain sharing is highly suitable as the rewarding strategy of the firm since it brings the objectives of both the firm as well as its employees on the same track and thus motivation plays a big role in making employees much more productive. Competency based pay may also suit the purpose since that would be an accurate way of rewarding employees given that our firm would then map the skill sets of each employee and pay on the basis of one’s proficiencies. However, this would not take into consideration the factor of productivity and be exclusively concerned with competencies that one possesses. Piecemeal payment system is verily suited for the laborers given that here the payment is totally incumbent on the productivity of the individual laborer. So the management can get rid of having to pay for idle time, set up time etc. The recommendations, if implemented, would result in better performance by employees since the rewards are based on not only productivity or profitability but also on how can rewards improve the overall performance of the firm. Introduction Compensation management is one of those areas that have always been considered from the point of view of the organization. This has been one of the major concerns that the management had to take care of not only to ensure smooth functioning of the firm but also in order to reward the labor force as well as the employees in lieu of the individual jobs one performed for the firm. From the perspective of Human Resource Management, strategy refers to a plan that helps in the achievement of a goal (Bogardus, 2004). The author further says that compensation strategy should contribute to as well as support the ability of the firm to meet is goals by attracting as well as retaining qualified employees. On the other hand, Snell and Bohlander (2011) have been of the opinion that strategic compensation refers to the compensation of employees in ways that augment the motivation as well as growth among employees and also simultaneously ensuring that the efforts put forward by the employees are channelized so that a fitment can be made among the efforts and the objectives of the organization. In this regard, Martocchio (2011) has noted that compensation may be regarded as a tactical decision that should support the strategy of the firm. Determining the compensation strategy of a firm involves the knowledge of various attributes from the point of view of the firm – the goals – both long term as well as short term, the projections, the core competencies of the firm, etc (Snell & Bohlander, 2011). Thus, in order to derive the right compensation strategy of any firm, the first thing to do is to come to get an understanding of the firm one is dealing in, the number of employees, the type of operations it is in, the sector to which the firm belongs, the regional perspectives, and last but not the least the objectives of the organization. In this case, the firm is from the manufacturing sector, and obviously growth oriented, and has 120 employees. Thus the focus of the compensation strategy throughout the rest of the report would be on these parameters which would be repeatedly referred to, in order to ensure that the compensation mix has the right fitment with the firm the present study is dealing in. The factors that are normally considered while devising a reward strategy, as explained by Chingos (2002) include the pay, benefits, and career prospects. The present report is prepared keeping in mind the objective of the task of presenting before the HR Head as well as the management at large a compensation strategy that is best suited for our firm, a manufacturing firm, with 120 employees. The report attempts at providing various types of compensation strategies available to the firm before boiling down to the best one that is suited for the context. Among the various compensation strategies available, some of the leading ones discussed in the present study are as follows: Component based compensation system including pay, benefits and career prospects is one of the leading ways to reward employees. Another way to rewarding employees is the gain sharing method which aligns the firm’s goals with that of the individual employee. Competency based pay is also a very effective way of rewarding employees since this method uses the skills, knowledge and other functional factors to reward employees. Research Findings The present problem that needs to be answered in the course of this report, it is obvious that before suggesting the best compensation strategy for the firm, extensive research be done on the options available to a company with 120 employees and the company being in the manufacturing sector. Thus it is important to write down the research findings that would provide the base for the compensation strategy best suited for the firm. There are quite a few findings of the study. However, these findings have been categorized under three main headings so that the findings adhere to the parameters on which major compensation strategies are based. Moreover, the focus of the report is to understand the parameters on which to base the findings so that these are objective and is subject to minimum possible amount of bias. Also, ideally a firm should be in a position to choose from various alternatives – something which the findings would support with requisite academic content from books, journals etc. Finding Number 1 Based on the study on the area of strategic compensation, the first point to be noted is that, as mentioned above, reward strategy is basically incumbent on three factors – pay, benefits and career prospects (Chingos, 2002). Pay is the most important determinant among the three factors mentioned in the list. However, the pay can be made in various ways, such as the calculation of the pay can be based on various formats. In the context of the manufacturing sector, the labor force is normally paid on the basis of piecemeal rates and commission at the individual level, bonus as well as productivity sharing at the group level, and ultimately profit sharing as well as equity sharing at the organizational level, whichever the management of the organization finds best (Sharma, 1992). Pay, in turn, is determined based on various factors. The rate of pay is determined by the following criteria as discussed by Henderson (2006) given as under: Level of knowledge as well as skills required Nature of business Power of union Capital or labor intensive Management philosophy Profitability of the business Demand and supply of labor force Tenure of employment Stability of employment Benefits are other allowances that are normally non monetary by nature (Bhatia, 2003). These non monetary benefits may generally include insurance, medical allowances, free or subsidized lunch, pick and drop facilities etc. Bhatia (2003) further reports that these benefits have shown to be fruitful for firms of various nations in retaining the labor force. Bogardus (2004) has mentioned in his book that benefits are basically indirect compensation. These indirect ways of compensating employees has been proved to be beneficial both for the employer as well as the employee. Moreover, benefit plans can provide both flexibility as well as choice for employers (Mathis & Jackson, 2009). Career prospects is yet another important consideration that firms have to evaluate while fixing the compensation of employees. The prospects of growth or so to speak whether the specific job shows a distinct career path is indeed an important determinant in this regard. In this regard, Milkovich, Newman and Ratnam (2008) have suggested the concept of total reward system, which is somewhat akin to what other scholars have suggested. Thus, given the nature of business that our firm is in and also the number of people we currently employ, the employees can be paid in a piecemeal rate. However, we should also ensure whether hourly payment rates would be more feasible for both the management as well as the employees of our organization. Also, not all of our employees are laborers and a substantial amount of the work force comprises managerial employees, who cannot be paid a piecemeal or hourly pay. In this regard, the piecemeal rate basically refers to paying the labor force based on the number of units they produce. This is very well applicable in our case. However, since ours is not a seasonal product, thus we would need the labor force to work for us as well as produce for the whole year puts to question whether a basic and variable based pay would be more suitable for us. Analysis Since the three main determinants of the reward strategy mentioned includes pay, benefits and career prospects, it is implied that a reward strategy as suggested by (Chingos, 2002) is a holistic one that not only includes payment in monetary terms but also includes other non monetary benefits which are as important as the monetary rewards. So, from the view point of our firm, this serves the purpose better than the piecemeal rate of payment which only covers a reward system based on productivity. Finding Number 2 The second major finding in the domain of compensation management that has been seen is the concept of profit sharing as compared to the newer concept of gain sharing. Berger and Berger (2008) has come up with an argument that as far as the compensation strategy is concerned, gain sharing can prove to be a much more realistic as well as better and also appropriate way of compensating employees. Their argument is that whereas normal profit sharing leads to calculating the pay based on solely the financial profitability of the firm or of its products, gain sharing uses ‘line-of-sight’ method to calculate the compensation of employees. The differences that crop up when we calculate the compensation based on gain sharing basis indicate that this is a much better way of compensating employees. Moreover, Berger and Berger (2008) suggest that the concept of gain sharing has taken into consideration the aspects of alignment of organizational goals, targets, communication as well as involvement of employees in reaching the goals of the organization. This can be compared with the purpose of using the profit sharing method which postulates that the pay is based on the sharing of profits with the employees. In other terms the profit sharing mode of paying employees is only based on the financial perspectives and leaves out on all other considerations. Also, Berger and Berger (2008) insist that the gain sharing mode of paying employees is suitable for small as well as medium firms that have stand alone units and not a large labor force. The above statement is just in congruence with the kind of firm ours is. Thus it is clear that as per the dictates of Berger and Berger (2008), the concept of gain sharing can be applied to our firm in determining the pay of our employees. Analysis The finding that gain sharing is better than profit sharing because of various reasons including that of the alignment of goals of the firm with that of the employee, pronounces mutual benefit and can thus be adopted for our firm. Finding Number 3 The third major finding in the area of compensation management is that of the competency based pay for the work force of an organization. Upadhyay (2009) is of the opinion that the development of competency based models of rewarding employees is relatively new to the corporate sector, though the effectiveness of this specific model has already been widely accepted by the academia as well as the industry alike. Upadhyay (2009) further notes that, while the other major functions of the Human Resource department of an organization like selection and recruitment, training as well as development, employee evaluation etc have been done through the help of competency based models, the determination of remunerating employees is a rather later inclusion in this area. Upadhyay (2009) further suggests the process by which employees may be justly compensated for the jobs they perform for their organizations using these competency based models. The concept of competency-reward linkage is dependent on the factors like knowledge, skills, critical behaviors etc. However, Upadhyay (2009) also warns that the effectiveness of the competency based models of rewarding employees should be determined first before actually executing the plan. In this regard, the concept of validity, reliability and participant credibility become important determinants. In the light of the concept suggested by Upadhyay (2009), the employees of our firm may be rewarded from the perspective of the competencies that exhibit at their workplace. Of course, as warned by the author, the effectiveness of the model or even the applicability of the same has to be ensured first. Analysis Since the competency based pay takes into consideration the competency for rewarding them, thus it is understood that the skills or abilities of the employee is directly commensurate with the payments made. So, from the viewpoint of our firm we can map the competencies of employees and pay them accordingly. This can serve as a stand alone function and unlike other models that work as a framework or put forward the various components to be paid for, here it is just competencies and not based on any standardized. This way we can ensure a higher level of accuracy in terms of the payments made to our employees. However, this would not take into consideration the factor of productivity and be exclusively concerned with competencies that one possesses. Recommendations Given the findings from the texts as well as researches put forward by various noted authors as well as researchers in the area of compensation management as well as strategic compensation, the following recommendations may be made in fitment with the overall structure of our firm: Recommendation 1 Our firm may further ponder about whether the present rewarding system may be replaced by one that is based on piecemeal rates – at least for the products that are seasonal. That would save money on the payments that have to be made to the labor force. Moreover, piecemeal rate of payment may prove to be a more effective mode of payment for our labor force given that then the idle time of the labor force does not have to paid for, as is in the case of hourly payments of the labor force. However, reward system of the managerial employees should be made based on a different format. Recommendation 2 If the management thinks of rewarding on a uniform scale throughout the organization, then the management may contemplate taking up the concept of gain sharing and not profit sharing. As stated by Berger and Berger (2008), the concept of gain sharing is suited for stand-alone and small as well as medium sized organizations like ours. This would help both the management as well as the employees get rewarded based on the gains from the efforts put in by the employees, apart from aligning the efforts of the employees with the goals that the company has. Recommendation 3 Competency based systems may also be given due consideration. However, since our company is a manufacturing unit, skills are of high importance. Also, as far as competency is concerned, employees of the same level may resist being paid differently and thus in order to prove their competency, a better approach would be the piecemeal approach, which would itself prove their competency. Recommendation 4 Given the total number of employees, the nature of offerings that our company has, it is best to go for the gain sharing approach to compensating employees, though other approaches are also feasible. This would motivate employees to perform better and the evaluation would also not be restricted to only financial considerations. Conclusion The report is based on the various compensation strategies available to our firm for rewarding our employees. Among all the major strategies evaluated, it has been found that the concept of gain sharing best suits the purpose of our firm, the nature of the functions we are into, as well as the factors of motivation, efforts on the part of the employees and also the right way of evaluating or rewarding the employees. As is clear from the study, though all the major ways to compensating employees discussed in the study may be used or even applied to some extent of success, a better level of success is likely with the gain sharing model of compensating employees. Summary of Benefits The recommendations are based on the following lines: Piecemeal rate of paying employees is suited only for laborers given that this policy allows the management to pay the laborers to pay on the basis of productivity. A uniform compensation system throughout the firm would call for the introduction of gain sharing. This would also help motivate the employees better. Competency based pay may also be considered given the high dependence on skills by our firm since this would give the management the opportunity to pay employees on the basis of the skills the employee possesses. References 1. Bogardus, A. (2004). Human Resources JumpStart TM. Alameda, CA: SYBEX 2. Snell, S. & Bohlander, G. (2011). Managing Human Resources. NY: Cengage Learning 3. Martocchio, J. (2011). Strategic Compensation: A Human Resource Management Approach. New Delhi: Doris Kindersley 4. Chingos, P. (2002). Paying for Performance: A Guide to Compensation Management. NY: John Wiley & Sons 5. Sharma, B. (1992). Compensation Strategies and Export Performance of Small Manufacturing Firms in Atlantic Canada. Journal of Small Business and Entrepreneurship. Vol. 9 No. 2. January-March. 6. Henderson, R. (2006). Compensation Management in a Knowledge-Based World. New Delhi: Pearson 7. Bhatia, S. (2003). New Compensation Management in Changing Environment: Managerial Remuneration and Wage and Salary Administration. New Delhi: Deep and Deep Publications 8. Mathis, L. & Jackson, J. (2009). Human Resource Management: Essential Perspectives. OH: South-Western Cengage Learning 9. Milkovich, G., Newman, J. and Ratnam, C. (2008). Compensation. New Delhi: Tata McGraw Hill 10. Berger, L. & Berger, D. (2008). The Compensation Handbook: A State-of-the-Art Guide to Compensation Strategy and Design. USA: McGraw Hill 11. Upadhyay, S. (2009). Compensation Management: Rewarding Performance. New Delhi: Global India Publications Pvt. Ltd. Read More