The term compensation refers to 1) all monetary payments and 2) all goods or commodities used in lieu of money to reward employees. An organization’s compensation structure includes wages and/or salaries and benefits such as health insurance, paid vacations or employee fitness centres. Developing an effective compensation system is an important part of human resource management because it helps to attract and retain talented workers. In addition, a company’s compensation system has an impact on strategic performance. Human resource managers design the pay and benefits system to fit the company strategy and to provide compensation equity.
Ideally, management’s strategy for the organization should be an important feature and operation of the pay system. For example, managers may have the goal of maintaining or improving profitability or market share by stimulating employee performance. Thus, they should design and use a merit pay system rather than a system based on other criteria such as seniority.
The most common approach to employee compensation is job based pay, which means linking compensation to the specific tasks an employee performs. However, these systems present several problems. For one thing job based pay may fail to reward the type of learning behaviour needed for the organization to adapt and survive in today’s environment. In addition, these systems reinforce an emphasis on organizational hierarchy and centralized decision making and control, which are inconsistent with the growing emphasis on employee participation and increased responsibility.
Skilled based pay systems are becoming increasingly popular in both large and small companies. Employees with higher skill levels receive higher pay than those with lower skill levels. Also called competency based pay, skill based pay systems encourage employees to develop their skills and competencies thus making them more valuable to the organization as well as more employable if they leave their current jobs.
Whether the organization uses job based pay or skill based pay, good managers strive to maintain a sense of fairness and equity within the pay structure and thereby fortify employee morale. Job evaluation refers to the process of determining the value or worth of jobs within an organization through an examination of job content. Job evaluation techniques enable managers to compare similar and dissimilar jobs and to determine internally equitable pay rates that is, pay rates that employees believe are fair compared to those for other jobs in the organization.
Organizations also want to make sure their pay rates are fair compared to other companies. HRM managers may obtain wage and salary surveys that show what other organizations pay incumbents in jobs that match a sample of key jobs selected by the organizations.
Many of today’s organizations develop compensation plans based on a pay for performance standard to raise productivity and cut labour costs in a competitive global environment. Pay for performance also called incentive pay, means tying at least part of compensation to employee effort and performance whether it be through merit based pay, bonuses, team incentives, or various gain-sharing or profit sharing plans. Data shows that, while growth in base wages is slowing in many industries, the use of pay for performance has steadily increased since the early 1990s, with approximately 70 per cent of the companies now offering some form of incentive pay. The seniority based pay system used by most companies has come under intense scrutiny in recent years, with experts arguing that it creates an environment where poor performers tend to stay and the best and brightest leave out of frustration. A survey conducted by the Office of Personnel Management found that only one in four federal employees believe adequate steps are taken to deal with poor performers, and only two in five think strong performers are appropriately recognized and rewarded.
Pay for performance incentives are aligned with the behaviours needed to help the organization achieve its strategic goals. Employees have an incentive to make the company more efficient and profitable because if goals are not met, no bonuses are paid.
The best human resource managers know that a compensation package, requires more than just money. Although wage and salary is an important component it is only a part. Equally important are the benefits offered by the organization
Some benefits are required by law. Other types of benefits such as health insurance , vacations, and such things as on site day care or fitness centers are not required by law but are provided by organizations to maintain an effective workforce.
One reason that benefits make up such a large portion of the compensation package is that health care costs have been increasing so quickly. Many organizations are requiring that employees absorb a greater share of the cost of medical benefits, such as through higher co-payments and deductibles.
Computerization has cut the time and expense of administrating benefits programs tremendously. In some companies employees can change their benefits selections easily. Today’s organizations realize that the one size fits all benefits package is no longer appropriate so they frequently offer cafeteria plan benefit packages that allow employees to select the benefits of greatest value to them. Other companies use surveys to determine which combination of fixed benefits is ,most desirable. The benefits packages provided by large companies attempt to meet the needs of all employees.