The compensation plan should further the firmâ€™s strategic aims â€“ management should produce an aligned reward strategy. In other words, management should look into and plan to construct a total portfolio of reward programs that all link to both short and long term business success, drive shareholder value, encourage the behavior that we need, and deliver true value to employees. The employerâ€™s basic task is always to create a bundle of rewards â€“ a total reward package â€“ specifically aimed at eliciting the employee behaviors the firm needs to support and achieve its competitive strategy.
Exactly how the firm will use its pay plan to further its strategic aims will manifest itself in the firmâ€™s pay policies. The HR or compensation manager will write the policies in conjunction with top management in a manner so that the policies are consistent with the firmâ€™ strategic aims. For example, will the firm be a leader or a follower regarding pay? A top hospital like Johns Hopkins might have a policy of starting nurses at a wage of 20% above the prevailing market wage, as might the Hotel Paris.
Paying higher salaries is no guarantee that the employer will be able to hire more qualified employees, since other factors may influence the quality of the people it hires. For example, in a study of public schools, the researcher found that for nonunion school districts there was a statistically significant relationship between teacher salaries and that school districtâ€™s probability of hiring well-qualified teachers. The researcher did not find a pay â€“ teacher quality relationship in unionized school districts.
Whether to emphasize seniority or performance is another compensation policy issue. For example, US federal employees get raises based on longevity. The government groups jobs into grades based on things like skill and education and there are 15 salary steps within grade. It takes 18 years for an employee to progress from step one to step nine. Seniority based pay may be advantageous to the extent that employees perceive may get the same raises as poor ones.
Other policies usually cover the pay cycle as well as how to award salary increases and promotions, overtime pay, probationary pay, and leaves for military service, jury duty and holidays. For example, pay cycle policies vary from weekly to monthly. In one survey 24% of respondents issued weekly pay checks, 48% paid biweekly, 22% paid twice a month and 5% paid monthly.
Salary Compression: How to handle salary compression is another policy issue. Salary compression, which means longer-term employeesâ€™ salaries are lower than those of workers entering the firm today, is a creature of inflation. Prices and starting salaries go up faster than the companyâ€™s salaries, and firms need a policy to handle it. Writing one is tricky. On the other hand, you donâ€™t want to treat current employees unfairly or to have them leave with their knowledge and expertise. However, mediocre performance or lack of assertiveness not salary compression, may explain some low salaries. One policy is to install a more aggressive merit pay program. Others authorize supervisors to recommend â€œequityâ€ adjustment for selected employees who are both highly valued and victims of pay compression.
Geography also plays a policy role. Cost of living differences between cities can be considerable. For example, a family of four might live in Miami for just over $39,000 per year, while the same familyâ€™s annual expenditure in Chicago or Los Angeles would be over $56,000.
Employers handle cost-of- living differentials in several ways. One is to give the transferred person a nonrecurring payment, usually in sum or perhaps spread over one to three years. Others pay a differential for ongoing costs in addition to a onetime allocation. For example, one employer pays a differential of $6,000 per year to people earnings $35,000 to $45,000 when transferred to a higher cost of living city. Others simply raise the employeeâ€™s base salary.