Compensation & Benefits Management
Compensation and benefits system often becomes a crucial element for the company’s competitiveness in the market. Compensation can be defined as the combination of the indirect and direct payments, which aim to motivate people to join the company and to stay there, contributing to the achievement of organizational objectives. Its impact on the organizational effectiveness is not limited by the productivity increase only. Effective compensation system, which is aligned with the overall company strategy and vision, reinforces the understanding of company objectives and helps all people in the organization to understand what they need to achieve and what the highest priorities for the company are. Moreover, compensation and benefits serve as a valuable mechanism, which can emphasize or reshape current organizational culture and behaviour. Through the system of benefits and payments, it is possible to communicate to the workforce the standards, which best reflect the current vision of the company and its market position. Individuals, in this case are expected to alter their behaviour in a way, which is best for the company and fits into its strategic organizational culture.
Employee compensation is much more complicated than just a salary. It consists of the whole system of bonuses, incentives and benefits, which often become the major expense for the company. However, the way compensation and benefit system is structured and its effectiveness in the majority of cases becomes the determinant of success in attracting and retaining talented and productive employees. Although competitive compensation system is important for the success of any organization, its design and planning always faces a trade off. On the one hand, attractive compensation is one of the key factors, affecting employee satisfaction. However, on the one hand, there is a constant pressure to reduce labour costs, since in some companies they may account for as much as eighty percent of the operating expenses. Therefore, an effective compensation system has to maintain the balance between satisfying the needs of the workforce, to establish a competitive level of compensation, in order to ensure that employees will not leave for a competitor company, and to keep the expenditures on compensation within certain limits.
The major components of any compensation system can be divided into monetary and non-monetary. It can be further classified into psychological satisfaction factors, direct monetary payments and indirect monetary reward. In order to design a successful and comprehensive compensation package, it is necessary to consider all three elements.
Direct monetary payments are the most straightforward form of compensation. It involves a direct monetary reward for the work done during a certain period of time. Direct monetary payments are a discretionary income for the employees in the form of a salary, a wage or a commission, and without distinction as to whether it is paid by the month, hourly or by any other method. Indirect monetary rewards, also referred to as benefits, do not directly result in the monetary income for the employees. This category often includes services, such as subsidized meal plans or free parking, and some form of protection for the people, who work in the company, such as insurance. Lastly, psychological satisfaction refers to the ability of an individual to derive pleasure from the work performed and from the overall environment in the company. This category usually includes promotion opportunities and recognition, fair appraisal, training and relationships with other people in the company. Although, the distinction between the three categories is quite clear, they are inextricably interconnected. Therefore, it would be a major mistake to consider one form of rewards, without paying close attention to the others. Thus, psychological satisfaction defines the way people interpret direct payments, while direct compensation can influence the perception and prioritization of psychological satisfaction factors. Indirect compensation also affects employee expectations both in terms of direct rewards and psychological satisfaction. Hence, an effective compensation system should have a balance between the three types of compensation and refrain from concentrating on one of the categories only.
Despite the general need to maintain a balance in the definition of the compensation and benefit system, every company adopts its own compensation and benefit philosophy, which includes company’s priorities and objectives. Therefore, the design and implementation of the reward system should be closely connected to the overall compensation philosophy. Inability to adhere to the compensation philosophy would send mixed messages to the employees, therefore the compensation system would fail to achieve its goal of communicating strategic plans and setting company priorities through the payment mechanism. Moreover, as the design of the compensation package is always constrained by the available resources, it is not possible to satisfy every need of the employees. In this case, it is important to convince the workforce, that all their needs and desires are recognized, however, only those, which are consistent with the compensation philosophy, can be implemented.
The basic definition of pay architecture, classifies it as a grouping of jobs, with corresponding pay ranges, which reflects job hierarchy and pay delivery. In defining pay architecture, companies often group some jobs, which are paid approximately equally, into pay grades. Pay grades are usually based on job evaluation and job market information. They facilitate and simplify employment process, since salaries do not have to be negotiated individually, but can be assigned based on the respective range. The grades are usually two-dimensional, where the vertical component defines responsibilities and requirements, while the horizontal one shows the corresponding monetary reward. Having defined pay grades, companies calculate pay ranges, or the minimum and maximum payment levels for each grade. The amount by which a person, who earns the maximum, is making more than the one , who earns the minimum in the range, is called a pay width. The width is used in determining the range of the compensation, and can be established based on the needs of each organization. Moreover, the company can adopt either an external or an internal equity approach to the definition of the compensation level. The former method implies that the compensation strategy is created based on the standards in the respective industry or among competitors. The latter, on the other hand, evaluates a certain job within the organizational hierarchy by comparing it to the compensation at senior and junior levels. The current trend is to reduce the number of grades, but to increase the corresponding ranges through the process of broadbanding in order to flatten organizational structure and to develop more flexibility (Mathis & Jackson, 2009).
An important aspect to consider in defining the compensation plan is the ratio of base pay to incentive pay. It is largely determined by the impact of the individual employee on the results produced, by the possibility to quantify performance and by the overall company objectives. Thus, in an R&D department, the base salary should be high, compared to the incentive pay, since individual effort does not always directly impact the success of the research. For a salesperson, the incentive pay should be higher than the base salary, since it gives additional motivation to gain and retain customers.
Determining the benefit components is also crucial for a successful compensation system. Benefits can be divided into five categories: retirement benefits, insurance, payment for time off work (vacation, sick leave etc.), employee services and payments, guaranteed by law (Grobler & Warnich, 2006). The combination and extent of these benefits should be defined within the framework of a particular company, taking into consideration national and organizational cultures, as well as company strategic orientation.
As the largest city’s employer, Holland Enterprises should show commitment to its employees. Moreover, since the workforce of the company accounts for as much as 3500 people, the company is very much dependent on its workforce. Therefore, the loss of 25% of the staff is a serious issue for Holland Enterprises and might significantly hamper its growth and competitiveness in the future.
The first step in the redesign of the existing compensation policy is to understand the problem with the current one. An employee survey could pinpoint the major reason for dissatisfaction, such as low wages, inappropriate level of incentives or the absence of a strong benefit system. The assessment areas in this case are not limited to the monetary compensation and benefits only. Holland Enterprises should consider the whole system of compensations, thus accounting for benefits, direct monetary rewards and psychological compensation. Such approach is crucial for a successful reward strategy, since it helps to balance the views on the compensation system and allows accounting for the interrelatedness of its elements.
In the next step, the current compensation and benefit system should be evaluated based on the external equity approach, in other words, it should be compared to the industry and competitors’ standards. The use of benchmarking can be useful for understanding the key success factors of the compensation philosophy of the competitors, so that further areas for improvement can be identified.
Having understood the needs of the employees and the common compensation practices in the market, the new compensation strategy should be created with respect to the company philosophy. Moreover, the need for compensation improvement and commitment to the employees should be emphasized in the company strategy and communicated to every person in Holland Enterprises.
Since unfairness has been quoted as the major problem of the current compensation system, the design process of the new packages should also incorporate modified metrics for performance evaluation. Unless it is completely clear for the employees, how they are being assessed, any compensation structure will be perceived as unfair. Holland Enterprises should also clearly set company objectives and define their compensation accordingly. Thus, if productivity is the core principle of the business, the ratio of base pay to the incentives should favour the latter.
Once all the steps in the strategy are completed, the new compensation system can be implemented in practice. It may be helpful to test it on a small group of employees first, in order to obtain their feedback and improvement suggestions. If this step does not reveal any major problems with the system, it can be further implemented companywide. However, the performance of the new compensation and benefits system has to be monitored regularly by measuring employee turnover rate and their satisfaction. Such approach will help Holland Enterprises to control their compensation strategy and to make sure that it reflects the current market requirements and employee demands.
Grobler, P. A., & Warnich, S. (2006). Human resource management in south africa.
(3rd ed.). London, United Kingdom: Thomson Learning.
Mathis, R. L., & Jackson, J. H. (2009). Human resource management. (13th ed.). Mason,
OH: South-Western Cengage Learning.