Compensating the employees is an important tool by which managers can influence the efficiency of a business activity. In management literature and in practice as well, a number of terms are used, such as: compensation, reward, salary, wage, payment, bonuses, incentives, commissions or indemnities.
In accordance to Dessler (2008), through the concept of compensation, one must understand that it is everything that an employee receives in return for their work from the institution where they are employed. Compensation is represented by the total financial and material income an employee receives , a systematic approach to provide monetary value in exchange for personnel’s performe work.
A company’s compensation philosophy is referring to a set of guiding principles driving the decisions taken in regards to compensation. The company would state in its compensation philosophy its methods in regards to employee payment. This philosophy usually differs from business to business and it reflects that organization’s Mission, Vision and Values. Every company seeks to employ and retain the best talented workers, and that request will be clearly reflected by its compensation philosophy.
An organization may use its compensation philosophy to state out what its total compensation package includes or it may be non-specific by not providing fixed numbers or percentiles, but instead focusing on the principles that guide how the company will pay its employees. It may describe therefore how wages may and should inspire the personnel working in the company, promising rewards and other incentives and bonuses to top performers but without mentioning the amount these bonuses may represent, to strive towards excellence. (Sarfin, n.d)
Effective personnel compensation strategies may set the stage for effective recruiting as well as for personnel retention. The strategy should articulate a different value proposition that would inspire and guide the employees in the right direction, providing a framework of principles that should outline the payment program.
The compensation strategy outlines the overall statements of belief around which to administer, design and communicate the rewarding programs. Among the most effective and important components of a compensation strategy is, first of all the statement of the overall objectives. Next, the compensation strategy should explain how the rewards compare with other organizational identifiers. The strategy should also outline the performance measures as well as the competitive reference points, the comparative group for the rewards package. Moreover, the desired competitive positioning should be stated in order to avoid lack of information.
As the employees will be looking for fair and equal treatment, there is the need to be stated in the compensation strategy whether the organization is for internal or external consistency, or try to balance between the two. Last, but not least, the program should be reviewed and refreshed frequently, and the responsibility for reviewing needs to be established from the beginning so that it will always be up to date and in accordance to the needs of the organization and the employees as well.
Compensational practices have a major impact on a company’s positive organizational climate; therefore much emphasis should be put on this from the very beginning. For instance, as a best practice policy, a successful organization should provide its personnel with at least one opportunity to earn more money based on their effectiveness and performance, in the form of profit sharing, gain-sharing or bonuses. If, for instance, a sales person manages to sell more products than its colleagues in a month, or establish some kind of record, the company could name them “employee of the month” and offer them a bonus or some kind of other monetary compensation for their performance on the job.
8 components of an effective employee compensation plan. (2013, March 27). Retrieved November 26, 2014, from HR.Blr.Com
Compensation Practices: Signals of Your Organization's Climate & Culture. (2010, March 2). Retrieved November 27, 2014, from https://greatworkplace.wordpress.com/2010/03/02/compensation-practices-signals-of-your-organization’s-climate-culture/
Dessler, G. (2008). Human Resource Management (7th ed.). USA: Prentice Hall.
DHS Compensation Philosophy. (2014). DHS. Retrieved June 2, 2003, from http://dhs.georgia.gov/sites/dhs.georgia.gov/files/imported/DHR-OHRMD/DHR-OHRMD_Employment_and_Selection/CompPhil.pdf
Sarfin, R. (n.d.). Compensation Philosophy Examples. Retrieved November 26, 2014, from http://smallbusiness.chron.com/compensation-philosophy-examples-14059.html
Wanjiru, M. (2012). Performance Based Compensation Practices Among Commercial Banks in Kenya. University of Nairobi.