In matters of Human Resource Management, compensation is one of the most crucial elements. Compensation refers to the rewards received by employees in return for the performance of their duties. Payment falls into two types, and these are intrinsic compensation and extrinsic compensation. Compensation departments aim to achieve three primary goals, and these are attracting employees, motivating the employees and retaining them. These elements are critical to the continued performance of any organization since without them, an organization simply collapses. One way that an organization can achieve these goals is by instituting strategic compensation schemes. A strategic compensation payment plan aims to improve organizational performance by motivating the employees to work even more (Milkovich et al., 33). This essay looks at the critical role played by strategic compensation in the human resource system.
In designing a compensation mechanism, a compensation department frequently focuses on three main aspects. These issues or objectives are internal consistency, recognition of personal contribution, and market competitiveness. A reward system is internally consistent when it identifies how important each job is as compared with other jobs in the same organization. Internal consistency focuses on ensuring that an employee’s pay is based on their position. On the other hand, market competitiveness in the payment system is critical to ensuring that the company attracts and retains the required quality of employees. Recognition of an employee’s contribution as an individual focuses on pay structure, the pay ranges, and the pay grades.
Strategic compensation plans are not only critical to human resource systems; they are also vital to the success of any organization in the long-term. Hence, these plans necessitate paying attention to detail both within the organization, and outside it (Milkovich et al., 45). The internal element refers to the company politics whereas the external element refers to remaining competitive.
Since the business environment is often very competitive, and employees have several options open to them beyond the organization, attracting and retaining employees becomes critical to business survival. Losing skilled and experienced workers because of not paying adequate attention to matters of compensation depresses the ability of an organization to perform. When the underpaid and disgruntled employees leave for greener pastures, an organization loses more than just its vital skills. These employees leave with the corporate memory hence damaging the morale and productivity of those they leave behind.
Strategic compensation plans are molded to attract the best people and keep them there. Strategic compensation is not merely about offering the biggest sum in terms of wages to the prospective employees. Instead, it also encompasses the formatting of the corporate compensation table to reflect performance as well as seniority, which are factors that do not always synchronize. In retaining employees who are junior in rank, it is imperative that the management pays attention to the supplemental compensation packages. The reason for this is that the junior employees’ performance and their value to the firm may be greater than that of the senior employees whose lengthy service with the organization may necessitate higher pay.
Payment or reward is accepted as one of the most popular means of motivating employees. A reward refers to an outcome of work that is positive to an individual. Organizations often reward employees whose accomplishments in terms of performance help the organization to achieve its objectives. Rewards may take two forms, and these are extrinsic and intrinsic. Extrinsic rewards are administered externally. That is, they are outcomes that are valuable in nature and another individual who is often a supervisor or a superior gives them. Some examples of these rewards include pay bonuses and time off. Hence, the motivation from these extrinsic rewards is externally generated.
Intrinsic rewards on the other hand stem from within the individual himself. An example here is the “high” that a person experiences once they can complete a task successfully. The person experiences a good feeling because he or she feels competent and in control of their work. Hence, the stimulus from the intrinsic rewards stems from within a person, and it is not dependent on others’ actions.
This last point is particularly significant since it represents the major flaw with traditional pay systems. The traditional basis for pay advocates for payment of people based on their positions as opposed to paying them based on the contribution they make towards the organization. When individuals feel that their efforts hardly get recognized, they may quickly lose their motivation. Hence, this realization has seen organizations in the modern day show an increased shift towards pay based on what a certain person brings to the entity. This model is a fundamental element in strategic compensation where salary computation is dependent on pay structures.
The compensation system should also have internal consistency. Internal consistency refers to that quality that employee pay is based on the worker’s position in the organization. The implication, in this case, is that individuals get equal pay for work that is of an equivalent value. It also ensures that the pay difference for work that is considered unequal is acceptable. Hence, following this model, the employees who have more qualifications, greater responsibilities, and whose duties are more complicated expect higher pay. Thus, if an employee demonstrates his abilities and skills or knowledge while proving to be efficient and successful, he will be likely to get a more demanding position with a pay rate that is in the same range. Pay will also not be the most critical factor, but it will provide the employee with the chance to move up in the organization.
In contrast, individuals have lesser qualifications, less complicated duties, and fewer responsibilities should be paid less. Internal consistency aims to develop procedures and pay structures that aid the organization in the accomplishment of its objectives. The employees and the managers also remain satisfied, and the organization abides by the laws and regulations in place about compensation.
Market competitiveness is another important element of a strategic compensation system. Market competitiveness is vital in attracting qualified candidates and retaining them upon their recruitment. The people in charge of compensation in an organization’s Human Resources system base their system on many activities including strategic analysis, compensation surveys, and compensation policies. Strategic analysis is used to establish the internal and external factors that allow the management to comprehend what is going on in the organization both at present and in future. In basic terms, it is an evaluation of the environment in which the firm conducts its business. The information obtained from this analysis aids the management to generate a strategy that works. Besides this, this information is critical to identifying opportunities that will lead to the development as well as the implementation of a robust strategic plan.
Some of the contextual factors that may affect the organization’s competitiveness include the lack of marketing, the quality of its services and products, the management, the competitors, and the presence of unions. These factors all affect the level of competitiveness that a company will have in the market to which they belong. However, many of these factors depend on the amount of resources the organization has at its disposal. The resources and financing available to an organization affect its production, marketing, and the type of employees it can afford to hire.
Another aspect of market competitiveness is that of compensation surveys. These surveys involve the collection and examination of data that focuses on competitors’ remuneration. Benefits are a critical aspect of the market competitiveness of a firm since if an organization offers lower pay than its rivals in the industry it will not attract high-quality staff and even those it has may flee. The next element of competitiveness is to integrate the company’s job structure and with the market pay rates as determined by the surveys. The purpose of this action is to ensure that the organization is not offering too much over the market rates hence reducing its profits.
In conclusion, it is evident that strategic compensation plays a critical role in human resources. Through having a strategic compensation mechanism for remuneration, an entity improves existing employee motivation, which is a core goal of human resources. The organization also ensures that by offering competitive salaries, which are aligned with the market, it can attract the required caliber of employees. Hence, this fulfills the selection role of human resources.
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