The effective compensation and benefit system contributes to optimize the organizational effectiveness. The organizational effectiveness enhances with the effective performance of the employees as it directly impacts on the business performance. The system of compensation is very important to contribute to attract and retain the strongest performers from the market (Abdullah, 2009).
The compensation and benefits system serves the needs of the organization to attract and retain the best employees and the motivation of these employees are very important for the growth in the productivity of the business. No one wills to work for such company lacking compensations and benefits for the employees (Sinclair, Leo & Wright, 2005). Budhwar, Al-Yahmadi & Debrah (2002) have stated that the trained and expert employees are sought out by the competitive firms that offer high pay and benefits.
The Components of Compensation and Benefit System
The effective compensation and benefits system consists of financial pay and claims for kinds of goods and services. Other than compensations, the employees must also be provided with the non-compensation rewards to influence the capabilities of the employees. The employers must ensure to make the employees understand that all important and needed tools for the successful job will be given to them. Therefore, to design an effective compensation system, the following major components are very important for the management of Holland Enterprises.
Compensation and Benefit Philosophy
Compensation and benefit philosophy is one of the most important components to design an effective compensation and benefit system for the firm. It can be defined as the statement of the organization about how it feels and takes rewards as worthy and what rewards it considered as important to be given along with what type of benefit the employees should receive on completion of certain milestones.
The philosophy of the company for the compensation and benefits is directly linked with different factors. These factors include the size of the firm, the financials situation, the market, the industry, objectives of the business and information from the salary survey. Additionally, the difficulties that the firm faces in finding the talented, skilled and qualified staff in line with the economy and circumstances to the business.
Therefore, to design an effective compensation system, the management must review its compensation philosophy to advances and change the philosophy based on the factors affecting the business. The markets conditions for the Holland Enterprises are very difficult in terms of finding the talented and skilled workers for long term commitment because of the uncompetitive compensation plan. It means that the competitors of Holland Enterprises are offering better pay, compensations and benefits to the talent in the marketplace. In these particular conditions, the management is needed to focus on its compensation philosophy to change it to meet the needs of the business in the market. Therefore, it is recommended to the managers of Holland Enterprises that they should:
Identify and analyze the pay and rewards strategies of the company
Identify how these strategies are supporting the business objectives and needs
Attracting more talent from the market
Motivating the employees to perform their best
Position in the market based on the pay structure, benefits and compensation opportunities for the employees
Test the current compensation philosophy
Identify that the current programs is fair for the employees
Test that the current system is equitable
Determine that either the program is communicated to the employees or not
Pay Structure Architecture
Another important component of the effective compensation and benefit system is the pay structure architecture. The pay structure and architecture is designed based on the ways in which it best fits with the goals and abilities of the enterprise to pay. Therefore, the management of Holland Enterprise should consider the following factors to design the pay structure (Henderson, 2006):
The market rate: At first, the management should identify the ongoing rate in the market to restructure the pay accordingly.
Job evaluation: Evaluate the job of each employee based on different factors such as job difficulties, bottom line affects, training etc.
Pay grading: Once the management is done with the job evaluation, it should upgrade the pay ranges or scale between the minimum and maximum level of pay for the certain job.
Structure criteria: Based on the pay range and scale, the management should then decide the structure criteria such as skilled based pay, proficiency based pay and unpredictable pay etc. For instance, the company should decide that either it will increase the pay based on the skills improvements or based on the competencies and capabilities needed for the particular job or even based on the accomplishments. The pay scale must possess the proper difference so that the employees can see the value for their improved performances and increased incentives (Henderson, 2006).
Ratio of Base Pay to Incentive (Bonus) Pay
Another important step in designing the compensation and benefits system is determining the ratios. Determining the ratio of base pay to incentive pay is very important to meet the expectation of the employees. The 100% of the salary received by the employees must be based on the mixture of base salary and bonus pay. The pay ratio must be higher than the competitors in the market (Bloom & Milkovich, 1998). The businesses risks are reduced with the effective strategy for base pay and incentives. It is considered that those organizations perform better that mainly rely on the incentives. Therefore, Holland Company should focus on incentives in the ratio of base pay to incentive pay to reduce the risks for the business.
Emphases on External Equity or Internal Equity
Equity is one of the most important components to be considered while designing the compensation and benefits system. Equity can be defined in many ways such the equity at workplace is the perception of treating all employees fairly and equally. Based on the equity for the employees, the compensation can be designed based on two types of equity include external and internal (Milkovich, Newman & Milkovich, 1999).
External equity is the perception among the employees of being fairly rewarding for the performances and jobs in relation with others having similar jobs and performances in other organizations. While, the internal equity is the perception of employees comparing their rewards for the jobs similar of what others having similar jobs within their company. The organization can loss its effectiveness in case of perceived biasness and unfairness either internally or externally.
The employees having feelings of unfair compensations can reduce their efforts or either leaves the company that resulted in damages to the performance of the firm. Therefore, based on the current problem, the management of Holland Enterprises should focus on the external equity. As the rate of turnover has increased and around 25% of the staff has lost by the company, it means that the other companies are offering better compensation and benefits for the similar type of jobs. Furthermore, the company is the largest employer in the city; therefore, to attract more employees and reduce the rate of turnover, the company should focus on the external equity and pay better compensation and benefits as compare to the other companies in the marketplace.
Principle Type of Benefits
For the effective compensation and benefits system, it is very important for the management of the company that it should increase its expanses in some of the major benefits to the employees such as medical care, health insurance, pension, holidays, vacations and leaves etc. The company should offer both short term and long term incentives to design the complex employment contract. The benefits must be competitive with the other benefit packages in the market to attract the best talent (Henderson, 2006). The wellness of the employees is very important to motivate them to perform better than before such as offering sick leaves and vacations. Furthermore, the employees should be ensuring with the proper investments for their benefit programs such as in health insurance and pension packages.
Before deciding the basic and additional benefits for the employees, the management should keep focus on its effects on the productivity of the company means it must be increased. Offering better compensations, vacations and sick leaves will increase the satisfaction of the employees that will result in reduction in absenteeism, turnover and the sense of safety and security will also be developed among them that will result in their improved performances.
Based on the components analysis of compensation and benefits system, the management of Holland Enterprises should raise the pay range and grades to achieve competitive advantage in the market because inefficient compensation system can increase the cost of the business rather than cost effective where, the efficient compensation plan including the discussed components will be cost effective in terms of controlling the cost of absenteeism and turnover. In addition, the company should also offer the health insurance and coverage program along with life insurance or disability insurance to increase the security. With these incentives, the company should also offer the flexible job schedule and sharing of work and create the sense of self-empowerment among the employees as all these incentives will contribute to the high performance, well-being and effectiveness of the company and thus, the company should increase the investment in all these areas.
Abdullah, H. (2009). Major challenges to the effective management of human resource training and development activities. Journal of International Social Research, 2(8), 11-25.
Bloom, M., & Milkovich, G. T. (1998). Relationships among risk, incentive pay, and organizational performance. Academy of Management journal, 41(3), 283-297.
Budhwar, P.S., Al-Yahmadi, S. and Debrah, Y. (2002). Human resource development in the Sultanate of Oman. International Journal of Training and Development, 6 (3), 198.
Henderson, R. (2006). Compensation management in a knowledge-based world. (10th ed.).
Milkovich, G. T., Newman, J. M., & Milkovich, C. (1999). Compensation. T. Mirror (Ed.). Burr Ridge, Ill.: Irwin/McGraw-Hill.
Sinclair, R. R., Leo, M. C., & Wright, C. (2005). Benefit system effects on employees’ benefit knowledge, use, and organizational commitment. Journal of Business and Psychology, 20(1), 3-29.