Question

Discuss the general goals of an organization's compensation system, including how a compensation strategy works to support the organization's business strategy.

Answer 1

Let's start our discussion of Compensation Management with a simple question: "What is compensation?" In very simple terms, compensation is the results or rewards that the employees receive in return for their work. Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc. Compensation can also include non-monetary perks like a company-paid car, company-paid housing and stock opportunities. Compensation is a vital part of human resource management, which helps in encouraging the employees and improving organizational effectiveness.

From a manager's point of view, the compensation package offered to a company's employees is essential not only because it costs money, but because it is likely to be the primary reason the employees work for the firm. Compensation packages with good pay and advantages can help attract and retain the best employees. A quick survey of employees about compensation is likely to expose an expectation that wages are fair and cover basic living expenses, keep up with inflation, leave some money for savings (perhaps for retirement) and leisure, increment over time. A company's compensation scheme also informs a great deal about the firm's values and cultures. Employees often look at what a company pays rather than what it says. In many aspects, people behave as they are rewarded.

General goals of an organization's compensation system

Budget Allocation

The strategy should include the organization's approach to allocating compensation dollars into salary and benefits. This budget allocation will determine how much of the total compensation budget will be spent on salary and what percentage will be spent on benefits and other incentives.

Allocating specific budget dollars to pay and benefits can help control labor, health care, and other miscellaneous benefit costs

Develop Salary Ranges

Develop salary ranges to ensure employee pay is competitive with other organizations. To be competitive, it is important to benchmark similar jobs within the same industry and to create a pay structure.

Benefit Package

Many organizations use benefit packages, in addition to salary, to attract and retain employees. Their goal is to be competitive with health, retirement, tuition reimbursement and other benefits because they understand that it can be the determining factor for a job candidate who is deciding whether to accept a position with an organization, or an employee who is considering leaving.

Develop Salary Ranges

Salary ranges can be developed internally by conducting research or utilizing sites like salary.com or payscale.com to determine average salaries in a particular geographic area. Smaller organizations often pay a vendor to help develop salary ranges, whereas larger organizations may have the HR resources to conduct the research internally. Regardless, it is important to look at all jobs and determine what work is done, how the job is slotted and establish salary ranges that match all job descriptions.

Performance Management System

It is important to have a structured performance management process to ensure employees are meeting corporate objectives and are assessed on a regular basis. This process should include the development of annual goals, annual performance appraisals and a structured process for coaching and mentoring employees.Compensation strategies can positively influence employee engagement and improve employee productivity.

Structured Administration

As with any other business process, the structure is important. Develop an annual review process, salary audit, raise process timeline and make sure someone is responsible for all compensation areas. A comprehensive compensation strategy can be the foundation for creating an environment that recognizes and rewards employee performance and helps to establish a strong culture of employee engagement. Organizations are only as successful as their approach to hiring the right people, setting clear expectations, managing performance and recognizing and rewarding employees for a job well done.

How a compensation strategy works

There are a number of components that need to be addressed when developing your compensation systems to ensure they align with your organizational strategy and objectives. One key to remember is that your compensation strategy must help to create the work culture you want. How you structure your systems and manage the internal and external equity issues will directly inform the culture of your organization.

A compensation philosophy is developed to guide the design and complexity of your compensation programs. This is done by identifying your goals and objectives, considering your competitiveness in attracting and retaining employees, your emphasis on ability to pay, internal and/or external equity and whether performance is tied to increases. Understanding what balance you want to achieve between direct salary and indirect benefits is critical in developing your overall total compensation approach

•    A compensation package is an important part of the overall strategic HRM plan, since much of the company budget is for employee compensation.
•    A compensation package can include salary, bonuses, health-care plans, and a variety of other types of compensation.
•    The goals of compensation are to attract people to work for your organization and to retain people who are already working in the organization.
•    Compensation is also used to motivate employees to work at their peak performance and improve morale.
•    Employees who are fairly compensated tend to provide better customer service, which can result in organizational growth and development.