Compensation and Benefit System in Management

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Productive interaction between managers and subordinates is largely achieved due to effective compensation and bonus systems offered to employees as incentives for high performance. These bonus payments are also a tool to retain talented workers, which is an important perspective in a flexible and competitive business market. Developing appropriate incentive strategies may help build trust and improve operational performance. On the example of Holland Enterprises, a large organization with many jobs, relevant principles for the implementation of compensation and benefits will be considered. The problem of high staff turnover, which is observed in this organization, is largely due to an inadequately coordinated system of bonus payments. Carrying out the necessary assessments and drawing up plans for the distribution incentive can make it possible to increase employee satisfaction with the working conditions in the company in question. Special benefits will be proposed, and equities will be analyzed in the context of their role and impact on the financial stability of Holland Enterprises. Creating a reasonably designed compensation and bonus strategy is an objective step in conditions of high staff turnover and the loss of profit due to steadily falling market positions.

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Compensation and Benefit Philosophy

Paying employees for productivity and high-performance outcomes is common in the business environment. Nevertheless, when analyzing the value of special bonus programs and their impact on labor productivity, one should take into account additional aspects that may affect the final results. According to Park (2018), evaluating the individual characteristics of employee incentive programs is a more important procedure than a general review of these strategies. In other words, a well-developed bonus payment plan can be more useful in terms of production outcomes than a program with basic payment schemes. Therefore, a comprehensive preliminary assessment of all the crucial conditions for the implementation of these projects is a mandatory task to achieve productivity and subordinates’ working capacity.

For Holland Enterprises, as a company that provides jobs to a large number of people, a compensation and benefit philosophy should be based on an honest approach. According to the results of the assessment, the staff turnover in the organization is caused by employee dissatisfaction with the existing principles for the distribution of bonuses. This factor is a significant incentive to build a more advanced compensation system in order to avoid personal turnover and maintain the company’s authority in the market. As Park (2018) states, most researchers on this topic agree that performance pay is one of the crucial motivators that stimulate employees to achieve high production results. This means that the basic principles for the distribution of compensation and benefits imply evaluating the work of a team with paying subsequent bonuses. However, it is not enough to allocate a particular amount of money or another incentive. It is essential to formulate a payment strategy in order to eliminate possible bias and potential subordinates’ discontent, which, in turn, impede productivity.

When taking into account the aforementioned aspects of the formation of a special payment strategy, one can argue that formulating a compensation and benefit philosophy is inextricably linked with the field of personnel management. Mabaso and Dlamini (2017) analyze job satisfaction as one of the main criteria that determine the success of any business organization. According to the authors, competent managers can influence this parameter through several incentives, and a bonus program is the most effective approach (Mabaso & Dlamini, 2017). Creating conditions for fruitful work is an element of a well-coordinated strategy, which is largely achieved due to the use of efficient management methods. In case the staff is dissatisfied with many working nuances, even bonus payments may be a weak motivating driver. Accordingly, a compensation and benefit philosophy implies considering the following principles:

  • Creating conditions for employees’ fruitful activities;
  • Promoting bonus programs as a means of motivating subordinates;
  • Distributing bonuses based on a fair approach to assessing performance outcomes.

Pay Structure Architecture

The specifics of bonus payments are largely determined not only by the current working conditions but also the accompanying factors affecting the creation of a premium strategy and its effectiveness in a certain working environment. To determine payments, managers should have statistical data on pay grades in the labor market as a whole and form an individual strategy. In terms of these levels, Plenkina and Osinovskaya (2018) note that bonus distribution may be based on a traditional principle of hierarchy within an organization. Key employees and managers are at the top grade because to attract and retain them, the level of salary should be above the market average parameter. The average payment indicator is a parameter of market trends and can vary slightly. Salaries and bonuses in this category are paid to most employees. In case the organization has difficulties with competitiveness, an increase in bonuses may compensate for low salaries. Finally, low-skilled personnel is related to the lowest pay since, at this level, labor costs to hire, train, and adapt subordinates are minimal. Therefore, payment grades vary based on the value of workers and their relevance to the company.

A pay range is a flexible indicator that depends on a number of criteria, including external market dynamics and internal organizational processes. According to Plenkina and Osinovskaya (2018), it is essential to control the highest and lowest payout points. Despite the aforementioned qualification levels, the range parameter may not satisfy the interests of employees even if there are differences in salaries and bonuses. Receiving maximum premium payments in a specific category means no growth until a worker receives a promotion. This, in turn, may lead to dismissal and transition to a competitive organization to obtain greater career opportunities and higher wages. Therefore, setting pay ranges is significant in the context of payout distribution policies maintained in most business companies to satisfy the staff and make the pay range wider and more flexible.

Pay width as the difference between the maximum and minimum coefficients in ranges is another significant component of a wage system. As Sanchez-Marin, Lozano-Reina, Baixauli-Soler, and Lucas-Perez (2017) state, the same or different widths can be set for different qualification grades. With a constant absolute and regressive relative growth of average values ​​in the range, the indicator in question will be the same for all grades (Sanchez-Marin et al., 2017). With all other options, this parameter will differ, which, in turn, will affect employee satisfaction. To maintain a fair approach to payments, the difference between the minimum and maximum value should be the same in all the categories involved. This will help avoid employee turnover due to employees’ dissatisfaction with wages and make it possible to develop a bonus system in accordance with the initial and stable pay width indicators.

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Ratio of Base Pay to Incentive (Bonus) Pay

The key principle of compensation management and bonus modeling in a business organization is that the remuneration of employees based on the results of their work should be optimal. A company that operates inefficiently in the market loses competitiveness. On the example of Holland Enterprises, one can assume that an unreasonable bonus system is one of the reasons for staff turnover. As Mueller, Ouimet, and Simintzi (2017) remark, incentive payment is a part of the general labor system that aims an employee to achieve indicators expanding his or her duties stipulated by the basic norm. In this context, bonus payments should be considered additional ones. A decisive influence on the ratio of wage components is exerted by the level of production at the enterprise and the quality of labor standardization inherent in it. According to Chi, Liao, Wang, Zhao, and Ye (2019), the lower these indicators and the more indefinite employees’ responsibilities are, the lower is the share of the tariff payment and the higher is an incentive. Therefore, it is crucial to consider the relationship between the basic and bonus payment systems.

As a rule, from a financial position, the ratio of base pay and to incentives is two to one. However, these parameters are average, and the assessment should be based on the individual characteristics of a particular enterprise. Holmström (2017) draws attention to non-financial premiums and notes that they can be an effective factor in the organization’s bonus policy. In order to determine the ratio of compensation payments, Chi et al. (2019) suggest paying attention to the bonus system of top managers and middle-class managers based on average monthly remuneration. The authors argue that if the final comparison results show a significant difference, such a bonus system is unfair and is a driver of discontent (Chi et al., 2019). Accordingly, a compensation and benefit program is more effective if it offers the ratio of incentive payments among employees of different ranks on the basis of equal principles while maintaining the difference in wages.

When analyzing the optimal ratio between basic and bonus payments, the expansion of production volumes is another important aspect that is to be taken into account. As Mueller et al. (2017) argue, “pay disparities between top- and bottom-level jobs should be increasing with firm size” if payments are calculated based on the marginal product (p. 3616). In other words, all employees have the right to rely on increased compensation if their organization expands the volume of production and involves new resources for the implementation of business objectives. Thus, a bonus payment policy based on fair correlation and the assessment of the company’s activities is a successful mechanism for distributing benefits among workers of different ranks.

External vs. Internal Equity

In the context of equity sources as factors influencing bonus payments and employees’ perceptions of proposed compensation policies, internal and external assets will be considered. At Holland Enterprises, the largest employer in its region, both financial systems play a significant role due to high business activities. However, when evaluating the optimal ways for the development of a bonus program, it is essential to take into account employees’ perception of specific profit distribution channels. According to Buttner and Lowe (2017), the features of internal pay equity affect turnover intentions more strongly than those of external one. This means that employees tend to perceive the company’s internal assets as a key factor determining the nature of its compensation policy. Consequently, the distribution of bonuses and benefits should be based on engaging available resources but not those that are achievable in a long-term perspective.

The analysis of external equity as a resource for compensation shows that such a practice complicated by high employee turnover is fraught not only with unreasonable costs but also a long search for bonus funds. Quas and D’Adda (2018) consider this topic and argue that even building potentially profitable partnerships with investors is not a guarantee of stable bonus payments. In addition, the authors note that controlling domestic capital is more convenient, particularly if effective planning methods are utilized (Quas & D’Adda, 2018). Due to an opportunity to compare bonuses within their organization, employees perceive such a bonus system more favorably than the one based on engaging third-party resources to pay for performance. Moreover, managers can control all financial activities more competently and utilize the available information on the amount of capital for its use as a source for the distribution of premium awards. Therefore, internal equity is a more important source in the context of promoting compensation and benefit strategies.

For Holland Enterprises, internal capital may be used as a resource for distributing profits based on such a criterion as staff satisfaction. Open data on available assets and giving employees an opportunity to rely on a fair distribution of performance payments are potential benefits in the context of current problems. The inability of the company’s management to provide subordinates with bonuses in an appropriate amount can be caused not only due to neglecting the principle of fairness but also assessing the channels of funding inadequately. In order to address these gaps, internal equity needs to be expanded and applied as a background to optimize the existing compensation policy. Thus, the revision of the bonus strategy and, in particular, the mechanisms for distributing equity funds may help increase the company’s authority among employees and improve the bonus system.

Principle Type of Benefits to Include

Since Holland Enterprises is a growing company with significant assets and a large number of jobs, creating conditions to meet the social needs of employees is most easily implemented through basic compensation payments. Due to the fact that there is a tendency towards a high staff turnover, more opportunities should be provided to subordinates in comparison with those in other firms offering more favorable terms of bonus programs. As a principle type of benefits to include in the company in question, increased vacation and sick leave payments may be a relevant solution. According to Gu (2018), who conducts research on employee preferences, this type of payment is one of the most in-demand in business enterprises. In addition, as the author states, in comparison with expensive health insurance services, this type of benefit is less costly for any company and, at the same time, no less relevant (the second most important indicator) (Gu, 2018). Access to free healthcare can be an individual decision of each employee, while increased vacation and sick leave payments are a significant factor that helps retain the staff and guarantee employees support from the management.

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In the context of staff turnover problems, applying a strategy for introducing a variety of bonuses is not the best option. Although Gerakos, Ittner, and Moers (2018) note that “multiple compensation objectives” are important initiatives, for a company that experiences the loss of profits, such a move would be extremely unprofitable (p. 105). In addition, the complexity of implementing a bonus program in different directions causes too many activities to maintain and control the relevant payments. Vacation and sick leave bonuses may be the first step towards optimizing the compensation system at Holland Enterprises. In addition, as Gu (2018) argues, the introduction of other payments is associated with difficulties due to the need to interact with third parties. For instance, employee health insurance or deferred bonuses encourage company managers to create partnerships with relevant organizations that provide these services. For Holland Enterprises, it is easier to involve internal resources to create a stable employee benefit plan as a mandatory social package. This step will be perceived positively by subordinates and provide an opportunity to increase performance indicators and, in addition, reduce turnover, which is one of the key strategic objectives.

Conclusion

The loss of market position and high employee turnover rates are objective reasons for developing sustainable a compensation and benefit systems. For Holland Enterprises, pay for performance is an ongoing strategy to reward employees and their productive activities. In addition, the equitable distribution of bonuses should be part of this program in order to stimulate subordinates’ fruitful work and demonstrate the interest of the management in retention. A pay structure based on grades, ranges, and width should not contradict with the reasonable distribution of bonuses among employees of different positions. The assets of internal equity are more acceptable than those of external. As a principal strategy, introducing a vacation and sick leave bonus program is the most acceptable solution due to an opportunity to avoid third parties’ participation and save resources.

References

Buttner, E. H., & Lowe, K. B. (2017). Addressing internal stakeholders’ concerns: The interactive effect of perceived pay equity and diversity climate on turnover intentions. Journal of Business Ethics, 143(3), 621-633.

Chi, W., Liao, H., Wang, L., Zhao, R., & Ye, Q. (2019). Incentives to move up: Effects of pay gaps between levels on employee performance. Human Resource Management Journal, 29(2), 238-253.

Gerakos, J. J., Ittner, C. D., & Moers, F. (2018). Compensation objectives and business unit pay strategy. Journal of Management Accounting Research, 30(2), 105-130.

Gu, G. W. (2018). Employment and the cyclical cost of worker benefits. Review of Economic Dynamics, 28, 96-120.

Holmström, B. (2017). Pay for performance and beyond. American Economic Review, 107(7), 1753-77.

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Mabaso, C. M., & Dlamini, B. I. (2017). Impact of compensation and benefits on job satisfaction. Research Journal of Business Management, 11(2), 80-90.

Mueller, H. M., Ouimet, P. P., & Simintzi, E. (2017). Within-firm pay inequality. The Review of Financial Studies, 30(10), 3605-3635.

Park, S. (2018). Pay for performance in modern compensation practices. Compensation & Benefits Review, 50(1), 21-35.

Plenkina, V. V., & Osinovskaya, I. V. (2018). Improving the system of labor incentives and stimulation in oil companies. Entrepreneurship and Sustainability Issues, 6(2), 912-926.

Quas, A., & D’Adda, D. (2018). High-tech entrepreneurial ventures seeking external equity: Whether, when, where… and why not? Economia e Politica Industriale, 45(3), 311-334.

Sanchez-Marin, G., Lozano-Reina, G., Baixauli-Soler, J. S., & Lucas-Perez, M. E. (2017). Say on pay effectiveness, corporate governance mechanisms, and CEO compensation alignment. BRQ Business Research Quarterly, 20(4), 226-239.

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