Compensation Decision-Making in the Company

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Compensation reflects the relative importance an organization attaches to an employee. It is a tangible expression of the perceived value of an individual with respect to the role he/she holds within the organization. It influences an individual’s lifestyle, position within society, and the stature held among peers, family members, and friends in general. Compensation decision-making is often a complex and emotionally involving process that confronts the management of any organization (Timothy, 2009). Often it is used as a retention strategy whereby most valued employees are awarded reasonable compensation which makes them want to stay more. Equitable compensation is therefore vital in engendering trust and credibility in an organization’s management (Timothy, 2009). While the likelihood of compensation driving may be minimal, Inequitable compensation often lowers the morale of employees and make them feel that their efforts are unappreciated.

Compensation achieves several functions assisting in the organization’s recruitment, job performance, and job satisfaction within the organization. Wages and salaries structure is important for employee retention as due to stiff competition if the inappropriate salary is not awarded, then the employees will go to other organizations offering higher salaries. Compensation is based on a number of factors (Jones & DeCottis, 2010). These factors dictate the level of compensation offered to an individual within an organization. These include the position being held by an individual, the job description assigned to the individual, and the worth of that job to the functioning of the organization. Compensation, therefore, begins with job analysis. Job analysis is defined as a structured procedure to analyze the requirements for the role and profile associated with that particular job (Jones & DeCottis, 2010).

Components of job analysis

The job position is determined by the elements used to refer to the organization’s designated responsibilities to an employee/position. It is an integral part of remuneration decision-making.(Jones & DeCottis, 2010). For instance, employees at the management level will tend to earn more than those at non-managerial levels. The two levels will also receive different non-monetary benefits which vary from one job grade to another (Grinstein & Chhaochharia, 2009).

Job description designates the duties and responsibilities associated with a job. It is often accompanied by an elaborate description of the skills necessary to do the job, the appropriate experience level, and educational requirements among others (Jones & DeCottis, 2010). These are useful benchmark tools in the grading of positions and hence assigning compensation.

Job Worth refers to the estimate of the value of a given position i.e. how much the job contributes to the organization. The job description provides a measure of the worth associated with the job. It is also known as job evaluation. The assigned roles and responsibilities contribute to the allocation of remunerations and bonuses. Determination of a job’s worth allows appropriation of necessary compensation (Kienast et al., 2009).

Job analysis is always important in determining compensation and benefits because it helps determine the skills level of an individual, compensation job factors, hazards an individual is subjected to within the work environment, assigned responsibilities, and education level among others (Jones & DeCottis, 2010). Thus, it appropriately assists in setting up compensation rates. A number of steps are involved in job analysis. These include;

  • Develop job description and specifications.
  • Verification of the information on job analysis with the employee engaged in the job and his immediate superiors.
  • Analysis of various aspects of the job.
  • Choice of representative samples.
  • Background review.
  • Decide how you’ll use the information since this will determine the data you collect and how you collect them.

Those charged with the responsibility of making compensation decisions must always act with good faith and diligence. The interest and needs of all stakeholders need to be taken into consideration. This is however not enough in itself. In the modern world, a number of factors influence the compensation decision-making process. Outsiders including legislators, regulators, and analysts among other stakeholders also play some role in making such decisions (Kienast et al., 2009). Organizations need to clearly demarcate the lines between what is considered poor pay and what is considered good pay. Working within this reality is fundamental if an organization is to retain its competitive employees.

Compensation decision making

Compensation is defined as the sum total of all forms of payments or rewards given to employees for performing various tasks aimed at achieving the objectives of an organization. Compensation decision making is a complicated process that includes making decisions on both fixed and variable pay/benefit offered to individual employees (Timothy, 2009). It generally forms the center of exchange between the employee and the employing organization. Compensation decision-making generally involves design, development, implementation, communication, and the evaluation of the reward strategy and process of the organization (Grinstein & Chhaochharia, 2009). Compensation assists the organization in a number of areas including;

  • Fair rewarding of past performance of employees talking into consideration their efforts, skills and competency levels.
  • Attraction and retention of highly performing employees/prospective employees.
  • Motivation of highly performing employees and reinforcement of positive employee behaviors/tendencies.
  • Aligning the future employee performance with respect to organizational goals.
  • A form of communicating to employees the worth attached to them.
  • Providing employees with a social status upon which to identify.

Strategic Compensation Planning

Strategic Compensation Planning offers a bridge between remuneration of employs and the policies, goals and objectives of the organization. It additionally serves in identification of the net monetary rewards assigned to specific employees (Jones & DeCottis, 2010). Various policy issues dictate the process of compensation decision making. This include, payment based on performance, payment based on seniority, raise in compensation alongside promotions, payment for overtime work and shifts, payment during probation and compression of salary over time whereby old employees in similar position to new ones may end up earning lesser than their counterparts (Timothy, 2009).

Compensation Administration Process
Figure 1: Compensation Administration Process

Factors determining compensation may be classified into two broad categories, internal determinants and external determinants.

Internal determinants include:

  • Employer’s Compensation Strategy, which may involve setting the compensation policy of an organization to lead or lag behind that of competitors within the industry in general (Grinstein & Chhaochharia, 2009).
  • Job worth, which prides an avenue for relation of the job under evaluation and the relative level of skills required (Grinstein & Chhaochharia, 2009).
  • Relative worth of employees, which espouses a performance based reward system
  • Ability of the employer to pay, which deals with the resources at the employers disposal.

External factors influence compensation decisions include the following (Grinstein & Chhaochharia, 2009):

  • Prevailing labor market situation: this covers the availability and quality of qualified personnel in the market. This is often dictated by the economic situation, regulations by the government and unions.
  • Area Wage Rates: often specific areas are associated with specific rates of wages. Comparison cannot be ignored in such cases and the organization may need to use it it ranging its salary scale.
  • Cost of Living: This is affected by various economic conditions affecting the area of catchment of employs and the company’s environ.

Inflation my also affect the lifestyle of workers and hence raise the need for an upward adjustment of workers salaries.

Competency-Based Pay in Practice

This approach to compensation of employees mainly focuses on skill/competency/ knowledge as the basis of compensation. A number of factors define the structure of this system. These include (Grinstein & Chhaochharia, 2009):

  • A system that defines specific skills, and a process for tying the person’s pay to his or her skill
  • A training system that lets employees seek and acquire skills
  • A formal competency testing system
  • A work design that lets employees move among jobs to permit work assignment flexibility.

However, while the system enables attainment of high quality, reduced absenteeism and accidents at work, it faces implementation challenges, and is often associated with incurring of costs for unused knowledge/skills. It is additionally complex and a lot of uncertainty surrounds its actual productivity level.

It is important to mention that the new era has brought along newer approaches to compensation decision making (Timothy, 2009). Compensation design decisions, practices and procedures need to strike an explicit evidenced balance between outsider influences and the needs/interest of the organization. The outside-inside approach to compensation decision making strengthens management of compensation and ensures that key compensation decisions are based on factual and rational basis (Jones & DeCottis, 2010). While some managers and administrators may argue that this does not guarantee organizations success, it must be acknowledged that Good decisions do not always lead to good outcomes and hence if the route you normally take to work is congested you may (rightly) decide to take an alternate route. If the alternate road is closed you are be late for class (a bad outcome), it does not necessarily mean you made a bad decision. Structured, modeled approach to decision making is therefore vital in making good decisions though good outcomes are not a guarantee.


In conclusion it is important to mention that Organizations are purposive, and that their creation is aimed at accomplishing a set of goals/objective. Achieving these goals require s collective efforts which brings together individual contributions. Compensation must take into consideration the contributions of each individual with respect to the position they hold and service they provide to the organization. Some vital information is necessary in helping the organization do that? These include:

  • What does or should an employ do?
  • What proficiencies are necessary for the job?
  • What output does the employ contribute to the organization?
  • How does this job/position relate to other positions in the institution?
  • What contribution does this job make to the organizations endeavor?

Answering these questions would open the doors to a deeper understanding of what it takes to determine appropriate compensation. Further all this must be based on the capability of the organization/budget availed to compensate employees. Generally, organization constraints must be weighed against other factors in making of decisions regarding employing compensation.


Grinstein, Y. & Chhaochharia, V. (2009). CEO Compensation and Board Structure. The Journal of Finance, 64(1), p 231-261.

Jones, J. & DeCottis, T. (2010). “Job Analysis: National Survey Findings,” Personnel Journal, 2 (10), p 805-809.

Kienast, P. et al. (2009). Employing Conjoint Analysis in Making Compensation Decisions. Personnel Psychology, 36 (2), p 301-313.

Timothy, R. (2009). The Future of Salary Administration,” Compensation and Benefits Review, 2001, p.10.

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