Compensations Role in Human Resources Management

Introduction

Modern organizations are constantly advancing human resources management to attain and sustain competitive advantage as well as increase returns. Studies indicate that adopting effective human resources practices leads to sustainable competitive advantage and increased returns in the organization¹. The best human resource practices that have been identified as critical to long-term sustainability and attainment of profits, as well as competitive advantage include employees training and empowerment, compensation and reward systems as well as benefits for employees. Moreover, human resource management practices related to compensation including job design, improvement of workers’ skills as well as increasing employees’ motivation and attitudes have an impact on the general performance in the organization².

The purpose of this research paper is to examine compensation as one of the human resources practices that are critical for improved organizations’ performance. Most importantly, the paper provides a deeper understanding of compensation practices as well as the role in promoting the organizations’ competitive advantage. As such, the paper examines the concepts of compensation practices and strategies, compensation systems design, criteria used to compensate employees, employees’ benefits as well as modern challenges that human resource managers face in their professional practice.

Compensation practices and design

When deciding on the best compensation strategy, factors such as employees’ needs and feelings have to be considered. Employees have diverse needs that organizations have to take into consideration when determining effective rewards. Essentially, employees will consider compensation as effective when the types of rewards meet their primary objectives³. The central argument is that fair compensation satisfies the needs of employees, motivates and improves performances. Therefore, compensation and work performance are directly related.

The most excellent compensation practices take into account internal business processes as well as environmental competitiveness. Internal balance in the compensation practices and design implies the organization’s activities and practices that ensure the attainment of goals. The internal business processes include human resource management practices that form the core basis of compensation. External competitiveness encompasses compensation practices in relation to industrial standards or regulatory framework. In most cases, compensation practices follow the regulatory frameworks set by the industry or legal authority. However, the organization must ensure that its compensation practices are geared towards attaining set goals in order to gain competitive advantage. In other words, compensation practices must be aligned with the employee’s general productivity as well as motivation⁴. The compensation strategy should enable the organization to achieve its set objectives.

Further, designing compensation strategy starts by acknowledging preferred outcome as well as goals for the organization. The philosophical approach to compensation is the processes in which compensation strategy is based on the desired outcome. In other words, the compensation philosophy considers a variety of factors including balancing indirect and direct rewards. In addition, devising different roles and responsibilities of employees as well as emphasizing on both internal and external equities are some of the factors to be considered in philosophical approach to compensation⁵. What is critical in the compensation philosophy is the attainment of goals, which determine the success of the organization.

In compensation design, direct and indirect benefits involve both financial and non-financial gains. Direct financial benefits include equitability of financial rewards such as salaries, wages and remunerations which increase depending on the rise in cost of living. Moreover, with different merits may increase benefits or bonuses, as well as fair commissions are classified as direct financial benefits. On the other hand, benefits employees receive from the organization include insurance coverage, life and health as well as disability benefits and social security settlements such as retirement plans, workers compensations, employment insurance and education services and they are classified as indirect financial benefits. In addition, payment in absentia including sick leave, education leave and compassionate leave, vacations, holiday and jury duty are characterized as indirect financial benefits.

Conversely, benefits workers receive from employers, including identity, authority, achievements as well as opportunities are characterized as non-financial gains. Other benefits which are classified as non-financial are justifiable practices and consistent strategies, competent supervision in addition to supportive management, which lead to practicable and good working environment. Moreover, flexible work schedules, alternative working arrangements together with modified environment are benefits from secure and contented working atmosphere. In fact, both financial and non-financial benefits are critical in the design of compensation strategies. As indicated, the organization will realize increased benefits when creative compensation strategies are put in place and workers comprehend these benefits⁶.

Equity is another important consideration in the compensation philosophy. Impartiality and fairness in the workplace are the practices of ensuring that employees are fairly treated. Employees as well as other stakeholders should perceive treatments offered by the organization as being fair and justified. In other words, both direct financial and non-financial benefits offered to employees have to be fairly distributed. Equity or fairness is classified as either internal or external depending on terms of payment. In external equity, the organization must reward employees in relation to what other organizations pay for similar roles, responsibilities and positions. Employees have to perceive the rewards as being fair in relation to the similar rewards other organizations offer for the same job or position. Essentially, external equity considers environmental factors in determining compensation.

Conversely, internal equity is the process through which organizations reward employees fairly relative to the work performance. Employees’ perceived notion that they are properly remunerated for the value of job done increases their motivation as well as effectiveness. In other words, internal equity considers factors relating to employees job performance, roles and responsibilities, as well as positions within the organization. By extension, internal equity considers the organizations work environment. Essentially, both internal and external factors are critical for the employees’ motivation and effectiveness, which in turn are significant for the attainment of the organizational goals⁷. The attainment of goals also determines success of the organization.

Linking compensation philosophy and organizations’ strategy

As indicated, various considerations have to be put in place while developing compensation strategy. Essentially, compensation systems should be linked with organizations objectives and goals. The major aim of compensation strategy is to build the required wok culture that is geared towards attaining organization success. In other words, ways in which compensation systems are managed considering both internal and external equity factors form the basis of the organization working culture.

Compensation philosophy provides a framework for the design of the reward system through the identification of the organization’s goals, strategies and objectives. Moreover, consideration of the organization competitiveness through increased performance forms the basis of compensation design and practices. Having knowledge on the achievement of direct and indirect rewards is critical for approach to compensation systems the organization has⁸. In other words, compensation philosophy forms the basis for the success of the organization. In essence, the compensation philosophy should be in line with the dimension of the organization.

In the case if the organization is small, compensation strategies should be simple and manageable. In addition, course of actions for the compensation strategies is understood and constantly practiced by executives and employees. As such, compensation strategy will lead to increased employees performance, which adds to the organizations’ competitive advantage. Therefore, linking compensation philosophy with organizations strategy adds competitive advantage to the organization.

Linking compensation practices and competitive advantage

Appropriate compensation strategy is one of the ways through which the competitive advantage of the company can be achieved. Decisions involving compensations should be incorporated within the business processes. The business process determines the level at which the company goals and objectives can be attained⁹. The compensation design system should be within businesses processes and contribute to increased competitive advantage.

In terms of compensation design, appropriate remunerations of workers increase the level of their participation that in effect increases productivity¹⁰. Further, suitable levels of employees’ participation strengthen the principles and ideals of the organization. The standards set by the organization directly correlate to the value created. As a result, the company competitive advantage is attained through values created by the organization.

Compensation strategy

The compensation system of an organization is established to accomplish several objectives particularly on the management of employees. Moreover, compensation system of an organization is set up to attract, retain and motivate employees. To attain these major goals, compensation system should comply with the regulations that govern the employees’ remunerations. Compensation system should also simplify the administration of employees as well as be cost-effective. The compensation system can only attract, retain and motivate employees when it is perceived to be satisfactory. Increased compensation of an organization will attract employees with skills and needed competence. As a result, employees are motivated towards attaining the desired goals of the organization¹¹.

The strategic choice of compensation influences the attainment of the goals of the business. Organizations should adopt a strategic choice that enhances the employees’ development and growth. Moreover, the firm should adopt the strategy that upholds culture of participation and empowerment within the workforce. In addition, organizations should adopt compensation strategic choices that develop culture of protection and reliability to employees. Most importantly, compensation strategy should increase business competitive advantage through sustaining production approach to development and improvement¹².

The components of compensation strategies

The variations in remunerations should be evaluated after the compensation philosophy has been aligned with the organization’s policies and culture. The determination of the differences is significant in addressing internal equity issues. The reason is that determining variations in payment ensures fairness in the manner in which the organizations reward employees. Differences normally exist in the way payments are made to experts, supervisors, executives as well as front-line workforce. While normalizing payments, several factors have to be put into consideration. One of the critical factors is the objective of the compensation program. In the objective factor, the functions of compensation plan aimed at attaining the organization success need to be addressed. Compensations should be closely linked to organizations’ performances in order to attain competitiveness and success. Moreover, elasticity in the work environment as well as benefits should be provided. Employees consider flexibilities in work environment as critical in their compensation benefits.

The other important factor is the market competitiveness. Compensations should be related to the market or industry in which the organization operates. In other words, wages and salaries should be based on the market rates. The organization rewards should be perceived as per or above the market rate in order to attain high performance resulting from motivation¹³. Moreover, benefits and incentives should also balance with what other organizations offer or within the required market rate. However, for the compensation strategy to succeed in attaining its objectives, other factors such as cost of living as well as the employees’ secondary needs have to be taken into consideration.

In addition, legal compliance is significant in the compensation strategy. The compensation system should be in line with the existing regulations as well as labor standards in various areas including equal payments, pensions, employees’ rights, insurance benefits, retirement benefits, occupational health and safety among other labor relations. Ensuring that compensation practices adhere to the labor regulations is significant for guaranteeing and maintaining good relations with the employees. While ensuring that compliance to the set regulations may seem to be time consuming, such practices are critical for long-term sustainability of good relations with workers, which in turn contribute to the success of the organization.

Moreover, compensation strategies should be linked to the organization resources. In other words, the available resources should determine the extent to which the organization rewards its employees¹⁴. High compensations require increased resources, which are limited in most cases. Therefore, average compensation would be appropriate for most organizations. However, performances should be directly linked to compensation at all times. In other words, performance is a significant determinant of compensations offered by the organization.

The impact of compensation within an organization

Most modern organizations are recognizing the employees’ compensation as one of the significant practices that increase benefits to the organization. Studies indicate that not only the employees benefit from such practices, but organizations as well. On the contrary, most organizations perceive employees’ compensations as being costly. However, the benefits surpass the costs involved. In essence, proper compensation ensures continuous flow of qualified staff with required skills and technical competence to keep organizations at the competitive edge¹⁵. The organizations have to recognize the fact that qualified staff with required skills and technical competence is the key driver for their growth and development. With current competitive environment, organizations find it necessary to keep such qualified staff as part of their workforce. In addition, organizations must remain flexible when it comes to the management of employees’ compensations and benefits.

On the part of employees, increased compensation and benefits ensure augmented productivity due to the satisfaction they receive from such benefits¹⁶. Well-compensated employees feel protected from social ills that may affect the work processes, which in turn may result in decreased performance. In other words, compensation and benefits that take into consideration needs of workers are critical in the general output of the employees. The general assertion is that there is a direct correlation between appropriate compensation and increased productivity. Essentially, compensation has a direct impact on the employees’ performances.

One of the major effects on the forms of compensation is that employees are motivated to attain the greater output. Good remunerations increase the worker’s motivation and job commitment that are translated into high performances. The forms of compensation also enhance the performance culture among the employees. However, these forms of compensation can hardly be determined without appropriate measurement procedures¹⁷. In the circumstances where the output cannot be measured, compensations have increased limiting factors. In other words, compensation should be based on some form of measurable output. The impact of compensation on output can be quantified through the process.

Increased efficiency cannot be separated from high performance and attainment of the organizational goals. Appropriate compensation raises performance among workers. In fact, the increased performances are the results of augmented motivation workers gain from appropriate compensation. The motivation will enhance effectiveness and efficiency among workers that will contribute to improved performance. The effect is a greater productivity and attainment of the overall goals of the organization. The major effect of appropriate compensation design system is the increased performance, productivity within the workforce and general attainment of the organizational goals¹⁸.

On the broad perspective, compensation practices impact the employees’ perception of culture and performance in the organization. The compensation design system of an organization communicates particular aspects that are directly related to the culture and performance, in particular, to the level on which the organization contends for outstanding talent. In other words, the compensation should reflect the employees’ talents, skillfulness, capabilities, and understanding of the working processes. In addition, compensation should reflect the reparation levels of other organizations. The organization’s success mirrors the extent of talent and skilled workforce within the organization¹⁹.

The compensation system reflects on the level in which the organization recognizes the contribution of individuals, teams and groups. Compensation practices such as offering bonuses to individuals with increased performances, portray the cultural aspect of the organization that values individualistic ideals. Under such circumstances, the organization will attract those employees with individualistic traits. On the other hand, compensation based on teams’ contribution portrays the collective values of the organization. Individuals that value collective ideals will be attracted to the organization. In general, compensation system and design communicate the values and beliefs of the organization regarding performance.

Compensation also influences general employees’ management procedures. The employees’ efficiency and effectiveness can be enhanced through appropriate compensation²⁰. In this case, appropriate compensation implies that compensation should be based on the market rate. In other words, suitable compensation that has effect on the workers’ attitude and motivation should be above the market rate. Effective compensation indicates the manner in which the organization values its workers as well as their needs. In addition, effective compensation increases productivity as well as the general performance of the organization²¹.

Compensation criteria

Performance-related pay option

The performance-related pay covers various forms of employees’ compensations that take into consideration the output of individual workers. In other words, workers are compensated according to the individual performance. The performance-based pay is applied in cases where workers can easily show a discrepancy in their productivity depending on the individual endeavor²². In such situations, performance-based pay is believed to have greater chance of increasing workers’ performance.

There are various forms of performance-based pay. However, the most common practice is the piecework pay where the compensations are based on each unit of output. Piecework pay is majorly applied in public institutions. The advantage of piecework compensation is that it prevents public wastage and less costly in terms of financial management. The greater disadvantage with this form of performance-based compensation is that it does not motivate workers particularly in the situations where the output cannot be measured.

The other form of commonly used performance-based pay is the result oriented pay. In this form of performance-based payments, workers are compensated according to the quantity of output or measured value. The compensation increases with the increase in the results²³. The result oriented pay is closely related to the merit pay where the compensation is pegged on the individual contribution in the general performance. Profit related pay is another form of performance-based payment where the organizations reimburse their employees depending on the level of profits or gains made by the company.

One of the major advantages with all these forms of payment is that the employees are motivated to attain the greater output. The forms of compensation also enhance the performance culture among the employees and within the organization. However, these forms of compensation can hardly be determined without appropriate measurement procedure. In cases where the output cannot be measure easily, performance based compensations have increased limiting factors.

Seniority and merit pay

The seniority pay plans are the process where employee’s compensations are increased based on the longevity of the employment. The advantage with seniority pay is that it increases the employees’ commitment to the organization. However, the form of compensation can be detrimental to high performing employees. On the other hand, merit pay is a form of compensation where the workers’ reimbursements are increased based on their performances. The form of compensation is critical to the increased performance of the organization as well as enhanced productivity by the workers²⁴. The drawback in the form of compensation is that the firm must undertake additional cost to attain the required performances. The most important determinant factor is the expected output of the workers. Other factors such as job assignment, level of motivation, costs involved as well as level of competency required are also considered.

Incentive pay plans

Incentive pay is the form of compensation that is based on performance. Individuals are motivated due to incentives provided based on performances²⁵. Any achievement of the assigned task based on the company’s objectives is rewarded by the incentive pay plans. The major weakness with individual incentive pay plan is that an employee may indulge entirely on personal pursuit of performance goals, which may result in harmful rivalry within the organization²⁶. However, the pay plan can be made effective through objective assessment of the performances as well as allowing the employee to be in control of the outcome.

Similarly, group based incentive payment plans are geared towards rewarding members of the team for accomplishing the goals of the organization. The group based incentive plans can be strengthened through the application of gain-sharing plans. Gain-sharing plans reward group members for attaining group goals that contribute to one particular area of performance such as better customer services. In all industries, both individual and group based incentive payment plans are widely practiced.

The principle-based executive compensation

In the context of an organization, an agency is an entity that acts on behalf of the principal. The principal, in this context, is the shareholders. The principal has the responsibility of compensating the agent that can either be a Chief Executive Officer (CEO) or any other entity hired by the principal to perform a particular duty. According to the agency theory, the agent must be loyal and obedient to the principle²⁷. The agents are compensated based on their loyalty that determines the level of performance. In essence, the organizations must apply the principle-based executive compensation strategies to ensure cordial relations between the agents and the principal. The advantage of the principle-based executive compensation is that it irons out the differences that may arise between the principal and the agent.

Conclusion

From the discussion presented above, the reasons for compensation becoming an increasingly important component of human resource management practice are numerous. As such, most of the modern organizations are recognizing the employees’ compensation as one of the significant internal business processes that enhance organization competitive advantage and success. Further, it has been found that both the organization and employees benefit from better compensation practices. On the contrary, compensations have been perceived as being costly. However, most organizations have realized that the benefits of good compensation practices surpass the costs involved.

In essence, proper compensation ensures continuous flow of qualified staff with required skills and technical competence to keep the organization at the competitive edge. The organizations have to recognize the fact that the qualified staff with required skills and technical competence is the key driver for their growth and development. With existing competitive environment, organizations find it necessary to keep such qualified staff as part their workforce. In addition, organizations must remain flexible when it comes to the management of employees’ compensations and benefits.

Moreover, increased compensation and benefits ensure augmented productivity due to satisfaction employees receive from such benefits. Well-compensated employees feel protected from social ills that may affect the work processes, which in turn may result in decreased performance. In other words, compensation and benefits that take into consideration needs of workers are critical in the general output of the employees.

References

Dinkin, E, “5 point plan: Five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.

Martocchio, J, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011. Web.

Richards, DA, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.

Shields, J, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009. Web.

Footnotes

1. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234. Web.
2. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
3. E Dinkin, “5 point plan: five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.
4. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
5. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234. Web.
6. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
7. E Dinkin, “5 point plan: five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.
8. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
9. E Dinkin, “5 point plan: five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.
10. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234. Web.
11. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
12. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
13. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234. Web.
14. E Dinkin, “5 point plan: five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.
15. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
16. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
17. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
18. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234. Web.
19. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
20. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
21. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
22. E Dinkin, “5 point plan: five steps to developing a long- term total compensation plan”, Employee Benefit News, vol.23 no.6, 2009, pp.32-33. Web.
23. J Martocchio, Strategic compensation: A human resource management approach, Prentice Hall, Upper Saddle River, 2011, p.234.
24. J Shields, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Melbourne, 2009, p.37. Web.
25. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
26. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.
27. DA Richards, “High-involvement firms: compensation strategies and underlying values”, Compensation and Benefits Review, vol.38 no.3, 2006, pp.36-49. Web.