In an organization, compensation focuses on what is referred to as extrinsic rewards. Precisely, these can be financial, social or material rewards (Duchon, 2007). Compensation plans are difficult to define because several factors are put into consideration while developing one. In most organizations, total compensation plans mainly comprise of financial rewards such as competitive salaries, salary increments based on the overall performance and lump-sum rewards. Compensation plans can be based on either internal or external equity (Duchon, 2007).
In designing a total compensation plan based on internal equity, job position in an organization is considered. The aim is to create balance in the compensation of a certain job position relative to compensation offered to higher levels in the organization’s job hierarchy (Duchon, 2007). At the American Institute for Research (AIR), the total compensation program is formulated in such a way as to attract, engage and retain their highly qualified employees to achieve their goals and objectives (American Institute of Research, 2009).
Their total compensation plan includes competitive salaries to employees, premier benefits such as insurance and tuition assistance and establishment of a work environment that encourages a collaborative work ethic. Their compensation plan reflects the internal equity within the organization. Each of the highly qualified employees is rewarded for contributing to the achievement of goals and objectives at AIR (American Institute of Research, 2009). They ensure that the salaries of the employees are adjusted appropriately. They periodically review the salaries of their employees to ensure that the basic salary is in line with the level of education, experience, skills and contribution in the overall mission of the organization (American Institute of Research, 2009).
Total compensation plans based on external equity relies on analysis on market pricing. This involves assessing the standards maintained by competitors and designing compensation plans based on the existing compensation plans in the market (Duchon, 2007). At Marriott hotels, the total compensation plan based on external equity involves comparing the salaries of employees offered by other organizations in the hotel industry. Marriott has established a salary structure that offers employees salaries that are above the average compensation in the market (Beam and McFadden, 2001, p.36). This serves to motivate employees to work for Marriott.
Advantages and disadvantages of internal equity
For AIR, internal equity is advantageous because it motivates employees and creates a feeling of fairness in compensation. Balancing the salaries of all employees promotes employee determination and output because it creates a feeling of fair and just treatment. However, some employees may consider their package unbalanced relative that of fellow employees. This may create feelings of guilt or anger if they feel that they are either undercompensated or overcompensated (Beam and McFadden, 2001, p.42).
Advantages and disadvantage of external equity
With its compensation plan based on external equity, Marriott has successfully retained its group of highly qualified employees. It has managed to retain them by offering them a compensation package that is slightly higher than the average package in the market. However, it has a disadvantage. The compensation plan offered may not match the objectives of the organization because it is controlled and determined by the prevailing market forces.
Impact of the compensation plan
The compensation plan based on internal equity contributes to AIR’s overall objective positively. The objective of AIR’s compensation plan is to attract, engage and retain their highly qualified employees. With the salary packages offered and other rewards such as insurance and tuition aid, AIR has managed to maintain its employees and motivated them to be more committed and productive. The compensation plan does not have great impact on their overall financial status because packages and rewards are reasonable and in line with the financial capabilities of the organization (Beam and McFadden, 2001, p.52).
Marriott’s compensation plan that is based on external equity has helped them achieve their compensation plan objectives fully. Their objective is to take good care of their employees by offering competitive packages that motivate them to offer quality service to their clients. However, the plan has a negative impact on the organization’s overall financial situation. The packages offered are controlled by the prevailing market condition and not by the current financial situation of the organization. This may lead to deficits to compensate employees to retain them.
Organizations design total compensation plans in line with their objectives regarding the employee’s compensation. Compensation plans are difficult to define because several factors are put into consideration while developing one. In most organizations, total compensation plans mainly comprise of financial rewards such as competitive salaries, salary increments based on the overall performance and lump-sum rewards. Compensation plans can be based on either internal or external equity. They can help either retain employees and motivate them to be more committed and productive or can create dissatisfaction prompting employees to move to organization that offer better packages. Whichever the case, total compensation plans improve the overall output of an organization or business.
American Institute of Research: A Total Compensation Program to Attract, Engage, and Retain our Greatest Asset: Our Employees (2009). Web.
Beam, B., and McFadden, J. (2001). Employee Benefits. New York: Dearborn Trade Publishing.
Duchon, M. (2007). Compensation: Total Reward Plan that Attract, Retain and Motivate. Web.