Executive Summary
Compensation in organizations refers to the remunerations remitted to employees by employers in exchange for their labor. A compensation system plays a critical role in the success of any organization. Among the 4ms of operation (Manpower, Materials, Money, and Machinery), manpower is the most important of all. In fact, it is impossible for an organization to succeed without manpower. The activities performed by the manpower help an organization to earn income, and consequently, the organization rewards the efforts of its manpower in terms of money and other benefits.
Strategic compensation in an organization is when a company’s HR department and the executive develop a well-designed compensation design that aligns with the company’s strategic plan, business goals, operating objectives, initiatives, and overall reward strategies. For an organization to develop a competitive advantage in the labor and product markets, it must have strategic compensation practices. These practices should be equitable, fair, and legally compliant. It is important for organizations to develop an effective and strategic compensation strategy since it reflects a company’s overall image and it shows the way an organization values its employees.
Organizations can utilize compensation to gain a competitive advantage in the labor and product market in various ways. However, compensation in organizations varies depending on an organization’s various factors like size, financial position, competitor salary information, the industry, expertise of employees, and a company’s overall objectives. Organizations should regularly review their compensation strategies to meet the current demands in the labor and product markets lie market conditions and obtain qualified and competent manpower. In fact, a well-designed compensation strategy motivates employees, who in turn lead to maximum productivity. Increased productivity means a company is making increased sales in the market than its competitors. A failure in designing an effective compensation design leads to unmotivated employees, hence affecting a company’s overall productivity and competitive advantage in the labor and product markets.
How a Compensation Strategy Should Align with an Organization and Stakeholders
HR managers create compensation systems to attract and maintain top-talent employees for a competitive edge in the labor market. However, an organization’s compensation strategy should align with the context of an organization’s strategy and that of stakeholders to be deemed effective. To ensure that the compensation system supports an organization’s strategic objectives and structure, the managers should consider various elements before designing the system. For example, in SIPL’s compensation strategy, Padmanabhan considered all the industry dynamics before developing the company’s compensation strategy. He started by conducting an internal evaluation to get clear details about a job holder and their compensation rates. He found 35 overlapping jobs that were shared among 54 employees. He then used the data to generate relevant job descriptions and the appropriate remuneration for new employees.
When looking at the compensation system from the community side, it is clear that the payments increase interest in the company. Seeing the steps a company takes to improve the quality of its employees will motivate the society to buy products to support employees. It is worth remembering that the community has future employees and stakeholders who will be happy to be involved in such a well-designed working mechanism. This works as an excellent marketing ploy and allows SILP to have a more extensive base of possible future employees. This process increases the demand for the shares on the market, which significantly boosts their price. This cannot but attract the attention of stakeholders, who are much more willing to inject their funds. For the company’s customers themselves, there will also be a noticeable change, such as in production quality. To match the level of a company like SILP, competitors will reduce the price of their products, which is always beneficial for the ordinary customer.
Writing job descriptions like Sushma Industries Private Limited is also an ideal way of ensuring a compensation strategy aligns with the goals of both stakeholders and an organization. However, before formulating a job description, an HR manager should conduct a job analysis to determine the specific responsibilities and roles that are necessary for the performance of a given role. A job description is centered on the specific job, and not the employee (Dutta & Padmanabhan, 2017). When job descriptions are available, it makes the process of designing a compensation strategy easy. HR managers can utilize job descriptions to determine the effective wages that a particular employee should receive as part of their remuneration. Before job descriptions are finalized, they have to be accepted by employees and other critical organizational stakeholders. A written job description is a fundamental document for organizations because it helps to determine and classify the payment levels for employees.
Recommended Compensation Philosophy and Policy
Since Sushma Industries is a tech enterprise, I recommend that Padmanabhan should use a skill-based compensation philosophy and policy for renumerating the company’s employees. Skill-based pay is a system that rewards employees by considering their mastery of the fundamental skills as well as their certifications for a similar role (Berger & Berger, 2020). Skills are the observable expertise when an individual is performing a given role or task. However, by using skill-based pay, the employer can be assured that their money has gone to a worthwhile cause, namely improving the life of an employee who is worthy of it.. In addition, the SBP focuses on the individual, rather than the job. Therefore, it is a system that fosters holistic development as well as constant rewards for an employee’s exemplary performance, a reason why I recommend it to SIPL. SBP is economical and effective because it rewards an employee according to their capabilities, unlike job-based pay systems which reward an employee regardless of their proficiency in their positions.
While developing a compensation strategy for Sharma Industries Private Limited (SIPL), Padmanabhan faced a lot of challenges in terms of talent acquisition, compensation, and merit challenges. One of the major challenges was that most employees were hired based on “known references” (Dutta & Padmanabhan, 2017, para. 11). Most of these employees were needy individuals with little to no industry-specific expertise. Upon evaluating the manpower of SIPL, Padmanabhan found critical gaps in the skills and competencies of most employees. For example, he found that most salespeople did not understand the purpose of SIPL, a reason why they failed to achieve the company’s targets. However, with a skill-based compensation philosophy and policy, SIPL would regain its momentum and gain a competitive advantage in the market.
There are various types of skill-based pay systems that Padmanabhan can use to achieve SIPL’s goals and objectives. These are the bonus reward system and the base pay reward system (Ledford & Heneman, 2011, para. 3). Since the goal of a compensation strategy is to attract and maintain top-talent employees, bonuses are a great way to motivate and retain competent employees. The bonus pay system dictates that an employee should only receive additional payment when they portray exceptionally specialized skills in a given position. Bonuses can be in terms of promotions or direct remuneration on top of their basic salary. As a technology company for calibration services, SIPL would benefit greatly from a skill-based pay system since most of its services require top-notch skills that are rare and valuable in the market. Therefore, compensating employees for their skills would motivate the best to give their best, thus allowing SIPL to have a competitive advantage in the labor markets.
Evaluation of Padmanabhan Pay Strategy
After evaluating SIPL’s organizational structure and hierarchy, Padmanabhan found that most employees had overlapped responsibilities because some of them were not skilled for their positions. To help SIPL achieve its objectives, Padmanabhan proposed a new system where he made changes to the manufacturing and marketing process. He assigned the manufacturing operations to one head and also delegated financing duties to one head. In addition, he divided sales teams into “hunters” who would go out looking for clients and “farmers”, who would remain at the company to service customers (Dutta & Padmanabhan, 2017).
Based on my understanding of strategic compensation, I think Padmanabhan’s approach is not ideal for the success of SIPL. First, Padmanabhan’s strategy does not fit the current and dynamic labor market demands. In fact, sending employees to go and fetch clients for a company is tedious and obsolete because as technology advances, newer skills are required in the labor market. Therefore, instead of retaining unskilled unemployed and sending them to fetch clients, Padmanabhan would have thought of how he could empower SIPL’s employees to match the current skills in the tech industry. Industries like tech are constantly changing, a reason why they need employees who are updated with the current skills and trends.
The revised compensation plan can be implemented at SIPL by communicating about the strategy to all employees. From the SIPL case study, it seems that Padmanabhan did not communicate effectively with the employees concerning his new changes in terms of “working hours and clocking attendance” (Dutta & Padmanabhan, 2017). Effective communication is essential in organizations since it provides accurate information that perfectly lays out the expectations of each employee. The new strategy can be implemented by clearly communicating the new compensation strategy as well as the expectations of each employee. This would reduce the objections raised by employees concerning the new and unfriendly policies that Padmanabhan developed in a realistic manner.
Finally, SIPL should adopt a pay plan that has a base pay and raises, incentives and bonuses according to an employee’s performance in their positions. Base pay is the basic or the initial salary an employee receives without additional benefits. In addition to the base pay, SIPL should promote employees and reward exemplary talent with bonuses and incentives. Employees should get annual salary increments based on their performance ratings and rankings. For example, an employee who performs exemplary should get a 10% salary increase. Since SIPL is a technology company, it relies heavily on specialized expertise to remain competitive in the market. By implementing a base pay and an incentive-based pay plan, the company would attract specialized talent and retain only competent employees. One major advantage of this pay plan is that employees would strive to achieve the best so that they can enjoy the yearly increments, on top of their base pay. The main disadvantage is that SIPL has to pay extra money to top-performing employees yearly.
References
Ashwini, D. (n.d.). Compensation System. Web.
Berger, L. A., & Berger, D. R. (2020). The compensation handbook. A state-of-the-art guide to compensation strategy and design. McGraw-Hill.
Introduction to the human resources discipline of compensation. (n.d) SHRM. Web.
Sheffield, L. (n.d.). How to develop a strategic compensation strategy. GuideSpark. Web.
What is a compensation philosophy? What should be included in a compensation philosophy? (n.d.). SHRM. Web.