The Main Goal of the Compensation Department - Case Study Example

? Setting the stage for strategic compensation and bases for pay Table of Contents Introduction 3 Contextual influence posing greatest and least challenge for companies’ competitiveness 3 Subjective Performance versus Objective Ratings 5 Conditions in which profit sharing plans motivate employees 6 Pay-for-knowledge pay concepts 7 Conclusion 8 References 9 Introduction The main goal of compensation departments in organizations is to develop compensation practices which allow organizations to remain competitive in the labour markets and demonstrate it as an employer capable of attracting top talents from the industry and from the community in which it operates. Along with the aim of attracting talents, motivating them, and retaining qualified personnel from the industry, compensation departments also have the important role of rewarding them for their good work and potential to take up responsible and crucial positions in the organizations. However, it is important that compensation structures are aligned with the strategic objectives of the business. Three of the main goals of compensation departments in organizations are to attract talented personnel from the industry and help provide a certain amount of flexibility to the needs of the department; improve morale of employees and motivate them to ensure the existence of an innovative and knowledgeable workforce; as well as maintain salary standards which are competitive in the industry. Contextual influence posing greatest and least challenge for companies’ competitiveness Some of the external, as well as internal, conditions of a firm can determine the nature of pay structure which it would design or which would be appropriate for it. Most importantly, the supply and demand of labour in the market would be a serious consideration while designing its pay structure. Shortage of a particular skill in the market might imply that the organization might have to pay a higher price for those skills, and vice versa. In fact the demand and supply of labour in the market is the determinant of the existing wage rates at that region too (Prakashan, 2009, p.14). The other very important factor which would pose serious challenge before an organization is the prevailing market rates. This can be also termed as the comparable wages or the ongoing wage rates. The compensation policy fixed by an organization must necessarily confirm to the wage rates paid by other competitors in the industry. Otherwise, it might result in employees leaving the organization getting attracted towards those with higher salary packages. The cost of living also accounts for an important criterion based on which organizations develop their compensation structures and plans. It is crucial to make adjustments in pay depending on the increases or decreases in the cost of living index. When organizations fail to reset their salary structures according to the changes in the living index, it can face resistance from employees and unions demanding higher wages. This could be challenging for the organizations (Prakashan, 2009, p.14). Apart from the above serious threats there are certain issues which are also crucial for determining compensation structures but which pose challenges before organizations to a lesser extent. The ability of an organization to pay or its affordability is crucial to determine its pay structure. Degree of profits, costs of production, sales revenues are some aspects which must be evaluated before designing pay structures. Psychological and sociological factors greatly determine the extent to which an employee would be willing to put in effort in his job. A person’s psychological perception helps him equate his wage or salary levels as a measure of the extent of success he has earned. Lastly, rapid technological developments have been the main cause of rapid development of skills of employees. The level of wages of these employees has also been changing correspondingly. Thus, it is important that organizations keep track of changes in skill levels and wage level of employees (Koli, 2007, p.853). Subjective Performance versus Objective Ratings There has been extensive debate with regards to the suitability of subjective and objective evaluations of performance. Many employers are also found to be relying on a combination of both strategies. Each of these measures has their own strengths and weaknesses and suitability of application in different situations and conditions. Interpretation is typically defied under objective ratings of performance management. An employee attained his per-hour target or he did not. Employers generally tend to use objective measurements for jobs or employees having repetitive performances. Entry-level jobs’ performance is purely a function of what is done not done. However, there are certain jobs which cannot be measured easily. For example, job of a data analyst might not be measurable in objective form. In such cases, employers or managements determine categories of measurement for the same. Some of the categories can be professionalism, team work or team performances, interpersonal relationships, relationship with customers etc. These categories are assigned a numeric figure representing the employees’ performance in that category. It is seen that objective measures are more suitable for working in such situations in which each employees’ performance can be measured and evaluated directly and it is also possible to make comparisons between their performances. In this regard, an example can be sited. While evaluating the performance of a full time employee and a part time employee, the same measures of performance cannot be used. In such a case, objective measurements are most suitable. However, employers are required to distil complex system processes within a single score; it loses relevance in a large organizational setting. In such cases, objective measures of performance evaluations fail. For example, the work of an attorney cannot be evaluated in terms of the cases he files in a month. Subjective measurements provide managers and supervisors to make judgements on performances in extremely complicated settings. However, there are certain disadvantages associated with the subjective performance measures. In cases of sour relationships between an employee and his supervisor, employees tend to consider perceiving a negative rating s unfair or punitive (Micklitsch, & Mityling, 1996, p.25). Conditions in which profit sharing plans motivate employees Profit sharing plans are particularly used by employers to motivate their employees. Under this plan, a certain percentage of the company’s profit earnings is shared with the employees who qualify for attainment of bonuses. However, designing the profit sharing plan is crucial and must ensure that it results in enhancing the motivational impact of the bonus plan on employees. It must be understood that it might not always result in motivating employees in the organization. In such cases, the terms and conditions of the plan of profit sharing is crucial. It is seen that often organizations set performance targets and goals for the employees to make them eligible for profit sharing plans. This plan is particularly motivating for the employees as it enhances their interest and eagerness to perform at higher levels and consequently improves and enhances their performance. This is, consequently, beneficial for the company and for the employee as well. The fact that being part of the profit that the company generates can act as a motivator in itself for the employees. It provides a feeling that they are responsible and accountable for the profit that the business has been able to generate and this gives them a feeling of pride and satisfaction too. Very often firms are seen to employ escalating profit sharing plans in which cash bonuses are given to the employees either in their retirement or in lump sum. This is particularly beneficial for employees as it works towards motivating employees to monitor the percentage and consequently helps them to work harder (Martocchio, 2011, p.97). Pay-for-knowledge pay concepts The pay for knowledge concept is employed in organizations seeking to encourage their employees to gain as much knowledge as they can and for compensating them too for learning or acquiring new skills in the company and their job. Here employees are especially paid for the excess knowledge they acquire and not necessarily for the task he is assigned. This is particularly effective in such industries which employ technical knowledge and expertise. The software industry is one such example where jobs are highly skilled and technical in nature. The more diverse technological expertise an employee is able to acquire the more flexibility he attains to perform in his job. This particular pay structure can also be effective in production related work structures like automobiles, infrastructures etc. Employees gaining expertise in a particular skill or production process becomes highly efficient in the job processes. However, after a certain point of time the work might become extremely monotonous and boring for him. In such cases, he must try and acquire extra knowledge and expertise in new skills. This is beneficial for him and for the organization too in attaining greater flexibility and knowledge base. This type of pay concepts is also applicable in hospitals and nursing homes. It is particularly for one employee to possess a wide diversity of skills. This is because there can be many situations in which a hospital staff might be absent, however, there can be a high emergency requirement for a particular job task to be done. This is where it is crucial for the hospital to have alternative staffs that also have the same expertise. Conclusion It is evident that compensations structures must be such that it not only motivates employees to perform, but is also aligned with the future plans and strategies of the organization. Factors like demand and supply of labour in the market, existing wage rates, and cost of living in the region are crucial components of determining wage rates. Apart from that organizations must also know, their affordability, and consider the social and psychological factors of employees for the same. It is also concluded that objective performance measures are more effective in measuring entry-level performance of employees, whereas in complicated work processes subjective performance measures are more accurate as objective measures become inaccurate and redundant in such complicated systems. It is also seen that escalating percentage of profit sharing plans helps to motivate employees to perform better. Finally, the pay for knowledge concepts are seen to be most applicable and suitable for highly technical sectors, like the information and technology sector, hospitality sector and the production sector as their efficiency relies much on the extent of flexibility and diversity of knowledge and skill base demonstrated by their employees. References Koli, L. N. (2007). Ugc-Net/jrf/slet Commerce (paper-Iii). Gabler Wissenschaftsverlage. Martocchio, J. J. (2011). Strategic Compensation. Pearson Education India. Micklitsch, C. & Mityling, T. A. (1996). Physician Performance Management: Tool for Survival and Success. Medical Group Management Assn. Prakashan, N. (2009). Human Resource Management. Nirali Prakashan. Read More