Week 6

Explain the different compensation systems used by organizations today

Within every business, the compensation system is established and implemented to simplify processes.
Human resources' actions generate cash for the company, and the organization will reward the human
resources' efforts in the form of monetary profits or in kind.

Compensation is a method employed by management to promote the company's existence for a variety
of reasons. It can be altered based on the company's objectives, goals, and available resources.
Moreover, compensation has an impact on morale and work satisfaction.

Many organizations share the common objective of attracting and retaining talented staff. To some
extent, market conditions beyond the employer's control impact the availability and cost of competent
applicants for unfilled positions. While a business may set and advertise wage ranges for new workers, it
does so in the context of other firms trying to hire from the same candidate pool.

Generally, an equity must be established between the monetary value the employer is ready to pay and
the employee's feelings of worth. Employers may choose to freeze salaries or compensation levels in
order to conserve money at the expense of employee happiness and morale. In contrast, a business
seeking to prevent employee turnover may aim to raise wages and pay levels.

Compensation can also be used to recognize and reward exemplary work performance. Bonuses,
commissions, shares, profit sharing, and gain sharing are all examples of such systems.

Compensation System Components

Employees will regard compensation as fair if it is based on systematic components. To evaluate the
worth of employment, many compensation methods have evolved. Many comparable components are
used in these systems, such as job descriptions, wage ranges/structures, and documented processes.

A compensation system's components include:

Job descriptions are an important component of both compensation and selection systems because they
specify the responsibilities, requirements, functions, tasks, location, environment, circumstances, and
other characteristics of occupations in writing. Work descriptions can be created for individual
occupations or for whole job families.

Job analysis is the process of evaluating employment in order to create job descriptions. Interviews,
questionnaires, and observation are all methods of job analysis.

Work evaluation is a technique for evaluating jobs in order to determine suitable pay levels for
particular jobs or job aspects. Ranking, classification, factor comparison, and the point method are the
four primary strategies.

Pay Structures are used to standardize pay methods. Most pay systems include numerous grades, each
having a minimum salary/wage and either step increments or a grade range. Step increments are
frequent in union jobs where the compensation for each job is set by collective bargaining.

Pay surveys are collections of salary and market information. Average wages, inflation indicators, cost of
living indicators, and salary budget averages may be included. Companies can either buy the findings of
wage surveys done by survey suppliers or conduct their own.

When acquiring the findings of wage surveys done by other vendors, keep in mind that the surveys may
be conducted within a given sector or across industries, as well as within a single geographical location
or across many geographic regions. Before comparing the wage statistics to your organization,
determine which industry or geographic region the findings relate to.

Design of a Compensation System

Employers are paid by a firm in exchange for the work they do. Most people believe that salary and
compensation are synonymous, yet compensation includes much more than monetary benefits supplied
by an employer. The remuneration policies and design of any firm have far-reaching consequences for
its competitive advantage. According to Richard Henderson, in order to build a competitive edge in a
global market, the organization's pay program must fully complement the organization's strategic aims
and activities. Organizational compensation systems can aid in the reinforcement of essential business
values and the attainment of organizational goals. Our corporate compensation system must be
carefully considered since it represents how employees are valued.

Compensation System - Primary and Common Goals

The compensation system is established and used in any business to simplify processes. Human
resources' actions generate cash for the company, and the organization will reward the human
resources' efforts in the form of monetary profits or in kind.

As a result, the system is required to convert, distribute, and transmit a portion of the organizational
profits to its personnel in order to appropriately pay their efforts/offerings.
The compensation system is the mechanism that performs and regulates this procedure. The system
may split compensation payments into phases such as (a) on-hand Wage/Salary and (b) payments
retained until some future period in order to hold their obligations and/or safeguard their future
(retirement/disability/future unforeseen liabilities).

Employees are often compensated on an individual basis by organizations.

Organizations use the following compensation methods to compensate employees:

1. Piece rate system

2. Commission system

3. Bonus system

4. Skill-based system

5. Merit Pay system

Type # 1. System of Piece Rates:

This pay scheme is used by businesses that produce or manufacture things. Employees in this system are
paid according on the quantity of units produced over a given time period. Organizations employ other
organizations' production statistics, as well as time and motion studies, to determine the minimal
number of units that must be manufactured by workers.
One significant downside of this method is that employees believe management is primarily concerned
with production and not with their well-being.

Commission Structure:

Employees whose productivity can be measured are often compensated on a commission basis. Sales
personnel, for example, are compensated according on the amount of sales they generate. Salespeople
are motivated when they are given a commission for their efforts.

The commission system is a fair and effective method of rewarding salespeople. However, such a
structure may encourage the adoption of immoral practices to increase sales and hence the commission.

Type # 3. System of Bonuses:

This is a one-time payment made to employees at the end of the year in exchange for meeting
productivity or performance goals. Employees believe they have earned a huge chunk of money since
the bonus is provided in the form of a lump payment. As a result, they are pleased with the sum they
have gotten. Employees may not feel as satisfied if they were given the same amount over a twelve-
month period. The bonus system is one of the most effective and dependable methods of paying
employees.

Type # 4. Skill-Based System

Employees in this sort of pay scheme are compensated based on the quantity of talents they possess.
Unlike the merit rating or bonus system, in which employees are compensated for their performance,
employees in this system are compensated for the skills they develop on the job. Employees are
subjected to a variety of employment tasks. They are required to build knowledge in all aspects of their
employment over time.

The size of the company may not be important, but the approach to compensation management is.
Smart compensation systems have been shown to help organizations grow. This is due to the fact that
they aid in the recruitment and retention of high-quality, engaged staff.

In fact, one of the most effective methods to keep people satisfied and focused on accomplishing
personal and professional goals is through pay management. Employers of all sizes should desire to
preserve and sustain their workers' goal-oriented mindset.

Identify the factors considered by an organization in designing compensation systems

A clear and equitable compensation system allows the firm to preserve both internal and external
equality. It is an effective technique for recruiting personnel, inspiring them to work toward strategic
corporate goals, and keeping them over time. An HR Consulting Firm can give a thorough study and
detailed report on establishing a balanced compensation structure for the firm.

An organization must have a defined pay philosophy that aligns with its strategic goals, objectives, and
culture. The many components of compensation are established and detailed based on the company's
compensation philosophy.

1. Concentrating on the Strategy Goals:

The most essential purpose in establishing a compensation system is to support the organization's
strategic objectives and ensure that the system fits in with the organization's structure and strategy.

Before developing a compensation strategy, the following questions should be addressed:

What is the organization's rate and mission?

Why is it there?

What are the next five years' strategic aims and objectives?

Is it possible that present personnel have the necessary abilities to fulfill these goals? If that's the case,
would they be rewarded for having them? If not, would internal applicants be taught to develop skills, or
will the business recruit from outside sources to meet the objectives?

What is the company's strategy?

Do employees work alone or in groups?

Are employees viewed as a cost or an investment?

How much does it cost to replace one employee?

What is the targeted rate of turnover?

What should the organization's compensation strategy achieve?

How would you define the organization's present entire remuneration package, including perks,
retirement, time off, and so on?

How does it compare to the salaries of other market employees? What should the company pay in
comparison to the market?

What is the proper ratio of external market equity to internal worth?

Once top management understands the answers to these questions, pay can be formed, policy
guidelines are prepared that represent thinking, beliefs, and strategies, and the organization is set
inconsistency.

2. Communicating and Participating to Ensure Commitment:

Changes to an organization's pay structure must be planned for. Before starting anything, it is critical
that senior management be completely committed to the process, the outcome, and the
implementation. All critical approaches for involvement and communication by a well-defined advisory
or steering group. A pay review committee might assist in detecting existing compensation difficulties,
job clarity, or salary administration. It may provide ideas, and feedback provides useful suggestions.

3. Examining Job Functions:

A job analyst gets a current and full grasp of the work that the employee is forming. Before making
adjustments to the pay plan, it is critical to do a job analysis. A job analysis offers a collection of
pertinent information on the kind, scope, and responsibility of each position. It serves as the foundation
for job descriptions and how they are marketed. It allows the company to create a baseline of
information about a job's degree of responsibility and qualification and compare it to the market. It also
assures and verifies our adherence to legal obligations.

4. Job Description Writing:

Once the information gathered during the job analysis process has been compiled, it may be utilized to
create a job description. A job description highlights the essential components of the job, such as the
overall nature of the work, particular tasks, responsibilities, and outcome competency necessary to do
the job. A job description in writing should be regarded a finished document. It should be received and
accepted by both the employee and the supervisor before it is completed.

5. Creating Internal Pay Equity:

It determines the organization's fairness. Employees usually consider fair compensation to be equitable.
Job evaluation strategies such as the total job rating method and the factor comparison methodology
are used to determine internal equity.

6. Calculating External Pay Equity:

It is the perceived fairness of compensation in comparison to what other employees are paid for
performing the same sort of work. The market price slotting approach is an outside focused job
assessment tool. For greatest flexibility, market pricing is preferable to market competitive pay rates.
Market competitiveness is more versatile and flexible than other approaches.
7. Wage Structure Design: Once market data has been collected and a hierarchical ordering of positions
has been determined, a salary structure may be built. The compensation structure is made up of
positions of equal importance that are organized into grades with competitive salary ranges. Pay ranges
are the rates from the lowest to highest grade. Grades and pay ranges are awarded to positions based
on job content, marketing, or external and internal equity. Each pay range has a minimum, a middle, and
a maximum, with the midpoint reflecting the market rate.

Compensation detailing entails defining positions and establishing compensation or salary parameters
for each role. Additionally, incentive packages and incentives, if any, are fully outlined for each position
while outlining salary information.

Depending on the needs of the firm, the HR Consulting Firm may take on the factors that must be
addressed for the creation and/or enhancement of the compensation system in the organization, so
enhancing the company's pay system by making it more equal and appealing.

Determine how compensation programs contribute to an organization’s competitive advantage

The success of any sales organization is dependent on meeting both short-term and long-term sales
goals. While other programs such as sales force recruitment, training, and motivation are costly to the
organization, sales force compensation deals with the management of salespeople's performance in
order to generate money for the company.

An organization's sales performance is heavily reliant on the effectiveness of its salespeople. Salespeople
frequently improve and regulate their performance by tying it to the income they get from the sales
organization. A solid pay plan will inspire salespeople to improve their performance and meet greater
organizational goals.

 Companies create compensation plans with several goals in mind. Attracting competent salespeople is
one of the primary goals. If the company's salary and reward structure is appealing, the top salespeople
will want to work for it. It will also help to increase the productivity of the organization's existing
salespeople.

It also aids in the optimization of salespeople's efforts and maximizes sales while lowering sales
expenditures

and production costs. In the near run, such organizations may pay their marketing expenses due to
better sales efficiency than the ordinary company with a bad sales incentive scheme.

A good pay plan aids in the retention of quality employees and the reduction of absenteeism in the
business. This moderates salespeople's performance and acts as a control mechanism in the business. A
good compensation plan also fosters a positive relationship between the sales force and the company's
sales supervisors and managers, and the salespeople strive to present a better image for the company as
well as the product in the marketplace as a result of the high level of motivation generated by a good
reward system in the company.

The key problem is determining the correct balance between basic pay and commission, since a well-
designed compensation plan helps build a work culture of high performance, ensuring both personal
and organizational success. Recognizing and rewarding individual success based on remuneration and
benefits creates an appealing environment for attracting and keeping top people in the sector.

Companies often have a written and recorded compensation plan that is updated and evolved in
response to market circumstances and competitive challenges. To keep employees engaged and goal-
oriented, the remuneration plan should be explicit and presented to them. To get the most out of the
sales force, line managers and organizational hierarchies must properly implement the strategy.

Enhances Employee Engagement

A structured pay scheme provides employees with a roadmap for professional advancement and
motivates them to succeed.

Income packages that directly relate compensation to work performance are highly successful at
motivating people to perform better. When a cash incentive is attached to meeting a certain sales
objective, for example, it might drive sales teams to work harder to meet that goal.

It boosts staff engagement.

Many aspects influence employee engagement, but according to TalentMap study, salary is one of the
lowest rated engagement elements.

Employees who believe they are appropriately compensated in comparison to coworkers or those from
other organizations are 4.5 times more likely to be highly engaged. Yet engagement isn't only crucial for
an organization's staff retention; it's also linked to your financial line, as we'll see below.

It boosts productivity and profits.

Employee engagement is closely related to the fact that happy, fulfilled workers feel appreciated and
are more productive.
The longer people stay with the firm, the more they learn and become more efficient, making them even
more valuable to the company - and a bigger loss if they leave.

It lowers turnover.

People leave their occupations mostly for financial reasons. Indeed, one-quarter of employees depart
for better income.

Compensation planning, on the other hand, may help to reduce turnover by ensuring that employees
are fairly rewarded and feel appreciated.

It reflects the culture of the firm.

At work, each person is assigned a monetary worth, which influences not just how employees view
themselves, but also how their company regards them. As a result, it's no surprise that remuneration is
important in shaping business culture.

Compensation policies reflect the organization's culture. Employers who pay fairly for competitive roles
and encourage open debate about compensation will develop more trustworthy relationships with their
employees, which will benefit the bottom line.

It drives exceptional talent.

Companies may enhance their impression and recruit outstanding performers by offering an appealing
compensation plan.

A compensation plan reflects how a corporation treats its employees. As a result, a firm with a
reputation for delivering competitive compensation and benefits will find it easier to recruit and hire top
people.

The most common reason candidates refuse job offers is that the basic pay and perks do not meet their
expectations; thus, when those expectations are fulfilled — or exceeded — via strategic compensation
planning, it is simpler to welcome a new team member.

It eliminates discrimination.

A compensation planning technique narrows salary disparities between demographics such as race,
gender, and age.
Although unconscious prejudice exists in the workplace, a systematic, transparent pay plan based on
abilities, performance, and years of experience helps organizations employ and promote individuals
equitably.

Compensation planning is one of the abilities you will need to develop as a leader. A compensation plan
that motivates employees and offers competitive pay is one of the most critical parts of organizational
planning.

When it comes to accepting a job, one of the first things people think about is the pay. As a result,
compensation planning seeks to place the employee in a situation where they are not forced to seek
alternative work possibilities. Bottom line: the better the pay approach, the higher the retention rates.

Design a pay-for-performance system.

Implementing a pay-for-performance remuneration approach in the workplace can boost employee

engagement and productivity. They are paid more in this approach if they reach or surpass performance
targets set by management or the corporation. Before implementing a pay-for-performance strategy at
work, it is necessary to weigh the benefits and potential drawbacks to determine whether it is
appropriate for the company.

Pay for Performance compensation programs are often used in sectors where the employee's activities
generate money for the firm and the outcomes of those actions are easily observable.

Pay-for-performance compensation falls into two broad categories: merit pay hikes and variable pay
programs. You may utilize any of these two types of pay-for-performance programs - or both - to
motivate employee performance and achieve your intended outcomes as you attempt to implement a
pay-for-performance program in your firm.

Increases in Merit Pay

A merit pay rise is an increase in an employee's basic salary owing to exceptional performance. These
raises are usually given once a year and are budgeted for as part of the yearly pay increase budgeting
process. Merit pay raises are the most often utilized pay-for-performance mechanism for employee
performance recognition, since they deferentially reward top performers for their achievements with a
raise in their basic salary for the following year.
Variable Pay Programs include a range of discretionary and non-discretionary incentives that can change
depending on the payment period, the workers who are eligible, and the parameters against which
employees are scored. Variable pay programs, unlike merit pay increases, are increasingly administered
not just once a year but numerous times a year (e.g., once a quarter), and a mixture of different variable
pay programs is frequently utilized in combination to accomplish the desired effects.

Pay-for-performance pay programs are not just required to compete in today's talent market. Pay-for-
performance schemes can help employees advance professionally since they want to be rewarded.
Frequent awards can also contribute to better employee retention, since financial incentives assist
retain employees with your company for the long run.