Compensation Plans by Paula Tomkiel

Compensation refers to the payment or award going to employee for the value he brought during employment. Compensation is awarded in many forms, whether direct or indirectly. It can be used as a strategic tool to either motivate and empower employees or be used as a bargaining tool by employees when deciding where they will apply their skills and knowledge.

Creating a compensation plan will vary on many factors that HR will consider. Legal issues will involve laws such as the 1938 Fair Labor Standards Act, which determines which employees are exempt or non-exempt based on the salary basis and duties act. Then the 1963 Equal Pay, which states equal work for equal pay, regardless of gender.  The 1964 Civil Right Act goes further to make discrimination based on race, color, religion, or origin illegal. HR will need to be sensitive to its union labor, as the NLRA of 1935 gave the unions the right to organize, bargain collectively, and engage in concerted activities for the purpose of mutual protection.

It’s important that employees feel that they are being paid fairly and viewed equitable compared to other employees’ pay in the organization. To determine the pay rate, we first consider the job description, which defines the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. HR will then perform a job evaluation, or a system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. This may be done through a pay structure, which is designed in increments. Salary surveys are a collection of salary and market data. The salary pay is then made up of the importance of difficulty of the job, or the job assignment, as determined by the job evaluation.

Now we consider incentive plans. Much like an award, these are bases on productivity. The award may be non-tangible and be expressed through recognition. “Fringe-benefits” are usually expenditures made be the employer on behalf of the employees. Consider profit sharing plans, stock options, paid time not worked, and paid health insurance. Compensation can directly related to job recruitment, satisfaction, and performance. It is an important tool for management and should be adjusted according the goals and resources of the business. 

Perhaps incentive based, indirect compensation has the largest effect of boosting job performance. “The biggest problem with a straight-pay structure is that employees quickly become used to earning a certain level of income regardless of the results they produce. Promotions do usually increase pay, but the motivational influence stems from recognition, increased responsibility, more challenging work and a personal sense of accomplishment - all of which are motivating factors, according to Herzberg.”  (Kokemuller)

However, these incentives should be paid out immediately in order to recognize performance and as an employer, obtain the most benefit. The researchers at PwC and the London School of Economics and Political Science performed a survey and found that employees prefer for immediate bonuses such as cash or equity, rather than long-term incentives. “If you simplify your compensation structure and remove some of the uncertainty from it, you can actually pay senior managers less in absolute dollar terms without putting a damper on performance -especially if you're careful to pay everyone the same.” (Klein)

It’s worthwhile to recognize that these performance incentives should be not handed out freely and only with careful consideration to avoid a repetitive pattern. According to Donald Delves, of Forbes.com, “One of the detriments of extrinsic incentives, researchers have found, is that they can be addictive. It will quickly feel less like a bonus and more like the status quo, which then forces the principle [owner] to offer larger rewards to achieve the same effect.” (Delves)

If HR can design a well-planned compensation program, it can have a measurable impact on bottom-line results. The right compensation program will align with the organization’s business strategy and goals. In order to achieve these, an organization must recruit and select best possible employees. To attract these employees, there must be an attractive compensation plan. Competitors will be offering an array of payment options, whether it’s based on pay rate or special perks, such as a company car or generous stock options. Organizations must be aggressive yet reasonable in order to compete. Retaining and encouraging employees to perform at their peak can be achieved through an immediate incentive award program.

As a student beginning to enter the workforce, it would be highly beneficial to do research regarding pay grades in your industry. Being knowledgeable and informed will bring more negotiating power when it comes to salary discussions. Many factors will affect this rate; keep geographical location in mind. Even if a salary isn’t as desirable, there are non-tangible payments available; it’s never too early to begin thinking about retirement options.

Works Cited

Delves, Donald. "Is Incentive Compensation a True Motivator?" Forbes. (2011): <http://www.forbes.com/sites/donalddelves/2011/02/16/is-incentive-compensation-a-true-motivator/>.

Klein, Anne. "Time to rethink long-term incentives for executives?" CNN Money. (2012): Web. <http://management.fortune.cnn.com/2012/07/25/time-to-rethink-long-term-incentives-for-executives/>.

Kokemuller, Neil. "The Effects of Monetary Compensation & Promotions on Motivation." Small Business Chron. (2012): <http://smallbusiness.chron.com/effects-monetary-compensation-promotions-motivation-14394.html>.