Compensation Management

4th Chapter
1. Strategic Compensation
Strategic compensation is a human resource management technique used by companies to bring
growth in employee performance. This process helps in the orientation of employees’ behaviour
and performance to the company’s objectives and goals.

2. How to develop a strategic management? Steps to Create a Strategic

Compensation Strategy:
i. Ask for Employee Input: Of course, employees aren’t going to be part of the
team that determines salaries; however, you can ask for their input about total
compensation. Find out what benefits matter most to your workforce
ii. Benchmark against Competitors: As mentioned above, your compensation plan
and employee benefits are a way to attract talent. To remain competitive in
your industry and the locations where you conduct operations, take time to
benchmark what your competitors offer their employees.
iii. Allocate Budget: Take a realistic look at your company’s human resource and
operational budgets. Identify the total amount you can spend on any one
employee. Factor in all costs, including taxes, payroll costs, existing benefits,
compensation, and bonuses.
iv. Plan for Rewards: As you make your budget, consider how you can use total
compensation as a way to engage employees, increase performance, and
entice them to stay.
v. Determine Pay Grades: One way to establish a framework for compensation is
to determine pay grades based on job position and duties. For example,
positions in pay grade one may be for entry-level roles, pay grade two for
technician roles, pay grade three for managers, and pay grade four for
executives.
vi. Confirm Compliance: Compensation strategy provides the big picture for an
organization’s pay; however, the manner in which you implement and provide
compensation must meet regulations. The Fair Labor Standards Act (FLSA) sets
the legal requirements for minimum wage, overtime, equal pay, record-
keeping, and child labor.
vii. Communicate About Total Compensation: Employees want all the information
available about compensation, so do your best to make the communication
engaging. An employee communication software tool can help you deliver
timely, engaging, and streamlined compensation communications.
 3. Compensation as a strategic business partner
personnel administration was transformed from a purely administrative function, engaged in
transactions such as payroll processing, to a competitive resource in many companies emerging
during the 1980s. Technological advances (e.g., the use of robotics in manufacturing) and global
competition (e.g., increased imports of Japanese automobiles) contributed greatly to the need for
a strategic approach. As a strategic business partner, HR and compensation professionals today
need to think like the chief executive officer (CEO) to become a strategic partner in achieving
organizational plans and results.6 Essentially, they must know more than just HR work.7 For
example, GE’s Human Resources Leadership Program (HRLP)8 is an exemplar of these ideas. The
HRLP provides participants with opportunities to learn HR competencies, global leadership skills,
and business acumen through formal training and rotational assignments in areas such as
compensation, staffing, and employment relations. Participants also receive exposure to GE
executives and HR leaders to put their work in the context of strategic issues facing the company.
In doing so, they understand the production and service sides of the business and help to
determine the strategic capabilities of the company’s workforce, both today and in the future. For
example, increasing sales and building brand loyalty are important goals of soft drink companies
such as Coca Cola and PepsiCo. Increasing sales requires hiring highly dedicated and motivated
sales employees whose success is rewarded through innovative sales incentive arrangements.
Compensation professionals can give the CEO and CFO a powerful understanding of the role that
employees play in the organization and the way it combines with business processes to expand or
shrink shareholder value. Compensation professionals are integrating the goals of compensation
with the goals of the organization and focusing on expanding its strategic and high-level corporate
participation with an emphasis on adding value.

4. Strategic Compensation Decision ***

To change this outcome a company must alter how it makes compensation decisions. And the
CEO must take the lead in that process. Here I would like to suggest five of the key issues a
business must include and successfully address in its decision-making process if it wants to drive
better results in the execution, productivity and performance of its people. Here are the five
presented in the form of questions to be answered:
i. How can we reinforce our business model through the way we pay our people? Implied
in this decision is a company's ability to clearly articulate its business model and
distinguish it from its business strategy.
ii. What kind of value-sharing approach best reflects the kind of partnership we want to
have with our employees? I prefer the term value sharing to incentives because the
latter implies that someone needs a carrot to become motivated. Value sharing, on the

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 other hand, implies all stakeholders deserve to participate in the value they help
create.
iii. What pay components will best foster a unified financial vision for growing the
business? This issue has to do with how employees will be paid as opposed to how
much. Addressing this issue forces a company to develop a basic rewards philosophy.
iv. What structure do we need to maintain to ensure our compensation strategies produce
the desired results? Structure has to do with organization and process. A company
needs to have a systematic means of assessing performance and productivity and then
"pivoting" in a different direction if necessary. The structure continues to keep strategy
front and center with a constant eye on cost and productivity.
v. How can we communicate our rewards strategies in a way that has the most favorable
impact on the mindset of our employees? If effective, a strategic approach to building
rewards programs should result in more engaged employees. This does not come by
simply rolling out a great compensation plan. Engagement is built over time through a
reinforcement process that integrates the discussion about pay into an overall strategy
and business plan review to which all stake holders are exposed.

5. How to compensation function fit to HR department?

i. Recruitment: Recruitment refers to the process of identifying, attracting,
interviewing, selecting, hiring and onboarding employees.
ii. Relocation: In an employee relocation, an organization moves employees from
one location to another.
iii. Retention: Employee retention is the organizational goal of keeping productive
and talented workers and reducing turnover by fostering a positive work
atmosphere to promote engagement, showing appreciation to employees,
providing competitive pay and benefits, and encouraging a healthy work-life
balance.

6. Identify the stakeholder of the compensation program function

i. Employees: Successful pay-for-knowledge programs depend on a company’s
ability to develop and implement systematic training programs. Compensation
professionals must educate employees about their training options and how
successful training outcomes will lead to increased pay and advancement
opportunities within the company.
ii. Line Managers: Line managers turn to compensation professionals for advice
about appropriate pay rates for jobs. Compensation professionals oversee the
use of job evaluation to establish pay differentials among jobs within a
company. In addition, they train line managers in how to evaluate jobs properly.

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iii. Executives: Executives look to them to ensure that the design and
implementation of pay and benefits practices comply with pertinent legislation.
Violation of these laws can lead to substantial monetary penalties to
companies. Executives also depend on compensation professionals’ expertise
to design pay and benefits systems that will attract and retain the best-qualified
employees.
iv. Unions: collective bargaining agreements describe the terms of employment
reached between management and the union. Compensation professionals are
responsible for administering the pay and benefits policies specified in
collective bargaining agreements.
v. Legislation: Legislation is a set of laws put in place by the government to protect
businesses, employees and consumers. Businesses must operate within these
laws to ensure the fair and safe treatment of any party involved with a business

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