An Ideal Compensation Strategy

Compensation is a key strategic area for an organization which directly impacts an employer’s
ability to attract applicants, retain employees and ensure optimal level of performance from
employees in meeting organizational objectives. According to HRM department, compensation
is an important segment just like other crucial factors such as organization behavior approach,
employee selection, performance appraisal and turnover. From the perspective of general
employees of each organization matters most to each and every employee. Compensation can
include monetary and non-monetary components. Compensation often includes an employee’s
basic salary and additional benefits such as health insurance, retirement plans and performance
bonus. The compensation packages a business offers to employees affects the company’s
recruitment rate, retention rate and employee satisfaction.
An organization is mandated to fairly compensate its workforce for the value of the work they
contribute towards the organization’s success. To construct a compensation package some
criterion come into play, which need to be followed. Some of factors are as below:
1. Determine the company's vision and how its compensation and benefits package can
reflect this.Compensation plan should be designed to further the future of the company
and its goals.
2. To fix up compensation, it is perquisite to gather industry-specific data, in order to
ensure parity in compensation package
3. The financial capability and budget of the company must be taken into consideration
while designing a compensation structure, in order for the package to be realistic and
not misleading
4. Find out salary information of competing firms, as otherwise employees will be
dissatisfied and companies might end up losing human resources due to poaching by
rival companies
5. External equity is another important criteria (in terms of economic variable)
6. Internal equity (in terms of job grade)
7. Expert opinion, who can provide can provide their valuable suggestions in regards to the
compensation package design
8. Package should be flexible and adaptable in order to accommodate changes in
compensation structure
9. Which factors motivates employees must be identified, as each organization is unique to
each own vision and talent pool. While there are some generic elements for employee
motivation, the unique catalysts which are only true to the organization must be
identified.
10. A company’s compensation structure should be a reflection of the culture it intends to
establish
To establish a standard pay rate or compensation package there is a sequence of steps which
are as follows:
Step One: Salary survey, as already discussed in previous section salary survey must be
conducted in order to specific wage rates. It can be done through phone call, newspaper, email
or questionnaire.
Step Two: Job evaluation is an important part in selecting pay range for employees. Job
evaluation can be conducted through the following methods:
 Ranking Method – Jobs can be categorized as per relative difficulty in
performing tasks. The ranking method is simple to understand and practice.
It is best suited for small organizations.
 Job Classification –This method jobs into job classes and job grades, which
include segregations such as office, clerical, managerial, personnel, etc.
 Point Method – Factors are jotted down and points are assigned to each
factor in order of importance
 Computerized Job Evaluation – Separate segments are assigned to different
tasks and quantitative factors are assigned accordingly
Step Three: Similar jobs can be paid similar compensation packages, as per pay structure
Step Four: Price each pay grade, as per wage curve (consists of accurate data regarding
compensation for similar jobs).

However, in order to design an effective compensation package, competencies play a crucial

role. Competency-based pay refers to where the company pays for the employee’s range,
depth, types of skills and knowledge rather than the job title he/she holds. E.g. A legal counsel
can be paid in accordance her knowledge and capabilities, instead of her job grade (manager or
above). Traditional pay plans may actually backfire if a high-performance work system is the
goal. Paying employees as per their KPI’s (Key Performance Indicators) is more strategic,
measurable. Skills, knowledge and competencies are the heart of any company’s performance
management process. On the other hand, there are some other methods of designing
compensation model such as broad banding (consolidation of salary packages).
To fix the compensation it is mandatory to take benefits into consideration. Benefits are
monetary, non-monetary perks which can be incorporated in compensation package in order to
boost employee morale, attract/retain good employees, reduce risk of unionism, maintain a
competitive position in market and build a favorable company image. Examples include medical
insurance, paid leave, subsidized/free lunch, transportation facility, day-care facilities,
entertainment allowance, pension plans, etc.
Other similar such benefits are as follows:
 401(K) Plan - A 401(k) plan is an arrangement that allows an employee to choose
between taking compensation in cash or deferring a percentage of it to a 401(k) account
under the plan. The amount deferred is usually not taxable to the employee until it is
withdrawn or distributed from the plan.

 Pension Plans - A pension plan is a retirement plan that requires an employer to make
contributions into a pool of funds set aside for a worker's future benefit. The pool of
funds is invested on the employee's behalf, and the earnings on the investments
generate income to the worker upon retirement.

 Raises, Bonuses and Incentives - Employees receive annual raises based on

performance ranking and ratings. For example, an outstanding performance appraisal
could result in a 5 percent salary increase. Sample employee bonus and incentive plans
include cash incentives based on a percentage of the employee's gross salary or an
employee's share based on a discretionary pool of funds designated for distribution to
employees whose performance contributed to business success. Many executive
bonuses and incentives are tied to improvement of the bottom line or even increases in
the value of shares for publicly held companies.

 Group Health Benefits - A total compensation plan may include group health-care
benefits. Many employers pay a sizeable portion of the total monthly premium, leaving
a portion of the premium to be deducted from the employee’s pay. Group health
coverage may include supplemental coverage for dental and vision care as well. Some
employers pay the total cost for short-term disability insurance and offer coverage for
long-term disability insurance as part of an employee’s total compensation

 Pay-for-Performance – Paying for performance is a compensation which has mixed

reviews. Can be beneficial or could backfire. In order to implement a pay-for-
performance system, factors which should be taken into consideration are how the
compensation policy created will enhance employee satisfaction, improve company
processes or results and customer satisfaction, help with implementing new products or
protocols, provide innovation or cost-savings to operational methods
Establishing Compensation package and benefits: for setting an ideal compensation package
the following factors to be considered

1. Position
2. Job responsibilities
3.

To sum up, a compensation package is a comprehensive plan which is based on actual salary
data, competencies required to perform the job and benefits/work perks to induce employee
motivation.

References:

1. https://www.wikihow.com/Develop-a-Compensation-Plan
2. https://fitsmallbusiness.com/employee-compensation-plan/
3. http://smallbusiness.chron.com/example-employee-compensation-plan-10068.html
4. https://www.investopedia.com/terms/p/pensionplan.asp
5. https://www.investopedia.com/terms/1/401kplan.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
6. https://hbr.org/2017/01/what-matters-more-to-your-workforce-than-money
7. https://hbswk.hbs.edu/archive/compensation-what-s-the-big-secret