Compensation and Reward
Compensation management and Performance reward
For an organization to run a healthy business, it needs to have a clear strategic plan to compensate employees. In our previous articles we´ve gone through issues of consideration, when enrolling new employees. In this article well go through compensation as way to increase employee engagement and different types of performance rewards used by businesses around the world. The emphasis of the article is on the responsibility of the organization to create an environment for workers to perform to their best ability.
Thanks for the job, what’s my salary?
Compensation is the single most important cost in most organizations. Salary is the most looked at compensation value. However, total compensation is best seen as the total sum of three different values base compensation, pay incentives (a reward program designed for good performance) and indirect compensations including benefits such as health insurance and vacations. According to research employees cruelly undervalue their employee’s contribution to indirect compensation. Hence, more and more businesses are actively bringing the costs of the benefits forward so as to show the reality of expenses. (Gomez-Meija, Balkin & Cardy 2016, 315 – 316.)
Taking care of employees with a well-designed and well-communicated compensation program will help in the long-term investment of organizations employees as the company’s strongest asset. Thus, enabling the company to achieve its long-term visions. The pay option managers need to consider as components of compensation frame are internal versus external equity, fixed versus variable pay, performance versus membership, job versus individual pay, egalitarianism versus elitism, below-market versus above-market compensation, monetary versus nonmonetary rewards, open versus secret pay and centralization versus decentralization of pay decisions. (Gomez-Meija, Balkin & Cardy 2016, 316 – 321.)
Compensation is a complex topic that has a significant impact on organizational success. And, there is no one size fits all. Keeping in mind that unionized workforces are subject to negation. Hence, managers are restricted in what they can choose as compensation. (Gomez-Meija, Balkin & Cardy 2016, 326 – 328.)
Tools to use for compensation when deciding on pay can be divided broadly into two category job-based and skill-based approaches. As the names suggest job-based approaches are concept’s in which we assume that the specified work gets done by the people who get paid for them examples of these types are coding, recordkeeping. In these types of environments, the primary objective is to pay more for those jobs that organizations define as more important. It’s simple to understand and easy to apply. Every position in an organization has a specifically determined value for the company. (Gomez-Meija, Balkin & Cardy 2016, 328 – 334.)
Skill-based approach on the other hand values the abilities that the employee has. In that, pay is decided upon based on skills that the company holds valuable. Here, compensation directly focuses on the individual and their unique skills, rather than the title of their position. Workers are rewarded for different categories of skills they possess. As a result, A single employee can be assigned to multiple different jobs, since they are trained in numerous different areas. Low-skill jobs are being automated, so the remaining jobs require higher skills. Skill-based pay motivates employees to get a wide range of capabilities which enable business in the digital age for example the ability to work without close supervision. At the same time this approach might lead to more expenses in training costs. (Gomez-Meija, Balkin & Cardy 2016, 339.)
Legally though - U.S. -
In U.S. the law which establishes minimum wage, overtime pay when people work over forty hours a week and, also prohibits employment of minors is called Fair Labor standards act. Another act, called Equal pay act involves that in the same workplace equal pay is to be given for equal work regardless of gender. Taxes payed in different forms by employers are defined in the U.S. in the Internal Revenue Code. (Gomez-Meija, Balkin & Cardy 2016, 340 – 343.)
As we have gone through the approaches to compensate employees, we need to take into consideration some of the challenges as well. Deciding a pay on the basis of measurable data, may result in getting only those parts of the work done that have been mentioned. Meaning the more tangible works are neglected. For example, in schools that pay is in a relation to students test score, the teachers tend to help in the test as to help understand the subjects. If individual achievement is emphasized, teamwork and helping each ether may be neglected. Individuals feel like they are responsible for their performance and anything that a colleague is facing is their problem. In long-term this will affect companies overall goal achievements negatively. (Gomez-Meija, Balkin & Cardy 2016, 352 – 355; HR Daily Advisor 2013.)
Emphasizing on individual merits puts employees under stress and leads to dissatisfaction. Interestingly Career analyst Dan Pink explains the puzzle of motivation, by comparing the amount of reward to positive goal achievement. Dan argues that the higher the reward is the more pressure the person is under. Hence, the more focused that person is. How this impacts negatively is intense focus reduces creativity and increases stress, resulting in slower and worse outcomes. (Gomez-Meija, Balkin & Cardy 2016, 357; Pink 2009.)
Good performance should be rewarded, and employees should feel that they matter. This can achieve by building trust and building the reward system as multilayer of a broader HR strategy. Employees should also get involved with reward decisions, which builds the feeling fairness and credibility among employees. (Gomez-Meija, Balkin & Cardy 2016, 358 – 360; Thehartford n.d.)
Types of pay-for-performances are four 1. individual-based plans: in this type commonly, supervisor decides on an individual award and benefits (merit pay) becomes a part of the base salary. 2. Team-based plans: as the name suggest the award is given to the outcome of the teamwork. 3. Plantwide plans: gainsharing is the way to go. Here the workers of the entire unit. 4. Corporatewide plans: is the highest level of award given. Meaning the entire organization is awarded. (Gomez-Meija, Balkin & Cardy 2016, 362 – 369.)
Pay-for-performance for both executives and sales personnel is a bit different. For executive’s short-term bonuses and long-term benefits are given to motivate executives to make decisions for the companies benefit. Revenue is of course in relation with sales. Hence, their companion’s systems are tied to productive behavior. Here sales staff receives a straight salary. A fixed sum of pay that does not include commission. In small the issue in hand usually is that a professional designate to oversee compensation is rarely to be found. Basically, they just don’t have the resources. Hence, giving merits can have a large impact on the firm. (Gomez-Meija, Balkin & Cardy 2016, 372 – 379.)
Engaging with employees
Having a successful business requires a lot of work and, that work or at least a part of it needs to be done by your staff. Now, if your employee is counting minutes to end of the shift. We can probably argue they are not engaging with the work. With the comparison to a worker that is willing to do overtime to get the job done without being asked to do so, comes early to work and is exited to be there. Engaged worker simply means that employee feel passionate and committed towards what they do. According to Mr. Kappel´s article in Forbes there is five ways to increase the implementation of engagement in the work culture of the organization. First of provide training and development(which we talked about in the previous article), set clear goals for the company to achieve, Building respect by acknowledging employees efforts and lastly avoid micromanaging for its obvious reasons, but mainly if you don’t trust the work to be done well then training is required and if you have time to micromanage, then why do you need a employee? (Kappel 2018; Kruse 2012.)
Gomez – Meija L., Balkin D. & Cardy R. 2016. Managing human resources. Eight edition. Pearson.
HR Daily Advisor 26 September 2013. Advantages and Disadvantages-Team Goals vs. Individual Incentives? Article. HR Daily Advisor. URL: https://hrdailyadvisor.blr.com/2013/09/26/advantages-and-disadvantages-team-goals-vs-individual-incentives/. Accessed: 15.04.2020
Kappel M. 4 January 2018. How To Establish A Culture Of Employee Engagement. Article. Forbes. URL: https://www.forbes.com/sites/mikekappel/2018/01/04/how-to-establish-a-culture-of-employee-engagement/#6c0376878dc4. Accessed: 15.04.2020
Kruse K. 22 June 2012. What Is Employee Engagement. Article. Forbes. URL: https://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-what-and-why/#10c3741d7f37. Accessed: 15.04.2020
Pink D. July 2009. The puzzle of motivation. TED talks. URL: https://www.ted.com/talks/dan_pink_the_puzzle_of_motivation?language=en. Accessed: 15.04.2020
Thehartford N.D. How to Implement Performance Rewards Systems. Article. Business owner’s playbook. URL: https://www.thehartford.com/business-insurance/strategy/employee-performance/rewards-systems. Accessed: 15.04.2020