Question

Managing compensation costs, headcount, and participation/communication issues

Cisco systems, Hewlett-Packard, American Airlines, and General Motors are examples of companies that have cut employment or cut wages and/or benefits to reduce labor costs in hope of becoming more competitive and more profitable. Indeed, American and GM went through bankruptcy in part to gain control over labor costs. In contrast, some companies- Southwest Airlines, Nucor, and Lincoln Electric- have a no-layoff practice and do not appear to have cut wages or benefits even in years when sales have declined significantly (They have also not gone through bankruptcy).

If you were in charge of designing a compensation system for a company that is fairly new but is now reaching a stage and size where it needs a formal compensation system, how would you design the compensation system to have labor cost flexibility?

Answer 1

Designing the compensation system firstly involves knowing the goals/directions of the organization and secondly involves achieving the objectives called FARM which means focus, attract, retain and motivate. Focusing your employee efforts involves recognition given by the employer to the efforts of employee, attracting quality employees means attracting high productivity employees, retaining high performers to keep skillful workers with the company and motivating your employees to make them more productive, skillful and efficient workers.

These all objectives are required to be achieved for a new company to design formal compensation system to have labor costs flexibility. Design the compensation system is done through the following ways

• Determining the compensation strategies like how much you want to pay to the employees for his work.
• Keeping in mind the job description.
• Formal pay structure of the company
• Except/non except evaluation
• Surveys regarding marketplace in the organization
• New positions are consistently, regularly updated.
• Incentive plans.