Question

When designing a compensation system for an organization, it is important to have a compensation philosophy which serves as a framework for making decisions about various components of the system.

Tasks:

One question to be addressed is how can your compensation program help the organization be successful (e.g., be able to attract and retain talented workers needed to be competitive in the marketplace)?

Some options for consideration include:

Being an “employer of choice” in the industry

Offering top salaries

Putting more emphasis on benefits and less on salaries

Establishing “pay for performance” systems

Offering flexible in work hours, shifts, work rules, dress code, professional development/education policies

Offering designer benefits

ESPP (Employee Stock Purchase Plans)

what factors you think should be considered when creating a compensation system for an organization and why.

Answer 1

The primary objective of the employee compensation and benefits program is to attract and retain the right talent in the organization. Employee benefits program offers the basket of benefits that an individual can enjoy, if he becomes an employee of the organization offering them. It is observed that benefits often form the hygiene and the motivating factors that encourage the employee to stay with the organization.

The inability of the company to increase employee salary and the basket of fringe benefits led to non-fulfillment of the most basic need of the employees’ i.e. physiological need. Physiological need is concerned with the basic amenities required for sustenance. Money fulfills most of the basic needs. As the employees are not getting compensation and benefits as per the industry standards, their morale has come down and is getting reflected in their performance.

The strategic value of the employee benefits program can be reflected in the attrition rate as well as the employee motivation and satisfaction index of the organization. If the attrition rate is high, this means the benefits program is not able to provide the essential benefits, required by the employee. Similarly, a low employee motivation and satisfaction index means that the employee is not happy in the organization and can consider leaving the organization anytime.

The primary factor which must be taken into consideration while developing the compensation and benefits structure for an employee is the basis on which the payments will be done. The company needs to choose from skill based compensation and job based compensation. In skills based compensation, the employee is being compensated based on his performance as well as skills. In job based compensation, the employee is compensated based on the job level or cadre held by him.

The advantages of skill based compensation structure:

• Ensures contribution to job enlargement
• Encourages employees to portray different skills
• Enhances productivity

The disadvantages of skill based compensation structure:

• No seniority factor may add to employee’s unhappiness towards this differential pay structure
• The employees may take this as a differential pay where the employer is paying their favorites, high compensation
• There is subjectivity in this evaluation

The advantages of job based compensation structure:

• Emphasis is on job experience
• Characterized by promotions and pay raises
• Can be easily administered

The disadvantages of job based compensation structure:

• Increases the employer’s operating cost
• Job evaluation is not a standard process
• Has probability of increasing employee turnover