The compensation system of an organization is established to accomplish several objectives particularly on the management of employees (Martocchio, 2011). The compensation system of an organization is set up to attract, retain, and motivate employees. To attain these major goals, the compensation system should comply with the regulations that govern the employees’ remunerations. The compensation system should also simplify the administration of employees as well as be cost-effective. The compensation system can only attract, retain, and motivate employees when it is perceived to be satisfactory. Increased compensation of an organization will attract employees with skills and needed competence. As a result, employees are retained and motivated towards attaining the desired goals of the organization.
Essentially, the strategic choice of compensation influences the attainment of the goals of the business. Organizations should adopt a strategic choice that enhances employees’ development and growth. Moreover, the firm should adopt a strategy that upholds the culture of participation and empowerment within the workforce. Also, the organizations should adopt compensation strategic choices that develop the culture of protection and reliability of employees. Most importantly, the compensation strategy should increase the business competitive advantage through a sustainable business approach to development and improvement (Martocchio, 2011).
An appropriate compensation strategy is one of the ways through which the competitive advantage of the company can be achieved. The decisions involving compensations should be incorporated within the business processes. The business process of the organization determines the level at which the company goals and objectives are attained (Martocchio, 2011). The compensation design system should be within the business’s processes and one of the factors that contribute to the increased competitive advantage of the organization.
In terms of the compensation design, appropriate remunerations of workers increase the level of their participation that in effect increases their productivity (Martocchio, 2011). Further, suitable levels of employees’ participation strengthen the principles and ideals of the organization. The standards set by the organization directly correlates to the value created. As a result, the company’s competitive advantage is attained through the values created by the organization.
The impact and effect of compensation within an organization
Most modern organizations are recognizing the employees’ compensation as one of the significant practices that increase benefits to the organization. Studies indicate that not only the employees that benefit from such practices but also the organizations (Richards, 2006). On the contrary, most organizations perceive employees’ compensations as being costly. However, the benefits surpass the costs involved. In essence, proper compensation ensures a continuous flow of qualified staff with the required skills and technical competence to keep the organization at the competitive edge. The organizations have to recognize the fact that the qualified staff with the required skills and technical competence is the key driver for their growth and development (Richards, 2006). With the current competitive environment, organizations find it necessary to keep such qualified staff within their workforce. Besides, organizations must remain flexible when it comes to the management of employees’ compensations and benefits.
On the part of employees, increased compensation and benefits ensure augmented productivity due to the satisfaction they receive from such benefits (Weinberger, 1995). Well-compensated employees feel protected from social ills that may affect the work processes, which in turn may result in decreased performance. In other words, compensation and benefits that take into consideration the needs of workers are critical in the general output of the employees. According to Weinberger (1995), there is a direct correlation between appropriate compensation and increased productivity. Essentially, compensation has a direct impact on the employees’ performances
One of the major effects of the forms of compensation is that the employees are motivated to attain greater output. Good remunerations increase the worker’s motivation and job commitment that are translated into high performances. The forms of compensation also enhance the performance culture among the employees and within the organization. However, these forms of compensation can hardly be determined without appropriate measurement procedures (Richards, 2006). In the circumstances where the output cannot be measured, compensations have increased limiting factors (Weinberger, 1995). In other words, compensation should be based on some form of measurable output. The impact of compensation on output can be quantified through the process.
Increased efficiency cannot be divorced from high performance and attainment of the organization’s goals. Appropriate compensation raises performance among workers. The increased performances result from augmented motivation workers gain from appropriate compensation (Weinberger, 1995). The motivation will enhance effectiveness and efficiency among workers that contribute to improved performance. The effect is greater productivity and the attainment of the overall goals of the organization. Generally, the major effect of an appropriate compensation design system is the increased performance, productivity within the workforce, and the general attainment of the organization’s goals (Weinberger, 1995).
From the wider perspective, compensation practices impact the employees’ perception regarding culture and performance of the organization (Richards, 2006). The compensation design system of an organization communicates particular aspects that directly relates to the culture and performance. In particular, the level in which the organization contends for outstanding talent. In other words, the compensation should reflect the employees’ talents, skillfulness, capability, and understanding of the work processes. Besides, the compensation should reflect the reparation levels of other organizations. The organization’s success mirrors the extent of talent and skilled workforce within the organization (Richards, 2006).
The compensation system reflects the level at which the organization recognizes the contributions of individuals, teams as well as groups. Compensation practices such as offering bonuses to individuals with increased performances portray the cultural aspect of the organization that values individualistic ideals. Under such circumstances, the organization will attract those employees with individualistic traits. On the other hand, compensation based on teams’ contribution portrays the collective values of the organization. Individuals that value collective ideals will be attracted to the organization. In general, the compensation system and design communicate the values and beliefs of the organization regarding the performance (Richards, 2006).
Compensation also influences the general employees’ management procedures. The employees’ efficiency and effectiveness can be enhanced through appropriate compensation (Richards, 2006). In this case, appropriate compensation implies that the compensation should be based on the market rate. In other words, suitable compensation that affects the worker’s attitude and motivation should be above the market rate. Effective compensation indicates how the organization values its workers as well as their needs. Besides, effective compensation increases productivity as well as the general performance of the organization (Richards, 2006).
Seniority and merit pay
The seniority pay plans are the process where employee’s compensations are increased based on the longevity in employment. The advantage of seniority pay is that it increases the employees’ commitments to the organization. However, the form of compensation can be detrimental to high performing employees (Dinkin, 2009). On the other hand, merit pay is a form of compensation where the workers’ reimbursements are increased based on performance. The form of compensation is critical for the increased performance of the organization as well as enhanced productivity by the workers. The drawback with the form of compensation is that the firm must undergo additional cost to attain the required performances. The most important determinant factor is the expected output of the workers. Other factors such as the job assignment, the level of motivation, the costs involved as well as the level of competency required are also considered.
Incentive pay plans
The form of compensation that is based on performances. Individuals are motivated due to incentives provided based on performances. Any achievement on the assigned task based on the company objectives is rewarded by the incentive pay plans. The major weakness with an individual incentive pay plan is that an employee may indulge entirely in a personal pursuit of performance goals, which may result in harmful rivalry within the organization (Dinkin, 2009). However, the payment plan can be made effective through an objective assessment of the performances as well as allowing the employee to be in control of the outcome.
Similarly, group-based incentive payment plans are geared towards rewarding members of the team for accomplishing the goals of the organization. The group-based incentive plans can be strengthened through the application of gain-sharing plans. Gain-sharing plans reward group members for attaining group goals that contribute to one particular area of performance such as better customer services. In the IT industry, both individual and group-based incentive payment plans are practiced widely.
Dinkin, E. 2009. 5 point plan: Five steps to developing a long- term total compensation plan. Employee Benefit News, 23(6), 32-33.
Martocchio, J. J. (2011). Strategic compensation: A human resource management approach. Upper Saddle River, NJ: Prentice Hall.
Richards, D.A. 2006. High-involvement firms: Compensation strategies and underlying values. Compensation and Benefits Review, 38(3), 36-49.
Weinberger, T.E. (1995). Determining the relative importance of compensable factors. Compensation & Benefits Management, 11(2), 17-18.