Introduction
The long-term success of an organization depends on the capacity to attract, retain, enhance and effectively utilize the most talented human capital of its employees (Schwind, 1998). We are living in an era when employees are only as devoted to the next paycheck. People are more willing to search for new jobs, a reality that is making it even more difficult for organizations to attract and retain the desired people. One of the ways through which organizations have managed to attract and retain human resources is by designing and implementing effective compensation and benefits systems. In that respect, this report is aimed at reviewing, analyzing and revising the compensation and benefit system used by Holland enterprises to develop an effective strategy that can reduce employee turnover. In as much as the strategy is to be effective, an investigation of the components that pertain to effective compensation and benefits systems for the large-scale organization is essential.
Impact of compensation and benefit system on organizational effectiveness
Organizational effectiveness refers to the concept of how effective a firm is in attaining the outcomes it intends to produce. Three elements influence organizational effectiveness namely: external environment, shareholder value and support. For this report, the element of interest is the shareholder value as it involves the value created by the organization for employees. According to literature, the value for an employee can be created through effective human resource management practices such as training and development, compensation and benefit plans, and job design and enrichment initiatives (Lee & Bruvold, 2003).
For compensation and benefit system, this concept relates to organizational performance and goal attainment. Employee performance essentially depends on several factors including motivation, security and compensation. Human resources being the key drivers of organizational performance, compensation and benefits have a motivational effect on employees. Incentive measures including salaries, intangible rewards and secondary benefits have traditionally been employed to motivate workers to increase performance. It goes with the saying that employees who are motivated demonstrate relatively higher individual performance than de-motivated employees. Incentive schemes, whether based on reality or perception, do have substantial impacts on the performance of individual employees and hence the performance of the organization as a whole.
If the workers are not motivated, their effectiveness including the highly skilled ones will be limited. However, human resource management practices can affect worker motivation by encouraging employees to put more effort into their work. Examples of organizational efforts to control and motivate workers include appraisal systems and other performance metrics that evaluate individual or team performance, linking them firmly with compensation systems as well as promotion systems that emphasize employee merit and intended to align the interest of workers with those of other stakeholders. In that respect, Gratz (2009) argues that compensation systems can be considered as an essential factor that influences organizational alignment; that is, aligning organizational strategies with goals (p.236).
Effective compensation and benefit system as an organizational alignment factor plays three important roles. First, an effective system can attract and retain the desired employees who steer organizational strategies towards accomplishing the set goals. Most of the internal strategies are formulated with a focus on the availability of the necessary skills and competencies to implement them. Otherwise, an organization that cannot acquire and maintain such skills and competencies can rarely accomplish long-term goals (Gratz, 2009). Second, an effective compensation system enables the firm to escape regulatory intricacies. Organizations that have turnover issues are always vulnerable to challenges imposed by labour and trade unions, which ultimately deviates the goal-focus of strategic initiatives. Third, an effective compensation system promotes strong relationships among the stakeholders. Organization alignment is achieved when there are mutual relationships between the management and the employees to enable coordination in tasks especially those which demand teamwork.
Effective compensation and benefit system support the development of an enabling organizational culture by compelling individual workers to be more responsible. In organizations where employees are contented with the pay and rewards they get, there is a general tendency of individuals to become committed to the welfare of the organization as a whole. Every employee views others as “comrades” rather than “workmates” and is ready to contribute to the success of others. In addition, teamwork is valued that leads to a quality and innovative culture. Indeed, in firms where teamwork is emphasized, the two distinct competitive advantages are quality and innovation (Schwind, 1998). Therefore, effective compensation does not only improve the performance of the organization but works as a strategy to enhance the competitive position of the firm.
Compensation and benefit system for a large-scale organization
In large-scale organizations, salary and benefits are major factors in recruiting and retaining employees. There are three major goals of compensation and benefits schemes within these organizations that are described by the labour market, business environment and employee needs. First, compensation schemes are aimed at attracting and retaining highly skilled workers. It appears that this goal is targeted at responding to the universal scarcity of skilled labour. There is also an increasing trend of employees leaving their positions in search of jobs that pay well. Second, the organizations aim to remain competitive in the market through effective compensation systems. It is apparent that the more the firm can acquire and retain skilled and competent human capital, the better they compete in the market. Market differentiation is enabled through quality and innovative products which can only stem from skilled and competent workers. Third, the organizations aim to provide a balance of pay and benefits that meet the desires of workers and their families. Since money is also a determinant of social welfare, organizations strive to ensure financial security for their employees.
Pay structure architecture
In many large-scale organizations, the pay structure is varied mainly because of the size of the company, the industry and the region of operation. This variation is also extended between the profit-focused organization and non-profit organizations as well as private businesses and public businesses. In particular, the general pay structure of business organizations combines both internal equity and market competitiveness. For each salary range, there involves a sequence of positions described to have an analogous value, although the person holding these positions may be performing very diverse kinds of functions. For very big organizations, the positions are defined by grouping the positions according to the similarity and demands of the responsibilities thereof. Each compensation range has three fundamental reference points:
Minimum: The minimum remuneration range reflects the lowest pay usually available within a pay range. This point is about 80 per cent of the middle point. Workers are normally being hired at the minimum point of their remuneration range, even though previous experience and competitive forces may give a good reason for a higher starting remuneration.
Middle point: The middle point enumeration range is the targeted salary level for an employee who is fully qualified and fully trained with a record of good performance. The middle point is also the reference point with the labour market and matches directly with competitive market information; thus, workers paid within this range are paid competitively.
Maximum: The maximum point reflects the maximum remuneration usually available within a pay range. The maximum point of a remuneration range is 120 per cent of the middle point. Workers will normally be restricted to the maximum of their pay range. However, special situations may give a good reason for remunerations above the maximum point.
Salary/incentive ratio
For large-scale organizations, it is a general issue to set the most appropriate base salary and bonuses for workers. This is a ratio that will permit workers to recognize the constancy and attractive bonuses that will lead to the enthusiasm and eventually improve their performance. The problem rotates between human resource management and line management. Most line managers usually believe in the strength of a high ratio. This is driven by the conviction that it is much easier to manage human resources when the proportion is high since workers will be enthusiastic to achieve greater individual performance. In reality, however, workers with low base wages and high bonuses do not increase performance automatically, rather they find shortcuts to win the bonuses or do not see the organization as a supportive element of their life. The universal market practice of large-scale organizations is to keep a ratio of 7:3 since a bonus higher than 30 per cent of the base salary will force the workers to find illegitimate ways to win the bonuses
Emphasis on equity
Joshi, Liao and Martocchio (2011) have the opinion that large-scale organizations emphasize external equity as opposed to small-scale organizations. Therefore, in most cases, they compare their remuneration structures with those of external labour markets. Organizations operating in highly competitive industries are usually compelled to harmonize the need to control costs with the need to pay higher salaries to attract desired and talented employees. Salaries in labour-intensive industries such as telecommunications comprise a substantial fraction of overall operating expenses, hence there is continuous pressure to control salaries. In industries such as transportation where labour is not intensive and salaries do not take a large fraction of operating expenses there is low pressure to reduce salaries. Organizations whose workforces are represented by labour unions are compelled to pay higher wages compared to non-unionized organizations. Moreover, organizations operating in certain geographical locations are forced to compensate their employees on the grounds of the prevailing economic conditions in the area. Such circumstances may result from the cost of living as well as the need to attract workers in less desirable regions.
Principle types of benefits
The most prevalent benefits provided by many large-scale organizations include, but are not limited to, health/medical insurance, life insurance, disability insurance, pension, vacation allowances and education grants. Few organizations include compensatory time, fitness breaks and payment upon termination of employment as benefits to their employees. Indeed, when they are only affected to employees holding higher positions such as managers and executives. The two very prominent benefits are health insurance and pension schemes where almost 90 per cent of the organizations provide their employees with the benefits.
Compensation and benefits strategy for Holland Enterprises
Of course, providing competitive compensation is essential for Holland Enterprise in the tight labour market; but, that just keeps the firm in the talent mix, it does not win the mix. Thus, the organization needs to change its compensation and benefits systems so that they resonate well with the current labour force. Given that this generation of employees is more footloose than the previous generation (baby boomers), compensation and benefit probably are important. Top management in the firm should labour to make certain that their workforce has a compensation program that is portable amid all outlets within the country. The firm also needs to offer learning programs, life-work balance schemes and professional development opportunities, and certainly define them as key components in the benefit plan.
The most strategic pay system for Holland Enterprise will require that all compensation decisions be designed and implemented to attract, retain and motivate workers. As such, the whole reward structure of the organization should be designed to serve its purpose and mission fully. Realistically, the organization should limit incentive pay to only a fraction of the compensation package. This is because the organization is in the transportation industry where labour is not intensive and the incentive pay does not represent a significant portion of the operating costs and hence, there is no pressure to control costs. Nonetheless, this guarantee serves to contain fears regarding financial security and therefore assists in attracting and retaining individuals.
A performance-based system will appropriately serve Holland Enterprise. The best pay-for-performance system should build on the base-pay scheme. The wage or remuneration put ‘at risk’ should be applied in a manner that encourages and motivates the employee without putting at risk his/her basic financial security. The organization can address the overall performance of individual employees or specific circumstances by focusing on the group performance at either the team level or corporate level. Individual schemes grounded on merit pay phase increases; bonuses, suggestion awards and allowances as well as competency- or skill-based approaches should proliferate. Additionally, corporate or group rewards should be the focus of goal- and gain-sharing plans. Performance appraisal schemes should be the trigger mechanism for facilitating pay-for-performance. The performance rating for individual employees should be used to determine the workers qualified for rewards at group or individual levels as well as the kind of rewards an individual is qualified to get.
Conclusion
The high turnover rate of employees in Holland Enterprises suggests the dire need to redesign the compensation and benefit system to attract new and retain the desired employees. The organization can accomplish this by adopting the practices that have proved to be successful in other large-scale organizations. The best strategy is to design a pay-for-performance plan in which all decisions are designed to attract, retain and motivate employees. Such a system should support a smaller base pay/incentive ratio since the industry is not labour intensive and low pay can have a great impact. In addition, the system should include an instrument that identifies the eligible employees as well as other performance metrics such as performance appraisals.
References
- Gratz, D. B. (2009). The peril and promise of performance pay: making education compensation work. Dallas, TX: R&L Education.
- Joshi, A., Liao, H. & Martocchio, J. J. (2011). Research in personnel and human resource management. London, UK: Emerald Group Publishing.
- Lee, C. H. & Bruvold, N. T. (2003). Creating value for employees: investment in employee development. International Journal of Human Resource Management, 14(6), 981-1000.
- Schwind, H. F. (1998). Canadian human resource management: a strategic approach. New York, NY: McGraw-Hill Companies.