The Concept of Compensation Management in an Organization

Compensation is seen as being a key element of the employment relationship and, in addition to being the single greatest operating cost for many organizations, it has been advocated as a tool for enhancing organizational performance and sustained competitiveness. Therefore, this paper seeks to explain the concept of compensation and further discuss the factors that affect compensation of employee in industrial organizations. Compensation can be explained as being the human resource management function that deals with every type of reward individuals receive in exchange for performing organization tasks, with a desired outcome of an employee who is attracted to the work, satisfied, and motivated to do a good job for the employer (Ivancevich, 2004). In short compensation is a double input – output exchange between an employee and an employer.

Further, the American Compensation Association’s (1995) define compensation as the cash and non-cash remuneration provided by an employer for services rendered. It could be financial rewards which refer to any monetary rewards that go above and beyond basic pay. These rewards are separate and not added into basic salary. Examples of these include financial incentives, bonuses, and recognition. In addition, Compensation can be described as direct and indirect compensation received by employees in an organization that serves to achieve employee satisfaction and retention as well as improve performance (Belcher, 1997). On one hand, direct compensation includes wages, salaries, bonuses or commission. Indirect compensation on the other hand includes incentives, medical benefits, housing allowance, annual leave allowances and training opportunities.

According to Henderson (2003), the level of compensation largely depends upon organizational performance as well as operating policies and strategies. Dessler, (2005), suggested that the factors that affect compensation of an organization are determined by its ability to pay, employees productivity, labour laws and regulations, job requirement, reward systems and strategies, trade unions and organization structure. These factors are discussed in as follows;The firms’ ability to payAccording to Dessler, (2005), compensation can be divided into various parts. One way of making this division is to break it down into three parts namely, fixed-Pay, Flexible Pay and Benefits (Beard, 1986). Another way could be divided Compensation into two parts, Performance-based pay and Non-performance based pay. When analyzing the first classification, fixed pay is the compensation given to employees as their salaries for example promotions, merit increases and cost of living increase. These come under fixed pay because all of them become part of the employee’s base salary after its effect. Secondly, flexible pay is made up of two components in itself, variable pay and deferred income. Variable pay refers to commissions, bonuses, gain sharing, and goal-based pay; where the amount of pay is variable or its distribution is not certain, which is given usually to salespeople.

Deferred income is long-term organization pay schemes for example profit sharing, company savings plans employee stock ownerships etc. Finally we have benefits, which include thing like vacations, sick leave, company car, company house, severance pay, medical insurance, retirement benefits etc (Dessler, 2005). Employee ProductivityOrganization that link pay to individual performance are more likely to attract individualistic types of employees, while organizations relying more heavily on team rewards are more likely to attract more team-oriented employees. It has been found that different pay systems attract different people depending on their personality traits and values (Judge & Bretz, 1992). The implication is that the design of compensation programs needs to be carefully coordinated with the business and human resource strategy. The mechanism for recognizing employee contributions differs for new and existing employees. Contributions made by new employees are recognized by varying the level of starting pay they receive. New employees usually are paid at the minimum rate unless their qualifications exceed the minimum qualifications of the job. Those exceeding minimum qualifications are paid more because they can make a greater contribution, at least initially. Existing employees’ contributions usually are recognized in the form of pay raises, typically granted on the basis of seniority and performance (Henderson, 2003).

Moreover, the labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills. When prolonged and acuter, these labour market pressures probably force most organizations to reclassify hard to fill jobs at a higher level that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is a great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and ongoing wage concepts since; in essence, all of these remuneration standards are determined by immediate market forces and factor (Judge & Bretz, 1992). However, skill based pay also pose some risks in the area of employee paying higher compensation that are not offset by organization productivity. Also, employee may become rusty unless there is opportunity to use all the skills acquired; and when employee hits the top of the pay structure, he may become frustrated and leave the firm just because there is no further opportunity to receive pay raise (Noe et. al. , 2006). Laws and regulationsWorkers’ compensation (WC) laws generally vary from state to state. One important implication is that statutory minimum wage may actually result in an increase in employment, because it forces monopsony employers to raise their wage rates and thereby fill existing vacancies.

Further work has under lined the extent to which many labour markets could be subject to ‘dynamic monopsony, because of the difficulties workers face in gaining accurate information about alternative jobs and the costs incurred in leaving one job and starting another (Stewart, 2001). Regardless of the effects of legislation on salaries in general, compensation continue to be influenced by several factors that are producing some important trends in compensating workers. On of such trends is aligning wages to the organizations goals. Others include tailoring compensation to the needs of employees; better salary, and pay equity (Fisk 2001).

Job requirements

The factors or criteria which have influence pay and pay increases include profit (but generally unrelated to individual or group performance), job evaluation, seniority, cost of living, manpower shortage or surplus, negotiating strength of the parties and skills. Performance measures such as productivity or profit related to the performance of a group have been of less importance in determining pay increases. Though skills have been reflected in pay differentials, pay systems have been seldom geared to the encouragement of skills acquisition and application (Droar, 2006). Modern organizations are very significant changes in their compensation systems in order to better fit the dynamic, highly competitive business environment. Firms increasingly are using things such as skill-based pay, which compensates employees for the number and types of skills they possess instead of the type of job they have. Similarly, there is a strong movement to at-risk compensation, where employee pay is tied to performance. Under this system, the employee’s bonus does not become part of his or her base pay. Instead, the bonus must be re-earned each year.

These changes, and numerous others are designed to help offset compensation costs by gains in productivity, and to develop more flexible workforces (Kleiman, 2000). To achieve internal consistency, a firm’s employees must believe that all jobs are paid what they are worth. In other words, they must be confident that company pay rates reflect the overall importance of each person’s job to the success of the organization. Because some jobs afford a greater opportunity than others to contribute, those holding such jobs should receive greater pay. For pay rates to be internally consistent, an organization first must determine the overall importance or worth of each job. A job’s worth typically is assessed through a systematic process known as job evaluation. In general, the evaluation is based on informed judgements regarding such things as the amount of skill and effort required to perform the job, the difficulty of the job, and the amount of responsibility assumed by the jobholder (Mathis & John, 2006). A firm achieves external competiveness when employees perceive that their pay is fair in relation to what their counterparts in other organizations earn. To become externally competitive, organizations must first learn what other employers are paying and then make a decision regarding just how competitive they want to be. They then establish pay rates consistent with this decision.

The firm begins by conducting or acquiring a salary survey. This survey provides information on pay rates offered by a firm’s competitors for certain benchmark jobs i. e, jobs that are performed in a similar manner in all companies can thus serve as a basis for making meaningful comparisons. Some firms gather this information from existing surveys already conducted by others, such as those produced by the Bureau of Labor Statistics (Milkovich, & Jerry, 2005). An increasing number of organizations are trying to link pay to performance, though programs such as variable or incentive pay, where a percentage increase in pay depends on the employee’s achievement of predetermined measurable goals; skill-based pay, where employees paid for the number of skills they possess; and most recently, competency-based pay, in which an employee is paid for the range, depth and types of skills and knowledge he/she is capable of using in the job rather than for the position they hold. The happier people are within their job, the more satisfied they are said to be. Most times, job design aims to enhance job satisfaction and performance and this could be achieved via job rotation, job enlargement. Other influences on job satisfaction include the management style and culture, employee involvement, empowerment and autonomous work position. Job satisfaction is a very important attribute which is frequently measured by organizations and the most common way of measurement is the use of rating scales where employees report their reactions to their jobs (Judge et. al. , 2001).

Reward strategy

According to Armstrong (2000), reward strategy is the policy that provides specific directions for the organization to develop and design programmes which will ensure its rewards the performance outcomes supporting the achievement of its business goals. Employers develop an initial compensation structure that complements various steps of workforce planning. Workforce planning consists of creating a formula for the types of kills, expertise and concentration of workers that are necessary to achieve the company’s goals. Once the organization completes its workforce planning steps, the nest step is creating a competitive, yet feasible compensation structure. Too often, companies give little consideration to reevaluating compensation to ensure it addresses future business needs, such as employee developing, inflation, employment trends succession planning. One of the most effective ways compensation can have a positive impact on employee retention is to construct an employee developing plan that promises employees career track opportunities with the company. Being on an upward career track should come with corresponding salary and merit increases. In addition, performance-based bonuses motivate employees in terms of aligning their individual goals with company goals. Implementing incentives such as stock options, profit sharing and spot rewards are other ways compensation affects retention. These forms of compensation demonstrate how critical employee performance is to the organization’s overall profitability. Spot rewards are usually not as lucrative, however, they provide immediate recognition, reward and compensation when company leadership observes an employee performing superior work.

Appreciation is key to employee retention, and if compensation is a part of recognition, then compensation is likely to increase employee retention. Trade unionsIt is increasingly recognized that institutional factors such as trade unions do play dominant role in the process of economic development especially in the industrial sector; this realization is more pronounced in the case of developing economies. The influence of trade union is evident in crucial economic indicators such as employment, level of wages, standard of working conditions etc. , in short, the nexus between labor organizations and labor market has been firmly identified and is gradually getting articulated. As a result, obtaining of wage increase has become an inherent function of trade unions. Studies on the labor movement in India show that there was no organized laborforce in the early stages of industrialization in India. However, unbearably long hours of work, low wages etc. , made the workers use a weapon called strike. As a result, between 1900 and 1914 there were several strikes, but most of them were unsuccessful. In the twenties, soon after World War I, the Indian working class realized the effectiveness of strikes as a means of obtaining concessions such as higher wages and improvement of working conditions. A new sense of confidence and an awareness of injustice perpetuated against them induced them to stand up for their right and to offer resistance against ill treatment and exploitation. The workers were dissatisfied with their wages, more particularly in view of the steep rise in prices. The unions agitated for rise in wages (Deshpande, 2000).

In Zambia trade unions are organizations that represent people at work. Their purpose is to protect and improve people’s pay and conditions of employment. They also campaign for laws and policies which will benefit working people. Trade unions exist because an individual worker has very little power to influence decisions that are made about his or her job. By joining together with other workers, there is more chance of having a voice and influence. The ability of a union to carry out these functions may depend on the union membership and the union density. A small union with few members is unlikely to have as much influence as a large union with many members. People are recruited to unions in different ways. Most people find out about the union by talking to colleagues at the workplace and then make direct contact with the union. Others are contacted by the union representative who gives them information about the union and tells them how to join. Some employers and personnel officers tell employees about the union when they start working for the organization (ZCTU, 2012).

In conclusion this essay has explained compensation as being the human management function that deals with every type of reward individuals receive in exchange for performing organizational tasks, with a desired outcome of an employee who is attracted to the work satisfied, and motivated to do a good job for the employer. It furthermore this essay has suggested that the factors that affect compensation of an organization are determined by its ability to pay, employees productivity, labour laws and regulations, job requirement, reward systems and strategies and trade unions.