Key concepts
The term total compensation is used to describe all forms of monetary payments to an employee. Calculation for it is: total compensation = base salary + incentive compensation. (Money-Zine n.k.) Total compensation (Gomez-Mejia, Balkin & Cardy 2016) has three components:
- Base compensation – the fixed pay received on a regular basis
- Pay incentives – programs designed to reward good performance
- Benefits or indirect compensation – including health insurance, vacations and perquisites.
Following a prescribed compensation design process can help an organization achieve a balanced and successful pay plan. While each company may need to tweak their methodology slightly to align with their own specific requirements (VanOrnum 2019), the pay options managers need to consider in designing a compensation system are (the book):
- Internal versus External equity
- Fixed versus Variable pay
- Performance versus Membership
- Job versus Individual pay
- Egalitarianism versus Elitism
- Below-market versus Above-market compensation
- Monetary versus Non-monetary awards
- Open versus Secret pay
- Centralization versus Decentralization of pay decisions
Compensation refers to payments, such as salaries, wages and bonuses, that reward employees for their job-related performance. Job-based compensation structure, or job-based pay, is the most traditional type of compensation system in which pay is set on the basis of the job itself. Employees are remunerated on the basis of the jobs they are currently performing. Job-based compensation is in contrast to skill-based pay, which awards employees on the basis of their skill and knowledge level. Job-based compensation structure has several advantages despite being touted as an outdated compensation structure. (Gilani 2017) Different tools to use are, for example: labor market analysis, fair labor standards act (FLSA), salary grades and total compensation calculator. (Merced n.k.)
The legal framework exerts substantial influence on the design and administration of compensation systems. The key federal laws that govern compensation criteria and procedures are the Fair Labor Standards Act, the Equal Pay Act, and the Internal Revenue Code. (O’Reilly n.k.)
Pay-for-performance system, also called incentive systems, reward employee performance on the basis of three assumptions (Gomez-Mejia, Balkin & Cardy 2016):
- Individual employees and work teams differ in how much they contribute to the firm – not only in what they do, but also in how well they do it.
- The firm’s overall performance depends to a large degree on the performance of individuals and groups within the firm.
- To attract, retain and motivate high performers and to be fair to all employees, a company needs to reward employees on the basis of their relative performance.
There are four types of incentive programs. At the level of individual employees, merit pay and bonuses and awards. At the next level, team-based plans, rewarded with bonuses and noncash awards. At the level of plant or business unit it is gainsharing. (Gomez-Mejia, Balkin & Cardy 2016)
The challenges and problems (PayScale 2014) with pay-for-performance are that:
- Not everyone is motivated by money – While the importance of pay can’t be overstated, it remains true that not everyone is motivated by pay. Some employees are motivated by praise, recognition, or the opportunity for better assignments
- The annual raise is not what it used to be
- Many managers are unskilled at giving meaningful evaluations
- The goals aren’t SMART? – SMART? goals are specific, measurable, attainable, realistic, and timely.
Building a pay-for-performance system is an evolutionary process that must begin with the basics. While ideally all five of the primary issue categories should be addressed before a performance system is instituted, most implementations are not afforded the time. Those overseeing the shift to pay for performance must focus on the essentials through a careful assessment of the most relevant issues to the particular organization. Many pay-for-performance efforts fail because the focus eventually becomes about pay and has little to do with performance. The focus should remain on performance and providing lasting results for organizations. (Gabel, Harker & Sanders 2009)
Case – The Puzzle of motivation
In the video, The Puzzle of Motivation, (Pink 2009) it is stated that rewarding employees with money doesn’t always bring the best performance out of them. According to Dan Pink the 20th century rewards do work, but only in surprisingly narrow band of circumstances. He also stated that if-then (if you reach this goal, then you get this amount of money) kind of rewards often destroy the creativity. For people it’s far more rewarding if the feel like they are doing something for the sake of themselves. The drive to do things cause their matter. Bringing the rewards to 21st century is for example this: most of Google’s new products are developed within the 20% free time the employees have. This 20% -free-time-model means that Google’s employees can use 20% of their work time to do anything they want. It has to be something different than their usual work. As stated earlier, not everyone is motivated by money. Employees will perform better in their jobs when they feel engaged and appreciated. They must know and feel that their work is valued. This kind of appreciation will enhance their working.
Other similar cases
For employers looking to keep employees happy, it’s important to develop non-monetary motivational policies that recognize employee efforts effectively. (Smith 2018) Here are few examples:
- Recognition and praise – overall, employees just want to be values for their work, time and effort. In one client employee satisfaction survey, 55% percent of the respondents said that praise and attention from their supervisor would make them feel cared for and valued in the workplace. You could establish a recognition team, identify positive behaviour to reinforce and acknowledge employees often.
- Physical rewards – in some cases, a company can use in inexpensive physical reward like a ticket to a show, a gift card to a local restaurant or a mug.
- Growth or learning opportunities – In one employee engagement survey, 34% of those polled said that career and development opportunities would increase their loyalty.
References
Gabel, L., Harker, K. and Sanders, E. 2009. Avoiding ‘pain for performance’: How to design and implement a pay-for-performance system effectively. URL: Gomez-Mejia, L.R., Balkin, D.B. and Cardy, R.L. 2016. Managing Human Resources. Global Edition 8/E. Pearson. London.. Accessed: 15 March 2020
Gilani, N. 2017. What are the advantages of a job-based compensation structure? URL: https://bizfluent.com/info-8771841-advantages-jobbased-compensation-structure.html. Accessed: 15 March 2020
Gomez-Mejia, L.R., Balkin, D.B. and Cardy, R.L. 2016. Managing Human Resources. Global Edition 8/E. Pearson. London.
Merced – University of California. N.k. Compensation tools. URL: https://hr.ucmerced.edu/compensation/compensation-tools. Accessed: 15 March 2020
Money-Zine. N.k. Total compensation. URL: https://www.money-zine.com/definitions/career-dictionary/total-compensation/. Accessed: 15 March 2020
O’Reilly. N.k. The legal environment and pay system governance. URL: https://www.oreilly.com/library/view/managing-human-resources/9780133029697/xhtml/fileP700049518300000000000000000331C.xhtml. Accessed: 15 March 2020
PayScale. 2014. The top 4 problems with pay for performance. URL: https://www.payscale.com/compensation-today/2014/09/the-top-4-problems-with-pay-for-performance. Accessed: 15 March 2020
Pink, D. 2009. The puzzle of motivation. URL: https://www.ted.com/talks/dan_pink_the_puzzle_of_motivation/up-next?language=en. Accessed: 15 March 2020
Smith, B. 2018. 5 ridiculously useful non-monetary reward examples that improve employee engagement. URL: https://www.business2community.com/human-resources/5-ridiculously-useful-non-monetary-reward-examples-that-improve-employee-engagement-02147022. Accessed: 15 March 2020
VanOrnum, C. 2019. The 4 phase of compensation design. URL: https://hrsoft.com/blog/the-4-phases-of-compensation-design/. Accessed: 15 March 2020
Basics of Human Resource Management 