Free Essay

Compensation Strategy

In: Business and Management

Submitted By monirzaman
Words 1436
Pages 6
Before you think about designing and implementing a compensation plan, you must first develop a clear and compelling compensation strategy. To develop a successful compensation strategy you need to take the following steps:

Define your compensation philosophy.
Link compensation to your overall business strategy.
Change the culture and reinforce it with compensation.
Reward the behaviours that drive the results.
Think total compensation.
Measure your return on invested payroll £s.

1. Define your compensation philosophy

A sound compensation programme begins with a clear, focused compensation philosophy that defines and answers fundamental questions such as:

What do we want to pay for?
How do we want to pay for it?
What is our competitive posture?
How will we split up the pie?

We recommend developing a total compensation mission statement that clearly specifies the results you want to accomplish, the behaviours necessary to achieve them, what you will pay people for, and how you intend to position your company in the marketplace. This lays the foundation for your entire compensation programme. It serves as a compass and a beacon to guide you through the difficult task of creating and implementing the programme.

Who creates the total compensation mission statement? Depending on the size of the company and the management structure, any or all of the following: board of directors, board of advisors, CEO, top management team and representatives from others in the organisation.

Your pay philosophy should:

reflect the values and beliefs of the owner/CEO/management team reflect the economic realities of your pricing structure and market share take into account "softer" issues such as corporate culture, industry standards and your growth strategy provide a foundation to make consistent hiring and promotion decisions.

2. Link compensation to your overall business strategy

Most organisations know where they want to go and how to get there. Compensation provides a very effective tool for getting employees to move in the same direction and follow the same path.

For example, suppose a young, growing company wants to increase market share. Its compensation plan needs to reward people for bringing in new customers and clients. In contrast, a more mature company might need a better balance between growth and profit. Accordingly, its compensation plan should equally reward activities that generate growth and profit.

Another company might identify world-class customer service as one of its top strategic objectives. It would need to reward the activities (in all areas of the organisation, not just the customer service department) that lead to outstanding customer service.

If compensation doesn't have a direct connection to corporate goals and objectives, employees will take any direction because they don't know which one to take. Compensation strategy starts with identifying your top strategic objectives, defining what they mean in terms of organisational behaviour, and designing your compensation plan in a way that rewards and recognises those behaviours.

3. Change the culture and reinforce it with compensation

A good compensation strategy alone won't get the results you want. In order to get permanent behaviour change, you must first change the culture and the environment. Then use compensation to reinforce those changes.

If all you do is dangle money in front of people, you get short-term blips in behaviour and then people go right back to the old ways of doing things. You don't get sustained productivity improvements unless you change the culture. That involves identifying the results you want to achieve as an organisation, identifying the behaviours that lead to those results, and then designing a compensation programme to reinforce and reward those behaviours so that they become permanently instilled in the organisation.

Compensation provides a very effective tool to reinforce organisational values. Too often, CEOs talk about values but then don't walk their talk. For example, many companies say they value teamwork but continue to reward individual performance. Or they talk about customer service but reward only financial performance.

Compensation sends powerful messages to your employees about who you are as an organisation, what you value and what skills and results you reward. If you want to instil certain values in the organisational culture, reward them through your compensation programme.

4. Reward the behaviours that drive the results

In order to reward behaviour that drives results, you have to know what creates value in your company. Value gets created in two ways. First, as an organisation you must do the things your customers want, need and desire. This represents the qualitative side of the business. Second, everyone in the company has to help the company to do those things in a profitable manner. This represents the quantitative side of the business. Without both, a company won't survive for the long term.

To get the customer's perspective on value, call your top 20 customers and ask two questions:

What are we doing now that is creating value for you and makes you feel good about doing business with us?
What can we do to earn more of your business?

Asking these questions will generate some amazing feedback. It will definitely change your thinking, not just in the compensation arena but in almost every area of your business.

Next, look internally to see who is creating value on the financial side. Every employee must do one of two things (or both): create or support sales (revenue side) or keep expenses to a minimum (expense side). If you find that people aren't doing either one, you have to question whether or not their function should continue to exist.

Between the quantitative and qualitative pieces, you can start to work out where value really gets created in your company. Then you can design a compensation plan that will get the results you want because you have identified the specific behaviours that directly lead to those results.

5. Think total compensation

In today's fiercely competitive labour markets, compensation provides a powerful tool for attracting and retaining quality people. Yet, most employees think of compensation as base pay plus the occasional bonus. They forget – or are never told – that anywhere from 30% to 50% of their total compensation comes from other areas, including:

profit sharing retirement and pension plans benefits shares or equity incentives and bonuses recognition and rewards holiday and personal time off opportunity income (education reimbursement, professional development programmes, etc.).

If you don't think, talk, market and sell total compensation, you're leaving a lot of money on the table. Talk about compensation frequently and impress upon employees that it includes a lot more than base pay. When comparing compensation for potential employees, always use total compensation, because base pay never tells the whole story.

We recommend providing employees with an annual total compensation statement that lists the complete package of rewards and recognition they receive for working in your organisation.

A total compensation statement surprises employees because the bottom-line number always exceeds what they normally think of as their compensation. You can't afford to lose employees who might get lured away by promises of a bigger base pay. Make sure all your people understand and appreciate the full range of compensation and benefits they enjoy in your company.

Don't stick the compensation statement in the salary slip envelope. Instead, sit down with each employee and say: "I want to show you the full extent of our commitment to you." (Don't say: "Here's what you cost us", because that insults the employee.) Thank them for doing a good job and go over all the costs, answering any questions they may have.

This little meeting will get you two weeks' mileage and then employees will forget about it. The real value comes when competitors try to steal your people. They may offer more £s above the line but not as much below the line. Once your employees become aware of all that you pay them, they start to ask the right questions when other employers come hunting.

6. Measure your return on invested payroll £s

How do you know whether you're getting a good return on your invested compensation £s? The answer is simple: measure it. Yet, far too many companies either ignore or overlook this critical practice.

Most companies don't even measure their return on compensation £s, much less determine whether it is a good one or not. To measure your compensation ROI, decide up front what you want to look at: productivity, bottom-line results, employee turnover, ability to recruit and retain key people, morale, customer service or any number of measures.

Identify the measures that come from your overall business strategy, then define and track them to see whether the return on your compensation £s matches your expectations.…...

Similar Documents

Premium Essay

Compensation Strategy

...To start with, we must first understand what a managerial strategy means and how we can apply the appropriately. And according to a lay man understanding it simply means how you designs you organization in order to meet your targeted goals and how the managerial strategy links to rewards and compensation. To choose the appropriate managerial strategy for the multi-products corporation, we must firstly have to understand the five key Contextual variables, which will help identify the best managerial strategy to use. These variables are:- THE ENVIRONMENT This is the most important aspect to help determine the managerial strategy to use, because it help ask two questions to determine the managerial strategy and the first question is:- Whether the firm environment is stable or unstable? and an unstable (dynamic) environment exists where product or service life cycles are short, where product or service demand is volatile, where customers needs change quickly and unpredictable (Richard, 2009). And according to the multi products corporation story, market research suggests that the demand for the product will be strong and stable and demand will not be very price sensitive, since golfers who want the product will generally be willing to pay what it takes to get the product. However, it have a stable environment and classical or human relations approach will be best for the corporation. The second question is if the firm's......

Words: 1080 - Pages: 5

Premium Essay

Compensation Strategies

...Business Research Report Compensation Strategies Assessment Code: RWT1 Table of Contents Executive Summary 3 Introduction 4 Research Findings 4 Finding Number 1 4 Finding Number 2 5 Finding Number 3 5 Recommendations 5 Conclusion 6 References 7 Executive Summary The XYZ Manufacturing Company harnesses employee happiness to produce high quality goods. Happy employees equates to loyalty and long term employee – employer relationships. To continue this formula, there are 3 strategies that will assist: 1) Group Performance Compensation, 2) Hourly Job Compensation, and 3) Contingent Employee Compensation. Group Performance strategy will foster teamwork, collaboration and higher production outputs. The diverse skill set of the group will allow them to work independently with minimally supervision. Bonuses for meeting and exceed manufacturing goals will be offered. The Hourly Job strategy will compensate all employees for their actual time spent working. Employees that are paid hourly have been found to be happier and more loyal to their employer. Profit sharing bonuses will be offered to keep the employees vested in the company thus keeping overtime to e minimum. Contingent employees will allow the company to meet the demand of peak production without the costly investment of higher regular employees. These contingent employees will be skilled temporary / seasonal workers and independent contractors. They will be hired to meet the just in time......

Words: 2168 - Pages: 9

Free Essay

Compensation Strategies

...Business Research Report Compensation Strategies Student Name: Shannon Prazen Table of Contents Executive Summary 3 Introduction 4 Research Findings....................................................................................................................................4 - 7 Finding Number 1………………………………………………………………………………………………………………………………4 - 5 Finding Number 2……………………………………………………………………………………………………………………………….5 - 6 Finding Number 3……………………………………………………………………………………………………………………………….6 - 7 Recommendation…………………………………………………………………………………………………………………………………….7 Conclusion……………………………………………………………………………………………………………………………………………….7 References………………………………………………………………………………………………………………………………………………8 Executive Summary Within this report I have completed research on three additional compensation strategies that have a focus on retaining and recruiting highly qualified employees in the manufacturing field. The additional compensation packages could be implemented into the benefit package already in place for both our exempt and non exempt employees, as well as future employees. The key factor in this report is to battle our problem of employee turnover. While we offer a very competitive wage for a manufacturing company we also need to show that we value dedication and above all pride in a job well done. We need to make sure that we are encouraging the quality of the work performed meet existing standards, and also provides the extrinsic motivation needed......

Words: 3013 - Pages: 13

Free Essay

Compensation and Benefits Strategies Recommendations

...Compensation and Benefits Strategies Recommendations 1 Compensation and Benefits Strategies Recommendations HRM/531 May 12, 2014 Compensation and Benefits Strategies Recommendations 2 Mr. Stonefield, our esteemed client who is starting Landslide Limousine Service, is looking to us for recommendations for pay and benefits strategies. In a voicemail left on our office phone, he has helpfully summarized his five main areas of concern and these are summarized below. 1. 2. 3. 4. 5. He wants to be comparable with other limousine services He wants to fit in well with the limousine market in the Austin, Texas area He reiterates that he is planning for 25 employees His projected annual net revenue for the first year is south of $50,000 He predicts five percent revenue growth over the next couple years. The overall unemployment rate in any given area is a crucial factor in the retention rate of any given industry or field in that area, and the limo industry is no different. (Mergent 2013). Austin, Texas, in recent years has become a hotbed of growth and an area that has attracted much new blood; (5.2 (BLS, 2013)) resulting in a 2013 unemployment rate (five percent) that is below the state and the national average (roughly seven percent) . (Robert Grattan, “Austin Unemployment Rate Sets the Pace”,, December 19, 2013). Mr Stonefield was wise to select Austin for his business, then, as it is in the midst of a boom that shows no signs of abating. In fact...

Words: 922 - Pages: 4

Free Essay

Compensation and Benefit Strategies

...Compensation and Benefit Strategies HRM/531 Compensation and Benefit Strategies In the development of a compensation and benefit strategy for Clapton Commercial Construction, the Atwood and Allen Consulting firm will research multiple factors, and provide a comprehensive recommendation proposal to the firm. The proposal includes the development of clear job descriptions and employee performance plans, a local market evaluation, market position, performance incentives, and laws pertaining to Arizona compensation, as the construction company is expanding the operation in the near future. The Clapton Company requests the recommendations allow the company to remain comparable to other Arizona construction firms and meet the parameters of their annual net revenue of $10,000,000. The primary goal of the package is to provide a fair yet competitive pay structure to employees while maintaining the financial standing of the firm. Market Evaluation With more than 35 billion dollars in post-bid commercial construction projects currently underway in Arizona, the construction market is likely to continue to remain quite competitive (Reed Construction Data, 2013). “Nationwide, the construction industry stood at 5.83 million workers in October, up 3.3 percent year-over-year. That also was up by 11,000 from September, marking the fifth consecutive month of job gains, making the industry competitive at best” (Hansen, 2013, p. 1). Although the market is robust in the state,......

Words: 592 - Pages: 3

Premium Essay

Foundations of a Compensation Strategy

...Foundations of a Compensation Strategy Dana Williams BUS434: Compensation & Benefits Management Instructor Gwendolyn McCants-Allen July 7, 2014 An effective compensation strategy is made up of many different components and will directly support the organizations business strategy. As stated by Steve Elliott, the compensations strategy is “externally competitive, legally compliant, compatible with the culture and appropriate for the workforce” and above all it is perceived as fair (Miller, 2014, p. 1). When a company is creating a compensation strategy there are four components that should be reviewed in order for the company to be competitive in the global economy. The four components are; as stated by Henderson, (2006), “1) the work that must be performed by some work unit or individual, 2) the kinds and levels of knowledge and skill required, 3) the quality of people needed to promote organizational success, and 4) the rewards the organization can offer to its members that promote a work culture that ensures accomplishment of organizational strategy” (p. 5). In order for the compensation strategy to be effective, the process needs to create a clear link between the job description, performance evaluation, internal salary comparison and the external salary survey. A good starting point in creating a compensation strategy is to create a job description for each position within the company. A job description can be defined as a written statement......

Words: 990 - Pages: 4

Premium Essay

Compensation and Benefits Strategies Recommendations

...Learning Team Assignment: Compensation and Benefits Strategies Recommendations Purpose of Assignment For this task, Traci has asked your team to develop compensation and benefits strategies for your client. It is important to understand the relationship of compensation and benefits to achieving business objectives and employee attraction and retention. You will also need to consider the increasing cost of compensation and benefits and appropriate actions management may take to maintain or reduce this cost factor. It is important that any business have a compensation and benefits plan that not only attracts and helps to retain quality employees, but also allows the business to survive financially. Learning Team Assignment: Compensation and Benefits Strategies Recommendations Purpose of Assignment For this task, Traci has asked your team to develop compensation and benefits strategies for your client. It is important to understand the relationship of compensation and benefits to achieving business objectives and employee attraction and retention. You will also need to consider the increasing cost of compensation and benefits and appropriate actions management may take to maintain or reduce this cost factor. It is important that any business have a compensation and benefits plan that not only attracts and helps to retain quality employees, but also allows the business to survive financially. Learning Team Assignment: Compensation and Benefits Strategies......

Words: 417 - Pages: 2

Free Essay

Compensation Strategies Even if the partner tries to meet the expectations, it will never be exactly what their partner wants. This is because expectations in relationships are most often unattainable. We all have a preconceived notion of what we want in our ideal mate, and this is how expectations are conceived. When someone harbors unclear or unspoken expectations, then they are likely going to surface at some point. “Happiness is living without expectations. “ Peter Cajander Types of Expectations on Relationships There are different types of relationships a person experiences in their life: parent/child, friendship, romantic, and business. Situations discussed in this chapter most directly involve persons in a romantic union, yet all these strategies apply to any type of relationship. Different types of expectations can negatively affect our relationships. Expectations can be unrealistic, unclear, unfulfilled, unspoken, unexpressed, and misguided. These unrealistic expectations can come from: Our family values and traditions Past relationships Past experiences Expecting the other person to provide our personal happiness or fulfillment Projecting onto someone else how we want them to be. Most importantly, problems in any relationship come from lack of communication and miscommunication. How Past Experiences Influence Our Expectations Our past experiences shape how we think, feel and act. It is through various influences in life that we form unclear......

Words: 4360 - Pages: 18

Premium Essay

Compensation Strategy Options

...employees, you have been asked to evaluate different compensation strategies that are available for adoption within your organization. Compare and contrast at least three compensation strategies and determine recommendations for how they may be implemented within your organization. Name: Henry Rivera I.D. #: 000318961 Reference Title Finding #1 Godfrey, W. (2013, January). Compensation Strategy for Success. Prezi. Retrieved from Sager, Suzanne. (2011, September). Merit Pay Most Often Used in Compensation in Public and Academic Librarians. Library Worklife. Retrieved from Ojimba, E. (2004, November 15). Salary Basics – Developing a Strong Compensation Strategy. for Business. Retrieved from Finding #2 McGladrey. (2011). Lessons from Recession Increasing Focus on Incentive Compensation Programs. Retrieved from University of Wisconsin – Green Bay. (2013, April 9). Compensation Philosophy. Retrieved from Finding #3 Gerhart, B., Milkovich, G.T., & Newman, J.M. (n.d.). Compensation Strategy. Answer, McGraw Hill. Retrieved from......

Words: 2629 - Pages: 11

Premium Essay

Compensation & Benefit Strategies

...Compensation & Benefit Strategies Compensation and Benefit Strategies In today’s world, assigning a right compensation for a right job position and matching it with individual’s expectation has become a challenging task. For large scale organizations, defining compensations and benefits is even harder and border challenge. In this case organizations need to consider various demographic factors prior to defining favorable compensation strategy. Any compensation strategy applicable in given organization cannot be matched with similar job functions in other organizations or in other regions for same organization. A constant review of compensation and benefits strategy is needed with various benchmarks to attract right talent. Organizational long term strategies, span of organization, hierarchical structure, policies and future internal expansion in organization determines overall pay scales and promotions. For a large organization as referred in video ("Atwood and Allen," 2014) which is already having multinational presence and looking forward to expand further in various demographic regions, needs to consider various factors to fulfill organizational strategies. Attracting right talent, retaining existing talent and improving upon existing talent of employees are some major challenges faced by all such types of organizations. For such organization with its multinational existence I will choose a multinational based compensation plan which will account for......

Words: 1074 - Pages: 5

Premium Essay

Compensation Strategy - Sephora

...has a human relations managerial strategy that focuses on teamwork and company loyalty. Using a combination of base pay, indirect pay and team-based performance pay, Sephora’s compensation strategy aligns well with its chosen managerial strategy. Sephora also has a clear understanding of the different structural and contextual variables and how they must align with their managerial strategy. They take care to ensure that these variables are linked with their human relations strategy. By doing so, Sephora is also able to understand its own needs as well as what behaviours, and mix of compensation to generate these behaviours, is required to achieve its goals. In order to produce the behaviour that is necessary to achieve an organization’s goals, the company needs to be aware of the rewards they are offering their employees and whether the employees find these rewards motivational. Sephora, a leader in compensation in their industry, understands what type of rewards encourages their cast members to produce results, and ensures that these rewards are communicated and visible to the workers. While having a successful team-based reward program, Sephora needs to look at improving its individual rewards. By looking at Sephora’s compensation strategy through the compensation strategy formulation process, it is also evident that the strategy they have in place is appropriate and serving them well. About Sephora and Their Compensation Strategy & System Sephora was founded......

Words: 3500 - Pages: 14

Premium Essay

Compensation and Benefits Strategies Recommendations

...Compensation and Benefits Strategies Recommendations May 20, 2014 Steven Colon James Thompson Oscar Caldera University of Phoenix HRM/531 Robin Sully Compensation and Benefits Strategies Recommendations The following paper will be about the development of the compensation and benefit recommendations for Mr. Bradley Stonefield. This development will have a market evaluation with researches on what companies in the relevant market are providing to employees from a total compensation perspective. With the results of the research, we will then take a look at the compensation structure. With these two outcomes, we will be able to recommend a position in the market. We will also be creating a total compensation and benefits strategy, consider the use of performance incentives and merit pay to recognize and engage employees. In creating these compensations we will have to identify laws related to the benefits and pay program. Results for the Market Evaluation The results for the market evaluation will show that it will be very competitive for a small startup business to hire qualified and experienced limousine drivers in Austin, Texas. According to the Yellow Pages (2014), Austin has over 113 limousine business competing in the same market. With these many companies operating in the same market may result in several issues when it deals with human resources (HR). One of the issues with this type of market is that should assume high......

Words: 1444 - Pages: 6

Premium Essay

Compensation Strategy

...was is no compensation strategy in place. As an HR director I would start by revamping the entire system. There would need to be policies in place to form the compensation system. The Four main policies that I would start with would be internal alignment, external competitiveness, employee contributions and management. These four policies manage pay in ways that accomplish the systems objectives. (Milkovich et al., p. 10) The question to address when looking at the internal alignment of the company is how should different types and levels of skills be paid within the organization. The Wilson Brothers have no form of internal alignment. The salaries of the employees that were hired in the past were all negotiated. There were no pay comparisons between jobs and skill sets within the company. Pay relationship within the organization affects employee decisions to stay in the organization. (Milkovich et al., p. 10) When looking to hire future employees for the company one should look at the Marginal Productivity Theory. This theory states, unless an employee can produce something of value from their job equal to the value received in wages, it will not be worthwhile for the employer to hire that employee. (Milkovich et al., p. 39) By applying this theory to the Wilson Brother’s company it would eliminate the need for salary negotiations among employees. The second point to address is external competitiveness. External competitiveness refers to the compensation......

Words: 438 - Pages: 2

Premium Essay

Compensation Strategies

...Compensation Strategies Table of Contents Executive Summary 3 Introduction 5 Research Findings 6 Health Benefits 6 Retirement Planning 7 Employee Rewards and Incentives 8 Recommendations 10 Conclusion 11 References 12 Executive Summary We need to re-evaluate our current employee package. Our compensation strategy needs an entire tune-up. We do not offer competitive benefits that will entice the type of employees we want working for our company on a long-term basis. A new, improved, and luring employee benefit package will help set us apart from our competition. Our current benefits policy includes: Paid vacation for salaried employees only after 1 full year of continuous service, paid sick days for salaried employees only after 1 full year of continuous service, medical and dental only to all employees after 6 months of continuous service, holiday dinner for corporate employees and their spouse/domestic partner. We can improve these areas and add some other options to our current employee package, Our current health benefits are through an HMO, which is the best option at this time. Perhaps in the future when we have become a 500+ employee company we can look at the other option, a PPO coverage with an additional option to include an HSA account. Our current HMO plan provides coverage with a small co-payment and a 20/80 % coverage with a $1000 annual deductible. The only way I can see right now......

Words: 3032 - Pages: 13

Premium Essay

Foundations of a Compensation Strategy

...Foundations of a Compensation Strategy Datrise D. Boyd Bus 434: Compensation & Benefits Management Professor Furlong, J. Sept 10, 2012 Foundations of a Compensation Strategy The sole purpose of a compensation strategy is to “develop a compensation program that recognizes the lifestyle and standard of living of all employees,” (Henderson, R., 2006, pg 3). To define a compensation strategy even simpler, organizations use this strategy to determine how rewards to their employees are distributed. Considering that, compensation is an excellent way to motivate those employees not performing well to do better and those that are working hard to work harder. It is critical that a good compensation strategy be developed and put in place so that companies have a fair process of rewarding each employee for their hard work and determination. “The most effective compensation strategy is one that develops a clear link between the following components: job description, performance evaluation, external salary survey, and internal salary comparison,” (assignment instructions). The position selected for this paper is Human Resource management but first let the discussion focus on the three links mentioned previously. The job description is where potential candidates learn the expectations of the inquired position such as general tasks, functions, and responsibilities. It can also include the position point of contact, specifications such as qualifications or skills needed, or a......

Words: 614 - Pages: 3