Good Essay On How Should A Compensation Plan Reflect An Organization’s Mission Statement And Core Values?

Type of paper: Essay

Topic: Workplace, Employee, Compensation, Organization, Employment, Business, Company, Competition

Pages: 9

Words: 2475

Published: 2020/11/13

Philosophy of Compensation

The company’s mission and vision statements reflect its core values. For the same reason, having the right vision and mission statement is of outmost importance as it serves as a guiding principle for organizations to be able to stay focused on what they intend to do and how they should do it . Most organizations that have aligned their activities on their vision and mission statements have gained satisfactory results. Part of an organization’s strategic development is the setting of goals in line with their core business. For example, a product manufacturer would ask, what is the purpose of making these products? How do I market these products? In the face of the competition, how would I know that consumers would buy these products? In addressing these questions, one would need to have a clear goal of what particular product he would manufacture and the intended market for the said products. Apparently, the product must have an edge whether in pricing, design and other value adding strategies in order to become sellable. In this regards, a manufacturer sets a vision of what he wish to accomplish; say he want to become the leading producer of sports apparel. In order to accomplish that, he sets his mission; say, producing the best sports apparel using only the best material in the market. In between, he develops his strategies on how to acquire the best material through a careful selection of suppliers, extensive quality control and other activities that would set him apart of the competition. An organization that seeks excellence on their product and service subsequently should hire highly skilled and highly motivated employees. In order to attract these types of people towards the organization, the organization must offer a competitive compensation package. For the same reason, compensation reflects how an organization is committed to excellence by hiring rather expensive yet highly competitive individuals in their ranks. Such organization would not settle for mediocrity and always pushes their employees for excellence. It should be noted though that pushing employees to strive for excellence would fail unless it is backed by solid compensation packages as motivation. This assumption can be based on several studies, which indicate that compensation is rated as very important by employees .

How does a compensation approach relate to the social good?

Ethics suggests that equity in compensation should be observed. This notion of equity is somehow reinforced by the theory of social exchange which was developed during the 1920’s. This theory emphasize that humans strive for a positive outcome by maximizing benefits and minimizing costs when engaging in an exchange. The notion of equality in social exchanges has been observed even in primitive societies through gift-giving traditions. As observed, the exchange of gifts has a social and psychological implication both for the giver and the receiver. In the act of exchanging gifts, each party expects them to be of equal value. By analogy, employees who possess skills and abilities offer them in exchange of monetary compensation. Employers, on the other hand, must met the exchange with equal value to maintain the notion of equity between the two exchanging parties. Aside from the notion of equality, some people believe that companies are socially responsible for their employees. Ralph Nader, for example, believes that corporations are not ‘our buddies,’ but rather, fictitious entities that should be made responsible for social responsibility (Nader, 2013). While there are differing views on the extent of social responsibility that an organization is accountable for, as much as possible, businesses take serious efforts to address human relations concerns in order to avoid internal and external conflicts that could affect their operations. Even so, conflict between management and occur when demands are not met and most of these demands is related on employee compensation. The increasing cost of living is one of the main reasons why most employees are pushing for increase in compensation. Most argue that the current minimum wage is not sufficient to make a descent way of living. Evidently, people need a certain amount of money to pay for their basic needs and personal necessities such as housing, food and shelter; not to mention the rising cost of healthcare that may sometimes come out directly from the employees’ pocket. Ethics suggests that compensation should be enough to provide for a person and his family all the necessities in life plus something left that he can spent on his well-being. However, the rise in compensation is not adequate to meet the rising cost of commodities. Evidently, the way organizations compensate their employees impact the financial status of their employees as well as the particular community where they operate. By providing a reasonable compensation package, the organization can provide economic prosperity not only to its employees but also to the economy of the community as well.

How should an organization’s compensation approach align with organizational strategy?

The relationship of compensation to the organization’s strategies and vice versa can be easily established knowing that compensation is part of the organization’s financial aspects. Since 1900’s, employee benefits has greatly improved in the United States. Aside from the statutory benefits that the government requires, organizations provide additional benefits towards their employees as part of their compensation package. According to researchers, corporations in the United States pay their employees up to 30% of their compensation in benefits which is estimated to cost these companies around $600 billion every year. Among the largest spending on benefits are being provided among company executives. However, benefits have also caused controversies that could lead to fraud. Lavish lifestyles of some executives at the company’s expense have been identified in some of the largest corporate frauds in history. One particular example is the case of Tyco’s CEO, Dennis Kozlowski . According to sources, he had the company pay for personal purchases which includes a $16.8 million apartment on Fifth Avenue and a $7 million apartment on Park Avenue for his former wife. He bribed Tyco executives by giving lavish incentives and loans which was later forgiven without approval from the board amounting to millions of dollars. In one particular instance, Frank E. Walsh, Jr, one of Tyco’s boards of directors received $20 million as finder’s fee for the acquisition of CIT Group. As the case of Tyco and Kozlowski suggests, it is quite evident that excessive benefits is not a sign of a healthy organization, rather, it can be an indication of financial issues. For the same reason, an organization’s compensation approach should reflect balance between being competitive as well its commitment to its shareholders. Friedman believe that the primary responsibility of a business entity it to earn profits for its shareholders. Furthermore, Friedman argues that it is the responsibility of the manager, being the top employee of the company, to oversee and make sure that the responsibility of the business to earn profits for its owners is ensured. In a competitive business environment, employers expect to get the best employees by offering competitive compensation packages. On the other hand, the compensation package is reasonable enough that it does not affect the financial stability and the ability of the organization to retain its earnings.

How should pay and benefits be distributed throughout the organization?

Compensation distribution varies depending on the type of organization. Whether it’s for profit or non-profit, organizations have their own scheme on how their compensation is structured. There are things that need to be considered when planning on how pay and benefits are structured. Primarily, it is important to know things such as the economic conditions of the region, the volume of potential employees and the statutory requirements of a particular country where the business operates. In developing a compensation strategy, it is important to determine how much is allocated to salary and how much goes to benefits as well as how it is spent. A budget of $3,000, for example, may be allocated for individual employee compensation whereas say 85% of this amount goes to his salary while 15% is allocated for his benefits. It is also important that the company does not exceed their budget allocation to avoid any unexpected deficits due to compensation. So, by clearly allocating a certain amount for compensation, the organization does not exceed from its budget. Aside from allocating a known amount for compensation, it is also important that a salary grade or hierarchy is established. Salary grades are an important aspect of compensation strategy in terms of competitiveness. Accordingly, “To be competitive, it is important to benchmark like jobs within the same industry and create a pay structure”. In terms of performance, salary grades can provide the necessary identifier that separates performing employees from those who do not. It should also identify key employees to those who can be replaced without dire consequence to the organization. Most importantly, salary grades are what provide the organization its hierarchy which also acts as a major motivator for employees to rise up the corporate ladder. For the same reason, the compensation of the rank and file employee could never exceed their supervisor’s as well as the compensation of the supervisors should ideally not exceed the compensation of the executives.

How should individual performance be recognized via compensation?

In compensation management, best practices suggest that in order to retain talents, the perception of fairness or equity must be maintained. It is only fair then to recognize exceptional performance through additional compensation to maintain the concept of equality. Primarily, . The retention incentive will have a maximum amount of 20% of the base pay or the minimum amount of 10% depending on the employee’s performance. The previous base pay plus the retention incentive would constitute the new base pay for the employee, which would incrementally increase every year. The underlying idea behind a performance-based incentive system is to provide a form of recognition for those employees who are doing well with their job. As a result, performing employees will get higher salaries and benefits as compared to under-performing employees. This competitive strategy would address the social and psychological need to compete and to be recognized. The recognition of individual performance through compensation would also imply that organizations would have to create a form of evaluation for employees. As an effect, standardization of work processes might be necessary in order to create a specific and measurable metric, which would serve as a guide on how employees should be evaluated and compensated. Most industries recognize their employees’ performance with compensation. This is done through performance appraisals that are conducted on a yearly or semi-annual basis. The result of the performance appraisal will also become the basis on how much raise will the employee get in that particular appraisal period. On the other hand, bonuses and perks are also being provided for those employees who may have reached or exceeded their quota. Perks may include cash, paid vacation leave or any additional compensation beyond the employee’s salary and benefits.

How should a compensation approach impact employee recruitment and retention?

According to experts, getting the right employees and placing them on the right seats, is one of the major reason why some organizations are more successful than the others (ASHHRA, 2011). In this regards, the recruitment process is not taken lightly. Organizations would like to attract competitive applicants. Especially in industries and regions where competition is fierce, having the best talent could define an organization’s edge compared to another. For the same reason, competitive compensation packages are designed to become magnets to job applicants. The obvious reason for this approach is that the more job applicant there is, the more choices can be made, and the easier it is to select the right people for the organization. It is also important to clarify to every job applicant the job description and expectations that goes with the job. Despite a generous compensation package, an employee might end up inadequate or perhaps unsatisfied with the job if expectations are not met. In fact, the conventional idea that job satisfaction is influenced heavily by economic benefits has been increasingly challenged by recent observations. Experts believe that work can become stressful the employee is a mismatch with his job. According to Branham, 80% of the employees in an organization feel that their true potential is not utilized and though they have the potential to succeed, there is not enough opportunity for advancement. Behavioral studies that aim to understand what employees value most indicate that compensation and benefits, job security and the organization’s financial stability are among the major drivers in employee retention (Society for Human Resource Management, 2013). Evidently, although compensation is still the number one motivation of most employees, personal and social factors are also equally important. Aside from using compensation for recruitment strategies, it also provides retention opportunities that should set the organization apart from the competition. Employee retention is one of the major concerns in today’s human resources management. Despite the increasing unemployment rate, most business organization still suffer high attrition rate. On why employee retention has gained considerable attention can be attributed to the increased awareness that quitting cost businesses and organizations a considerable amount of money, time and effort. Quitting or attrition has long been considered to translate in loss of resources and productivity. It is believed that the cost of hiring and training new employees has cost private companies in the U.S. an estimated $44 billion annually. Underlying the obvious costs of employee attrition are other factors that also contribute to the monetary losses of businesses and corporation that are sometimes neglected and unaccounted. One of the hidden costs of employee attrition is the decreased level of productivity. Apparently, it would take a considerable amount of time for a new employee to reach the productivity level of old employees. Wastes and efficiency is another factor that contributes to the hidden cost of employee attrition. In jobs where extensive skills are required, new employees could accumulate wastes during transition while it takes several trial and error processes to reach acceptable levels of efficiency. Given that organizations are also losing monetarily while losing their employees, it has been one of the major goals of organizations to retain their best talents while limiting attrition at a minimum. Even so, the cost of attrition does not justify the retention of non-performing employees. For the same reason, several strategies are employed that aims to increase an employee’s job satisfaction and limit his tendencies to leave his job and one way of addressing this issue is through competitive compensation.
It is only logical to think that employees’ compensation is impacted by the changing economic conditions of the organizations that they are working with. Since whenever companies are making profits, it is also common for employees to demand an increase in their compensation package. In the same way, one would think that when an organization is experiencing economic difficulties, their struggle would also reflect on their employees’ pay slips. This scenario is quite true; most especially when employees earn their compensation on a performance based compensation structure. One particular way on how compensation is affected by the changing economic conditions is the way incentives and productivity pay and bonuses are earned. Evidently, in a struggling economy, overtime pays are extremely limited and bonuses may not be as generous as when the company is under good economic conditions. However, the cutback on employee compensation and incentives should be at acceptable levels or else it would create bigger labor issues, which the company would ultimately like to avoid. One particular example is the case of J.C. Penny and its former CEO, Ron Johnson. Since 2010, J.C. Penny has been struggling with decreased sales. Adding up to its financial struggle is the rising price of cotton brought about by the general shortage of the world’s cotton industry. Under this poor economic condition, the company hired Ron Johnson’s with the hopes of taking the company back on track. However, upon taking the reins of J.C. Penney, Johnson embarked on a series of bold and radical changes. Among the major changes that Johnson did while working as J.C. Penney’s CEO was taking off the sales commissions of the company’s sales staff. For Johnson, taking away the individual rewards would make employees focus more on the success of the company as a whole thereby increasing collaboration and teamwork among sales persons (Sawyer, 2013). Unfortunately, J.C. Penney’s commission and rewards system has been deeply rooted on its employees’ compensation package that removing it without replacing an equal or better earning opportunity can be regarded as a direct threat to their financial benefits. As a result, most of Johnson’s strategies did not elicit the needed cooperation from JC Penney’s’ employees, which eventually led to his dismissal.


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