Strategic Compensation Management: Aligning Compensation with the Business Goals and Objectives of the Organization Jasmine McCrary Compensation Management, Fall Semester 2009 Professor: Dr. Debra Sherrill Strayer University September 4, 2009 Executive Summary Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. In traditional organizational structures, employees were expected to work and follow top-down orders of a boss or supervisor.
These employees could expect job security, pay rate increases each year, and promotions based on seniority. Salary was determined on the basis of work performance and the years of experience the employee held. Additionally, some organizations provided pension and 401K plans. Money was considered the primary and only need of the worker. With the creation of labor and trade unions, employees began asking for their rights and facilitated a change in compensation systems. Behavioral Science Theories also contributed to the change in compensation systems.
Abraham Maslow brought in the need hierarchy for the rights of the employees. He stated employees did not work only for money but there are other needs an employee must fulfill from their job, i. e. psychological needs, safety needs, needs of love, affection, and belongingness, needs for esteem, and need for self-actualization (Simons, Irwin, & Drinnien 1987). Employees were considered a valuable resource to the organization. Today’s compensation systems should be aligned to the business goals and strategies. Employees are expected to contribute individually to the organization and diversity is embraced.
Companies expect employees to make decisions, accepted delegated authority, and understand their position in the overall organizational structure. Companies launch campaigns to ensure all employees are feeling secured and valued in their organizations. As all national and international industries labor to remain competitive in the various markets, it has become imperative that all companies operate strategically in all facets of its organization. Employees of an organization should be managed properly and motivated by providing the best compensation per the industry standards.
In order to remain effective, compensation management should be aligned with the business strategy, goals and objectives of the organization. Strategic Compensation Management: Aligning Compensation with the Business Goals and Objectives of the Organization Compensation is an increasingly complex operation for today’s organizations. Compensation once involved only salary planning. In recent years it has expanded to include pay for performance, variable pay, and non-cash compensation programs. The resulting complexity can be overwhelming to both small and large enterprises.
Some of the issues that affect compensation management are legislation, competition, and organization characteristics. Among the concerns of organization characteristics is the increased need to align compensation with the business goals and objectives of the organization. When Strategic Compensation Management is aligned with the business goals and objectives of the organization, the company will improve organization effectiveness by motivating employees, attract and retain employee talent, and generate productive and diverse work groups with all employees contributing to organizational output.
From a strategic and tactical perspective, the quality and quantity of organizational output depend directly on the skill, interest, and effort of employees. (Henderson, 2006). Employees who are motivated and consider themselves a valued part of the organization will be effective in the position and roles that play in the organizational hierarchy, therefore improving the effectiveness of the organization. Companies recognize that employees on all levels provide vital contributions to the organization.
Recognizing the influence of emotion on human behavior, it may be valuable for organizational strategists and tacticians to understand the relationships among pay satisfaction, job satisfaction, and organizational satisfaction and their effects on individual behavior (Henderson, 2006). As work is divided among the various groups of employees in an organization, each individual rates their satisfaction with the job on their unique thoughts and experiences. Their views on the organization’s compensation program can either motivate the employee or demoralize the employee.
It is imperative that management team of the compensation program recognize employees must first understand the strategy, goals, and objectives of the organization and comprehend how the compensation program parallels the organization’s mission, policy, and strategy. Because the motives of employees affect their productivity, one of management’s jobs is to channel employee motivation effectively toward achieving organizational goals (Hellriegel & Slocum, 2009).
When employees have a clear understanding of the direction of the organization, their role and requirements, and the reward system in place, employees have the motivation they need to help meet and exceed the targets set by the organization and contribute to the tasks that help the company succeed. In August of 2007, the CIPD (Chartered Institute of Personnel and Development) UK defined talent as consisting of those individuals who can make a difference to organization performance either through their immediate contribution or in larger term by demonstrating the highest levels of potential.
With the onslaught retirement of the baby boomer generation, organizations are required to reevaluate the needs of the new generation X and Y workers. Providing a strategic compensation program will allow organizations to attract and retain the best people. A majority of organizations understand the business requirements for key talent, and know that identifying and retaining the people who can deliver is essential to build a sustainable future. However, many organizations have failed to make the link between the success of the organization and the opportunity and reward of the individuals concerned (Berger, L. Berger D. , 2008). Base pay structures, annual bonus, and lump sum payments are all appealing compensation when organizations work to appeal to new talent and maintain existing talent. Long-term incentives can also magnetize talented individuals. From a rewarding talent perspective: • It closely aligns the individual with long-term success of the business • It has a pleasing balance in that it allows the organization to repay and share some of the value that the individual has participated in building, and helps to share the financial benefits of success. It acts as a reminder to both high-potential and high performance individuals that long-term sustainability and success of the company is critical (Berger, L. & Berger D. , 2008). Strategic compensation management generates productive and diverse work groups with all employees contributing to organizational output. Incentives reward an employee’s productivity directly to their pay. By using incentives as part of an organizations compensation package, the company can spur all employees to strive to higher performance with the knowledge that their performance will be rewarded and recognized by the organization.
In recent years increased focus on diversity in organizations has placed renewed concentration on the importance of utilizing the talents and ideas of all employees at all levels of the company. Managing incentives properly is an effective way to introduce natural competitiveness of individuals in the company. Incentives increase productivity, so the theory goes, because employees compete with each other on an organization sanctioned basis: output, performance, and end results (Caruth, D. & Handlogten, G. 2001).
Strategic compensation management requires clearly defined job pricing and job descriptions, effective communication among all work groups, and a reward program that targets employees at all levels of employment within an organization. With the implementation of a comprehensive and strategic compensation management system, an organization can expect to see values in employees that can be directly related to the goals of most organizations including reduction in absenteeism, reduction in idle time, reduction in costs, utilization of equipment more effectively, and avoidance of staff additions.
In today’s competitive labor market, organizations need to fully leverage their human capital to sustain a competitive position. This requires integrating employee processes, information and programs with organizational processes and strategies to achieve optimal organizational results. When organizations design an incentive system, the company must identify productive and non-productive work for each work group thus eliminating all unnecessary functions and waste. Once the compensation system is implemented the only work that should be performed is work that is vital to the organization’s survival.
An organization must identify what each work group and department should be doing within the organization. When strategic compensation is implemented and aligned with the business goals and objectives of the organization, the company will improve organization effectiveness by motivating employees, attract and retain employee talent, and generate productive and diverse work groups with all employees contributing to organizational output. The end result is an unmistakable and unquestionable focal point on achieving the things that contribute to the targets of each work group and the organization as a whole. References Simons, J. Irwin, D. , & Drinnien, B. (1987). Psychology – The Search for Understanding. New York: West Publishing Company. Henderson, R. (2006). Compensation Management in a Knowledge-Based World. Upper Saddle River: Pearson Education, Inc. Hellriegel, D. & Slocum, J. (2009). Organizational Behavior. Canada: Cengage Learning. Berger, L. , & Berger D. (2008). The Compensation Handbook, A State-of-the-Art Guide to Compensation Strategy and Design. United States: The McGraw-Hill Companies, Inc. Caruth, D. & Handlogten, G. (2001). Managing Compensation (and Understanding It Too) A Handbook for the Perplexed. Westport: Quorum Books.