Compensation Of Employees Needs example essay topic

A rigorous review of compensation and all its components Compensation is what is paid to an employee, whether in the form of wages, salary or incentives by the employer for a specific amount of time, skill and effort made available by the employee in fulfilling specific job requirements (Biesheuval, 1984). Compensation is important in organisations as it conveys information to an employee about their relative importance to the organisation and provides a scale to identify how much recognition they are receiving for their contribution (Harley and Stephenson, 1992). Compensation shows employees how much they are appreciated and worth. The most important differentiating element between jobs is the effort involved in performing a job (Biesheuval, 1985). o Objectives of pay systems (Harzing and Van Ruysseveld, 1999): Objective: How to achieve it. To attract employees: Job salary To keep qualified employees: Bonus or incentive to stay e.g. shares To stimulate effective performance: Payment by results To teach employees new behaviour's at work: Multi-skill bonus To compensate for inconvenient working conditions: A separate allowance o Monetary and non-monetary compensation Compensation is made up of many parts. Although money (extrinsic compensation) is the most recognised, other factors can be just as rewarding.

Employee benefits are one type of non-monetary compensation and are intended to improve the quality of work life of an organisations labour force (Sherman and Bohlander, 1992). These benefits make up a significant portion of the wage bill. Although benefits were initially introduced as a bonus to employees, they have since come to be expected in the workplace (ibid). Employee input is integral in determining the type of non-monetary compensation that is the most desired (ibid). Benefits (Sherman and Bohlander, 1992): o Medical aid funds including health and dental plans o Pension funds where the employer also contributes a percentage. o Employee assistance programs where counselling and assistance are provided with day-to-day issues such as career planning and emotional trauma. o Education assistance plans where the employer pays a portion towards further study. This often benefits the employer as the employee becomes more multi-skilled and efficient at their job. o Child and elder care where an in-house cr " ec he is often provided. o Food services such as a cafeteria that provides free or subsidized meals. o Free housing in hostels. o Social and recreational services such as a gym. o Company car. o Expense allowance etc o Unemployment insurance has been made compulsory by the law and allows people to have a minimum wage to live on while they are looking for further employment should they become unemployed (Venter, 2003).

Other types of compensation are reward programs where employees receive public recognition for their work. e. g., employee of the month competitions or even just receiving acknowledgement in the form of a thank you can boost employee morale (Pierce and Gardner, 2002). This is called intrinsic compensation as it is related directly to the nature of work (Harzing and Van Ruysseveld, 1999). Other forms of intrinsic compensation: o Interesting work Good career prospect so Corporate image The role of the external environment Labour market conditions, area wage rates, industry wage rates, government taxes, collective bargaining agreements, and the cost of living are all external factors that need to be taken into account when determining wages (Sherman and Bohlander, 1992). Organisations have little or no control of these factors. A South African specific factor is that due to apartheid many previously disadvantaged races such as Blacks, Coloured's and Indians were excluded from the labour force or under paid. These inequalities need to be addressed in terms of the Employment Equity Act and Black Economic Empowerment (Venter, 2003).

The amount of money other companies are paying work the same type of job is an important determinant of the ballpark amount an organisation should pay (Sherman and Bohlander, 1992). If the salary they are offering is lower than the industry average applicants as well as existing employees will often prefer to work for competitors (ibid). This depends on supply and demand, however. If an industry is saturated many entrants will be will to work for less rather than be unemployed (ibid).

Unions often deter this from happening by agreeing on minimum wages through collective bargaining (Venter, 2003), which in effect is counter productive in that less people are employed. Governments also institute minimum wages (Sherman and Bohlander, 1992). Offering a higher salary often attracts a greater applicant pool and can allow the organisation to choose the best talent available (Noe et al, 2003). However, care must be taken to ensure that employees are profitable enough to justify the higher wage. Employers determine industry salaries by statistical methods and by surveys (Noe et al, 2002).

The cost of living influences the wage employees expect and this as well as inflation needs to be taken into account when determining wages in different areas (Sherman and Bohlander, 1992). For instance, if the price of petrol is skyrocketing many employees will demand a pay increase to cover this cost. o Equity theory and fairness also called the social consumption theory (Biesheuval, 1984) Human motivation is affected by the outcomes people receive for their inputs compared to their outputs (Peirce and Gardner, 2002). This theory is strongly related to compensation. Employee perceptions (rather than actual facts) about what they are worth as well as what other people are worth are taken into account (Noe et al, 2003). Factors an employee considers in determining inputs are: education, qualifications, abilities, training, experience, age, seniority, sex, ethnic background ans most importantly, effort (Biesheuval, 1984).

Outcomes include basic pay, fringe benefits, intangible intrinsic rewards and status symbols (ibid) as well as stress and fatigue (Peirce and Gardner, 2002). According to Elliot Jaques ratings of equity are determined by the time span of discretion which is the length of time an employee can be left to exercise his own judgement about his performance before a supervisor makes sub-standard work apparent (Biesheuval, 1984). People compare their outcomes to relevant others whose jobs are similar in difficulty and complexity (Peirce and Gardner, 2002). Employees want an outcome that 'feels fair'. This is when their input / outcome ratios are equal to the referent other (ibid). two innate human weaknesses govern perceived equity: they overrate their own performance level and they overrate the outcomes of others (ibid). In a state of perceived over reward inequity people rarely feel sufficiently dissatisfied with their extra reward to change their state to one of equity.

In a state of perceived under reward equity people are motivated to change their situation. There are various ways of achieving this (Peirce and Gardner, 2002): o Alter their own inputs or outcome so Alter the inputs or outcomes of the referent other Choose a different referent other Leave the situation Distort perceptions of inputs or outcomes. Employers should aim for both external equity (focus on what other employers pay), which affects applicants' acceptance of job offers and whether existing employees stay in the organisation, and internal equity (focus on what they pay for different jobs within the organisation), which affects employees' willingness to transfer to different jobs and accept promotions (Noe et al, 2003). o Using compensation as a motivator The strategy of rewarding people for performance dates back to the ancient Greek and Roman empires (Harzing and Van Ruysseveld, 1999). Pay is a vastly under exploited resource and is seen all too frequently as an occasion for disappointing rather than motivating employees (Harley and Stephenson, 1992).

Pay is what motivates employees to work. Were it not for pay, it is doubtful whether employees would continue working (Sherman and Bohlander, 1992). When deciding what to use as motivator an important question is 'how much to employees value the motivator?' (Biesheuval, 1984). According to Lawler's expectancy theory, a valence is an anticipated reward value of an outcome (ibid). Money is in most cases the most valued motivator with the highest valence (ibid). Using pay to reward employees serves to differentiate employees: high performing employees often feel that they should receive more than employees who are less productive than they are (Sherman and Bohlander, 1992).

When pay is linked to performance, employees make the connection between working hard and receiving more money (ibid). This means they become more productive. Feedback is important for employees to accept a 'pay for performance's ystem (Harzing and Van Ruysseveld, 1999). If they work hard but do not see results, they become demotivated.

When employees perform exceptionally, they should also be awarded over and above their regular pay (Harzing and Van Ruysseveld, 1999). This could be in many forms such as a ticket for lunch or a study tour that includes vacation days (ibid). It is widely accepted that managers should tie at least some reward to employee performance and effort (Sherman and Bohlander, 1992). This includes merit pay (annual pay increases are linked to performance appraisal ratings), cash bonuses and incentive pay (ibid). These programs differ on 3 levels: payment method, the frequency of payout and in the ways performance are measured (Noe et al, 2003). Compensation is the strongest motivator.

Higher pay is the reason many people strive to achieve promotions. o Some requirements for a motivating pay system (Biesheuval, 1984) o It should be equitable. The employee needs to feel that their compensation is in line with that of others in the same field or doing a similar job. According to Logger and Vine internal equitability is important in preventing social and personal conflicts within the organisation (Harzing and Van Ruysseveld, 1999). o There should be acceptable differentials between grades and rates. The amount of compensation being received by a person's superior as well as people under them should be proportionate. o The pay system should be competitive. Market rates should be determined and adhered to. o There should be adequate measurement of individual employees' performance.

Performance measurement is the most important factor in compensation programs (Peirce and Gardner, 2002). If employees feel they are being under-rewarded, they will become unmotivated and the program will be useless (ibid). Peer and customer assessment in addition to supervisor assessment is often necessary to combat this problem (ibid). The ideal is a state of Pay Equity where the amount they receive is equal to their personal view of the value of work they put in (Sherman and Bohlander, 1992). o There should be adequate communication about a systems principles, facts and procedures. If people know how they are being evaluated it will reduce confusion. Many companies now reveal their pay scales to employees (Noe et al, 2002).

This will prevent people making unrealistic judgement's about the amount of money others earn. Worker participation in the compensation process will lead to greater acceptance of the outcome and fosters an environment of trust and cooperation (Peirce and Gardner, 2002). The Scanlon plan: This combines a system of employee participation where departmental committees encourage idea generation as well as suggestions for achieving more effective results (Harzing and Van Ruysseveld, 1999). The resultant profits gained by these improvements are shared by all employees. Employees stock ownership plans (ESOPS): It is thought that giving employees a stake in the organisation will lead to them feeling a sense of personal ownership for the future of the business which will result in enhanced cooperation, teamwork and increased job satisfaction (Peirce and Gardner, 2002). However, no performance results are shown if employees only have 'equity' (ibid).

They need to be able to participate as well as exercise control in order to experience the benefit of feeling like owners. A downside is that employees also felt stress and worry that detracts from them doing their job effectively (ibid). ESOPS often fail because payment is deffer ed (employees only receive it when they sell their shares) (Noe et al, 2003). Gain sharing: Individual plant performance is measured and if performance exceeds expectations or goals, the employees all share in the profits (Noe et al, 2003). This is effective in that payouts are frequently distributed. When performance is measured at plant and not organization level employees are more motivated as they see the difference their hard work makes to their earnings (ibid). o Compensation in the context of globalisation With the advent of new technology that speeds globalization as well as the reduction of trade barriers and increase in travel companies need to look at their structure and compensation from a global perspective.

Labour supply and demand is now global and not as area specific as it was only 5 years ago. Compensation of employees needs to be in line with global averages. In South Africa especially, apartheid has resulted in us having a closed labour force that was sheltered from the international arena. Companies need to adapt to the new post apartheid environment. Compensating international staff is also a factor.

Accurate comparisons of wage differences often pose many problems (Harzing and Van Ruysseveld, 1999). Countries also have different tax levels and costs of living. Including these factors is called the total remuneration perspective (Harzing and Van Ruysseveld, 1999). In multinational corporations or where companies have employees across borders, a balance needs to be reached between uniform company policies and country-specific elements (ibid). There are three methods used to determine compensation: the budget system, the balance sheet or home net system and the local going rate system (ibid). There are important objectives of compensating international staff (Harzing and Van Ruysseveld, 1999): o To attract employees qualified for service abroad. o To facilitate transfers between foreign affiliates. o To maintain a consistent wage policy between employees posted both home and abroad. o To offer compensation that can reasonably compete with competitors. o Most importantly, to be cost effective.

Strategies differ greatly across countries. In the UK, 45-50% of employees were rewarded according to job performance, in the USA, 35% and in the Netherlands only 19% (Harzing and Van Ruysseveld, 1999). Traditionally countries in Eastern Europe apply the pay per performance concept on a large scale (approximately 75%) (ibid. ). o The strategic importance of compensation It is essential to consider the company's overall strategy before determining the compensation structure. The way an organisation uses compensation can drive an organisation in specific directions (Noe et al, 2003). Therefore, great thought should go into deciding what type of compensation structure to use in terms of the whole organisations strategy and the chosen method should contribute to furthering the overall objectives of the organisation (Sherman and Bohlander, 1992). e. g., individual incentives will not fit into an organisation that wants to further a team-based approach to work (ibid). Compensation sends a message about what an organisation feels is important and the types of activities it encourages (Sherman and Bohlander, 1992).

Compensation tailoring is an integral method of maintaining the budget (ibid). For this reason, many companies resort to retrenchments in economic downturns (Venter, 2003). An organisations compensation program determines the type of employees that it will attract as well as either increase or decrease the applicant pool (Sherman and Bohlander, 1992). 2295.