The considerations when building market-competitive compensation systems include two main points. The first one is what the companies hope to gain from compensation surveys; the second one is custom development versus the existing compensation survey (Martocchio 145). Studying compensation surveys from the competitor companies, the managers look for the information concerning the compensation policies, incentive reward structures, and base pay levels.
This is done because learning the strategies applied by the competitors allows businesses to work out alternative plans for their own companies and employees. In order to establish the most suitable and fair pay, the compensation professionals need to know what the competitors pay to their workers. Poor and inequitable pay is likely to create recruitment problems.
Establishing a compensation system the professionals also need to make sure if they should create their own survey tools or use results of surveys generated by the competitors. The creation of customized survey holds numerous benefits and provides businesses with the most relevant and precise data about their performance. The limitations to the creation of customized surveys are its cost, lack of workers able to conduct a survey, and the reluctance of the companies to surrender their data (Martocchio 146).
Pay structures are normally based on five steps, which are deciding on the number of pay structures, determining that market pay line, defining pay grades, calculating pay rages for each pay grade, and evaluating the results (Martocchio 175-176). Companies frequently employ more than one pay structure. The number of structures depends on the built of the company’s job and on market development.
The company’s pay line depends a lot on its job structure, which determines its market competitive pay rates that change along with the value of job positions. Jobs are grouped into pay grades according to the size of compensations there and the similarity of their value. Wider pay grades minimize the social distance between the employees, and narrower ones maximize hierarchy at the workplace.
Pay ranges are in direct dependence on pay grades. Pay ranges have the highest, lowest, and middle points, which determine boundaries for the paid amounts. Pay ranges also include range spreads that represent the alterations of payment for various positions depending on their levels. To evaluate the results after the establishment of pay structures, the professionals are to calculate the internal value of jobs and compare it to the value of the same jobs in the market (Martocchio 182).
Strategic compensation is a major component of human resource systems. Moreover, it is crucial for the successful operation of the whole company. Strategic compensation determines the future of the company, its ability to function properly and develop, and its popularity in the market. Since compensation is what attracts and keeps workers in the company, it is basically what gives life to the business. Compensation should be oriented at the internal atmosphere in the company and its external interactions and competitions.
The main function of compensation is to enable the company to acquire the best specialists able to provide the company’s progress. Poor or unfair compensation will inevitably lead to the loss of valuable human resources and the degeneration of the work process. Experienced employees are the carriers of corporate memory required for the harmonious development and the analysis of the previous work processes, losing such employees, the company experiences the damage of productivity and ethics.
This way, strategic compensation is responsible for the success of every function and goal of the business. This is why a wise and professional attitude towards compensation structure and planning is vital for any company.
The pay is assigned to the employees for performing their jobs. At the same time, there are many more factors that serve are the basis for pay. Base pay normally is assigned considering the effort, level of skills, and responsibility needed to perform a certain job (Martocchio 4). Besides, the severity of workplace conditions is another factor contributing to the base pay level. Employees’ base pay also needs to match their cost of living and differences in performance.
The cost of living includes the general price level in the area where the employees dwell. It has to increase along with the growth of prices and with the rates of inflation. Compensation also carries motivational functions. This is why various tactic decisions can be employed by businesses. Such decisions include seniority, merit, incentive pay, or skill-based pay (Martocchio 10).
All of these pay tactics are designed to create a level of competition and motivation among the employees since high-performers are the ones who benefit from such a system. Wisely built motivational pay strategy may create a significant positive impact on the productivity of the company.
To create internally consistent compensation systems, the companies need to take into consideration such factors as the cost of living in the area where the business operates, the revenue and profits of the organization, enabling it to be more flexible, the need for improvement, and the level of competition. The operation costs of the organization determine the salaries of its workers. These costs often depend on the location of the business, and so does the cost of living of the workers. This way, all of these factors need to be counted when creating an internally consistent compensation system. The internal consistency of a business is highly important.
When the compensation is inequitable, and the payments of the employees do not satisfy their regular costs spent on essential goods such as food, rent, and taxes, the company will be likely to lose some of its valuable human resources to its competitors with the better internal consistency of compensation system. Businesses today are under high pressure of technologic and informational development, which forces them to innovate and improve in order to stay competitive.
Such businesses constantly require educated human resources knowledgeable in the most contemporary professional spheres such as IT, engineering, or science. In order to motivate the workers to improve along with the business, the company may establish knowledge-based compensation bonuses and also provide education to the employees to make them more valuable and useful.
In order to design a market competitive compensation system, the compensation professionals of the company need to be aware of the compensation tactics and policies employed by their competitors. Besides, remaining competitive becomes more difficult because the companies need to consider other costs, for example, utility and material costs.
This way, attracting and keeping highly valuable human resources, and providing motivation and timely improvement for them is not enough for a business to remain successful. Basically, there are many other factors that influence the company’s policies concerning compensation levels, so clever and multidimensional business planning is required in order for the company to be able to pay satisfying compensations and remain profitable at the same time.
Martocchio, Joseph J. Strategic Compensation-A Human Resource Management Approach. 8th ed. 2014. Upper Saddle River: Pearson Education. Print.