Organizational reward systems serve as the motivational basis of work processes. Benefits and rewards play a significant role in attraction, stimulation, and retention of human resources and the level of compensation can influence employees’ motivation in both a negative and positive way. An ineffective compensation strategy may provoke job dissatisfaction that leads to a decrease in work productivity and quality, violation of discipline, and the occurrence of organizational conflicts.
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On the contrary, an effective pay system stimulates productivity growth and leads to a more efficient implementation of human capital which helps to develop competitive advantages (Martocchio, 2011). Based on this, strategic compensation is meant to assist organizational leaders to manage human resources in a way that will motivate them for the achievement of organizational goals. Through the merge of employee interests with organizational strategic objectives, leaders may increase morale and attain greater organizational efficiency.
In traditional management models, organizational strategy and HR strategy are usually separated. The major goals of corporate strategies are growth, sustainability, and cost-efficiency while HR strategies are primarily aimed to control “HR flow, workflow, and reward flow” (Rao & Krishna, 2015, p. 671). Strategic compensation unites both of these approaches and strives to fulfill the mentioned goals through the realization of one strategic plan.
The central question of compensation management is the estimation of salaries. In the traditional compensation system, this problem can be solved through a comparison of internal subjective organizational values of each workplace and its absolute market values (Nazari & Niknejad, 2014). The traditional algorithm in compensation strategy includes a job description, job classification, analysis of labor market, determination of workplace rates, and establishment of salary size (Nazari & Niknejad, 2014).
Evaluation of internal and external labor values may be regarded as the initial phase of the compensation strategy, and data accumulated through the environmental analysis may serve as the basis for the development of the compensation system.
However, there is no universal recipe for organizations to follow in the identification of benefits and reward factors, and managers need to identify the important compensable factors according to contexts, purposes, and missions of their companies. Along with the analysis of external environmental factors (situations in the market, social expectations of job evaluation, etc.), it is important to consider the internal factors such as the amount of organizational human capital, employee’s interests and needs, organizational structure, short-term and long-term objectives, corporate culture, etc.
Salary may be regarded as the basis of traditional compensation strategy while different flexible pays and material benefits are extra complements to the organizational pay system. Benefits add value to the work environment and conditions as they aim to increase employee life quality. Benefits may include medical and life insurance, extra vacation, free meals, reimbursements, etc. But during the planning benefit system, management needs to consider such factors as national policy, situation in the labor market, and cultural peculiarities (Martocchio, 2011). The external factors may significantly influence corporate system of benefits.
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For example, the introduction of basic benefits is a legal requirement imposed on employer by national government. In this way, organizational benefit systems tend to become more complex in order to maintain a competitive position in the labor market.
Identification of employees’ motivational factors is essential to the design of an appropriate compensation strategy. Thus, managers can refer to some of the relevant motivation theories. For example, Herzberg’s Hygiene Theory is focused on two main factors influencing individual’s performance: hygiene factors (working conditions, the level of supervision, organizational policies, etc.) and motivational factors (success, responsibility, career, etc.) (Sachau, 2007).
The hygienic factors define the level of work satisfaction in the context of the surrounding conditions. And the second group of factors serves as stimuli for work’s effectiveness and productivity increase. Based on this, along with high salaries, managers may provide employees with benefits of comfortable and safe working conditions. Moreover, by emphasizing employees’ autonomy and independence and relating compensation strategies to employees’ competencies and performance, it is possible to fulfill individual need for self-realization and, in this way, achieve productivity increase (Richards, 2006).
Compensation strategy design highly depends on management philosophy, corporate culture, values, and mission. The alignment of compensation strategy with organizational objectives implies adjustment of employee interests and needs with organizational priorities (Richards, 2006). It means that corporate culture needs to integrate multiple social, professional, and ethical values which emphasize the significance of employee efforts and demonstrate their importance.
When employees comprehend the significance and value of their work, they become more stimulated for the achievement of better and sooner high-quality results. The organizational philosophy thus may affect the introduction of compensation strategies, and people-oriented companies often implement such reward programs as skill-based pay or person-based pay which help to support employee commitment to work (Richards, 2006).
Managers and high-level corporate leaders recognize the importance of alignment between organizational strategic goals and employee compensation plans. However, the success of adjustment between goals and compensation strategy largely depends on the organizational characteristics, and especially corporate culture, values, structure, and management style. Efficient organizational management requires significant intellectual and financial investments for the evaluation of internal environment and selection of methods aimed to achieve corporate objectives.
The efficiency of such investments largely depends on the level of staff motivation for the achievement of the formulated goals, especially when it implies the contribution of extra efforts. An appropriate compensation strategy thus can help to motivate employees by aligning their personal interests with the corporate interests. And based on this, it is possible to say that strategic compensation is an effective method of organizational motivation and activation of goal-oriented corporate behavior.
Martocchio, J.J. (2011) Strategic compensation: A human resource management approach (6th Edition). Upper Saddle River, NJ: Prentice Hall.
Nazari, B., & Niknejad, S. (2014). Compensation strategies: A critical overview. Modern Journal of Language Teaching Methods, 4(4), 252-265. Web.
Rao, G. V., & Krishna, D. J. (2015). Alignment of HR practices with organizational strategies. Indian Journal Of Industrial Relations, 50(4), 666-679.
Richards, D. A. (2006). High-involvement firms: Compensation strategies and underlying values. Compensation and Benefits Review, 38(3), 36-49,4-5.
Sachau, D. A. (2007). Resurrecting the motivation-hygiene theory: Herzberg and the positive psychology movement. Human Resource Development Review, 6(4), 377-393.