Compensation policies are based on the choices made by the compensation managers in order to provide and maintain competitive advantage (Martocchio 161). The professionals base their compensation policies on the pay level policies of their choice and can choose from three of those. They are market lead, market lag, and market match. According to these three pay policies the companies can be characterized accordingly as the ones with highest, lowest or average payments.
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The companies may also employ pay mix policies which include the elements of core compensation and employee benefits composing the total compensation (Martocchio 162). The kinds and proportions within policy mix may be altered according to the kinds of employees compensated and the structures of the jobs they perform. This means that the businesses of different specialization and markets are to develop specific pay policies and strategies fitting their particular companies. Market lead and match pay level policies are used more commonly for the high-skill jobs, and market lag – for more basic jobs.
Compensation refers to the benefits and rewards workers receive for performing their professional duties and accomplishing various tasks (Martocchio 3) Compensation includes monetary and non-monetary rewards, and psychological mindsets of the employees. Compensation is established by the compensation managers of the organizations. The companies’ activities in their markets are determined by their strategic decisions. A strategy is normally based on the scanning of the environmental factors in order to identify threats and opportunities. Compensation structure makes a significant impact on the competitiveness of companies.
It is capable of retaining and attracting employees, motivating them to improve their performance, and directing them towards certain goals. Wisely designed compensation management may work on the levels of HR management, innovation and adoption of new technologies, outsourcing and expansion, communication and relationships between the employers and employees. The managers identify the spheres that are the most important for the competitiveness of a company and then address them with the help of compensation policies and techniques.
The greatest challenge to the companies’ competitiveness is posed by federal legislation protecting the employees. This legislation includes a number of limitations and restrictions the employers need to follow in order not to become outlaws. Due to the protective legislation workers are given a lot of rights and freedoms, which seriously limit the competitive practices that are deemed legal today. For example, the employers need to stick to minimum wages established in their areas, policies concerning hiring and firing.
The employers breaking these rules can be sued which makes a great negative impact on the company’s reputation and leads to the loss of revenue. The least challenge to the companies’ competitiveness is posed by unionization. Statistically, the industries with higher rates of unionization pay higher salaries, but these industries are normally capital intensive and need highly professional workers (Martocchio 46). This way, the payments remain adequate for the industry types.
Internal consistency of compensation systems relies on the job structures and hierarchy taking into consideration the particular value of each job compared to the other jobs within one company (Martocchio 118). There is one main principle job analysis and evaluation is based on. It maintains that the jobs which require higher skills, better qualifications, and include more duties and responsibilities are considered more valuable than the jobs with lower skills, qualifications and fewer responsibilities.
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To build a consistent compensation system the job contents and compensable factors such as skills and effort need to be identified. Job evaluation is carried out with the purpose to establish the pay differentials for various jobs; it relies on the job analysis by means of comparing the contents of jobs to one another and establishing their comparative value.
Employing part-time workers carries a number of advantages for the companies. For example, a lot of companies hiring workers with flexible schedules save costs because they do not have to pay discretionary benefits, besides, the benefits dependant on the number of hours worked and overtime pay expenses also can be saved (Martocchio 292). Hiring contingent workers helps the companies remain productive during economic recessions, maintain international competition, and shift from manufacturing to service industry.
Sharing jobs helps the employers to preserve good relationships with their core employees who are on a leave for some reason. Hiring temp workers benefits core employees who can safely leave their jobs for a while, positively affects the employers letting them maintain productivity of a business, and allows the temporary employees to gain some income. This practice makes the employees feel more secure about their jobs, stay a part of retirement plans, provides continuous employment during economic recessions, and maintenance of family income.
Merit pay programs work according to the method where performances that stand out are rewarded (Martocchio 57). This way, the employees who show better results are able to earn permanent merit increases. Merit pay rewards the high-performers, makes them feel valuable and appreciated, helps the companies retain the best professionals, and motivate the employees to work harder. Equity Theory maintains that it is highly important for the employees to feel that the compensation they are given is fair.
The employees determine the fairness of their compensation according to their own judgment when they compare the amount of work done, the effort it took and how it was rewarded. Besides, the employees that show good results and work very hard tend to compare their performance with the performances of their peers. If the achievements of high-performers is not recognized this would cause a sense of unfairness. This way, merit pay is what helps to establish the balance at the workplace and make everyone feel fairly compensated and satisfied.
Internal consistency is achieved with the help of job analysis and evaluation. Internal consistency is required for the establishment of fair compensation within one company as it determines the levels of pay for each job. Market competitiveness is provided by the pay policies that follow the objectives of a business. Market competitiveness of a compensation system makes a company more or less attractive as a workplace compared to other businesses.
Market competitiveness of a compensation system is crucial for the attraction and retaining of the employees. This way, market competitiveness is the most important component of the company’s competitive advantage because it allows the businesses to hire the best professionals and also enforce the business objectives.
Discretionary benefits are divided into three main groups which are paid time off, services, and protection programs (Martocchio 204). Paid time off refers to situations when an employee goes on a vacation. Services include the opportunities of day care assistance and tuition reimbursement. Finally, protection programs stand for health promotion, family benefits, and security in cases of income loss caused by serious illnesses, injuries, disabilities, or unemployment. Some of discretionary benefits are guided legally.
For example, the Internal Revenue Code (IRC) is designed to protect the employees who are to be compensated according to the retirement plans regulations (Martocchio 37). Besides, the Service that implements the IRC encourages the employers to provide retirement benefits by means of excluding the retirement plan payments from the income undergoing federal taxation.
Since discretionary benefits cover such important spheres of people’s life as family, wellness, safety, financial security in cases of bad accidents, and health promotion, they should be provided for all of the employees regardless of their performance, otherwise it seems unethical and looks like a person will only be treated as a person in case they deserve it at work.
The companies’ choice of competitive strategies and compensation tactics relies on their evaluation of the threats and opportunities for their business. For example, differentiation strategy is based on the intention to innovate or provide the kinds of services the other competing organizations do not offer (Martocchio 11). In this case compensation tactics will be oriented at rewarding the creative employees enforcing innovative practices or coming up with fresh ideas. Lowest-cost strategy makes a company a leader due to its production and selling of the goods for the prices lower than the ones their competitors have, which helps to attract customers.
This strategy will employ compensation tactics helping to save costs of production, and distribution. The company’s focus is the third factor (apart from cost or differentiation) that influences its competitive strategy. The managers of the company are to decide which sphere of a business they would like to make the most competitive and then direct compensation tactics in a way that stimulate the employees to make this sphere their priority.
Martocchio, Joseph J. Strategic Compensation-A Human Resource Management Approach. 8th ed. 2014. Upper Saddle River: Pearson Education. Print.