Every company, organization, or corporation has its own set of compensation philosophy, beliefs, strategies, practices and policies. They possess and abide by their own standards. These entities formulate and devise their own compensation plans to benefit their organizations and encourage employees to work properly and perform well.
Compensation is generally defined as something received in return for something else. It can take the form of earnings, incomes, and other financial benefits earned from labor (Investor Words, 2009). Compensation can also be characterized as commissions, professional fees, tips or net self-employment wages obtained from services rendered (qtd. The Free Dictionary, 2008). It covers hourly salary, overtime pay, bonuses, stock options, pension plans, vacation and sick time pay and health insurance. Local state and federal authorities charge taxes on compensation (US Legal 2009).
Compensation can also refer to insurance provided by companies to offer benefits to workers who become ill or injured on the job. Through this program, employees receive medical care and benefits while employers gain assurance that they will not face prosecution or lawsuits from workers. The amount of compensation is based on the gross payroll and the number and severity of illnesses experienced by employees. It is administered at the state level and overseen in the United States by the U.S Department of Labor’s Office of Worker’s Compensation Programs (Murray, 2009).
Total compensation consists of three components: base salary, annual bonus, and long-term incentives (Tauber and Levy, 2002, p.17).
Compensation philosophy is a set of guiding principles based on values that inform compensation decision-making (University of Minnesota, 2008). Although there is no universal standard, it covers several key elements.
The compensation philosophy is an essential aspect of any organization’s compensation program. It comprises four key elements:
- Overall Compensation Objective/Objectives: This focuses on the company’s compensation program, which supports the success of the organization.
- Market Positioning: This centers on the labor market and the company’s intention to position its program in relation to that market.
- Pay Roles and Mix: This revolves around each component of the organization’s program, such as base salary, annual incentive, recognition, etc., and their respective roles. The company must also determine its proportionate mix” in the compensation program relative to the market. For example, does it intend to compensate lower salaries but offer an “above-market” incentive opportunity?
- Job Evaluation Approach: This states how a company establishes the relative value of diverse jobs within its organization (Bares, 2006).
A well-thought-out and well-structured philosophy is crucial for effective incentives plans (Reda, n.d).
In order to fulfill the compensation philosophy of the company, it is vital to have a compensation strategy. The primary goal of this strategy is to provide proper rewards for desirable worker behavior. Compensation is a significant motivator because it implies that money is a powerful source of motivation” (Strategic-Human-Resource, n.d).
Compensation strategy can reinforce the organizational culture that the company desires. It enables culture because payment is linked to performance. The company’s compensation policy should, therefore, mirror the strategic business goals. It is essential that the company clearly defines the aims and purposes of the organization to achieve them by utilizing a compensation strategy.
Strategic compensation is a scheme implemented by companies to improve employee motivation and performance. It offers several advantages such as minimizing employee turnover rates and attracting high-quality employees.
If a company fails to use compensation strategies to supervise employee performance and productivity, it will overlook an effective tool for motivation. Compensation strategy covers various components developed by organizations such as monetary and non-monetary rewards, equitable compensation, rates of pay, and salary increases (Strategic-Human-Resource, n.d).
Compensation policy is the basis for defining the actual structure of a salary range. According to Berger and Berger (2000, p. 137), it provides companies with standards for evaluating employee competitiveness. This evaluation provides the rationale for adjusting or setting salary ranges and increases, aiding organizations in attracting and retaining employees while also controlling operating costs (Hestwood, 1992).
One example of an effective compensation policy or practice is when a new regulation governing the white collar” exemptions from the Fair Labor Standards Act is implemented. The regulation includes a “safe harbor” prerequisite that provides companies with the opportunity to avoid losing an employee’s exempt status due to unintentional salary deductions. To be eligible for the “safe harbor,” employers must take certain steps, including distributing and implementing a policy to report and promptly correct improper deductions (McKenzieHR, n.d.).
The compensation practice in question occurs when exempt workers are paid a fixed amount each pay period, regardless of the number of hours worked. This payment is considered to be full compensation for all work completed during the encompassed work week(s).
References
Bares, A. (2006). Instilling Communication into Your Compensation Philosophy.” Workforce Week. Retrieved March 18, 2009, from http://compforce.typepad.com/compensation_force/compensation_philosophy/.
Berger, L. and Berger, D. (2000) wrote The Compensation Handbook: A State-of-the-art Guide to Compensation Strategy and Design” which was published by McGraw Hill Professional in the United Kingdom.
Hestwood, T. (1992). Setting Fair Pay Policy: Effective Pay-Level Policies Link Compensation with Human Resource and Business Needs.” Business Network. Retrieved March 18, 2009, from http://findarticles.com/p/articles/mi_m3495/is_n1_v37/ai_11778718.
Investor Words (2009) defines compensation as the payment or remuneration given to an employee for their services rendered. This can include salary, bonuses, benefits, and other forms of payment. Retrieved on March 18, 2009 from http://www.investorwords.com/5466/compensation.html.
McKenzieHR (n.d.) provides a sample pay practice policy for exempt employees. The policy can be accessed at http://www.mckenziehr.com/pay_practice_policy.pdf. The source was retrieved on March 18, 2009.
Murray, J. (2009). Worker’s Compensation.” About.com: US Business Law/Taxes. Retrieved March 18, 2009, from http://biztaxlaw.about.com/od/glossaryw/g/workerscomp.htm.
Reda, J. (n.d). The Importance of a Compensation Philosophy.” James F. Reda and Associates. Retrieved March 18, 2009.
From http://www.jfreda.com/pdf_documents/RedaCompPhil.pdf
Strategic-Human-Resource.com (n.d.) explains that a compensation strategy is a powerful tool to motivate employees. According to their article, implementing an effective compensation strategy can help organizations retain top talent and increase employee satisfaction. The article can be accessed at http://www.strategic-human-resource.com/compensation-strategy.html and was retrieved on March 18, 2009.
Tauber and Levy (2002) wrote a book titled Executive Compensation” which was published by the Bureau of National Affairs Books in Washington.
The Free Dictionary (2008) defines compensation as the act of providing something, typically money, to make up for a loss or injury. This definition was retrieved on March 18, 2009 from http://financial-dictionary.thefreedictionary.com/Compensation.
The Office of Human Resources at the University of Minnesota published a Glossary of Compensation Terms in 2008. This resource can be accessed through their website at http://www1.umn.edu/ohr/toolkit/compensation/glossary/index.html. The publication provides definitions and explanations for various compensation-related terms.
US Legal (2009) defines compensation as a legal term referring to the payment or remuneration given to an individual for loss, injury, or damage suffered. The compensation can be in the form of money, benefits, or other forms of restitution. This definition was retrieved from http://definitions.uslegal.com/c/compensation/ on March 18, 2009.
