Every company, organization or corporation has its own set of compensation philosophy and belief, strategies, and practices and policies. They possess and abide with their own set of standards. They formulate and device their own set of compensation plans for the benefit of their organizations and to encourage employees to work properly and to perform well.
Compensation is generally defined as something that has been received in return for something else. It can take the forms of earnings and incomes, as well as other financial benefits that are earned and acquired from labor (Investor Words, 2009). It is also characterized as commissions, professional fees, tips or net self-employment wage obtained from services rendered (qtd. The Free Dictionary, 2008). It can cover hourly salary, overtime, bonuses, stock options, pension plans, vacation and sick time, and health insurance. Compensation is charged with taxes by the local, state and federal authorities (US Legal, 2009).
Compensation can also be an insurance disbursed by companies to extend benefits to workers who become ill or injured on the job. Because of such program, employees are given the benefits and medical care, and the employers gain the assurance that they will not be prosecuted and sued by the worker. The amount of compensation assistance is dependent on the gross payroll and the number and severity of illness that the kind of employer undergoes. It is run on and administered by states. In the United States, this area is being supervised by the U.S Department of Labor’s Office of Worker’s Compensation Programs (Murray, 2009). Moreover, total compensation encompasses three components including base salary, annual bonus, and long-term incentives (Tauber and Levy, 2002, p. 17).
Compensation philosophy, on the other hand, is a set of directing principles that are based on values that lead compensation decision-making (University of Minnesota, 2008). It has no universal standard; however, there are several elements that it covers.
First is the overall compensation objective or objectives. It focuses on the company’s compensation program that supports the success of the organization. Second is the market positioning. It centers to the labor market and to the company’s intention on positioning the program in relation to the said market. Third is the pay roles and mix. It revolves on the respective role of each of the different components of the organization’s program such as base salary, annual incentive, recognition, etc, and the company’s proportionate “mix” in the compensation program that is relative to the market. For instance, does the company intend to compensate lower salaries but give an “above market” incentive opportunity? Lastly is the job evaluation approach. It states the basis of the company in establishing the relative value of the diverse jobs in the organization (Bares, 2006). Compensation philosophy is indeed essential. Without a well-thought-out and well-structured philosophy, incentives plans will then be poorly designed and hence, not effective (Reda, n.d).
In order to carry out and to fulfill the compensation philosophy of the company, it is also vital for them to have a compensation strategy. The primary objective and goal of compensation strategy is to provide proper rewards for the right worker demeanors. Compensation is a significant motivator because it is being implied 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 in order to achieve them by utilizing compensation strategy. Strategic compensation is the kind of compensation scheme implemented by companies to improve the motivation of their people so that they will perform better. It covers several advantages such as minimizing the possibilities of good workers leaving the organization to look for a more profitable and rewarding job elsewhere and attracting employees especially those with good and excellent qualities. If a company fails to use compensation strategies to supervise the employees’ performance and productivity, it will then overlook and neglect the fundamentals of compensation as an effective tool on motivation. Moreover, compensation strategy covers components that are also developed by the organization. It can vary from rewards that are monetary and non-monetary, equitable compensation, rates of pay and salary increases (Strategic-Human-Resource, n.d).
Compensation policy is the basis for defining the actual structure of salary range (Berger, L. and Berger, D., 2000, p. 137). It provides companies with standards for evaluating the employee’s competitiveness. The evaluation, therefore, provides the rationale for adjusting or setting salary ranges and increases. It definitely aids the organization in attracting and retaining employees and controlling operating costs (Hestwood, 1992).
One of the examples of an effective compensation policy or practice transpires when there has been a new regulation governing the “white collar” exemptions from the Fair Labor Standards Act. One of the prerequisites in the regulation is a “safe harbor” which provides the companies a chance to avoid loss of an employee’s exempt status that arises from unintentional salary deductions. The “safe harbor” can only be applied to those employers who have taken certain steps which include the distribution and implementation of a policy for report and punctually correcting improper deductions (McKenzieHR, n.d).
The said compensation practice occurs when exempted workers are paid each pay period regardless of hours worked and the pay is determined to be a full compensation for the work completed during the encompassed work week(s).
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., Berger, D. (2000). The Compensation Handbook: A State-of-the-art Guide to Compensation Strategy and Design. United Kingdom: McGraw Hill Professional.
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.
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McKenzieHR. (n.d). Sample Pay Practice Policy: Exempt Employees. Retrieved March 18, 2009, from http://www.mckenziehr.com/pay_practice_policy.pdf.
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,
Strategic-Human-Resource.com. (n.d). Compensation Strategy is a Tool to Motivate Your People. Retrieved March 18, 2009, from http://www.strategic-human-resource.com/compensation-strategy.html.
Tauber, Y, Levy, D. (2002). Executive Compensation. Washington: Bureau of National Affairs Books.
The Free Dictionary. (2008). Compensation. Retrieved March 18, 2009, from http://financial-dictionary.thefreedictionary.com/Compensation.
University of Minnesota. (2008). Glossary of Compensation Terms. Office of Human Resources. Retrieved March 18, 2009, from http://www1.umn.edu/ohr/toolkit/compensation/glossary/index.html.
US Legal. (2009). Compensation Law and Legal Definition. Retrieved March 18, 2009, from http://definitions.uslegal.com/c/compensation/.