Hence, the decision made by an organization how to compensate its labors must be objectively and reasonably for the contribution from its labors in order to facilitate the corporate development and at the same time ensure the satisfaction of employee with monetary compensations (Chichi-Jean Shies, Social Behavior and Personality, 2008) Compensation can be defined as all forms of financial returns, tangible services and benefits that employees received as part of the relationship of an employment (G.
T. Miltonic, J. M. Newman, B. Gerhard;2014). Guaranteed compensation can be referred to as a fixed monetary (cash) reward paid by an employer to an employee and the base salary is the most common form of guaranteed pay, which can be paid by a bi-weekly or monthly rate (Compensation and benefits – Wisped, the free encyclopedia). This type of guaranteed compensation do not vary from one period to the next unless and except by the defined pay adjustments or increases which generally on annual basis.
The obvious drawback of the guaranteed compensation was a tendency for those long-standing employees had already become relatively stodgy and too comfortable with the guaranteed salary and become less motivated. As claimed by the compensation specialists that, today, the most significant trend is the move away from or the change of the traditional way of guaranteed compensation to performance related compensation, especially or the knowledge-based employees, performance-based compensation with measurable objectives is necessary.
Performance compensation can be defined as performance-related pay or pay for performance on which the money paid relating to the how well one works (Performance-related pay Wisped, the free encyclopedia). It is a standards- based system or methods and the payment of this type of compensation are normally vary from one period to any other period, depending on the productivity and efficiency of the employee (HRS Guide. Alan Price, Human Resource Management, 4th De).
The performance compensation, which is often referred to as performance- related-pay, was supported by the business theorists Professor Hauser and Dry WAIS in the believing that the main incentive for increased productivity and introducing the widely used concept of ‘piece work’ is the money (Performance- related pay – Wisped, the free encyclopedia). The sales personnel has been using this standards-based method for centuries, i. E. F they sell more, more pay will be received by them. There are widespread use of different pay-for- performance plans as indicated by the recent survey conducted by the HRS refashions as shown in Figure 1 below. Figure 1: Overall Prevalence of Short- and Long-Term Plans for Alternative Reward Plan in 2011 Short-term incentives Individual incentive Long-term incentives Bonus Team/unit/small group Prevalence in Private Companies 88% 26% Source: World at Work and Viviane Consulting, 2012. Private Company Incentive Pay Practice Survey” The implications of the performance related compensation as compared to the guaranteed compensation to the effectiveness of the human resource management of an organization as summarized below:- The correlation between effort and performance is positive.
As a result of the best performers being rewarded for their efforts, they are more likely to stay which will enhance the employee retention. With this compensation scheme, not only reward the high achievers, but also to weed out the weakest performers; perhaps it seems good for the organization’s performance by cutting out the ‘deadwood’, but may not so good for the employees’ morale.
The performance related compensation seem to present a far better deal for both employer and employee as with this scheme, it will increase the productivity, hence increase the sales revenue and bottom line of an organization, as the employees (production and operation workers, sales personnel) are motivated by the better reward, resulted from their efficiency and improved productivity level, as emphasized by most of the employer on which “the more you do, the more you earned”.
However, the organization may face some challenges in the implementation of this performance related compensation structure. This supposedly motivating process can in fact caused a damage to self-esteem, teamwork and creativity, for example, certain team members anxious to improve their performance may try o avoid to work with colleagues they perceive to be less able, leading this group of people being excluded from the more rewarding projects.
Furthermore, the performance related compensation may also cause a hostile work attitude due to internal competition, for example, few employees may compete for the single customer’s attention during the low sales seasons. In order to ensure that if the performance related compensation to be successful, the organization should set a goals or target which must be reasonable, achievable and measurable that are potentially achievable by any employee.
Besides, a comprehensive system must be put in place to monitor and assess whether the designated targets being met by the employees; the communication and transparency are essential as every members of the organization must be aware of, and understand this performance related compensation criteria. Finally, the employer should provide the training and education facilities to ensure that the weakest performers are improve and also at the same time, enable ambitious employees to widen their knowledge and skills in order to achieve the designated targets and getting a better reward accordingly. Total word count for part (a) = 827) ) As defined by the business dictionary, the strategic objectives of an organization referred to a broadly defined objective that an organization must achieve to make its strategy succeed (Objectifications. Com). In general, most of the organization strategic objectives are directed towards profits generation and greater returns for the organization, others are directed toward society or customers at large.
The strategic objectives of an organization must satisfy few criteria, namely Measurable, Specific, Appropriate, Realistic and Timely, which will bring many benefits for an organization. Firstly, it helps o channel the employees of an organization toward common goals, which in turn help to concentrate and conserve organization valuable resources and to work collectively in a timely manner; Secondly, with the challenging objectives, the employees will be motivated and inspired to higher levels of commitments and effort; Thirdly, meaningful objectives will reduce and resolve the conflicts among the employees.
Finally, the proper objectives will provide an indicator or yardstick for rewards and incentives, which will lead to higher levels of employee motivation, as well as ensuring greater sense of equity or fairness when regards re allocated (Dies, Gregory G, G. T. Limpkin and Marilyn L. Taylor; 2005). Based on the above, it seems that the support of the organization compensation strategies is of vital in the success of its strategic objectives.
A compensation strategy can be defined as the way or methodology that organization views and manages the pay and benefits of its employee, which also serves as guide and in a written form that clearly articulates the approach taken by an organization towards its compensation management. The existing employees will be motivated by an effective compensation strategies, besides attracting new ones.
In order to support the organization strategic objectives and the success in its businesses, the management of an organization shall periodically examine the alignment of both the compensation strategies and strategic objectives, make a necessary changes, in order to address weaknesses in that alignment, if any. The following key steps to be taken in this process to support its strategic objectives are: Articulating the long- and short-term business strategies or the strategic objectives of the organization, making sure that the current compensation strategies aligned with existing compensation approaches.
Choosing the appropriate compensation approach that will best reward and reinforce the organization’s articulated strategic goals. The organization should evaluate and review its compensation approach or strategies periodically to ensure if goals have been met and make necessary adjustments. As mentioned before, in order to motivate the type of performance necessary to achieve the desired strategic objectives of the organization, one of the objective of compensation strategy is to deliver the appropriate or right amount of pay or other form of rewards to its employees.
However, without an articulated cuisines strategy, it is not easy to identify and design appropriate compensation plan or reward programs. Besides, the organization should also determine the level of pay associated with the risks during the process of aligning its strategic objectives and compensation strategies to ensure that by implementing various forms of incentives will not affect the operating margins, return on investment and the cash flow position of the organization.
Therefore, the employer should communicate to all its employees on the revised compensation plan to ensure that all employees involved have a clear understanding of the compensation tragedy and how it affect the strategic objectives of the organization. Based on the above, compensation remains an important tool in supporting and helping the organization achieve its strategic objectives. However, the organization must recognize that compensation is merely one approach in a very dynamic strategic planning and implementation process, it does not operate in a vacuum.
The organization will stand a better chance of achieving the desired objectives and maintaining a competitive edge over its competitors, provided that the compensation of the organization is aligned with its strategic objectives Donald G McDermott). (Total word count for part (b) = 642) c) Senior executive refer to a group of high level executives, for example the Chief Executive Officer (“CEO”) and other executives, who are actively participate in the daily supervision, planning, and administrative processes required by the company to help meet its strategic objectives.
This group of executives are normally appointed by the Board of Directors Due to the roles play by the CEO and other executives is of important to the success of the company’s strategic objectives, hence, these individuals require executive compensation or pay for their work. Generally, the executive compensation or pay will be designed by the Combined Nomination and Remuneration Committee (“CNR”).
The ‘right’ amount of an executive compensation package should be designed in order to attract and retain a qualified executive, as well as to motivate the executive to perform in accordance with the company’s strategic objectives and risk tolerance. There are five basic elements of executive compensation packages, which include base salary, short- term incentive or bonuses, long-term incentive and capital appreciation plans, employee benefits and perquisites (G. T. McCormick, J.
M. Newman, B. Gerhard. Chapter 14, Compensation of Special Group; 2014). Today, one obvious trend shown that most of the companies are emphasizing more on incentives at the expense of base salary. The changed in such emphasis signals the increasingly importance of decision making that ensure the profitability and survival of the company. As such, it is important to study and analyses the linkage of executive compensation packages to the company performance. K. Murphy and M.
Jensen (1990) and many others who have built upon their work have established the statistical link between compensation or pays and performance. According to B. Gerhard and G. Miltonic (Academy of Management Journal 90 (33)), while the pay levels differed among the 180 U. S companies, there were nothing related to the subsequent financial performance of the companies. However, when the differences in the size of the bonuses and the eligibility of the stock options are combined, then the pay levels will related to the company’s future financial success.
In short, this study reveal that “it is not only how much you pay but also how you pay that matters”. It is important to create a proper incentives for the company’s senior executive. The basic elements of the executive compensation contract must address Leary the separation of shareholders, the ultimate owner of the company from senior executive ‘management, who actually running the operation, administrative and control of the company.
Increased scrutiny of the public means greater link stock options to Coos and their companies’ performance. The control of vast resources and assets to Coos are assigned by the owner of the Company, i. E. The shareholders, and it is therefore important that the contracts of the compensation should be structured or designed such that proper and reasonable incentive being awarded to CEO in order for the CEO to act on behalf f the shareholders’ interests and to maximize the company’s value which is determined by the share price.
Shareholders will want the CEO heading their company to be a risk taker for potentially large profits and better return on their investment, and hence, the contract should be designed in such a way that attractive and effective compensation scheme provide incentives to CEO to take risks while insulting them against potential outcomes. Besides, other authors have tried to look for new approaches to better illuminate the link between the pay and performance, on the hypothesis that due to the econometric challenges, the link appears weak; to further investigate the political constraints issue that affect the CEO compensation.
Telling (1996) suggested that on top of the econometric challenges, compensation will be more strongly linked to the performance of the company the higher are the costs incurred in monitoring the CEO. According to Beechen and Smith (1995), as a result of the mufti-year relationship involved by the senior executives with their companies, and in order to find the complete compensation-performance link, thus one should look at the long- term, dynamic relationship of compensation and performance.
On the other hand, Gradual and Jamaica (1999) tested the prediction that the variance in the company’s performance should increase the relationship between compensation and performance accordingly, and they confirmed and noted that when the account for compass performance variance the pay-performance link becomes much more economically significant. As mentioned earlier, aligning the senior executives’ incentives with the company’s shareholders is assumed to involve making the executives less risk- averse.
As such, in order to accomplish this goal, the Coo’s downside risk in making decision must be limited. This could be implied that less punishment for the CEO if the decision made by him causing the decrease in the market value of the company than the reward given to him for the similar increase in market value. However, most of the literature are in the opinion that the relationship of the pay-performance as if it were the same regardless of whether there is any increases or decreases in the market value of the company.
Another issue need to take into consideration is the pay-performance link changes as one moves up (or down) the corporate ladder. It is presumed that the very senior executive will has the most control over the company’s sections, and thus the compensation package should be most closely tied with the performance. However, Milord and Roberts (1992) noted that the middle- level managers will get much lower incentive pay than the senior managers, and Gradual and Jamaica (1999) find that the compensation of CEO is seem more sensitive to performance than the other executives’ compensation.
In conclusion, from the above, it reveals that executive compensation and performance are strongly linked when the market value of the company increase as a result of the company better performance. The result shown and confirmed hat not only the prediction of the agency theory where the executives should be at least partially insulated from the downside risk of making important decision, but there may be a stronger link between compensation and performance than previously estimated.
The senior executive will receive large raises that are adjusted when the company performed well, but if the company does badly, the CEO sees little compensation revision. As mentioned, the study and analysis confirmed that the pay or compensation and performance for those immediately below the senior manager in the company are less strongly linked.