The Impact of Compensation Practices

February 20, 2011

“The ultimate goal of a pay system is to align the goals and interests of employees with the goals and interests of the organization” – Robert L. Heneman

The Impact of Compensation Practices

The business arena is ever changing. Where people work, how they work, the relationships in the workplace and compensation for their work continues to change. Hence, “It will be the challenge of compensation professionals to devise ways to reward and motivate employees who work under increasingly flexible arrangements” (Bennett, 1995). Most people interchange and have the perspective that pay and compensation are the same when in reality, compensation is more than just monetary rewards. Compensation is often misunderstood, and can also be misapplied. More often than not, it is out of synch with the values and processes of an organization. This is because despite continued organizational changes, the actual strategies for administering and implementing compensation is misaligned with the rapid changes in the company. “Pay can no longer be seen as a mere expense and cost of doing business, but instead must be viewed as an investment that is closely linked to the long-term success of the organization” (Flannery, et. al., 1996). As Cable and Judge (1994) note, “compensation systems are capable of attracting (or repelling) the right kinds of people because they communicate so much about an organization’s philosophy, values and practices”. Traditional vs New In the next decade, no job will be entirely secure. The “start up” companies will continue to be uncertain. Large companies may simply offer the stability and security but with a limited guarantee of long-term employment. The average American will most likely work in ten or more different types of jobs and at least five different companies before he or she retires (Boyett and Conn, 1991). Traditionally, one would be able to join one company and stay with it throughout their working life. Advancement was a function of longevity as much as performance. But for businesses operating in the current market, flexibility and creativity will be more important for success than loyalty and long term commitment and tenure. Organizations are now leaner and with less hierarchical structure which then provides much fewer opportunities for promotion to management. The most valued employees of today are those who possess more flexibility and ability to adapt to rapidly changing environments, performing a wide range of functions. “Breadth of knowledge concerning business operations and customer needs is likely to be more highly valued than depth of knowledge in a narrowly defined specialty” (Boyett and Conn, 1991). Hence, compensation strategies would have to change as well. Success in the workplace of today will depend upon several factors that are different from those that contributed to success in traditional organizations. Primary to this is the compensation practices and strategies of the organization. Traditional compensation methods may hold a company back from appropriately rewarding its best workers. When compensation is tied to a base salary and a position, there is little flexibility in the reward system. Thus, new ways of focusing on reward for skills and performance, with the work force sharing in company profit or loss may be essential. New compensation policies allow employees to take part in company ownership, and therefore seen as likely to work harder to ensure the success of the company. Compensation programs now include gain sharing, in which employees earn bonuses by finding ways to contribute to the bottom line and save; pay for knowledge, in which compensation is based on job knowledge and skill rather than on position; and incentive plans like stock options. The Demands of the New Workplace The current instability in the business arena and workplace environments with enormous competitive demands on businesses will certainly result in extraordinary pressure for maximum performance. Compensation nowadays is “an important attribute and has a significant influence on job attractiveness and subsequent job choice decisions” (Cable and Judge, 1994). The new workplace of today looks at total compensation and not just the wage scale. Mitham (2007) asserts that “it’s not just the up-front cash compensation that matters to employees; sometimes the mere availability of parking spot could be what wins them over. In other cases, it’s a good group benefits plan”. Flexible benefits plans, allowing choice among different types of benefits may be beneficial to employees because they can choose less expensive benefits with greater personal value. Thus, the workforce of today is seen to value an incentive plan based on individual achievement rather than a seniority-based plan, even if the expected level of pay is the same. Pay for performance is seen most common in workplaces of today. These programs, also at times commonly referred to as variable pay programs, generally offer compensation incentives based on employee performance or on the performance of a team. Pay for performance rewards high performance and does not reward mediocre or low performance, and is the definition of the "merit" system. Teams in various organizations of today no longer have the traditional infrastructures; they perform best with members that share commitment to a meaningful purpose, specific performance goals and a clear-cut approach to working. The most effective teams of today are driven by the need to achieve better performance, and team members assume mutual and individual accountability for results not just waiting for a sole leader to pave the way. Hence, it is necessary for businesses to adjust processes and strategies, including compensation, to ensure they fit the new work patterns. Conclusion Compensation is a primary motivator for employees. People look for jobs that not only suit their creativity and talents, but also consider greatly what the compensation package looks like. As businesses change their focus, their approach to compensation must change as well. The traditional method of pay strategies may no longer be the right path for dynamic organizations of today. The shift in organizational values, work culture, and business strategies has greatly impacted compensation practices and strategies. Employees of today are expected to take responsibility for continued development and learn new skills while assuming broader roles. Managers are expected to be creative and innovative in decision making and more responsibility focused on results. It is crucial then for compensation practices to be in alignment with organizational strategies and ways of working so it is not rewarding inappropriately and inconsistently. For organizations of today that continue to be competitive and innovative, a one-size-fits-all compensation strategy may prove ineffective, as compensation folks must now try to understand and forecast the economic conditions prevailing and then modify its strategy as economic and business factors change. As Martocchio (2011) further asserts, “compensation practices contribute to competitive advantage by developing more productive and highly skilled workforces. Well-designed merit pay programs reinforce excellent performance by awarding pay raises commensurate with performance attainments. The use of incentive pay practices is instrumental in changing the prevalent entitlement mentality US workers have toward pay and in containing compensation costs by awarding one-time increases to base pay once work objectives have been attained. Pay-for-knowledge and skill-based pay programs are key to giving employees the necessary knowledge and skills to use new workplace technology effectively” (Pg. 13).

References
Bennett, M. (1995, January). Organizations face challenges of a transforming economy.
ACA News. Scottsdale. Vol. 38, Iss. 1; pg. 13
Boyett, J., and Conn, H. (1991). Workplace 2000: The Revolution Reshaping American Business.
Cable, D, and Judge, T. (1994). Pay preference and job search decisions: A person-organization fit perspective. Personnel Psychology, 47(2), 317. Retrieved February 17, 2011, from ABI/INFORM Global. (Document ID: 31509).
Flannery, T., Hofrichter, D. and Platten, P. (1996). People, Performance and Pay. New York, NY: The Free Press.
Heneman, R. (2001). Business-Driven Compensation Policies. New York, NY: Amacom
Martocchio, J.J. (2011) Strategic compensation: A human resource management approach
(6th Edition). Upper Saddle River, NJ: Prentice Hall.
Mitham, P. (2007, April). Keeping employees productive. Journal of Commerce,(28), 1. Retrieved February 18, 2011, from CBCA Complete. (Document ID: 1296909601).