HRM

Employee Compensation and Benefits

Graphics courtesy of HRM functionOpens in new window Today’s employees are more likely to move to another organization with better compensation and benefits offerings. Not only that, but it is easier than ever for employees to research this information. Workers are regularly sharing just about every piece of information they can online. That includes compensation and benefits information. With that data, employees can evaluate employers based on what they have found.

What are Compensation and Benefits?

Employee compensation includes all forms of pay going to employees and arising from their employment. It has two main components:

1. direct financial payments (salaries, pay raises, and bonuses) and
2. indirect financial payments (financial benefits, like employer-paid medical and life insurance, sick days and vacations).

In turn, organizations can make direct financial payments to employees on increments of time or based on performance. Time-based pay still predominates. Blue-collar and clerical workers receive hourly or daily wages, for instance. Others like middle-level leaders or Web-designers tend to be salaried and paid weekly, monthly, or yearly.

The second direct payment option is to pay for performance. For example, piecework ties compensation to the amount of production (or number of “pieces”) the employee turns out. Sales commissions tie pay to sales. Many organizations’ pay plans combine time-based pay and incentives.

It is important to link pay to behaviors or results that contribute to organizational effectiveness, thus the need for organizations to align total rewards with strategy. Organizations must also establish a pay level and pay structure.

Aligning Total Rewards With Strategy

The compensation plan should first advance the organization’s strategic aims—leadership should produce an aligned reward strategy. This means creating a compensation package that produces the employee behaviors the organization needs to achieve its strategy.

Put another way, the rewards should provide a clear pathway between each reward and specific organization goals. Many organizations formulate a total rewards strategy to support their strategic aims.

1.     Pay Level

Organizational leaders must decide if they want to offer relatively high wages, average wages, or relatively low wages.

• High wages help ensure that an organization is going to be able to recruit, select, and retain high performers, but high wages also raise costs.
• Low wages give an organization a cost advantage but may undermine the organization’s ability to select and recruit high performers and to motivate current employees to perform at a high level.

Either of these situations may lead to inferior quality or inadequate service. In determining pay levels, senior leaders must take into account their organization’s strategy. A high pay level may prohibit organizations from effectively pursuing a low-cost strategy. However, a high pay level may be worth the added costs in an organization whose competitive advantage lies in superior quality and customer service.

Many organizations, particularly smaller ones, simply price their jobs based on what other organizations are paying—they just use a market-based approach.

Doing so involves conducting formal or informal salary surveys to determine what others in the relevant labor markets are paying for particular jobs. Then they use these figures to price their own jobs. However, most organizations also base their pay plans on job evaluation methods.

Job evaluation methods involve assigning values to each of the organization’s jobs. This process helps produce a pay plan (or pay structure) in which each job’s pay is equitable based on what other organizations are paying for these jobs and based on each job’s value to the organization.

After all, organizations want employees’ pay to be equitable internally—relative to what their colleagues in the organization are earning—but also competitive externally—relative to what other organizations are paying.

2.     Pay Structure

A pay structure clusters jobs into categories, reflecting their relative importance to the organization and its goals, levels of skill required, and other characteristics leaders consider important. Pay ranges are established for each job category. Individual jobholders’ pay within job categories is then determined by factors such as performance, seniority, job complexity, and skill levels.

When developing a pay structure, an overarching objective should be to ensure that its resulting policies adhere to the principles of fairness and equity.

Specifically, steps should be taken to ensure individual employees are paid equitably relative to other employees in the organization and relative to employees at other organizations. Further, pay structure should abide by prevailing employment laws.

In sum, when developing and administering a pay structure and associated policies, an organization should strive for the following goals:

• internal equity,
• external equity,
• individual equity, and
• legal compliance.

Benefits

”What are your benefits”, is the first thing many applicants ask. Benefits, which include indirect financial and nonfinancial payments employees receive for continuing their employment with an organization, are an important part of just about everyone’s compensation.

Other benefits such as health insuranceOpens in new window, dental insuranceOpens in new window, vacation timeOpens in new window, pension plansOpens in new window, life insuranceOpens in new window, flexible working hoursOpens in new window, organization-provided child care assistanceOpens in new window, and employee assistance and wellness programsOpens in new window have traditionally been provided at the options of employers.

Benefits enabling employees to balance the demands of their jobs and of their lives away from the factory or office are of growing importance for many employees who have competing demands on their scarce time and energy.

In some organizations, senior leadership determines which benefits might best suit the employees and the organization and offer the same benefit package to all employees. Other organizations, realizing that employees’ needs and desires might differ, offer cafeteria-style benefit plans that let employees choose the benefits they want.

Cafeteria-style benefit plans sometimes help organizations deal with employees who feel unfairly treated because they are unable to take advantage of certain benefits available to other employees who, for example, have children. Some organizations have success with cafeteria-style benefit plans; others find them difficult to manage.

As health care costs escalate and overstretched employees find it hard to take time to exercise and take care of their health, more organizations are providing benefits and incentives to promote employee wellness.

In most instances, organizations provide some kind of incentive, prize, or reward to employees who take steps to improve their health. Accumulated evidence indicates that, in general, wellness programs are associated with positive employee health and work outcomes, as well as positive organizational financial performance.

For working parents, family-friendly benefits are especially attractive. For example, access to on-site childcare, the ability to telecommute and take time off to care for sick children, and provisions for emergency back-up childcare can be valued benefits for working parents with young children.

As noted in the opening paragraph, leaders in organizations should not underestimate the attractiveness of benefits to potential and current employees. Organizations can leverage benefits strategically to boost their recruitment and retention efforts and improve organizational performance.