Abstract
In this paper we focus on various theories and concepts and theories that can be systematically organized in order to distinguished between the different forms of compensation based on diverse characteristics of jobs. It should enable one to make a choice between the various forms that exist. The paper also try to explore factors that determine system of compensation to be adopted basing on the responses gathered from questionnaires. These questionnaires should concern job description and techniques of pay as per the Quality of Employment Survey and the Panel Study of Income Dynamics (PSID). The inferences from shows that there is no specific model of employment relationship that best describes the disparity in compensation form. There is relationship between job characteristic and form of compensation. It is imperative to understand that internal incentive is very paramount in developing viable theory of the compensation plans that are established by companies (Ronald, 1998)
Some of the outcomes of the research are:
Jobs with high power incentives which has close relationship with workers’ autonomy
Labor conditions that are so strict which are associated with high commissions and bonuses and other forms of promotions
The number of duties which are linked to the use of incomplete contracts.
Introduction
Compensation- These are techniques and practices that are incorporated into the organization policies in order to maintain balance between the interests of the company within the set up framework which govern expenditures within specified fiscal period and attracting, retaining and rewarding high quality staff. The company can attract and retain quality staff through wages and substantial salaries that is considered sufficient by the staff. Salaries and wages should be very competitive with the available rates that are used by other employers in the labor markets (Ronald, 1998)
The process is often described with the linear algebra elements that are very important in computation. It is important to note that proper computation of compensation is very crucial to the company for some relevant aspects of flow of cytometry. Compensation is a tool that has been adopted by many companies for several purposes that are aimed at enhancing further existence of the company. This entirely depends on the company’s needs, goals and the resources available. Compensation is implemented by a company with several objectives (Felicia, 1990).
Objectives of Compensation:
It is used to recruit and retain the existing qualified employees in the company
To boost the morale of the workers or the employees
To enhance peak performance in the organization due to the fact that workers will get encouraged to redouble their efforts
To ensure that there is fairness among all the stakeholders of the company where no one is subjected to any form of harassment. The management should at all times ensure that internal and external equity is achieved
Turnover reduction and boosting of the company’s loyalty
Modification of practices of unions through negotiations
Many employers projects to recruit and retain qualified staff at any time in their organizations. Market factors determine the availability and the cost of these qualified employees which cannot be control by the employer.
Compensation has a lot of impacts on morale and satisfaction of employees hence is very vital for management to ensure that there is balance between the monetary value that the company is willing top offer to the employer and the sentiments worth felt be the employee. Any employer wishing to reduce the employee turnover in the organization may opt to increase salary of the employees. Compensation is also used to reward those who perform exceptionally and such rewards may include commissions, bonuses, profit sharing and gain sharing.
Objectives
In conducting this research, there are number of objectives that are to be achieved. One of the objectives is to enhance understanding of the pay structures and other incentive systems that are to be adopted by the company. It is very crucial that the employees and other stakeholders are in position to integrate the theories ands concepts of compensation programs with empirical evidence concerning major compensation decisions that are to be effective in the company. These are very essential to avoid direct conflict between theories that are used in arriving at conclusions that concerns mode of payment to the employees in the company. For instance, tournament theories stress the substantial merits of hierarchical pay structure which sharply contrast with other theories such as social cohesion theory which emphasize potential dangers of hierarchical pay differentials. Some other theories argue that pay structures that should be adopted by the organization are depend on other factors that are attributed to the company such as amount of resources that the company has at any given time.
Another important objective of this research paper is to review theories and determine the aspects that affect the pay structures to be adopted by an organization. It is advantage to understand the effects of the compensation program that is to be designed and adopted by the company. It is also the goal of the paper is to understand the effects and practical importance of compensation programs and other incentive systems to be adopted (Meyer, 1995). Practical significance has been considered to be better than the statistical significance as the later is associated with the failure of the vast majority to meet its significance which depends on the sample size.
Literature Review
Some early researchers and other psychologist( Milkovich, 1998) have postulated that it is important for any organization to carry out job evaluation in order to determine the relative worth of each job that are undertaken by the company. It is important that before implementing any compensation program, job evaluation should be done to ensure that systematic assessment of jobs is done. This assessment is aimed at ascertain the worth of salary administration. They have also postulated that job evaluation commence with process of identification of job dimensions and classifying of the identified jobs. The process should end with the implementation of the evaluation processes as way forward to establishing proper compensation programs. It is important to understand the concepts and techniques that can be adopted when evaluating jobs. The available techniques that can be best used are quantitative and qualitative methods.
Compensation of employees comprises of base wage, incentive and benefits. It is suggested that base wage acts as the basis for determining the total compensation that an employee can receive. It is also important to note that minimum wage, the fair wage and the living wage are the most common concepts that are employed in compensation programs. The minimum wage is the least that an employee can receive as part of compensation for work done whereas living age is considered to be the highest of all. These different wage levels are used for different purpose as part of the compensation programs. For example, living wage is provided to the employees in order to accommodate comfortable living standard of the employees and their families. These include provision of the better health services, education to the children of the employees and other social facilities. If a compensation program is to be designed, it is very crucial to understand that there are various compensation programs which encompass both traditional wage plans and the modern wage plans systems. Traditional wage plans comprises of piece wage plans based on the quantity of units produced by the employee, time wage plan which depends on the amount of time that employee spend in certain job.
According to Ronald, employee ought to understand or get basic information such as the specific rate for a job, the time that paychecks are distributed by the organization, how much insurance are withheld for insurance. This information should be imparted to the employee before implementing any compensation program. It is also important that employees get general information such as basis of setting salaries, mode of providing certain benefits, and methods of job evaluation. It is quite imperative that the organization should satisfy the employees with compensation information through formal communication channels so as to ensure that they response positively to the programs that will be implemented. It also ensures that trust is developed in the compensation programs and systems and also to enhanced perceived equity matters between the internal and external stakeholders of the company. It is the duty of the top management of the organization to communicate adequate information to its employees so as to enable them to know the relevant issues on compensation programs. Implementation of company’s compensation program calls for great deal of information. It is important to ensure that employees get relevant information on formalized approach to certain pay that does not exist to avoid suspicion. They should that employees understand the benefits of the programs that are to be implemented by the company.
It is imperative that the employees get the company’s perspective of the compensation programs. It is necessary to make the employees aware of the importance of initiating certain compensation program, the time to implement through series of subsequent informational updates that are issued periodically. These are aimed at keeping employees apprised of the process of program implementation. If in case the employees perceived the advantages that are accruing to them if the compensation program is implemented, there are high chances that they are going to support the implementation of the process. This has a far reaching influence on the level of production that the company will experience hence gaining the organization too.
Discussion
Compensation programs may be complex to design as concluded by early economist and psychologists. Administration of the compensation program is evolving from the traditional concerns to a more modern system. Most top management of most organizations is faced with challenges that arise due to domestic norms and assumptions that are adopted by different companies. Companies are now exposed to diverse pay forms and other compensation programs that are quite healthy to the companies. There are legal and institutional context that should be followed in arriving at the most profitable and beneficial alternatives that match the global competitiveness. When one wants to implement a compensation program, it is imperative that he understand the recent development that affects international compensation programs and other matters of legal importance. According to the recent development, there are three main distinct levels of global pay in both local and international operations. These distinct levels are:
The basic level of cultural values and assumptions that are made in any compensation system
The intermediate level of pay strategy that encompasses practices and system design
The surface level
It is important that companies should try to balance between traditional and international based models basing on pay description that would maintain the status quo of the company. If a company is globalizing, it is recommendable that there is clearly boundary between practices and assumptions that are to be used in designing the compensation program. Firms or companies have choice on whether to adopt the firm specific theories of job worth such as behavioral theories or emphasize on the firm external theories and perspective such as cultural and institutional perspective
The various compensation plans are designed to reward employees basing on their performance but not on the hierarchal position in the company. These compensation plans are implemented to motivate and encourage the employees. The motive behind any compensation program in an organization is to increase performance among the employees. They encourage the employees and other individuals in the organization to perform better hence employee involvement in the organizational activities is very high. It is important to take into consideration factors such as organizational objectives and expectations of the stakeholders of the company before executing compensation plans. There are two broad classifications of rewards, intrinsic and extrinsic rewards where the former is tangible and can be controlled by the top management of the organization whereas the later are intangible in nature and depends entirely on the individual’s perception. It can also be classified into either monetary or non-monetary rewards. All these incentives can also be called performance based rewards. Compensation plans can be long-term or short-term. The long term compensation plans such as profit sharing and employee stock plans are adopted to reward the employee who has worked for long period of time in the company. The compensation plans should be fair and transparent so as to be very effective. It should not affect the bottom-line of the company. The basic purpose of an employee benefit program is to retain and motivate employees and improve their organizational commitment.
The diversity in the workforce calls for different compensation programs so as to match individual’s needs. Companies are designing and implementing innovative compensation plans to attract and retain staff who are efficient and effective in the company. A company can effectively use contemporary compensation programs to allow flexibility for designing customized programs. The compensation plan of any company, including the salary, the incentives and the benefits should contribute positively to both the employee and the employer.
It is important to identify components of compensation system before implementing the compensation program The diverse compensation system have similar components including job description, salary structures and written procedures, job evaluation, job analysis and policies and regulations
The economic understanding of the internal incentive structures and the compensation programs are far from complete. A lot of research has been done in this area but little implications hence minimal guidance and comprehension of actual compensation programs in large companies. There are some common characteristics of compensation programs an incentive systems that are adopted by companies which depend entirely on performance, used of promotion based incentive systems, egalitarian systems which is driven by the internal and external equity in the company, survey based systems and seniority pay systems, asymmetric systems which is based on rewards and punishments and so on (Ronald, 1998)
The Pay-for-Performance Compensation System
It is an assumption that high performance is associated with greater efforts on the part of the employees which is generally linked to disutility on the part of the employees. The system explicitly express the concern that existence if the reward systems is very crucial as the worker’s expected utility rises with the production experienced by the company. Economist and other psychologist have argued that monetary rewards for performance are very effective as compared to non-monetary performance rewards. Monetary performance rewards is considered to represent a generalized claim on resources hence preferred to non monetary payment in kind (Meyer, 1998)
These system is powerful motivator off employee action due to the fact that it can induce counterproductive effect hence can be effectively substituted to systems or programs that deemed less motivating in the organization. Many organizations have not adopted this compensation system due to lack of trust between employees and supervisors in the organization. This sometime gives rise to conflict between the different parties in the organization. There has been a lot of debate in many companies to eradicate this system due to such limitations. Organizations have been forced to abandon the performance pay system due to dysfunctional behavior that often arises due to induced resourceful workers who are exposed to subjective performance. It is important to note that this system is not recommendable to large organizations. It is also note worthy that pay performance compensation system programs are sometime very useful in encouraging the workers of a company to redouble their efforts in application of the systems. There has been a lot of disparity between the economist and the psychologists concerning the counterproductive impacts of the monetary rewards which are used in pay for performance systems. Economists have had a lot of focus on the importance of the unintended effects that arise from the adoption of the pay performance compensation systems.
It is every crucial to understand the pay strategies that are to be used by the company in compensation programs. The compensation programs should explicitly include the HRM strategy and norms and values that govern the company operations. Some of the external theories of job worth that are viewed from cultural and company’s point of view. The traditional employment relationships that are used by the company also affect the mode of pay performance compensation systems to be used by the company. Milkovich and Lawler postulated that some general principles should be followed as it determines the effectiveness of the program. There are a lot of questions that have arisen from compensation practices on the effectiveness and efficiency of the system and as whether these systems are reproducible across organizations. This depends on variety of factors such as the company’s history, the strategies of the company in achieving its goals, the culture of the company and the resources that are available in the company.
In addition, a lot of confusions are intensifying among the managers and other researchers due to disagreement over the central questions that besiege the pay performance compensation system which is affected by ideological beliefs. Some of the questions that have raised a lot of concern are:
Whether or not the pay for performance compensation system motivates the employee positively
Whether to adopt high pay for performance differentials within same or different job categories
Whether there general practices in compensation programs
Whether paying high salaries to employees will induce and encouraged them to be loyal and work extra hard.
Some economist have argued that financial incentives is sometime very dangerous to the organization as it might induce adverse effects that can hamper the company’s operations. It adversely affects the morale and productivity level of the employees and this may outweigh the benefits derived by the company from implementing the compensation plans.
The side effects of these compensation plan includes concerns of horizontal equity and limitations on imperfect performance measurements
Promotion Based Incentive System
Another compensation system that can be implemented in a company is the Promotion based incentive system. This is where salary levels depend on the hierarchical position occupied by an employee in the organization. In most companies, the increase in worker’s compensation is traced to promotions that are given or rather enjoyed by individuals in the company. Some of the early psychologist such as Medoff found that it is recommendable for organization and companies to establish job-level earnings as opposed to within-job-level differentials. Top managers are the people in an organization who are given compensation basing on the promotions that they are given. According to early findings, corporate managers receive average increase of 20% upon any form of promotion as compared to as little as 2% increase per year whenever they hold same position. It is imperative to adopt this compensation program for two main reasons. First and foremost, different individuals have different skills and talents that are useful to the company hence should be retained. Jobs are categorized in organization according to skills and qualifications it demands. To achieve effective and efficient productions in the organization, it is useful to match individuals to their jobs in which they are best suited as they posses certain skills. Promotions have been found to be the most efficient as individuals can gather information and accumulate human capital. The matching process is done continuously over time in order to ascertain the capabilities and talents of the individuals in the organization.
Another benefit of promotion incentive system is that it provide incentives to lower class employee who will strive to earn the prestige pay that are given to those who are been promoted. The lower class employees will work hard to ensure that they are promoted hence promoting efficiency and higher production in the organization. Through the promotion based incentive systems, company can be able to achieve peak performance. This device has been adopted by many organizations such as corporations, partnerships and higher learning institutions. This system is relatively cheap to implement as opposed to transitory financial bonuses. When combined with the pay-for performance compensation system, the amount of cost incurred will be less which indicates that this is the best for both small and large organizations in realization of its objectives and goals.
Research has also proved that promotion incentive systems have certain shortcomings that are to been factored into before designing any compensation program. Promotions based incentive systems depends omen the probability of promotion opportunities which are sometime minimal in many organizations and are affected by identity of the top management who are decision makers. Promotions of employees in companies are done after the top management decides and can be biased sometime. The top leaders of an organization are concern with deciding on which should be promoted hence benefiting from promotion based incentive system. Another limitation is that promotion is only limited to employees who had not been promoted in the past. Any employee who had been promoted cannot benefit from the program. Those whose ability to perform in the future is not predictable cannot benefit from the compensation plan (Ronald, 1998)
Profit-Sharing Plans
This is commonly used in the Western countries. It is estimated that about 20% of the labor force in the US have participated in the profit-sharing plan program. Milkovich and Ehrenberg postulated those profit sharing plans are more effective than the pay-for-performance. Gain sharing is very important in that it motivates employees and other stakeholders to work extra harder in order to earn huge profits that are going to be shared. Economist and psychologist have not understood the productive effects of profit sharing plans. The company should understand the demerits of the program before designing such programs. The program is associated with the problem of free rider hence cannot be effectively used by large organizations. It is recommendable to design a profit sharing program which tie pay to individual performance as opposed to overall company’s performance if the individual performance measures can be ascertained. The system or the program designed depends entirely on whether the output per individual is observable.
Data collection Methods
Job descriptions very important before one design any compensation program. Describing job performance calls for judgment and inference where careful study is done to get relevant information that can assist in arriving at the appropriate compensation program to adopt. Data can be collected by means of interviews, observations and questionnaires. It is recommendable that data collection is performed by personnel with appropriate skills. The method of data collection differs with the jobs in the organization. If compensation program is directed to top management, then data collected should be detailed i.e. should have full description due to the fact that jobs done by these workforce are fragmented, amorphous and most the activities cannot be easily observed. When collecting data, it is important that dichotomy between objective and subjective measurements are portrayed so as to avoid misleading information on job performance. It is not recommendable for organization to use job analysis when dealing with top posts such those occupied by managers in the organization. Information to be used in designing compensation program can also be obtained through observing the abstract character of the individuals. This method is used often among to collect information about the managerial performance. The community surrounding the organization can also acts as the most relevant source of information concerning the managers performance who are suppose to benefit from compensation program to be implemented (Ronald, 1998)
Conclusion
In conclusion, compensation programs are very critical aspect to all organizations. The efficiency of the programs depends on the way the system is designed. The consequences of the can be very productive to the organization. The short and long term incentives contribute positively to competitive aggressiveness in organization. (Medoff, 2000).
References List:
Ronald, G (1998). Compensation and Firm Performance. Ithica, NY, Cornell University Center for Advanced Human Resources Studies, 160-190
Medoff, T (2000). Incentive Based Systems. The New York Times Century of Business (New York, McGraw-Hill, pp. 253.
Felicia, N. (1990). Cost for Wages, Salaries and Benefits of Employees. Monthly Labor Review, pp. 3-11.
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