1. Compensation:
Objectives of Compensation:
Acquire Qualified Personnel: Compensation needs to be high enough to attract applicants. Pay levels must respond to the
supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes
needed to attract applicants already working for others.
Retain Current Employees: Employees may quit when compensation levels are not competitive, resulting in high turnover.
Reward Desired Behavior: Pay should reinforce desired
Behaviors and act as an incentive for such behavior to occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility and other behaviors.
Control Costs: A rational compensation system helps an organization obtain and retain workers at a reasonable cost. With
effective compensation management, workers might be over-paid or under-paid.
Comply with Legal Regulations: A sound wage and salary system considers the legal challenges imposed by the
Government and ensures the employer’s compliance.
Facilitate Understanding: The compensation management system should be easily understood by human resource
specialists, operating managers and employees.
Further Administrative Efficiency: Wage and salary programs should be properly designed to be managed efficiently.
Classifications of Compensation Objective Categories:
1) Equity: The first category is equity, which may take several forms. It includes income distribution through
narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing
power) and the concept of equal pay for work of equal value. Compensation management strives for internal and
external equity.
a. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar
pay.
2) Efficiency: It is often closely related to equity, because two concepts are not antithetical. The objectives of efficiency are reflected
in attempts to link a part of wages to productivity or profit, group or individual performance acquisition and application of skills
and so on.
3) Macro-economic stability – It can be achieved through high employment levels and low inflation. For instance, an inordinately
high minimum wage would have an adverse impact on levels of employment.
4) Optimal allocation of labor: The efficient allocation of labor in the labor market implies that employees will move to wherever
they receive a net gain. Such movement may be from one geographical location to another or from one job to another
(within or outside an enterprise). The provision or availability of financial incentives causes such movement. For
example, workers may move from a labor surplus or low-wage area to a high wage area. They may acquire new
skills to benefit from the higher wages paid for skills.
*When an employer’s wages are below market rates, employee turnover increases. When it is above market rates, then
employer attracts job applicants.
*When employees move from declining to growth industries, an efficient allocation of labor due to structural changes take
place.
Principles of Compensation Formulation:
Main factors affecting wage or compensation levels within an organization
1) External relativities,
2) Salary
3) Individual worth.
External relativities – Market rate as affected by supply, demand and general movements in pay levels.

2. Individual worth- It is the value of individual’s performance to the organization.
REWARD VS. RECOGNITION
Employee reward systems refer to programs set up by a company to reward performance and motivate employees on
individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or
otherwise have a cost to the company. While previously considered the domain of large companies, small businesses
have also begun employing them as a tool to lure top employees in a competitive job market as well as to increase
employee performance.
Employee recognition programs are often combined with reward programs they retain a different purpose altogether.
Recognition programs are generally not monetary in nature though they may have a cost to the company. Sue Glasscock
and Kimberly Gram in Productivity Today differentiate the terms by noting that recognition elicits a psychological benefit
whereas reward indicates a financial or physical benefit. Although many elements of designing and maintaining reward
and recognition systems are the same, it is useful to keep this difference in mind, especially for small business owners
interested in motivating staffs while keeping costs low.
DIFFERENTIATING REWARDS FROM MERIT PAY AND THE PERFORMANCE APPRAISAL
In designing a reward program, a small business owner needs to separate the salary or merit pay system from the reward
system. Financial rewards, especially those given on a regular basis such as bonuses, gainsharing, etc., should be tied to
an employee's or a group's accomplishments and should be considered "pay at risk" in order to distance them from
salary. By doing so, a manager can avoid a sense of entitlement on the part of the employee and ensure that the reward
emphasizes excellence or achievement rather than basic competency.
Merit pay increases, then, are not part of an employee reward system. Normally, they are an increase for inflation with
additional percentages separating employees by competency. They are not particularly motivating since the distinction
that is usually made between a good employee and an average one is relatively small. In addition, they increase the fixed
costs of a company as opposed to variable pay increases such as bonuses which have to be "reearned" each year.
Finally, in many small businesses teamwork is a crucial element of a successful employee's job. Merit increases generally
review an individual's job performance, without adequately taking into account the performance within the context of the
group or business.
DESIGNING A REWARD PROGRAM
The keys to developing a reward program are as follows:
Identification of company or group goals that the reward program will support
Identification of the desired employee performance or behaviors that will reinforce the company's goals
Determination of key measurements of the performance or behavior, based on the individual or group's previous
achievements
Determination of appropriate rewards
Communication of program to employees
In order to reap benefits such as increased productivity, the entrepreneur designing a reward program must identify
company or group goals to be reached and the behaviors or performance that will contribute to this. While this may seem
obvious, companies frequently make the mistake of rewarding behaviors or achievements that either fail to further
business goals or actually sabotage them. If teamwork is a business goal, a bonus system rewarding individuals who
improve their productivity by themselves or at the expense of another does not make sense. Likewise, if quality is an
important issue for an entrepreneur, the reward system that he or she designs should not emphasize rewarding
the quantity of work accomplished by a business unit.

3. Properly measuring performance ensures the program pays off in terms of business goals. Since rewards have a real cost
in terms of time or money, small business owners need to confirm that performance has actually improved before
rewarding it. Once again, the measures need to relate to a small business' goals. As Linda Thornburg noted inHR
Magazine , "Performance measures in a rewards program have to be linked to an overall business strategy….
Mostreward programs use multiple measures which can include such variables as improved financial performance along
with improved customer service, improved customer satisfaction, and reduced defects."
When developing a rewards program, an entrepreneur should consider matching rewards to the end result for the
company. Perfect attendance might merit a different reward than saving the company $10,000 through improved contract
negotiation. It is also important to consider rewarding both individual and group accomplishments in order to promote both
individual initiative and group cooperation and performance.
Lastly, in order for a rewards program to be successful, the specifics need to be clearly spelled out for every employee.
Motivation depends on the individual's ability to understand what is being asked of her. Once this has been done,
reinforce the original communication with regular meetings or memos promoting the program. Keep your communications
simple but frequent to ensure staff are kept abreast of changes to the system.
TYPES OF REWARD PROGRAMS
There are a number of different types of reward programs aimed at both individual and team performance.
VARIABLE PAY Variable pay or pay-for-performance is a compensation program in which a portion of a person's pay is
considered "at risk." Variable pay can be tied to the performance of the company, the results of a business unit, an
individual's accomplishments, or any combination of these. It can take many forms, including bonus programs, stock
options, and one-time awards for significant accomplishments. Some companies choose to pay their employees less than
competitors but attempt to motivate and reward employees using a variable pay program instead. According to Shawn
Tully in Fortune , "The test of a good pay-for-performance plan is simple: It must motivate managers to produce earnings
growth that far exceeds the extra cost of [the program]. Though employees should be made to stretch, the goals must be
within reach."
BONUSES Bonus programs have been used in American business for some time. They usually reward individual
accomplishment and are frequently used in sales organizations to encourage salespersons to generate additional
business or higher profits. They can also be used, however, to recognize group accomplishments. Indeed, increasing
numbers of businesses have switched from individual bonus programs to one which reward contributions to corporate
performance at group, departmental, or company-wide levels.
According to some experts, small businesses interested in long-term benefits should probably consider another type of
reward. Bonuses are generally short-term motivators. By rewarding an employee's performance for the previous year, say
critics, they encourage a short-term perspective rather than future-oriented accomplishments. In addition, these programs
need to be carefully structured to ensure they are rewarding accomplishments above and beyond an individual or group's
basic functions. Otherwise, they run the risk of being perceived as entitlements or regular merit pay, rather than a reward
for outstanding work. Proponents, however, contend that bonuses are a perfectly legitimate means of rewarding
outstanding performance, and they argue that such compensation can actually be a powerful tool to encourage future top-
level efforts.
PROFIT SHARING Profit-sharing refers to the strategy of creating a pool of monies to be disbursed to employees by
taking a stated percentage of a company's profits. The amount given to an employee is usually equal to a percentage of
the employee's salary and is disbursed after a business closes its books for the year. The benefits can be provided either
in actual cash or via contributions to employee's 401(k) plans. A benefit for a company offering this type of reward is that it
can keep fixed costs low.
The idea behind profit-sharing is to reward employees for their contributions to a company's achieved profit goal. It
encourages employees to stay put because it is usually structured to reward employees who stay with the company; most
profit-sharing programs require an employee to be vested in the program over a number of years before receiving any

4. monies. Unfortunately, since it is awarded to all employees, it tends to dilute individual contributions. In addition, while
profit is important, it is only one of many goals a company may have and is, according to Jack Stack in Inc., "an
accumulation of everything that happens in the business over a given period of time" and is therefore difficult for most
employees to connect their actions to. Stack argued that "[employees] have to be able to see the connection between
their actions, decisions, and participation, and changes in [a company's goals]." Like bonuses, profit sharing can
eventually be viewed as an entitlement program if the connection between an employee's actions and his or her reward
becomes murky.
STOCK OPTIONS Previously the territory of upper management and large companies, stock options have become an
increasingly popular method in recent years of rewarding middle management and other employees in both mature
companies and start-ups. Employee stock-option programs give employees the right to buy a specified number of a
company's shares at a fixed price for a specified period of time (usually around ten years). They are generally authorized
by a company's board of directors and approved by its shareholders. The number of options a company can award to
employees is usually equal to a certain percentage of the company's shares outstanding.
Like profit-sharing plans, stock options usually reward employees for sticking around, serving as a long-term motivator.
Once an employee has been with a company for a certain period of time (usually around four years), he or she is fully
vested in the program. If the employee leaves the company prior to being fully vested, those options are canceled. After
an employee becomes fully vested in the program, he or she can purchase from the company an allotted number of
shares at the strike price (or the fixed price originally agreed to). This purchase is known as "exercising" stock options.
After purchasing the stock, the employee can either retain it or sell it on the open market with the difference in strike price
and market price being the employee's gain in the value of the shares.
Offering additional stock in this manner presents risks for both the company and the employee. If the option's strike price
is higher than the market price of the stock, the employee's option is worthless. When an employee exercises an option,
the company is required to issue a new share of stock that can be publicly traded. The company's market capitalization
grows by the market price of the share, rather than the strike price that the employee purchases the stock for. The
possibility of reduction of company earnings (impacting both the company and shareholders) arises when the company
has a greater number of shares outstanding. To keep ahead of this possibility, earnings must increase at a rate equal to
the rate at which outstanding shares increase. Otherwise, the company must repurchase shares on the open market to
reduce the number of outstanding shares.
One benefit to offering stock options is a company's ability to take a tax deduction for compensation expense when it
issues shares to employees who are exercising their options. Another benefit to offering options is that while they could be
considered a portion of compensation, current accounting methods do not require businesses to show options as an
expense on their books. This tends to inflate the value of a company. Companies should think carefully about this as a
benefit, however. If accounting rules were to become more conservative, corporate earnings could be impacted as a
result.
GROUP-BASED REWARD SYSTEMS
As more small businesses use team structures to reach their goals, many entrepreneurs look for ways to reward
cooperation between departments and individuals. Bonuses, profit sharing, and stock options can all be used to reward
team and group accomplishments. An entrepreneur can choose to reward individual or group contributions or a
combination of the two. Group-based reward systems are based on a measurement of team performance, with individual
rewards received on the basis of this performance. While these systems encourage individual efforts toward common
business goals, they also tend to reward underperforming employees along with average and above-average employees.
A reward program which recognizes individual achievements in addition to team performance can provide extra incentive
for employees.
RECOGNITION PROGRAMS
For small business owners and other managers, a recognition program may appear to be merely extra effort on their part
with few tangible returns in terms of employee performance. While most employees certainly appreciate monetary awards

5. for a job well done, many people merely seek recognition of their hard work. For an entrepreneur with more ingenuity than
cash available, this presents an opportunity to motivate employees.
In order to develop an effective recognition program, a small business owner must be sure to separate it from the
company's reward program. This ensures a focus on recognizing the efforts of employees. To this end, although the
recognition may have a monetary value (such as a luncheon, gift certificates, or plaques), money itself is not given to
recognize performance. Glasscock and Gram noted in National Productivity Review that effective recognition methods
should be sincere; fair and consistent; timely and frequent; flexible; appropriate; and specific. They go on to explain that it
is important that every action which supports a company's goals is recognized, whether through informal feedback or
formal company-wide recognition. Likewise, every employee should have the same opportunity to receive recognition for
their work. Recognition also needs to occur in a timely fashion and on a frequent basis so that an employee's action does
not go overlooked and so that it is reinforced to spur additional high performance. Like rewards, the method of recognition
needs to be appropriate for the achievement. This also ensures that those actions which go farthest in supporting
corporate goals receive the most attention. However, an entrepreneur should remain flexible in the methods of
recognition, as employees are motivated by different forms of recognition. Finally, employees need to clearly understand
the behavior or action being recognized. A small business owner can ensure this by being specific in what actions will be
recognized and then reinforcing this by communicating exactly what an employee did to be recognized.
Recognition can take a variety of forms. Structured programs can include regular recognition events such as banquets or
breakfasts, employee of the month or year recognition, an annual report or yearbook which features the accomplishments
of employees, and department or company recognition boards. Informal or spontaneous recognition can take the form of
privileges such as working at home, starting late/leaving early, or long lunch breaks. A job well done can also be
recognized by providing additional support or empowering the employee in ways such as greater choice of assignments,
increased authority, or naming the employee as an internal consultant to other staff. Symbolic recognition such as plaques
or coffee mugs with inscriptions can also be effective, provided they reflect sincere appreciation for hard work. These
latter expressions of thanks, however, are far more likely to be received positively if the bestower is a small business
owner with limited financial resources. Employees will look less kindly on owners of thriving businesses who use such
inexpensive items as centerpieces of their reward programs.
Both reward and recognition programs have their place in small business. Small business owners should first determine
desired employee behaviors, skills, and accomplishments that will support their business goals. By rewarding and
recognizing outstanding performance, entrepreneurs will have an edge in a competitive corporate climate.
Read more: Employee Reward and Recognition Systems - percentage, type, benefits, cost, Reward vs.
recognition http://www.referenceforbusiness.com/small/Di-Eq/Employee-Reward-and-Recognition-
Systems.html#b#ixzz1jb9QHI5l
Main Objective of Compensation Strategy is to give the right rewards for the right employee behavior.
Compensation is an impt. Motivator when you reward achievement of the desirable organizational results.
Compensation Strategy can reinforce the organizational culture that you desire. This is an enabling organizational culture
under which pay is linked to performance. In order to achieve the desired result in an organization, objectives must be
clearly defined using the compensation strategy.
Compensation Policy must reflect your strategic business objectives.
Types of Reward:

6. 1) Monetary- include salary, bonus, commissions, medical and health benefits, holidays and retirement benefits.
2)Non-monetary- include meaningful and challenging works, recognition and career advancement, safe and healthy
working environment and fair treatment
How Can HR managers make use of Compensation Strategy?
Compensation is used to attract and retain performing employees. But this objective requires a firm to offer a salary that
equates the job and not lower than the market rates
Equitable Compensation is primarily considered by employees in any organization. Thus, it should also be drawn up in the
compensation strategy. When employees notice equities, their morale and motivation will be boosted.
By adopting compensation strategy, firms need not worry about other organization pirating their employees
Determining Pay Rates
Compensation strategy involves considering to adopt any of the following:
1) Seniority- based Pay – Pay increase based on employee’s length of time spent on the job. This is a good strategy
to motivate employee retention. In here, you are not rewarding performance.
2) Performance –based Pay – Pay intended to motivate employees to perform according to or above expectations.
This is common, whereby the manager and employee agree on the job goals and performance criteria in a
specific period. The effect of this as a motivator can vary from time to time and from different situation.*
3) Competency-based Pay - Pay increase based on job-related skills and knowledge. This is intended to motivate
employees to gain additional skills, acquire new competencies and knowledge. In this method a firm is not paying
employees for the job they are doing, their job title nor seniority.
4) Team-based Pay - Rewards employees who work in a team. This means that individual employees are
compensated based on the team performance. It requires the adoption of a collective performance evaluation
method, rather than individual assessment based on the result areas. This system emphasizes behavior on
team performance sustainability.
Motivating executives
We discuss this subject separately, since there is an indication from various surveys that the blue-collar and white-collar
workers do not attach the same importance to financial incentives. This is probably more due to differing value system of
the two, rather than the importance each attaches to the money per se.
When properly used, money can be a motivating factor, but little money may have no effect (Crystal (1970). To achieve
motivation of executives, therefore:
reward should be meaningful; and
Reward should vary with performance.
The concept is simple, but its implementation is not easy. However, the job is well worth trying. To be effective, the reward
should be 'tailored' to each individual, but only as part of the total compensation concept. It is essential (Moore (1968)) to
develop an overall program within which each compensation package must be individualized.
Executive compensation elements
There is also need for constant search of new ideas in this respect. The essentials of an effective company-wide
executive compensation scheme are: sound salary-base structure, several fundamental compensation devices and
considerable flexibility in its application.
The five basic elements (Ellig (1982)) of executive compensation are:
salary,
Short-term incentives,-defined as incentive scheme for a measurement period of one year and usually paid in
cash. pay-for-performance incentive schemes, gain share, profit share, commission and bonus scheme

7. long-term incentives- designed to improve employees' long-term performance by providing rewards that may not
be tied to the company's share price. In a typical LTIP, the employee (usually an executive) must fulfill various
conditions and/or requirements that prove that he or she has contributed to increasing shareholder value.
www.investopedia.com/terms/l/long_term_incentive-plan
employee benefits and
Perquisites.
Any plan for executives should take into account the following factors:
Executives perceive others as working less and paid more.
Appearance of a reward as important a factor as the reward itself.
Flexibility, but not at the expense of discretion.
Performance rating should support the pay action.
Correcting one inequity may lead to yet another.
A decision once announced is difficult to modify.
An arithmetic increase in the number of people involved results in a geometric increase in the time required to
reach agreement.
Motivating for high performance can cost a lot of money. Not everyone can be motivated by money alone, however much.
Incentive pay plans should be designed (Ivancevich (1983)) not only to reward good performance but also to minimize the
negative side-effects, such as conflict and grievance. At times it is difficult to develop a valid, equitable and acceptable
means of performance. Many pay plans fail because of either not being suited to the particular situation or because of
poor implementation. It is essential to consider the following aspects before designing a pay plan to motivate
performance:
preference of individual employees;
size of pay rewards for high performance;
method of motivating individual job performance;
subjective
We have pointed out earlier that for effective and sustained motivation, the reward must be prompt and immediate. The
example of Foxboro has been quoted. In its early days, the company's very survival depended on technical innovation.
Late one evening (Peters & Waterman (1982)) a scientist walked into the president's office with a working prototype. The
president was dumbfounded by the elegance of the solution and sought to reward him immediately and on the spot.
Rummaging through the drawers of his desk, all he could find was a banana and this had to suffice. This was the
forerunner of the 'gold banana' concept, a very apt and fitting reward. Likewise, Thomas Watson Snr. had made a practice
of writing out a check on the spot for any unusual achievement that he observed.
Executive pay - a caution
However, we must introduce a note of caution. There is a connection (White (1973)) between executive pay and company
size, in terms of turnover or number of employees, but no connection between executive pay and improvement in
profitability - the bigger the company, the higher the pay, but efficiency is not necessarily higher. The higher salary is
probably because of a larger number of levels in big companies. Of course, with the large number of variables involved, it
is difficult to correlate any two isolated factors, such as executive pay and overall company efficiency.
There should be a direct correlation, but perhaps the yardsticks available for this purpose are inadequate to establish it.
Let us, however, reiterate that individual executives have different senses of values, of which money is one, and an
important one at that. No reward other than money is so flexible, so measurable or so controllable. But in using financial
motivation, the companies must be clear on what they wish to achieve, then define what managers are expected to
contribute towards the objectives and finally ensure that financial reward is linked to managerial performance.
Profit sharing
Profit sharing could be on a macro basis or on a micro basis. The former relates to the entire company as a whole and the
latter to a particular section or group dealing with a particular activity and/or product. On a macro level, it would be difficult
to identify and reward outstanding performance. This is possible on a micro level by treating the particular activity as a
cost and profit center by itself. This is easier said than done, since overheads and other common services have to be
charged and this cannot be done completely objectively. The cost allocation in such cases is somewhat arbitrary and the
profit will therefore not be a true reflection of the performance of that particular group or activity.

8. An effective executive compensation is an important area of your organization's pay program. Executives are among your
key employees.
Salary Increases
your compensation strategy needs to align your compensation objectives to your organizational business objectives.
Salary increases are part of this plan. By this, you are recognizing employees' contribution to the accomplishment of your
organization's objectives.
Salaries are normally reviewed annually and an increase is given if the employee merits it.
There are times when you feel your organization cannot afford to give any pay increase.
So what do you do in order not to de-motivate your people?
Consider implementing a policy whereby employees are given salary increases when your organization can afford to give
them, in arrears. This ensures that good performers will continue to perform. They know that they will get what is due to
them.
In order to ensure that this is done properly, ensure that the annual performance appraisal is done as usual. You need the
employees' performance data.
Giving salary increase to an under-performer is not justified. There are organizations who have implemented a policy that
employees who are in the last five percent of the performancebracket will have to go.
Size of Merit Increase
This usually consists of payment in respect of performance level. A merit increase that is perceived as significant by
employees can motivate them to perform better.
Make sure that your best employees are duly rewarded, the amount being sufficient enough to motivate.
Ensure that your performance review is effective to reduce any possibility of wrong or biased decisions made.
Pay Increase on Promotion
When an employee is promoted, you may or may not give a significant pay increase.
It is not justified to pay an overpaid employee a significant promotional increase. Consider all relevant matters before you
make a decision.
One important thing to consider is the pay parity with people in the same category and performing similar tasks.
General Salary Adjustment
In performance-based pay, do not give across-the-board increases.
Differentiate between outstanding, average and non-performers. If not, your employees will lose trust in the system,
resulting in little or no motivational impact. Paying the right salary has impact on employee performance and
organizational effectiveness.
Automatic Salary Progression
This has no relationship to performance. Avoid it as it does not encourage your employees to improve their performance.

9. This is fairly common in the public sector. But there are now significant changes made in accordance with sound human
resource management principles.
The only occasion where you can consider giving some salary increase that is unrelated to performance is in respect of
increase in the cost of living.
Anomalous Salary
If you have any employee whose salary is below the minimum for the job or too low in relation to the employee's
performance and experience, make the necessary adjustment.
This is in addition to an increase based on performance merit.
On the other hand, you may have an employee who is paid above the maximum point in the salary range for the job.
You may freeze further salary increases until the relevant pay level is reached. Then give merit increase based on
performance. Don't give increase if performance is unsatisfactory.
Be careful in handling the situation where you do not see the reason for increasing an employee's salary.
Conduct a salary survey whether your range maximum is lower than the markets rates. If so, you may want to adjust the
maximum range.
Communicate the results to the affected employees. It is also good if other employees know why this is being done.
Do all of these as part of your compensation strategy.
Salary Reviews
Compensation strategy requires that the appropriate salary review method is adopted.
Fixed-date Reviews
Such reviews are usually on 1st January each year.
A modified version is to fix the reviews every quarter for different groups of employees whose appointment fall
within the respective quarter.
For example, 1st January review for those who joined the organization between 1st January and 31st March.
Under this method, there is widespread comparison of salary among employees.
In many cases, this creates dissatisfaction. And it can affect employee morale.
Anniversary Reviews
Here, you review employees' salary at 12-month intervals from the date of their appointment.
This is a good method to reward good performance. But it is time-consuming and needs a lot of effort.
Flexible-date Reviews
The interval can range from nine months to eighteen months.
You can use this method to adjust the salaries of high-performing employees whose salary is low, say after nine
months.
You can give an under-performer less frequent salary increases, say after eighteen months.

10. A non-performer gets no pay increase. Issue a letter cautioning the employee to improve his or her performance.
This is required under the law. If this continues, issue a show cause letter for poor performance.
Compensation and Strategic HR Management
None of the compensation systems is perfect. Human judgment remains an important element.
Try to reduce the subjectivity as much as possible. Provide the necessary skills training for assessors.
Use compensation strategy to:
monitor cost-effectiveness
Are you getting good returns from the compensation methods that you have adopted?
verify legal compliance
Are there legislation that may prohibit the way your organization is managing its compensation scheme?
determine pay equity
Are you using strategy to minimize or eliminate pay disparity in order to achieve maximum employee motivation?
and
link pay to performance
Is a performance-based pay implemented in your organization?
Corporate Transformation and Compensation Strategy
It is stated in a Report "Strategic Compensation: How to align performance, pay and rewards to support corporate
transformation" that it involves four strategic elements in a closed loop, or continuous process. These are:
translating business issues into compensation or HR interventions
designing and delivering them with key objectives
leading the resultant change process, and
reviewing or evaluating the outcomes."
(www.business-intelligence.co.uk)
The Report finds that strategic compensation is a significant contributor to different forms of competitive advantage,
including
better business results
more effective performance
stronger capability
higher staff attraction and retention levels
heightened motivation, and
employee satisfaction.
But it cautions on the repercussions if it is poorly managed.If so, it can "de-motivate, is divisive, create upheavals among
employees or force good performers to leave."
In addition, you may find help from Martocchios' book ""Strategic Compensation: A Human Resource Management
Approach".
He mentions criteria in determining employee compensation, design of compensation system, among other things.
Necessity to Rethink Approach to Compensation
Strategic compensation is the type of compensation that can achieve its intended purpose. Compensation strategy is the
course of action taken to ensure that this purpose is attained.
There is no excuse in paying salaries that make no difference in the performance of your employees.
Brent Longnecker,a leading authority on compensation trends, planning and strategy in his book "Rethinking Strategic
Compensation" believes we need to rethink our approach to compensation.

11. He provides "all facets of attracting, retaining, and motivating employees through a robust compensation plan."
Forces Affecting Compensation
Effects of Market Forces on Compensation Strategy
Organizations operate in a dynamic market environment. There are times of plenty and there are lean years.
This matter does not fail to catch our attention especially the effects of economic downturns. Many people particularly
corporate heads and leaders ask important questions how their organizations can continue to exist.
One question that they cannot evade is on compensation.
You want your organization to continue in existence. And reducing the headcount will quickly reduce your overheads.
You need people in order to survive. However, maintaining the same number of employees can lead to bankruptcy.
So what do you do? This is a difficult question to answer.
Further, you need to ensure that your organization does not lose talent and needs to engage talent that you need to help
during the hard times.
You also need to pay attention to the retained employees so that they remain committed and focused. Thus, the
importance of preparing a compensation strategy.
You can consider the following:
Differentiate between top performers and non-performers and even average performers. And reward them
accordingly.
Reward top performers only. This may motivate mediocre performers to contribute more.
Check the market whether your compensation system is competitive.
Clearly communicate to employees what their compensation package is worth. Then negotiate on possible
reduction for certain heads such as non-cash compensation. Don't say demotivating words like "You are lucky
you still have jobs."
Make plan to achieve continued employee motivation at least in the short-term.
Terminate non-performers, not good performers in sectors that are no longer profitable due to the downturn.
We read from publications or hear from broadcasts that some people are not too happy that organizations continue to pay
incentives to executives during downturns.
Some suggest that cost-cutting is not the answer but implementation of compensation strategy.
We need to remember that whatever the economic situation or your organizational financial performance is, formulating
andimplementing a compensation strategy will ensure the ever-readiness of your organization.
Once in place, it is necessary to review the strategy at least yearly and whenever there is a need to do so as dictated by
events.
Compensation Legislation and Compliance
It is necessary for people in HR and those in managerial positions to know and understand that the law affects your
compensation and benefits system.
In the public sector, practically every aspect of employee compensation is governed by legislation. In most cases, there is
not much room for innovative ideas in formulating compensation strategy.

12. The one good things about this is that the results are predictable at most times. But it can lead to a lot of dissatisfaction.
Legislation specify job grades, salary band or range, salary increases, promotion, allowances, benefits and so on.
When there are needs for changes, the legislation concerned is amended. Before any incentive or a new allowance is
given or paid the law must allow it. If not, nobody will or dares to take the risk to go against the stipulated rules.
Some government agencies are usually given some authority under a subsidiary legislation allowing their respective
Board of Directors to make decisions. Such decisions must not go against the provisions of the incorporation instrument.
Role of Legislation in Private Sector Compensation
Organization in the private sector are "free" to determine the levels and components of their compensation package. They
are "free" to determine their own compensation strategy subject to legislation.
Private entities are not free to follow their whims and fancies in compensation matters.
National governments may enact laws forcing private organizations to change their compensation system and practices.
This can happen during times of economic recession when sensitive matters such as compensation come under close
public scrutiny. This will also happen in response to sensible public opinion.
If this happens private organizations may not have much choice but to follow.
This can bring both positive and negative results.
Some argue that self-regulation is better and preferable. But some sort of basic framework is necessary.
An example in which legislation may determine private entities compensation policy is when a minimum wage is imposed.
Here, organizations are "forced to agree". This affects you compensation strategy.
This is a controversial issue. Employees at the lowest level and their unions look forward to it. Employers Associations
orFederation dread it.
Government officers may not know what further action they need to take. They are responsible for implementation in
which case they cannot go against against government policies.
Another real possibility where governments may intervene is when employees, unions, community leaders, commentators
and others believe that the cost of living (COLA) is getting exceptionally high and they appeal for government intervention.
Your organization may want to offer salary increase to help people cope during hard times. In this way, COLA become
one of the factors in deciding the quantum of compensation.
Further, anti-discrimination laws have impacts on compensation.
We know that market forces impose "unwritten rules" on the compensation systems and thus compensation strategy.
Accepted norms such as in salary systems affect decisions of organizations.
Apart from the enacted laws, the "common law" can shape compensation decisions. When cases come before the law
courts, judges interpret the law and refer to decided cases in deciding whether compensation is payable or not. And if
payable, the courts will also rule on the quantum payable by the employer.
A lot of these cases are on unfair dismissal or constructive dismissal. In many of these cases "compensation" specifically
refers to the amount of back pay that the employer must pay to the former employee.
The law courts will seldom award economic loss as compensation.
The courts may also rule that the employer take back the former employee to resume duties in the same position and
drawing the same salary. This may pose problems to the employer and other employees.

13. Compensation Strategy and HRM
An HR executive like you, will understand "how compensation plans must align with organizational design and corporate
strategy."
Whatever you decide to do, it is good to remember that compensation and compensation strategy are essential parts of
a strategic human resources management plan.