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Autor: anton 28 June 2011
Words: 2380 | Pages: 10
Total Compensation Methods
With a steady increase in unemployment, outsourcing, and globalization, salary and benefit packages are undergoing constant change. Compensation has and always will be a key element of choice in todayÐ²Ð‚â„¢s job market for candidates seeking employment. Due to a declining economy, employers have been forced to become more creative in their benefit and compensation packages offered to employees. Strategic planning has become the key element in a successful human resource department of large corporations throughout the United States. Our learning team paper will analyze the impact of three key salary methods on employees and organizations, explore three benefit packages, and explain how salary and administration strategies relate to organizational culture and performance.
The importance of a companyÐ²Ð‚â„¢s ability to sustain a balance between employee and company interests is significant. Compensation is defined as the methods and practices of maintaining balance between interests of operating the company within the fiscal budget and attracting, developing, retaining, and rewarding high quality staff through wages and salaries which are competitive with the prevailing rates for similar employment in the labor markets. (HR Guide, 2008)
A strong awareness of the overall job market is necessary for any organization that wishes to hire a job candidate who will understand and be able to participate in the organizationÐ²Ð‚â„¢s culture. The salaries paid by an organization considerably affect the type of job candidates who will seek a position within the organization.
According to Noe, Hollenbeck, Gerhart, and Wright (2004), if employees conclude that they are under rewarded, they are likely to make up the difference in one of three ways. They might put forth less effort, find a way to increase their outcomes, or withdraw by leaving the organization. (p. 355) Therefore, it is imperative that an organization is able to create a pay structure that allows each of its employees to feel they are paid what they are worth. If the employees of an organization are paid fairly, they are far more likely to continue working for the organization.
The overall performance of an organization is significantly affected by the compensation plans it offers to its employees. Employees who are provided with some form of incentive pay often try harder or get more creative than they might without the incentive pay (Noe et al., 2004, p. 374). In order for organizations to attract and retain their workforce, key components of benefits and compensation must be competitive. These components include; salary, Lump sum adjustments, merit pay, performance feeds, bonus incentives, and Employee Stock Ownership Plan (ESOP).
According to HR Guide, merit pay is an incentive plan implemented on an institution wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints. The merit plan has many advantages and disadvantages. One advantages is that it allows employers to differentiate pay given to high performers as well as allow the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated. On the opposite side, that pay may be biased.
The employee stock ownership plan (ESOP) allows employees to become owners of stock in the company they work for. ESOP is an equity based deferred compensation plan. An ESOP is required by law to invest primarily in the securities of the sponsoring employer. An ESOP provides a cost-effective plan to motivate employees since they will be acting as owners of the company and thus will work harder to insure maximum profit for the organization.
Performance feeds linked to organizational goals, culture, and strategy allows employees to improve and empower work performance. By providing employees with the resources necessary to meet goals, employees are more apt to value potential rewards, believe they can meet performance standards, and believe the reward system is fair (Noe et al., 2004, p. 430). The most successful human resource strategies measure employee satisfaction, promotion potential, and employee development. Good compensation strategies place a higher value on the employee and should promote the organizationÐ²Ð‚â„¢s internal culture and performance goals. Various compensation methods and benefit programs impact organizational culture and performance differently. Delivering compensation and benefits to employees both directly and indirectly based on the diversity of the workforce is a crucial part of attracting and retaining a competitive workforce of employees.
Employee benefits are compensation in forms other than cash. Examples include paid vacation time, employer paid health insurance, and paid pension plans, among many other possibilities. Other more generous benefits, such as use of a corporate fitness center and tuition reimbursement, help not only attract qualified employees but can help keep them loyal to the company. Benefits are more complex than pay structures so they are harder for employees to understand and appreciate. Employers need to effectively communicate regarding these benefits so that employees understand and use benefits so that their cost is not wasted. This paper will discuss the most widely offered optional benefits which are paid leave, life and medical insurance and retirement plans.
The major categories of paid leave are vacations, holidays and sick leave. Some organizations provide for other types of leave such as time off for jury duty, funerals and time off to vote. U.S. law does not require paid leave and it is up to each individual organization to determine what makes sense for their organization. The Bureau of Labor and Statistics says that nearly 80% of U.S. employers offer paid vacations and paid holidays to their full time employees (Noe et al., 2003, page 409). Paid holidays are time off on special days in addition vacation time, such as New YearÐ²Ð‚â„¢s Day, Memorial Day and Labor Day. In the U.S. employees typically have 10 paid holidays.
Sick leave programs pay employees for days not worked because of illness. The amount of leave is generally based on length of service. Employers also decide how the sick days accumulate, for instance if the days expire at the end of the year or if they can be accrued year after year until they are used. Some employers only let sick time accumulate for a year and it disappears after the year causing the unintended consequence of healthy employees using the days before they disappear even when they are not sick. Employers can counter this by paying employees for some or all of their unused sick time. With approximately 80% of U.S. employers offering paid leave to their full time workforce, employers that do not offer these benefits could find themselves at a disadvantage when it comes to employee recruitment and retention.
Several employers offer their employees group insurance, which offers rates that are typically much lower than individual policies. Also, group insurance benefits are not subject to income tax like wages and salaries. Due to this, group insurance is better for employees rather than paying them more and letting them buy their own benefits. The most common types of group insurance are medical and life insurance. Slightly more than 50% of U.S. workers receive medical benefits (Noe et al., 2003, page 409). Policies typically cover hospital expenses, surgical expenses and doctorÐ²Ð‚â„¢s visits. Some employers offer additional coverage for dental, vision and prescription drugs. Most insurers offer types of managed care programs - Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO). An HMO is a plan that requires participants to receive their medical care from the HMOÐ²Ð‚â„¢s health care professionals, who are often paid a flat salary, and provide all services on a pre-paid basis. Premiums paid for the HMO cover all the patients visits and procedures. A PPO is a health care plan which contracts with health care professionals to provide services at a reduced fee. PPOÐ²Ð‚â„¢s usually do not require the use of an in network provider but generally pay for a larger portion of the services when an in network provider is used.
Other types of medical insurance that employers can offer are flexible spending accounts and employee wellness programs (EWP). Flexible spending accounts allow employees to set aside pre tax dollars to pay for healthcare expenses. EWP are a set of communications, activities, and facilities designed to change health related behaviors in ways that reduce heal risks and therefore reduce an employeeÐ²Ð‚â„¢s need for health care services.
Another common type of insurance that is offered to employees is life insurance. Employers may provide this to the employee or allow the employee to purchase coverage at low group rates. With term life insurance, if the employee dies during the term, the employeeÐ²Ð‚â„¢s beneficiaries receive a payment called the death benefit.
Social Security amounts for less than half of a retired persons income. Employers have no obligation to offer retirement plans beyond social security, but most offer some form of pension or retirement savings plan. Retirement plans may be contributory plans meaning both employer and employee funds the plan. In non-contributory plans all contributions come from the employer.
A defined benefit plan guarantees a specific level of retirement income. Usually the amount is calculated for each employee based on the employeeÐ²Ð‚â„¢s length of service, age and earnings level. Federal statues and agencies like ERISA and the Pension Benefit Guarantee Corporation protect retirees by increasing the responsibility of pension trustees (Noe et al., 2003, page 416).
An alternative to defined benefit plans is a defined contribution plan. A defined contribution plan sets up an individual account for each employee and specifies the size of the investment into that account, rather than the amount to be paid out upon retirement. The amount the retiree receives will depend on the accountÐ²Ð‚â„¢s performance. There are three common types of defined contribution plans: Money purchase plans, profit sharing and stock ownership plans, and section 401(k) plans. These plans free employers from the risk that investments will not perform as well as expected and are also easier for employers to administer.
An organization that wishes to maximize the use of its human resources will closely tie its benefit administration and strategy to its organizational culture and performance. A survey conducted by the Institute of Management and Administration quotes Gregory A. Stoskopf, a senior manager at Deloitte Consulting, Ð²Ð‚ÑšSelecting a salary structure that suits your organization is crucial, since it can either support or inhibit the achievement of the organizationÐ²Ð‚â„¢s strategic business compensation, human resources, and business goals and objectivesÐ²Ð‚Ñœ (IOMA, 2004, p. 14). Different compensations methods are appropriate for different industries, different environments within a company, and even within the same company but in different economic climates. A small, family-owned business that serves local clientele will have a different culture and goals than a large, multinational corporation. An organization should understand what its purpose is when crafting compensation standards, if it wants those standards to support its purpose. Ð²Ð‚ÑšFrom the employerÐ²Ð‚â„¢s point of view, pay is a powerful tool for meeting the organizationÐ²Ð‚â„¢s goals. Pay has a large impact on employee attitudes and behaviors. It influences which kinds of employees are attracted to (and remain with) the organization. By rewarding certain behaviors, it can align employeeÐ²Ð‚â„¢s interests with the organizationÐ²Ð‚â„¢s goals.Ð²Ð‚Ñœ (Noe et al., 2003, page 345). Benefits, as part of the total compensation package, support strategic pay decisions. Ð²Ð‚ÑšBenefits contribute to attracting, retaining, and motivating employees.Ð²Ð‚Ñœ (Noe et al., 2003, page 403).
This does not necessarily mean that if an organization wants good employees it must pay the most and offer the best benefits. Each organization has a limited pool of money to devote to its workforce. How to best distribute that amount across the companyÐ²Ð‚â„¢s workforce is an important aspect of using salary and benefits to support the companyÐ²Ð‚â„¢s strategy. The prevailing wisdom in human resources management is that turnover is costly and results in poor use of those limited funds for recruiting, hiring and retraining, instead of retention. Jeff Chambers, Vice President of Human Resources at SAS institute believes that Ð²Ð‚ÑšThe pressing issue is not whether voluntary turnover is too high, but whether it is too low to provide opportunities for introducing new talent and resetting salariesÐ²Ð‚Ñœ (Hansen, 2005, p. 34). Chambers believes that it is more beneficial to face the economic risks of turnover to ensure a better return on money invested in compensation. It is important to note that this attitude is inline with the organizational focus on performance. Ð²Ð‚ÑšChambers believes that his performance-driven approach to turnover at SAS is clearly reflected in the companyÐ²Ð‚â„¢s 15 percent revenue growth for 2004Ð²Ð‚Ñœ (Hansen, 2005, p. 34). Conversely, the mission of a neighborhood grocer may be to make a living wage while providing produce and healthy food to a community. It would be more important for that grocer to reward its produce manager for the return business she generates with her customer service skills than base her pay on how quickly she can unload a flat of vegetables. Essentially, every organization must have its own strategy for managing salary and benefits and will benefit from analyzing how those tools can best support its culture and goals.
Human resource management responsibilities are broadening with the changes that are occurring in the job market and economy of our country. New laws are constantly being adopted in the world of employment; downsizing and layoffs are becoming a common practice in organizations; re-organizations within companies are constantly considered; benefit and salary packages are decreasing; job descriptions are changing. Yet among all this change, it is still critical to the success of an organization to keep employees motivated, properly benefited, and salaried. Strategic planning and proper forecasting is now the key element of concern of any successful business operating. Employment benefits and salary packages will continue to change within the next five years, and the question on most peopleÐ²Ð‚â„¢s mind today is will that change be for the betterment or detriment of our desired quality of life.
Hansen, F. (2004). Turnover Myth Workforce Management, 84. Retrieved from http://proquest.umi.com/pqdweb?vinst=PROD&fmt=6&startpage=-1&clientid=2606&vname=PQD&RQT=309&did=852909251&scaling=FULL&vtype=PQD&rqt=309&cfc=1&TS=1207310524&clientId=2606
HR-Guide.com (2008) Compensation. Retrieved on April 6, 2008, from the Worldwide Web
Salary Survey, (June, 2004). IOMA, Vol. 4, Issue 6. Retrieved from http://web.ebscohost.com/ehost/pdf?vid=5&hid=116&sid=0151d637-7a4f-4a97-a011-66f2ff30b9a7%40sessionmgr2
Noe, R., Hollenbeck, J., Gerhart, B., and Wright, P, (2004). Fundamentals of Human Resource
Management, McGraw-Hill/Irwin, New York, NY
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