Total compensation has three components:
- base compensation = the fixed pay an employee receives on a regular basis
- pay incentives = a program designed to reward employees for good performance
- Indirect Compensation/Benefits = a wide variety of programs for example health insurance, vacations etc (Gómez-Mejía, Balkin & Cardy 2012, 340.)
Compensation system needs to enable the firm to achieve its strategic objectives and needs to be molded to the firm’s characteristics and environment. Managers need to consider pay options when designing a compensation system:
- Internal Versus External Equity
- Fixed Versus Variable Pay
- Performance Versus Membership
- Job Versus Individual Pay
- Egalitarianism Versus Elitism
- Below-Market Versus Above-Market Compensation
- Monetary Versus Nonmonetary Awards
- Open Versus Secret Pay
- Centralization Versus Decentralization of Pay Decisions (Gómez-Mejía & al. 2012, 341-351.)
Compensation tools are grouped into two categories: job-based approaches and skill-based approaches. Job-based compensation plan has three components: achieving internal equity, achieving external equity, and achieving individual equity. Skill-based compensation plans use skills as the base of pay. It rewards employees for acquiring depth skills, horizontal or breadth skills, and vertical skills (Gómez-Mejía & al. 2012, 352-365.)
The Fair Labor Standards Act (FLSA) of 1938 is compensation law that affects most pay structures in US. The Equal Pay Act prohibits pay discrimination based on gender, and the Internal Revenue Code specifies how various forms of employee pay are subjective to taxation. (Gómez-Mejía & al. 2012, 367-370.)
Job-based compensation is more common. It is said that it’s outdated, so what are the advantages of it and why it is so common? Job-based compensation underlines job specialization and seniority. This assumes that an employee becomes more valuable with time. Job-based compensation motivates employees to perform better and move up through organizational ranks over time. It is also easy to administer because it focuses on allocating pay systematically and ensuring that the most important jobs are paid more. The system is stable and predictable (Gilani 2017.)
Competency-based pay structures in the other hand serve as a motivational tool. It reinforces a culture of self- improvement when it offers a reward for employees who are dedicated to growing their skills and improving themselves. Employees may be more motivated to stay with a company that rewards them for self-improvement and skill development, rather than seniority at the company. It improves employee engagement and employees know exactly what is expected of them to get a promotion (Liebegott 2015.)
I watched a video about motivation. The main message was that there is a mismatch between what science knows and what business does. Rewards often destroy creativity, carrots and sticks are old-fashioned (Pink 2009.)
References
Gilani, N. 2017. What Are the Advantages of a Jon-Based Compensation Structure? BizFluent. URL: https://bizfluent.com/list-5997745-differences-pay-job-base-pay.html Accessed: 13 March 2020
Gómez-Mejía, R. L., Balkin, B. D., Cardy L. R. 2012. Managing Human Resources. Seventh Edition. Pearson Education. Upper Saddle River, New Jersey.
Liebegott, K. 2015. 4 Advantages of Cometency-Based Pay Structures. KnowledgeWave. URL: https://www.knowledgewave.com/blog/competency-based-pay-structure-advantages Accessed: 13 March 2020
Pink, D. 2009. The Puzzle of Motivation. TED. URL: https://www.ted.com/talks/dan_pink_the_puzzle_of_motivation?language=en Accessed: 16 March 2020
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