Total Compensation Methods

Total Compensation Methods

The importance of a company’s ability to maintain a balance between employee and company interests is significant. According to HR Guide (2006) compensation is defined as

The methods and practices of maintaining a good balance in company interests of operating within fiscal budgets 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.

An organization with good compensation benefits will be productive and attractive to employees. Knowing the effects of compensation on organizational culture and performance, how to deliver compensation directly and indirectly to diverse workforces and having performance measures in place will influence a company’s success. This paper will detail the impact of compensation methods and benefit programs on employees and organizations.

Compensations Effect on Organizational Culture

A strong awareness of the overall job market is necessary for any organization that wishes to successfully hire a job candidate who will understand and be able to participate in the organization’s culture. The salaries paid by an organization considerably affect the type of job candidates who will seek a position within the organization. For example, an organization which continues to pay its employees less than average wages will see a gradual decline in both the morale and effectiveness of its workforce. The reason for such a decline is that the culture of any organization is dictated by an employee’s sense of self worth. If an employee believes that he or she is not being paid a fair wage, it will be highly unlikely he or she will push themselves for the sake of 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 (reducing their inputs), find a way to increase their outcomes (for example, stealing), or withdraw by leaving the organization. (p. 355)

Any of which detrimentally affect the overall culture and performance of the organization. Therefore, it is imperative that an organization is able to create a pay structure that allows each of its employees to feel employees will be paid what they are worth.

The pay structure used to compensate existing employees can also change the culture of an organization. If the employees’ of an organization are paid fairly, they are far more likely to continue working for the organization. This in turn creates a culture where longevity and loyalty become an integral part of the organization. Furthermore, as a benefit of longevity, experience and wisdom are also added to the cultural equation.

Compensations Effect on Organizational Performance

The overall performance of an organization is significantly affected by the compensation plans it offers to its employees. An organization which desires to hire only the best candidates in a particular field will need to offer a higher level of compensation than its rivals to be successful. 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). Additionally, the practice of offering incentives for high levels of performance may make an organization more attractive to high level performers when the organization is attempting to recruit new employees (Noe et al., 2004).

The practice of providing financial rewards to high performers can certainly increase an organizations overall performance. However, if the financial incentives are not truly attainable or are seen as inconsequential then the opposite affect will certainly occur. Employees who have been promised financial incentives must feel as though the rewards are attainable or the incentives become irrelevant. As a result, incentive plans must be designed in such a way that both low and high performing employees have the opportunity to reach the incentives if they are willing to increase their level of performance. To incorporate those employees who are not currently ‘high performers’ a tiered incentive plan would need to be installed. Ultimately, a tiered system would be far more beneficial to an organization than a system which strictly benefits the organization’s top performers. This would be the case as a tiered system would provide every employee with the motivation to improve regardless of his or her current level of performance.

Direct and Indirect Compensation

Organizations which offer a competitive benefits and compensation package to employees will have a competitive edge to hire