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Compensation and benefits is one of the many functions of human resource management. Compensation plans have not always been considered a strategic business initiative. However, with the effects they have on recruiting, retaining and motivating people compensation design is a critical element to achieving success.
Employees are the most valuable assets of any organization. The main purpose of human resource management (HRM) is to manage the development and performance of people employed in an organization. Some of the important tasks of HRM include attracting and retaining employees with the right skills and abilities, match people to the right positions within an organization and to align employee's goals and objectives with that of the organizations. All these key tasks are directly or indirectly affected by compensation and benefits plan which the human resource management decides.
Compensation and benefits redefines value and success in any workplace. An efficient compensation and benefits strategy is seen as an opportunity by organisations to differentiate themself from their competitors, who may otherwise take away talented workforce. Hence, organisations need to know the evolving needs of the working population to make sure they offer the most competitive package.
This paper adopts a general approach which may be relevant to number of different organizations or industries and discusses how the new generation workforce is making an impact and forcing organizations to change their traditional compensation strategies. This paper also examines how companies located in different sectors and countries look at compensation and benefits aspect of human resource management, to attract and retain their highly qualified staff. Finally the paper summarizes and analyses few articles related to HR practices in compensation and benefits, and see if they fit into organizations seeking best practice.
Compensation and benefit strategies for current generation workforce:
Compensation is a major driver in the success of any organization and it is also true that it is one of the highest expenses for an organization. Therefore, compensation is always under heavy scrutiny by the top executives of a company. Compensation is not only carefully analysed by the management, but also analysed by employees and prospective employees. If properly executed, effective compensation design can improve organizational effectiveness, support human capital requirements of the organization, and motivate the employees to achieve key corporate strategic and financial goals (Ellig, B. R. 2007). Effective compensation and benefits strategy is no easy task, especially with the large organizations and ever-changing demands of the workforce.
To construct the most attractive compensation and benefits package, organizations must now tackle the fundamental landscape change in workforce requirements and demands. Employees born in the 60s and 70s (generation X) have ceded place to a new generation of workers (generation Y). A flexible approach to compensation and benefits is now required to satisfy the different priorities of these generations. 'Planning for the future' has long been the motto governing Generation X's approach to their careers and so, traditionally, generous pension provision has been the key to attracting workers. But for Generation Y, priorities have changed. For instance, in a research conducted last year, just 4% of 16-24 year olds were attracted to their employer because of their pension contribution, compared to 17% of 45-54 year olds (HR magazine, March 2011). Certainly, younger workers are increasingly questioning the customs and traditions of the workplace and now pension plans, previously synonymous with security, are considered unstable.
In present day environment, employees have become much more educated on the possibilities available to them with sources like online salary calculators, industry chat rooms and so on (Schneider, B., & Paul, K. B. 2011). Employees now know more about current market pay levels, new opportunities and how to successfully negotiate compensation packages. Keeping these changes in mind organizations include many other noncash components to the potential cash components to come up with a fair, competitive and an attractive compensation program (Schneider, B., & Paul, K. B. 2011).
Employee benefits are indirect forms of compensation provided by the organizations to their workforce as part of an employment relationship. To compete for quality employees in today's marketplace, employers must do more than offer a fair salary. Employees also look forward for a good benefits package; in fact employees have grown accustomed to generous benefits programs, and join an organization expecting them. Employee benefits exist in organizations all around the world and the levels and range of these benefits vary between countries. Some of the benefits companies offer can be like company accommodation, company provided vehicles, health insurance, retirement benefits, easy loans and so on.
Compensation and Benefit strategies used in organisations:
As per Kevin O'Connell, there are three primary components in a strategic compensation plan. First, building a solid foundation for the plan to understand the business strategy is required. Where the company is now and where is it heading to in the future, what are its short term and long term goals. This will provide the necessary information needed to construct a solid framework for the design of a compensation plan. Second, understanding organizational capabilities and how the role of compensation plays a key role to achieve organizational goals is critical. This will provide an excellent understanding of what positions are the most critical to a company's future success and the various compensation options available to motivate employees to achieve this success. Third, aligning compensation with human capital management initiatives will help develop a plan that allows the company to successfully recruit and retain employees (O'Connell, K. 2007).
We will see how different organizations have overcome significant business challenges by re-evaluating and strategically designing new compensation plans. By finding the right balance between organizational goals and employee needs, compensation plans can play a strategic role in the success of a business.
Jamba Juice case:
Jamba juice was founded in 1990. It is a leader in blended-to-order fruit smoothies and fruit juices. (Source: http://www.jambajuice.com/) Since its inception, it found employee retention as a major problem. It was located in San Francisco bay area and therefore the employees had more options with other employers situated there. A lot of these employers were technology based and offered more generous financial benefits than the food retailer. To tackle this problem, Jamba Juice introduced a compensation plan, called 'J.U.I.C.E plan' which allows the general manager to receive a percentage of store's cash flow depending on their business's final performance. It allows manages a share in the profits over a period of three years. When the general managers increase the year-to-year sales, money accrues in a retention account, which is payable only in three year cycles. This retention account not only provides short term retention benefits, but also incentives to stay with Jamba. Also, executives at managerial positions are offered stock options. And, when assistant managers are promoted, their general managers also receive a cash award of $ 1000 for their development efforts. In a highly competitive industry Jamba was able to successfully reduce turnover. (Mellow Jeffrey, 2011)
The MAERSK way:
MAERSK not only rewards absolute performance but also focuses significantly on performance relative to peers, says Alex Penvern, Global Head of Group Compensation, Rewards and Executive HR. This had not always been the case. Less than five years ago, rewards in the company were characterised by confidential bonuses, awarded with very little transparency. One of Penvern's first challenges when he joined MAERSK in 2008 was to create a scalable, measurable and quantifiable compensation and benefits structure that was understandable and could, over time, be rolled out uniformly across the organisation (Source: http://www.maersk.com/Pages/default.aspx).
He spoke to CEO's of each business within the group and focused on the executive compensation structure that focussed on relative distribution. During these conversations he discussed range of different performance criteria, happening in annual sessions which were a part of the performance management cycle. The outcome was a relative performance distribution of the company's most successful and less effective performers. "The company believes that our people are motivated by this constant striving to do even better", says Penvern. "You can never rest on your laurels or spend too long patting yourself on the back, because you know how hard everyone else is running. We want people who thrive in this atmosphere".
This is brought in practice and reinforced by a carefully considered distribution of rewards to the highest performers. Since the introduction of the pay-for-performance scheme, fewer very high performers are securing a significantly larger share of the bonus on offer.
The highest performers receive nearly double the bonus opportunity that they did few years back but to earn that bonus they need to keep up or stay ahead of their peers or market. While Penvern discusses the value the company creates in this performance culture, he believes that the transparency of its bonus system is just as important. The lesson is clear. Company has to build employee engagement and drive performance both by having a clear and transparent compensation scheme that links pay and performance and by communicating this consistently in order to reinforce and reinstate the belief that pay and performance are linked.
Design and Engineering group in Delaware:
A small to medium design and engineering group in Delaware, employs engineers and designers, most of them who are in their 30's. Most of the employees were the primary wage earners in their families and have several dependents. This company pays wages that are slightly lower than those of its competitors, but it offers a fully paid insurance program that includes health, pharmacy, dental and eye care coverage for employees and their dependents. By meeting the employees benefit needs the company enjoys very low employee turnover (McConnell, J. 2003 Pg. 235).
Mississippi garment manufacturer:
A garment manufacturer in Mississippi pays on a piecework basis. Most piecework plans in garments factory in general must guarantee pay equal to at least the legal minimum wage. In this specific company, new employees receive an hourly wage until they have acquired the skills required to meet performance standards. Then the manufacturer pays them on the basis of the number of pieces they produce in an hour. The company has designed its compensation approach to retain good employees i.e. those who are good performers (McConnell, J. 2003 Pg. 232).
Compensation whether in the form of salary or benefits is a key element in both attracting and retaining employees. With careful and logical thinking companies should design a program that will significantly contribute to obtaining and retaining the type of employers who perform best for that company. Compensation professionals play a critical role in enabling organizations to execute their business strategy. The examples in this paper demonstrate how organizations have overcome significant business challenges by redesigning their compensation plans as seen in Jamba and MAERSK. We also have seen how a small company like the garment manufacturer in Mississippi use compensation package to retain highly performing people and do away with low performing people. Some companies like the one in Delaware uses non monetary benefits to keep their workforce happy and content.
Compensation and benefits have a negative effect on the company if not properly managed. Collapses of big companies like Enron and Global crossing are examples. These are direct results of managerial behaviour aimed at short term profit maximization. That behaviour is in turn a result of the executive pay structure that measure and reward performance based short-term financial results.
Compensation experts need to be at the focal point where strategy, organizational effectiveness and human capital management congregate. They need to have a clear understanding of the business and organizational issues as well as the future direction of the company. Strategic compensation and benefits design is not a sound bite to impress management. It's the process behind compensation plan design that links and binds strategy, organization effectiveness and human capital together. By balancing organizational, employee and business needs with a company's financial and strategic goals it is possible to develop the right compensation strategy to motivate, reward and sustain high levels of performance. By finding this balance, a company can effectively use compensation to execute and achieve desired business results.