Evaluation Of Compensation Models Business Essay


The creation of a wide-ranging pay structure to attract and employ the right kind of employees is known as 'compensation modeling'.

Compensation commonly refers to the monetary rewards that employees receive in exchange for their effort that they put into an organization. Generally, compensation is made up of the basic wage or salary, any bonuses or incentives, and other benefits. Basic wage or salary is the pay that employees receive on hourly, weekly, or monthly basis. Bonuses or incentives are rewards offered other than the basic wage when employees accomplish a high level of performance. The rewards offered for being an affiliate of the company are called benefits and they can include health and life insurance, paid vacation, and retirement pension.

Compensation strategies change every year - they are dynamic. Any compensation plan must have a buy-in of the business head as it results in money outflow. As an organization grows, it also shapes its philosophy on compensation. A few companies claim to be the pay masters in that industry segment. Several others would like to place themselves at the top percentile. Various companies say that they would like to be situated at the median and pay top salary for stupendous performance. In mature organizations, one would expect a clear statement of philosophy behind a compensation approach (Henderson, 1997).

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However, this philosophy is apparently not present in Townsend Rock Industries, Inc., though it is presently operating in multiple countries. The HR department needs to understand the importance of having a sound compensation strategy.

Undoubtedly, having a solid compensation model is a good promotion point to prospective employees and has an encouraging and optimistic impact on retention of the best market players, as well as having a positive effect on the organizational bottom line.

Therefore, companies, regardless of the industry that they operate in and their size, must devise a comprehensive and compelling strategy for executing a well thought-out total reward/compensation plan to draw, retain and stimulate key talent. This total reward strategy should incorporate key components including: (i) total compensation; (ii) work-life balance; (iii) benefits; and (iv) training and personal development opportunities. These core components are vital for an organization's survive in today's multifarious and demanding business climate (Milkovich, George, Newman & Jerry, 1996).

The principal element in a total rewards model is the total compensation. Basically, total compensation is composed of two key parts, base pay and incentives.

For a company like Townsend Rock Industries, Inc. (TRI), it would be very diverse and varied. For the hourly production workers operating in areas of Virginia, Maryland, and Georgia and those working overseas in Canada, the Bahamas, and Argentina have to be paid hourly wages. However, in such a case, care should be taken that the offered rates must be competitive with the market rates in the specific area. Moreover, a provision should be made for over-time pay if the employees are asked to work overtime or on holidays.

Apart from paying the basic salary to the management team, companies frequently include employee benefits as a part of their compensation package to attract, retain and motivate key talent. Examples of such benefits include medical benefits, social security, retirement plans and insurance coverage.

Employees of managerial level could also be offered bonuses which should be linked to performance. These incentives might be organization based, team based or even individual. It depends on the tasks that are expected to be performed. Usually, organization wide bonuses are based on financial measurements, e.g. favorable Return on Assets, Return on Equity etc.; team based bonuses are based on operational measures, e.g. reduced cycle time, and individual bonuses are based on identified behavioral level of development or achievement (Henderson & Richard, 2003).

After the middle management, executives are the people for whom compensation packages should be very carefully devised. An executive compensation package is normally composed of: (i) base salary; (ii) annual incentives or bonuses; (iii) executive benefits (e.g., health insurance, life insurance, and pension plans); (iv) long-term incentives (e.g., stock options); and (v) executive perquisites (Pauline & George, 1997).

With the purpose of emphasizing the importance of financial performance, generally measured by the company's stock price, top executives are offered stock options. Occasionally, exercising stock options by the executives yields more cash benefits for them than do annual salaries.

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Other than monetary compensation, executives enjoy many different types of perquisites, frequently called "perks." Such executive perks include company-paid membership in high-class country clubs, the use of a company airplane, and executive travel arrangements. Many companies even offer executives tax-free personal perks, counting such things as free legal counseling and free home repairs and improvements (Reingold, Jennifer, & Melcher, 1998).

Sub-Section B: Evaluation of Compensation Models Appropriate for TRI

So as to develop an appropriate and successful compensation package, an organization's HR department should consider several factors. Of highest importance are the factors which should be kept in mind while formulating the overall philosophy behind compensation packages - relevance, fairness, consistency, sustainability, and compliance.

Developing a proper and appropriate structure of compensation is another issue. With a growing number of baby boomers retiring over the next five to seven years, the coming workforce predicament will present testing times and will demand that organizations vigorously take steps to ensure they have the right talent in place.

An organization, like TRI, might select any compensation that suits its objectives and goals. The plans could either be: (i) Incentive Compensation; (ii) Skills Based or Knowledge Based Compensation; (iii) Team Based Compensation; or (iv) Performance Based Compensation.

Whatever the plan adopted, there are bound to be differences among the employees based on the level of hierarchy on which they operate. However, in this regard, it is vital that an internal and external equity is maintained - the pay should be reflective of the nature and importance of the job being carried out, as well as equitable with the pay paid to employees outside the firm carrying out the same job.

For the hourly workers all around the globe where TRI operates, competitive wages are recommended. However, the people who are basically a part of the administration but are required to be at the sites (quarries and plants), should be paid salaries along with facilities such as free transport facilities for work, subsidized accommodation, and part furnishing of accommodation provided.

As employees move up the hierarchy, they have to be compensated differently. In such instances, basic pay does not cover the requirements; bonuses, benefits and incentives are an integral part of the compensation plan. Therefore, the middle management operating in Canada, Bahamas and Argentina should be provided with performance based incentives. Apart from the basic salary, they should be given incentives and bonuses to induce better performance. At this stage, insurance coverage, retirement and old age benefits, social security and medical benefits must be provided. In this regard, the legislation of different countries must be kept in mind as the rate for contribution to the provident fund is different in each country.

The HR department of TRI must also plan training programs for the middle and senior management to help them move up the ladder of success. This would not only enhance the skills of the employees and help them in attaining self-actualization, it would ultimately benefit TRI.

The executive management of TRI must be provided with work-life benefits as most of them would belong to the Generation X, who would now prefer leisure time over ever-demanding work load. The executives might also be offered stock options and a share in company profit to induce them to work to increase the worth of the business.

In this regard, it is imperative to note the different legislations and cultures prevalent in different countries; e.g. minimum wage rate is different in every country, but as almost all the countries are against child labor, care should be taken about the workers hired to work in quarries.

Sub-Section C: Future Compensation Strategies

The population of the world is increasing tremendously. As a result, the demand for construction materials is also on the rise. TRI has an opportunity to grow and expand its operations in more areas. However, for this plan to be successful, it will need highly trained and motivated staff so that management diseconomies of scale are not encountered.

Understanding the factors that attract, retain and engage employees is imperative and valuable. It reaffirms that employees have dissimilar needs at special points in the employment cycle, and that prudent companies will take that discovery into account in practical ways.

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Of immense importance is the need for TRI to train its staff and provide them with opportunities to grow and build their career. This could be done in a non-monetary way; offering on-the-job and off-the-job training to the more able employees could serve the need accurately.

Moreover, TRI needs to put more emphasis on non-monetary rewards and benefits. However, these should be tailored to meet the specific needs of employees at different levels of hierarchy. A good measure would be to implement a pay for performance model which induces the employees to work harder to achieve common goals and objectives.

Perhaps the most important measure is to make sure that internal and external equity is achieved (Klein & Andrew, 1996). In order to secure employees' satisfaction, it is essential that the compensation package is at par with the market offers; the only way to retain employees is to pay them more than the market, or at least equal to what the competitors offer. A firm's employees must be encouraged to believe that all jobs are paid according to what they are 'worth'. Differently put, they must be confident that company's compensation package reflects the overall significance of each person's job to the success of the business. Since some jobs afford a greater prospect than others to contribute, those holding such jobs should be given higher pay.