The History Of Compensation Plan Business Essay

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Compensation plan for employees is a major component of any business. Do not consider it as expense or something that is adding cost to your business. Compensation and incentives have great impact over the quality of workforce and competitive advantage of employees. Compensation plan must be designed carefully as poorly developed compensation plan results in de-motivated, less productive workforce leading to a high turnover rate (Meyer, Plan & Now, 1993). However a carefully developed compensation plan will help to attract and retain high quality employees.

Objectives of an effective compensation plan:

It requires time and effort to develop a comprehensive compensation plan. Most importantly following points must be considered when developing a compensation plan for organization.

It is needed to measure how is performance will be measured and how performance is linked to compensation.

Company's mission and strategy must be supported by compensation plan. It must be compatible with organization's culture and must be reflective of workforce composition in terms of experience, skills and education etc.

Compensation plan should be cost effective, affordable and perceived as fair by organization's employees. Any distinguished success of company must be shared with employees as employees are the one who play key role in the success of the company.

Compensation plan must be simple that is easy to communicate and administer. It must be flexible enough that it can be updated if circumstances changes.

Compensation plan must be in compliance with federal, local and state laws and regulations.

Sales and executive compensation plan may be developed separately.

Critical success factors for compensation plan:

Management support:

Compensation plan must have the support and approval from the side of management. Management should review the compensation policy in order to ensure that compensation plan is in accordance with the mission and vision of company and its values.


Compensation plan must be objective and clearly directed toward stated goals. Compensation should be determined based on the level of job performed rather than the person completing the job.


Human resource personnel and management must be trained to develop an effective compensation plan. Well aware and trained management will be able to best administer the compensation plan.


Compensation plan must be reviewed periodically to determine if there is need to update the existing plan. Updates will help to ensure that plan is going in accordance with objectives of the company.

Development of Philosophy for Compensation Plan for Web Services Company:

Philosophy of compensation plan of any organization represents the ideals and values of employers. Compensation plan holds the goal of attracting, motivating and retaining best employees. Company's values, goals and objectives along with explanation about implementation of plan should be explained by the philosophy of compensation plan. It must also be supportive of mission, vision, culture and strategy of the company. It will be determined here that whether company will set the level of compensation plan above, below or equal to market level of salaries and employee benefits. External and internal equity must be taken into account.

Internal Factors that may Impact the Compensation Plan:

Strategy for Compensation Plan

Before developing compensation plan for WGlobal Services Company, first it is important to decide about the philosophy for the compensation plan. In order to have an effective compensation plan, compensation rates must be competitive with market rates for compensation plan. Strategy will be selected according to goal of organization (Cable & Judge,1994). If company wants to attract the new workforce, it will choose to pay above the market rates. If company chooses to pay below the market rates, it may be having the high turnover rate and need constantly to recruit the new employees. If company chooses to pay equal to market level, it will be having the goal to attract and retain the employees and being competitive in the market. For WGlobal Service Company, pay rate will be selected above the market rates for salaries and wages and benefit plan for its employees.

Job Worth

While determining the Job worth, internal equity is important to consider. Internal equity conducts a comparison of range of salary of a Job with range of salary of similar jobs. Worth of job is evaluated according to its worth for the company (Bartol & Srivastava,2002). During job analysis, internal value of individual's job can be determined by the employer. Range of salary for a job can be considers equitable internally if it is corresponds with the duties and responsibilities of the position as compared to other similar positions. WGlobal Service Company will conduct job worth analysis first to compare the salary range of jobs with salary range of other similar job within the company and then final decision about the compensation plan for the employees holding different positions in the company.

Employee Worth

Companies use to pay their employees according to their performance. When grant

Pay or merit increases for performance plans are decided by employers, there is need to need to set out the guidelines for such rewards. Some employees are more valuable than others due to specific skills they have and their unique abilities (Schuler & Jackson, 1987). WGlobal Services Company will evaluate the worth of different employees working with it and will offer compensation to these employees according to their worth for the WGlobal services.

View of Employees

Compensation plan must be viewed positively by employees. There must be fair and just perception of compensation by employees. When employees perceive the compensation plan fair and just, their productivity will increase. WGlobal Services Company will conduct a survey to have an idea about the perception of employees about the compensation plans of company and required changes will be incorporated in the prospective plan.

Financial Capability of Company to Fund the Plan

This is the most important thing to consider by any company. Employer must evaluate the budget of company if it is able o bear the increased compensation amount. If company selects to pay above the market level and has not enough financial resources to support it, it will be a poor and failed compensation plan. Pay rates must be finalized after checking the ability of budget and financial resources of the company. Moreover, pay plan must be created while keeping the cost maintenance in mind. Financial figures of WGlobal Services Company reveal that it is strong enough financially to support the pay above the market level that will strengthen its competitive position in the market.

External Factors that may Impact the Compensation Plan:

After careful analysis of internal factor affecting compensation plan, it is important to consider the external forces as well that might be having potential influence over the compensation plan of the company.

Labor Market

Labor market is referred to a geographic area where employees for a new job are located. Labor market may be different for different jobs. Size of labor market affects the wages and salaries for that position. Through the supply of labor determines the salary structure in labor market. There are many companies for which positions are filled from within the company. WGlobal Service Company has enough supply of labor and due to its higher wage rates and competitive advantage in industry; it will not face any difficulty in hiring new employees.

Area Wage Rate

Wage rates and compensation should be competitive with similar industries within a specific region. This is the point for which employers have enough concern. If competitors have better wage rates for same job, employee may leave your company and join the competitors. In this case, turnover rate may be higher representing the poor wage rate plan.

Market Rate

Worth of selected job against the current market is measured under the market pricing method. Evaluation of market rate typically creates the brief description of benchmark jobs and compares the descriptions with published surveys or customized market data about compensations. After this evaluation process, compensation rate and salaries for WGlobal Services Company will be decided. Using market pricing method will help to maintain the level of salaries at competitive level.

Rates in Target Market

Rates of salaries and compensation plan are observed in relevance of target market. Employer need to look over their compensation strategy in relation with market rates in order to determine the rates in target market or at the level where company wants to set the wage rates.

Union Environment

Unions have strong bargaining power and thus can affect the wage rates as strong external force. Companies keep this factor in mind as well. Companies that have unions or environment leading to unionization of employees, set their wage rates and compensation plan at the level at that is acceptable in the current market.

Compensation Survey:

Conducting a compensation survey can assist the employer in developing effective compensation plan. Survey will help to get an idea about what competitors are offering to their employees for similar job. Survey will reveal important information regarding average salary range on the basis of job title, geographical area, and industry or company size. WGlobal Service Company will hire a private consultant for conducting Compensation surveys. This process will consist of collecting and analyzing salary and benefits offered by other organizations in the industry. Results of survey will be used to develop compensation plan.

Job Analysis:

Analysis of job includes analyzing the relevant tasks, duties, and activities involved in performing the job. There are many ways for conducting job analysis. Questionnaires, surveys, and interviews are some commonly used tools for job analysis. Information resulting from these sources will help to evaluate the jobs in effective manner.


For job analysis interviews can be conducted in formal or informal way. Interviews are helpful in analyzing professional positions. Employees are the target audience for job analysis and interviews. Interviews can be conducted individually and or in form of group interviews. In interviews, questions are asked about abilities, skills, information and knowledge needed to perform that specific job. Also from these interviews, employers will be able to distinguish which skills and abilities are necessary to perform a particular job.


Observation technique will help to evaluate the work setting, equipment and tools, relationship among employees and difficulty of job. Observation is targeted over the assessment of job in process of analysis of job process. Due to nature of work involved, some jobs are easy to understand and observe from all these aspects than other jobs. Observation method is commonly used for analysis of jobs related to production type.


Questionnaire is a written series of questions completed by employee that is related to specific duties, tasks and skills and abilities required for the job. The focus will be upon the related skills and abilities an employee must possess for performing a specific job. Such questionnaire will help to obtain clear and comprehensive understanding of responsibilities and duties of each job position. Most of the times, questionnaires are open ended and generally given to employees currently performing that job.

Job Evaluation:

After conducting detailed analysis of job, WGlobal Services Company will move for job evaluation process. In this process, all jobs within organization are compared in order to determine the relative economic value of each of job. In job evaluation process jobs are ranked in the basis of demands placed on employees who are performing jobs and taking into consideration the skills, knowledge and abilities required for the job. The aim is to develop a fair structure. Job evaluation process enables employers to measure internal worth of performed job. A well developed and executed process of job evaluation results in uniform standards so that value of work can be determined and practices of unfair wages can be avoided. Economic values of the job are also measured by the job evaluation process. But it is important to measure the worth of job not the worth of person performing that job. Moreover job evaluations must be on the basis of average performance neither it will be on the basis of very high or low performance. There are number of methods available for job evaluation. Factor comparison, Job classifications, rankings, and point factors etc. are come methods for job evaluation. The method which will best serve the needs of company will be checked for the credibility and reliability. It requires expertise to conduct job evaluation process effectively. WGlobal Services Company will hire external professional for this service.

Pay Grades:

Jobs having similar skills, expertise, responsibilities and efforts, are grouped in a series of levels or grades. Each pay grade should include a specific pay range that allows employers to recognize the outstandingly performing employees in a position. Three levels, minimum, maximum, and midpoint pay rates are included.

WGlobal Services Company will use Minimum pay for newly hired employees or for those who are newly promoted employees to a higher level position. Based on target market, minimum rate for the job at or near the rate of a particular job will be determined.

Midpoint pay will be specified for those who are adequately performing the assigned duties. These midpoint pays will be determined on the basis of midpoint pay for similar positions in the target market.

Maximum pay rate is specified for WGlobal Service Company job s position s falling into a particular range. Maximum pay rates are devoted to the high achievers and those who have done an exceptional work. Senior workers will also be awarded at maximum pay scale. Sometimes pay rates may be overlapping, the rates specified as lowest may be specified as highest rates at next higher grade.

Pay Grades:













































Upper Management





This compensation plan is specifically designed for WGlobal Services Company. It will help the company to effectively execute the plan. A well developed and executed plan help to increase the satisfaction level of employees who in turn will result in improved performance and high productivity level of employees. All these factors are important for the success and improved profitability of the company.