A compensation strategy is to align all employees, top to bottom, in understanding what the organization wants to achieve; how each employee contributes to the achievement of the organization objectives; and, how the organization is going to reward desirable attitude and behavior. It is to outline an organization view on the employees’ compensation and benefits.
Therefore, in order to come up with a compensation strategy, it is imperative to understand the value of each job function within the organization. Every job has a role in either creating and supporting sales or to keep expenses to a minimum or sometimes both. By understanding the value, then the organization can evaluate if each function is able to meet their clients’ needs profitably.
Essentially, a good compensation strategy should take into consideration of the SPED factors – Sustainability, Perception of Value, Employee’s Behavior and Performance, Development of Organization.
Sustainability of the Compensation Strategy
Before designing the compensation plan and structure, the organization needs to understand the compensation budget. Many organizations lack a compensation budget despite the fact that manpower cost is often one of the highest expenses in the organization. Besides that, these organizations also often mistake the cost of compensation as the salary of the employees. The cost of compensation is often much higher than just the salary of the employees.
The organization needs to design a compensation strategy that is suitable for the organization’s finance. Organizations need to understand how much they can and willing to pay and how can they structure it in a way that is attractive to the employees they are trying to attract and retain.
Perception of Value of the Different Compensation Components
One of the main objectives of a good compensation and benefits plan is to be able to attract and retain good employees. However, that is not possible without understanding how employees view the different types of compensation and benefits. An employee with family may value more paid time off while a younger employee may be looking for a higher salary to pay off school debts.
Therefore the organization needs to find the point of balance for different groups of employees within the company. Some organizations have also introduced flexible rewards program by providing employees the option to customize their own compensation and benefits package within a pre-defined range.
Employees’ Behavior and Performance
The compensation and benefits plan should identify and reward organization’s desirable attitude and behaviors that contribute to the achievement of the organizational objectives. If the organization values teamwork, then it should reflect in the compensation plan. If the organization values teamwork but focuses on rewarding individual achievements, then the organization will not be able to instill the attitude and behaviors that the organization wants to.
The attitude and behavior that the organization desires should also result in better employee’s performance. This means that these attitude and behavioral traits should have been recognized to be associated with better performance. Therefore the emphasis on this particular set of attitude and behavior within the organization.
There are also an increasing number of organizations adopting performance-based compensation. Through the use of these performance-based compensation schemes, the organization rewards employees accordingly to the employee’s performance.
Development of the Organization
Besides sustainability, it is also important that the compensation strategy drives the development of the organization. Depending on how the compensation plan is designed, it may result in employees sacrificing the organization long term goals for short term gains. This often happens when the employees do not view themselves as a long-term member of the organization. Therefore, they make decisions to maximize their compensation and benefits within the few years they are with the organization.
The compensation plan should encourage the employees to act in the best of interest of the organization, and not maximize personal gains in expense of the organization’s long-term goals.