7 Compensation Key Elements

Seven compensation key elements to consider when formulating or reviewing your compensation system.

These seven compensation key elements provide you with some form of help when developing your compensation strategy.

  1. The overall objective of your organization. This depends on whether your organization is a profit-oriented or a charitable organization.
  2. It is fairly clear that a profit-oriented organization exists in order to generate revenue and make a reasonable amount of profit.

    Although a charitable organization does not have the objective of making a profit, it must at least break-even in order to continue its existence.

  3. The main activities carried out by your organization in pursuance of that overall objective. This also includes knowing inputs of employees in achieving the objectives.
  4. Compensation framework aimed at attracting, motivating and retaining employees. It is important not to lose sight of the primary objectives of a compensation system one of which is to attract and retain talents.
  5. Competitiveness of your compensation system as compared against market pay level. At the same time pay attention to internal pay equity, both horizontal and vertical equity. Usually organizations use the market median as a measure of compensation competitiveness. However, it is essential that this is not lower than the internal equity level.
  6. Identification of pay factors such as cash and non-cash compensation for different groups of positions in the organization. Consider employees' skills, knowledge, and experience. In performance-based pay system, identify not more than five Key Performance Indicators that are closely connected to the activities of the organization. Determine the base pay, variable pay, and benefits (that are usually non-cash compensation).
  7. Clearly-defined Policy on who can make decision, how high in the hierarchy, and types of decision they can make regarding compensation. Timely and pro-active decision making authority provides an in-built flexibility. It is logical to make certain decisions subject to review by someone higher up in the management. This flexibility facilitates timely response to changes in work systems, changing organizational structures and changes in what employees are expected to do and accomplish.
  8. Yearly review to determine effectiveness of compensation strategy in helping achieve the organization's objectives. Objectives may have changed. Other changes from within and outside the organization may also have occurred.

These compensation key elements require formulation of effective strategies

Strategy does not or cannot stand by itself. It is useful only when it is connected to achieving something that is of importance to a person or an organization. The same is true of compensation strategy.

The first two key elements indicate the necessity to align compensation strategy.

Understand these seven compensation key elements to help make your employee motivation plan effective. In this way, other people will see how effective your strategic compensation initiatives are. This characteristic may attract talented people to work for your organization.

Other People's Recommended List of Key Elements
Other people prefer their own list of key elements for a good compensation package.

One Avinash Kaushik mentions ten key elements, namely,

  1. Base Salary
  2. Annual/Quarterly Bonus
  3. Other bonus (Peer, boss, outstanding non-normal accomplishments)
  4. Stock options
  5. Stock units
  6. 401k contribution
  7. Health & Wellness
  8. Life & Accident Insurance
  9. Other Insurance (travel, legal), and
  10. Perks (Food, internet services, gym memberships, cell phone and service, company bus/train/plane, massages, company discounts, electric car chargers, university/ongoing education funding, etc.)

It appears that these are components of compensation and not key elements. For example, most organizations will give basic pay, maybe bonus, 401k contribution, and one or two perks.

For executives, the attractive components would include base pay with annual adjustment, benefits, short and long term incentives and perks. Some writers recommend that organizations offer a pay package customized to the needs of the individual.

Creativity in putting up an attractive pay package helps organizations attract and keep the right talents. Retaining talents requires an attractive compensation package.

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