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The Seven Compensation Key Elements

These seven (7) compensation key elements provide you with some 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. The main activities carried out by your organization in pursuance of that overall objective. This also includes knowing inputs of employees in achieving the objective.
3. Compensation framework aimed at attracting, motivating and retaining employees. It is important not to lose sight of the primary objectives of a compensation system.
4. 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.
5. Identification of pay factors such 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).
6. Clearly-defined Policy on who can make decision, how high in the hierarchy, and types of decision they can make. 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.
7. 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 have occured.

You need to include the first two elements in order to see how you can formulate your strategy.

Strategy does not 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 about compensation strategy.

Once you know these two elements you will see how to align your compensation strategy.

Understand these seven compensation key elements to help make your employee motivation plan effective. In this way, other people will see how strategic your compensation initiatives are.

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