Compensation Management is Tied to Performance

compensation management is one of the important responsibilities of HR people and line managers. Failure to manage this sensitive matter well can cause many employee problems. This, in turn, can affect the performance capability of your organization.

An area that needs careful thought is incentive compensation management. In order to effectively manage compensation and incentives you need to have a plan. This is where you can use strategies in the effective use of financial and non-financial rewards as a motivational tool.

In formulating a compensation plan, consider the following:

  • Formulation and approval of a comprehensive compensation plan
  • Every compensation plan needs to cover most things from attracting people to join the organization, to engage employees, and to retain talents for the long term.

    Also included are policies on compensation management with respect to employees who had reached the maximum of their pay scales, succession and employee career development plan, and how compensation is applied within the overall objectives of the organization.

  • The compensation package for various groups of employees
  • Compensation package needs to include both monetary and non-monetary compensation, incentive compensation programs, and benefits.

    The compensation package is intended to attract the right talents. The inclusion of retirement plans in compensation packages is for the purpose of attracting job seekers and also to induce employees to stay until they reach a certain age at which they will enjoy certain monetary benefits.

    You will also have to determine how the compensation package fit into the performance management system.

  • The compensation strategy or strategies your organization adopts
  • Incentive compensation programs
  • Incentive compensation programs are intended to increase the productivity of employees. This is to bring about a performance-driven staff. Bonus is one of such incentives whether contractual, performance-based or both.

    Your incentive compensation program can include a retirement plan. Such a plan has the potential of making people stay with your organization for a long time.

  • Whether or not to implement a deferred compensation policy
  • Compensation management policy may specify whether or not the organization can defer compensation under certain conditions such as during recession or when organizational financial performance is not satisfactory.

    Deferred compensation is pay owed by the organizational to employees. Your organization needs to pay this when it has the money in the future.

    Another instance is to defer paying bonus to top management or forfeiting part of the bonus because of unsatisfactory performance.

  • Whether to use executive compensation consultant(s)
  • You may decide that senior executives' pay and benefits are so crucial to organizational success that it becomes necessary to engage executive compensation consultants.

    On the other hand, you may decide that the organization's internal HR expertise is adequate for the purpose of determining the compensation package for junior employees. Compensation for senior executives is determined by the Board on the advice by the HR Manager, Chief HR Officer or HR consultants.

    This does not mean that external consultants can do a better job. They may not appreciate the peculiar circumstances in the organization.

  • whether it is advisable to use incentive compensation software in managing compensation

There are other things that go toward the making of effective compensation management. These include relevant information found in salary or compensation survey(s). But exercise caution in the use of such information.

You may want to use software, whether one readily available or custom-made. But while this can make things easier and more efficient, it may also cause a bottleneck if it is not accepted company-wide. If this happens, it becomes an expense that does not bring any real benefit.

Definition of Compensation
People differ in their understanding of the meaning of "compensation." Some define it as being the monetary award for loss, injury or suffering. Some others understand it to mean the sum total of the monetary and non-monetary pay including benefits given to employees.

Here, we are referring to the second definition.

In addition, you need to determine the different features of the compensation packages of executive and non-executive compensation plans respectively.

Bonus is an effective incentive if done right. Include it where possible and if affordable. However, it can also cause headache when poorly formulated or implemented.

Compensation-Performance Relationship
There is a need to take into account how the different performance levels of employees are treated under the compensation plan. Of particular importance is the executive compensation package. This is particularly true of CEOs' pay.

Is compensation manipulative?
Exercise caution in the management of compensation. If not, there is the possibility that compensation strategic plan is viewed as being manipulative.

Do not allow employees to believe that they will only enjoy pay increases in future if they can keep attaining the targets that keeps getting higher year after year.

This is where your performance appraisal system can play a critical role. Reward people based on their actual performance on the job and exclude factors that have nothing to do with performance of the job.

People Involved in Core Business Activities
Consider adding features that demonstrate the importance of certain areas of the organization's activities, particularly sections closely involved in revenue generation, production, marketing and revenue collection. These are activities connected to the core business of the organization.

Give them the rewards due based on outstanding performance.

Relationship between compensation management, Misconduct and Indiscipline

Compensation strategy has a link to misconduct or indiscipline. You can decide not to pay any compensation for absence from work. This is apart from poor performance of the job.

However, the HR policy, the employee handbook as well as the disciplinary rules must state these things very clearly and employees clearly understand the consequences.

Work in Progress (WIP)
Incentives and compensation incentives management is work in progress. The search for better approaches does not cease. Read what Sarah L. Fogleman wrote in her article "Creative Compensation."

Look out for any matter or issue that may weaken your compensation management plan which, in turn, can undermine the motivation of your people and organizational performance.

As indicated in recent surveys, effective compensation management means giving high pay for high value jobs.

Keep this in mind in order to compete for great talents that are scarce in supply.

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