Strategic compensation is the type of compensation scheme implemented to improve the motivation of your people to perform better.
It must also have the potential of strengthening your image as a good employer.
A good reward scheme has the potential of motivating employees if properly implemented.
But it can demotivate if poorly handled. There is nothing more immediate in affecting the behaviour of employees than a salary scheme that is not designed well or badly implemented even if the scheme is good.
Benchmark your salary scheme so that it is at par with salaries paid in the open market for similar types of jobs.
Doing this will minimize the possibility of good employees leaving your organization for a more lucrative job elsewhere.
Paying too low a salary may save you money but will not attract quality people.
On the other hand, it may compel good employees to leave.
Paying competitive salaries is in accordance with sound employee recruitment, employee engagement and employee retention practices. You are making it a truly strategic compensation.
Salary banding is part of strategic compensation system.
Jobs with similar responsibilities and workload are grouped together under a specific category. The salary grades under each category can vary in number depending on your strategy.
This can cut across departments and group of companies.
It is necessary to carry out this exercise in order to achieve pay parity and pay equity, both vertically and horizontally.
Salary bands follow the existing organizational structure.
The pyramid structure was the popular choice of many organizations. But some organizations have implemented a flatter organizational structure with the intention of improving efficiency.
This can also reduce or control overhead costs.
However, if there are too few levels with the same number of salary bands, there is less opportunities for your employees to move up in their career.
This is not good for employee development. Your employees, especially the good ones, have nothing to look forward to. They are well aware that if they move up the organizational ladder, their earnings will also improve.
There will come the time when they consider that enough is enough.
If your organization fails to utilize strategic compensation to manage employee productivity, it may have overlooked the importance of strategic compensation as an effective employee motivational tool.
What is Compensation?
Compensation consists of every item of payment in cash that you make to members of your workforce.
Bonus is a cash payment, a compensation but it is not "salary." It is taxable.
Based on Maslow's "Theory of Needs," salary or compensation can motivate. Some people put forward the theory that salary can motivate until the next salary increase.
Some believe in the power of bonus payment as a motivator. Others argue that it may motivate the recipients but makes "others" who receive lesser amounts become less productive.
Huge bonuses payout to CEOs and other senior executives do not escape public criticism. The amount of bonus payment does not necessarily reflect the ability of the CEOs concerned.
As the result it is necessary to implement controls in the payment of bonuses.
Some organizations base bonus payment on job performance. Again, this has come under criticism.
It is argued that financial performance and not employee performance is the determinant. This is the better argument. Employee performance evaluation is subject to human manipulation.
It is because of this that you cannot really classify bonus as strategic compensation. It is not easy to make effective plans for its payment. Further, it is hard to foresee its effects and to plan for it.
You want to distribute some of the profits. Therefore, you give yearly bonus. Now, there is something funny about paying a sum of money on a regular basis. Your people tend to expect to receive bonus each succeeding year.
Payment has led to what is called "an entitlement mentality." If you don't pay, you are not a good employer. If you pay, you are expected to continue making the payment at any cost. Even if you are staring bankruptcy in the face.
As stated above bonus is not truly a "salary" which employees can get paid every year.
To avoid any misunderstanding, explain to your people that revenue is not coming in which means that the organization is not in the position to pay the usual bonuses. Do this every year at the right time.
What else can your organization do to make bonus payout acquire a characteristic of strategic compensation?
Consider the following:
Making Your Compensation System More Strategic
In order to ensure that your strategic compensation is truly strategic in nature, see to it that it can motivate every employees.
It is important to know the differences between the different heads of payment that you make to your employees. Your people need to know what payments they may or will not get under certain conditions or when certain conditions do not exist.
With effective and regular communication with your employees there are less chances of misconception and misunderstanding. Avoid situations under which your people assume things that cause you problems.
Compensation is always a sensitive issue. It can become more complicated if you have a unionized workforce. This requires caution and careful planning otherwise you may find that your compensation system will lose its effectiveness in influencing people's behaviors.