Discuss why an effective compensation and reward system is so important to an organization. Do you feel your organization has an effective compensation and reward system?
Source Material
What is compensation? That depends on what resources you use. Dictionary.com lists as one of its definitions, “something given or received as an equivalent for services, debt, loss, injury, suffering, lack, etc.” while the website for Merriam Webster states, “something that is done or given to make up for damage, trouble, etc.; something good that acts as a balance against something bad or undesirable; and payment given for doing a job.” In the field of human resources, compensation is generally referred to as the pay, benefits, incentives, and perks employees earn in exchange for the work they perform. Recently, the term “total rewards” has become a popular synonym for compensation because it takes into account all of the things (monetary and nonmonetary) that employees receive for their efforts. There can be vast differences in compensation among employees based on many things such as: type of job, geography, skills requirements, employee performance, and job tenure, for example.
Employee compensation makes a difference not only in a firm’s ability to attract and retain workers, but also in a company’s ability to achieve its mission and vision. In addition, compensation has an impact on the earnings and profitability of an organization. As can be seen from a quick internet search yielding a myriad of sources, it is estimated that labor can account for more than 50% of a company’s total costs. That is one reason why human resource professionals must pay close attention to how compensation systems are designed and implemented.
As we will learn more in depth in upcoming weeks, there can be many components of a compensation system. They include:
Base pay: a set salary or hourly wage given to workers
Cost of Living Adjustments: changes in base pay that is dependent on the national Cost of Living Index
Merit increases: given as a reward for past performance
Bonuses and Incentives: payments that are linked to employee performance but that do not permanently increase an employee’s base pay
Benefits: items that help employees manage their health, wellness, and work/life balance
Perks: other items that enhance an employee’s work environment and overall job experience
In designing a compensation system, human resource professionals typically use a “pay model” that takes into consideration an organization’s compensation objectives, pay policies, and implementation and maintenance strategies. These are influenced by the strategic choices a company makes. As these choices change, HR must be certain that the HR strategy, including compensation systems, is able to support the direction of the organization.
To learn more about the components of total rewards programs, read Total Rewards: It’s more than just a paycheck that can be accessed at:
Total Rewards presentation
