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The compensation and benefits processes belong to most important HR Processes, which are critical for the organization and modern HR organization. The compensation and benefits is about managing the personnel expenses budget, setting the performance standards, setting the transparent compensation policies and introducing the competitive benefits for employees. The organization with effective compensation and benefits drives its personnel costs, manages the performance of employees and rewards the extraordinary performance.
bonus payout as the organization keeps the financial stability and the planned personnel expenses budget is kept. The compensation and benefits department has special processes to monitor the external job market as it can set the right compensation policy, which is compliant with the approved compensation strategy. The compensation and benefits department is responsible for the extensive monitoring of the market and designing the new compensation components inspired by the HR Best Practices in the compensation area. The compensation and benefits department is always closely attached to the development of the new compensation components, which support the performance and effectivity of the organization. It co-operates with the different business units and it aligns their requests into the general rules for the compensation components, which are transparent and fair. The compensation and benefits designs new adjustments to the compensation strategy and the compensation policy as the organization does not lose its competitive advantage on the job market.
Compensation Strategy
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Compensation Strategy Key Content Pay Market Strategic Position Setting Compensation Consultants and Compensation Strategy Compensation Strategy building Competitive Advantage Why is compensation strategy important?
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Salary Surveys
Compensation Strategy
The compensation strategy is extremely important as the right compensation strategy helps to build the effective and competitive organization and the wrong setting of the compensation strategy, which does not fit with the needs of the organization and with the HR and Business Strategies, can destroy the organization within several years and the organization suffers from decreased performance and not utilizing the full potential of employees.
organization and they ask for the progress of the implementation of compensation strategy on the regular basis. The HR Strategy has to be always designed and developed with having the respect to the situation in the compensation area in the organization. The HR Strategy cannot set the ambition, which is not suitable for the company. The HR Strategy always defines the basic principles for the compensation scheme in the organization and the compensation strategy defines the details for the components and when and how they will be introduced or redesigned. The compensation strategy should be updated, when Human Resources makes significant changes to the HR Strategy or the organization changes its business strategy. The compensation strategy has always support the business and its selling capabilities.
The managers are the users of the compensation policy and they should understand, it is based on the approved principles from the strategy. The compensation policy can change on the regular (usually yearly) basis, but the strategy is consistent over a longer period of time and the managers can plan the career of the subordinates.
The compensation is a part of the complex HR processes, policies and procedures. The top management and Human Resources have to decide, what will be the primary role of compensation in the organization. Some organizations prefer the supplementary role of
the compensation and other organizations prefer the dominant role of the compensation. This compensation decision is extremely important as it sets the general framework for the compensation components, if they will exist in the organization or they will be the part of the other HR policy. The compensation strategy has definitely include the description of the role of the compensation in the organization.
Competitiveness
The competitiveness of the compensation is another important compensation decision. The organization can decide to be aggressive with the compensation strategy and it can set the aggressive position on the pay market, but this strategy is extremely expensive for the organization and it has to balance it with high margin on the products and services. On the other hand, the organization can choose to offer the career and development opportunities, it can increase the responsibilities of the individual employees and it can balance aim to the lower level of the compensation on the pay market. The decision about the competitiveness of the compensation strategy is extremely important as it has a huge impact on the costs of the organization and it requests the right setting of other HR Processes.
Internal Structures
The organization does not have to follow the same pay market and the same level for all the job positions. It is extremely important compensation decision to be included in the compensation strategy. The organization can decide about making huge pay differences across different units or it can decide about the different pay level for the experts and managers as it protects the know how.
Administration
The administration is a tough compensation decision in the compensation strategy as it sets the roles and responsibilities of Human Resources, managers, top managers in the compensation processes. The organization can decide about preferring the decentralized compensation model, when the manager decides most issues and pay increases, but Human Resources is in a danger of not keeping the total personnel expenses budget. In the centralized compensation strategy, the HR Managers are the main decision makers and the employees and managers do not feel the comfort of the free decision.
5. What are the costs of the setting the strategic position on the pay market?
Setting the strategic pay market position without the proper analysis and calculation is just a hazard with the future of Human Resources in the organization as the top management can be amazed, how expensive the strategic pay market position is.
The excellent compensation consultant always asks the clients about the feedback and how the solutions work in practice to have the experience to build on. The compensation consultant can see a new creative solution in one company, which can help to build the HR competitive advantage in another organization. The compensation consultant can help to design the state-of-the-art compensation strategy and can save huge costs to the organization in the future.
It is quite dangerous to set the pay market position too high as the organization has to carry the increased costs and eats more from the margins on the products and services. The organization cannot make quick changes and the recession can be deadly dangerous for the organization as it carries higher costs to keep the processes operating and functional. The competitors have a better and bigger space to decrease the personnel costs in bad times. The higher competitive position on the pay market can be used in the time, the organization grows dramatically and it needs the best talents from the job market and there is no time to decide about the key job positions in the organization and all employees are treated to be of the same importance. Keeping the long term higher pay market position is suitable just for the companies in the modern industries, with high margins and the companies with the excellent brand name being known for employing the best of the best.
Competitive advance through strategic pay market position for key job positions
The competitive advantage in compensation can be set just for the key job positions in the organization. This solution is cheaper as the rest of the population can be kept in line with the median of the pay market or it can be below the median as the whole organization keeps the median in general. But, the organization has to be able to reach the consensus about the key job positions in the organization. Setting the key job positions is the painful procedure for Human Resources getting the consensus from the top management is a bit mission impossible, but HR has to accomplish this procedure successfully as the key job positions are identified and Human Resources can set the right compensation strategy for the key job positions. The differentiation in the compensation strategy and setting the different pay level for the key job positions is quite usual for the larger organizations as they save the personnel expenses and they are able to protect the key employees. It does not protect the key employees automatically, but it support the managers and other HR Processes as the employees feel pretty satisfied with their salaries.
The competitive advantage for the key job positions is usually the best pay strategy for the mature organizations, which does not grow aggressively and are purely focused on the product innovations. The key employees bring the innovations and the rest is paid fair enough for their job content.
organization as well as the successful employees and top talents feel the success in their pockets. The effective compensation strategy makes people feel the success and they speak about their successes with their friends. It build the extremely excellent competitive advantage among the competitors as the people feel, the organization really values the success and it can pay the successful employees. The effective compensation strategy manages the personnel expenses of the organization, but it supports the performance management and differentiates the employees as the successful ones are not motivated to search for a new job opportunity. The good compensation strategy does not provoke employees to search the web job boards during the working hours, it makes them to focus on delivering the results as they can be highlighted and they feel the highlight in their salaries. The successful compensation strategy gains the competitive advantage and can speed up the innovation processes and improve the performance management practices in the organization.
Compensation Policy
The compensation policy is the basic document, which drives the detail of the compensation practices in the organization. As the compensation strategy sets the high level compensation goals of the organization, the compensation policy describes the details of the individual compensation components, their behavior and their role in the compensation scheme of the organization.
The compensation policy belongs to most read and discussed internal policies of the organization as it drives the salaries of the individual employees. Each employee is interested in the structure of the salary and the potential total cash achievable in the organization. The compensation policy is the main tool to find out the details about the compensation components and the way, how to achieve the highest total cash. The compensation policy drives the effort and performance of employees as the employees will find the smart and easiest way how to achieve the highest possible income with the smallest possible individual performance. The compensation policy has to be set the smart way as it avoids the potential work-around and abuse.
Executive Compensation
The top executive compensation is a special and specific area of compensation and benefits, which is usually confidential and it is not open to all employees in the organization. The top executives hold the responsibility for the organization, they lead the development of the organization and they have a tremendous impact on the results of the organization. The compensation scheme of top executives has to
reflect the responsibility and it has to provide the security to the top executives to use the personal responsibility and to take courageous decisions. The executive pay is about the focus on the short-term performance and the longterm sustainability of the organizational development. The top executives are motivated to search for the cost-cutting potential and focusing on the sales and performance growth in the long-term perspective as the shareholders can realize the benefits of being involved in the organization.
The short term pay of the executives is about the base salary and short term bonuses, which are paid on the basis of the immediate performance of the organization. The bonuses are usually deferred over a period of time. The short term pay is usually fully cash based executive compensation component. The long term pay is about the stock options, shares, restricted stocks and pay based on the performance against the index. The shareholders use these long term compensation components to protect the value of the organization and betting of the top executives on the growing value of the organization on the market. The long term compensation components can be realized just in case, the stock price of the organization grows. The long term pay component is usually non-cash based.
In the modern organizations the short term pay is just a small part of the total cash of the top executives.
Excessive compensation
The excessive compensation is always more the issue of trust and confidence of employees and shareholders. The executive compensation scheme has to include the holdbacks and claw-backs and safety brakes for the case, the organization outperforms hugely the market. Each executive compensation scheme needs caps and floor as it is manageable in all situations, which can happen on the market
Clear focus on profits generation Long-term orientation of the compensation scheme Motivation of manager by high bonuses Non-cash focus of the compensation (stock options, shares, share phantom schemes)
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The executive compensation scheme has to support goals given by shareholders. The executives take risks of failing. They have to be over-compensated for meeting goals. They should receive an enormous extra bonus for exceeding the expectations (goals given by shareholders). The balance in the compensation has to be in favor of exceeding goals. The HR Professionals have to support the CEO in setting the executive compensation scheme, which support the top management in pushing the organization. The top
managers have to make tough decisions. They have to be compensated for overcoming the stress, the pressure of the line management and employees complaints about constant changes in the business operation. Human Resources has to understand the main business goals. HR has to help in setting the executive compensation and alignment with the performance based compensation for the rest of the organization.
Salary Surveys
The salary surveys are extremely powerful compensation and benefits benchmarking tool. They are important for the setting right compensation strategy and for following and monitoring the desired pay market. The salary survey is provided by the external compensation consultant, who gather the compensation information and salary details about the individuals, match the information and provides feedback about the pay market and pay structures back to the participating organizations. The salary surveys are always based on the proper job evaluation methodology, which is standardized across the industry as the compensation consultant can compare the jobs with the same job size as the job titles are not the suitable for the salary comparisons. The company has to choose the right and suitable job evaluation methodology and this know how is usually provided by the compensation consultants for free.
participating organizations. The salary survey can act as a tool to identify the key job positions in the organization as the competitors can protect the key job positions and it is usually visible in the salary surveys. The salary surveys provide the information about the new trends in the compensation and benefits area and many surveys bring the additional information like the average number of employees per manager, the average length of service for the company, the number of promotions and many other.