The Alignment Of Compensation And Business Strategies Commerce Essay

The Alignment Of Compensation And Business Strategies Commerce EssayCompensation is a key element in the success of any line of descent. Although give inment designs were not alship canal facen as a strategic business initiative, their huge impact on a caller-ups bottom line, recruiting, retaining and motivating people has led to requital design cosmos make doed an significant element to achieving success (OConnell, 2007).The alignment of stipend business strategiesIt is immanent that a fair, belligerent and attractive compensation plan is created in order to ensure the future success of the phoner. If the compensation plan is carried out properly it dismiss improve organisational effectiveness, support human swell requirements of a business, and motivate and impartoff light uponment of key corporate strategic and monetary goals (OConnell, 2007 20). It is thus essential that compensation plans atomic number 18 well thought out and effectively designed. Compensat ion is the answer to attracting, retaining and motivating employees who welcome the necessary repugnncies to carry out the business dodge and track greater responsibilities (Milkovich, Newman Gerhart, 2007).Managers must take note of the rewards that motivate their employees. If this is not done, it may effect in a mismatch in the midst of the strategies being used by managers to motivate their employees and the motivational rewards that the employees prefer (Arnolds Venter, 2007). This mismatch, as well as failure on the part of managers and employees to delve common ground in the pursuit of organisational objectives, brush aside result in firms failing to successfully implement their business strategies. Employees allow for perform at a low take, doing only what is least expected of them when the reward systems ar not aligned to their needs. They will not be motivated to limit in extra effort so that the organisations goals can be achieved (Arnolds Venter, 2007). It is and so chief(prenominal) for all firms to regularly assess the rewards that motivate employees.Different organisations have distinguishable compensation policies in place. Matching compensation policies to business strategy leads to greater organisational performance (Montemayor, 1996). both(prenominal) organisations ar quick to introduce a forward-looking compensation program based on what they have heard about it. The task is that it may not fit with their organisations strategic direction. Only programs that can move the organisation further along its strategic path should be identified and utilize (Kaplan, 2007). Ultimately, compensation strategies seek to either decrease be or increase r correctues congeneric to competitors (Milkovich et al, 2007).Compensation professionals play an big role in helping organisations put their business strategies into effect by introducing appropriate compensation plans. Compensation experts need to be at the focal take where strat egy, organisational effectiveness and human neat heed converge (OConnell, 2007 25). It is important that they have a clear under point of viewing of the business, the organisational issues and the direction in which the company is headed. Organisational, employee and business needs must be balanced with the financial and strategic goals of the company. Only then can the rectify compensation strategy be developed to motivate, reward and sustain high take aims of performance. When this balance is found, a company can effectively use compensation to execute and achieve desired business results (OConnell, 2007 25).For example, if a companys strategy is to be innovative, the strategy will focus on new yields and a short response time to market trends. The compensation strategy must be tailored to align with the business strategy. A reenforcement compensation strategy will thus place less emphasis on evaluating skills and channels and more emphasis will be placed on bonuss designed to encourage innovations (Milkovich et al, 2007). A exist cutting business strategy will focus on efficiency and doing more with less. To support the business strategy, the compensation indemnity will focus on competitors dig up be, variable render will be increased and productiveness will be emphasised (Milkovich et al, 2007). A company with a customer-focused business strategy will focus on pleasing customers and employees will be paid according to how well they do this. The compensation strategy will thus include customer satisfaction incentives (Milkovich et al, 2007). In order to do better than its competitors, a firm must come up with ways in which it can gibe value by matching its business and buy off strategies. When business strategies change, wear systems must also change (Milkovich et al, 2007). Organisations want to see the re looses that they argon getting from paying incentives, benefits and even base pay.Companies atomic number 18 starting to realise that by sharing in the economic gains of achieving targets, they keep employees motivated to reach change magnitudely difficult goals. When there is a clear line of sight between black market and reward, employees will work harder to achieve the goals and suck in the rewards (Ulrich, 1997). It has been suggested that performance-based pay deeds best when there is success to sh argon (Milkovich et al, 2007 54). An organisation can pay larger bonuses and stock awards when their profits or market share is on the rise. By paying bonuses fairly, employee attitudes and work behaviours improve, which in turn improves their performance (Milkovich et al, 2007). One of the major challenges in managing total compensation is to understand how the pay system can add value and create a more successful organisation.Internal alignmentInternal alignment refers to comparisons among caprioles or skill levels inside a single organisation. Jobs and peoples skills are compared in terms of their relation c ontri saveions to the organisations business objectives (Milkovich et al, 2007 19). Internal alignment is not only concerned with the pay rates for employees doing friction match work, but also for those employees doing different work. One challenge that managers face is how to make up ones mind differences in pay for people doing different work (Milkovich et al, 2007).An employees end to stay with the organisation, to become more flexible by investing in additional fostering, or to seek greater responsibility is influenced by the pay that they receive (Milkovich et al, 2007 19). A compensation system should not stand in the organisations way of retaining endowment funded and productive employees. One of the main causes of employee turn over is inadequate compensation (Grobler, Warnich, Carrell, Elbert Hatfield, 2006). Tensions will result if employees feel that they are not being treated equally and this may cause employees to reduce their future efforts, change their percept ions regarding rewards for their efforts or leave the organisation (Grobler et al, 2006). Managements goal is to minimise turnover and lost issue due to feelings among employees that they are not being compensated equitably. In order to ensure greater equity among jobs, a process known as job evaluation may be embarked upon, whereby a systematic relationship between the pay scales for jobs in spite of appearance an organisation is created. Job evaluation is the systematic determination of the relative worth of a job within the organisation that results in an organisations pay system (Grobler et al, 2006 404). When comparing jobs, the following factors are taken into account the skills needed to bang the job, the efforts needed to perform the job, the responsibilities of the job holder, and the working conditions of the job (Grobler et al, 2006). Job evaluation is preformed in order to develop a system of compensation that employees will consider to be fair, and in this way intern al consistency among jobs is obtained. Internal consistency thus refers to the relationship between the pay coordinate, the design of the organisation and the work (Grobler et al, 2006). It is important to design a pay system that supports the work flow, is fair to employees and directs their behaviours toward organisation objectives (Grobler et al, 2006 404).Many organisations are dividing their employees and creating different compensation plans for the different employee groups. For example, the executive team will be compensated one way, while a different approach will be used for the sales team, and yet another set of rules will apply to those working in the admin department. In todays business environment, a one-size-fits-all approach is no longer effectiveness (OConnell, 2007).Compensation methods have undergone a number of changes over the years such as the use of performance pay and other contingent systems of reward, the flattening of pay scales with fewer but broader pay grades and flexible cafeteria-style benefit systems (Brewster, Carey, Grobler, Holland Warnich, 2008). This new approach to compensation is known as strategic pay and is much more suitable to todays changing organisational environments and structures. Strategic pay flows from and implements an organisations business strategy. The old methods of compensation were associated with job-evaluated pay structures, time and seniority (Brewster et al, 2008 188). These old methods were appropriate for hierarchical organisations who operated in a stable environment.Internal pay structures must be designed in such a way that employees will be motivated to achieve the organisations objectives. There must be a clear line-of-sight between each job and the objectives of the organisation. It is also essential that the structure is fair to all employees (Milkovich et al, 2007). To motivate employees, management can build the following ideas into their strategic pay structure increase the harmonise of pay contingent on performance, increase the potency of variable pay by making base salaries only moderately competitive, broaden the range of incentive schemes to include linking pay to group and organisational performance as well as individual performance, identify new performance measures of business success, and introduce flexibility into compensation plans so that rewards extend beyond monetary ones to include prizes and recognition (Brewster et al, 2008 188).Pay structures vary among organisations depending on the number of levels within the organisation, the pay differentials between the levels, and the criteria used to determine the levels and differentials i.e. work content and its value. People are usually paid more if their job requires more knowledge or skills than another job, if their working conditions are unpleasant, or if their job adds a great deal of value. One reason for pay differentials is to motivate employees to work towards promotion and a higher-paying l evel (Milkovich et al, 2007).Internal structures are mold by both remote and organisation factors. External factors include economic pressures government policies, laws and regulations stakeholders and cultures and customs (Milkovich et al, 2007 75). Organisation factors include strategy applied science human capital HR policy employee gestateance and cost implications (Milkovich et al, 2007 75).With regards to economic pressures, one job is paid more or less than another because of differences in relative productivity of the job and differences in how much a consumer values the produce (Milkovich et al, 2007 76). It will only be worthwhile to employ an additional worker if they can modernise a value equal to the value of their wage. This is referred to as marginal productivity (Milkovich et al, 2007). The render and get for labour, products and services all affect internal structures. Organisations are unendingly forced to redesign their work flow and employees must contin uously learn new skills in order to keep up with changes in competitors products and customers tastes. Unpredictable orthogonal conditions require pay structures that support agile organisations and flexible people (Milkovich et al, 2007 76).Government policies, laws and regulations also have an impact on the internal pay structure. Our law gives e trulybody the right to fair compensation. This is also known as the right to a living wage. Laws have also been put in place to govern minimum bribe (Brewster et al, 2008). Pay-related legislation tries to achieve social welfare objectives by regulating economic forces (Milkovich et al, 2007). The government has influenced compensation by legislating pay levels, hours of work, pay for overtime and holidays and non-discriminatory pay practices (Grobler et al, 2006 187). The Basic Conditions of Employment Act has a direct impact on a companys compensation strategy.Unions, stockholders and political groups also influence the internal pay s tructure. In order to promote solidarity among members, unions generally prefer small differences among jobs and seniority-based promotions. Stockholders compare the salaries paid to executives with the salaries paid to others in the organisation. Stockholders are interested in this difference (Milkovich et al, 2007).If the pay structure is not aligned to the organisations strategy it can become an obstacle to the achievement of the organisations goals. other factor that has an impact on internal structures is human capital. Human capital refers to the education, experience, knowledge, abilities and skills required to perform the work (Milkovich et al, 2007 78). The technology used will influence the organisational design, the work that needs to be performed, and the skills or knowledge that is needed to perform the work (Milkovich et al, 2007). The organisations other HR policies also have an impact on the internal pay structure. The more levels an organisation has, the more promo tions it can offer, but the pay differences between the levels may be smaller. It is call backd that when promotions take place often, even if they do not include pay increases, employees develop a sense of career progress (Milkovich et al, 2007). Some companies develop talent from within the organisation. This also serves to retain top talent. These candidates are promoted when job vacancies arise. The result is that they do not have to employ expensive talent from outside the organisation. It is also easier to manage these individuals as they are already aligned with the culture and business priorities of the organisation. This leads to a greater return on the companys investment (Barnes, 2009).Another important factor influencing the internal pay structure is whether or not the employees involved accept it. In order to assess the fairness of their pay, employees compare the pay that they receive to that which others receive for doing different jobs in the same internal structure . They also look at what others are paid for doing the same job at competing employers (Milkovich et al, 2007). The procedures for find the pay structure must be fair as well as the pay structure itself. It has been suggested that employees and managers will accept low pay if they believe that the way in which the pay was determined is fair. It is likely that the pay procedures will be considered fair if they are consistently applied to all employees, if employees participated in the process, if appeals procedures are included, and if the information used are accurate (Milkovich et al, 2007 80). Pay structures do not stay constant. They change in response to external factors.An organisation will achieve much better results if the structure is aligned. The structure must be perceived as fair by the employees and it must motivate them to achieve the organisations goals. If there is a big pay differential between an entry level job and the highest level job in an organisation, it can encourage employees to stay with the employer and increase their training and experience. It can also result in greater co-operation with co-workers and for employees to look for more responsibility within the organisation (Milkovich et al, 2007).External competitivenessExternal competitiveness refers to the level of pay that an organisation offers in comparison with its competitors (Montemayor, 1996). This has a huge impact on the attraction and retention of talent as well as on labour cost objectives. With a high pay level, the organisation will be better able to acquire a competent workforce. By increasing the pay level, total labour costs will increase but it may also result in improved labour costs per unit of measurement (Montemayor, 1996). The efficiency wage theory states that paying above market levels can promote employee motivation that would offset any increment in labour costs (Montemayor, 1996 891).The pay systems of many organisations are market-driven i.e. based on what competitors pay. In the hope of attracting the best applicants, some organisations set their pay levels above that of their competitors (Milkovich et al, 2007). In order to compete with the external market, organisations must ensure that the pay that they are offering is sufficient to attract and retain employees. Employees are likely to leave an organisation if they believe that their pay is not competitive in comparison to what other employers are offering. Organisations must also ensure that they control their labour costs so that they can supply their products and services at a good price and remain competitive in the global economy (Milkovich et al, 2007). It is essential that when companies prepare their business strategies they decide how they are going to compete in the marketplace. For example, they can choose to compete on price, or they may prefer to tag themselves based on products or services, they could even decide to segment the market and only focus on a parti cular group of buyers. Understanding the competition is key (Kaplan, 2007).Employers can better differentiate themselves from their competition by introducing learning and development programs and creating a fun and flexible work environment. These are also known as relational rewards. These initiatives will conjure up employee commitment to the organisation (Kaplan, 2007). Employers that are highly-rated usually receive more employment applications as people want to work for the best organisation. The high ratings also result in improved retention of staff and greater profit mogul as committed employees usually provide better customer service (Kaplan, 2007).Job applicants who receive more than one offer will compare the offers and the pay scales. More weight is often placed on the salary being offered rather than on the other types of compensation, like benefits and intrinsic rewards (Grobler et al, 2006). In order to remain competitive within the local labour market, employers us ually offer salaries that are similar to those offered by competitors. Employers thus need to know what the going rate is for jobs within the local labour market. Wage surveys as well as published market data can be used to determine the average salaries for various positions. These methods assist the organisation in maintaining external consistency with other organisations (Grobler et al, 2006).An important strategic decision must be made as to whether the organisation should mirror what its competitors are paying, or whether it should design its own pay structure that differs from its competitors but is aligned to the business strategy. The pay level can be set above, below or equal to that of competitors. The mix of pay forms must also be determined relative to those of competitors (Milkovich et al, 2007).The following three factors shape external competitiveness labour market factors, product market factors and organisation factors. Together these factors influence pay-level and pay-mix decisions (Milkovich et al, 2007).As mentioned above, organisations usually birdcall to be market-driven. Looking at the demand and supply of labour gives one a greater understanding of how the markets work. The demand side deals with the actions of the employer i.e. the number of new employees they require, and what they are volition and able to pay them. The supply side deals with the potential employees i.e. their qualifications and the pay that they are likely to accept (Milkovich et al, 2007). The market rate is found at the point where the demand for labour meets the supply of labour.In the short run, the only way that an organisation can change its level of production is by changing its level of human resources. The other factors of production, such as technology, capital and natural resources are fixed in the short run. The marginal product of labour is the additional output associated with the employment of one additional person (Milkovich et al, 2007 207). Howev er, each additional employee hired will produce less than the previous employee due to the fact that the factors of production are fixed. Each employee thus has fewer resources to work with. The additional amount that each new employee produces is known as the marginal product (Milkovich et al, 2007). When the marginal product is sold, the specie that is generated from the sale is known as marginal revenue. Employers will hire new staff until the marginal revenue generated by the last hire is equal to the costs associated with employing that person (Milkovich et al, 2007 208). At this point the employer is maximising their profits. Therefore, in order to determine how many people to employ, a manager must establish two things the pay level that is set by the market forces and the marginal revenue generated by each new employee (Milkovich et al, 2007). This, however, is not so easy to do in reality.With regards to labour supply, the model assumes that many people are seeking jobs, t hat they possess accurate information about all job openings and that no barriers to mobility exists (Milkovich et al, 2007 209). It is not so innocent in the real world. For example, the supply curve slopes upward and shows that as pay increases more people will want to take jobs. In the case where unemployment is very low, supply may not increase with offers of higher pay as everybody has a job (Milkovich et al, 2007). The model provides a useful analytical framework but oversimplifies reality.In certain instances employers pay more than the market-rate. For example, if there are negative elements to a job such as very expensive training, small chances of success, enervated job security and unpleasant working conditions, employers may decide to pay higher wages in order to compensate for the negative characteristics. This is referred to as compensating differentials (Milkovich et al, 2007).As mentioned above, in terms of the efficiency wage theory, high wages can in fact increas e efficiency and lower labour costs. This can be achieved by attracting more qualified applicants and encouraging existing employees to work harder or smarter. It is assumed that the pay level determines effort (Milkovich et al, 2007). An organisations faculty to pay is also an important issue. The greater an organisations profits in comparison with its competitors the more it is able to share with its employees. These organisations will usually pay more that their competitors and may even pay bonuses in line with their profitability (Milkovich et al, 2007).Employers can design their pay levels and mix in such a way that a signal is sent to both live and future employees as to the kinds of behaviour that they require. This is known as signaling. For example, if the organisations base pay is below the market-rate but they offer good bonuses, they may be sending a signal that employees who are risk takers are required. If the organisation pays the market wage and offers no performan ce-based pay, a different signal is sent and different people are attracted. Signaling helps to communicate expectations (Milkovich et al, 2007).There are also two theories that help us to understand employee behaviour. A job seeker will not accept a job offer if the wage is below a certain amount irrespective of the other benefits or job attributes. This is known as the reservation wage. It may be above or below the market-rate (Milkovich et al, 2007).The second theory is the human capital theory. In terms of this theory, those who have improved their productive abilities by investing in themselves through education, training etc will earn higher wages (Milkovich et al, 2007).The next factor that shapes external competitiveness is the product market and ability to pay. To a large extent, product market conditions determine what the organisation can afford to pay its employees. The organisations ability to change what it charges for its products and services is affected by the dema nd for the product and the amount of competition (Milkovich et al, 2007).An employer who increases their wage level will either choose to increase its prices, thereby passing the higher labour costs on to consumers, or it can choose to keep prices fixed and pay the increased labour costs out of their revenues. If an employer is operating in a very competitive market they will not easily be able to increase prices (Milkovich et al, 2007).Lastly, organisation factors include characteristics that are unique to each organisation and their employees such as industry and technology, employer size, peoples preferences and organisational strategy (Milkovich et al, 2007).The industry in which an organisation competes influences the technologies used (Milkovich et al, 2007 216). Lower wages are paid in labour-intensive industries than in technology-intensive industries. When new technology is introduced within an industry, pay levels are also affected (Milkovich et al, 2007).Large organisatio ns generally pay more than small ones. In big organisations, talented people have a greater marginal value as they are able to influence more people and decisions resulting in larger profits for the organisation (Milkovich et al, 2007). cleanse understanding of employee preferences is increasingly important in determining external competitiveness (Milkovich et al, 2007 217). It is, however, difficult to measure preferences. It has been found that pay is more important to people than they are willing to admit (Milkovich et al, 2007).With regards to organisation strategy, some employers compete by adopting a low-wage, no services strategy. These organisations, such as Nike and Reebok, often rely on outsourcing to invent their products. Other organisations may choose a low-wage, high services strategy or even a high-wage, high services approach (Milkovich et al, 2007). Employers will pay more than their competitors if the job has a direct impact on the success of the organisation. Pay levels will equal that of competitors in jobs that have less of an impact on the success of the organisation. Evidence shows that those organisations with higher-skilled workers who make use of high-performance work practices and computer-based technology also pay higher wages (Milkovich et al, 2007).The integration of internal alignment external competitivenessIn order for a compensation strategy to be successful it must blend internal consistency with market competitiveness, and must be structured to recognise the credentials, knowledge and performance of the individuals involved (Martocchio, 2001). An appropriate compensation policy is designed around the organisational structure, competitive position, leadership style and the strategic plan of the organisation (Santone, Sigler Britt, 1993 86).A mentioned above, one of the main causes of employee turnover is inadequate compensation. The competitiveness of pay will affect the organisations ability to achieve its compensation ob jectives, and this in turn will affect its performance (Milkovich et al, 2007 221). It is common for organisations to match the rates paid by their competitors. If organisations fail to do so, the existing employees will be unhappy and the organisations ability to recruit will be limited (Milkovich et al, 2007). Such a policy will result in the organisations wage costs being similar to that of its product competitors and the organisations ability to attract new employees will thus also be similar to its labour market competitors (Milkovich et al, 2007).Job evaluation, whereby the worth of a job within an organisation is determined, is performed in order to develop a system of compensation that employees will find fair. In this way, internal consistency among jobs is obtained (Grobler et al, 2006). However, if a competitor is willing to pay an employee a higher wage to do the same work, the employee will leave their current job to earn better pay elsewhere. An employer must therefor e not only consider what they are willing to pay for a particular job but also what the competitors are paying for the same job. This is important if they want to attract and retain whole step workers.ConclusionIt is important that companies ensure that their reward systems are aligned with their organisational goals, strategy and culture. Strategic compensation allows for employees to earn incentives if they effectuate company goals. Compensation has a huge effect on recruiting, retaining and motivating people. The compensation strategy of an organisation also has a direct impact on its performance. Internal alignment and external competitiveness should be integrated when forming the pay structure.PracticalCore strategy detailsABSASARSObjectives-Attract and retain high quality individuals with the optimum mix of skills, competencies and values.-Motivate and reinforce superior performance.-Encourage the development of skills and competencies required to meet current and future obj ectives.-Employees should share in the success of the business.-Drive productivity, service quality and cost efficiency.-Enable employees to perform at their peak.-Build a skills inflow through the graduate and youth recruitment programme.Internal alignment-Remunerate people fairly and consistently according to their contribution.-Ensure that employees of equal value are remunerated more or less equally.-Parity in the immediate environment is the most important.-Fair salary.-Recognition system.-Employee development.-Talent management.Externally competitive-Set cost to company (CTC) at the market median.-Reads the market regularly to strategically position itself at mid-market for fixed remuneration packages with differentiation between employees via variable reward programmes.-Differentiates aggressively between levels of performance.-Emphasis on variable pay i.e. incentive and commission schemes.-Incentive system in place.Employee contributionsDirect rewards (standard)Fixed remune ration (CTC), allowances, overtime, leave encashments, variable/ performance based pay (long and short-term incentives).Direct rewards (non-standard)Commission.Indirect rewardRecognition rewards (prestige awards, service heroes, long service awards). Bursaries for employees and employee dependants. Benefits free banking, staff interest rates, disability support fund, leave.-Fixed remuneration, allowances.-Overtime.-Government subsidies.-Incentive pay.Management-Open and transparent communication.-Objective remuneration decisions.-Show genuine care and concern.-Create an enabling environment.Rewards/ compensation strategic mapLOW HIGHObjectives Attraction and retentionSuperior performanceQuality service satisfy see attachmentInternal al