Designed and administered appropriately, an organisation's compensation programme is an effective management tool
Devavrath Nambiar and Ajay Bhati

Compensation deals with establishing a meaningful and acceptable relationship between work and rewards. When designed and administered appropriately, an organisation's compensation programme is an effective mana-gement tool for supporting its overall business strategy. A series of steps are used in the process of designing good compensation programmes.

There are two broad categories of compensation: cash and non-cash. This article focuses on the former. Cash compensation mana-gement has two distinct but interrelated aspects: content and process. Content is mana-ged through job analysis, evaluation and research to keep abreast of the changes in compensation levels in the external market. Process includes tools and methods for collecting, calculating, organising, storing and customising internal and external information pertaining to compensation. The pay structure of an organisation is one such tool. Within the context of cash-compensation management, process should not conflict with content.

A perspective on compensation mana-gement claims that a firm's compensation system should be tailored such that it supports the firm's business strategy (Compensation, Milkovich & Newman). Its basic premise is that alignment between a company’s business strategy and human resource management system, including the compensation system, leads to better performance (eg. Gerhart, 2000). Given this premise, both researchers and practitioners suggest that a firm's business strategy should be a key determinant of the firm's compensation system. Consequently, firms pursuing different business strategies develop different compensation systems. Indeed, surveys done by The Lighthouse report that firms' pay systems (pay level, pay mix) were different even after contr-olling employee human capital (eg. education, tenure) and firm characteristics (eg. size, profi-tability, industry), and moreover, the differences were stable across time.

The following 'ideal' characteristics are necessary for every compensation programme in order to attract, retain and motivate qualified employees. These characteristics are the basic foundation for an ideal pay structure.

• Internal equity: A measure of how an organisation values each of its jobs.
• External competitiveness: A measure of an organisation's pay structure compared to that of its competitors.
• Affordability: A measure of how costly a compensation programme is to a company. If pay structures are not developed responsibly, an organisation could incur labour costs that exceed what it can afford to pay.
• Understandable/saleable: To be accepted and understood, compensation programmes must be well communicated.
• Efficiency to administer: With increased pressure to improve productivity and reduce costs, it is important that a company’s compensation programme is as simple and straightforward as possible to maintain and administer. A balance needs to be struck between what appears to be the best programme and what is efficient, effective and easiest to administer.
• Safeguarding resources: The compensation programme should reward performance fairly without conflicting with the interests of stakeholders of the company. Rewards should reflect both individual employee and company performance. Human resources should be seen as an investment that should be protected as well as maximised.
• Flexibility: Pay programmes are tools necessary to compete for labour in the marketplace. As such, they must be flexible and capable of changing as needed, without having to be revamped every time a new need arises.
• Meeting unique needs: To some degree, each company is unique within its own industry or geographical area. Unique characteristics need to be recognised and addressed when designing compensation programmes and pay structures.

Best practices in compensation
Offer compensation plans that provide a stable base
Compensation is not only a fixed cost of doing business, but also a substantial one. However, well-thought-out use of variable pay as part of the compensation package can moderate that high cost. When the company performs well and can afford a higher compensation bill, variable pay causes compensation costs to rise. But it also means that costs are lower when times are lean. When variable pay is tied to company goals, employees feel encouraged to act in the company's best interests because company strategies and plans are more directly linked to their individual jobs. When these employees exceed their targets, they gain greater compensation, are more highly motivated, and therefore, more loyal.

What companies gain

• Greater sense of ownership from employees
• Better retention and loyalty
• Higher motivation

Develop compensation plans that support strategic goals
Companies are obviously in business to succeed, but first they must develop a corporate strategy to guide them to that success. Once they clarify the strategy, they can communicate it to their workforce. The key tactics that make up the strategy form an overall work plan that employees can follow to take the company where it wants to go. When employees share the company's vision, they also realise that they have the power to help the company achieve its goals and that they will be rewarded for doing so. Competitive but equitable compensation packages attract, motivate, and retain key employees. Compensation is a sensitive issue in the corporate world, and employees are quick to identify what they see as inequities and slow to forgive perceived injustices. When this occurs, the resentment that results can create serious problems. However, employees see fairness at work when performance is linked to strategic goals; that framework makes performance easier to measure and creates a more objective basis for compensation.

What companies gain

• Clearer connections between strategic goals and pay
• Better employee focus on meeting objectives
• Stronger link between employee effort and re-establish compensation plans that are equitable and competitive

Link top management's compensation to company performance
When pay for top management executives rises or falls with company performance, it truly provides an incentive to achieve company objectives. And when their compensation is tied to company performance, executives stay focused on what they must do to make corporate goals happen. Further, tying executive pay directly to short and long-term goals is a more responsible way to run the company, and it looks good to shareholders and investors. It prov-ides tangible evidence that the company rewards behaviour that brings it success. One key performance measure is stock price – the stock market tells management how well it fares by how well the stock does. With their pay linked directly to company performance, executives get behind the company's efforts and provide creative leadership to improve productivity. The most obvious measure of performance – company profit – reflects their efforts. And when stock prices rise, they create more shareholder value, more profits for investors, and more jobs.

What companies gain

• Greater incentives to improve productivity
• More responsible corporate image presented to investors and shareholders
• Greater sense of ownership and responsibility among executives

Integrate HRIS with payroll
Shifting to a variable compensation plan offers an opportunity to upgrade the human resources information system (HRIS). Any well-designed compensation plan will benefit from incorporation into an information system that combines human resources systems with payroll. When these systems are maint-ained separately, it can be difficult to keep crucial payroll and personnel data reconciled.

Because one combined system means less time spent cross-checking data, internal audits cost less. Further, human resources benefit each pay period when payroll provides accuracy checks and updates. With an integrated emplo-yee information source, it is easier for line managers and HR to stay up to date with what competencies are available in the workforce and to ensure that employees get necessary training. Additionally, centralising the administration of compensation increases efficiency and avoids duplicate costs.

What companies gain

• Lower internal audit costs
• Greater accuracy and timeliness of employee data
• Greater accessibility to information
• Greater economies of scale