Compensation As An Element Of Hr Business Essay Example

Compensation generally refers to both base wage and variable wage.

The base wage in an organization is determined by the specific function and the market value for the required expertise. It serves as the foundation for calculating other allowances and benefits. Variable wage, on the other hand, is based on the individual's performance in that role, specifically how well they achieve their goals annually (Authenticity Consulting, n.d).

In order for a company's compensation system to align with its strategic business objectives and culture, it should be communicated to all employees and seen as fair and equitable by all (Stone, 2006, pp408).

A systematic compensation plan should consider several components, including job analysis (accurately identifying job duties and required employee qualities), job evaluation (determining each job's relative value), pay survey (comparing wage levels with other organizations), performance evaluation (assessing each employee's level of performance), and pay for performance (linking pay increases to performance and desired employee behaviors).

Source:
- Authenticity Consulting, n.d.
- Stone, 2006, pp408Rock (2006) discusses a compensation strategy called "at-risk compensation," where employees only receive rewards if they meet performance targets. This strategy links compensation to employee performance. The compensation and benefits scheme within a company reflects the organization's position in the job market and emphasizes the importance of performance within the company.

The most important aspect in the company is the duty of different mechanisms of compensation, as the position of compensation components can vary. For example, bonuses can primarily play a role in performance rewards or in employee retention and organizational decision-making (HRM Advice, 2008). According to Walker (1992), rewards can motivate employees to achieve the best performance results for an organization. Rewards are only as effective as

their impact on attracting, retaining, and motivating employees.

The text discusses the two main types of wages in organizations: fiscal rewards and non-financial rewards. Fiscal rewards include various forms of monetary compensation and benefits, while non-financial rewards focus on motivating employees through personal growth opportunities, recognition for achievements, and a sense of security.

It is important for rewards to be designed in a way that employees understand their purpose. This can help create a shared mindset within an organization, whether it involves individual incentives or profit-sharing systems.

Reward design should also consider employees' acceptance of pay differences as long as they are reasonable and based on fairness. However, the behavioral and motivational aspects of compensation are often overlooked despite their significance (Walker, 1992).

The research objectives of this study involve analyzing the impact of compensation on employee performance, determining the effects of benefits on employee performance, and identifying the relationship between the combined effects of benefits and compensation on employee performance. The scope of this study includes analyzing and studying the compensation and benefits provided to employees under the company plan in Indonesia to enhance their job role performance. The researcher aims to understand how compensation and benefits interrelate and can support employee performance. Employee performance assessment is closely connected to company-provided compensation and benefits, with factors such as wage level and payment policies influencing performance-related payments.

The company needs to be concerned about rival wages as it may result in the loss of their best employees (Gitman, 2008, pp214). There are two types of payment incentives: income allocation and extra benefits. Extra benefits are given to employees who meet monthly or yearly performance goals set by the company (McDaniel,

2008, pp215). Some companies offer numerous benefits to employees to meet their individual needs. This is known as a "cafeteria-style benefit program," where younger employees with families may opt for medical and life insurance, while older employees may prefer a retirement savings program (Gitman, 2008, pp215). According to Milkovich and Newman (2008), employee compensation is influenced by four key factors: institutional, economic, organizational, and individual.

According to Fallon (2007), the benefits that most employees prefer are health insurance, pension programs, and paid holidays. Deferred compensation programs can be tied to a company's net profits or specified amounts of stock or money to be paid to important employees. For example, signing bonuses paid to top management may be paid and taxed in installments (Mancuso, 2009, pp109). Compensation philosophies in companies fall into two types: entitlement philosophy and performance philosophy. The entitlement philosophy assumes that employees who have worked for another year are entitled to pay increases regardless of performance differences. On the other hand, the performance philosophy requires that compensation changes reflect the performance differences of employees. Satisfactory performers maintain or advance their compensation levels more than marginal performers (Mathis, 2008, pp362). Employees' perception of their compensation as fair, whether it be base pay or variable pay, often affects their performance and how they view their job and employers.

Compensation equity is the perception of fairness in the relationship between an individual's inputs and the end products they receive (Jackson, 2008, pp362). Mathis (2008) explains that external equity occurs when an employer does not provide compensation that is comparable to what other employees in similar roles receive in other organizations. This can lead to higher turnover. Internal equity,

on the other hand, refers to employees receiving compensation based on their knowledge, skills, abilities, job performance, and achievements compared to company standards. To honor flexibility, new forms of compensation need to be developed (Klaas, 2000). Base wage refers to the amount of rewards or wages given to employees for their services.

The base wage is determined by job rating and market study, according to Milkovich and Newman (1999). While many organizations advocate for equal pay for equal work and pay-for-performance, it is clear that several of the company's benefits plans contradict these principles. For instance, medical and wellness plans often provide additional coverage benefits to employees with families, and the distribution of company cars and similar perks depends on position rather than performance. Most employee benefits are linked to organizational rank instead of an individual's contribution to the company's strategic business objectives (Stone, 2009, pp356).

Employee benefits in companies are now seen by employers as a tip to the employees, but employees now view them as an earned part of their overall compensation. This makes it difficult for employers to modify or control the costs of these benefits. However, flexible benefit plans help in controlling costs and improving the benefits offered by the company (Walker, 1992, pp307). It is important to note that employee benefits are not based on performance but on membership. Regardless of their performance, workers receive these benefits. While employee benefits themselves do not directly impact employee performance, unequal benefits can lead to a low level of satisfaction and increase absenteeism and turnover among employees (DeCenzo and Robbins; 2007).

According to Roseman (1981), people do leave companies for the sake of "more

money" and it is undeniable that salary rates can influence turnover. However, managers often overestimate the importance of wages. Various consulting companies, industrial associations, and educational institutions have reported the emergence of new compensation practices (Heneman, Ledford, & Gresham, 2000). Cable and Judge (1994) discovered that compensation attributes affected job candidates' decisions to join companies. The findings from Cable and Judge's study (1994) revealed that job applicants generally preferred an individually tailored salary system, a flexible benefits program, and a fixed payment structure based on job requirements. The traditional pay-for-performance program, which focuses on immediate short-term results, extrinsically motivates employees and disregards the developmental aspects of performance.

Furthermore, the traditional pay-for-performance plan may discourage collaboration among workers, as it focuses on individual results and goals tied to compensation (Heneman, Ledford, & Gresham, 2000). A company's compensation system should be designed to address how businesses respond to changes and uncertainties by promoting knowledge, adaptability, and organizational behavior. This system should align with human resource characteristics and strategic activities, thereby improving the competitiveness of the firm. In a skill-based pay system, employees receive compensation based on their acquisition and mastery of skills and knowledge needed for their job responsibilities (Gupta & Shaw, 2001). Skill-based pay encourages workers to learn, acquire, and develop their skill levels as their wages depend on it. Such a system rewards employees based on the extent to which they gain skills and knowledge through training and development programs (Gupta & Shaw, 2001).

Group-based wage programs aim to encourage collaboration and communication among group members by sharing the wages. These programs address challenges that arise from group work, such as conflict and free-riding. By using group-based

wages, individuals are motivated to focus on group tasks and goals, as the wages are based on the group's performance (Gross & Leffler, 2001). In the company's compensation and benefits plan, the following elements should be included:

- Salary Structure: This refers to the standard wage based on an employee's position in the organization. It takes into account their experience and expertise, with a fixed range of payment determined by minimum and maximum levels.

- Variable wage: This is based on an employee's performance level within the company, reflecting their competence and hard work in achieving set targets for the year.

Incentive programs, such as bonuses, are a form of variable wage within the compensation and benefits plan.

Different types of fillip are specified as the portion of the benefits plan in company such as: Commission is one method that company common usage for their employee which is based on finding the compensation as a per centum of net gross revenues when the companies achieve some net income in a twelvemonth. Therefore, this sort of benefits normally becomes a good incentive for their employees as it provides a direct relation between the result and wagess. Bonus is a amount of money paid to an employee over and above his standard payment and the compensation and the payment is based on the employee public presentation. Stock Options plans offer employees of a company the right to purchase an assured figure of portions of the company 's stock at a peculiar monetary value on a specified day of the month where this is an attractive tool for retaining work force, since employees benefit straight when the company 's stock goes

up. Presents, the most popular of compensation plans concept in the company which is quire easier to understand is the compensation based on the employee public presentation. The plans normally referred as variable wage plans and usually present compensation inducements based on employee public presentation or on the public presentation of a squad.

The compensation plan for public presentations pays higher rewards for high performance and does not reward low performance (Advameg, 2010). The salary payment in small companies is mainly based on the manager's perception and ideas, as well as the company's financial capabilities. In larger companies, a system is implemented to ensure organization and maintain employee trust and a sense of fairness when comparing their own salaries with others in the company (HR Advice, n.d.). Furthermore, the compensation package may also include various additional benefits such as insurance, employee discounts, extended leaves, and retirement plans.

An employer may offer a retirement package to employees, which can include stock options or the accumulation of company stock over time. The number of stock options issued annually is often based on factors like the employee's salary category. Additionally, a company's worker compensation package may include vocational rehabilitation. If an employee becomes disabled on the job, they may qualify for vocational rehabilitation to learn new skills and find a new job. The original employer may also make accommodations for the employee's challenges. Estimating the costs of benefits helps the employer determine what benefits to offer, but determining if the compensation package is competitive requires knowing what benefits potential employees value.

The recruitment of potential employees in a company is a common goal for many employers. The availability and cost of

qualified applicants for available positions is determined by market factors beyond the employer's control. While an employer may offer compensation levels for new employees, it will be considered in comparison to other employers seeking to hire from the same pool of applicants. Compensation can also be used as a reward for exceptional job performance, and can include additional benefits such as bonuses, stock options, profit sharing, and additional allowances for employees (HR Guide, 2000). Various types of compensation include base salary, commissions, overtime pay, bonuses, profit sharing, merit pay, stock options, and employee allowances such as travel, meals, or even housing allowance.

In addition to the aforementioned benefits such as dental, insurance, medical, holiday, leaves, retirement, and revenue enhancements, the virtue wage concept involves differentiating between employees based on their performance and adjusting their pay accordingly. These adjustments are made within the confines of "scopes," which reflect job worth and market rates. Merit pay is determined by performance assessments, which can influence how managers and employees demonstrate their organizational behavior. Employees are generally more concerned with the perceived fairness of their pay compared to others within the company, rather than external wage comparisons or recognition for exceptional performance. Pay differentiations are only made for a small number of exceptional performers and those who are clearly below average (Walker, 1992, pp298).

Lump-Sum awards, commonly known as public presentation incentives, can be highly effective in situations where salary levels are high and management wants to avoid committing to yearly wage increases. Some companies have actually decreased employee salaries but compensate with bonus plans that offer greater earning potential. While this introduces risk for employees, it also helps cultivate a

sense of business performance awareness and treats employees as stakeholders (Walker, 1992, pp299). Incentives encourage employees to strive for better performance while also incorporating fixed costs of wage plans.

The advantage of offering a hard currency award as an incentive for performance is that it serves as a motivating promise or potential reward in exchange for achieving a specified level of performance or service. Company incentive wage programs are designed to encourage employees to excel or produce exceptional results. These incentives are additional components added to compensation based on performance and are not permanent additions to salary (Walker, 1992). Individual incentives also play a role in sales compensation programs within the company. These programs may include salary and a bonus, commission with or without a "draw" (payments made in advance of actual sales). The design of such programs needs to consider the combination of these elements, the amount of pay that is "at risk," the timing of incentive payments, and the performance measures upon which they are based (Walker, 1992, pp300).

Cooperation, teamwork, and goal achievement are encouraged through the provision of wages. These wages are typically distributed among all employees in a unit based on a predetermined formula, and the amount received depends on productivity improvement. In order to reward contributions to the profitability of specific units rather than the company as a whole, management incentive programs are commonly utilized. These programs offer incentives such as cash payments, stock options, stock awards, and performance-based shares. The implementation of performance-based bonus programs has been widespread and is widely regarded as effective.