Understanding the Organizational Compensation Strategy roles Essay Example

on performance. Compensation goals include attracting talented employees, motivating desired behavior, gaining a competitive edge, aligning organizational goals with future performance, demonstrating value to the organization, and providing social status. Forward-thinking organizations now seek alternative compensation methods that control costs while improving performance. Assessing individual or team contributions or overall profitability can result in different forms of rewards such as adjustments or bonuses.Human resources departments often have a crucial role in suggesting and implementing performance-based compensation systems. Even if HR is not leading these efforts, it still plays a part. When it comes to employee compensation, most managers ask what they need to pay. However, a better question is what message they want their compensation package to convey. Compensation objectives go beyond just the hourly wage and successful packages include direct, indirect, and non-monetary components such as bonuses, salaries, commissions, and regular incentives.

Base pay refers to the cash compensation given by an employer for work performed. Offering a higher salary is common among organizations seeking a competitive edge. The basic wage system has advantages as it is inexpensive and easy to administer while allowing for accurate labor cost forecasting. However, this system does not directly incentivize employees to improve productivity or performance. Toyota participates in annual external salary studies to maintain competitive wages for its employees.

On the other hand, incentive wages serve as bonuses awarded when specific performance goals are achieved. Implementing a well-designed strategy for incentive wages can effectively motivate employees to enhance their workplace performance.Poorly planned incentives can lead to division and corruption, as explained by Allen Z. Gilbert in his article "Incentive Wage Might Get Results, But Not Always The Ones You

Want." Gilbert provides examples to illustrate this point. In Example 2, a company decides to give its top executive a bonus based on the increase in the company's stock value. The compensation commission believes that this incentive will result in higher stock prices through improved gains. However, they overlook other factors that could impact stock prices, such as using cash reserves for stock buybacks. Although this does not generate increased profits, it raises the price per share by reducing available shares or engaging in costly actions that inflate the price without offering long-term benefits to financial performance. Despite being aware of these factors, the CEO's primary focus is on maximizing their bonus tied to stock prices.

In Example 3, traders on Wall Street manipulated their companies' balance sheets by adding toxic assets approved by the Financial Accounting Standards Board. They did so because their incentive compensation was directly linked to net incomes.
The text highlights that some companies, including BOEING, COCA COLA, and BMI, prioritize earning large bonuses. These companies may implement incentive-wage systems tailored to their specific needs. In sales environments, employers may offer additional pay or benefits to employees who meet targets in order to boost productivity. Stock options are given as rewards to employees, allowing them to purchase part of their company's shares. This is intended to incentivize longer tenure and improved job performance while increasing the value of their shares. Google is an example of a company that uses stock options alongside lower base wages compared to market standards, which presents both challenges and advantages. However, fluctuations in option values due to daily market changes can decrease motivation. Bonuses are used as gifts

for exceptional work performance or special occasions and encourage cost reduction and shareholder-like thinking among employees. One advantage of bonus packages is that they enable companies to focus on countries where optimal performance and profit can be achieved. Not all jobs show a direct correlation between employee performance and improvement in the company's financial results.Determining the contribution of employees in the research & development department is a challenge. Toyota offers various bonuses and benefits, such as signing bonuses, year-end bonuses, defined profit pensions, life and disability insurance, retirement planning assistance, and vehicle discounts for employees and their family members. In addition to these perks, there is also a lottery for discounted purchase of manager-driven vehicles and the usage of a white Lexus RX350 on an employee's or their child's wedding day (source: http://www.eluta.ca/top-employer-toyota-canada). NIKE has implemented a reward system based on company performance and individual contributions through a one-year fillip program (Source: http://www.new-academy.ac.uk/publications/keypublications/documents/nikereport.pdf).

Dr. Bennett's company experienced significant growth in the past two years due to new industries moving into the area. In response, she introduced a bonus program that rewards employees for achieving specific goals such as increasing the number of new patients and exceeding production targets. However, this program became demotivating because all goals had to be met to receive the bonus which was deemed impossible.

The importance of achievable and continuously evaluated incentives for effective motivation is emphasized in this text. It discusses the Employee stock ownership program (ESOP), which is a retirement plan that grants employees shares of the company's stock.One advantage of conventional loans, in contrast to rule loans, is that the interest payments on them can be tax deductible. This becomes

particularly advantageous when a company borrows money to purchase stock for an ESOP since considering the corporation's tax costs can significantly reduce both principal and interest payments. However, ESOPs also have some drawbacks. One drawback is equity dilution, which refers to the decrease in current stockholders' percentage ownership. Another drawback is exemplified by considering an example: an employee who has been employed by an ESOP company for 15 years decides to retire at age 55 in December 1997. The benefits they will receive are determined by the value of the stock at year-end 1998 if they do not return to work. In this case, their stock's value has increased from $20 per share in 1982 to $80 per share on their retirement date in 1997. Unfortunately, due to difficult circumstances faced by the company, such as two major clients switching to competitors after a year-long break, the stock's value dropped to $40 per share. Consequently, employees' retirement savings were cut in half. This situation highlights one disadvantage of the ESOP compensation program - its reliance on annual evaluations.Profit sharing goes beyond salary and bonuses and provides employees with additional financial benefits such as bonds, stocks, or cash upon retirement.This approach fosters collaboration among employees and enhances motivation by focusing on profitability.

Note: I've kept all and their contents intact while and unifying the text aboveIn 2006, IBM implemented its Growth Driven Profit-sharing plan as a replacement for the Performance Bonus plan. This new plan grants a portion of the company's revenue and income growth to contributing employees. The emphasis is on collaboration across divisions and eliminating separate unit-specific pools for determining results.

Similarly, Nike determines

contributions to its Profit Sharing Retirement Plan based on annual financial performance. Chrysler Corporation introduced their profit-sharing program during the economic recession of 1988. By 1994, they were granting an average bonus of $4,300 per person to their workforce.

However, one drawback with this system is that it may lead employees to prioritize quantity over quality due to the lack of guaranteed future benefits. Despite this drawback, companies like Procter & Gamble and Intel have also implemented profit-sharing systems in order to boost employee engagement and performance.

Implementing such profit sharing systems leads to improved staff performance and benefits for the company at large. It's important to note that these advantages are based on collective progress rather than individual achievements.

To illustrate this point further, let's consider a hypothetical manufacturing company that produces differential axles for tractors. After conducting an analysis, the company discovers that it takes 10,000 worker hours to produce $1,000,000 worth of axles. However, by implementing a gainsharing system (addition sharing), they can achieve the same output in just 9,000 hours.The reduction in time results in savings of $10,000 for workers earning an average hourly rate of $10 per hour. These savings are then divided between the workers and the company. Gainsharing systems are used by various organizations, including government entities like Indianapolis Department of Public Works (DPW). In this case, addition refers to the difference between projected operating costs and actual annual operating costs. Gains are calculated taking into account service betterment, which involves reducing the overall number of annual calls made. The City of Loveland, Colorado implemented a gainsharing plan in 1982 with three specific criteria for determining gains: city revenues exceeding actual

expenses, actual expenses being lower than or equal to the previous year's per capita expenses, and a satisfactory level of satisfaction with city services based on an annual citizen satisfaction survey. In relation to schools, the Monona Grove School District in Wisconsin has an agreement with AFSCME Council 40 and Local 60 that defines gains as surplus revenue from food services compared to costs incurred during one school year. Other areas suggest comparing budgeted costs to actual costs when determining gains.During a military program from 1988 to 1993, an agreement was made between the Sacramento Air Logistics Center at McClellan Air Force Base in California and the American Federation of Government Employees (AFGE). This agreement defined gains as expected costs minus actual costs, taking into consideration factors such as inflation, technological changes, and workload variations. The Scanlon Plan is a gain sharing program that provides incremental improvement bonuses to employees. One advantage of this plan is its requirement for companies to analyze their net income and loss in order to determine the ratio, which promotes a focus on financial consequences. However, this can lead to unequal bonuses due to variations in education and skills impacting cost effectiveness. The calculation used in the Scanlon Plan serves as an example of this inequality.

Another method of rewarding employees based on performance is through merit plans. These plans are explained in Compensation by George T. Milkovich and Jjerry M. Newman. Merit increases are added to base wages as a way to acknowledge past work behavior, which is commonly practiced in educational organizations. Barak Obama supported implementing smarter merit-based wage systems for teachers in the US by increasing funding for

teacher salaries to ensure proper compensation.It should be noted that laziness or neglectfulness towards students is not exclusive to teachers; other professions like mechanics or firefighters also have workers who shirk their duties. Therefore, this system benefits not only teachers but workers in other fields as well. The advantage of this system lies in its ability to allow employers to differentiate pay based on performance, although the fairness of implementing such a subjective pay structure may be questioned. However, it remains popular in educational institutions. Additionally, indirect benefits become increasingly significant in a competitive job market. Companies that cannot offer high cash salaries can gain an edge by providing personalized options tailored to the needs of potential employees. Hence, various alternatives for indirect compensation can be considered part of the social contract between employers and employees as stated by hrcouncil.ca/hr-toolkit/compensation-systems.cfm which offers various options for indirect compensation including benefits, leaves, retirement plans, education, and employee services like flexible working schedules, senior care, travel expenses and different types of insurance (health,dental, eye).The source jobbankusa.com/employment_jobs_career/walmart.html mentions various forms of indirect compensation provided by organizations, including Walmart. These include discounts on child care and travel services, educational reimbursements, professional guidance services, leaves of absence, and scholarships.

Similarly to Walmart's practices in providing indirect compensation options for its employees like discounts on child care and travel services or educational reimbursements (source: jobbankusa.com/employment_jobs_career/walmart.html), Google Corporation and Ford Motor Company also offer a range of benefits to their employees.

Google Corporation offers a variety of healthcare benefits for employees and their families. This includes on-site doctor and dental services at their California and Washington offices. They also provide flexible work hours with

vacation days, maternity and parental leave with meal write-offs during the first four weeks after having a new baby. Additionally, they offer adoption aid, a Google Child Care Centre near the central office, back-up child care assistance, free bird service to select locations, a Fuel Efficiency Vehicle Incentive Program, employee discounts,and on-site dry cleaning with a coin-free laundry room.The Ford Motor Company provides comprehensive benefits, including generous vacation time and total insurance coverage for healthcare, dental care, prescriptions, disability coverage, and life insurance. The amount of paid leave can vary from year to year but can be up to 15 vacations per year and up to 25 days of holiday after 20 years with the company. Salaried employees are automatically enrolled in the employee retirement program upon hire with personal investment options. Ford also offers various programs for vehicle purchases, tuition aid, and a dependent scholarship program. These details can be found at http://www.jobbankusa.com/employment_jobs_career/ford_motor.html.

Similarly, Walmart offers opportunities for career development and promotion, recognition, a positive work environment,and clear job descriptions. They provide various avenues for employees to advance their careers including classroom training, internships,on-the-job training , computer-based training , mentoring ,and other skill development programs.They also promote employee recognition and foster friendly relationships among their workforce.

IBM invests more than $750 million annually to enhance the skills of its employees through ongoing development opportunities.Peoples Development at IBM aims to provide necessary guidance ,resources,and tools for employees to expand their knowledge and facilitate career advancement.The text highlights the significance of foundational competencies, such as adaptability, communication skills, creative problem-solving abilities, and reliability, in establishing a common standard of excellence among IBM employees. It also mentions that non-monetary

or non-financial compensation refers to employee benefits provided by employers without tangible value. Employers have various options for creating compensation packages that effectively meet individual needs by combining different elements of compensation. Considering each employee's uniqueness is crucial in determining effective rewards based on their distinct needs and motivations for their work. The text emphasizes the importance of a compensation package tailored specifically to these requirements. The adequacy or fairness of compensation is subjective from the employee's perspective. Therefore, it suggests implementing a compensation strategy that balances internal equity and external competitiveness to address various needs while benefiting both employees and the company in terms of satisfaction, happiness, and goal achievement. It encourages companies to have fair compensation practices and communicate the benefits to employees. Table 1 showcases factors such as equitable wages, market adjustments, merit increases, performance bonuses, and fair commissions.The text discusses various non-financial aspects of a job, including interesting duties, challenges, authority, autonomy, recognition opportunities, feeling of accomplishment, and advancement possibilities. It also emphasizes the importance of a favorable work environment with fair policies/practices, competent supervision, effective colleagueship, comfortable/safe setting, and flexible scheduling options. Additionally, it mentions insurance coverage for life insurance as well as health/dental/vision/disability plans.

Furthermore,the text explores different aspects of compensation such as social security benefits, retirement plans,eemployment insurance,and worker's compensation.It also covers educational services employee services,paid absences like vacations,sick leave,eccucational leave,and compassionate leave.The significance of equity in creating a successful compensation system is highlighted.Three ways to define equity are workplace equity (fair treatment for all employees), external wage equity (reasonable rewards compared to similar roles in other organizations), and internal wage equity (fairness within an organization).

Chapter 2 delves into

different types of compensation and their advantages and disadvantages. The question is whether these reward systems benefit both employers and employees. Scientific research is analyzed to provide answers to this question through illustrative examples. Compensation is viewed as a significant motivator for employees that should be fair.Companies strive to attract and retain the best employees by providing competitive pay and benefits that are tailored to individuals' skills and abilities. They constantly update their compensation strategies in order to achieve this goal.