Ep 1.8 What are the Four Objectives of Pay Model of Compensation?

A Business Objective is defined as a short-term or a long-term goal that a company plans to achieve with its efforts 

An Organization Compensation Objective is aligned with the company’s main objective that guides the design of the Compensation pay system. 

It defines how the company’s compensation pay system should be designed so that it helps the Organization to achieve its Business Objective and Purpose.

Since the Compensation Pay systems are designed to achieve certain business objectives hence it serves as the standard for judging and evaluating the effectiveness of the Pay system.

Below is the table for a sneak peek, as an expression of the compensation and company’s objectives alignment

S.No.	Organization Objectives	Compensation
1	To Increase customer satisfaction	Incentive programs and merit pay might be used to pay for performance .
2	To Develop innovative new products	Pay system aligned with this objective may include salaries that are at least equal to those of competitors (external competitiveness) and that go up with the increased skills OR knowledge (internal alignment).

Job design, training, and team building used to reach this (Objective 2) is actually the technique, not the Objective.

In a nutshell, Policies and Techniques are the means to reach the objectives.

Four (4) Objectives of the Pay Model of Compensation

(Newman and Milkowitch) 

Let's look into each of these Compensation Objectives briefly

1. Efficiency

Efficiency means optimizing the resources to produce a given output in less time and energy   i.e., using the least amount of input to obtain the highest amount of output. Efficiency as a Compensation Objective specifically calls for 4 requirements to be achieved under this objective, which is as follows: 

1. Improved Performance

2. Increased Quality

3. Delightful Customer & Stakeholder experience

4. Controlled Cost

2. Fairness

Fundamental Objectives of pay systems. Fairness means “ensure fair treatment” and “recognize personal and family well-being.”

The fairness Objectives call for fair treatment for all employees by recognizing both employee contributions like higher pay for greater performance, experience, or training, and employee needs like a fair wage as well as fair procedures.

However, Procedural fairness refers to the process used to make pay decisions. It suggests that the way a pay decision is made may be equally as important to employees as the results of the decision.

3. Compliance

It is a pay objective that conforms to federal and state compensation laws and regulations. It also calls out clearly that the Companies which are operating globally must comply with the laws of all the countries in which they operate.

If laws change, pay systems may need to change, too, to ensure continued compliance.

4. Ethics

Ethics means a set of principles that govern the appropriate conduct within the organizations. Ethics are important as it is a reflection that the Organization cares about how the results are achieved and equally inevitable since managing pay sometimes creates ethical dilemmas.

Ethics play a vital role in the Compensation Objectives to avoid ethical lapses. A few examples of Ethical lapses are as follows:

• Executive bonus payouts results are either manipulated OR misrepresented

• Competitors’ pay rates statistics are misused

• Stock options values are increased through manipulations like re-pricing OR backdating

• When executives of the firm are bailing out, the employees are encouraged to invest a portion of their wages in company stock 

• Bad practices to hire new joinees

• The hours recorded in employees' time cards are manipulated and shaved off 

Key Behaviors, Values, and Code of Conduct are examples of Ethics.

Conclusion:

Since there are many companies in different industries with varying Business objectives.

The Compensation pay objectives also vary with Business Objectives.

Now be it a single line of business OR multiple lines of Business, it is advised by the experts if the firms want to be successful then the firms should try to ensure that each unit’s objectives meet overall business objectives, no matter how diversified they are with how many lines of business and to what degree the Compensation pay objectives vary.

 

The compensation professionals and consultants are also advised by the experts, not to remain silent during ethical misconduct and outright malfeasance.

Compensation managers must look at their own ethics first. Since Ethics is linked to Fairness, Compliance, and Efficiency of the Compensation Objectives.

Pay relationships within the organization affect all three compensation objectives. They affect the employee's decisions to stay with the organization, to become more flexible by investing in additional training, OR to seek great responsibility. Internal pay relationships indirectly affect the capabilities of the workforce and hence the efficiency of the entire organization. Fairness is affected by the employee's comparisons of their pay to the pay of others in the organization.

Performance-based pay equally affects fairness, where an employer expects from employees to understand the basis for judging performance to believe that their pay is fair. However, such expectations are ignored by the employees. And what happens that we all know. As a result, we see massive Employee turnover OR Employees Silently quit

On one hand, Fairness is impacted on the other hand Compliance is affected by the basis used to make internal comparisons.

There are stricter laws that back pay compensation. For example- In the USA Compensation payment based on race, gender, age OR national origin is illegal as per their law. But how about the unconscious bias that overlooks the law?

Thanks for reading.

I will resume it in my next blog.