When an organization faces some challenging situations while the top leadership is unable to make decisions and is not sure about the action plan to pay the employees to retain their top talent. It means the “Policy” is not in place. So a Policy is a must-have for an Organization.
The policy is a “plan of action” implemented as a protocol in the defined situation to aid decision making and it is aligned with the Objectives of the business.
A compensation policy is a policy specifically adopted by a company for determining employees' pay, rewards, and benefits. It acts as the foundation on which pay systems are built, serving as the guidelines for managing pay in ways that accomplish the system’s objectives, that the Employers must address during the policy decisions.
Every company has its own compensation policy, depending upon the type of industry, and whether it follows a similar or comparable approach to pay compensation to its employees.
About Exhibit 1.6 Compensation Pay Model by Newman and Milkovich, the Year 2002. The Compensation Policy is categorized into Four (4) Policy Choices as follows:
- Internal Alignment
- External Competitiveness
- Employee Contribution
- Management of the Pay System
This Blog will give an overview of each of the 4 Policy Choices however the rest details I will cover in my upcoming blogs, to avoid clutter.
INTERNAL ALIGNMENT
Internal Alignment refers to comparisons among jobs or skill levels of employees inside the Company. Job and People’s skills are compared in terms of their relative contributions to the Organization’s business objectives, which we all know is one of the key challenges for managers especially when the job roles are dissimilar. Sometimes it is as difficult as comparing apples with oranges.
Internal Alignment pertains to the pay rates both for the employees doing equal work and for those doing dissimilar work.
You must be thinking, “How to do this”?
Step 1: Compare the work of the employees based on their roles in the same system. Like the work of an Associate, Developer (Testing), Programmer, Or Engineer?
Step 2: Check, whether are they contributing to a delightful customer experience and satisfied stockholders?
Step 3: Then check out of the three whose contribution is more on these lines?
EXTERNAL COMPETITIVENESS
External Competitiveness refers to pay comparisons with competitors. External Competitiveness policy answers the following questions:
How much should employers pay in comparison to what other employers in the market or in the industry pay?
What is the appropriate market?
What pay rates should be considered? Global OR Domestic?
Should the Pay systems be “market-driven”?
External Competitiveness Decisions, both how much and what forms, have a two-fold effect on objectives:
To ensure that the pay is sufficient to attract and retain employees- if the employees do not perceive their pay as competitive in comparison to what other organizations are offering for similar work, they may be more likely to leave, and
To control labor costs so that the organization’s prices of products OR services can remain competitive in the global economy.
You might have heard about the hiring strategies of many organizations claiming that the pay systems are market-driven, employers set their pay levels higher than their competition to hire the “best” from the pool of applicants as per their desire.
EMPLOYEE CONTRIBUTIONS
The Employee contributions policy lays emphasis on paying for performance.
Emphasis placed on employee contributions Or the nature of the pay mix (base, incentives, stock, benefits) is an important policy decision since it directly affects employees' attitudes and work behaviors.
Employee Contributions policy answers the following questions as an example:
Should employees be paid differently from others based on better performance or greater seniority OR should there be a flat rate for employees?
Should the company share any profits with employees?
What mix of pay forms- base, incentives, stock, benefits- do our competitors use in comparison to the pay mix we use?
From a strategic standpoint, it is advised that “the external competitiveness and employee contribution decisions should be made jointly”. The market compensation level is most effective and sustainable when it exists together with the market employee contributions to productivity, quality, customer service, or other important strategic objectives.
MANAGEMENT OF THE PAY SYSTEMS
Management of the pay system is the last policy in the Compensation Pay model and it is a building block. It ensures that the right people get the right pay for achieving the right objectives in the right way. It supports competent management.
Traditionally, Managing compensation policy answered the “How to” like how to administer various techniques, etc. for quite some time.
However, now there is a shift from a “How to” perspective toward replying to the “So What” questions like:
-So what is the impact of this policy, this technique, this decision?
-So what difference does it make? Does the decision help the organization achieve its objectives?
Although costs are important and easy to measure as per the traditional focus of “How to” which has been replaced by more strategic thinking i.e. “So What” perspective.
Because the traditional way does not go beyond simply managing pay as an expense to better understand and analyzing the impact of pay decisions on people’s behaviors and organizations’ success such as pay’s impact on attracting and retaining the right people, and engaging these people productively which is required for the management of compensation.
CONCLUSION:
Techniques tie the basic four policies to the pay objectives. Uncounted variations in pay techniques exist. We will urge interested readers to obtain updated information on various techniques by simply surfing the web.
The main purpose is to help the readers know how the Compensation systems impacts the business objectives.
Traditional pay systems designed in response to some historical but long-forgotten problems are sometimes illogical, unclear, and irrelevant.
It is expected that the design of the next-generation pay systems will focus more on flexibility, seeing the changing work conditions like the way we are going more digital and virtual.
Thanks for reading.
