Compensation Management

What is Compensation Strategy and Principles of Compensation Strategy

What is Compensation Strategy – To survive and sustain in business, organisations have realised the significance of acquisition and retention of effective talent. In order to do so, compensation strategy may play a vital role in terms of rewarding and recognising the star performers, planning the individual employees’ career, meeting the industry rate and motivating employees to be re- gained in the company. A strategic perspective on compensation focuses on the patterns of compensation decisions that are critical to the performance of the organisation. Compensation strategy needs to assure that compensation practices are in line with overall business strategy and human resources management philosophy.

Compensation strategy, therefore, provides a sense of purpose and direction and a framework for developing reward policies, practices and process. It is based on an understanding of the needs of the organisation and its employees and how they can best be satisfied. It is also concerned with developing the values of the organisation on how people should be rewarded and formulating guiding principles that will ensure that these values are enacted.

Principles of Compensation Strategy

(1) Make the Compensation Programme Logical and Equitable – It should be viewed as both generous and fair by most employees, particularly those not eligible for strategic compensation. Those contributing only to ongoing results – securing the company are present so that there can be a future – should also get incentives that reward their proportionate contribution to a short- and long-term profit. Strive for some, but not perfect, equity between strategic and operating incentives.

(2) Provide Rewards for Extraordinary Actions and Results – Reward specific extraordinary strategic actions or accomplishments by teams or individuals outside of the regular compensation system. For example, a Fortune 500 company gave one young woman, employed for only a year at a level where there usually was no or little incentive pay, an unprecedented amount of stock and a cash bonus. Her supervisors said she did two years’ work in one year, was well liked and motivated people, and was clearly on the fast track – and the company wanted her to know that.

(3) Keep it Flexible – Strategic objectives can change quickly to reflect changes in the outside world or progress toward goals. Be sure that compensation plan can be adjusted accordingly.

(4) Keeps Momentum Going – Pace rewards so that they maintain momentum in strategic task achievement throughout the organisation.

(5) Make the Plan Clear and Understandable to Employees – Organisation’s strategic compensation system must provide line of sight between payout and objectives.

(6) Reward Programme Accomplishments as well as Current Numbers – Steps in a strategic programme that are accomplished and reflect in a scorecard and that will pay-off in profits three years from now can be as more important than immediate financial results and should be treated and compensated as such.

(7) Assess it as an Investment – The financial returns of strategic programmes/actions should ultimately far outweigh the cost of the incentives.

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