Compensation Amp Benefits
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Transcript of Compensation Amp Benefits
Compensation and BenefitsThe compensation and benefits processes belong to most important HR Processes, which are critical for the organization and modern HR organization. The compensation and benefits is about managing the personnel expenses budget, setting the performance standards, setting the transparent compensation policies and introducing the competitive benefits for employees. The organization with effective compensation and benefits drives its personnel costs, manages the performance of employees and rewards the extraordinary performance.
Compensation and Benefits Role
The compensation and benefits processes introduce the transparency
into Human Resources and rewarding employees for the achieved
performance. The compensation and benefits provides the managers with
the compensation tools to build a difference among employees as the high
performance corporate culture can be built in the organization.
The compensation and benefits department monitors the external job
market and optimizes the personnel expenses budget of the organization.
The compensation and benefits defines the compensation strategy, sets the
transparent and simple compensation policy and defines the general rules
for the extraordinary payments, bonus schemes applied in the organization
and introduces general other compensation policies like the Relocation
Policy, Short-Term Assignment Policies, Benefit Car Policies and other.
Compensation and Benefits Responsibilities
The compensation and benefits department is usually responsible for
thetransparency in the compensation practices in the organization and
keeping the internal fairness of the total cash. The compensation and
benefits has to supervise the development of new compensation components
and keeping the general rules for the design of the compensation
component.
The compensation and benefits department is responsible for the personnel
expenses budget of the organization. The compensation and benefits
department sets the standards for the individual salary increase, the mass
salary review and the rules for the bonus payout as the organization keeps
the financial stability and the planned personnel expenses budget is kept.
The compensation and benefits department has special processes to monitor
the external job market as it can set the right compensation policy, which
is compliant with the approved compensation strategy. The compensation
and benefits department is responsible for the extensive monitoring of the
market and designing the new compensation components inspired by the
HR Best Practices in the compensation area.
The compensation and benefits department is always closely attached to the
development of the new compensation components, which support the
performance and effectivity of the organization. It co-operates with the
different business units and it aligns their requests into the general rules
for the compensation components, which are transparent and fair.
The compensation and benefits designs new adjustments to
the compensation strategy and the compensation policy as the
organization does not lose its competitive advantage on the job market.
Compensation and Benefits Content
o Compensation Strategy
o Compensation Strategy Key Content
o Pay Market Strategic Position Setting
o Compensation Consultants and Compensation Strategy
o Compensation Strategy building Competitive Advantage
o Why is compensation strategy important?
o Compensation Policy
o Executive Compensation
o Executive Compensation Plans
o Salary Surveys
o Sales Incentives Compensation Plans
Compensation StrategyThe compensation strategy is extremely important as the right compensation strategy helps to build the effective and competitive organization and the wrong setting of the compensation strategy, which does not fit with the needs of the organization and with the HR and Business Strategies, can destroy the organization within several years and the organization suffers from decreased performance and not utilizing the full potential of employees.
What is compensation strategy?
The compensation strategy is derived from the HR Strategy and it
defines theposition of the organization on the job market, the level of
the total cash, the main bonus principles in the organization and rules for
the base salary setting.
The compensation strategy is the strategy, which is approved by the Board
of the organization as the owner of the compensation strategy is always the
top executive management of the organization. The compensation strategy
has a huge impact on the costs of the organization and that is the main
reason for the top management approval. The rest of managers are
the users of the compensation strategy.
The compensation strategy defines the pay market, the organization
follows, the desired position on the pay market and the way, how the
desired level and position on the pay market will be achieved. The
compensation strategy defines the basic compensation components used in
the organization and the standard rules applied to each compensation
component.
The compensation strategy has to be in line with the business and HR
Strategies as the compensation of employees is aligned with the expectation
of the top management from them. The compensation strategy does not
change often as the compensation principles cannot be changed within few
days.
Compensation Strategy and HR Strategy
The compensation strategy is one of the main supporting document for
the HR Strategy. The compensation strategy is closely monitored by the
management of the organization and they ask for the progress of the
implementation of compensation strategy on the regular basis.
The HR Strategy has to be always designed and developed with having the
respect to the situation in the compensation area in the organization.
The HR Strategy cannot set the ambition, which is not suitable for the
company.
The HR Strategy always defines the basic principles for the compensation
scheme in the organization and the compensation strategy defines the
details for the components and when and how they will be introduced or
redesigned.
The compensation strategy should be updated, when Human Resources
makes significant changes to the HR Strategy or the organization changes
its business strategy. The compensation strategy has always support the
business and its selling capabilities.
Compensation Strategy Importance
The compensation strategy helps the organization to manage the
personnel expenses of the organization and it sets clear limits for the
managers and employees. It provides the top management with the
certainty, the personnel expenses are under the control and the costs will
not boom.
The compensation strategy gives the certainty to the HR employees and HR
managers as they can promise the stability in the compensation, the
stability and the managed development of the compensation components
and they can explain the basic role of the individual compensation
components.
The compensation strategy acts as the basic document driving the
compensation and benefits processes and defines clear priorities for the
development or redesign of the compensation components.
Compensation Strategy Importance for managers
The managers should be always informed about the existence of the
compensation strategy and they should know the implementation plan. The
managers should not be allowed to comment and decide about the strategy
as they would tend to make their lives easier and they would make the
personnel expenses of the organization to boom.
The managers are the users of the compensation policy and they should
understand, it is based on the approved principles from the strategy. The
compensation policy can change on the regular (usually yearly) basis, but
the strategy is consistent over a longer period of time and the managers can
plan the career of the subordinates.
Compensation Strategy Importance for employees
The compensation strategy is not intended to be read by the employees. The
employees are the users of the compensation policy and they should not be
informed about the general position of the organization on the pay market
and the compensation components to be used to motivate the employees.
The employees can read the compensation policy, which describes the
details about their compensation as they recalculate the salaries, but they
should not read about the strategic compensation components, which help
to build the competitive advantage of the organization.
Compensation Strategy Key ContentThe compensation strategy is the underlying strategy for the general HR
Strategy and its main role is to support the implementation of the HR
Strategy and building the competitive and effective organization with the
high performance corporate culture. The compensation strategy does not
explain the detail of the compensation scheme and the details of the
individual compensation components, but it sets the general guidelines for
the compensation components and sets the priorities to be implemented
over the period of the HR Strategy implementation
The high performance corporate culture and the high performance
Human Resources organization have to be supported by the compensation
strategy, which is designed to be business driven strategy and with the
right compensation tools, which motivate employees to go the extra mile
and rewarding the real successes.
Main Compensation Goals
The compensation strategy has to set the main compensation goals of the
organization and they have to be kept as the main target for Human
Resources to be achieved. The compensation goals have to be set in
accordance with the business strategy and they have to visible in the HR
Strategy.
The top management and Human Resources have to decide, what the goals
are of the compensation schemes in the organization. The compensation
goals should be aligned with the corporate culture and the general long-
term expectations of the employees, when the organization does not
implement a huge change in the corporate culture.
Main compensation goal is about the role of the compensation in the
organization. Each organization pay salaries, but the role of the
compensation has to be balanced with the other aspects of the overall
motivation scheme applied in the organization. The organization has to
choose to pay higher salaries and offer less development or career
opportunities or it can offer lower salaries and better career opportunities
to keep the motivation system balanced.
When the organization defines its basic compensation goals, it can continue
with structuring the main compensation decisions formulated in the
compensation strategy.
Main Strategic Compensation Decisions
The compensation strategy allows smooth and efficient operation of other
HR Processes like the recruitment and staffing, performance management,
proper KPI and goal setting process, performance appraisals. As the other
HR Processes can run smoothly and they are not blocked by the wrongly set
compensation strategy, the main compensation decisions have to be
included in the compensation strategy and the top management and Human
Resources have to be aligned in the understanding to the main
compensation decisions.
Role of Compensation in Human Resources
The compensation is a part of the complex HR processes, policies and
procedures. The top management and Human Resources have to decide,
what will be the primary role of compensation in the organization. Some
organizations prefer the supplementary role of the compensation and other
organizations prefer the dominant role of the compensation.
This compensation decision is extremely important as it sets the general
framework for the compensation components, if they will exist in the
organization or they will be the part of the other HR policy.
The compensation strategy has definitely include the description of the role
of the compensation in the organization.
Competitiveness
The competitiveness of the compensation is another important
compensation decision. The organization can decide to be aggressive with
the compensation strategy and it can set the aggressive position on the pay
market, but this strategy is extremely expensive for the organization and it
has to balance it with high margin on the products and services.
On the other hand, the organization can choose to offer the career and
development opportunities, it can increase the responsibilities of the
individual employees and it can balance aim to the lower level of the
compensation on the pay market.
The decision about the competitiveness of the compensation strategy is
extremely important as it has a huge impact on the costs of the organization
and it requests the right setting of other HR Processes.
Internal Structures
The organization does not have to follow the same pay market and the same
level for all the job positions. It is extremely important compensation
decision to be included in the compensation strategy.
The organization can decide about making huge pay differences across
different units or it can decide about the different pay level for the experts
and managers as it protects the know how.
Administration
The administration is a tough compensation decision in the compensation
strategy as it sets the roles and responsibilities of Human Resources,
managers, top managers in the compensation processes.
The organization can decide about preferring the decentralized
compensation model, when the manager decides most issues and pay
increases, but Human Resources is in a danger of not keeping the total
personnel expenses budget.
In the centralized compensation strategy, the HR Managers are the main
decision makers and the employees and managers do not feel the comfort of
the free decision.
Pay Market Strategic Position SettingThe right position on the pay market is a key to successful compensation
and benefits function in the organization. Setting the right position enables
other HR Processes with value added to work and it supports the
recruitment, staffing, retention and talent management. The right position
on the pay market allows the organization to allocate the personnel costs
efficiently and to keep the organization competitive.
When the organization sets the strategic position on the pay market, it
has to evaluate several basic questions, which help to set the target position
correctly. The decision is not formal as it forms other compensation and
benefits processes, has a huge impact on the allocation of the personnel
costs and limits the potential for quick changes in the compensation
schemes used in the organization.
The main questions to be answered are:
1. What do we want to achieve by setting the strategic position on the pay market?2. Who are my competitors?
3. What reactions will we see to follow from the competitors?
4. How many strategic positions do we need?
5. What are the costs of the setting the strategic position on the pay market?
Why to set the strategic position on the pay market?
The modern organizations and modern and effective Human Resources
Management are based on setting the competitive advantages. The right
and efficient compensation strategy is a definitely the competitive
advantage and it cannot work without the strategic position on the pay
market.
The modern organizations are based on the talent management, offering the
career opportunities and having other HR Processes to prolong the length
of employment of the key employees and key job positions. The strategic
positioning on the pay market allows the other processes to function
properly and keeps the organization healthy.
The recruitment strategy cannot work without the adequate compensation
strategy as it can easily miss the goals. The company can target the best
potentials on the job market, but the salary offered has to be adequate to
the qualities of the candidates.
Knowing your competitors on the pay market
The organization always knows its competitors in products and services. But
the organization has to know and understand the competitors in Human
Resources as well. They can be different. But employees can see the
competition on the job market differently.
Knowing the competitors on the job market is extremely important for
Human Resources. HR Recruiters have to analyze, which companies are
sourcing the organization and the HR Front Office has to monitor, what
companies hire new employees from the organization.
The compensation strategy has to be set as the organization can compete
with the competitors on the pay market and the compensation strategy has
to be inspired by their compensation strategies. The employees from the
competitors working for the organization are usually open to help and they
can provide the excellent information, which can save many discussions in
determining the right compensation strategy.
Predicting the reaction of the competitors
It is extremely important to have several scenarios describing the reactions
of the competitors. When you are the market maker and you change your
compensation strategy, you can expect all the competitors will react and
you can start costly war on the job market. When you are a niche player and
you hire several employees per year from your competitors, they will not
react.
In case, you hire just the experts, you can expect, the initiatives to protect
the experts and key employees will evolve at your competitors and the price
of hiring the expert from the competitor will rise.
One or more pay market strategic positions
Human Resources has to decide, whether it will use just one strategic pay
market position for the whole organization or it will identify groups of
specific job positions, which will be evaluated and positioned on the pay
market differently.
The general pay market position is simple, it is easy to explain, the
organization uses just one, but the organization loses the flexibility in the
setting of the compensation strategy and this can lead to many exceptions
in the compensation policy as the key groups of employees are not
protected by the compensation policy in general and the managers will ask
for the increased protection by using the exceptions.
The general pay market position can be more expensive than more pay
market positions as the system tends to set the system to protect the key
employees and the key job positions and the rest of the populations benefits
from it.
The costs of setting the strategic pay market position
Money is driving the compensation strategy. Each proposal for setting
the strategic pay market position has to be carefully calculated, analyzed
and Human Resources has to prepare the predictions and forecasts of the
future development.
Setting the strategic pay market position without the proper analysis and
calculation is just a hazard with the future of Human Resources in the
organization as the top management can be amazed, how expensive the
strategic pay market position is.
Compensation Consultants and Compensation StrategyThe compensation strategy design and development is too difficult to
accomplish purely internally. The compensation and benefits team is usually
asked for the external benchmarks and the common practice on the market
and thecompensation consultants can be a huge help, when the HR team
is able to manage their deliverables.
The compensation consultants are expensive and HR has to have a clear
goal for the compensation consultant to be achieved. The compensation
consultant is always able to bring the creative and innovative
compensation solution, when the goal is not given. The organization has
to pay for the services, which are not utilized. With the clear goal, the
compensation consultant has a clear navigation tool and forces the effort to
reach the defined vision.
Compensation Consultants Benefits or Value Added
The compensation consultants bring the huge external know how in the
compensation and benefits area, the previous experience and the
experience with different solutions of the issues in the compensation
schemes.
The compensation consultant should provide the advice on the strategic
position of the compensation strategy on the pay market and to provide the
information about the best practices in the compensation and benefits area.
The compensation consultant should never decide about the final
compensation strategy, but can provide the useful feedback and advice in
the process of designing the compensation strategy.
The excellent compensation consultant always asks the clients about the
feedback and how the solutions work in practice to have the experience to
build on. The compensation consultant can see a new creative solution in
one company, which can help to build the HR competitive advantage in
another organization. The compensation consultant can help to design
the state-of-the-art compensation strategy and can save huge costs to
the organization in the future.
How to use Compensation Consultants
The organization should invite the external compensation consultant at the
right moment. The organization cannot leave the compensation consultant
to set the whole compensation strategy. The organization has to set the
clear goals for the compensation consultant and it should use the
deliverables of the compensation consultant in the following decision
process.
Without strict goals, the organization cannot manage the compensation
consultant and it cannot use the best know how of the compensation
consultant. The consultant has a deep knowledge of the compensation pay
market and has know how about the compensation best practices and these
should be used for building the competitive advantage, but the organization
has to keep the final decision about the design of the compensation
strategy.
Compensation Consultants Deliverables
The organization has to define the deliverables, which support the
organization in its decision process. The deliverable of the compensation
consultant can be easily the content of the discussions with the executive
top management as the consultant has a broad knowledge of the pay market
and the top executives likes the discussions about the general market and
the best pay practices in the industry.
The common deliverables of the compensation consultant are about the
comparison of the proposal from Human Resources with the best practices
available and the comparison with the real pay data. The consultant usually
has the access to the detailed salary data and is able to make a comparison
and to point out the key components and key jobs to be included in the
compensation strategy as the jobs building the competitive advantage.
Compensation Strategy building Competitive AdvantageThe competitive advantage is a necessary component for the modern
organization. The competitive advantage has to be in products, services,
internal and external processes and in Human Resources Management. The
employees are the assets of the organization and the competitive advantage
in Human Resources Policies can generate a huge impact into the net
profits and overall performance and profitability of the organization.
The competitive advantage in compensationarea usually generates a
huge portion of the overall competitive advantage in HR Management.
What is competitive advantage in compensation?
The competitive advantage in the compensation area is not about
beating the pay market by paying higher salaries and bonuses to all
employees. The managers tend to think, the better the pay of employees,
the more competitive the organization is. It is not true, the organization has
to carry the higher personnel expenses and during the crisis or the
recession, it can be a huge competitive disadvantage in the compensation
and the compensation strategy has to be redesigned quickly as the
organization can continue in its operation and it has a destroying influence
on the overall employee satisfaction.
The competitive advantage can be built by using two general approaches:
1. General competitive position on the pay market2. Competitive pay market position for key job positions
General competitive position on the pay market
Setting the higher position than the median on the pay market is quite
common competitive advantage setting in smaller companies, who have to
fight for the best talents with the big organizations in the same industry.
It is quite dangerous to set the pay market position too high as the
organization has to carry the increased costs and eats more from the
margins on the products and services. The organization cannot make quick
changes and the recession can be deadly dangerous for the organization as
it carries higher costs to keep the processes operating and functional. The
competitors have a better and bigger space to decrease the personnel costs
in bad times.
The higher competitive position on the pay market can be used in the time,
the organization grows dramatically and it needs the best talents from the
job market and there is no time to decide about the key job positions in the
organization and all employees are treated to be of the same importance.
Keeping the long term higher pay market position is suitable just for the
companies in the modern industries, with high margins and the companies
with the excellent brand name being known for employing the best of the
best.
Competitive advance through strategic pay market position for key job positions
The competitive advantage in compensation can be set just for the key job
positions in the organization. This solution is cheaper as the rest of the
population can be kept in line with the median of the pay market or it can
be below the median as the whole organization keeps the median in
general. But, the organization has to be able to reach the consensus about
the key job positions in the organization.
Setting the key job positions is the painful procedure for Human Resources
getting the consensus from the top management is a bit mission impossible,
but HR has to accomplish this procedure successfully as the key job
positions are identified and Human Resources can set the right
compensation strategy for the key job positions.
The differentiation in the compensation strategy and setting the different
pay level for the key job positions is quite usual for the larger organizations
as they save the personnel expenses and they are able to protect the key
employees. It does not protect the key employees automatically, but it
support the managers and other HR Processes as the employees feel pretty
satisfied with their salaries.
The competitive advantage for the key job positions is usually the best pay
strategy for the mature organizations, which does not grow aggressively
and are purely focused on the product innovations. The key employees bring
the innovations and the rest is paid fair enough for their job content.
Why is compensation strategy important?The current competitive conditions in the business world make it difficult to
acquire and retain the top talents. Once the organization is able to identify,
it can be unable to offer the right pay and to manage the pay increases to
retain top talents. The compensation strategy is the extremely important
piece of the overall HR Strategy to keep the company competitive and
successful. On the other hand, the compensation strategy is important to
keep the personnel budget under the control and to manage the jobs in the
right salary (pay) brackets.
The compensation strategy differentiates the organization on the job market
and builds the attractiveness of the company for the top talents. They
love to be hired by the attractive organization, they do not like to be hired
by the average company offering the same conditions as any other average
organization in the industry.
Competitive Advantage and Compensation Strategy
Today, the products are similar. It is difficult to distinguish the cars from
different car makers. The employees are in the same situation as the
consumers. They have the problem to distinguish the employers and they
are not able to recognize the excellent organization, when it is not different
from the rest. The competitive advantage is the essential part of the mix for
the success. The organization has to present itself differently, not just by
the presentation, but it should differentiate itself by the different approach
toward its employees. The compensation strategy is one of the most
successful differentiators.
The excellent compensation strategy does not just differentiate the
organization from the other organizations on the job market, it brings the
differentiation into the organization as well as the successful employees
and top talents feel the success in their pockets.
The effective compensation strategy makes people feel the success and they
speak about their successes with their friends. It build the extremely
excellent competitive advantage among the competitors as the people feel,
the organization really values the success and it can pay the successful
employees.
The effective compensation strategy manages the personnel expenses of the
organization, but it supports the performance management and
differentiates the employees as the successful ones are not motivated to
search for a new job opportunity. The good compensation strategy does not
provoke employees to search the web job boards during the working hours,
it makes them to focus on delivering the results as they can be highlighted
and they feel the highlight in their salaries.
The successful compensation strategy gains the competitive advantage and
can speed up the innovation processes and improve the performance
management practices in the organization.
For what HR Processes is Compensation Strategy important?
The compensation strategy is not important just for the competitive
advantage, but it supports the other HR Processes and helps them to
become highly efficient HR Processes and being on the top in the industry
(when measured and benchmarked).
The compensation strategy has a strong influence on the performance of the
whole Human Resources, which is a good vehicle to manage the
performance of Human Resources, but has to be managed carefully as it
does not destroy the performance of the whole organization. Smart
compensation strategy supports the HR Processes and helps to bring the
top talents from the job market to the organization and helps to retain the
best talents in the organization as they do not feel the need to find a new
job opportunity elsewhere.
Recruitment and Compensation Strategy
The effective Recruitment and Staffing cannot exist without the effective
Compensation Strategy. The recruitment can be based on the excellent HR
Marketing Policies, but the HR Recruiters have to be able to offer the
competitive salary packages, which are competitive externally and fully
aligned with the policies and the compensation strategy internally. The
recruitment of the best top talents from the job market cannot be based on
exceptions from the compensation policy.
The recruitment and staffing processes have to be supported and backed by
the excellent compensation strategy as the HR Recruiters can offer the
competitive conditions to the right talents from the job market and they are
able to identify the key job positions, where the compensation strategy
allows to be more aggressive against the pay market.
The job candidates are extremely sensitive to the salary package offered in
the Job Offer letter and the compensation and benefits department should
measure the number of failures in the job offer acceptations. It is the
extremely important sign of the wrongly set compensation strategy, when
the job candidates do not accept the job offers made by the organization.
Motivation and Compensation Strategy
The salaries or bonuses are extremely important for the motivation of
employees and managers. Generally, the motivation is not about the
compensations, but the compensation should support the general
motivation framework in the organization.
Even the best managers in the world are not able to keep highly motivated
teams, when the compensation strategy is not in line with the job market.
The employees usually know the common levels of salaries in the industry
and when the organization is below the median or the average, it has to
compensate the difference in other area. But, when the difference is too
high, the compensation by a different motivation tool does not work and the
employees start to feel demotivated as they receive no equal value for their
effort.
Talent Development and Compensation Strategy
The compensation strategy provides the key support to the talent
management processes in the organization. The talents have to be clearly
supported by the compensation strategy as the talents usually expect higher
salary increases than the average employees and the compensation strategy
has to allow the limited freedom to managers to do so.
The successful top talents management cannot survive without the
adequate support from the compensation and benefits side. The talents have
to feel the different approach of the organization and the compensation is
extremely important in this. The top talents cannot live on the promises for
a long time. They have to see the real improvements and advances. They
deliver, they expect the organization the same.
The compensation specialists have to co-operate closely with the career
advisors and career development specialist to introduce the right mix of the
career opportunities and the compensation strategies for the top talents.
Compensation PolicyThe compensation policy is the basic document, which drives the detail of
the compensation practices in the organization. As the compensation
strategy sets the high level compensation goals of the organization, the
compensation policy describes the details of the individual compensation
components, their behavior and their role in the compensation scheme of
the organization.
What is the compensation policy?
The compensation policy describes the details of the compensation
componentsin the organization, how they are used and the conditions for
the employees as the compensation component can be applied in their
specific situation.
Each organization uses many compensation components and they have to
be described. The compensation policy provides the basic explanation of the
compensation component, how it is calculated, who is eligible for the usage
and the approval procedure.
The compensation policy belongs to most read and discussed internal
policies of the organization as it drives the salaries of the individual
employees. Each employee is interested in the structure of the salary and
the potential total cash achievable in the organization. The compensation
policy is the main tool to find out the details about the compensation
components and the way, how to achieve the highest total cash.
The compensation policy drives the effort and performance of employees as
the employees will find the smart and easiest way how to achieve the
highest possible income with the smallest possible individual performance.
The compensation policy has to be set the smart way as it avoids the
potential work-around and abuse.
What is important in the compensation policy?
The compensation policy has to be transparent and it has to provide just
the only way of the interpretation. It is extremely important, the employees
and managers are not unsure about the compensation component and they
understand clearly, what conditions are applied for the approval of the
specific compensation component.
The transparent compensation policy supports the high performance
corporate culture organization as the employees understand, what behavior
and performance levels are expected to be eligible for the specific
compensation component and it drives the behavior and performance
specifically the right way for the organization.
The policy has to cover all the compensation components, which are used in
the organization and affects large populations. The exceptional managerial
component tools can be referenced from the general compensation policy,
but they should not stay hidden. The employees cannot trust the
compensation policy, which does not mention all the compensation
components.
Executive CompensationThe top executive compensation is a special and specific area of
compensation and benefits, which is usually confidential and it is not open
to all employees in the organization. The top executives hold the
responsibility for the organization, they lead the development of the
organization and they have a tremendous impact on the results of the
organization. The compensation scheme of top executives has to reflect
the responsibility and it has to provide the security to the top executives to
use the personal responsibility and to take courageous decisions.
The executive pay is about the focus on the short-term performance and
the long-term sustainability of the organizational development. The top
executives are motivated to search for the cost-cutting potential and
focusing on the sales and performance growth in the long-term perspective
as the shareholders can realize the benefits of being involved in the
organization.
Executive Compensation Principles
The executive pay has to reflect the role of the executive top management in
the organization. The executive management drives the development of the
organization and the executive compensation has to be aligned.
The executive compensation changed dramatically over the last two years
as the financial crisis showed several issues with the executive pay, which
was too focused on the growth of the organization while ignoring the
sustainability of the organization.
The executive compensation consists usually from two main parts:
o Short Term Pay
o Long Term Pay
The short term pay of the executives is about the base salary and short term
bonuses, which are paid on the basis of the immediate performance of the
organization. The bonuses are usually deferred over a period of time. The
short term pay is usually fully cash based executive compensation
component.
The long term pay is about the stock options, shares, restricted stocks and
pay based on the performance against the index. The shareholders use
these long term compensation components to protect the value of the
organization and betting of the top executives on the growing value of the
organization on the market. The long term compensation components can
be realized just in case, the stock price of the organization grows. The long
term pay component is usually non-cash based.
In the modern organizations the short term pay is just a small part of the
total cash of the top executives.
Executive Compensation Risks
The executive compensation is sensitive to the right setting as the short
term and long term components of the pay have to be in balance as the
organization does not suffer from the imbalances in the managerial
decisions. The organization should always focus to balance the short term
remuneration (which is valued more) with the potential to get more in the
future. It is always difficult to find the right balance and the shareholders
have to be in the agreement with the top management.
Excessive compensation
The excessive compensation is always more the issue of trust and
confidence of employees and shareholders. The executive compensation
scheme has to include the holdbacks and claw-backs and safety brakes for
the case, the organization outperforms hugely the market. Each executive
compensation scheme needs caps and floor as it is manageable in all
situations, which can happen on the market
Executive Compensation PlansTop management needs an outstanding compensation plan. The
executive management is responsible for the delivery of the business results
to shareholders. They represent the company to the outside world. They
handle the strategic initiatives. They are in a risky position. Their job
contract can be cancelled within minutes. They want the protection.
The executive compensation plan has a highly motivating component,
and it guarantees the income protection in case of the job cancellation.
Executive Compensation Plan Principles
The shareholders buy the shares of the company to keep the value of
money. They expect even more. They expect to earn the extra from the
increased value of shares. The top management is paid for the constant
increases in the valuation of the company. It is an absolute rule of the
business.
The shareholders define the executive compensation plan. They usually
cooperate with the CEO, who engages Human Resources in the process of
designing the executive compensation. The shareholders define targets;
shareholders expect the executive management to reach targets.
The executive managers are not paid for developing the warm and friendly
environment in the organization. They are not paid for the sympathetic and
people oriented corporate culture, when it does not bring benefits of
increased profits for shareholders. The company exists to make profits, it
does not exist to employ satisfied employees.
The principles of the executive compensation are:
o Clear focus on profits generation
o Long-term orientation of the compensation scheme
o Motivation of manager by high bonuses
o Non-cash focus of the compensation (stock options, shares, share phantom schemes)
o Risk Management
o Balanced Scorecard implemented into the Compensation Scheme
The executive compensation scheme has to support goals given by
shareholders. The executives take risks of failing. They have to be over-
compensated for meeting goals. They should receive an enormous extra
bonus for exceeding the expectations (goals given by shareholders). The
balance in the compensation has to be in favor of exceeding goals.
The HR Professionals have to support the CEO in setting the executive
compensation scheme, which support the top management in pushing the
organization. The top managers have to make tough decisions. They have to
be compensated for overcoming the stress, the pressure of the line
management and employees’ complaints about constant changes in the
business operation.
Human Resources has to understand the main business goals. HR has to
help in setting the executive compensation and alignment with the
performance based compensation for the rest of the organization.
Salary Surveys
The salary surveys are extremely powerful compensation and benefits
benchmarking tool. They are important for the setting right compensation
strategy and for following and monitoring the desired pay market. The
salary survey is provided by the external compensation consultant, who
gather the compensation information and salary details about the
individuals, match the information and provides feedback about the pay
market and pay structures back to the participating organizations.
The salary surveys are always based on the proper job evaluation
methodology, which is standardized across the industry as
the compensation consultant can compare the jobs with the same job size
as the job titles are not the suitable for the salary comparisons. The
company has to choose the right and suitable job evaluation methodology
and this know how is usually provided by the compensation consultants for
free.
Salary Surveys Benefits
The salary survey measures the competitiveness of the organization on
the pay market and provides the benchmark information about the salaries
on the general pay market and the specific industry pay markets, when the
organization operates on several pay markets.
The salary survey helps to set the internal compensation policy and to
set the right optimal salaries for each job and to keep the desired position
on the pay market as defined by the compensation strategy.
The salary surveys provide the information about the average salary review
percentage and the allocation of the growth of the salaries into specific job
positions across the participating organizations. The salary survey can act
as a tool to identify the key job positions in the organization as the
competitors can protect the key job positions and it is usually visible in the
salary surveys.
The salary surveys provide the information about the new trends in the
compensation and benefits area and many surveys bring the additional
information like the average number of employees per manager, the
average length of service for the company, the number of promotions and
many other.
What is important to know about Salary Surveys?
The participation in salary surveys is a difficult decision as the organization
has to choose the right compensation consultant. The salary survey needs a
standardized approach to the job position creation and the job position
evaluations as the results of the salary survey are credible and useful.
Human Resources has to have a clear plan for the usage of the salary
survey results and the presentation including the action plan has to be
prepared for the top management.
The salary survey is about strictly confidential data and the compensation
consultant has to be widely recognized for the data privacy practices and
has to present the large population of the participating organizations in the
salary survey.
How to participate in Salary Surveys?
The organization has to select the right compensation consultant, who
brings the methodology for the job evaluation and determining the job size.
The organization has to evaluate all job positions and prepare the salary
data in the predefined structure as the compensation consultant compares
the right data.
The good compensation consultant will prepare a detailed implementation
plan and will act as the project manager for the first initial salary survey
and will provide the help, when Human Resources prepares the salary
survey results presentation.
Sales Incentives Compensation PlansNo business company can survive without the sales. The sales brings the
blood of the organization. The organization needs the sales to grow and to
successfully compete with other organizations on the market. The sales
incentives compensation plans are the compensation tools to support
and motivate the sales function to compete and to increase the sales
volumes of the organization.
The art of Sales Incentives Compensation Plans
The sales incentives compensation plan can really motivate the
salesman to sell more products and services. Or, they can easily destroy the
company, when the design of the sales incentive plan is not good and it does
not support the business goals.
The sales incentive plans should be always focused on increasing the
profitability of the company or gaining the additional market share.
That is the theory behind the sales incentives plans. As the incentive plans
are usually introduced purely by the business function, they fail and they do
not support the goals of the organization, they just allow the employees to
earn more.
The art of developing the sales incentives plans takes several years of
learning and measuring the results achieved. The senior manager of the
Sales function usually knows, what has to be achieved, but does not know,
how to achieve that by using the incentive plans, which are cost-efficient
and not hurting the future of the organization.
The sales incentive plan has to be fair to the whole organization. The
employees in the Back Office and the support functions should not feel the
internal unfairness. They understand, that the sales representatives have to
be motivated by the additional compensation component, but it should be
aligned with the overall compensation scheme and the compensation
strategy applied in the whole organization.
Sales Incentives Development
The development of the sales incentive scheme has to be a joint
initiative of Human Resources and the business function. HR has to
define the general principles, which have to be applied in each incentive
scheme as it follows the compensation strategy and does not break the
internal equity in the organization.
The effective sales incentive plan does not evolve on its own. The
development process is creative and full of the conflicts between HR and
the business. The good incentive plan is always tested on several employees
to see the real results from the field as the joint team can do the
adjustments into the incentive scheme and can make it more realistic.
The sales incentive scheme can be developed in the co-operation with the
external compensation consultant and it is recommended for the first
incentive scheme in the organization, but the compensation consultants
should not be invited later in the process as they can set a generic incentive
scheme, which does not fully support the goals of the organization. The
organization should develop its internal know-how for the development of
the incentive schemes.