Effective and Decent Compensation Plans

Effective Compensation Plans
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Effective Compensation Plans
Employee compensation refers to the benefits received in exchange for the service provided to the employer. It is the combination of salaries, wages and benefits received by employees in exchange for a job done. In addition to salary and wages, compensation involves other components such as bonus payments, stock options and incentives. Others include retirement contributions, health care coverage and short-term disability insurance. A complete compensation package normally comprises most of these components. According to Butrica & Karamcheva (2015), employees always have high expectations of the elements in their compensation packages. Sometimes, they demand certain benefits that are costly if the business is small. Regardless of the size and cost of the business, establishing a fair and reasonable compensation package is effective for attracting new employees and retaining the current ones.
One of the components of effective compensation plans is salary and wages. It is regarded as the largest component of a compensation package. According to Frye (2014), the salary needs to be aligned to individuals' skills and experience. That is to say, an employee with the highest skills and experience needs to receive the highest salary. Subsequent increment should be based on employees' performance, values and their contribution to the company. Another component is bonus. Clinch (2011) asserted that employee bonus is one way of providing performance incentives. Bonuses are usually paid out in a lump sum at the end of the year. The formal way of providing this benefit is through profit-sharing plans. Bonuses motivate and retain the employees. Most workers prefer companies that acknowledge their efforts. This acknowledgement can be done by giving employees bonuses for the work done.
Another component is long-term incentives provided by stock options. Stock options can also help retain competent employees through the start-up phase of the organization. Another component is health insurance. Frye (2014) noted that employer-sponsored health insurance is relatively standard among medium-sized companies. It benefits most employees. According to Sarmad et al. (2016), an employer-sponsored plan saves employee money and gives them peace of mind because they are sure that they cannot be denied coverage irrespective of the existing health problems. Providing insurance to employees implies that the employer cares about the health of the workers and that of their families. Health insurance is also a measure of productivity.
Another component of the compensation is retirement plans. Employers need to offer a 401 (k) plans because they are relatively simple to manage and are less costly than the traditional pension plans (Butrica & Karamcheva, 2015). Some employees prefer these plans because they control their contributions and investments. Time off and flexible schedules are other compensation plans. They include holidays, personal days and sick days. An employer who cannot provide competitive salaries can reduce the gap by providing more time off and flexible work hours (Clinch, 2011). A few employers do not distinguish between vacation, sick days and personal days. This gives employees a particular of days to use at their will every year. Doing so prevents workers from abusing sick days and gives them a chance to be free during emergencies.
Another component is miscellaneous compensation. It includes employee assistance programs that may offer legal assistance, psychological counseling, the use of company cares, discounts on company products, and other incentives that motivate workers and provides a competitive advantage to the organization.
The Most Beneficial Ratio of Internally Consistent and Market Consistent Compensation Systems
The most beneficial ratio is 1:1. Frye (2014) defined internally consistent compensation system as the value of all jobs in a company. Most jobs that require high qualifications and more responsibilities attract hefty compensation. Conversely, positions with fewer qualifications and responsibilities have reduced wages. Some jobs in internal compensation have a particularly salary. The pay structure is determined by job evaluation. The qualifications are the employee requirements such as knowledge, skills, and experience to do the job.
Most organizations find it challenging to reduce or increase compensation in an attempt to remain internally consistent and competitive in the market. The goal of the competitive market system is to attract and retain talented workers (Butrica & Karamcheva, 2015). Companies should not pay excessively because it is a burden. Also, they should not pay lower than the minimum because it neither attracts nor retains the most qualified employees.
Instead of reducing or increasing compensation, companies should aim to identify a healthy balance. They need to compensate employees according to their financial abilities and ability to remain competitive in the market. Failure to find a state of equilibrium between the two choices can cause a problem. A company that does not consider internal consistency and strictly adheres to market consistent systems may experience inflated compensation costs which could reduce their competitive advantage. However, a firm that firmly adopts internally consistent techniques may not attract and retain competent employees. A balance between the two compensations is crucial. A competit...