HR Management Paper on Compensation Strategy

Compensation Strategy

As the company’s manager, I understand that employees are the firms’ key resources and the performance of the organization is centered on our ability as the employers to attract, retain, and motivate the illustrious, committed, and competent employees. An employee’s willingness to remain loyal to the organization and show appropriate citizenship behavior is highly dependent on the compensation packages offered by the organization. For the past few years that I have worked in the organization as a manager, I have come to note that hiring employees is the simpler part of engaging the workforce. Retaining them and keeping them motivated is a complex task because it involves understanding the satisfying the employees’ demands for the good of the company. As a manager, I have come to understand that employee turnover comes at a high cost to the organization. This is because the company will have to find and train more employees to replace those who have left. There are also other hidden costs such as lowered employee engagement that have a huge impact on organizational performance. There is no doubt that employee turnover costs organizations time, resources, and productivity. Evidently, there are many costs linked with employee turnover. In spite of this fact, organizations can employ some trusted ways to manage employee loyalty and commitment. Compensation is one of the most effective and cost efficient ways of driving employee retention and motivation. It also informs the employee selection process in a way that gives the company a considerable level of guarantee that the hired employees will remain happy and satisfied with the terms of working in the organization.

This paper focuses on what I would do as a manager to select, retain, and motivate my employees from a compensation perspective. Several theories will be used to inform the compensation strategy.

Theoretical Basis of Compensation Strategy

Compensation is an effective way of improving motivation and satisfaction among employees. Numerous reports have been documented to explain how motivation can be interpreted in the workplace. However, the theoretical background of motivation has provided sufficient information on why compensation is effective as a strategy for attracting and retaining the most competent employees for the benefit of the organization. According to Maslow’s needs theory, different people have needs that they look forward to satisfying. They are motivated to satisfy and fulfill their needs in succession. The theory posits that motivation is a function of five basic needs. These include physiological need, safety, love, esteem, and, most importantly, self-actualization. An individual’s physiological needs have to be met first before the safety needs and so on up to the level of self-actualization. Therefore, when designing a compensation package, the workforce’s multifarious needs have to be considered.

According to Maslow’s theory, employees also have a high affinity for needs-satisfaction. At the workplace, employees are most likely going to be motivated through recognition, appreciation, and being given promotions to elevate their status. Taormina and Gao (2013) assert that organizational rewards are the basic motivation factors for employees in an organization as they lead to the development of an enthusiastic workforce. Research studies have also shown that organizational rewards have a huge impact on the employees’ attitudes to their organizations. This means that they may be used as a way of checking employee behavior and retaining the most valuable of them.

Keefe (2015) defines employees’ job satisfaction as the positive feeling exhibited by the employee as an individual about their tasks in an organization. It is also associated with the expectations that the workforce has on a certain job versus the real status of their position. If the current position held by the company elicits positive results, the employee can be termed as satisfied with their job. On the other hand, Hussain, and Rehman (2013) view job satisfaction as that positive attitude or status that employees have after evaluating their experiences in the workplace. He explains that job satisfaction comes from either extrinsic motivation or intrinsic motivation. Numerous studies have shown that organizations mostly use intrinsic motivation aspects such as employee engagement and appreciation to effect job satisfaction (Gerhart & Fang, 2015). But Herzberg’s theory of motivation reveals that employees measure their job satisfaction levels on aspects such as their salaries, promotion and the job itself (Miner, 2015). Based on the theory, job satisfaction can be attributed to the employees’ emotions towards specific work aspects after reviewing the gap between their expectations and the reality on the ground at that moment. Therefore, a compensation strategy must be seen to meet the needs of the employees by involving hygiene factors and motivators.

It is certain that employees expect their needs to be fulfilled. However, they also demand that they are treated with fairness by their organization. This is an aspect emphasized by Adam’s equity theory because it focuses on fairness in the workplace. According to Fogleman and McCorkle (2013), the staff is more likely to compare their input with the output they get from their places of work. If an employee feels that are constantly getting less output than what they put in, they will increasingly become dissatisfied and demotivated. This happens because there is an imbalance. Therefore, when designing a compensation package, it must ensure that employees are treated fairly in recognition, appreciation, and promotion. There must be a procedural justice of performance appraisal.



The Effective Compensation Strategy

There is no doubt that attracting and retaining the most talented employees has become a huge challenge in human capital management. Every organization is in a competition for what appears to be scarce skills in the job market. This trend has been consistent with high turnover rates in various industries, making the need motivate and retain the most competent employees even more important for the survival of organizations. However, to attract, motivate, and retain the most talented employees requires novel compensation systems that will raise their satisfaction levels.

At my company, the business is picking, and the management is working harder to retain and attract the most talented and competent employees. There is a need to integrate a sound compensation strategy that will drive their motivation and satisfaction levels. As a manager, I would change the way the organization views and pays the employees. The focus would be to create a successful program that will guide the employees to remain committed to the company’s objectives and rewarding them for their efforts. Bengtsson and Hand (2013) define compensation as a set of rewards that employees earn in return for their efforts and productivity. The compensation package may include direct financial compensation, indirect financial compensation, and non-financial compensation. The compensation package that is mostly used is that of direct financial compensation which consists of salaries, wages, and bonuses. The indirect financial compensation involves those monetary rewards that are not incorporated in direct compensation. They are mostly categorized as those benefits that form the social contract between the company and the employees such as retirement plans, education programs, and leaves. However, the non-financial compensation package involves aspects such as career development opportunities, recognition, and a satisfying corporate culture.

  • Design the Plan

Before determining the right mix of the compensation package, I would seek to analyze the composition of the workforce to determine their needs. I would involve the employees to understand what they would like incorporated into the culture of the organization for them to remain motivated and satisfied. I would also align the compensation plan with the business objectives to ensure they are compatible and are sustainable in the future. There is a need to integrate the plan into every aspect of the business for fairness. This is because the right compensation plan will need to meet the individual wants and needs because adequate compensation is always in the mind of every employee. Additionally, a compensation package must also be tailored to the needs of the employees to be as attractive as possible to prevent them from becoming dissatisfied and demotivated. A compensation package that does not fulfill the needs of the employees is likely to lead them to look elsewhere for better salaries, fringe benefits, and other incentives.

  • Incentive Plan/Side-Agreement Compensation

After noting the compositional structure of the workforce and ensuring the compensation plan is consistent with the organization’s objectives, I would seek to improve the base level pay of the employees. The base pay has always been recognized as an important part of a rewards strategy. According to Gupta and Shaw (2014), the base salary cannot motivate the employees to show citizenship behavior. A base salary only spurs employees to sustain that level of working that will enable them to keep their job. This is a risky trend because most often the employees become susceptible to boredom. Eventually, they become disengaged, demotivated, and dissatisfied with their jobs because there is little to work for. However, as a manager I would offer them an opportunity to earn additional pay. This is an incentives plan that will motivate them to become more engaged and expend more effort. It is also a pay-for-performance plan that will be used to reward employees for achieving specific objectives.

The rationale of focusing on the base pay of the employees to attract, motivate, and retain them in the company is that most of them agree that their lifestyle revolves around their paycheck. What remains after taxation is what determines how they fulfill their basic needs. It is, therefore, an important area to focus on because it can help the employees fulfill more needs if it is raised. To motivate them even more, I would ensure that, as part of the wages, the employees are compensated for overtime pay, shift differentials, and any time worked during the weekend. However, I would approach the add-ons with a little more caution to ensure that the adopted pay mechanism is sustained in the long term. With time, it is expected that the employees will feel entitled to the add-ons to the extent that if they are not compensated for what was agreed upon, they become disengaged and demotivated.

An incentive plan requires a boost because it has been shown that some employees may not appreciate the trade-off of the pay and their effort. If this is predicted in my company, I would integrate a side agreement compensation plan to induce more employee motivation, retention, and attract talented potential employees. This plan is better because it involves negotiations between the employer and the employee. It is often a close-ended exchange that also relies of financial incentives. It has been proven to be an effective method of engaging employees and motivating them to work toward realizing their targets. The way this plan works is that the payout is conditional and pegged on producing a certain target. Therefore, an employee does not feel limited by the constraints of typical incentive plans. Numerous organizations have used this approach to motivate and retain their most illustrious employees. However, it would be important to involve a PEO (professional employer organization) who facilitates the side agreement compensation plan. The PEO also ensures that there is a fair interaction between the employer and the employees. This is a tried and tested method because a concrete understanding of employee expectations and employer obligations is sustained by a neutral party. It is a plan that is based on Adam’s Equity Theory that focuses on fairness at the workplace. The side agreement plan sustains employee motivation and increases organizational productivity. And by involving the PEO, the employees will most likely see that they are receiving fair rewards for their input.

  • Financial Rewards

According to Olafsen, Halvari, Forest, and Deci (2015), money is one of the most powerful sources of motivation because, in most cases, the performance of an employee is related to the pay. It can be useful in attracting and retaining talented individuals. Numerous reports indicate that most employees base their satisfaction with the amount they are paid. Before embarking on the compensation, I would ensure that the employees are paid salaries that are not lower than the present market rates. This would be a strategy to reduce a high rate of turnover because equity would be reinforced. Note that if employees notice inequities in the offered salaries, they are more likely to become demoralized and demotivated.  It is only after the salaries review that I would incorporate the direct financial compensation plan. This is in the form of financial rewards that would take several forms. To begin with, I would use cash bonuses to improve the motivation of employees. Cash bonuses are attractive even to potential employees who may feel compelled to join the organization. However, I would base the cash bonuses on special occasions such as during the holidays. According to Osibanjo, Adeniji, Falola, and Heirsmac (2014), cash bonuses improve the brand image of organizations to the extent that the company becomes attractive to a large pool of talented workforce. To follow up on the cash bonus, I would also introduce raises to the employees’ salaries once or twice every year as deemed fit by the financial capacity of the company. The raises would be calculated as a percentage of the employee salaries to factor in their performance to that of the organization. Raises have been noted to have a positive and direct relationship with employee motivation and retention.

  • A Competitive Benefits Package

Benefits are part of the compensation plan. According to Taylor (2016), over 80% of the corporate organizations in the U.S.A. use employee benefits as part of their compensation package to attract and retain key talent. This is a strategy that is supported by Maslow’s theory which claims that employees have a high affinity for needs-satisfaction. As the manager, I would ensure that the company seeks out the right benefits package for all the employees to elevate their status in the society. Maslow’s hierarchy of needs which includes the physiological need, safety, love, esteem, and self-actualization can be satisfied through the provision of a benefits package. Although not all may be realized at once, there is a great opportunity for the organization to improve the lifestyles of their employees. As a manager, I would integrate a benefits package involving:

    Medical benefits

    Holidays

    Paid time off

    Retirement plans

Providing a benefits package that fits the employees’ needs is a huge positive for the organization because it is able to attract, retain, and motivate key talent. However, all these plans would have to be confirmed through the legal framework provided by the relevant authorities. Certain laws regulate compensation packages that companies must offer the employees. For example, there is the Fair Labor Standards Act and the Employee’s Compensation Act that must have to be followed to ensure the company is compliant. As a manager, I would ensure that the regulatory standards regarding compensation are followed. An organization that complies with the relevant authorities is able to sustain its operations and protect its employees effectively. This is an area I would focus on to attract, motivate, and retain key talent in the company.

  • Non-Financial Compensation: Recognition

Compensation can also be non-financial. As a manager, I would ensure that the company is fair in recognizing the employees. According to Manzoor (2012), organizations that promote fair appraisals are attractive to potential job incumbents. Employee recognition is often ignored by most organizations in their compensation package plans. However, it has been proven to be an important component of a reward strategy because it promotes employee value. Organisations need to focus more on employee recognition to improve satisfaction among employees. According to Goldhaber, Grout, and Holden (2015), employees who feel recognized and appreciated are more motivated and likely to remain loyal to their organizations. Employee recognition may not cost anything, but its impact has been proven to be long lasting. This is an important approach that can be used to motivate, retain, and attract key talent. As a manager, I would ensure that the employees receive their rightful recognition for their efforts. I would make sure that worthy employees are recognized in public so that they can see that their efforts are appreciated by the management.


Managers have a huge responsibility in ensuring that organizations perform at their highest level. However, no organization can perform without competent employees. It is for this reason that employers have come up with compensation packages as a way of attracting, motivating and retaining the most skilled and talented workers. Compensation can either be in the monetary or non-monetary form. For the fictional company described above, both monetary and non-monetary forms of compensation would be used to attract and retain employees. This is a process that would require the support of all stakeholders to be successful because it is crucial for employee productivity and organizational performance.



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