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Question:
In order to ensure that a compensation system is effective, there are certain
objectives that need to be achieved. Discuss these objectives
Answer:
In order for a compensation system to be effective the following objectives need be
achieved.
1. Efficiency
2. Legal compliance
3. Equity
Efficiency
Efficiency refers to improving of performance, increasing the work quality, customer and
shareholders satisfaction. The labour costs need to be controlled in order for
a compensation system to be effective.
Compliance with legal requirements
Remuneration design faces certain legal constraints and needs to comply with
legislative regulations and collectively bargained agreements. Compliance as a pay
objective means conforming to relevant laws and regulations. If legislation changes, pay
systems may need to change too to ensure continued compliance. The concepts of
Equity
In the context of compensation, the concept of equity relates to perceptions of fairness
in the distribution of rewards. Equity is generally considered to be one of the most
important objectives of any compensation/remuneration system.
THERE ARE DIFFERENT TYPES OF EQUITY:
External equity (also called external competitiveness) involves the comparisons of
rewards across similar jobs in the labour market. Pay surveys are usually used for
information regarding external equity.
Page 1 of 17
,Internal equity (also called internal alignment) deals with comparisons of rewards
across different jobs within the same organisation. It addresses the issue of the relative
worth of, for example, an engineer versus an accountant working for the same
employer. Internal equity pertains to the pay rates both for employees doing equal work
and for those doing dissimilar work. The techniques of job evaluation and pay
structuring are used to establish internal equity. The whole issue of ``income
differentials'' (in terms of the Employment Equity Act) is thus very relevant here.
Procedural fairness is concerned with the extent to which an employee's remuneration
is reflective of his or her contribution and the fairness with which pay changes such as
increases are made. Changes may be based, for example, on individual performance,
on competencies, or according to fixed increments or seniority. This concept suggests
that the way pay decisions are made and implemented may be as important to
employees as the result of the decisions.
Distributive fairness: The distributive justice model of pay equity holds that employees
exchange their contributions or input to a company (skills, effort, time and so on) for a
set of outcomes. Pay is one of the most important of these outcomes, but non-monetary
rewards like a company car may also be significant. This perspective suggests that
employees are constantly (1) comparing what they bring to a company to what they
receive in return, and (2) comparing this input/ outcome ratio with that of other
employees within the company. Employees will think they are fairly paid when the ratio
of their inputs and outputs is equivalent to that of other employees whose job demands
are similar to their own.
Question:
Are all these objectives equally important? Why do you say so?
Answer:
Equity is very important as it deals with the perception and distribution of rewards.
Employees want to know that they are being compensated fairy in relation to their peers
in the same organisation as well as to employees in competing organisations.
Organisations therefore need to strike a balance between internal and external equity
as this has a big impact on the retention and attraction of employees.
The other objectives are however also very important. Organisations need to ensure
that they comply with South African legislation or the legislation of the country that the
organisation is operating in.
Lastly, a compensation system also needs to be efficient. Organisations aim to use
compensation to improve the performance of employees. The compensation system
also needs to be cost efficient as personnel costs can be as high as 60% in some
organisations.
Page 2 of 17
, Study unit 2
Question:
What do you understand by the term "strategic compensation" and why does
compensation have to be strategic?
Answer:
The term "strategic compensation"
Strategic compensation is an approach to the development and implementation of
compensation strategies and the guiding principles that underpin it.
It can be said that strategic compensation is a belief in the need to plan for the future
and makes the plans happen as to what the organisation values and wants to achieve.
For this to happen the compensation practices should be aligned with both business
goal and employee values.
The aim of strategic compensation is to develop and implement compensation policies,
processes and practices required to support the achievement of the organisation's
business goals and meet the needs of its stakeholder. To create total reward processes
that are based on the beliefs about what the organisation values and wants to achieve,
rewards employees for the value what they create, support the development of
performance culture, to align reward practices with both business goals and employee
values, to facilitate the attraction and retention of the skilled and competent people the
organisation needs.
Strategic compensation is forward looking, visionary, empirical the way to achieve
organisational goal, systematic an analysis of the internal and external environment,
goal oriented a clear definition of the goals to be achieved, focused on implementation,
the guiding principles that is the philosophy. It is conducted within a framework.
Thus it can be said that strategic compensation is about making compensation
management work effectively for the organisation and its people. Its aims at alleviating
disconnect between business strategy and how Human resource supports the business
strategic.
Why does compensation have to be strategic?
Compensation has evolved from a general to a more strategic approach. In the past,
employees received a salary for doing their jobs. Things have evolved (organisations
and employees) and the approach towards compensation has changed. Organisations
are striving to be more competitive and the workforce has also changed (the workforce
is more diverse, there are more woman in the workforce, older and younger employees
and dual career couples). Considering all these aspects organisations have realised
that they can use compensation in a strategic way. Strategic compensation is about
aligning compensation practices with business goals as well as employee values.
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