Formulating Compensation Strategy

Running head: MANAGEMENT
Compensation and benefit
Name of the Student
Name of the University
Author Note

1MANAGEMENT
Table of contents
Brief description of the steps involved in the formulation of compensation strategy.....................2
Goals of an organization’s reward and compensation system.........................................................3
Brief explanation of the three methods for establishing base pay...................................................3
Identification and explanation of the nature of individual performance pay plans.........................4
Steps needed for designing an effective reward system..................................................................4
Difference between “extrinsic” and “intrinsic” rewards.................................................................5
Importance of the structural and five contextual variables in a workplace.....................................5
Identification of the fundamental job attitudes and their roles in determining employee behavior 6
Brief explanation of the difference between content theories of motivation and process theories
of motivation....................................................................................................................................6
Difference between goal-sharing and gain-sharing plans................................................................7
Brief description of the three main categories of performance pay.................................................7
Similarities and difference between "direct" and "indirect" pay.....................................................8
Concept of FIT.................................................................................................................................8
Identification and explanation of the types of employee stock plans..............................................9
Discussion........................................................................................................................................9
References......................................................................................................................................11

2MANAGEMENT
Brief description of the steps involved in the formulation of compensation strategy
The following are the five steps required for formulating the compensation strategy:
1) To define the required behavior: It defines the commitment made by the members over
turnover costs, the quality of task (simple or complex) and the cooperation of citizens
with each company’s unit to evaluate the organizational performance (Long & Singh,
2006). Mention can be made of providing technical advancement for skill development.
2) To define the role of compensation: It defines the classical, human relations and high-
involvement organizations focusing on economic needs, social needs and employee needs
respectively. A typical example can be increasing the compensation will fulfil the basic
human needs and increase the participation for completing the task which will ultimately
lead to enhanced growth and development of the organization.
3) To determine the compensation mix: It defines the role of basic pay, indirect pay and
performance pay to an individual or group. In this context, Long and & Singh, (2006)
cites the example of variability in compensation leads to an increase in total
compensation to compensate employees for the uncertain risk.
4) To determine the compensation level: It is a different compensation level strategy of
lagging, leading and matching payment based on average compensation in the given
labour market. Example: providing the Company's product on a discounted price when
lagging in cash.
5) To evaluate the proposed strategy: The proposed strategy should follow three essential
criteria: affordability, employee attraction and legality. As per the arguments of Long and
Singh, (2006), the human relations strategy need to focus on preserving the interest of the
employees' group.

3MANAGEMENT
Goals of an organization’s reward and compensation system
The goal of an organization’s reward and compensation system are as follows:
a. To promote the achievement of the goals of the organization
b. To support the organization’s structure and strategy and fit into it
c. To attract, retain and hire the qualified individuals
d. To promote the desired behavior of the employee
e. To be identified as equitable
f. To abide by the law
g. To be within a financial organization means
h. To be cost-effective in achieving the above goals (Long & Singh, 2006)
Brief explanation of the three methods for establishing base pay
The base pay also referred to as salary or wages, is the specific guaranteed amount paid
to the employee irrespective of performance. It accounts for 75-80% of the compensation. The
following three methods are used to establish base pay:
a. Job Evaluation: It is the process of analysing the job description and ranking it by
comparing it with all jobs in terms of their value in the organisation.
b. Market Pricing: It is the process of determining the average amount of payment
made to employers for a particular job in an organisation.
c. Pay-for-knowledge system: It is the process of payment made to the employees
based on their skills, capabilities and competencies (Long & Singh, 2006).