Compensation Management Report 2022

Running Head: COMPENSATION MANAGEMENT 0
Compensation Management
Student Details

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Contents
Introduction...........................................................................................................................................2
Company Overview...............................................................................................................................3
Application of compensation strategy...................................................................................................3
Impact of External factors on Compensation Strategy...........................................................................5
Critical Evaluation of Traditional Pay with Modern Pay.......................................................................5
Conclusion.............................................................................................................................................7
Reference List.......................................................................................................................................8

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Introduction
The pay strategy of the company performs an essential role in defining and managing
company ‘growth plans. The pay strategy is the plan of action relating to the compensation of
the employees. Pay is the word for describing compensation or remuneration an individual
expects from the company for his/ her designated job. The goal to design pay strategy is to
achieve competitive edge of the company. The pay strategy can be defined as plan which
focuses on the strategic perspective of the organization ( Harzing, 2017). The pay structure is
planned in advance to understand the financial planning of any company.
In this report, the pay structure of Microsoft Corporation is discussed. The report
major goal is to evaluate modern strategies of pay with traditional methods of compensation
on the basis of merit and seniority. The reports will also analyze laws, labor unions, and
market factors which impact the company’s compensation practices.

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Company Overview
Microsoft Corporation is an American multinational technology company who has
headquartered in Washington. The company is one of the most reputed companies in the
world. The major products of Microsoft Corporation are Microsoft windows and office suite.
The company has a robust compensation structure in the place. Microsoft Corporation was
using stack ranking method for its compensation strategy. In this strategy, the managers were
ranked on the scale of 1to 5 (Bort, 2014). This kind of reward system affects the morale of
the employees as the scale is based on the comparison of other employees.
The company has faced various retention issues. The company has felt that this kind
of incentive system impacts creativity as well as teamwork of the company. The incentives
and pay structure plays a crucial role in understanding the human behavior which can impact
the performance of an employee in long run. Currently, the Microsoft has implemented core
competency model of pay strategy which links performance to pay. The company has also
introduced sustainable goals which involve social, environmental and good governance goals
which lead to achievement of long term success and competitive edge over competitors
(Windsor, 2013).
Application of compensation strategy
The Development and retention of the employees have grown importance in recent
years. As human resources are the most valuable asset of the company and Retaining right
talent is challenging task. It is very important that management understands the linkage of
training and development initiatives performance strategy, development strategy and
compensation strategy for the employees.

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The Microsoft has set its compensation strategy with customer recognition goals. The
targets are defined on the basis of time the customer contract is valid. The company has also
introduced stock-based reward programs which are named as Restricted Stock Units (RSU)
and Performance Stock units (PSU) is measured on the basis of performance period and
related service. Under the executive plans, PSUs are provided over three- year performance
period and it is calculated on the basis of the performance goals (Microsoft Corporation,
2019b). The company is also comprised of non-executive and independent members in
compensation committee which leads to transparency and good governance of compensation
strategy.
The company has introduced performance-based compensation and which has led to positive
impact on the employees as it has been successful in creating healthy competition. The major
responsibility of the compensation committee is to review trends of compensation with
relating to retention of the employees (Microsoft Corporation, 2019a). The aim is to create
competitive plan which can lead to the motivation of the employees towards achievement of
the organization objectives. The alignment of key goals of employees with the long term
interest of the company is the major focus of the members of the compensation committee.
The company also focuses on development of new compensation plan time to time as this
leads to sustainable impact on the company goals and the employees.
The compensation strategy helps the manager to guide the employees in right
direction and the execution of the incentive plan depends on how it is communicated to the
employees and the departments. The Microsoft as a big software company has introduced
various online portals for incentive clarification and proper metrics are in place to measure
and improve the result of the employees. The company has introduced various initiatives for
diversity and inclusion programs to retain the employees. The company has provided

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distinctive benefits and competitive compensation that proactively engage the employees
(Microsoft Corporation, 2019b).
Impact of External factors on Compensation Strategy
There are various external factors which directly impact the compensation strategy of
the company. Some of the major factors are compensation laws, market factors, and labor
unions. The oldest US labor laws is fair labor standards act which defines hourly wages
criteria. The major four factors of compensation are stated as minimum wages, equal pay,
overtime pay and record-keeping requirements which are need to be fulfilled by all the
companies in US. The Corporates always design the compensation strategy keep all the laws
and guidelines in place as the breaking of compensation law can lead to heavy penalties and
lawsuits which can lead to bad reputation of the company (Gready, 2013).
The labor union is the group which are organized to protect the basic rights of the
workers. The group of employees nominate one person to represent them it is called as labor
union leaders. The executive management also involves of labor representatives to protect the
compensation of the employees. The labor union is the factor which can never be taken
lightly as this can lead to stoppage of daily operational work. The labor unions are highly
intensive in manufacturing companies (Lawler, 2012).
There are various market factors which decide the application and planning of the
compensation program in the company. The most driving factor while designing the
compensation program is competition. The companies need to retain the talent to achieve
competitive edge of the company as competitors always try to attract the talented employee
by offering attractive compensation plans (Duckjung, 2017). The company need to be
technology upgraded and updated with changing needs of the employees.

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Critical Evaluation of Traditional Pay with Modern Pay
The traditional methods of compensation strategy are Seniority Pay and Longevity
pay plans which are mostly adopted by the government and legal bodies. This plan is based
on the tenure of the employee. The assumption behind the studies is that the experienced and
committed employee of the company should be appreciated and rewarded. It is very objective
way of plan as it can be measured and compared with the help of data and numbers (Price,
2011). This makes this plan easy to execute and apply over all the companies. It is also
considered a plan which does not favour any employee as everything is quantified on the
numbers and rankings. It can lead to better motivation as employee will focus on retaining in
the Company for large number of years in order to achieve better compensation. The major
drawbacks of traditional methods of compensation are that they do not belong in the robust
competitive world as the targets and performance are not considered in this system. This can
also lead to low and poor performance of the employee as performance is not the major
incentive for any employee (Nankervis, 2017).
Another traditional method is Merit pay which states that the performance should be
linked to pay. It has various benefits as it can lead to effective appraisals. The healthy
completion is created in the company as well as employee feels empowered. The major
limitations of the system are biased ratings and rankings to the employees (Saini, 2013). The
measurement techniques are not clearly designed and which led to poor communication
between manager and employees as the employees are compared with each other and then
they are ranked accordingly. The merit pay also failed in differentiates between two equally
good employees (Nawaz, 2019). The negative competition is the result of merit pay as
employee start taking advantage with wrong practices in order to gain good ratings from the
managers.

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The modern methods of compensation strategy are person-focused pay and incentive-
based pay. The person-focused pay offer job flexibility and job enrichment to the employee.
These programs recompense employees on the basis of the major contributions to the
company ( Harzing, 2017). It helps an employee to grow in the organization. The incentive-
based compensation programs lead to enhance the performance of the company. These
programs are customized and designed according to the interest of the employee as well as
company (Gready, 2013). This lead to the employees to remain motivated and try hard to
achieve better results as the growth of an individual is linked with the growth of the
company. The company has shown positive impact which has followed modern methods and
the major reason is the changing technology and competitive world as in order to retain the
employees company has to strategies the compensation strategy according to the needs of the
employees.
Conclusion
The report has analyzed various external factors which impact the compensation
strategy. The importance of compensation strategy in regard to retention of the employees is
discussed with the help of Microsoft Corporation. The application and objectives of
Microsoft Corporation are discussed in brief. It is evident that compensation motivated the
employees and to retain the talent in the organization it is important that robust compensation
strategy is designed which can challenge the competitive needs.
The traditional methods of compensation strategy are evaluated with modern methods
and the report can be concluded by stating that the performance-based metrics and
compensation strategy can lead to the proper management of the company.

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Reference List
Harzing, A.-W. (2017). International Human Resource Management: A Critical Text.
Thousand Oaks: Sage Publication.
Bort, U. (2014, August 12). This Is Why Some Microsoft Employees Still Fear The
Controversial 'Stack Ranking' Employee Review System. Retrieved July 27, 2019,
from Business Insider: https://www.businessinsider.in/This-Is-Why-Some-Microsoft-
Employees-Still-Fear-The-Controversial-Stack-Ranking-Employee-Review-System/
articleshow/41022639.cms
Duckjung, S. (2017). Causality between high-performance work systems and organizational
performance. Journal of Management, 43(4), 973.
Gready, P. (2013, Sepetember 1). Organisational Theories of Change in the Era of
Organisational Cosmopolitanism: lessons from ActionAid’s human rights-based
approach. Third World Quaterly, 34(8), 1339-1360.
Lawler, E. (2012). Effective Human Resource Management: A Global Analysis. Stanford :
Stanford University Press.
Microsoft Corporation. (2019a, July 1). Compensation Committee Charter. Retrieved July
28, 2019, from https://view.officeapps.live.com/op/view.aspx?src=https://c.s-

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microsoft.com/en-us/CMSFiles/Compensation%20Committee%20Charter.docx?
version=e139a253-1ee8-2575-6b7b-7e24b96f0107
Microsoft Corporation. (2019b). Empowering our employees. Retrieved July 28, 2019, from
https://www.microsoft.com/en-us/corporate-responsibility/empowering-employees
Nankervis, R. (2017). Human Resource Management: Strategy and Practice. Boston:
Cengage Learning.
Nawaz, T. (2019, June). Exploring the Nexus Between Human Capital, Corporate
Governance and Performance: Evidence from Islamic Banks. Journal of Business
Ethics, 157(2), 567-587.
Price, A. (2011). Human Resource Management. Boston: Cengage Learning.
Saini, D. S. (2013). Human Resource Management. The Journal of Business Perspective,
17(1), 98.
Windsor, D. (2013). Corporate social responsibility and irresponsibility: A positive theory
approach. Journal of Business Research, 10, 1937-1944.

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