Challenges of Compensation Management

by Patricia Woodside; Updated September 26, 2017
Portrait of a businesswoman

Compensation management is more than providing a paycheck and cost of living increases. In many organizations, employee performance relative to organizational goals serves as the basis for compensation. Whether brought on by economic difficulties, changes in technology or other business factors, compensation remains a human resources challenge.

Forms of Pay

Employee pay begins with a cash base and bonus pay, but may also contain non-cash forms of compensation. The valuation of non-cash compensation is often most difficult for employees to appreciate, but it offers the most opportunity for creativity on the part of the organization.

Pay Philosophy

“All organizations pay according to some underlying philosophy about jobs and the people who do them”, says KP Kanchana, a professor at CFAI National College in Bhopal, India. Compensation programs must consider and value the work of those who provide internal support to the organization as well as those who directly impact financial results. An organization’s compensation strategy will dictate the rate and timing of pay increases, which jobs are eligible for bonuses, and the level of competitiveness with similar organizations.

Employee Incentive

Pay-for-performance has become increasingly popular. Companies use compensation to reward and boost the morale of high-performing employees, but also to motivate underachievers.

Presentation of Compensation

How a manager speaks regarding pay can inadvertently create ill will when the intention was to deliver good news. It is important to use specifics when speaking with employees rather than categorize any pay increase as “good”, “significant” or some other qualifier. Employee perceptions of compensation are based on individual values, needs and expectations.

Pay Competitiveness

Businesses wishing to compete for the best of the available talent pool must offer a competitive compensation program compared to other companies within their industry and at large.

Automation and Outsourcing

Automating compensation, including outsourcing some compensation functions, enables businesses to standardize its system throughout the organization, eliminate paperwork and help departments to communicate more effectively. It minimizes payroll errors and makes it easier to compensate performance based on quantifiable measures. Organizations may also use technology to benchmark jobs and survey employees.

Generational Differences

People are living longer, and thus, working longer. In a look at physician compensation, Max Reibolt of The Coker Group noted a difference in work ethic and expected compensation that fell along generational lines. Older workers were more likely to work longer hours in exchange for their pay while younger workers expected high levels of pay even when their productivity was aided by technology.

Multinational Operations

Multinational corporations must balance the needs and expectations of employees from various countries. Compensation must balance conformity with local laws and customs against global corporate policies.

Controlling Labor Costs

Labor costs often constitute the largest line in a corporation’s budget. In a tight economy, companies are faced with a flat, if not shrinking, pool of funds. The cost of labor is broader than the amount paid to employees, taking into account recruitment, training, turnover, infrastructure and overhead, and the impact of these things on productivity.

About the Author

Patricia Woodside has written articles, business proposals and training manuals since 1985 while working in information systems management and business consulting. In 2006, she began writing short fiction for women's magazines, The Wild Rose Press and Amani Publishing, and book reviews for FreshFiction.com. Woodside received an engineering degree from Cornell University and an MBA from the University of Cincinnati.

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