COMPENSATION

Job satisfaction includes challenging work, interesting job assignments, equitable rewards, competent supervision, and rewarding careers. The quality of work life and psychological rewards from employment are very important. It is doubtful, however, whether many of us would continue working were it not for the money we earn.
Employees desire compensation systems that they perceive as being fair and commensurate with their skills and expecta­tions. Pay, therefore, is a major consideration in HRM because it provides employees with a tangible reward for their services, as well as a source of recognition and livelihood.
Em­ployee compensation includes all forms of pay and rewards received by employees for the performance of their jobs. Direct compensation encompasses employee wages and salaries, incentives, bonuses, and commissions. Indirect compensation comprises the many benefits supplied by employers, and nonfinancial compensation includes em­ployee recognition programs, rewarding jobs, and flexible work hours to accommodate personal needs.
Both HR professionals and scholars agree that the way compensation is allocated among employees sends a message what management believes is important and the types of activities it encourages. For an employer, the payroll constitutes a sizable operating cost. In manufacturing firms compensation is seldom as low as 20 per­cent of total expenditures, and in service enterprises it often exceeds 80 percent.
A sound compensation program is essential so that pay can serve to motivate employee production sufficiently to keep labor costs at an acceptable level. The management of a compensation program, job evaluation systems, and pay structures for determining compensation payments is covered here. Included will be a discussion of fed­eral regulations that affect wage and salary rates. Employee benefits that are part of the total compensation package are discussed later.

The Compensation Program

A significant interaction occurs between compensation management and the other functions of the HR program. For example, in the recruitment of new em­ployees, the rate of pay for jobs can increase or limit the supply of applicants. Many fast-food restaurants, traditionally low-wage employers, have needed to raise their starting wages to attract a sufficient number of job applicants to meet staffing requirements. If rates of pay are high, creating a large applicant pool, then organizations may choose to raise their selection standards and hire better-qualified employees. This in turn can reduce employer training costs.
When em­ployees perform at exceptional levels, their performance appraisals may justify an increased pay rate. For these reasons and others, an organization should develop a formal HR program to manage employee compensation. This program should establish its intended objectives, the policies for determining compensation payments, and the methods by which the payments will be disbursed. Included as part of the program should be the communication of information concerning wages and benefits to employees.

Compensation Objectives and Policies

Compensation objectives should facilitate the effective utilization and manage­ment of an organization’s human resources, while also contributing to the overall objectives of the organization. A compensation program, therefore, must be tai­lored to the needs of an organization and its employees.
It is not uncommon for organizations to establish very specific goals for their compensation program. Formalized compensation goals serve as guidelines for managers to ensure that wage and benefit policies achieve their intended pur­pose. The more common goals of compensation policy include:

1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To motivate employees’ future performance
5. To maintain the budget
6. To attract new employees
7. To reduce unnecessary