Week 3: Assignment
Compensation, Compensation Philosophy, and Critical Components of a Compensation Strategy
Linda Moody
HRM430: Compensation and Benefits
Professor John Dibenedetto
January 19, 2015

Compensation Defined Compensation is mostly known as the paycheck that an employee receives from their employer in exchange for the hours and work contributed by the employee. However, compensation does in fact include more than just the paycheck between the employer and the employee. According to the Code of Federal Regulation, or CFR, compensation is any form of payment that is paid to an employee by the employer for services rendered, which may include money, commodities, and privileges (20 CFR 211.2, 2014).
Forms of payment other than money may include vacation pay, employer contributions towards an employee’s health insurance or retirement fund, severance pay, and tips. If an employee is receiving such things as employer matching on their insurance premiums or their 401K this has to be taken into consideration as a form of compensation from the employer to the employee.
Compensation Philosophy The compensation philosophy for a company is a formal document that explains the overall process of employee compensation. This will indicate to the employees what the company’s position is on their pay, and this will create transparency for the employer (SHRM, 2012). The Human Resources department will create this formal document after collaborating with the upper management to ensure that it reflects the mission and goals of the company. Factors that must be taken into consideration when developing the compensation philosophy include the financial standing of the company, the size of the company, what industry the company serves in, salary surveys, and economical factors that will impact the company’s ability to hire qualified candidates (SHRM, 2012). Once the company has a compensation philosophy in place it is important to review it and modify it as needed based on the needs of the company, as well as the overall effectiveness of the compensation philosophy itself. The implementation of this philosophy should be used to draw the attention of qualified candidates to the company. Also, this philosophy should serve a tool to guide and motivate employees within the company to perform at peak levels to earn bonuses and other rewards, which are defined in this document.
Critical Components of a Compensation Strategy Once the Human Resources department has finished compiling all the data from job analyses, job evaluations, and compensation surveys the department can begin to build on the compensation strategy of the company. It’s important to meet discuss the business goals and objectives with the board member and other key stakeholders in a company to understand their position on how to compensate employees. The company must decide whether it’s going to apply a market lead, market lag, or market policy. The idea policy would be to adopt market lead in order to find and retain the highest qualified candidates for each job. However, this decision is going to be based on the mission, goal, and financial position of the company. When assembling this strategy is also important for the human resources team to research the competition to find out how they compensate their employees. Being able to offer the same or better compensation package will attract the right candidates to the company and may ensure their retention in the future. Another part of this strategy is to decide what the wags, bonuses, rewards, benefits, and incentives the employees will be eligible for. This should identify who is eligible, such full time or part time employees, and when they become eligible based in their hire date.
Example of an Effective Compensation