Compensation System Plan

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Patricia Elizabeth Scott
BUS 434
Compensation System Plan
Instructor Foster
September 19, 2011

Compensation System Plan
When designing a strategic compensation plan, key considerations include criteria for strengthening performance, containing cost, limiting liability, and promoting fair pay. (Mayer, 2004, pg. 2). To ensure long-term success, organizations need a compensation system that links company strategy to performance, ties the strategy to the labor market, is within legal compliance, and provides a sound salary structure. The combined, collaborative interdependency between these elements must be designed in such a way that will support the firm’s business strategy and stand the test of time. This paper serves to identify and discuss the key components and considerations associated with the creation of an efficient compensation system. A case study which reflects a compensation plan proposal for Holland Enterprises is included.

Components of a Strategic Compensation Plan:
Individual Equity
The strategic criteria associated with strengthening performance places a focus on individual equity. If an organization intends to see a ROI for their most valuable asset, they will need to design a compensation system that rewards employees for their constructive efforts. (Henderson, 2006, p. 360). To keep employees engaged and committed to the organization, a short term incentive plan must be incorporated in the compensation system design.

Organization wide short-term incentives include everyone in the organization. Indicators such as profit, costs, sales, ROI, ROA, or the change in any of these indicators from one year to the next can be used to gage performance. (Henderson, pg. 358). “Over the years, a variety of productivity improvement programs have focused on increasing products and reducing costs. These plans enable the employee to share with the employer any benefits gained from improved profits or a reduction in costs”. (Henderson, pg. 358).

Performance standards are the criterion used for measuring employee performance. With job performance, it is necessary to have a reference point for estimating the relative value of performance. (Henderson, pg. 335). After establishing a reference point for the responsibilities and duties for the job definition, an annual employee performance appraisal instrument can be used to rate individual employee performance. Job content-based appraisal dimensions include: 1) knowledge of job which rates overall knowledge of assigned duties and responsibilities, 2) quality of work which rates the accuracy, thoroughness, and neatness of work, 3) quantity of work which rates the amount of work successfully completed on a timely basis, 4) organizational skills which consider how employees effectively manage time, priorities, and follow ups, 5) cooperation and flexibility which rates the extent to which the employee will go to help others during peak work periods and how he/she responds to changing work requirements, 6) judgment which rates the effectiveness in responding to problems with appropriate courses of action, 7) employee/public relations which rates employee communication skills, courtesy, and effective interaction with firm personnel, clients, and vendors, and 8) attendance and punctuality which considers whether the employee has a good attendance record and is basically on time. (Henderson, pg. 332). The dispensation of individual-based bonuses and awards leads to enhanced employee behavior and improved organizational performance. Setting the right ratio between salary and bonus is the key to optimizing performance. The common market practice is the maximum base salary vs. bonus ratio 70%:30%. When the bonus is higher than 30% of the annual base salary, employees may attempt to gain the bonus without the performance outputs. (Pearson, 2007, pg 2). There are various other incentive plans that are designed to stimulate specific employee behaviors. Examples...
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