Employee Compensation and Corporate Culture: What Works?
When determining what method to use to compensate employees, a company must be aware of the impact that different compensation methods can have on employee performance, and on organizational culture. Unfortunately, there is no one-size-fits-all answer to the question of employee compensation. Some employees will respond very well to a program that other employees might balk at. Similarly, some companies or industries may flourish under one sort of compensation scheme, while others are more successful with different schemes. This paper will examine the various methods of compensation, and will speculate on what it is about compensation that acts as a motivator for employees. There are two overarching systems of compensation: salaried or fixed pay, and performance-based pay. Many if not most companies use a mix between these two forms of compensation, however emphasis is invariably placed on one over the other, and it is this emphasis that can determine the success or failure of an overall strategy for an employee or a company. In a salaried compensation scheme, an employee is essentially paid for his time. Regardless of his performance, he will receive the same amount of money from his employer. There are advantages and disadvantages to this sort of scheme. One major advantage is that salaried pay gives employees a sense of job security, or security of income. An employee who receives a fixed salary need not worry about how much money he will take home to feed his family. He is therefore at ease while at work, and may be more capable of performing his job to the best of his ability. Fixed pay provides a similar benefit for the company owner, who can be certain of the exact amount of his wage expense for any given year, and not worry about an unexpected rise in employee compensation. The major disadvantage of salaried pay is that it does not provide a personal incentive for an employee to succeed. Performance-based compensation, on the other hand, does provide a direct incentive for employees to do a better job. In a study published in Contemporary Accounting Research (2009), Joanna L.Y. Ho et al examine the effects that switching from a performance-based system of compensation to a fixed compensation system had on employee productivity at a car dealership in Taiwan. They concluded that, for this particular company, the abandonment of performance-based compensation led to a decrease in individual productivity, especially for those workers who had been most productive immediately prior to the switch. These employees, who were formerly motivated by the opportunity to earn more money if they made more sales, now found that they earned the same amount of money regardless of how many cars they sold. Therefore, they put less effort into selling cars, and their individual productivity declined considerably.
Another major disadvantage of salaried pay that the study found is adverse selection. The lack of a performance-incentive resulted in low-performers flocking too the company in question, and high performers leaving the company. “The average sales productivity (cars sold) of employees hired under the less performance-sensitive compensation scheme will be less than that of employees hired under the performance-sensitive compensation scheme” (p. 173). Thus, both for current employees and future hires, salaried pay without performance-incentives decreased motivation and thereby decreased performance.
Performance-based compensation’s strength is that it a material incentive for an employee to strive to meet goals. However, there are a number of weaknesses inherent in the performance-based compensation method. The most glaring weakness is that incentivizing performance, especially on the part of the individual but also on the part of a smaller group of individuals, risks pitting employees against each other in competition for compensation....