People are the most important asset in an organization. It is for this reason that the human resources department in a corporate entity is assigned with a number of responsibilities pertaining to the workforce of the business. Among many of these responsibilities, the determination of the compensation for the employees is the most important duty of this department.
In its simplest interpretation, compensation can defined as the sum of financial and non financial pay given to a worker from his company in exchange for the services provided by the former. Compensation, thus, involves a monetary value of the pay plus the other incentives including bonuses, vacations, health insurances, etc . However, apart from the basic salary, these incentives differ from organization to organization.
Historically, there have been three different compensation structures prevalent in the corporate world including traditional, broadband, and market based. According to a 2012 compensation survey by Deloittee Consulting, market based compensation is the most used strategy in comparison to traditional and broadband structures .
Market based compensation program is a salary structure that an organization constitutes keeping in view of what the external labour market is paying for the same job. Under such a program, the management of an organization concentrates on three aspects when deciding for the compensation of an employee namely, market pay, functional area and the skill level of the employee. Market based compensation program does not only decide about the salary range; rather it is the compensation philosophy that works by evaluating the market value of attracting the required talent . There are two important components that are kept in mind while developing market based competition. These are competition and supply and demand in the market.
Compensation is a direct function of the productivity of employees and the organization; hence, it is really important that employees are affectively compensated for their efforts. An appropriate and employee satisfactory compensation strategy is the one that sorts out the balance between the internal equity and the external competitiveness.
Internal equity is an idea that helps employees in assessing that they are being fairly rewarded for their efforts when compared with others in the similar position within the same organization. The workforce in any organization considers factors like skills level, job duties and responsibilities, and the working conditions as the minimum criterion of assessment. Therefore, internal equity dictates that for the same posts the salary is just and all the departments in the organization follow the decided compensation strategy. The management in an organization can achieve internal equity by rewarding according to the relative value of the specific jobs .
External competitiveness is an important element in market based compensation program which is achieved when the employees feel that they are paid the same as others in the same role in different organizations of the industry. An organization can establish external competitiveness in its compensation program by ensuring that the pay rates are over and above or at least equal to the average rates in the industry .
Organizations find it difficult to search for the balance between the internal equity and external competitiveness in a compensation system because of the tradeoffs between the two elements. However, the balance can be achieved by adjusting for the odds of both the systems by making an appropriate and through market research.
Coca Cola is one of those global companies that have been able in achieving this balance. Research studies are an indicative of the fact that the senior management at Coca Cola made a through salary reviews of the companies starting from PepsiCo to Procter and Gamble to Yahoo. Based on the results of the market search, the company then announced salary increments from $1000 to $ 15000 for various positions in the company . However, there are companies who miserably fail at achieving this balance. Consider the case of Bank of India. This public sector bank is unable to establish external competitiveness in its compensation program for the employees. The bank is also subject to internal inequity because of nepotism and other issues. The result is the fact that the bank is unable to attract and retain the right kind of talent, thus, affecting the productivity of the organization.
References
Caruth, Donald and Gail Handlogten. Managing Compensation (and Understanding it Too): A Handbook for the Perplexed. London: Greenwood Publishing Group, 2001. Print.
Costello, John. Market pricing is the foundation for market-based compensation systems. 25 June 2009. Website. 26 January 2017.
Davis, John. Statistics for Compensation: A Practical Guide to Compensation Analysis. New York: John Wiley & Sons, 2011. Print.
Deb. Compensation Management. New Delhi: Excel Books India, 2011. Print.
Moore, Gwen. Defining Market Compensation. 14 February 2013. Website. 26 January 2017.
Varkkey, Dessler. Human Resource Management. New Delhi: Pearson Education India, 2009. Print.
