STRATEGIC RECOMMENDATIONS FOR COMPENSATION AND BENEFITS

Human resource is the most important and challenging resource an organization can have as it plays an important and critical role in accomplishing company goals and competing in the marketplace. No other resource is as diverse and difficult to manage as it is as the human beings can be needy as well as greedy. Businesses have a tough time in providing a first-rate benefits package for employees. To provide benefits and compensation plan as per the needs of employees is an important part of the recruitment and retention puzzle and poses a difficulty in controlling and maintaining a stable workforce. The Holland Enterprises at XYZ city employs 3,500 employees and it is facing challenges in terms of employee retention. It has lost 25% of its staff since 2007 and the insights from exit interviews indicate the primary reason cited for this is perceived unfair and uncompetitive compensation and benefit system. Nowadays as the companies are running on leaner budgets it has fuelled the competition in attracting good employees between companies. The Holland Enterprises is no exception and to compete in the marketplace they must maintain their employees and hold their skill personnel.

In line with the company’s compensation philosophy of attracting and retaining qualified employees by rewarding good performers to retain a high quality, diverse employees for the Holland Enterprises several recommendations in the benefits and compensation packages shall be made in this paper. A sound compensation strategy must incorporate business and operating inputs, inputs on employees’ preference, industry and labor market practices.  The various resource issues including the salaries and startup packages, the environmental issues including the workload and the administrative issues including retention strategies and salary procedures have been examined in depth and the information including prior reports, interviews of existing staff members, exit interview information and data on salaries, benefits, and startup packages has been utilized before making the recommendations.

The Mechanism of Determining the Compensation

The formulation of salary or compensation offers for employees takes the following considerations into account the departmental budget; external and internal equity and their education, experience and skills. The term ‘external equity’ is used to describe the comparative salaries paid in the marketplace where the organization competes to hire and retain similar types of employees. Williams et al. (2008) suggested the job analysis, job evaluation, pay policy identification, pay survey analysis and pay structure creation as essential steps to develop a compensation package. The competitive pay practices can be determined by participation in various salary surveys. Similarly ‘internal equity’ is used to describe the comparative salaries paid to employees working in the same grade or level within the organization. In order to make a cross sectional comparison of compensation policies and staff salaries, the salary surveys are employed. The pay practices for the next fiscal year are determined by analyzing the survey data procured through multiple surveys about the breadth of positions represented in the organization. The company “manages to the midpoint” and administers base pay with pay structure comprising pay grades and ranges. For example: staff member has a pay scale of 8,600 – 9,100 with a minimum of 8,600 paid to an employee who is assigned to a position for which he possesses minimal qualifications and maximum up to 9,100 in this position. The pay range system serves as cost-control mechanism ensuring that most of the fully job-knowledgeable employees will be paid “at midpoint” and those who consistently exceed performance standards on a sustained basis are able to get salary above midpoint.

Analysis of the Current Facts

Market Evaluation

Insights from the market evaluation reveal that there is tight competition in the market for well-qualified and experienced professionals which makes hiring new employees a challenge. Therefore more efforts must be directed to retain the employees by offering them a desirable compensation and benefit package. XYZ city has around 300 competing companies operating in or near the XYZ area with a large number of competing businesses a number of issues regarding the human resources develop. The high employee turnover because of low wages is one amongst the expected problems in this market. The other issue to be considered is the tightening of the European job market in current years. As the economy improves the number of qualified applicants is decreasing and the employment in job market pick-up. Trends indicate that in coming months it is expected that wages and benefits will rise as companies compete for fewer and fewer available, qualified applicants. To improve resource allocation and tackle an ageing population as well as continued globalization measures to secure fiscal sustainability and adaptation of policies for the business sector and labour market reform are required.(OECD, Economic Surveys: Netherlands 2012).

Salaries and Benefits Data

Table 1 shows that Holland enterprises average employees’ salaries lag those of a peer group of competitors with an overall difference of -5.0% in 2012-13.  The problem is most acute for Top-level managers with the current difference of -5.9%.  Moreover there has been a substantial raise of about 1 % in the salary differential in each of the past two years despite the management’s commitment to provide average raises of at least inflation plus 1.5%.

 

Rank/Year 2008-09 2009-10 2010-11 2011-12 2012-13
Top-level managers

Executives

Staff members

All Ranks

-3.6%

+0.9%

-1.0%

-1.1%

-3.7%

-0.8%

-2.4%

-2.8%

-3.6%

-1.4%

-1.7%

-2.7%

-4.5%

-2.9%

-5.3%

-4.2%

-5.9%

-2.1%

-4.2%

-5.0%

Table 1: Weighted average salary differentials between the Holland enterprises and the competitors over the past five years

The above table suggests that the Holland Enterprises employees’ salaries lag those of peer group by an average of about 5%.

An additional illustration depicts that average raises of inflation plus 1% are insufficient to keep up with the peer group as exhibited in Figure 1.  Here, the competitors’ average salaries for 2012-13 are plotted against the years of service assuming that the average length of service is 5 for top-level managers, 10 for executives and 20 years for entry-level staff members respectively. The 2012-13 competitors’ average salaries of $51,595 and $77,965 for Executives and top-level managers respectively, are 20.5% and 73.3% higher than the 2012-13 competitors’ average salary of the entry level staff members.  In order to achieve these increases (in constant dollars) of 20% in seven years and 73% in 20 years average raises of at least inflation plus 1.5 % are required.  If the overall raise pool is only slightly above the inflation and employees with extraordinary merit get raises well above inflation then employees with ordinary merit will be ble to get raises below inflation.

Figure 1: Average 2012-13 salaries versus rank for competitors and the average salaries for different post-inflation average raises after seven years for executives and top-level managers and after twenty years for staff members

 

The findings reveal that the average raises of inflation plus 1% are insufficient to keep pace with competition.

Findings from Interviews

The key findings of exit interviews of departing employees, the interviews of department heads and executives regarding successful and unsuccessful retention cases reveal that noncompetitive salaries represent the most-cited factor in retention, especially among male employees. Other, less frequently cited include lack of housing assistance programs and absence of noncompetitive benefits like health insurance and the need for flexibility with childcare options.

 

Role of compensation and benefit system

The performance of the employees directly equates to the performance of business. A compensation system should not only align to the business needs but also contribute to attracting and retaining strong performers. The lucrative and good compensation serves the need for attracting and retaining the best employees and it is important to motivate the employees to increase the organizational productivity. In absence of compensation no one will come and work for the organization. Compensation needs to look into all psychological and self-actualization needs of the employees besides the salary.

Recommendations

The major factors contributing to employee retention are salaries, benefits, supportive environments and growth opportunities.  To overcome deficiencies at Holland Enterprises in these areas along with considering the tightening labor market a significant modification in the current HR practices and an increase their compensation and benefit expenses will be required besides the following key recommendation:

  • A proactive approach to employee retention must be taken which includes the provision of approximately 0.12% annually of the total salary pool for market-based salary adjustments.
  • Annual total raise pools should be targeted at approximately inflation plus 1.5-2%, to keep pace with competitors and reward both exceptional and ordinary merit.
  • Employee benefits should be improved by increasing the employer contribution to the family health plan by approximately 85-100 units per month per employee, expanding the new housing assistance program and providing additional child-care leave options.

The Job-Based Compensation Model

The pay structure recommended is the traditional job-based compensation model that has the pay-system mechanics which includes a well-written, detailed and up-to-date job description for each position in the company. Job description is an important step while designing the pay system as it explicitly identifies the important characteristics related to each position allowing each of these characteristics to be defined and weighed appropriately with compensable factors (Cascio, 2013). Job evaluation is a process to evaluate and rank jobs in terms of their overall importance to the organization and thereby creating a job hierarchy. It also facilitates the organization structure and communicates the differences in pay between jobs ranging from top-level managers to the junior entry-level employees. The position of hierarchy can be suitably determined by the weight factor or the awarded points (Cascio, 2013),the pay rates can be ascertained by the external survey in relevant labor markets including the direct competitors operating in the same location or similar business environment(Cascio, 2013). The points awarded to each position during the job evaluation process are to be summed up as totals and these totals can be used to establish pay grades in accordance to the job positions in the hierarchy.

Position in the Market

The analysis of one’s competitors is imperative when looking at compensation and benefits. The lost employees are being swayed by the lucrative offers from the competing companies hence knowledge of competition gives a view of possible opportunities in the market that might sway or tempt the employees to leave the organization. The main competition of the Holland Enterprises is Big Avenues and Austin Dues. These companies are currently operating in the XYZ marketplace and are large competitor. Therefore Holland Enterprise must offer a comparable benefits package to ensure the retention of its skilled and trained staff members and also to woo the skilled employees from the two competitors.

Total Compensation and Benefits Strategy

The compensation strategy must target the three key compensation points including the level of experience, the hierarchy of position and the internal customer or employee satisfaction. The use of traditional job-based compensation model requires division of the compensation strategy according to the jobs of the organization. Each position must compensation comparable to the market standard of the job. The statistics indicate that employee average at the Holland Enterprise is 25,000 a year nationally while the competition averaged 25,760 annually. Moreover the experience of each employee should also be accounted as the employees gain experience and attain a threshold performance level; there shall be suitable increments and pay raises. The ceilings of these raises can be set at approximately inflation plus 1.5-2%, to keep pace with competitors and reward both exceptional and ordinary merit per annum. The compensation to boost internal customer satisfaction will be realized through scheduled benefits and performance bonuses. Acknowledging the importance of internal customer satisfaction as a significant contributor to the growth of business and customer retention, rewards to encourage higher performance become necessary. According to Lister (2013) an easy to understand and achieve reward system encourages employees to work harder to reach higher goals. An incentive system should be easy enough for the workers to comprehend as well as being achievable at its lower levels to provide a constant reassurance to the employees to work tougher in quest of the more complex goals. If the reward system specifies too high performance levels with early attainment the process would discourage hard work as employees might ignore it. A good benefits package will be a reasonable expense to retain employees. Employee benefits should be improved by increasing the employer contribution to the family health plan by approximately 85-100 units per month per employee developing and expanding the new housing assistance program further and providing additional child-care leave options to the working females in the organization.

Performance Incentives and Merit Pay

A tactical plan for holding quality employees must involve benefits rewarding the personnel who exhibit exemplary business devotion. This would further inspire the new staff members to make a pledge of building a profession with the organization as well as prevent the leap of traditional employees to other companies. An option of pay cut would make veteran employees think twice about following another opening. Merit pay linking pay to performance is one of the most often used systems to reward the workers on the basis of individual performance. In order to be effective such a program must certify and communicate explicitly that rewards provided to the best personnel will be noticeably better than the routine growths given to normal or below-average worker as the theory of performance-based compensation for employees suggests that employees outperforming their co-workers and an ordinary worker must be demarcated in terms of compensation. The company must consider pay increase for an employee based on the four factors including performance; market deficiencies; living wage and overtime, change in job accountabilities; change in knowledge, skills and competencies; range penetration; change in market pay for the job.

Conclusions

Compensation and benefit package is one of the several human resource (HR) tools used by the companies in management of employees. In order to accept the worth of the money involved in the management of human resource business needs to ensure the continuous efforts for motivation and retention of its skilled labor force and to see that its compensation system is not an island. It is imperative for a business to connect compensation and benefit package with its overall objectives and plans along with aligning it with its HR scheme.

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References

Biswas, B., Cascio, W., & Boudreau, J. (2013). How to Apply HR Financial Strategies (Collection). FT Press.

Cascio, W. F. (2013). Managing Human Resources (9th ed.). New York, NY: The McGraw- Hill Companies, Inc.

Lister, J. (2013). Strategic Plan for Employee Compensation and Benefits. Retrieved from http://smallbusiness.chron.com/strategic-plan-employee-compensation-benefits-15613.html

Mahoney, T. A. (1989). Employment compensation planning and strategy. Compensation and benefits, 1-28.

Milkovich, G. T., Newman, J. M., & Milkovich, C. (1999). Compensation. T. Mirror (Ed.). Burr Ridge, Ill.: Irwin/McGraw-Hill.

OECD, E. (2010). OECD economic surveys: China 2010.

Schuster, J. R., & Zingheim, P. K. (1996). The new pay: Linking employee and organizational performance. San Francisco: Jossey-Bass.

Williams, M. L., Brower, H. H., Ford, L. R., Williams, L. J., & Carraher, S. M. (2008). A comprehensive model and measure of compensation satisfaction. Journal of Occupational and Organizational Psychology, 81(4), 639-668.