Explain how Strategic Compensation is a major component of human resource systems. Please include the aspects: strategic analysis and contextual factors, traditional basis for pay and motivational concepts, building internally consistent compensation systems, and aspects of designing a competitive compensation system.
Strategic compensation plans are not just a major component of human resource systems, they are vital to the long-term success of almost any business enterprise. Such plans require meticulous attention to detail both inward – in terms of politics within the company – and outward, in terms of remaining competitive. Assuming a competitive business environment in which employees have employment options beyond one’s company, the ability to attract and retain quality individuals is extremely important. The loss of skilled, experienced workers as a result of inadequate attention to compensation issues depresses an organization’s ability to function. It is not just vital skills that are lost when disgruntled or undercompensated employees leave for other positions, it is the corporate memory they take with them that damages productivity and morale.
Strategic compensation plans are designed to attract and retain the best people. It is not simply a matter of offering the highest possible wages to prospective employees; it is also a matter of structuring the corporate compensation tables to account for seniority and performance, two factors that are not always in-sync. Careful attention to supplemental compensation packages is key to retaining more junior employees whose performance and value to the organization may exceed that of more senior workers, whose time with the organization may warrant a higher pay scale.
When drafting a strategic compensation plan, human resources managers must evaluate the environment in which the organization for which they work is operating. Questions regarding the cost-of-living within a specific region, the level of competition, the profitability of the organization, and the requirement to constantly innovate all must be addressed. A business operating in New York City will inevitably experience far higher operating costs than one located in rural Mississippi, and compensation packages will invariably reflect those differences. Consequently, employee salaries in the more expensive location will usually be higher than in the lower-cost regions, but that does not necessarily mean the New York-based employees will enjoy a greater quality of life in terms of salaries if their costs of living are commensurately higher. Similarly, irrespective of cost-of-living considerations, human resource managers must evaluate the level of competition and whether compensation packages need to be adjusted to reflect the probability that undervalued employees will bolt for the competition at the earliest opportunity. Finally, human resource managers need to be attuned to the vagaries of the industry in which they function to ensure that a steady flow of appropriately-educated employees are available. A business that can remain content to manufacture a specific item or provide a specific service, the technologies and skills for which remain largely stable over long periods of time, without the pressures of having to continuously innovate and incorporate new technologies and skills has an easier task with respect to compensation plans than industries in which a failure to constantly innovate means corporate death.
Structuring a competitive compensation system requires careful attention to the competition, and to the morale within one’s own shop. Compensation packages are just one component of a business’s financial picture. Corporate officials also must remain attuned to additional factors, including material and utility costs, while remaining competitive. In a turbulent economy, these latter considerations can seriously complicate the process by which strategic planning is undertaken. In other words, attracting and retaining the best employees is vital to success, but it is not the only component of a business plan. Balances have to be found among costs of doing business, and structuring a compensation plan accordingly, therefore, can be particularly challenging.