Entries Tagged 'Compensation and Benefits' ↓

It is the biggest pain of Compensation and Benefits - how to introduce the fair and transparent compensation policy to the organization. In the public sector, this issue is quite easy to solve as their compensation scheme are pretty rigid and people get used to them. But in the large corporations - the transparency and fairness of the compensation policy can be a real issue to the employees.

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It is a quite common issue for many organizations - setting the right ratio between the base salary and bonuses of employees. The right ratio, which will allow to employees to feel the stability and attractive bonus, which will motivate them to reach a better performance. The balance can be delivered just by the right ratio between the base salary and bonuses.

The issue is more about the relationship between HRM and Line Management. The line manager usually believes in the power of high ratio between the base salary and the bonus. It is easy to understand as the manager believes in easier people management when the ratio is high as employees will be motivated to reach higher performance on their own.

In reality, this is not true. When you provide employees with the low base salary and the high bonus, it does not increase their performance automatically. Sure, for some employees it can be seen as a really high motivation, but the rest of the team can be quickly demotivated as they do not see the company and the manager as supportive part of their life. They feel to be abandoned in the moment of troubles on the market.

To make things even worse - when the bonus is really high the employees will spend a lot of their working time to find out the way how to get high bonuses without the performance outputs. The employees are clever enough to find out the way how to get it. It will spread as a fire then.

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, the employees try to find the way to get their bonuses without value added to the company.

The bonuses work just when two main conditions are met. The employees must believe in the motivational role of bonuses, which is about the correct ratio between the base salary and bonuses. The second condition for efficient bonuses is the working and transparent goal setting process.

When the Business decides about its Business Strategy and HRM Management Team decides about correct HR Strategy - it is a moment to create and implement a correct Compensation and Benefits Strategy for the organization.

The HR Strategy helps to navigate and set goals for HR Employees, managers and employees in the organization and it sets their expectations from the organizations. When the organization sets itself as a low cost provider of services, then HR Strategy cannot state the highest quality of employees is the goal. The quality is always expensive. Even with human capital.

The correct Compensation and Benefits strategy depends on overall HR Strategy and it has a huge influence on the rest of the organization. Compensation Strategy is about the costs of the organization and it can have a huge impact on total profit of the organization.

Setting the correct Compensation and Benefits Strategy needs a lot of interaction with the Business and Business Leaders as they will be final users of the strategy and it can hugely  limit their activities.

The business strategy is the main limit for the compensation strategy. A quality focused organization with expensive products can afford to employ quality staff. The organization focused on mass market with average products does not need to employ quality sort of employees and it can save a lot of money from the payroll.

The compensation strategy sets the position of the organization on the job market. And it has to be in line with any other HR Strategy - mainly in recruitment, training and development. But many organizations forget about the need of alignment and they lose money and efficiency.

A bonus scheme is not an easy task to accomplish successfully. A successful bonus scheme depends on Performance Management and mainly on efficient goal setting process. In many companies the Incentive Scheme and Bonus Scheme are taken as the same items in compensation and benefits area, but they are not the same.

Bonus Scheme is usually linked to the company goals with long term deadlines. But the Incentive Scheme is very individualized and the employee can fully control the income from the scheme. Even in the case the company is loosing money, the excellent salesman can earn a lot of money.

A successful Bonus Scheme needs realistic and achievable goals to be set. When the goals set are not realistic, the employees will not believe in the bonus scheme and they will become de-motivated rapidly.

The efficient bonus scheme needs the following criteria to be met:

• Transparency;
• Simplicity;
• Trust.

The bonus scheme must be transparent to employees. Each employee must have a chance to sit down with a calculator and based on goals or KPI fulfillment, he/she must be able to make a proper calculation of his/her bonus. Many companies do make a mistake – the bonus scheme is not transparent to the employees and they do not know exactly, what behavior and performance is expected from them.

Also – the bonus scheme must be simple. When the bonus scheme is simple, the employees can see, what is expected from them at the first look at the paper. When they do not have a chance to make a proper interpretation of the scheme, the company cannot expect the employees to deliver the results.

And trust – the employees must be sure, the money invested into the scheme will be really released. When the company tries to make a note about a final decision about the money released, the motivation and trust is lost.

The rules for developing the bonus scheme look simple, but they are really hard to achieve in the daily practice. Good luck to accomplish them.

A variable pay or a bonus is the most common part of the motivation of employees. Many companies do believe in the motivational role of variable pay. But is it really truth?

The companies believe the higher proportion of variable pay to the base salaries, the more the employees will be motivated to reach higher goals and better sales volumes. But this kind of motivation works just in the years of good and excellent sales  volumes.

Some companies set very aggressive proportion of base salary and variable pay, which can work in times of excellent sales results and booming net income of the whole company. In the moment, when the sales volumes are stable, the employee can be stressed by the decreasing personal salary and total cash.

The variable pay for employees has to be a “nice extra”, but the company cannot make all the employees depend on the variable part of the salary to survive. It will be the company, who will loose the war - the employees will leave immediately. When their income will get smaller and smaller.

Most people do not understand how their salary is set and what is the structure of their own salary. The bigger the company is the less understandable the system for setting the base salary and variable scheme is understandable for employees.

The salary is one of the most important factors in setting the whole motivation and performance management system in the company. In the small company, it is pretty easy to explain to people the goals, the company has to reach to survive. In large corporations, the employees do not see their own impact on the financial results of the organization and their contribution to the final result.

In small organizations, setting the salary is mainly on the sense and ideas of the founder or a leader of the company and the financial possibilities of the company. In larger organizations, the system for setting salaries must be put in place to keep the organization in shape and to allow employees to trust and feel fairness in the system, when they see their own salary and comparison with the rest of the organization.

Large corporations use services provided by external consulting companies to set the correct level for each position within the organization and to attach correct salary level to each position and to make adjustments every year to stay competitive with market.

Setting the base salary is not that hard task and it is pretty simple to explain it the employees, but with the variable part of the total income - it can be a complete mess. Human Resources tends to provide management with a very sophisticated system, when every calculation needs a lot of time from managers and Human Resources. And - it does not support performance in the organization as employees do not see the impact of their performance to the final result of the company.

Or - do you understand fully to the structure of your salary and how you can improve your total income?