HR8

8.- Employee Engagement

COMPENSATION

Compensation has three components. The proportion of each is known as the pay mix and it differs a lot by firm. Usually the largest element of total compensation is base compensation (fixed pay an employee receives on a regular basis), secondly pay incentives (programs created to reward employees on good performance) and lastly, benefits or indirect compensation.

Compensation is the one most important cost for most firms. Research suggests that employees sometimes underestimate their employers efforts to provide for indirect compensations or benefits, which is why recently, companies are increasing employee communication involving the real const of benefits.

DESIGNING A COMPENSATION SYSTEM

Due to society’s relationship with a person’s paycheck, compensation affects individuals economically, sociologically and also psychologically. This is why, a firm must handle compensation properly to avoid a bad impact on both employees and the firm’s performance.

Managers have a double challenge: designing a system that enables the firm to achieve its strategic objectives and simultaneously fits the firm’s characteristics and environment. These are some criteria or checkpoints to go through when creating a compensation system.

COMPENSATION TOOLS

We have two broad categories according to the unit of analysis used to make pay decisions:

• job-based approaches: Include the most traditional and widely used types of compensation programs. It is assumed that the people being paid are properly performing well-defined jobs. The compensation system’s primary objective is to allocate pay so that the most important jobs get paid most.
• skill-based approaches: Less common and it assumes that workers should be paid not according to the job they do, but rather by how flexible or capable they are at performing multiple tasks. Here, the greater the variety of job-related skills workers showcase, the more they are paid.

LEGAL ENVIRONMENT AND SYSTEM GOVERNANCE

The design and administration of compensation systems is greatly influenced by a legal framework. Federal laws carry compensation criteria and procedures. Ex: Fair Labor Standards Act, Equal Pay Act and the Internal Revenue. In addition to these federal regulations, in the USA, each state has its own rules as a compliment.

The FLSA defines two categories of employees: the exempt employee (not covered by the provisions of the FLSA, mostly professional, administrative, executive and outside sales jobs fall in this category) and the nonexempt employee (those who are covered by the FLSA).

These also cover issues like minimum wages, overtime, comparable worth (EPA), etc.

The Internal Revenue Code (IRC): this affects how much of their earnings employees can keep. It also affects how benefits are treated for tax purposes. It requires the company to withhold a portion of each employee’s income to meet federal tax obligations.