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Devising a Good Compensation Plan
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One of the main reasons for a person to stay with a company is the compensation provided. HR must work out a strategy such that the firm not only has a realistic compensation but also retains its best talent. A firm values the employee as intellectual wealth. In a survey conducted by William M. Mercer, 31,615 HR executives from 1,100 firms participated. One of the most important results of this survey was that the HR felt the need for the organization to reassess its compensation policies.

A comprehensive compensation plan must involve the following steps:

1.  A comprehensive audit of the current compensation practices and plans must be performed.

2.  A feedback report must be developed based on the result of this audit.

3. The HR, top management and the board of directors should meet to work out the company’s compensation philosophy.

4. Every position in the company must be sampled so that the job nature can be totally analyzed. The fundamental duties, responsibilities and functions of each of the roles must be identified.

5. Based on the above analysis the market is surveyed for the current prices and a salary structure is developed. Administration guidelines to determine the pay are established as are the parameters like performance, level in hierarchy, market rates, etc… in order to calculate the compensation.

6. Incentive plans that reward the employee for specific achievements must be developed. Long-term reward plans like stock options and equities must also be offered for the top performers.

The salary of an employee is not only the compensation that is given but also the benefits the firm provides. While the former is known as executive compensation the latter is known as executive benefits. Executive compensation focuses on administration of salary, structure of the organization, short term and long term incentive plans, etc… Executive benefits, on the other hand, focuses on providing tax-saving benefits, bonus, etc…

Talent differential is one major factor that determines the pay of top performers and that of average performers. The Top Performer Differential (TPD) can be calculated using methods like revenue generated per employee, which is found by dividing the total revenue that is generated by a division in a year by the number of employees in that division. One of the assumptions in calculating productivity is that the average productivity for an average performer is $150,000 in a year and $200,000 is the average productivity of the top performers. Top Performer Increase Factor (TPIF) is the ratio of the output of the top performer to the output of the average performer. It usually ranges from 0.5 to 3.

A debatable topic that is related to devising compensation plans is pay secrecy. This means that the compensation offered to the employee is not the business of any other firm or any other person within the same firm. The reasons for such a policy are that compensation is considered to be privileged information to the employee and the employer and unjustifiable comparisons with regard to pay difference must be curtailed. The counter-argument is that open pay policies in public sector firms help build trust between organizations. It also helps maintain open information flow in the market.

All these points must be kept in mind when a viable compensation plan is to be designed. One last salient point is the availability of good payroll systems like direct deposits, debit cards, electronic tax filling services, etc… When these systems are well implemented, 50% of labor costs and 85% of material costs can be cut.


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