What are the different objectives and policies related to compensation program?

The Compensation Program

A significant interaction occurs between compensation management and the other functions of the HR program. For example, in the recruitment of new em­ployees, the rate of pay for jobs can increase or limit the supply of applicants. Many fast-food restaurants, traditionally low-wage employers, have needed to raise their starting wages to attract a sufficient number of job applicants to meet staffing requirements. If rates of pay are high, creating a large applicant pool, then organizations may choose to raise their selection standards and hire better-qualified employees. This in turn can reduce employer training costs.

When employees perform at exceptional levels, their performance appraisals may justify an increased pay rate. For these reasons and others, an organization should develop a formal HR program to manage employee compensation. This program should establish its intended objectives, the policies for determining compensation payments, and the methods by which the payments will be disbursed. Included as part of the program should be the communication of information concerning wages and benefits to employees.

Compensation Objectives and Policies

Compensation objectives should facilitate the effective utilization and management of an organization’s human resources, while also contributing to the overall objectives of the organization. A compensation program, therefore, must be tai­lored to the needs of an organization and its employees.

It is not uncommon for organizations to establish very specific goals for their compensation program. Formalized compensation goals serve as guidelines for managers to ensure that wage and benefit policies achieve their intended purpose. The more common goals of compensation policy include:

1.  To reward employees’ past performance

2.  To remain competitive in the labor market

3.  To maintain salary equity among employees

4.  To motivate employees’ future performance

5.  To maintain the budget

6.  To attract new employees

7.  To reduce unnecessary turnover

To achieve these goals, policies must be established to guide management in making decisions. Formal statements of compensation policies typically include the following:

1.  The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate

2.  The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities

3.  The pay level at which employees may be recruited and the pay differential between new and more senior employees

4.  The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises

5.     The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered

Policies must be established very early in the process of compensation management.