Describe how a compensation strategy can be designed to support organizational goals by providing intrinsic and extrinsic rewards for job performance
Describe how a compensation strategy can be designed to support organizational goals by providing intrinsic and extrinsic rewards for job performance. Describe, compare, and contrast the two dimensions of extrinsic compensation (monetary and non-monetary rewards), and describe other factors that influence rates of pay for similar work in different.
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What Is Compensation?
Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs and for their membership as employees. Together, both intrinsic and extrinsic compensation describe a company’s total compensation system, which we will look at more closely in this chapter, and, in even greater detail throughout the remainder of this textbook.
Intrinsic compensation reflects employees’ psychological mind-sets that result from performing their jobs, for example, experiencing a great feeling from the belief that one’s work matters in the lives of others. Perhaps it is easy to imagine that many health care providers feel this way. Extrinsic compensation includes both monetary and nonmonetary rewards. Organizational development professionals promote intrinsic compensation through effective job design. Compensation professionals are responsible for extrinsic compensation, which is the focus of this textbook.
Compensation professionals work with high-level managers to determine the best compensation plans that will contribute to recruitment, employee job performance, and retention. Then, compensation professionals use their expertise to establish monetary compensation programs to reward employees according to their job seniority, performance levels, or for learning job-related knowledge or skills. Some describe this exchange as a pay-effort bargain. As we will discuss shortly, monetary compensation represents core compensation . Nonmonetary rewards include protection programs (e.g., health insurance), paid time off (e.g., vacations), and services (e.g., day care assistance). Most compensation professionals refer to nonmonetary rewards as employee benefits . Employees receive some or all of these offerings as part of an employment arrangement. Rarely do employers base employee benefits on job performance. Employee benefits are becoming an increasingly important element of compensation packages. Since the so-called Great Recession (2007–2009) ended, many companies now offer lower pay increases (from an average 3.8 percent annual increase to less than 3 percent) 1 to better control costs and build cash reserves for a “rainy day.” Another reason for lower pay increases is the rising cost of health care coverage, which employers are required to provide full-time employees under the Patient Protection and Affordable Care Act of 2010, or else pay a substantial monetary penalty.
Both monetary and nonmonetary compensation represents costs to companies. In the case of core compensation, employers pay an hourly wage or salary. In the case of employee benefits, employers pay some or the entire cost for employees to have health insurance coverage rather than providing dedicated monetary payments, apart from wage or salary, to pay for health care coverage and contributions to a retirement savings plan, among others.
What Is Strategic Compensation?
Defining strategic compensation requires that we place the relevance and importance of compensation practices in a broader context where compensation practices are linked to competitive business strategy, as shown in Figure 1-1 . Competitive business strategy refers to the planned use of company resources—financial capital, equipment capital, and human capital—to promote and sustain competitive advantage. The time horizon for strategic decisions may span multiple years. For example, Netflix company leadership maintains that “Now internet entertainment—which is on-demand, personalized, and available on any screen—is replacing linear TV.” 2 Netflix’s success is largely due to its ability to capitalize on changing technology and consumer preferences as well as produce popular content. The company has been highly successful. In the last three months of 2017 alone, Netflix added 8.3 million subscribers globally. 3
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Human resource executives collaborate with company executives to develop human resource strategies. Human resource strategies specify the use of multiple HR practices to reinforce competitive business strategy. These statements are consistent with a company’s competitive strategy. For example, Samsung emphasizes the essential role of its employees as it endeavors “to create a better world full of richer digital experiences, through innovative technology and products: For this, we dedicate our efforts to creativity and innovation, shared value with our partners, and our great people [employees].” 4
Within the context of competitive business strategy and human resource strategy, compensation professionals practice strategic compensation. Strategic compensation refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies. Compensation and benefits executives work with the lead HR executive and the company’s chief financial officer (CFO) to prepare total compensation strategies. For example, pharmaceutical manufacturer Eli Lilly is well known for offering a balanced compensation and benefits program which recognizes employee contributions and embraces employees through recognition of their needs outside the workplace.
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