Managing Compensation

Employees need to be compensated for their efforts based on volume of time or volume of production. Compensation refers to all forms of financial rewards received by employees. It arises from their employment. It occupies an important place in the life of the employee. It is a considerable cost to the employer. Compensation dissatisfaction can lead to absenteeism, turnover, job dissatisfaction, low performance, strikes and grievances. Majority of labor-management disputes relate to compensation. (Zenger and Lawrence 353-377) The need for stronger governance is driving a variety of changes in the way compensation is managed, including how to:

Create compensation programs that support the key performance drivers in the business

Enable the functions, and the services they provide, to best support the needs of the business

Encourage managers to be more engaged in the process and act as advocates for the compensation policies

Make the best use of technology for building market insights, modeling costs and supporting managers

Raise employee awareness and appreciation of the value of their compensation and the basis on which it is determined (Carter 21-41)

Knowing how to pay people is becoming as important as knowing how much to pay them, but only 17 percent of companies believe that they are very effective at managing compensation.

This paper considers the direction that compensation management is taking in American organizations and provides some insights into the goals and objectives of these businesses, as well as the value they see from investing in effective ways of managing compensation. These insights have been derived from research that Mercer has been conducting on the theme of compensation management since 2007.

The following section focuses on some of the key themes affecting compensation management in American organizations.

Depending on the needs of the business, companies in America are either centralizing or decentralizing their compensation functions. For around 60 percent of companies, the move is toward a more centralized function. To date, compensation responsibilities have been devolved, leading some to observe that a variety of programs and practices in most companies are overcomplicated. Through centralization, these companies hope to establish greater control, remove duplicate programs and practices, and consolidate activities for greater efficiencies. But for companies moving in the opposite direction, decentralizing the compensation function Point of view Mercer 9 enables distinct and autonomous business units to make the best decisions regarding different talent capabilities and related issues. Regardless of the direction governance will take, what is apparent is that very few organizations (10 percent) are standing still. (Butler and Reese 37-47)

Effective compensation management needs to be based on a well-articulated compensation strategy. By motivating employees to demonstrate behaviors and achieve outcomes that will support the business, companies can ensure that they are getting value for money. This initiative transforms compensation from being a cost to the organization to being an investment. Thus, principles for compensation that are based on business priorities provide a good framework through which compensation programs can be developed.

The vast majority of companies in America view aligning their compensation strategy with ...