STRATEGIC COMPENSATION Strategic compensation is determining and providing the compensation packages to the employees that are aligned

with the business goals and objectives. In todays competitive scenario organizations have to take special measures regarding compensation of the employees so that the organizations retain the valuable employees. The compensation systems have changed from traditional ones to strategic compensation systems. Strategic compensation is the type of compensation scheme implemented to improve the motivation of your people to perform better. It must also have the potential of strengthening your image as a good employer. A good reward scheme has the potential of motivating employees if implemented with care. But it can demotivate if poorly handled. There is nothing more immediate in affecting the behavior of employees than a salary scheme that is not designed well or badly implemented even if the scheme is good. Paying competitive salaries is in accordance with sound employee recruitment, employee engagement and employee retention practices. You are making it a truly strategic compensation.

Salary Banding

Salary banding is part of strategic compensation system. Jobs with similar responsibilities and workload are grouped together under a specific category. The salary grades under each category can vary in number depending on your strategy. This can cut across departments and group of companies. It is necessary to carry out this exercise in order to achieve pay parity and pay equity, both vertically and horizontally. Salary bands follow the existing organizational structure. The pyramid structure was the popular choice of many organizations. But some organizations have implemented a flatter organizational structure with the intention of improving efficiency. This can also reduce or control overhead costs. However, if there are too few levels with the same number of salary bands, there is less opportunities for your employees to move up in their career.

This is not good for employee development. Your employees, especially the good ones, have nothing to look forward to. They are well aware that if they move up the organizational ladder, their earnings will also improve. COMPENENTS OF COMPENSATION Compensation has become a far more complicated issue than just deciding how much to pay your employees. In addition to salary, employers must consider many other components - 401(k) plans, stock options, bonuses, and vacation - these too have become part of current compensation packages. Employees also have greater expectations of what should be included in their compensation packages, and they may demand specific benefits that can be costly for small businesses. Costly or not, building a fair and attractive compensation package is critical for attracting and retaining employees. When setting up your compensation package, consider the following components: Salary and wages: This is usually the single largest component of a compensation package, and not surprisingly, the most common point of comparison used by employees and potential employees. Salary should be tied to a person's skills and experience. Subsequent increases need to be based on an employee's performance, value, and contribution to an organization. For salespeople, it might be important to find a balance between salary and commission. Check salary surveys and want ads, and scout out competitors to see if they are underpaying or overpaying their staff. Paying too much is an unnecessary drain on your resources, but paying too little will make it difficult to find and keep the best people. Bonuses: Employee bonuses, which are usually paid in a single lump at the end of the year, are one way of providing performance incentives. Profit-sharing plans are a more formal way of doing this, but they're not as effective for rewarding individual performance and compensating employees for meeting their goals. Long-term incentives: Stock options or stock grants not only provide long-term incentives to employees, but they can also help retain valuable team members through your organization's crucial startup phase. Health insurance: Employer-sponsored health insurance is fairly standard among medium-size companies. Plus, it's a benefit that has great value to employees. An employer-sponsored plan saves employees money, and gives them peace of mind in knowing that they won't be denied coverage, even if they have existing health problems.

If you think you can't afford it, think again. Providing insurance to your employees sends the message that you care about their health and the health of their families. It can also be a vehicle for promoting productivity. To minimize costs, consider having employees pick up part of the tab. Employees who have coverage through a spouse may want to opt out of a plan, particularly if there's a cost associated with it. Life and/or disability insurance: This is also a benefit that usually costs less when it's purchased by an employer rather than by an individual. Retirement plans: 401(k) plans have become popular because they're relatively easy to administer and are less expensive than traditional pension plans. Many employees like these plans because they maintain some control over the amount of their contribution and how the money is invested. Most small companies try to put some kind of savings or 401(k) plan in place, even if they don't contribute money to them. Time off and flexible schedules: This includes holidays, vacations, sick days, and personal days. An employer unable to offer competitive salaries may close part of the gap by offering more time off or flexible work hours. Some employers make no distinction between sick, vacation, or personal days, allowing employees a set number of days off each year to be used at their discretion. This prevents employees from abusing sick days, and keeps them from feeling that they need to lie when a child is ill or a personal emergency arises. Miscellaneous compensation: Other forms of compensation to consider include employee assistance programs, which can provide everything from psychological counseling to legal assistance; discounts on company products; the use of company cars; and any other incentives that motivate employees and give your company a competitive advantage

DIRECT COMPENSATION Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time. Basic Salary Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services.

House Rent Allowance Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work. Conveyance Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization. Medical Reimbursement Organizations also look after the health conditions of their employees. The employees are provided with medi-claims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements.

Bonus Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee. Special Allowance Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.

Making Compensation System More Strategic

In order to ensure that your strategic compensation is truly strategic in nature, see to it that it can motivate every employees. It is important to know the differences between the different heads of payment that you make to your employees. Your people need to know what payments they may or will not get under certain conditions or when certain conditions do not exist. With effective and regular communication with your employees there are less chances of misconception and misunderstanding. Avoid situations under which your people assume things that cause you problems. Compensation is always a sensitive issue. It can become more complicated if you have a unionized workforce. This requires caution and careful planning otherwise you may find that your compensation system will lose its effectiveness in influencing people's behaviors.

In the a sales incentive compensation system is it going to be a revenue plan, meaning we pay our salespeople a certain percent of revenue they generate or is it going to be a quota plan, we pay them in order words, were going to pay them a certain percent of that incentive target based on how well they do against some sort of quota. 1. Threshold. You have to determine if youre going to have a threshold in your incentive compensation system. And if so, where is that going to be? And by that we mean at what point do you begin generating money to make incentive payments. Is it 70% of the goal achieved? Is it 90%? Is that 100%? Are you not going to have any threshold at all?

2. Targets in the incentive compensation system The target generally refers to the target incentive amount. And every eligible person in the plan should have an incentive target amount. That refers to the amount that youre going to pay when objectives are achieved 100%. 3. Maximum limits in an incentive compensation system You can also have to determine whether there are some sort of maximum on your incentive plan, even a maximum funding in a group plan or a maximum award amount for an individual plan. And if you are going to have a maximum, at what level do you step that maximum? A hundred and twenty-five percent of goal? A hundred and fifty percent? Where is that going to be? And it has a lot to say about how motivated your people are going to be. 4. Accelerators. These are the points at which the pay level actually increases given increases in performance against a goal or quota. Where are they going to be set? At what point do you start funding more money in a group plan or paying out a larger percent of a sale to salespeople? Difficult questions and complex questions. 5. Goal based links in the incentive compensation system An incentive plan sets predetermined goals, beginning the performance period and pays rewards based on the achievement of those goals at the end of the performance period establishes an incentive link, meaning that you tell people exactly what you expect of them at the beginning of a performance period and then you pay out like you said you would at the beginning of the performance period. You pay out based out on how well they perform so they know what they need to do, right, and how much theyre going to get. You have what I would call a bonus plan though if you really dont set very specific goals at the beginning of the performance period. And even though you paid bonuses to individuals, a lot of people may scratch their head and say, Im not sure why I got this but, hey, Ill take it. Right. To me, thats a bonus plan. It has less of an incentive plan link in the first example.

For jobs that are incentive eligible, you want to first establish a total target compensation level thats equal to the market target total compensation. And this is base salary plus target incentive, not actuals last years. Its target incentive. 6. The amount you put into the incentive compensation system. For example, you may not give salary increases but you may want to increase for 2009, but you may want to increase the incentive opportunity for your people if the company achieves a certain level of performance. Youre going to leverage your employees more. Even though they dont get salary increases, youre going to give them more incentive opportunities. 7. Take away base salary and put more cash on the table with an incentive compensation system And what happens is this is now its not paid though unless the company achieves the target performance. So theres no cost to doing this if the company doesnt achieve its goals. Gently trade off though between $1 of lost salary increase is about $2 of increased incentive opportunity. Its not a dollar for dollar kind of trade off. Otherwise, I think your employees are going to view this as a takeaway. But you can put more money out there in incentive opportunity even if you arent having salary increases this year.