Compensation and Reward Consulting: 3 Major Approaches in Reward and Compensation Management
Employee compensation and reward are key business tools to achieve business goals. When it comes to job satisfaction, good employee benefits and compensation packages are key factors to reward employees for their job performance.
Learn more about compensation and reward, and the different compensation strategies commonly used by companies in order to help you maximize compensation in meeting your desired outcomes!
Compensation and Reward: What's the Difference?
Compensation and rewards are provided in exchange for work. They can come in the form of money, equity, or benefit, and are key business tools to help increase motivation and improve individual and team performance.
Human resource management can help you create a compelling reward and compensation system for your employees. Understanding the difference between reward and compensation can help you come up with a better reward system.
COMPENSATION
You hire employees to work for you. The relationship is a transactional one, as they offer their services, time, and experience to your company. In return, you give them money, equity, or intrinsic rewards to fulfill your side of the transaction.
This is compensation in a nutshell. How much compensation should be given depends on several factors such as the nature of work, level of experience, demand for the position, job evaluation, location, and industry.
REWARD
Whereas compensation is transactional, rewards are incentives that encourage employee motivation. These are given to qualified employees for fairing well in performance appraisals.
Unlike compensation, the factors that determine what should be a reward are mostly defined by the perceived value of the recipient. However, from the company side, rewards should be considered in terms of cost. How much reward costs should be proportional to the contributions of the recipient and should be within the company's budget.
Why Do You Need a Compensation Strategy?
Every aspect of a company is a tool that can help drive business success. Hence, compensation is a method companies can utilize in order to achieve certain goals such as hiring top performers, retaining the best employees, and minimizing employee turnover.
Developing a compelling compensation strategy, effective reward system, and pay system helps ensure that every penny spent on remuneration is also serving another purpose to help the company achieve its objectives.
This is also the reason why many companies outsource compensation and reward consulting services. Compensation consultants develop total rewards programs that not only consider market data and give reasonable pay raises and rates, they also include equity compensation, benefits, and rewards based on performance appraisal.
Major Approaches in Compensation Management
How much you pay your employees depends on strategic goals determined by your particular situation.
Check out the three main compensation strategies used by hiring managers to achieve certain business objectives.
LEADING COMPENSATION STRATEGY
In a leading compensation strategy, the company offers higher than market salary rates. This is a good way of attracting good employees, promoting good performance, and retaining key employees. It also sets a good reputation for the company, making it the company people aspire to work for.
This strategy, however, can only be employed when a company is financially healthy and can afford the high payout.
LAGGING COMPENSATION STRATEGY
Contrary to a leading compensation strategy, a lagging compensation strategy offers below market price for salary. This strategy is typically used by companies that are financially unstable to help them regain their financial footing, or by non-profit-driven companies and startups that offer benefits and non-financial rewards.
While such a compensation strategy is important in helping a company's finances, it doesn't do much in terms of employee performance and may have a side effect of high employee turnover. Hence, it's rarely adopted indefinitely and is usually only used for a period of recovery.
MEETING THE MARKET COMPENSATION STRATEGY
Meeting the market compensation strategy involves paying within the market range for salary price. This is the most commonly utilized compensation strategy because with employees paid fairly, you can still expect employees to perform well without shelling out additional cash.
And with the addition of other rewards, you can even compete with companies who can afford a leading compensation strategy in order to motivate employees and retain good talent.
Key Factor to Consider in Determining Compensation
Before coming up with a compensation plan, it's best to watch out for these factors in order to make an informed decision that will be best both for your company and your employees.
Performance - Reward qualified people who provide results. By basing compensation and pay rates on employees' performance, you also encourage high performance.
Experience - How much experience an employee has is correlated to how much value they can offer to your company, hence compensating them more when they have more experience is a good way of attracting experienced employees.
Current Wage Level - People tend to move towards the direction of growth. When compensating a new hire, it's important to consider their current wage level and match, if not exceed, what they are currently earning, in order to provide a compelling reason for them to choose your company over your competitors.
Get in Touch With a Professional Compensation Consultant
How much compensation and rewards you should offer employees depends on many factors from your financial performance, business goals, and the nature of your business, all the way to market salary price, industry practices, and demand for the role.
Reach out toFutureSensetoday for compensation and rewards consulting. Let us help you determine the bestcompensation and reward strategy that will help you achieve your business goals.