The objective of this chapter is to review the general practices and principles of
compensation management. We’ll briefly review new trends in compensation management, the
common offerings, and explore what the future holds.
Understanding compensation is a key to understanding compensation management. The
compensation policies are driven by each company’s philosophy of how best to compensate their
people. The complexity of compensation programs drive the complexity of compensation
management and in turn drives the compensation systems. Compensation management and
compensation administration are used synonymously in this book.
What is compensation?
The dictionary defines compensation as, “Something, such as money, given or received as
payment or reparation, as for a service (or loss). “ So for the purposes of the book, we’ll assume
that an employee works for an employer by providing a service (their job), and the employer, in
turn, compensates the employee.
5 compensation trends employers should consider
What compensation trends will you be considering as you prepare your 2013 compensation
strategy? There are a lot of factors at play in the market today, and employers need to be aware
of the trends to be able to make choices that will retain top talent.
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Ongoing compensation trends will affect 2013 choices
Economic conditions stagnated or reduced salaries over the past 3 years. As conditions begin to
improve, companies are realizing that their market competitiveness may have suffered. Many
companies are beginning to reevaluate their existing salaries and the salary structures by
undertaking market studies to determine where they stand.
1. Since some employees may be eager to seek other employment as the labor market opens up,
it is important to understand market positioning in the event that compensation is one of the
main drivers for seeking another job, particularly for recent graduates.
2. Employees are only aware of what their getting (cash compensation, benefits, professional
development, etc.) if their employers tell them so. Total rewards statements are effective in
getting that message across.
3. Concurrent with improvements to the economy is the fact that companies are refocusing on
their strategic plans. Ensuring the total rewards package is properly structured will enable
employees to contribute towards goals that relate to the strategic plan. However, this is a
significant effort that needs to be undertaken by HR.
"Not only must that base pay be competitive and commensurate with the market and both
performance on an individual and corporate basis, but the opportunities for incentive
compensation should be provided to those that can actually impact the strategic plan." Diana
Neelman told us in a recent BLR webinar. Incentive compensation provides organizations with
another layer of "pay-for-performance" in addition to annual merit increases to base salary,
which are relatively modest as compared to the impact incentive compensation can make to total
4. Many companies also want to refocus on pay-for-performance to use their compensation
dollars more effectively. While many companies embrace a "pay-for-performance" concept, this
was somewhat stalled during the recent economic crisis. However, as the market begins to
improve, companies are returning to this concept and looking to reward employees for their
True merit-based pay is most effective when it can be tied to a performance management process
that objectively and accurately evaluates individual performance, so that the merit increase is
commensurate with the performance contribution of the individual, while recognizing company
budget and overall performance.
While many companies want to use pay-for-performance systems, there are still organizations
who continue to provide employees with across-the-board or cost of living increases, with no
relationship to performance. In many of these organizations, this is a cultural issue that has
existed for many years, which is difficult to move away from as employees feel a sense of
5. While difficult, the culture can shift to transition to a merit-based process. Strong
communications with a commitment from the top down is the first step to moving away from
entitlement, along with effective management training. While turnover may result as part of this
transition, most likely it will be from the poorer performers who have hidden behind across-the-
For more information on compensation trends for 2013 and how they may affect your
compensation strategy, order the webinar recording of "HR’s Compensation Update: Tips,
Trends, and Tactics for 2013." To register for a future webinar, visit http://catalog.blr.com/audio.
Diana D. Neelman, CCP, is a Principal and Senior Consultant with Compensation Resources,
Inc. (CRI) , in Upper Saddle River, New Jersey. With over 20 years of collective compensation
and HR experience, Neelman is responsible for business development and project management
in all areas of compensation, consulting to a variety of industries on salary administration,
performance management, and incentive compensation, with a specific emphasis on executive
and general compensation matters within not-for-profit organizations.
New Trends in Employee Compensation
In today’s day and age, compensation packages have evolved to include perks and benefits that
were unheard of a generation ago. Gone are the days of meeting with employees once a year to
give them a pat on the back and the standard four percent merit increase. With the world
progressing and people’s wants and needs shifting, in order to stay competitive, an
organization’s compensation program must continually change. Merely updating the way a
company pays employees may not be enough to keep pace. Because the current marketplace is
so competitive, in order to attract, retain and motivate the kind of people who are committed to
the success of an organization, it may necessitate a complete compensation system overhaul.
There are a number of catalysts present that have strongly influenced the direction and
philosophy behind employee compensation packages. Things like the changing business
environment including new technology like the Internet, downsizing due to sluggish economic
growth, and the transition to flexible or contingency work forces have caused companies to
rethink their approach to compensation. As well, the old business model of authority dictating
from the top down has been replaced in many organizations with horizontal cross-functional
work teams which require a different system to reward performance. And finally, companies
today want their compensation programs to help increase productivity and reduce costs. But
traditional programs don’t reward employees for cutting costs or increasing profits. This creates
significant conflict between organizational and employee wants and needs. In my personal
experience, when employees see no personal gain for working hard or harder, they have no
motivation to embrace continuous improvement.
A new approach to compensation includes new and enticing ways to attract and motivate
employees with a wide range of perks designed to enhance individual effort and, in some cases,
promote team building and chemistry. While large companies have long touted major corporate
perks, including tuition payments and daycare on site, many smaller businesses are now
providing plenty of attractive cost-effective perks that are having some very positive results. The
following information will attempt to outline the direction employee compensation packages
seem to be going, as well as explain some of the reasons these types of modes of compensation
are gaining in popularity.
To start with, a consideration for most companies is consistency and fairness in base pay
structures. In this era of rather small incremental pay increases, employees feel that if they can’t
be paid more, then they should at least be paid fairly. Therefore, internal pay equity in
organizations and pay for performance are becoming even higher priorities. Things like
automatic incremental raises, simple cost of living increases, and lump-sum merit payments are
quickly falling out of favour. Conversely, growth has been observed in management incentives,
key staff incentives, and multi-year cash-incentive plans focused on the achievement of long-
term corporate goals.
Another trend in employee compensation approaches has been to focus on work/life balance
initiatives. This has become important to many employees, particularly due to the rise in two
wage-earner families. Employees are willing to forego large pay increases for advances in the
area of work/life balance. For example, rather than the strictly structured eight hour work day
schedule Monday through Friday, offering flexible work schedules are more attractive to
employees as a way to achieve more of a balanced lifestyle. Some employers embrace alternate
work arrangements like ten hour work days scheduled four days a week, job sharing between
employees and allowing employees to work from home to offer employees added flexibility.
Working from home is very attractive to some staff to avoid the daily commute and to complete
their work around their own schedule to allow additional time with family. And as previously
mentioned, large corporations can offer things like on-site daycare which is a huge benefit to
employees with children in light of the rising costs of childcare.
Many organizations have also added indirect compensation elements focused on employee
wellness initiatives. Things like having health clubs on-site with free memberships for
employees, offering yoga classes or massage therapy during the work day, offering
complementary breakfasts, arranging social outings like sporting events and concerts and by
offering free wellness seminars for staff. It is in every company’s best interest to concentrate on
reducing stress at work and in their employee’s personal lives. Wellness initiatives in the
workplace can result in less employee absenteeism due to illness and workplace injuries.
And when it comes to the direction actual financial compensation packages are heading, there
have been a number of changes in this regard. There has been a shift from pay for job and status
to pay for individual employee skills and contributions. As well, discretionary bonuses have
been replaced by incentive awards for achieving defined goals and objectives. Innovative
compensation programs also include:
* Broad-banding — or reducing the number of pay grades in an organization while expanding
the actual salary ranges. The benefit here is being able to expand the actual pay for performance
and competency component.
* Competency-based programs — involves identifying the skills employees need to possess in
order to meet expectations in a given position. The key benefit here is that the employee
continually upgrades their skills and the emphasis is on paying the individual and not the job.
* Incentive compensation — this is pay that is directly connected to the performance of the
individual or the team and has been found to increase employee performance in the right
environment. The right environment means employees are actually motivated by money, the
employee’s efforts and results are measurable and the potential rewards are significant.
The final trend in compensation to discuss is stock options, the leading means of compensation
for executives and managers in the 1990s. With stock options, the employee owns the option to
buy stock in their company at a price that is fixed beforehand and is exercised by a specific date.
The goal here would be to motivate the employee to work hard to create the greatest possible
value for their company. So when the time came for the employee to buy the stock, they would
hopefully earn the expected additional value of the stock by purchasing at the lower price. Some
companies are getting away from stock options because of their inherent volatility and are
moving towards a more controllable and predictable system that involves providing variable
compensation that is tied to medium and long-term strategic goals. Still, stock options remain a
component for high-level positions in many organizations. Some feel they are a good avenue for
executive staff to share in a company’s success and to create value for those professionals who
are committed to the company for long-term goals.
All of the various approaches to employee compensation that have been covered are not
appropriate for every type of organization. To implement programs that promote wellness
initiatives or competency and performance based compensation for example, requires a
significant investment of time and resources. While the planning and implementation required is
no small task, it can pay large dividends for the organization in the areas of employee
development and satisfaction, as well as achieving corporate goals and objectives. In summary,
the best compensation system for any organization is one that ties the interests of the employees
with that of the company and creates real commitment among staff to work together to
strengthen the corporation. The best method is to conduct a complete and thorough analysis of
the company to determine what motivates the particular staff members at each level of the
organization. Based on this information, the appropriate vehicles for compensation as discussed
previously can be implemented. This should create a workforce that is motivated and engaged,
which should facilitate the achievement of corporate goals and objectives.