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Compensation Incentives Theory and Practice Nadine Smith

Compensation is the direct financial consideration offered by employer to employee in return for work done or service offered by employee during the period of employment. Incentives are extra benefits given to employee in recognition of high quality performance. Incentives also ensure employee-loyalty to organization. In a way, incentives inspire employees to put in extra effort in work performance. This management practice reduces employee turnover and provides continous harmonious workplace environment. This strategy is also implemented for new recruitment. Sometimes, organizations may not offer high remuneration to attract best talent in business; but the extras like additional accommodations, facilitations and flexibility offered attract talented employees. The practice is based on human psychology that forms individual preferences and choices; and makes employees feel important and with sense of dignity. The employer organization can offer direct financial, indirect financial and non financial compensation to the extent that will prove beneficial to all concerned. (Compensation Systems: Design and Goals). This paper discusses forms or manner in which incentives are offered by employers and how incentives affect, impress and prompt employee response. We are living through some very challenging and chaotic times for organizations as well as individuals. During times like these, organizations needs for achieving competitiveness and individual's needs for achieving a greater sense of career balance, purpose and meaningfulness in their lives become increasingly important. While most people think compensation and pay are the same, the fact is that compensation is much more than just the monetary rewards provided by an employer, an organization's compensation practices can have far reaching effects on its competitive advantage. Employee engagement is a critical competitive advantage, as organizations should recognize and address both the diversity of employee's needs and motivational factors. It is advisable to focus on addressing

important needs common to the majority of employees, however, needs which may be important to smaller numbers of individuals should not be underestimated or overlooked, as they could also be likely to have significant impact on engagement and commitment levels. Employees find compensation decisions important. How much one is paid by the organization is of extreme importance, but often how the decision is arrived for total compensation is also very important. Supervisors need a compensation plan that creates a climate in their work unit that is individually and collectively conducive to completing that unit's work. Pay for Performance is an effective tool to increase employee efficiency and ensure increase in production, is not viewed with favor. General Motors VP Roy Roberts offers a refreshing alternative view that underscores the inherent ambiguity of words like fair and equal: "To treat people fairly you have to treat people differently." (Quoted in Schlesinger [39]). (cited by Baker et al. 1988). The message is clear: It is not only money that makes the mare go. Offering monetary rewards to a select few in workplace causes a divide among employees. Basic concept in designing compensation system is to offer equity to employees. It is stated that: Workplace equity refers to the perception that all employees in an organization are being treated fairly. External pay equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations. Internal pay equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization. (Compensation & Benefits, Compensation Systems: Design and Goals).

It is evident that compensation considerations are aimed to ensure high morale, excellent performance and loyalty of the employees. Care has to be taken to consider the needs of individual employees as each one of them has different perception, talents and unique identity. One dissatisfied employee can act like a spark in a haystack. It should be understood that employees should not feel that they are considered as items to be bought with money and that their intrinsic and finer values are being ignored or sidelined. To avoid this, depends upon organizational philosophy must understand employee psychology. Organizations are concerned with pay not only because of its importance as a cost of doing business, but also because it motivates important decisions of employees about taking a job, leaving a job, and performance on the job. (Adeniji Anthonia Adenike. 2009). While Pay for Performance is aimed at Improved recruitment and/or retention, increased individual and/or organizational performance and greater fairness in pay. (A Report to the President and the Congress of the United States). This policy has to be implemented with discretion. It is likely that such distinction among employees in workplace may cause dissatisfaction among those who are not rewarded. The aim of recognizing and showing appreciation for high quality performance should benefit all employees in workplace. The expression pay for performance refers to a pay strategy where evaluations of individual and/or organizational performance have significant influence on the amount of pay increases or bonuses given to each employee. (A Report to the President and the Congress of the United States). Here the words each employee are indicative of importance of ensuring benefits to all employees. The signal is loud and clear as: Aggressive pay-for-performance systems ultimately involve
distinguishing workers on the basis of their performance, and there is a large behavioral literature arguing that treating employees differently from each other is detrimental to employee morale. (Baker et al. 1988). This serves as a guiding priniciple while designing compensation system

in organization.

In the pay for performance system managers cannot be the employees friend. An organization uses job analysis, evaluation and pricing to value the company pay for performance. You have to know your employees and understand want what money means to them, others want a plaque, some want time off or pay vacation. An example is Mary Kay employees: they will work themselves crazy just to get the recognition for a car or at their rally be the employee of the quarter. The motivation tool is part of the compensation package. When you get someone something for a job well done others wants the same too so this will motivate them even more to work harder. An example would be in my company we have a quarter board that soldiers get a four day weekend (time off) if they can go without getting into trouble,achieve a high physical fitness test and other incentive. All the lower enlisted work hard for this recognition and this is one form of pay for performance we have at our company. Although pay for performance is a nearly universal objective of executive compensation programs, there is little agreement on how to measure it and monitor it, many companies believe that they achieve pay for performance because they award compensation that is above a target level when performance is good and below a target level when performance is poor. But there is evidence to suggest that management and workers alike believe pay should be tied to performance, but a pay for performance system is only as successful as the performance management program on which it depends, so we can define pay for performance as any compensation system that links pay and performance. Jobs that require decisions of morality and ethics cannot be left alone to each individual as they represent the organization and their views may not necessarily match that of the organization. Moral and ethical decisions should be a concern of every stakeholder including corporate executives and management. It is a good idea to have high performers work with low performers, however, the high performers need to be acknowledged, recognized, and rewarded appropriately for their

contributions. Usually, high performers that are not recognized properly may reduce their standards to match the average standards, meaning they are going to do the minimum just to get by until a better position comes along. In many organizations diversity has become one of the major focuses for enhancing organizational productivity. People from diverse background and nationality want to work in an environment where they feel valued and empowered to contribute to the company with their expertise and ideas for the organization's success. If a program wants ton get the best out of workers they should have employees participate in the process. What I mean by that is employees should have some input with managers in the designing and development of a performance plan. I believe that this will help the employee better understand the organization goals and structure. They can also see how they are important with their contribution or contribute to the company mission, goals and also success. This is a good reinforcement for employees and they will know that their performance is important to the success of the organization. Most organization there is a set salary but you can make extra money through cost of living. An example is the military, no matter what rank you are there is a base pay but the cost of living for housing allowance is different and it is base on the location you are. So the cost of living in New York is high than the cost of living in Savannah. Individual incentive you can get out of the military where you get extra money is if someone is airborne qualified they get an extra $200 a month, Drill Sergeanst also get extra money too. Our class textbook talks about merit pay and how it links to the individual performance. Lump sum bonus is another way you can get pay for performance. This can be cheaper for the organization too. Look at the military and they are downsizing and some of the ways they are getting soldiers out is to offer lump sum payment. They are offering a onetime payment of 30k to soldiers with 15 years and they will be out of the army. Most of these somdiers are jumping on the band wagon but dont they know that this is cheaper for

the military and in the long run it not good for them. Most of them just see the money but not the way it going to cost them in the long run. Yes they get that money for a job well done but if they wait 5 more years and fully retire then they would have get retirement pay and benefits for the rest of their life. Another lump sum bonus that the military offer is when they are low on a certain soldier skill such as scout, infantry men then would offer big lump sum bonus to soldiers who sign up for those positions. Some advantages of pay for performance would improve the employee satisfaction level because those employees know if they are work performance relates to their job. There will be no discrimination because they know that pay is based on performance. Rewards and compensation are given on the basis of the employee performance rather than seniority or experience. I believe that everyone in the organization will be motivated and willing to achieve more in order to earn that incentive. This will also help the organization to align these incentives or pay for performance to achieve the organization goals. Some disadvantages of pay for performance would be impossible to determine tasks that are to be fulfilled in the future precisely enough so that variable pay for performance can be applied. In todays society we continually faced with new challenges, and superiors have a hard time what that employee will do in the future. Would it be wrong to assume that employees that are subjected to a pay for performance doctrine would accept the individual responsibility in a reactive way and do their work accordingly to those rules. The disadvantage to this is many of them would spend much energy and time trying to manipulate these rule or doctrine in their favor. I see this in the military on the evaluation for many soldiers get at the end of the year. If we do not counsel soldiers or employees then we usually remember what they do at the end but not the beginning of the evaluation. This is why we have to have monthly evaluation and use that as your assessment tool. Pay for performance results in employees restricting their work to those

areas covered by the performance criteria. This may induce employees to spend considerable time and energy during their work trying to find a better paid job with another firm. They therefore neglect their tasks as they are not contractually fixed by the performance criteria. I believe that sometime pay for performance tends to take out the work motivation and the joy of fulfilling a particular task. However, such motivation is of great importance in a modern economy because it supports innovation and helps to fulfill tasks going beyond the ordinary. The designing of compensation systems revolves round the employees who are the central core of the organization. Compensation is a critical piece of overall human resource strategy. Because compensation is both visible and important to employees,. (Milkovich and Broderick p. 5). It is further mentioned that decisions related to labor costs and performance are strategic as these are of critical importance as they contribute to the success of the business. The relationship between the organization and manpower is summarized as: What counts here, though, is the ability to recognize what really drives human behavior and in which parameters there is a genuine correlation between pay and lasting performance. (Fernandez-Araoz C., Rosmarin M. p. 1). Compensation Incentives are fringe or additional benefits offered by organizations to employees. It is evident that, communication with regard to rationale behind incentives, is important as pointed out by Gerhart et al. (1995) as : The most technically sophisticated payment plan can generate desired employee reactions or exactly the opposite. The actual effect depends on whether the rationale for the payment plan is understood and accepted and whether employees' perceptions of the facts upon which the rationale is built (e.g., the company's financial health, the pay of employees in other jobs or organizations) are the same as the perceptions of those charged with seeing that the payment plan has the intended effects.

Forms of Incentives vary in nature and content depending upon organizational structure. Incentives in general practice are: Additional Pay for Special Duty in foreigh country: This practice is generally followed in military services. Foreign postings for military servicemen is a cause of concern for employee and family. Providing additional monetary consideration in such cases, at least offers some relief from financial aspects. Promotion is another incentive offered. However, there has to be a uniform policy in this practice. Size, financial stability and continual growth of organization are factors to be taken into consideration while implementing this practice. Transfer to a location of preference is practicable when organization has different operational divisions and units. Such transfer can facilitate employee to choose location of convenience. Incentives in form of health benefits is one of common practice. Organization offers financial benefits to employee for health needs of employee and his/her family. It is a welcome relief. Heavy expenses are incurred in prolonged sickness or accidents. This is one of major cause for concern that is addressed by organization; and employee feels secure and assured. An example of how strategic Total Compensation plan is related to the Organizations goals can be the new Obama Health Care Reform Bill. This bill will reform the American Health Care System because it now makes health care more affordable to Americans. Healthcare is one of the incentives that cost organization so much money. We know this law has been arguable because we see this is the presidential debate. In many organization will be for and others against it. Health care compensation packages in most organizations is costly since the cost of health care cost some much. I believe if they use this compensation package in any organization then that organization can still compensate employees in other area. At the end of the day, for companies to experience meaningful growth and progress, they must develop the means of helping their most valuable assets their employees, and build a total rewards foundation that encompasses a compelling future, a

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positive work environment, Opportunities for personal and professional development and financial rewards. Education benefit is offered to employees for educational expenses of their children. Expenses related to education take away substantial part of individuals income. This consideration helps employee to plan expenses for other needs of family. Shift working and flexibility in working hours offer choice to employee to select convenient working shift and to plan time for other activites related to personal and family needs. This practice is helpful to employee in augmenting income from other sources of employment or activity. Flexibility in working hours, in families with young infants and children and where both parents are employed, offers considerable convenience and comfort with regard to looking after children. Pregnant woman employee are facilitated by offering less laborious duties. Single women with children are offered in house children care company paid care homes. This is considerable relief to single mothers from concern for children while on job. Paid vacation is another welcome incentive. This offers relief from work stress and provides time and money to enjoy outings with family. Transportation of employees to and from workplace, by company owned or hired transport is another relief measure for employees as it reduces travel time. It is also beneficial to employer as employees reach work place on time. Bonus pay is another monetary benefit offered to employees. The practice will consider deciding standards for the amount, mode and manner of such incentive. Company events, get-togethers, lunches or dinners are helpful incentives, though not monetary. Such practice creates environment of goodwill in organization. Reasonable accommodations and facilitations for disabled employees have to be provided under provisions of ADA. This is a legal obligation upon employer and discrimination or

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infringement in this regard is liable to face punitive action by EEO. Other incentives or benefits are provision of pension and gratuity payments to employees with long service. Some countries have acts related to such provisions. It is crucial to remember that what works for one organization may not work at all for another. Therefore, surveys of "best practices" are useful to the extent that the surveys report a diversity of best practices and the reasons why different practices are best for different organizations. The ultimate choice of a best compensation strategy rests, of course, on its fit with other human resource activities and its fit with the business strategy. (Gerhart et al. (1995)) Compensation system have to focus on two related aspects of business. These are recruiting skilled, talented and innovative employees and the quality-performance output (achieving the Goal) for the organization. The modern world is highly competitive and business organizations have to be equipped with the latest technology and efficient manpower. The philosophy is simple and straight: Successful business organizations need talented manpower and talented manpower needs successful business organization. Ranganekar mentions in his book, In the Wonderland of Indian Managers, that employee perception in employment, is to be viewed on three axes: Concern for organization, Concern for self interests and Concern for users. It is important to assure that coordinates on all three axes have maximum value. It is an ideal situation. In practice, business activities are also influenced by external influences beyond control of organization. In any case organization must aim to maintain it house spic and span to face external challenges.

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References Adenike A. A, Covenant University,Ota, Nigeria, Abstract, Tools and Techniques for Designing Designing Effective Compensation Systems., Copyright 2009. ww.igiglobal.com/chapter/tools...designing...compensation/13324 A Report to the President and the Congress of the United States by the U.S. Merit Systems Protection Board , Designing an Effective Pay for Performance Compensation System, Sec2:x (8 of 56), www.mspb.gov/netsearch/viewdocs.aspx?docnumber=224104... Baker G. P, Jensen M. C, and Murphy K. J. Compensation and Incentives: Practice vs. Theory. THE JOURNAL OF FINANCE .VOL. XLIII, NO. 3 .JULY 1988 people.exeter.ac.uk/maf206/baker_jensen_murphy_1988.pdf Compensation & Benefits, Compensation Systems: Design and Goals., (n.d); hrcouncil.ca ... HR Toolkit Compensation & Benefits Fernandez-Araoz c., Rosmarin M., Compensation, Designing fair management reward system; THE FOCUS VOL. XIII/1(p. 62). www.egonzehnder.com/us/download/62_Intern_II. Gerhart B. A, Minkoff H v B and Olsen R. N. Employee Compensation: Theory, Practice, and Evidence. Cornell University ILR School, DigitalCommons@ILR Working Paper Series, Center for Advanced Human Resource Studies
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Milkovich G., Broderick R., Developing A Compensation Strategy,Working Paper #89-19, Center For Advanced Human Resource Studies, School of Industrial and Labor Relations, Cornell University. digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1416..