Compensation Strategy and Business Strategy

19 Oct 2021

Chapter 1: INTRODUCTION

 

 

Compensation is defined as a reward or bonus that is given by the company to its employees. The form of compensation could be cash or non-cash, it is a form of appreciation or feedback that given to the employees outside of their regular wages for the result of their work. There are different types of compensation, which are base pay, sales commission, overtime wages, tip income, bonus pay, recognition or merit pay, stock option, non-cash benefit, or other benefits such as insurance, standard vacation policy, and retirement. However, there is a system called the Pay model, which helps the managers to make a plan and analyze the right

compensation for their employees. There are three important factors in Pay model, the first one is the objective of the pay model, the managers must understand and know what is the impact of doing the pay model that they choose so it could be run effectively. The second one is the policy for the model, they need to consider the policy that will work as the base of the pay model, so every process that happens in the pay model could be trusted because have clear rules and regulation. And the last is to identify the techniques that could be used to connect the objectives and the policy that is decided by the company, the right, and effective pay model to be used is the model that has a strong value in both objectives and policy, however, the tools or strategy that

will be implemented to gather those two aspects also very important. When the compensation model is a match their objectives, it could help the company to identify whether the decision is beneficial or not for the company in the long term. In order to decide the pay model, there are steps of how to make an effective one, which are; the company needs to develop a program outline, choose someone to be responsible to design the compensation program, create the compensation philosophy, doing a job analysis to every sectors and position in the company, do job evaluation for every individual, determine grades criteria for each level, create the grade pricing and range of salary, create an appropriate salary structure, make a policy for salary administration, get approval from the executive board for the salary program, then communicate the program to all organization members so the program could be executed and the last but not least, monitor how the program works, get feedbacks then evaluate.

It is also proved by some literature that has been written. One of the essential components of compensation strategy is the motivation of the salesforce, the company needs to have a fair

and specific compensation design to make it effective because there is a working relationship between the employee’s sales and the company sales. When the compensation helps to gain employee’s attitudes and performance, the company performance will be improving too (Madhani, 2015). By doing an effective compensation strategy, it will not just affect the employee’s attitude and performance, but also could be gaining safety, innovation, creativity, and

 

quality of the working environment in the company (Gupta & Shaw, 2013). In the compensation strategy, there are two types of pay, which are Pay Level and Pay Mix. The composition of the strategy will help the company to reach its goals by making the employees happy and loyal. Based on Herberg’s theory of employee motivation, the Pay Level is called the “Hygiene Factor”, where it doesn’t give any contribution to employee motivation, it is only a base and formality that is given by the company. While, the Pay Mix is called the “Motivating Factor”. Where the Pay Mix will be affecting the number of achievements of the employees based on the variable pay that they received (Madhani, 2015).

To summarize, most of the previous research finds that compensation has a really big influence on a company. If the company competes on their sales with the competitors, the HR Department competes on the benefits or compensation that they offer to the employees. Because, how the company treating their employees will not just important for the employee’s loyalty but also for the public opinion that will be affecting the brand image of a company. There are many types of compensation that a company might consider offering, however, the number of benefits that they spent for their employees need to be planned and examine thoroughly to make sure that what they are giving is balanced with what they get in return. When what the company gives already balanced with what they get, it means that their compensation strategy is effective. Having an effective compensation strategy could be gained by keep evaluating and analyze the needs of both company and employees, making sure every single step of deciding the pay model and the compensation type is very important to make sure the cost that spent could be redeemed on the long-term or even short-term goals.

 

 

Chapter 2: ANALYSIS AND DISCUSSION

 

 

Business strategy is a plan of how a company wants to be run and what are their plans to face the market, compete, and how they want to be seen on the market also for their goods, services, or the production process for it. It is a very important essential for a company to have a great business strategy because they need to have clear goals and plan to make sure that everything that needs to be done in the company could be run effectively. To have an effective business strategy, there are some core steps that a company needs to do. Which first, having a clear leadership vision because is a key point that will help as the foundation for every business process. The second one is having a positive and productive culture in the workplace. Third, having a marketing plan for the company, having a great management team because the management is the structure of the company and once it is weak or fragile, the company will be messed up and it will be affecting the employee’s motivation. Fourth, having a strong, effective, and efficient business system that helps the company to run their business. And last but not least, having lots of resources that needed by the company, one of the most important resources is the human resource. Having SWOT (Strength, Weakness, Opportunities, and Threats) analysis also important in business strategy, so they could evaluate what is needed by the company, what are the opportunities and value that the company has, and also what the competitors have but the

 

company doesn’t. One of the factors that could be influencing the result of SWOT is the performance of people that work in the company. That is why the compensation strategy and business strategy have a really strong relationship to strengthen each other.

As stated in the previous chapter, compensation has various types of form, The first one is base pay, base pay is the amount of salary that is given to the employees, which is the minimum amount of salary that is expected to be given to them hourly or monthly. Sales commission is the amount of money that is received based on the product that they sold or their role in increasing the number of sales. For example, a car salesperson sold 4 units of the car in a

day, he will get compensation for each car that he has sold. Overtime Wages is the amount of pay that employees received after having a task or job outside their working hour, they get extra money for the extra time spent. Bonus pay is an amount that employees receive as a form of “Thank you” from the company, this compensation could increase the employee’s productivity and motivation to keep giving the best efforts for the company. Recognition and merit pay is a program where all of the employees have an equal opportunity to get recognition for their work. A stock option is where employees are considered as the investor of the company, they get the rights to buy or sell the stocks but not the obligations for it. Non-cash benefits are the bonus that the company gives to the employees in a form of good or services or property, the example is when a company provides a great facility in their office for the employees and make them comfortable. And last but not least are other benefits such as insurance, standard vacation policy, and retirement, this type of compensation is not mandatory for a company to provide, there are

no specified requirements from the government for this. However, if a company profit the other benefits, they will be easier to compete with other company to find people to be hired because we have more benefits that could be offered.

Also mentioned before, to have a successful compensation strategy design, a company needs an effective pay model, in order to have an effective pay model, there are objectives, policies, and techniques that needed. The objectives that need to be considered on the compensation model must include efficiency, fairness, and conformity. The efficiency is needed to be considered by seeing if the compensation model could give effective changes or impacts towards quality and performance of the company, also the consumer satisfaction and the amount of cost that is spent by the company. Fairness also needs to be considered during the making of pay model structure, because with fairness, we show that the decision that we are making could be a benefit for every employee in the company by treating them fairly so they really get what they work for, and also fulfill their needs. Conformity also important for a pay model, because a company needs to know the salary regulation from the government sides. For supporting the benefits, the policies need to be considered too. The policies need to cover four different aspects which are alignment, external competitiveness, contributions, and management. The last is the techniques to gather both benefits and policies, the technique is how the company conduct working analysis and assessed their employee’s performance based on the performance guidelines that the company has. What makes the compensation strategies and the business strategies are the points of view that they trying to reach. If the compensation strategies are

 

reaching from the internal aspects, gaining loyalty and employee performances, the business strategies more focus on the business process, the management quality, and sales that is gained for the company. This research shows how both aspects could influences each other.

The company needs innovation to keep growing and compete with the competitors, the ideas to make an innovation could be gained from the employees or people who are involved in the company. Therefore, they need to make sure that people who work it could get the highest satisfaction that makes them happy to do what they are working because of what they get in return. The ideas that the employees could suggest are the biggest and most impactful investation that a company could have. The correlation of compensation and business strategy relies on how the employees perform and what could they make in return. And when they make achievements, the company needs to appreciate them so they would give more and more contribution ahead.

 

 

Chapter 3: SUMMARY AND SUGGESTIONS

 

 

To Summarize, compensation is a bonus that is rewarded to the employees for what they have contributed to the company. Inside compensation, there is a pay model or compensation model where the managers design the compensation strategy that is suitable for their company and its employees. However, there are two types of Pay, which are Pay Level and Pay Mix that is also part of Herberg’s theory that influence the employee’s motivation and productivity.  In a company, there is another important aspect which is Business Strategy, which is how the company decides the business process from vision, mission, goals, value until their Strength, Weakness, Opportunities, and Threats from the SWOT Analysis. Both aspects are important for the company because compensation strategies and business strategies have a strong relationship

and support each other for better company performance. Because the human resource role is very huge for a company. Therefore, their motivation, productivity, and satisfaction really giving a huge impact on the company’s output. In order to have effective results for both compensation and business process, the company needs to follow every step and requirement. From how objectives and policies could influence compensation strategy, and how the positive workplace situation may affecting business strategy. HR is part of a business strategy that has a strong correlation with the Compensation decision that is made. From lots of types of compensation that the company may choose, from overtime wages, paid-off wages, retirement, insurance, until

stock option, not every kind of it must be given by the company, but the more offer the better chance for the employees to give their best performance. Mostly for the most outstanding employees, we need to make them stay loyal to the company because we need their contribution for the long term.

My suggestion for companies out there, you need to maintain not just the quality product or service that you are offering but also people who are working in the company. The employee’s productivity and motivation could give an amazing result for the company because the output of the company is gained from people who are working for it, and to get the best quality, their satisfaction as employees also needed. There are lots of steps to be faced during the decision of

 

compensation strategy, pay method, and also other benefits that you want to offer. However, you also need to make sure that your decision is aligned with the company objectives. The compensation that the company offers must be on the capability of the company itself and also based on what the employees needs. The compensation doesn’t have to be pricey, but what matters is it could make the employees feel that the company cares about them. As simple as giving them an unlimited snack corner on the office, or making a room for the employees to relax within the hectic time of work, or giving a refreshing corner for them to entertain themselves. This trick has been implemented by many big companies such as Google and Shopee. Another example is IKEA, IKEA conducts an event to appreciate their employees. This attempt will be beneficial for the company for two different sides, which are their CSR and employees’ loyalty. On their websites, IKEA also shows some programs that they offer for the

employees and what is the benefits for people by joining IKEA’s family. It is showing that IKEA trying to have competitive advantages not just from their product or service but also from their employee’s quality, loyalty, and benefits.

 

 

REFERENCES

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  • Madhani, P. M. (2015). Sales Compensation Strategy. Compensation & Benefits Review,

47(3), 107–120. doi:10.1177/0886368715614940

  • Gupta, N., & Shaw, J. D. (2014). Employee compensation: The neglected area of HRM research. Human Resource Management Review, 24(1), 1–4. doi:10.1016/j.hrmr.2013.08.007
  • https://www.imd.org/tbl/leadership-reflections/business-strategy/
  • Yanadori, Y., & Marler, J. H. (2006). Compensation strategy: does business strategy influence compensation in high-technology firms? Strategic Management Journal, 27(6),

559–570. doi:10.1002/smj.521

Business Strategy, 19(2), 25–27. doi:10.1108/eb039918

Tasliyah Athaya Nahdah 2301926005/MG Herlina