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Total compensation systems are a necessary aspect of company human resource management. The base wage and contribution policies are critical in attracting, retaining, and incentivizing human capital. Each firm should adopt an approach to developing compensation packages that align with the organizational structure and the company’s solvency. Business strategy has a direct impact on total compensation systems as the salary and benefit rates are optimized by company requirements and design.
Total compensation systems are a critical function of company management and human resources. It directly affects employees and their salaries. The compensation packages are developed to incentivize and maximize employee performance. Each firm should focus on optimizing the compensation system according to the company’s needs. The total compensation system of each firm depends on the chosen business strategy as it determines the organization’s finances, human capital needs, and staff performance.
Total Compensation System
A total compensation system is a comprehensive financial package that is offered to employees in any company. It consists of base compensation, pay incentives, and indirect benefits. Base pay is the largest portion of the payment, which consists of an agreed-upon salary. The payment is fixed and continues as long as the person is employed. Pay incentives are variable payments that are offered by the company. They can be considered a method of profit-sharing with employees since these payouts are usually made as commission or performance bonuses. Most firms choose to pay a larger ratio of fixed wages over incentives. Finally, the indirect benefits part of the package includes common employee benefits that supplement salaries. It includes insurance, paid time off, retirement programs, and additional perks that the position offers (Bessette, 2014). The corporate business practice has developed an emphasis in all parts of the total compensation system as the incentives and benefits can often match and exceed the base salary in monetary value.
Any compensation systems must align with the organizational objectives and company business strategy. The concepts are interrelated as it is essential to determine the best compensation structure which helps to manage profits and equity. Also, the compensation policies have an effect on workplace culture as additional pay-outs can impact employee retention, motivation, and productivity. The total compensation system is usually a firm’s largest expenditure. When developing compensation packages, a business philosophy should be considered. The rates, benefits, and incentives should be consistent with the complexity and solvency of the firm (Bessette, 2014). Therefore, the company should maintain a cost-effective package that balances employee and business interests.
Business Strategy Effect
An innovative business strategy is common among high-technology firms. There are multiple dimensions of compensation within innovation-seeking companies. Technological innovation implies the firm will take a product differentiation position within a market. Product differentiation consists of developing and producing unique products that provide value to the consumer thus establishing a competitive advantage over competitors. An innovative strategy seeks to increase pay levels of positions that are critical in new product development. This includes research, development, and design. The CEO can choose to connect the innovation strategy to non-executive compensations as it garners support and motivation for the employees. The firm compensation structure is based on investment in necessary departments that ensure the success of the business strategy. Besides, the firm can add time-dependent compensation incentives to retain talent which has gained experience and helped to implement the business strategy. A concept of pay mixes gives a disproportionate advantage to long-term pay. Also, employees may be offered extended access to stock options vesting (Yanadori & Marler, 2006). The internal pay structure of highly technological firms is decisively affected by innovative business strategies.
Executive compensation packages are dependent on a variety of factors. Managers are responsible for executing the firm strategy and directly influence corporate performance. The company can establish a strategy of cost leadership that focuses on high volume sales at lower prices. The alternative is the differentiation strategy which focuses on brand recognition and product innovation with a lower return on asset. In either approach, empirical findings support that firms customize compensation systems to reward management styles that pursue chosen business strategies. This is critical since the compensation system becomes a tool that the board of directors and shareholders can use to encourage management to adhere to a certain company direction and be more efficient in its implementation. Also, regulators may use this information in audits or legislation on executive payouts, taking into account the correlation between firm strategy and compensation packages (Balsam, Fernando, & Tripathy, 2011).
The system is directly interrelated to business strategy through performance-linked compensation and long-term incentive plans. Companies with a product differentiation strategy use performance incentives more commonly than with a cost-leadership approach. However, the strategy did not lead to significant differentiation in long-term incentives. That may occur when such incentives are based on qualifications and experience which are independent of the current business strategy the company chooses to adopt. It is critical to include strategy in developing the compensation structure because a poor design results in an adverse effect on performance. Evidence suggests that the contingency theory applies to compensation systems sincere there is no universal approach to performance incentives. A compensation system correctly aligned with a business program positively influences the performance and fulfillment of goals based on the strategy (Chen & Jermias, 2012).
Developing a comprehensive and competent total compensation system requires knowledge of the company operations. The business strategy determines the company’s needs, available finances, and investment into the staff. In turn, the compensation package will influence human capital. Budget allocation is an aspect that must be considered as the company has to determine salary ranges for each position. Salaries have to remain highly competitive to attract experienced and qualified individuals that are necessary for innovative strategies. If a company is restructuring its debt or attempting to raise total assets, the compensation package may be smaller with a focus on long-term benefits that do not require immediate payouts.
If a firm is choosing a business strategy to increase sales or customer support, introducing performance-based incentives will motivate employees to increase productivity in those areas. Furthermore, the total compensation system has a function besides pure financial incentives. The time invested in developing the system by business strategy and engaging the employees in the process provides an excellent opportunity for feedback. The company can re-examine its values and priorities. Management can enhance its operations and organizational structure. Meanwhile, the workplace culture shifts accordingly, and there is more interest amongst employees to seek out professional opportunities. The alignment of policies and payments of the total compensation system with strategic business aspects optimizes company efficiency.
Balsam, S., Fernando, G., & Tripathy, A. (2011). The impact of firm strategy on performance measures used in executive compensation. Journal of Business Research, 64(2), 187-193. Web.
Bessette, D. 2014. Total compensation and how it is used in an organization’s human resources strategy. In 11th International Conference on Information Technology: New Generations (pp. 573-574), Las Vegas, NV. doi: 10.1109/ITNG.2014.12
Chen, Y., & Jermias, J. (2014). Business strategy, executive compensation and firm performance. Accounting and Finance, 54(1), 113-134. doi:10.1111/j.1467-629X.2012.00498.x
Yanadori, Y., & Marler, J. (2006). Strategic Compensation: Does Business Strategy Influence Compensation in High-Technology Firms? Strategic Management Journal, 27(6), 559-570. doi:10.1002/smj.521