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Employee Compensation Factors and Structure Essay


In the field of Strategic Human Resource Management (SHRM), benefits and compensation systems are important in ensuring that an organization attracts, motivates and retains employees. Other than the direct and financial compensation that employees receive in terms of salaries and wages, an organization needs to include intangible and indirect benefits. However, compensation is dependent on compensable factors such as experience, education, complexity of the task, work conditions, mental demands, physical demands and supervision (Pynes, 2009). This paper discusses the impacts of the compensation structure on the aforementioned factors of compensation.

Types of Pay Differentials, their Impacts on Compensable Factors and Avoidance of Grade Creep

Instead of the fact that there are apparent pay differentials among employees working in similar positions, it is important to focus on the form and shape that these differences take. Besides, various types of pay differentials affect compensable factors such as education, experience, physical demands, mental demands and complexity of duties. As elucidated by Pynes (2009), pay differentials recognize that different employees have different levels of productivity and motivation to fulfill their roles and responsibilities. This is despite occupying similar positions in the organizational hierarchy. Moreover, many organizations tend to reward seniority within the organization as the only of ensuring that they retain, motivate and attract experienced and talented employees. While seniority is important, various types of pay differentials have emerged to address the problem of grade creep and enhance equity amongst employees (Kovach & Millspaugh, 1990).

Pay for performance is probably the most popular type of pay differentials. It is entrenched in the belief that employees ought to receive compensation and benefits according to their level of productivity as well as their performance. While compensation related to employees’ performance and productivity has a sound and logical argument, studies have shown that it has not managed to achieve its desired outcomes in many organizations (Pynes, 2009). The rationale is that this type of pay differentials fails to capture the actual competencies of employees and rewards undeserving employees at the expense of the most productive employees (Kovach & Millspaugh, 1990). Consequently, pay for performance also referred to as merit pay influences such factors of compensation as physical and mental demands of the job. The reason is that many employees who work extra hard to receive extra compensation and fail to achieve it, feel that the job demands are too much. Besides, experienced workers who do not meet the threshold of extra compensation tend to feel that such factors as seniority do not count in job performance. Consequently, they become less motivated to perform their duties.

Pay for knowledge also known as skilled-based pay is a type of pay differential that would also be important in the organization. It seeks to compensate employees according to the skills and mastery they exhibit in their jobs (Bernardin, 1986). Organizations will, therefore, compensate employees according to the amount of tasks they fulfill and the skills they have amassed over time. Subsequently, skilled-based pay influences some compensable factors such as experience, education, and complexities of duties. Pynes (2009) asserts that employees will seek to increase their skills and knowledge by enrolling in training institutes. This will not only allow them to handle complex duties within the organization but also increase their cognitive abilities. As such, they will receive compensation based on their acquired skills in schools, experience and ability to fulfill complex tasks. Another important type of pay differential is longevity pay that seeks to compensate employees who have worked for a prolonged period within an organization. It takes into account that some employees have reached the highest grade possible and their salaries may not change at all (Bernardin, 1986). It is similar to compensation based on seniority although it remains constant. By implementing longevity pay to justify apparent pay differentials, experienced employees will acquire the motivation to continue working for the company while junior employees will not be motivated.

It is important to mention that the above types of pay differentials have different influences and effects on grade creed. For instance, longevity pay may increase motivation among the experienced and senior employees while at the same time encouraging high rates of grade creep (Biswas, 2010). Besides, pay for performance limits grade creep within an organization and encourages performance. This is similar to skill-based pay or pay for knowledge type of compensation.

Comparable Worth and the Effects of Issues and Lawson Benefits and Compensation System

According to Pynes (2009), comparable worth refers to the notion that every job has an intrinsic value. This value is unique to other positions within an organization. Subsequently, jobs that have high value ought to elicit higher compensation than low-value jobs. In other words, jobs that have similar requirements, skills, responsibility and working conditions may not be the same in terms of compensation. As such, comparable worth establishes a comparable relationship among jobs that are similar but have different inherent value (Kovach & Millspaugh, 1990). This way, comparable worth aims at ensuring that there exist minimal disparities in an organization between different jobs that are traditionally associated with such demographic factors as gender, race, and physique among many others.

Various issues and laws affect the whole idea of comparable worth in compensation and benefit system. At the outset, issues of gender disparities and inequalities are pertinent to the concept of comparable worth. The reason is that jobs that were traditionally associated with women tended to have a marginal value. As elucidated by Pynes (2009), it is apparent that male jobs are overvalued while similar jobs that women perform are undervalued in many labor markets. For instance, it is common for nurses (mainly females) to receive less pay than tree trimmers (mainly males). This is even though both jobs require similar skills and competencies. However, critics have pinpointed that the inherent value of a job is not entirely defined by gender belonging. In a case depicting the American Federation of State, County and Municipal Employees versus the State of Washington, the court deliberated that discrepancies that were apparent in labor markets did not necessarily imply discrimination along gender lines (Kovach & Millspaugh, 1990). Pynes (2009) says that labor rates offered by various organizations in the labor markets are not objective. In other words, the criterion for allocating inherent value is prone to subjectivity. It ends up discriminating against jobs performed by women (Bernardin, 1986). Other issues that surround the concept of comparable worth include the passage of various federal and court legislations that ensure that the concept plays an essential role in determining compensation of employees within a specific jurisdiction. Such acts as the Equal Pay Act of 1963 and the Fair Labor Standards Act are major steps towards recognizing comparable worth.

Distinction between Required and Discretionary Benefits

Benefits refer to indirect compensation that employees receive from their organizations. They constitute a substantial fraction of the actual compensation. Pynes (2009) postulates that benefits constitute approximately 40% of the entire compensation expenses of an organization. Benefits attract and retain employees. Such traditional benefits as health cover, elder care, and education assistance assist an organization to attract, motivate and retain employees. There two main types of benefits that organizations provide to employees (Bernardin, 1986). They include required and discretionary benefits. On the one hand, the required benefits refer to a type of indirect compensation where employees contribute a proportion of their salaries and wages as stipulated by federal and state laws. They include benefits that relate to social security, medical insurance, unemployment compensation and workers’ compensation (Pynes, 2009). On the other hand, discretionary benefits refer to additional benefits that nonprofit and public organizations provide to their employees as a way of enhancing attractiveness, employee motivation, and retention. They include pensions, paid time away from work, health insurance, disability benefits insurance and education programs among many others.

As aforementioned, the most important objective of benefits in compensation packages is to attract, motivate and retain employees. As such, it is essential to include discretionary benefits that enhance the achievement of the goal. In our organization, vesting is an important way of increasing the benefits of accruing the employees. It also increases the ability of the employer to retain employees and attract talented and skilled employees. Pynes (2009) articulates that vesting takes place when employees contribute towards their retirement plans. Besides, any employee who contributes towards the retirement has a non-forfeitable right to the benefits even after leaving the company. This fact allows the organization to attract and motivate employees. Other discretionary benefits that the employee ought to consider include defined-benefit pension plans and health insurance. Particularly, health insurance is important for employees who are about to retire due to their health frailty.

Relevant Federal Laws and Regulations Governing Compensation and Benefits

Organizations operate within the context of law. They should, therefore, ensure that they comply with laws that aim at enhancing equitable compensation and uphold ethical and fair standards. Fair Labor Standards Act (FLSA) was passed by the congress in 1938. It dictates the minimum wage that employers ought to pay the employees and the rules that govern child labor. Also, FLSA enhances the working conditions of the workers and dictates that the amount ought to fetch in an hour. For instance, the Congress amended the Act in 2009 and stipulated that all employees should receive $7.25 per hour (Pynes, 2009). This is the minimum wage for all employees working in the jurisdiction of the United States. This does not only allow employees to take industrial actions upon noncompliance by the organization but also affects compensable factors such as working conditions, mental demands and physical demands of the job (Bernardin,1986 ). The law also advocates for comparable worth and ensures that employers ought to comply with international labor standards and laws. Compliance with the provisions of FLSA, therefore, allows an organization to attract, motivate and retain employees. For-profit organizations, compliance enhances positive public image and ensures that it reduces turnover, increases employees’ loyalty and job satisfaction.

Another relevant law that governs compensation and benefits systems in organizations is the Equal Pay Act of 1963. It reduces discrepancies and pay differentials for both male and female workers who perform duties that require similar skills and competencies. In other words, the Equal Pay Act addresses the raging criticisms associated with the concept of comparable worth. Besides, the Act proposes that organizations ought to establish appropriate working conditions for the employees. Although the law allows pay differentials, it prohibits compensation differences that stem from preexisting gender inequalities and racial prejudice.

Quality of Work and Quality of Life Issues are Part of Benefits and Compensation System

Quality of work and quality of life are issues that employers ought to target when choosing the appropriate benefits and compensation system. Pynes (2009) asserts that employers who integrate these two issues when designing their respective benefits and compensation systems enjoy a competitive edge over other companies. The rationale is that the quality of work and life determines the attractiveness of a job (Biswas, 2010). Besides, it enhances the ability of an organization to retain its employees by motivating them. Studies show that women are more willing to take up job opportunities in nonprofit organizations owing to the fact the organizations uphold the quality of work and life of their employees (Pynes, 2009). This is notwithstanding high compensation that typifies for-profit organizations.

In the context of our organization, all issues that revolve around the quality of work and life are important. The reason is that the organization ought to ensure that its employees live a decent life and work in improved conditions. For instance, the organization ought to design programs that affect the social life of the employees (Biswas, 2010). They may include flexible benefits programs and employee assistance programs. To enhance the quality of work, the organization ought to design flexible schedules for the employees. This way, an organization can design pay systems that attract, retain, and motivate workers.


Bernardin, H. J. (1986). Subordinate Appraisal: A Valuable Source of Information about Managers. Human Resources Management, 25(3), 421–439.

Biswas, B. (2010). Compensation and Benefits Design. New York: FT Press.

Kovach, K. & Millspaugh, P. (1990). Comparable Worth: Canada Legislates Pay Equity. Academy of Management Executive, 4 (2), 92 – 101.

Pynes, J. E. (2009). Human Resources Management for Public and nonprofit Organizations: A Strategic Approach. San Francisco, CA: Jossey-Bass.

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"Employee Compensation Factors and Structure." IvyPanda, 26 July 2020, ivypanda.com/essays/employee-compensation-factors-and-structure/.

1. IvyPanda. "Employee Compensation Factors and Structure." July 26, 2020. https://ivypanda.com/essays/employee-compensation-factors-and-structure/.


IvyPanda. "Employee Compensation Factors and Structure." July 26, 2020. https://ivypanda.com/essays/employee-compensation-factors-and-structure/.


IvyPanda. 2020. "Employee Compensation Factors and Structure." July 26, 2020. https://ivypanda.com/essays/employee-compensation-factors-and-structure/.


IvyPanda. (2020) 'Employee Compensation Factors and Structure'. 26 July.

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