Compensation: Total Reward Plans that Attract, Retain and Motivate


Written by:
Michael Duchon
Published:
November 2, 2011

With an increasing number of baby boomers retiring over the next five to seven years and a "birth dearth" of sixteen to twenty-four year olds, the coming workforce crisis will present challenging times and will demand that organizations actively take steps to ensure they have the right talent in place.

In order for organizations to remain competitive, companies must aggressively pursue talent to increase productivity and profitability, leveraging human capital to maintain a competitive advantage.

To meet this challenge, companies, regardless of industry and size, must craft a clear and compelling strategy for implementing a well thought-out total reward/compensation plan to attract, retain and motivate key talent. This total reward strategy should integrate key components including:

  1. Total compensation
  2. Benefits
  3. Work-life balance
  4. Training, career and personal growth opportunities (World at Work Model)

These core components are critical for an organization to survive and thrive into today’s complex and challenging business climate.

Total Compensation Component

Total Compensation is the primary component in a total rewards model. Essentially, total compensation is made up of two primary parts, base pay and incentives.

Base Pay

Base pay is the first and most important component of a total rewards strategy.  Most would agree that a person’s lifestyle revolves around his/her paycheck. The “after-tax” amount of a paycheck determines the kind and quality of food, housing, clothing and transportation a worker can afford; therefore, it will clearly be an important area for consideration. Base pay is a fixed cost, so it is important that jobs are evaluated accurately with due consideration given to both internal and external equity. In addition, organizations should move their employees to a pay-for-performance environment to further justify potential increases.

As part of wages, it is often necessary to include overtime pay, shift differentials, premium pay for working weekends and holidays and other add-ons for being on call for other demands not normally required. Companies are always concerned with overtime, as it can add 25 to 40 percent to an employee’s base pay. Employers must be very cautious regarding these add-ons as they are practically permanent, and employees depend on them being realized with a high degree of certainty. After a while, they become known as an “entitlement.”

How does an employer determine which employee will be paid $30,000 and which will be paid $40,000? Naturally, there are sound reasons that mark differences in pay and compensation packages. There are a variety of factors that should be considered when establishing a compensation philosophy:

  • Level of requisite knowledge and skill
  • Industry and market
  • Union vs. non-union status
  • Capital intensive vs. labor intensive
  • Size of business
  • Philosophy of management
  • Profitability of the organization
  • Employment stability
  • Employee tenure and performance

The stage an organization is in its life cycle (start-up, growth, maturing, declining or renewal) may dictate which factors it focuses on most intensely. For organizations in the construction industry to remain competitive from a talent perspective, certain key factors require priority consideration.

Level of Requisite Knowledge and Skill

The most direct factor influencing an employee’s rate of pay is the job that the person performs. When we classify or differentiate jobs for pay purposes, no single factor carries greater influence than the knowledge and skills required by the jobholder. The highest paid workers have strength in two key competencies: (1) the ability to work in a flexible, team-based environment, and (2) the technical skills allowing them to reach high levels of performance and productivity.

Industry and Market

Even in times of high unemployment, individuals with certain skill sets or abilities are in demand. When construction is booming in a region, and strong able-bodied workers are in short supply, hourly wages can escalate to attract labor from other locations. To attract and retain individuals with appropriate skills/competencies, organizations must be willing to pay competitive compensation rates based on their targeted labor markets (local, regional and national). It’s the law of supply and demand.

Profitability of the Organization

Employees working for a profitable company have a greater likelihood of receiving higher wages than those working for a less profitable one. Organizations that sincerely believe human capital is their competitive advantage typically hire and retain the best workers by paying above the going rate in their markets. Statistics show that by attracting and retaining employees through higher wages, organizations actually reduce costs through decreased turnover, lower absenteeism rates and increased productivity and profitability.

Incentives

The second part of total cash compensation is incentive payments. Workers, particularly in construction and manufacturing industries, often receive a specific amount of money for a prescribed output. Individual activities could be precisely defined, daily output could be measured and pay could be tied directly to the measured output.

As service jobs have expanded in the second half of the 20th century, including the work of clerks, secretaries, repair and service technicians, administrators, professionals, scientists and managers, employers have crafted incentive programs based on an incentive model grouped into three categories:

  1. Organization Wide— These incentives use financial-based measurements (e.g., ROE (Return on Equity), ROA (Return on Assets), EBIT (Earnings Before Interest and Tax, etc.). 
  2. Department/Team Based— These incentives require operational measures (e.g., reduced cycle time, reducing costs by x percent, increasing market share by x percent, etc.). 
  3. Individual Measurements— These measurements make use of an identified behavioral level of achievement or development (e.g., improving project management skills, honing effective presentation skills, etc.).

Depending upon the job level (e.g., VP, director, manager, non-management exempt, non-exempt, etc.), a targeted payout is identified based on market data for total cash compensation (e.g., base pay of $35,000 for an electronics technician with a targeted bonus level of 5 percent). Then a weighting of incentive payouts based on job level within the organization is calculated (i.e., technician—20 percent weight based on an organization-wide measure, 50 percent based on team/department-based measures and 30 percent based on individual measures). In addition, through incentive programs organizations provide opportunities for employees to earn an upside leverage incentive payout for exceeding goals (e.g., 120 percent payout).      

Total rewards strategy encourages organizations


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