This essay deals with the reward management of companies. Compensation and remuneration are important issues in human resource management. In the following chapters, we will describe the reward management in detail in order to give a basic understanding about this topic. First, the different levels of remuneration are presented which is a necessary background information. Furthermore we would like to concentrate on the practical work in the human resource department. We will describe how the operational tasks in compensation management are separated between the staff and how these tasks changed in the last decades due to changes in the business environment. In the following part we will name and explain more in detail important factors which influence the compensation and rewarding strategy. We add a short excursus concerning legal minimum wages. This topic is one significant force to control and manipulate the strategic decisions in the reward and compensation strategy.
Moreover we will focus on performance related payment systems. This issue became more and more important in the last year and there are many employees who argue against such a system. We will explain it and afterwards we would like to name some arguments which are against this kind of a structure.
Finally we will present a practical example of compensation management. We have chosen the global-acting company BASF because we could organise some background information and we think that this company uses some of the strategic tools we described in their compensation management. Not every company is willing to show their strategies to the public because they think that their competitors will profit from this knowledge.
Table of Contents
1 Introduction
2 Levels of remuneration
2.1 Fixed levels of pay
2.2 Reward linked to performance of the individual
2.3 Reward linked to the results of the company
3 Compensation Administration
4 Variables influencing compensation strategy
4.1 Workforce expectations
4.2 Internal Environment
4.3 External Environment
4.3.1 Excursus minimum wages:
5 Pay for Performance Systems
5.1 Development of a pay system
5.1.1 Merit Pay
5.1.2 Bonuses
5.1.3 Profit-related pay
6 Criticisms about performance related pay systems
6.1 Fairness & managerial judgment
6.2 Design of PFP Systems
6.3 Value of compensation
6.4 Unhealthy Competition
6.5 Teamwork
7 Practical Example: How to establish a Compensation Strategy
8 Conclusion
Objectives and Thematic Focus
This essay explores the complexities of reward management within modern organizations, focusing on how compensation strategies are developed and influenced by internal and external environmental factors. The research investigates the balance between traditional fixed remuneration and performance-based systems, aiming to understand the link between pay structures, employee motivation, and organizational success.
- Analysis of direct versus indirect compensation models.
- Examination of internal and external factors influencing compensation strategy.
- Evaluation of performance-related pay (PRP) systems and their efficacy.
- Critique of potential drawbacks like demotivation and unhealthy competition.
- Practical implementation strategies for diverse employee groups.
Excerpt from the Book
4.1 Workforce expectations
Payment is an important feature in Human Resource Management, so workforce expectations is the third factor an enterprise has to consider while establishing a compensation system. Besides payment, other determining factors for people to go to work are job motivation and job satisfaction, but after all payment is the main reason why people work.
‘Am I treated fairly and do I get the money I deserve?’ is the essential thought of employees. Unconsciously they are guided by the equity theory and compare the ratio of their output (wages, benefits) and input (contributions) with the ratio of others. When perceiving that the ratios are not equal, the individual senses inequity. In theory the structure of compensation should fulfill the following three criteria:
1. Internal equity is about the fairness of pay differentials between different jobs within the organization. It can be established by job ranking, job classification, pointing system and factor comparisons.
2. External equity deals with a job comparison between different enterprises. The organizational pay strategy should assure a certain fairness of organizational compensation levels relative to external compensation by comparing and collecting salary and wage information among different industry branches. The strategy of a company should be to meet or better to lead the labor market price. Leading the market price make sure that high qualified workers are attracted to become employees in this company and it ensure that the present workforce senses equity regarding external variables.
3. In contrast to internal equity, individual equity means the fairness about pay differentials among individuals who hold the same job within a company.
Summary of Chapters
1 Introduction: This chapter provides an overview of reward management, distinguishing between direct and indirect compensation and outlining the scope of the essay.
2 Levels of remuneration: The chapter presents three main approaches to remuneration: fixed pay, individual performance-based pay, and company result-based rewards.
3 Compensation Administration: This section covers the shift in administrative roles from paper-intensive processes to service-oriented, consultative tasks within HR.
4 Variables influencing compensation strategy: This chapter categorizes the factors shaping pay strategies into internal (culture, strategy) and external (market, law) variables.
5 Pay for Performance Systems: The chapter details the development and implementation of performance-related pay systems and their components like Merit Pay and Bonuses.
6 Criticisms about performance related pay systems: This section analyzes common critiques, including issues of fairness, managerial judgment, and the risks of unhealthy competition.
7 Practical Example: How to establish a Compensation Strategy: This chapter demonstrates how large organizations classify employees into groups to tailor pay structures appropriately.
8 Conclusion: The concluding chapter summarizes the importance of compensation management and highlights the challenge of balancing flexibility and security in future strategies.
Keywords
Compensation, Remuneration, Reward Management, Human Resource Management, Performance Related Pay, Internal Equity, External Equity, Individual Equity, Merit Pay, Bonuses, Profit-related Pay, Compensation Strategy, Job Analysis, Labor Market, Minimum Wages
Frequently Asked Questions
What is the core focus of this work?
This essay deals with the reward management of companies, analyzing how businesses design compensation structures and the impact of these decisions on human resource management.
What are the primary thematic fields discussed?
The work covers remuneration levels, compensation administration, the environmental factors influencing pay, and the implementation and criticism of performance-based systems.
What is the central research question?
The paper seeks to understand how companies can structure effective payment systems that remain flexible enough to adapt to environmental changes while providing necessary security for employees.
Which scientific methods are utilized?
The authors employ a descriptive and analytical approach, combining theoretical frameworks like equity theory with practical business examples to assess compensation strategies.
What does the main body address?
The main body focuses on the dichotomy between internal and external environmental influences, the technicalities of developing pay systems, and the critical arguments surrounding performance-linked remuneration.
Which keywords define this work?
Key terms include Compensation, Remuneration, Performance Related Pay, Equity, and Human Resource Management.
How does the author explain the difference between internal and external equity?
Internal equity refers to the fairness of pay differences between different jobs within the same company, whereas external equity focuses on the fairness of organizational pay levels relative to the wider labor market.
Why is the "excursus on minimum wages" included?
It is included to illustrate a specific external economic factor that serves as a significant force in controlling and manipulating strategic decisions regarding reward structures.
- Quote paper
- Christiane Zügner (Author), Stefan Ullrich (Author), 2005, Compensation and Remuneration, Munich, GRIN Verlag, https://www.grin.com/document/44273
