The compensation system that is followed by a firm should be in tune with its own unique character and culture and allow the firm to achieve its strategic objectives. A wide variety of options confronts a firm while designing such a system. Internal and external pay: Pay equity, as stated previously, is achieved when the compensation received is equal to the value of the work done. Compensation policies are internally equitable when employees believe that the wage rates for their jobs approximate the job’s worth to the organisation. Perceptions of external equity exist when the firm pays wages that are relatively equal to what other firms are paying for similar types of work. Fixed vs. variable pay: Nowadays variable pay programmes are widely followed throughout many organisations and for all levels of employees. Widespread use of various incentive plans, team bonuses, profit sharing programmes has been implemented with a view to link growth in compensation to results. Of course, while using variable pay systems, management must look into two issues carefully:
1. Should performance be measured and rewarded based on individual, group or organisational performance?
2. Should the length of time for measuring performance be short-term or long-term?
Performance vs. Membership
If employees are remunerated according to the merit only then senior and more experienced employees may feel injustice. If remuneration is based on the only length of service then talented and effective employees do not get enough motivation to perform effectively. This poses the challenge in today’s organisation to strike balance between these two approaches.
Job vs. individual pay: Most traditional organisations — even today — decide the minimum and maximum values of each job independently of individual workers (who are placed in between these two extremes), ignoring their abilities, potential and the ability to take up multiple jobs. Such job-based pay systems may, in the end, compel capable workers to leave the company in frustration. To avoid such unfortunate situations, knowledge-based pay systems (or skill-based ones) have been followed increasingly in modern organisations. Below market vs. above market compensation: In high-tech firms, R&D workers might be paid better than their counterparts in the manufacturing division. Blue chip firms such as HLL, Nestlé, Procter & Gamble, TCS, Hughes Software Systems might pay above market compensation to certain groups in order to attract (and retain) ‘the cream of the crop’. Open vs. secret pay:In the real world, the issue of paying compensation openly or in a secret way may often become a bone of contention between employees and the employer(s). Current research evidence indicates that pay openness is likely to be more successful in organisations with extensive employee involvement and an egalitarian culture that encourages trust and commitment. Managers may eliminate pay differences among subordinates despite differences in performance levels. This may, in the end, force talented people to leave the organisation. Pay secrecy involves withholding information from the recruits regarding how much others make, what raises others have received and even what pay grades and ranges exist within an organisation. Pay secrecy gives managers some amount of freedom in compensation management since pay decisions are not disclosed and there is no need to justify or defend them.