HUMAN RESOURCE MANAGEMENT

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QUESTION
1. What causes differences in compensation between employees?
2. What are the current compensation management challenges?
Table of Contents
QUESTION....................................................................................................................................................1
Table of Contents........................................................................................................................................1
1.0 INTRODUCTION.....................................................................................................................................2
1.1 Definitions of Important Terms.............................................................................................................2
1.1.1 Compensation....................................................................................................................................2
1.1.2 Compensation Management..............................................................................................................2
1.2 Compensation Management Theories..................................................................................................3
1.2.1 Behaviour Reinforcement Theory.......................................................................................................3
1.2.2 Equity Theory......................................................................................................................................4
1.2.3 Agency Theory....................................................................................................................................4
2.0 MAIN BODY...........................................................................................................................................5
2.1 Causes for differences in compensation between employees...............................................................5
2.2 The current compensation management challenges.............................................................................8
3.0 CONCLUSION.......................................................................................................................................11
4.0 REFERENCES........................................................................................................................................12
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1.0 INTRODUCTION
An effective compensation plan is more than just the happy medium between what a company
can afford and what employees will settle for. A well-designed plan is a powerful tool that
fosters excellence and builds competitive advantage. With increased scrutiny from shareholders
and the public, as well as new laws regulating executive compensation, designing a good
compensation plan is not an easy prospect. Boards of directors, company management, and
human resources professionals must work together to develop a plan that balances business
issues, human resources concerns, shareholder expectations, and current regulations.
1.1 Definitions of Important Terms
1.1.1 Compensation
According to Biswas (2013) defined compensation as the set of valuable things that is given to
employees in exchange for their labour. Usually compensation is money which is given to
employees as an hourly wage or salary. However, in addition to pay, some organizations offer
benefits, stock options, bonuses, profit sharing, commissions, allowances and other rewards.
Tanzania Employment and Labour Relations Act (2004) defined compensation as a remuneration
which means the total value of all payments, in money or in kind, made or owing to an employee
arising from the employment of that employee.
1.1.2 Compensation Management
It is very common for labour to be the largest expense for an organization. As such, systems are
put in place that attempt to ensure that no money is being wasted and that the money that is spent
secures the highest levels of productivity from the best employees possible. Those systems are
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called compensation management (Chingos, 2002). Therefore, compensation management is the
art of using different pay and benefits to recruit and keep the best talent within an organisation.
The ideal compensation management system pays employees well enough to be motivated to do
their best and want to stay with an organization. New talent will be drawn to the company based
at least in part on the fact that employees at the firm are compensated fairly. Those who are not
performing at high levels will receive less pay than their productive counterparts and will
eventually leave the organization to make room for more talented individuals (Milkovich and
Gerhart, 2013).
1.2 Compensation Management Theories
According to Gerhart and Rynes (2003), there are three main theories that are used by human
resources professionals when developing compensation management plans. These are:
(i) Behaviour Reinforcement Theory,
(ii) Equity Theory and
(iii) Agency Theory
1.2.1 Behaviour Reinforcement Theory
Behaviour reinforcement theory is similar to that of operant conditioning. If a person is rewarded
for a particular behaviour, he or she is more likely to perform those actions again. You can
probably think about a time when you did something that made your parents or teacher happy
and you were rewarded in some way. The positive reaction motivated you to do the same actions
again because you would anticipate getting the same or a similar reward.
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1.2.2 Equity Theory
Equity theory suggests that employees' actions will be changed based on their perception of how
they are paid in comparison to their co-workers. For example, if you and Billy work the same
number of hours and have the same type of job and a similar level of work experience, you
would expect to be paid fairly and about the same salary. However, if you discovered that Billy
was paid more than you are, then your productivity will probably decrease so that you are only
working up to the level that is fair based on your new perception of your compensation.
1.2.3 Agency Theory
Agency theory attempts to use pay in order to get the different interests of people involved with
the company to become one in the same. There are many categories of people within a company
and each has their own set of priorities: Employees wish to have a safe workplace, to be paid
fairly based on their level of effort and maybe even share in company profits if the company is
successful. After all, the company could not make profits without employees. Management seeks
to increase the productivity of employees and to be paid fairly based on their level of expertise
within the organization. Stockholders want the company to maximize profits by reducing costs
(including labour expenses) while increasing the value and reputation of the company.
As you can see, the priorities of each group can be in direct conflict. The agency theory of
compensation management can make it a priority to maximize productivity, performance and the
reputation of the company so that employees, management and stockholders all ultimately have
the same goals.
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2.0 MAIN BODY
2.1 Causes for differences in compensation between employees
Completing the same job as a colleague and not receiving the same wages can seem unfair.
While it is normal to expect what you think is a fair share for your talents and skills, there may
be good reasons why you earn less. Legally, there should not be a large wage gap between you
and a co-worker doing the same job. There are number of factors that determine or justify why
different employees are compensated differently. These include:
Education
Education can affect pay levels. If you have a bachelor’s degree in business administration, while
your colleague with the same job description has a master’s degree in the same subject, your
employer may pay more for the higher-level degree. An employee who takes classes to improve
his skills in a work related area may also be entitled to a more substantial pay check. If you and
your co-worker both deal with data analysis and she has taken statistics to sharpen her skills in
that area, she may be paid a higher wage.
Experience
Even if the two jobs are the same, there may be other reasons that the pay is different.
Experience makes a difference in many jobs. A 10-year veteran is usually considered to be more
effective in his work than a newbie with six months on the job. Many organizations also start a
new employee with relevant experience at a higher salary than a new employee with no
experience. Experience is particularly important in jobs that require critical thinking skills or
hands-on technical expertise, such as nursing, medicine, law or piloting an airplane.
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Relevant Skills
Skill and technical proficiency can be reasons to pay a different salary, especially if they are
highly relevant to the particular job. For example, secretarial jobs might be paid differently if one
employee is highly skilled at using software programs, such as spread sheets, and can type 80
words a minute, compared to an employee who has no experience with spread sheets and types
40 words a minute. Both the ability to use spread sheets and typing speed are relevant to most
secretarial jobs.
Length of Time with Employer
Some companies offer yearly bonuses to encourage employee retention. If a co-worker has the
same position as you but has worked at the company for more years, her annual bonuses may be
the reason you earn less for doing the same job. In Tanzania, for example, a worker who works
with the Government institution for many years is paid different with the new worker with few
years with the Government institution.
Performance
Just because the jobs, duties, education and skills are the same does not mean your performance
is equal to that of a co-worker. Performance issues can include the accuracy of your work,
whether you ever miss deadlines and whether you accept new assignments. If you make frequent
mistakes, grumble at the slightest sign of an additional task or make deadline promises that you
miss by days or weeks, your employer is within his rights to pay you less based on your
performance.
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Industry or Employer
Occupational wages vary by industry and employer. Diverse working conditions, clientele, and
training requirements are among the reasons why wages might differ from one employment
setting to the next.
Job Tasks
Jobs for a specific occupation often have similar position descriptions, but individual tasks may
vary, and jobs involving more complex tasks or greater responsibility may have higher wages
than those that do not, even within the same company.
Geographic Location
Some states or areas have higher wages than others for jobs in an occupation. Local demand for
the work and cost of living are among the geographic factors affecting wages differential
between employees.
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2.2 The current compensation management challenges
Compensation management is more than providing a pay check and cost of living increases. In
many organizations, employee performance relative to organizational goals serves as the basis
for compensation. Whether brought on by economic difficulties, changes in technology or other
business factors, compensation remains a human resources challenge. Human resources staff
encounters many issues as they try to design fair and competitive programs that reward and
recognize employees and attract and retain the people in organization that needs to succeed.
The following are common challenges that face compensation managers today:
External Competitiveness
As human resource professionals strive to establish competitive pay rates so an organization can
attract and retain the right talent, they compare their compensation rates to the rates in published
surveys to gauge their competitiveness. However, many nuances complicate the process. For
example, when you are hiring the head of software development, the competition for talent might
be a different set of companies than when you are hiring an administrative assistant.
Internal Equity
Legal considerations are also on the mind of human resource professionals who manage
compensation programs. In addition to being competitive with the external market, pay must be
equitable internally within the organization. Companies generally want to reward high
performers with more money and try to create pay differences between employees in the same
job to recognize outstanding performance. However, human resource must be mindful that it is
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against the law to pay employees who perform the same work differently solely because the
employee is female, non-white or over 40 years.
Forms of Pay
Employee pay begins with a cash base and bonus pay, but may also contain non-cash forms of
compensation. The valuation of non-cash compensation is often most difficult for employees to
appreciate, but it offers the most opportunity for creativity on the part of the organization.
Recognizing and Rewarding Employees
Human resource professionals design programs to successfully motivate employees to perform at
their best and that recognizes and reward employees for their contributions in a way that is
affordable to the company. However, ultimately, it is the supervisors and managers in a company
who recognize and reward employees, and compensation staff must train and educate managers
on how to use rewards and recognition to make employees feel appreciated by the company and
happy in their jobs.
Human Resources Budget
It is been argued that human resources (HR) budget allocations are too low because HR is not a
revenue-producing department. In theory, however, the most valuable resource a company has is
its human capital. Consequently, human resources compensation specialists and HR department
leaders must sometimes work within limited budget constraints. In addition, justifying budget
increases requires proof of return on investment in HR department activities.
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Salary and Wage Levels
Attracting qualified applicants may depend on your company's ability to offer extremely
competitive wages. Employee benefits are important, too, but the base amount is what initially
appeals to some job seekers. A company's reputation is also a determinant in whether your
company can become an employer of choice. It's likely that competitors' employees and industry
experts network with your employees to share information. Candidates want fair wages, not
necessarily high wages, especially when a job offer comes with an attractive benefits package.
Compensation specialists analyse competitors' wages, labour market trends and employment
levels to construct compensation policies.
Bonus and Incentive Pay
Some employers offer annual bonuses or incentive pay based on the individual employee's
performance or organizational performance, also called variable pay. The most widely used
program of this kind is profit sharing. The amount of bonuses and incentives is difficult to
budget too far ahead if your company is relatively new; however, if you have an incentive
program that is structured and adhered to consistently without favouritism and bias, you can
accurately project budget requests for bonuses and incentive pay.
Setting the Right Salary for the Right Market
At the most basic level, targeting appropriate compensation levels for local talent across multiple
locations is becoming an increasing concern for employers. Pay levels vary across national
borders as a result not only of market and industry factors, but also due to traditional practices
and values inherent in the concept of salary.
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Pay Reviews
Pay once determined should not remain constant. It must be reviewed and changed often, but
how often becomes a relevant question. Pay reviews may be made on predetermined dates,
anniversary dates or there could be flexible reviews. In the fixed-date reviews, wages and
salaries of all employees are reviewed and raised on a specified date each year- In the
anniversary-date reviews, salaries may be reviewed at twelve-month intervals from the date of
the employee's anniversary date of hire. Using variable timing ensures flexibility.
In addition, high-performing employees, who are low on their salary ranges, can be rewarded
more frequently.
3.0 CONCLUSION
Handling compensation issues requires knowledge of employment trends, the value of
experience and credentials for various positions and industries, negotiation skills, company
budget and the organization's bottom line. Economic conditions also play an important role in
compensation and benefits issues. To develop and operate a compensation system that promotes
fair treatment, an organization should consider such compensation strategies as: relating job
worth to differences in job requirements, recognizing the worth and value of employee
knowledge and skills, rewarding employee contributions and the results achieved, promoting
employee continued acquisition and upgrading of knowledge and skills, supporting team and
work-unit cooperative efforts, designing compensation plans that successfully compete within
established labour markets, aligning compensation of all employees with objectives and goals of
the organization and providing a compensation package that enhances current lifestyles and
provides long-term protection for employees and their dependants.
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4.0 REFERENCES
Biswas, B, D. (2013). Compensation and Benefit Design: Applying Finance and Accounting
Principles to Global Human Resource Management Systems. New Jersey. Prentice Hall.
Chingos, P. T. (2002). Paying for Performance: A Guide to Compensation Management. 2nd
edition. Wiley. New Jersey.
Gerhart, B. and Rynes, S. (2003). Compensation: Theory, Evidence, and Strategic Implications.
3rd edition. New York. Sage Publications.
Greenwood, B. (2016). 4 Factors That Can Result in Different Pay Levels for Employees Doing
the Same Job. [http://woman.thenest.com/4-factors-can-result-different-pay-levels-
employees-doing-same-job-2881.html]. Site Visited 07/05/2016.
McDonnell, S. (2016). HR Compensation Issues. [http://smallbusiness.chron.com/hr-
compensation-issues-71617.html]. Site Visited 05/05/2016.
Milkovich, G, T. and Gerhart, B. (2013). Cases in Compensation. 11th edition. New York. Sage
Publications.
Mulligan, I. and Finkelstein, D. (2007). Challenges for Global Compensation. International HR,
33 (2): 1 – 4.
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Richards, F. (2016). 4 Factors That Can Result in Different Pay Levels for Employees Doing the
Same Job. [http://smallbusiness.chron.com/4-factors-can-result-different-pay-levels-
employees-doing-same-job-17662.html]. Site Visited 06/05/2016.
Torpey, E. (2015). Same Occupation, Different Pay: How Wages Vary.
[http://www.bls.gov/careeroutlook/2015/article/wagedifferences.htm]. Site Visited
02/05/2016.
URT. (2004). Tanzania Employment and Labour Relations Act, 2004. Dar es Salaam.
Government Printers.
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