STRATEGIC HUMAN RESOURCE MANAGEMENT

Equitable Compensation System

An organization should focus on system fairness when designing the overall compensation plan. Workers need to feel confident in the knowledge that their company has a skill-and ability-based compensation structure. Therefore, when creating an equitable compensation plan, an organization needs to incorporate three different forms of equity. These are the following:

Fairness in compensation packages for various employees working for the same company is known as internal equity. Each worker needs to believe that their compensation is appropriate for the work they accomplish. The following four methods can be used to determine internal equity:

Job ranking: Senior management is in charge of identifying jobs that are highly important in small or informal organizations. Higher compensation is determined for jobs of great importance based on the analysis's findings. Large organizations do not use this kind of approach.

System of job classification: This approach divides jobs into grades or classes based on similarities in their requirements, i.e., jobs that are similar in nature. This approach is used in big businesses.

Point structure: Using this approach, an extensive list of jobs that employers are willing to pay for is created. For instance, training, expertise, abilities, responsibility, etc. After that, a factor scale is assigned to each of these factors, indicating different degrees of each factor's accomplishment or mastery. Points are then allocated to every level after that. The total of all points according to the job is a crucial factor in figuring out how much different jobs pay.

System of factor comparison: The five standard factors that are used in this method of evaluating jobs are: accountability; skills required; mental and physical efforts; and working conditions.

External equity: In this procedure, a worker must be content with their compensation package in relation to workers in similar positions at other companies. Employee motivation and performance are directly impacted by competitors' pay structures. Knowing that coworkers in other companies doing comparable work are getting paid more would not make any employee happy. Employers must therefore take competitors' current pay structures into account.

Employers can accomplish this by gathering the necessary data with the assistance of their HR department or outside consultants. A business can appropriately design its compensation plan by analyzing the information it has received.

Individual equity is the term used to describe how employees feel about their pay in relation to other employees in the same organization who are employed at the same level. The merit pay system can be enforced in order to achieve individual equity. Under this system, employees receive incentives based on how well they individually complete the tasks assigned to them. System-based incentives are typically added to base pay on a permanent basis. Furthermore, a widely-accepted performance feedback system that is impartial and fair to employees needs to be developed.

Strategic Compensation System

One of the most important components of an HR strategy is compensation, which helps an organization both attract and retain talent over the long run. Without a doubt, decisions about compensation have a significant impact on employee management concerns in every single organization. The concept of compensation management as merely an administrative task is out of date. The perception of the compensation system as a fundamentally important strategic function has evolved over time. Compensation merits are seen by the strategic compensation system as a strategic component that supports and builds HR strategies.

The company's goals and objectives must be taken into consideration when designing a strategic compensation plan. Two methods are used in this system: deferred compensation and stock-based compensation. When an employee receives stock-based compensation, their performance is evaluated based on the outputs they produce over a predetermined amount of time. By giving them company stock, employees are rewarded under this strategy.

Conversely, employees receive various forms of stock-based compensation for their performance under deferred compensation.

There are certain conditions that must be met in order to create strategic compensation plans. The prerequisites for a successful strategic compensation system are as follows:

It is necessary to establish an efficient system for performance management.

Trade union relations need to be cordial.

It is important to promote employee participation in the creation of compensation plans.

Employee objectives and organizational objectives must be connected.

It is necessary to use quantitative performance measures to assess employees' work in relation to predetermined objectives.

To ensure that changes to the compensation system are implemented on time, a feedback mechanism for plans must be established.

The management team is in charge of putting the compensation plan into action.

The impact that compensation plans have on staff members needs to be observed.

EXECUTIVE COMPENSATION

Executive compensation is the amount that a business pays executives for their contributions to the company. It is often created by the board of directors of the company and consists of both monetary and non-monetary rewards. Since executives have a significant influence on organizational strategy and decision-making, the goal of designing executive compensation is to increase executive retention. The features of executive compensation include the following:

Compensation package: Consists primarily of salary, annual and long-term incentives, benefits, perks, and agreements pertaining to severance and change of control.

Equity compensation is a type of ownership interest in a company that is primarily made up of the company's stocks.

Performance and contingent pay are primarily determined by the accomplishment of the business's strategic goals.

Vesting schedules: They are contingent on the executive's adherence to the previously established agreements and contracts.

The primary element of executive compensation is the Employee Stock Option Plan (ESOP), which gives executives the chance to buy shares at a future date at a price set at the time stock options are awarded. Employee benefit plans, or ESOPs, are profit-sharing schemes. Nevertheless, in order to present a positive image of the company's financial health and raise the value of stock options, ESOPs may also encourage employees to participate in unethically creative accounting techniques known as "window dressing," which inflates revenues and profits. Furthermore, even though they do not have to be disclosed as expenses in the profit and loss statement, ESOPs are deductible from corporate income tax.

These days, many businesses are compensating executives with stock grants rather than stock options. Certain requirements, like a predetermined return on capital or return on asset, are attached to stock grants.

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