Compensation’s Role in Human Resource Strategy

Reading the book “Solving the Compensation Puzzle” I realized that even being obvious I had never wrote about the important of Compensation’s Role in Human Resource Strategy so I decides to put this post based on the book and my views.

Compensation is one of many human resource (HR) tools that organizations use to manage their employees. For an organization to receive its money’s worth and motivate and retain skilled employees, it needs to ensure that its compensation system is not an island by itself. Not only is it important for an organization to link compensation to its overall goals and strategies, it is important that its compensation system aligns with its HR strategy.

Too many organizations plan and administer their pay systems by default; or worse, fall back on “the squeaky wheel gets the grease” practices. More than any other area in HR, ignoring pay and performance systems can be devastating. It is a very expensive and laborious process to hire new employees, buy back trust of current employees and renew the organization’s energy and motivation level. By ignoring this issue, it does not go away or get better with time. It will take extra money and valuable resources to fix the system.
Smart, successful organizations do regular planning and evaluating of their compensation and performance appraisal systems. Because compensation is visible and important to employees, it is critical to consistently communicate a clear message regarding how pay decisions are made. In short, a solid pay-for-performance strategy requires that employee pay matches the organization’s message.

Engaging Key Stakeholders to Support the Compensation Strategy

There are three levels of compensation strategy that exist within an HR department:

  • The first level is a strategy that is only understood and supported by the HR department.
  • The second is a strategy that is supported by the HR department and translated into practical solutions, policies and decisions Compensation’s Role in Human Resource Strategy that guide compensation decisions.
  • The third level, which should be an organization’s ultimate goal, is the most difficult to achieve. It is a compensation strategy that supports a pay-for-performance system that transforms and permeates all levels of the organization.

Key Stakeholders of a Pay System_HR StrategyImportant Considerations in Designing a Compensation Strategy

Does the compensation system match the organization’s overall objectives? In other words, how does the compensation strategy complement other HR initiatives? For example, if quality, experience and a sophisticated skill set are an organization’s strategic advantages, then it will not be successful hiring employees significantly below the market rate for that position. To answer this question, it is important to review the organization’s strategic plan (at least annually) and discuss whether the current HR and compensation systems are supporting these initiatives.

market position_HR StrategyWhere does the organization want to be in terms of market competitiveness? In this competitive job market, it is important to be aware of the organization’s competing firms. An organization can lead, meet or lag the market.

pay policies_HR StrategyWhat are the strengths and weaknesses of the organization’s current compensation system? An important component of market competitiveness is to find answers to the following questions:

  • Is the organization able to attract the appropriate skill sets and types ofemployees when needed?
  • Where is the organization hiring its best employees?
  • How long do most employees stay at the organization?
  • Where do employees go when they leave the organization?
  • What are the organization’s promotion policies?
  • Are employees frequently asked to take on new tasks without being rewarded for their efforts?
  • Do employees value the company’s benefit, incentive, work environment?
  • What of these items should be changed or updated?
  • What is the employee morale? This information can be gathered from managers, exit interviews, employee surveys and other communication tools. Employee survey feedback, in particular, provides valuable information for moving forward.
  • What mix of base pay, incentive pay, work environment and benefit levels make the most sense for the organization when considering the competition, types of jobs, niche and labor market available?

Borja Burguillos

Author: Borja Burguillos

Global People Strategy

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