Paper Example on Total Rewards and Compensation

Introduction

In organizations or businesses, employees are one of the most essential resources through which all the other objectives are achieved. Organizations are focused on ways to get and retain human resource, which has turned out to be a difficult task especially in an environment characterized by stiff competition in the labor market. Some businesses have been victims of human resource competition with some of their key employees leaving to join the competitor's labor force. Consequently, the human resource management team in different organizations have been assigned the responsibility to deal with and to minimize the risk and loss of human capital as well as retention of employees (Mathis, et.al 2016). One of the tools the human resource teams have stressed on is the use of total reward and compensation package for their employees. Mostly, employees are motivated by money for a limited period but job satisfaction retains them in a given organization. Therefore, this paper will expound the difference between total reward and compensation, the components of each, and discuss

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Difference Between Total Rewards and Compensation

A total reward system (TRS) is encompassed of at least three key elements valued by employees for their performance. According to the total reward philosophy, compensation, benefits and work experience are some of the essential things that attract, retains, and motivates workers in a given organization. Total reward includes both tangible and intangible factors critical in driving performance of labor force. An effective TRS emphasize on balancing the interest and cost of employers with the needs and expectations of their employees. The rewards include financial returns and other remunerations that workers find rewarding such as recognition, career development feedbacks, and meaningful work (Mujtaba & Shuaib, 2014). On the other hand, when people hear the term compensation they think of the money they would receive in the paychecks. However, total compensation goes beyond salaries to include all financial rewards of the employment deal. It is the complete pay package for employees and includes all tangibles that can be measured and summed up to give a money value.

Components of Total Rewards System

A total reward system comprises of all the efforts employers may use to attract good talent, recruit, motivate and keep their employees. Some of the elements of TRS include:

Compensation

In this case, compensation refers to different ways an employee earns money from a company. Mainly, it consists of the base salary or wages, profit shares, and bonuses among other incentive pays in the system. Regardless of title and roles, a worker may have within an organization, there is always an expectation regarding the financial gain they receive for their performances (Mathis, et.al 2016). The compensation offered to the potential employee should commensurate with the market competition to attract talented and skilled workers. In fact, this has been one of the strategies used by various firms to be competitive and sufficient in enticing prospective workers to join the company. The compensation package should also be sufficient for employees to remain in the firms. In some cases, where the workforce is dissatisfied the organization might lose some of its productive employees in search of better and sustainable salaries and incentives.

Benefits

Some organizations provide rewards in an indirect manner. Some benefit programs are mandatory as per provision of various government guidelines while others are optional. The mandatory benefit packages include Medicare, Social Security, and retirement programs among others (Mujtaba & Shuaib, 2014). Organizations have an obligation to ensure that their employees and their dependents are secure in case of any serious health concerns. On the other hand, the flexible benefits package allows employees to determine the additional coverage they may receive from their employers. Some of the common flexible programs include work-life support, educational assistance, paid time-off, and recreational services. Offering an attractive benefits package can help an organization to surpass its competitors and round up the total reward system.

Performance and Talent Management

Initially, some employees used to work for one employer in their entire career. However, the contemporary workforce is determined in exploring and learning new things making it a challenge to retain them in a single organization for years. The departments of human resources have been assigned the mandate to promote talent, innovation, and creativity within the workforce, which is a strategy used by several firms to create job satisfaction (Caza, McCarter & Northcraft, 2015). Some of the issues the talent management team embarks on include performance appraisal, facilitates accomplishment of organizational and individual goals, offers training amenities, and outlines succession plans, which is essential in career development.

Components of Total Compensation

Total compensation systems mainly comprise of basic salaries, short-term incentives, long-term incentives, and perquisites. There are wide ranges of pay strategies that provide incentives and encourage employee retention. The following are some of the elements of total compensation

Base Pay

Base pay refers to the compensation that a worker receives usually as a salary or a wage. A considerable number of companies use at least two base pay categories namely hourly and salaried pays based on the distribution and the nature of the job. For instance, hourly wages, which is the most common type of base pay, depends on the time a worker is performing his or her duty. In contrast, salaried employees receive the same amount of payment each period regardless of the number of hours they work (Caza, McCarter & Northcraft, 2015). The society has developed a perception that being paid a salary carries a higher status than wages. Therefore, a poorly designed pay system can result in human resource unrest and low morale, which would ultimately affect the overall productivity of an organization.

Variable Pay

Variable pay is a form of compensation directly linked to organizational, team or individual performance. The most common types of variables are bonuses and different forms of incentive program payments. For instance, commissions, are mostly associated with the sales teams, which is based on the number of sales an employee makes in a given period. In the United States, the national average rate of commission is at 5 percent although this value varies based on the industry, employee's experience level, and one region to another (Caza, McCarter & Northcraft, 2015). Bonuses and merit pays are also common in some firms and are aimed at acknowledging tremendous performance from the employees. Likewise, stock options have been a productive long-term way of compensating employees especially the executive officers who are determined in adding value to the organization.

Compensation Philosophies

The aspect of an organization compensation philosophy is defined by pay market where the company intends to play in rewarding its employees. Therefore, it is important that to evaluate the pay market to ensure that the resultant compensation strategy would be relevant to both employees and the business. Some of the factors to consider in the evaluation process include the analysis of firms with similar and comparable approaches, companies operating within the same jurisdiction, and the productivity of businesses with similar structures among others. However, most compensation philosophies fall in between the entitlement philosophy and performance philosophy.

Entitlement Philosophy

According to the entitlement, philosophy individuals who happen to have worked an additional year are entitled to a pay increase with limited regard for the performance difference. For example, some organizations have embraced a system where employees' salaries increases within a given period of time a process known as cost-of-living raises (Mathis, et.al 2016). The salary increment is not tied to economic indicators and mostly employee receives the same increment each year. However, the limitation to the entitlement philosophy is that all employees are entitled to the same adjustment without regards for performance, a process that might undermine the purpose of compensation.

Performance Philosophy

Contrary to the entitlement theory, the performance model does not guarantee increased or additional compensation after every year. The performance philosophy requires that the change in compensation directly reflect performance difference. In this case, the employee whose performance is satisfactory maintains a high level of compensation as compared to marginal performers. Rewarding good performance may help a business in reducing employee turnover and improves commitment, motivation, and chances of retaining a productive workforce (Mathis, et.al 2016). However, only a few firms entirely follow the performance-oriented compensation practices. The process of determining the performance of every individual might be costly in terms of cost and time.

Total Reward and Compensation System Design Issues

Depending on the compensation strategies, philosophies, or approaches identified for an organization they are a number of design issues that need to be addressed for the reward and compensation systems to succeed. Some of the common issues include:

Compensation Fairness and Equity

Most people work expecting to receive financial reward and other benefits. Whether employees receive base pay, variable rewards or any form of incentives they expect that their employers to act in a fair manner that promotes equality across the workforce. Pay satisfaction is directly linked to the organizational level of performance and productivity of labor force (Hofmann, 2015). In this case, equity refers to the perceived fairness of workers' performance and the rewards they receive. However, most people believe that they are underpaid a condition that makes it difficult for firms to retain them in the workforce. There are two forms of equity in a compensation system, which include internal and external equities in compensation.

Internal Equity

Organizations that have effective internal equity compensation ensures that their employees receive rewards that reflects their skills, knowledge, abilities, experience, responsibilities, and accomplishments. However, procedural and distributive justice are some of the prevalent issues associated with internal equity. Procedural justice refers to the fairness of the process and techniques used to make decisions about employees' pay (Milkovich, Newman & Milkovich, 2012). Therefore, employees expect that the base pay, variable rewards, and incentives they receive from their employers are determined through a fair and transparent process. On the other hand, distributive equity entails fairness on the distribution of outcomes. In instances where a number of employees have similar performance records but some receives extremely higher rewards as compared to the rest this might lead to turning over and demoralization of workforce. For instance, in the United States, there has been a continues disagreement on the amount of reward the chief executive officers receives as compared to the rest of the employees (Milkovich, Newman & Milkovich, 2012). As a result, this might be one of the causes of an increased rate of turnover among the top executives who are being offered better pay in competitors' organizations.

External Equity

In some cases, employers provide pays that employees view unequitable to what other workers may be receiving in other companies for performing simil...