The Challenges of Designing Effective Compensation Plans

Designing Compensation Plans that are Fair and Reflect the worth of the Employees

Jobseekers and aspiring and working professionals as well are usually curious about their employers design compensation plans.

Indeed, given the fact that we all work for money as well as other things such as job satisfaction and fulfillment, it is imperative that employers and employees alike are convinced about the compensation being fair and adequate as well as reflecting the potential and the contributions of the employers.

Further, research has shown that most employees who quit organizations do so because they feel that their contributions and talents are being wasted and hence, the dissatisfaction and the disappointment as well as the frustration boils over leading them to quit their jobs.

In addition, organizations usually do not want to lose key employees and high performers and hence, they do need to design effective compensation plans that take a balanced and fair approach.

Moreover, compensation plans should also not result in the employers and employees’ alike thinking that they have compromised and hence, this is more the reason for the HR (Human Resources) Managers and the Middle Managers who are usually part of the compensation designing team to work out a compensation plan that leaves everybody happy.

The Challenges of Designing Effective Compensation Plans

Having said that, it is always not easy to design the perfect compensation plan as can be seen from the fact that most compensation plans are judged to be skewed in favor of the employers.

A typical employee compensation plan or package in most reputed organizations would have a fixed component or the base salary that is paid irrespective of the performance and the contributions of the employees.

In addition, there is the variable pay that is linked to employee performance and the standard allowances such as HRA or House Rent Allowance, Medical Allowance, and Transport Allowance.

Apart from this, there are bonuses that are usually paid based on the ratings in the performance appraisal.

Of course, the variable or the flexible pay and the bonuses sometimes are taken as equivalent in most organizations where these components are usually linked to the ratings and the other factors such as revenues accrued due to the employee.

In other words, it is the variable or the bonus component that is crucial since designing this often is a challenge as most employees often protest and lodge complaints with the HR or the Middle Managers to get this rectified.

Dwindling Social Safety Nets and a Pension-Less Future

In recent years, the challenges in designing employee compensation plans have increased as it is no longer the case that social security nets and the medical and other allowances are enough or sufficient for the employees to feel motivated and secure in the knowledge that their employer would take care of their retirement and the medical needs of theirs and their families.

Indeed, in the United States, there is an intense debate over dwindling Social Security Benefits going forward as well as concerns that the 401(k) plans that are supposed to be the retirement Nest Eggs of employees are not being funded adequately.

In other words, with the future looking bleak for older workers, there is much agitation among them about their future. In other countries such as India, there are legitimate concerns that pensions would become a thing of the past or have already become so except for the present pool of workers who retired in the last decades.

This is being reflected in the anxieties about PF or Provident Fund Contributions and how both the government and the employers are perceived to be denying workers their fair share when they retire.

The same goes for medical allowances as President Trump is trying to undo Obamacare or the Healthcare Act that is supposed to be friendly to the poor.

Part Time Work, the Gig Economy, and Compensation Plans

Thus, from the discussion so far, it is evident that the HR managers have a tough task on their hands when they design the compensation plans. Indeed, given the prevailing uncertainties over the layoffs and automation caused job losses, it remains to be seen as to how effective compensation plans would be going forward.

This is the reason why most firms and corporates worldwide are tending to hire temporary or contractual workers who need not be paid social security and medical benefits.

Whether this is a positive trend for employers is debatable since while it allows them to save money, it also leads to decreased employee productivity and morale that can have cascading effects on the way in which workplace and organizational culture ensues.

Having said that, this trend is also amplified by the increasing instances of Freelance or Gig Workers who work on a per project or task basis and hence, remove the added layer of benefits that are paid to the temporary or the contractual workers.

What this means is that employees in the future would have a tough time dealing with so many cuts to their paychecks.

Some Tips for Working Professionals

Therefore, if you are a professional just starting out in your career or are aspiring to be one or even have been working for a decade or so, it is our suggestion that you remain alert and vigilant to all these trends and ensures that you get a good deal in the process.

Indeed, negotiating and bargaining for a fair compensation is your right that nobody can take away from you and hence, do not hesitate to follow what your intuition says.

Having said that, learn to draw a line as well and back down if the negotiations look like they are becoming bitter.

To conclude, a fair compensation plan goes a long way in ensuring that both employees and employers achieve a win-win situation.


❮   Previous  Article


Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.