Creative Compensation Practices

Alfonso Gómez Franco Creative compensation practices

March 2012

Creative compensation practices March 2012

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© 2012 Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. International Business and Human Resources.

If you have a great team, don’t let them go

Creative Compensation practices.

Alfonso GÓMEZ

Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Monterrey. 2012

Pay, in the form of wages and salaries and a wide range of legally required and agreed upon benefits, collectively represent the means by which employees are financially compensated for joining organizations, staying in them and accomplishing certain levels of work performance. The compensation activity in personnel management, therefore, is a key people-processing activity, which begins with the planning that occurs before people enter organizations and continues until their exit and beyond.

Introduction Companies with high employee turnover ask themselves

what they can do to retain their employees. It is a great

waste of money to have your employees trained and

then let them go because they are not content with their

jobs. While some experts may say it is a good thing for

the companies to have a young crew, some may say it is

not the ideal thing to do in order to have a stable

workforce.

It has been said organizations must take their

compensation systems both attractive and equitable to

current and prospective employees. Information

regarding the external labor market, often supplied

through industry or area wage surveys, is necessary for

determining an appropriate pay structure in making

individual wage and salary decisions within that

structure. Also necessary is information regarding the

internal labor market. Again, is the compensation system

attractive? Is it equitable? A variety of job evaluation

methos are available for estrablishing pay grades and

ranges for jobs on the basis of their relative worth to the

organization.

We need to ask ourselves if we are ahead of

other companies by using the right compensation system

but before it is important to define what compensation is

and what creative compensation can be.

Compensation: Definition and facts

Experts in Human Resources have talked about

having the right compensation to maintain their key

elements. Compensation is defined as something given

or received as an equivalent for services, debt, loss,

injury, suffering, lack, or anything related.[1]

Compensation refers to all forms of financial returns and

tangible services and benefits employees receive as part

of an employment relationship. The main objective of

compensation strategy would be to give the correct

rewards for the right employee behaviors.

Throughout the world there are different

definitions of compensation. In English, “compensation”

means something that counterbalances, offsets, or

makes up for something else. In China, the traditional

characters for the word “compensation” are based on the

symbols for logs and water; compensation was treated


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as an entitlement. In today’s China, compensation takes

on a more subtle meaning. A new word, dai yu, is used.

It refers to how you are being treated- your wages,

benefits training opportunities, and so on. When people

talk about compensation, they ask each other about the

dai yu in their companies.

In Japanese kyuyo means compensation, which

is made up of two separate characters and both mean

giving something.

Society sees pay as a measure of justice. For

example, a comparison of earning of women with those

of men highlights what many consider inequities in pay

decision. Sometimes differences in compensation among

countries are listed as a cause of loss of jobs from more

developed, higher-wage economies to less developed

ones. As Exhibit 1.1 reveals, labor costs in Mexico are

around 10 percent of those in the US. However, when

differences in productivity are factored in, the wage

advantage of Mexico, Korea and Taiwan disappears.

According to society, managerial, employee and

even global; compensations may take several meanings

and it is useful to be in context when using the term

correctly.

Exhibit 1.1 Hourly compensation costs for production workers in Manufacturing in U.S. dollars.

Source: Bureau of Labor Statistics, April 2003.

Creative compensations: a new term

It is true compensation has existend since

companies started to work. Compensation is an

important motivator when you reward achievement of the

desired organizational results. Ensure that management

of compensation takes this into consideration.

Money is considered a powerful source of

motivation. However, it is also said that salary increase

can only motivate until the next pay increase is due. This

is when creative compensation starts playing an

important role. Recognition, motivation, feedback but

above all an integration of every aspect of compensation

is needed.

2.44 4.75

5.7 7.77 8.09

10.88 13.15 13.28 13.76

15.23 15.88 16.14

18.35 19.29 19.4 19.59 20.32

21.98 22.86 23.13

0 5 10 15 20 25

Mexico Portugal

Taiwan Singapore

Korea Spain

Australia Ireland

Italy Canada France

U.K. Sweden

Netherlands Austria Japan

U.S. Denmark Germany Norway


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Types of compensations: its options

There are several ways to classify

compensation, however, in this paper only two of them

will be analyzed.

Compensation represents both the intrinsic and

extrinsic rewards employees receive for performing for

their jobs. Intrinsic compensation reflects employees’

psychological mind-sets that result from performing their

jobs. Extrinsic compensation includes both monetary and

nonmonetary rewards. Organizational development

professionals promote intrinsic compensation through

effective job design. Compensation professionals are

responsible for extrinsic compensation.

I. Intrinsic Compensation

Intrinsic compensation represents employees’

critical psychological states that result from performing

their jobs. Job characteristics theory describes these

critical psychological states. According to this job theory,

employees experience enhanced psychological states

when their jobs rate high on five core job dimensions:

skill variety, task significance, autonomy, and feedback.

Jobs that lack these core characteristics do not provide

much intrinsic compensation.

Exhibit 1.2 The influence of Core Job Characteristics of

Intrinsic Compensation and Subsequent Benefits to employers.

According to job characteristics theory, jobs that demand

skill variety, task identity and task significance enable

employees to experience meaningfulness of work. Jobs

that provide autonomy lead to experienced responsibility

for outcomes of work. Jobs that convey feedback

enhance employees’ knowledge of the actual results of

their work activities, or how well they have performed.

Exhibit 1.2 gives a broader idea of what core job

characteristics are and the importance for employers.

Principles of intrinsic compensation also provide basis for

nonmoneteray recognition awards.

II. Extrinsic Compensation

Extrinsic compensation includes both monetary and

nonmonetary rewards. Compensation professionals

establish monetary compensation programs to reward

employees according to their job performance levels or

for learning job-related knowledge or skills. As we will

discuss shortly, monetary compensation represents core

compensation. Nonmonetary rewards include protection

programs (for example, medical insurance), paid time-off

(for example, vacations), and services (for example, day

care assistance). Most compensation professionals refer

to nonmonetary refer to nonmonetary rewards as

employee benefits or fringe compensation. Exhibit 1.3

shows the six types of monetary or core compensation.

Exhibit 1.3 Types of core compensation

•  Skill variety, task identity, task signficance •  Autonomy •  Feedback

Core Job Characteristic

•  Experienced meaningfulness of the work •  Experienced responsibility for work outcomes •  Gained knowledge of results of results from work

activities

Critical Psychological

State

•  Lower turnover •  Lower absenteeism •  Enhanced job performance •  Greater job satisfaction

Benefit to employers

Base Pay

Cost-of living Adjustments

Seniority Pay

Merit Pay

Incentive Pay

Pay for knowledge plans and Skill-Based Pay


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Comparative anaylisis

Money has long been viewed as a reward and,

for some people, it is more important than anything else

their organization can give them. Newman and Hodgetts

investigated motivation in the hospitality industry, for

example, and found that workers here rank good wages

at their top of important work factors. This was a sharp

contrast to industrial workers who ranked interesting

work as first (and good wages as fifth) in importance. So

the role of money as reward will often vary by both

individual and industry, but one thing is clear: money is

an important reward. Commenting on money, Steve Kerr,

a compensation expert with Goldman Sachs, recently

noted that “Nobody refuses it, nobody returns it, and

people who have more than they could ever use do

dreadful things to get more”

Money provides a rich basis for studying

behavior at work because it offers explanations for why

people act as they do.

Money is also associated with four of the

important symbolic attributes for which humans strive:

achievement and recognition, status and respect,

freedom and control and power.

Individualizing the pay system. Traditionally the pay programs of organizations

have adopted a one-size-fits-all approach to rewards.

Individuals are given little choice with respect to how they

are rewarded and what rewards they receive. The

differences that exist within organizations are usually the

result of the type of work individuals do rather than their

needs and desires. This approach generally fits a

homogeneous workforce but does not fit a diverse

workforce. With a diverse workforce it runs a tremendous

risk of giving individuals rewards that they do not value

while failing to reward them with things that they value

highly. This can obviously have negative consequences

for both and the attraction and retention of individuals as

well for motivation.

Organizations need to think through the

consequences of having a diverse versus a

homogeneous workforce and then pick the reward profile

that fits the degree and type of diversity they desire.

Given that many organizations are moving towards a

more diverse workforce and becoming more global, it is

likely that organizations will increasingly choose to have

flexibility and individualization in their reward system.

This simply makes sense with respect to optimizing the

impact of the dollars organizations spend, particularly

organizations that are dealing with diverse markets and

multiple national cultures. Based on how organizations

are changing and the impact of reward systems, three

strategic techniques are appropriate:

1. Person-based pay should be used to reward

individuals for their skills, knowledge, and competencies

relative to their external market value.

2. Multiple pay for performance approaches should

be used, with variable pay and stock as rewards.

3. Reward systems should be individualized to fit

the characteristics of individuals that an organization

wishes to attract and retain. In most cases, this can best

be done by allowing individuals choice in the rewards

that they receive.

Although these three approaches are widely

applicable, they clearly do not fit all situations and they

are only the first step in developing an actual reward

system for an organization. The next step is to develop

actual pay practices that follow them and fit with the

management style, structure and strategy of the

organization.


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How to implement a certain type of compensation.

Recognition is one of the compensation parts

that needs to be taken into consideration at any

company. Steps as the following need to be set up to

effectively manage a reward and recognition program.

1. When introducing new recognition procedures

and programs, take advantage of all communication tools

including Intranet and other knowledge-sharing networks

let everyone know what is going on.

2. Educate the managers so that they use

recognition as part of the total compensation package

3. Make recognition part of the performance

management process so that everyone begins to use it

4. Have site-specific recognition ceremonies that

are featured in the company’s communication outlets

such as the weekly newsletter and the bimonthly

magazine.

5. Publicize the best practices of the employees so

that everyone knows some of the things they can do in

order to earn recognition

6. Let everyone know the steps that the best

managers are taking to use recognition effectively

7. Continually review the recognition process in

order to introduce new procedures and programs and

scrap those that are not working well.

8. Solicit recognition ideas from both employees

and managers, as they are the ones who are most likely

to know what works well and what does not.

It could be said that there are easy and creative ways

to recognize employees.

Employees never seem to tire of recognition. In

psychological terms, they do not seem to become

satiated or filled up with recognition as they do, say, with

food or even money. For some, in fact, the more

recognition they get, the more they want.

Fortunately, it is not difficult to recognize people. Some

of the easiest and representative ways are the following:

• Practice giving concentrated focused recognition

by calling deserving employees into your office and

thanking them fordoing an outstanding job. During this

interaction, focus is only on the detailed recognition and

nothing else, so that the effect is not diluted by the

discussion of the matters.

• Buy a trophy and give it to the most deserving

employee in the unit or department. Inscribe the

individual’s name. To help ensure fairness and

acceptance, at the end of the month, have this recipient

choose the next member of the unit to be recognized and

explain why this individual was chosen.

• Write a note that recognizes an individual’s

contributions during the last pay period and attach this

note to the person’s paycheck.

• When you get a raise or a promotion,

acknowledge the role that was played by your support

staff by taking all of them out to lunch. In sports, a smart

quarterback who receives all the attention for a win will

always recognize especially his line in front of him and

may even take theses “unsung heroes” out for dinner or

buy them something.

• Take a picture of someone who is being

congratulated by his or her manager. Give a copy of the

photo to the employee and put another copy in a

prominent location for everyone to see.

• Have a senior manager come by and attend one

of your team meetings during which you recognize

people for their accomplishments

• Invite your work team or department to your

house on a Saturday evening to celebrate their

completion of a project or attainment of a particularly

important work milestone.


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• Recognize the outstanding skill or expertise of

an individual by assigning the person an employee to

mentor, thus, demonstrating both your trust and your

respect.

• Next time you hear a positive remark made

about someone, repeat it to that person as soon as

possible.

• Stay alert to the types of praise and recognition

that employees seem to like the best and use these as

often as possible

• Catch people doing things right and let them

know!

How is all this relevant for your company?

1. Having the right compensation for the right

employee may save you a lot of money because

he or she might be excellent for your company

2. CEOs tend to be overpaid, because you want to

make them happy, so having a creative way of

compensation may do the same effect as raising

three times the amount of money you pay

3. Having a happy team will always result in better

performance and this is something your

company wants to have. (For a real example, go

to the section: Real case: Rewarding Teamwork

in the plains)

Companies applying compensation strategies.

Today there are a wide number of formal

recognition systems that are being effectively used by

organizations globally. All effective programs are

designed to reward effective employee performance

behavior and enhance employees’ satisfaction and

commitment. They are designed to meet the specific and

changing needs of the employees.

Patricia Sellers, an expert on implementing recognition

systems offers the following creative, but practical

suggestions.()

Select a pad of Post-it Notes in a color that

nobody uses and make it your “praising pad”.

Acknowledge your employees for work well done by

writing your kudos on your praising pad.

Hire a caterer to bring in lunch once a week.

Besides showing your respect and appreciation, this

encourages mingling and the sharing of information,

knowledge, ideas, and innovative solutions.

To get a team motivated during an important

project, have them design a simple logo for the

assignment. This will give the team not only a sense of

camaraderie and cohesion, but also a group identification

and focus.

These tidbits represent useful suggestion but

many companies have gone much further by designing

formal recognition systems that align their overall

objectives (increased productivity, reduced cost, better-

quality products and customer service, and even higher

profitability) and employee performance behaviors.

Real case: Rewarding Teamwork in the plains.

Behlen Manufactoring company in Columbus,

Nebraska. The 1100 mostly production employees are

organized into 32 teams. Some of these teams have only

a handful of members, whereas others have as many as

60. Although each individual receives a base-pay

component, which comes to about $8 an hour, the rest of

the compensation is variable and is determined in a

number of different ways, including how one’s team is

performing.

The centerpiece of the manufacturing company’s

variable reward plan is gain sharing, an increasingly


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popular form of compensation whereby all members

share a usually fixed percentage of the documented

savings or performance gain accomplished by the team.

Behlen employees can earn monthly gain sharing of up

to $1 an hour when their teams meet productivity goals.

The CEO explained this team reward system as

follows: “if you are in a group that makes stock tanks, for

example, from the start of the process to the end of the

process, over all shifts, all month long, if the team

achieves certain levels of productivity, each of its

members is rewarded anywhere from 0 to $1 an hour for

every hour worked in that area” Documentation of the

gains is based on actual pounds of products, so that

everyone on the team knows exactly how well their team

is doing. Another part of the company’s variable-reward

system involves profit sharing. Employees receive 20 per

cent of the profits. In recent years this has resulted in

everyone’s getting a profit-sharing bonus equivalent to

three week’s salary. Still another part of the reward

package is the employee stock ownership plan. Each

employee receives company stock equal in value to two

percent of his or her base salary each year. Senior

managers in the company participate in the same reward

system as the workers, receiving the same proportional

benefits.

However, in the case of managers, performance

is calculated on the gross margin of their business unit

before selling and administrative costs are deducted.

How well has this company in the middle of the Great

Plains performed with this organizational reward system?

In each of the eight years this pay plan has been in pace,

performance has exceeded top management’s

expectation.

In addition to the five million dollars the firm

saved because of safety, quality and efficiency ideas that

were submitted through the teams, the company has

exceeded its profit goals each year. In fact, in the most

recent year profits were one million dollars greater than

expectations. The CEO explained it this way: “As people

focused in on their gain-sharing opportunities and they

have understood their profit-sharing opportunities, we are

seeing positive productivity improvements in every

corner of the plant”

Recent knowledge about HR: creative compensation

I. Laid-off Workers accept jobs with lower pay

Layoffs represent one type of involuntary termination

instigated by the employer. Oftentimes, employers

institute layoffs to control costs when business activity

slows down. This practice is also known as downsizing.

During the recent economic recession, when most

business activity slowed, announcements for company

layoffs were common newspaper headlines.

Not surprisingly, most laid-off workers seek

employment elsewhere after company downsizing. It is

reasonable to assume that displaced workers will find

jobs that pay at least as much as they were earning prior

to being laid off. However, the slowing economy has

substantially reduced the number of comparable

available jobs, creating a situation in which the supply of

qualified job applicants exceeds company demand for

these individuals.

In addition, more company layoffs are permanent

now, which means that the jobs will not be filled in the

future. As a result, many job seekers have accepted

comparable jobs at lower pay. For example, a New York

Times article called “Data show growing trend toward

permanent layoffs” indicates that those who managed to

find full-time employment after having been laid off (from

1999 through 2001) earned a median weekly average of

$571, compared with $609 in the jobs they lost.


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II. Recommendations for managing executive

pay practices.

HR has gathered vast information about HR from

the bottom-up level. However, little has been revealed

concerning CEO’s positions and motivation for these

unique individuals. Compensation is no other exception.

We are to pay attention onto how compensation and

motivation for CEOs is a key element in an organization.

CEO compensation is under increasing scrutiny

because of its growth relative to other employee groups.

In fact, executive compensation has grown despite the

financial setbacks experiences by most firms in the early

2000’s. Several practices can be recommended to

ensure that executive pay, especially CEO pay, is fair

and equitable and is high enough to ensure the attraction

of talent but not too high to fly in the face of efficiency

and fairness to employees and company stockholders.

First, watchdog organizations, especially those

financed by concerned stockholders, play a viable role by

ensuring that by laws and regulations are followed when

developing and implementing executive compensation

plans. These organizations can draw attention to

outrageous compensation rates and initiate activity to

reduce compensation packages to reflect governance

and selection procedures would allow the selection of

board members who are not politically in the pocket of

the chief executive.

Conflict of interest clauses should be made clear

and be rigidly followed. Third, systematic procedures for

conducting accurate market surveys should be

implemented. A true random sampling of competitors

should be conducted to determine the real price of the

executive position. Fourth, and related to the previous

suggestion, consultants should adhere to ethical

guidelines for the profession. Perhaps the ethical code

provided by the Society for Human Resource

management (SHRM) for human resources professionals

could be followed. Finally, improved performance

management for senior executives is necessary.

Practical performance standards should be delineated

and adhered to during the evaluation period. Pay raises,

bonuses, and other forms of compensation should be

based on meeting and/or exceeding these standards.

In summary, it is not the intent to generalize the

belief that all CEEOs and other senior executives are

overpaid or have purely mercenary intentions. Many, in

light of their experience and firm performance under

command, are paid fairly. In these cases, one must turn

to motivation theory to understand the need to offer

marketable salaries to provide raises, bonuses, etc., to

continue to reinforce desired behavior. It is not

unreasonable to demand a higher salary than what the

executive is currently paid to make a job change.

The companies themselves must also receive

something in return for such high compensation. Paying

high compensation rates must also be reinforced by

achieving desired organizational objectives that are

clearly stated and understood by the employee.

However, many CEOs are overpaid. Implementing the

recommendations made here may help stem the tide of

rising compensation and develop a more fair and

equitable mechanism for distributing the rewards of work.

III. New pay techniques.

The standard base-pay technique provides for minimum

compensation for a particular job. It does not reward

above-average performance nor penalize below average

performance. Pay-for-performance plans correct this

problem. In fact, in many cases, such as those in which

pay is tied directly to measured performance, pay for

performance plans not only reward high performance but

also punish low-performance. Sometimes, of course,

these plans are unfair in the sense that some jobs may

be easy to do or carry very high incentives, thus allowing


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employees to easily earn high rates of pay, whereas in

other cases the reverse is true. Similarly, in a group

incentive arrangement in which all members are highly

productive, the personnel will maximize their earnings,

but in groups where some individuals are poor

performers, everyone in the group ends up being

punished.

Despite the downside to some of these pay-for-

performance plans and the fact that they have been

around for many years, they have become quite propular

and can be considered new pay techniques. Exhibit 1.4

shows a brief summary of them.

Exhibit 1.4 New pay techniques.

Conclusion.

Compensation is one of the most important or

key element in HR Management. As this paper

describes, there are several techniques or

recommendations any company may follow. This is a

broader approach on how compensation can lead to a

better performance motivator.

From its definition to its actual application,

compensation is without a doubt an aspect we should be

concerned. There is a new approach nowadays about

creative compensation. There are many ways we can

improve our team’s steadiness such as giving them

positive feedback when needed, praising the best

customer, rewarding leadership effectiveness, rewarding

new goals, offering knowledge courses, training, extra

pay and so on. However it is key to any Human

Resource team to preserve its best elements and make

those ones who are not fully accomplishing the

company’s ideals, to go back on track.

Compensation systems are changing. Change

creates many exciting challenges for those who wish to

work as compensation professionals.

Comissions beyond sales to customers

Rewarding leadership effectiveness

Rewarding new goals

Pay for knowledge workers in teams

Skill pay

Competency pay


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References:

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2. Bureau of Labor Statistics, April 2003 3. Cabeza, M. (2002). Sistemas de incentivos basados

en el reconocimiento, un enfoque más estratégico. Revista venezolana de análisis de coyontura. Redalyc. Retrieved October 17, 2011 from http://redalyc.uaemex.mx/redalyc/src/inicio/ArtPdfRed.jsp?iCve=36480111

4. Fred Luthans (2005), “Organizational Behavior”, McGraw Hill.

5. George T. Milkovich. (2005) “Compensation” McGraw Hill International Edition. 8th edition.

6. Gerald R. Ferris. (2002) “Human Resources Management”, Prentice Hall. 4th edition.

7. Joseph J Martocchio (2004). “Strategic Compensation” 3rd edition. Pearson. Prentice Hall.

8. Patricia Sellers (1996), “What Exactly is Charisma?” Fortune, January 15, , p.68

9. Rosanas, J. & Cugueró, N. (2011). Las disfuncionalidades de los incentivos y la ética de los sistemas de control. Universia Business Review. Redalyc. Retrieved october 17, 2011 from http://redalyc.uaemex.mx/redalyc/src/inicio/ArtPdfRed.jsp?iCve=43318798004

10. Sánchez, B. (2006). Técnicas de Administración de Recursos Humanos. Editorial LIMUSA, S. A. de C. V. Grupo Noriega Editores, México.

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