Employees must have control over their performance

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Reference no: EM132183093

CHANGES IN COMPENSATION SYSTEMS

As businesses change their focus, their approach to compensation must change as well. Traditional compensation methods may hold a company back from adequately rewarding its best workers. When compensation is tied to a base salary and a position, there is little flexibility in the reward system. Some new compensation systems, on the other hand, focus on the reward for skills and performance, with the workforce sharing in company profit or loss. One core belief of new compensation policies is that as employees become employee owners, they are likely to work harder to ensure the success of the company. Indeed, programs that promote employee ownership and thus employee responsibility and emotional investment are becoming increasingly popular. Examples of these types of programs include gain sharing, in which employees earn bonuses by finding ways to save the company money; pay for knowledge, in which compensation is based on job knowledge and skill rather than on position (and in which employees can increase base pay by learning a variety of jobs); and incentive plans such as employee stock options plans (ESOPs).

Pay for Performance probably the most popular of the newer concepts in compensation is the easiest to understand compensation based on performance. These programs, sometimes referred to as variable pay programs, generally offer compensation incentives based on employee performance or on the performance of a team. Pay for performance rewards high performance and does not reward mediocre or low performance and is the definition of the "merit" system.

In a true merit-based system, there are a few conditions which must be satisfied for it to be meaningful:

- Employees must have control over their performance. If employees are overly dependent on the actions and output of other employees or processes, they may have little control over their own performance.

- Differences in performance must mean something to the business. If there is little difference between a high performer and a mediocre one, merit pay won't work.

- Performance must be measured regularly and reliably. A clear system of performance appraisal, with defined criteria that are understood by the employee and regularly scheduled meetings must be in place.

Reference no: EM132183093

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