Designing Compensation Systems and Employee Benefits Essay

A compensation system has an important role in a company. An ideal compensation system can motivate employees to enhance their job performance. An organization can use adequate compensation to retain talented employees. Retaining talented employees is important because they help organizations grow and earn high profits. A well-constructed compensation system is the key to an organization being successful and prosperous (â€Å"Importance of Compensation,† 2007). To further elaborate on the importance of compensation, the differences amongst job analysis and job evaluation and how these practices aid in creating internally consistent job structures will be described, and details will be given on the challenges that occur when creating compensations that are both internally consistent and market competitive. Also, the fairness of merit increases based upon quartiles will be discussed, the fundamental concept of insurance and how this concept applies to health care will be discussed, and the changes in the business environment and society that may affect the importance of legally required benefits will be described. Describe the Differences Between Job Analysis and Job Evaluation and How These Practices Help Establish Internally Consistent Job Structures Job analysis and job evaluation are the key to creating internally consistent job structures. An internally consistent compensation system will define the relative worth of each job amongst all jobs in a company. Companies use a basic principle when creating internally consistent compensation systems, which is jobs that require higher abilities, more responsibilities, and more intricate job tasks should be compensated more than jobs that require lower abilities, lesser responsibilities, and fewer intricate job tasks. Internally consistent job structures recognize distinctions in job traits that allow compensation managers to set pay based upon the distinctions. Furthermore, compensation professionals create internally consistent job structures by using job analysis and job evaluation. A job analysis will reveal the duties as well as compensation factors such as skill and effort that are required to sufficiently perform the job. The results of the job analysis will be used to conduct the job evaluation. Job evaluation will create pay differentials for jobs within a company. The results of the job analysis help compensation professionals set pay rates by quantifying the main similarities and differences between jobs (Martocchio, 2011). In the end, the job evaluation will categorize jobs according to their relative worth in the company. The relative worth of a job will be determined based upon compensation factors such as skill, job duties, and working conditions. Finally, job evaluation will guarantee internal equity because the value of jobs will be determined based upon compensation factors (Williams, 2012). Describe the Challenges in Developing Compensations That are Both Internally Consistent and Market Competitive One challenge in creating compensation systems that are internally consistent and market competitive deals with flexibility. Internally consistent pay systems have the potential to decrease a company’s flexibility to react to changes in the pay practices of competitors because job analysis creates structured job descriptions and job structures. Also, job evaluation creates the relative value of jobs within an organization. Reacting to competitors may require employees to perform tasks that are not included in their job descriptions whenever competitive pressures arise. This process makes equity appraisals more difficult because the definitions of jobs become more changeable (Martocchio, 2011). Moreover, some employees may resent being required to perform tasks that are not in their job descriptions. These employees may believe that the employers are taking advantage of them because they are not being compensated for performing the extra job duties. As a result, employees could become unmotivated to help their employers compete against competitors. Another challenge in developing compensations that are both internally consistent and market competitive is the bureaucracy that results from the internally consistent compensation structures. Organizations that develop job hierarchies have a tendency to create narrowly defined jobs, which results in larger number of jobs and staffing levels. This type of structure can place heavy compensation burdens on companies. Heavy compensation burdens can reduce profits for companies, which can affect whether companies use a market lead, market match, or market lag policy for compensating employees. Organizations that use the market lead policy compensate its employees more highly than most of its competitors. Employees receive pay that is above the market pay line. Organizations that use the market match policy compensate employees based upon the market pay rates. Employees will receive pay on the market pay line. The market lead and market match policies can help companies attract and retain talented employees; thus, the companies using these policies can obtain competitive advantage in a highly competitive business environment by using its talented employees. Furthermore, organizations using the market lag policy compensate its employees less than the majority of its competitors. Employees receive pay below the market pay line (Martocchio, 2011). Furthermore, a company should not be forced to choose the market lag policy because of heavy compensation burdens that could result from bureaucracy. Some companies may use the market lag policy as a cost savings method to offset heavy compensation burdens. A market lag policy could prevent a company from attracting and retaining talented employees, which could affect the competitiveness of a company. Moreover, a company could lose customers and profits if it does not have the talented employees in place to produce goods and services than can compete with the goods and services of competitors. Two Employees Perform the Same Job and Each Received Exemplary Performance Ratings. Discuss Whether it is Fair to Give One Employee a Smaller Percentage Merit Increase Because His Pay Falls Within the 3rd Quartile But Give a Larger Percentage Merit Increase to the Other Because His Pay Falls Within the 1st Quartile and Explain Why Supervisors use the merit pay grid to designate merit increases to employees. A merit pay grid contains a pay range for a pay grade. The pay range is divided into four quartiles. Employees with the lowest salaries fall into quartile 1. The salaries increase as the quartiles increase. Employees with the highest salaries fall into quartile 4. Furthermore, the lower an employee’s salary falls within its designated pay grade the larger the percentage pay raise. For example, if two employees perform the same job and both employees receive excellent performance ratings, the employee whose pay falls in quartile 3 will receive a smaller percentage merit increase than the employee whose pay falls in quartile 1. The employee whose pay is in quartile 3 may receive a 7% merit increase for excellent job performance; whereas, the employee whose pay is in quartile 1 may receive a 12% merit increase for excellent job performance. Furthermore, using the merit pay grid may be logical but not fair. It is logical because compensation professionals decrease merit pay increase percentages as quartile ranks increase to control employees’ advancement through their pay ranges. If employees in quartile 1 and quartile 3 were to receive the same merit pay increase percentage, the salary for the employee in quartile 3 more than likely would exceed the maximum pay rate for the range quicker than would the salary for the employee in quartile 1 (Martocchio, 2011). Moreover, the merit pay grid may be viewed as unfair because employees performing the same job and displaying the same amount of effort and job performance are not receiving an equal percentage merit increase. Employees may view this procedure as an unfair work practice. Furthermore, the employees may believe that the company places more value on some employees’ job performance more so than on other employees’ job performance. Discuss the Basic Concept of Insurance and How This Concept Applies to Health Care The basic concept of insurance is to spread risks. Risk does not mean that an unfavorable incident will occur but that there is a possibility of an unfavorable incident occurring. All persons have the risk of suffering a major illness. Thus, the whole concept of insurance when relating to health care is that an individual will be able to spread his or her risk among other people so that if an unfavorable incident occurs, he or she will not be overwhelmed because of high health care costs (â€Å"Understand the Concept,† 2012). In the United States, health care is classified as a multiple payer system, which means that multiple parties are held accountable for paying the costs of health care. The multiple parties can include the government, employers, labor unions, employees, and unemployed individuals (Martocchio, 2011). Moreover, insurance allows an individual to pay a few hundred dollars a month in level premium rather than having to pay a $50,000 surgery bill once (â€Å"Understand the Concept,† 2012). Finally, health-related expenses can become costly; thus, it would be wise for individuals to have some form of insurance for health care. Health insurance covers the costs of various services that promote sound mental and physical health such as physical exams, surgical procedures, and psychotherapy. Normally employers enter into contractual relationships with insurance companies to provide employees and possibly their dependents with health care. Moreover, the insurance policy or contractual relationship will specify the amount of money insurance companies will pay for health-related services such as physical exams. Furthermore, employers pay insurance companies a negotiated amount or premium to create and sustain insurance policies (Martocchio, 2011). Health insurance premiums are costly. The average monthly health insurance premium for an employee is $309. 03. The average monthly health insurance premium for an employee and his or her family members is $708. 83. Numerous private sector companies make it mandatory that employees pay a portion of health insurance premiums because of the high costs. Employees only contributed a small percentage toward health insurance premiums in 2008. Moreover, employees with single coverage contributed around 19% and employees with family coverage contributed around 29% (Martocchio, 2011). Except For the Family and Medical Leave Act, the Remaining Legally Required Benefits Were Conceived Decades Ago. Describe the Changes in the Business Environment and Society That Might Affect the Relevance or Perhaps the Viability of Any of These Benefits There are several legally required benefits in the United States. Legally required benefits are the benefits provided by the Social Security Act, which are retirement; unemployment insurance; old-age, survivor, and disability insurance; and Medicare. Other legally required benefits are workers’ compensation insurance and family medical leave. The United States government created legally required benefits to protect individuals from calamitous incidents such as unemployment and disability. Legally required benefits try to maintain the flow of family income, promote worker safety and health, and assist families in critical situations. Furthermore, providing employees with legally required benefits can be costly to companies. Present day, companies in the United States spend an average $4,400 for each employee yearly to provide legally required benefits (Martocchio, 2011). Finally, the effect that legally required benefits have on costs and the competitiveness of businesses could affect the sustainability of legally required benefits For numerous years, there have been genuine concerns that there will be lack of funding to provide the legally required benefits, especially the social security benefits. There are continuous political debates about how to safeguard the viability of social security programs. President George W. Bush signed an executive order that established the new Presidential Commission to Strengthen Social Security. Politicians have debated the advantages and disadvantages of differing solutions to strengthen the Social Security system. The administration of George W. Bush focused on encouraging tax credits for persons who save for retirement and promoting additional savings through employer-sponsored retirement plans. Furthermore, the Democratic Party suggested enhancing the tax under the Federal Income Contributions Act to strengthen the trust fund. However, business leaders have opposed the suggestion of the Democratic Party. Business leaders, especially small business leaders are concerned that the increase in tax will lower company profits (Martocchio, 2011). Legally required benefits may hinder businesses in the short term because these benefits require sizeable employer expenditures. Employers are required to make contributions that are mandated by the Social Security Act and several state workers’ compensation laws. These mandated expenses prevent businesses from investing these funds in direct compensation programs designed to increase productivity and product or service quality (Martocchio, 2011). If the money for mandated expenses could be used for compensation programs then the company could increase its competitiveness. Furthermore, enhancing productivity, products, and services can help businesses become strong competitors against its competitors. Conclusion In conclusion, a job analysis will reveal compensation factors that will be used in the job evaluation to determine the worth of jobs. Compensations that are both internally consistent and market competitive can affect a company’s flexibility to respond to changes in the pay practices of competitors, and companies have to deal with the heavy compensation burdens as a result of bureaucracy. Usage of the merit pay grid is logical but unfair. Insurance allows employees to share the costs of health care with multiple parties. The effect that legally required benefits have on costs and the competitiveness of companies could cause companies to view the mandated benefits as burdensome. Finally, compensation will always have a vital role in the strategies of companies.