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Designing an Effective Compensation System

Provided by SME.com.ph

Expectation management is key to managing your compensation and benefits program effectively. As your company is growing, the compensation and benefits that you are able to offer your employees at this time may not likely be as competitive as those offered by more established companies. Employee communication and feedback is crucial for small and medium enterprises. It is important that your compensation structure is perceived as fair, equitable, and commensurate to work performed by your employees. Hence, while ensuring alignment of individual expectations with your desired organizational results, you need to convey and clarify to your employees your pay structure. You should be able to make meaningful distinctions in performance to explain the differences in compensation and benefits given to your employees. This will require you to manage not only your formal contract with employees but also your psychological contract with them.

Managing the Formal Contract

Your formal contract with your employees specifies the terms and conditions of employment, particularly their wages, salaries and benefits. Providing timely feedback on the terms and conditions of this contract, particularly on pay decisions is important. Each and every employee does not need to know what the other employees are receiving. You only need to articulate your pay policy which must be grounded on a set of values that guides your pay system. This pay policy must be competitive, not very much lower than market rates and must have clear linkage with company financial performance. It must be determined using objective criteria including hours of work performed, difficulty of executing the task and risks associated with performing the job. Your pay system should also have safeguards to enhance transparency and ensure fairness of pay decisions. You may even devolve decision making on pay to the employees themselves. This will help build consensus, acceptance and ownership for pay structures within your company.

Managing the Psychological Contract

As pay is most likely not a major consideration for employees working in small and medium enterprises, you need to provide your employees motivators other than money and financial benefits to encourage them to remain with your company. You may do this by managing what is called the psychological contract. Psychological contracts are perceptions held by individual employees about the terms of their exchange, interaction and relationship with the company. As they are basically perceptions, your interpretation of the terms and conditions of their employment and their obligations may not be shared by your employees. Effective management of psychological contract is important because it influences the behaviors and attitudes to work of your employees. Effective management of this contract has also been found to be positively related to individual commitment, job involvement, empowerment and job satisfaction, and negatively related to intent to turnover.

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