Business Strategy and Compensation Strategy

The purpose of this research paper

The purpose of this research paper is to discuss two strategies: company strategy and pay strategy. Studies on corporate strategy have been conducted, but little emphasis has been paid to its implications on external competitive policies and compensation plan tactics. The purpose of this study is to show how a company’s strategy affects the pay structure. It will, therefore, present and discuss the conclusions from case studies. Compensation, on the other hand, is shown to be separated into three categories: Direct financial compensation consists of financial advantages and prizes obtained directly from employers by employees. indirect financial compensation that involves the financial benefits received by the workers based on the social contract between them and their employers, and non-financial compensation that is viewed as the service provided by the employers that aims at improving the skills and talents of the employees. The results of the research have shown that different business strategies which include growth strategy, price skimming strategy, acquisition strategy, product differentiation strategy and how they affect compensation systems.

Compensation is a crucial factor in Human Resource Management and so it must be supported by techniques and competitive policies. It is associated with rewarding employees for the work done. It means the workers receive benefits from their companies in return for their labor; hence, motivating them to operate effectively to enable the firms to achieve their goals and objectives. Compensation, in this case, has been divided into three categories. The compensation system of an organization should be effective to ensure it achieves its goals and objectives in the market. Therefore, it is important to analyze how an organization’s business strategy can affect the techniques and external competitive policies of its total compensation structure.

Compensation Strategy

Compensation is a package of returns that include services, financial rewards, and benefits provided to the employees by the organization in return for their labor. They can either be in terms of direct benefits or indirect benefits. Compensation strategy refers to a deliberate application of modeling a compensation structure through which the workers are informed of the company’s strategic role and objective in terms of their rewards.

Intangible compensation is a non-monetary compensation awarded to the employees who perform work operations. Such forms of compensation include challenging task, pride of work, job satisfaction and work achievement (Brown, Sturman & Simmering, 2003).

Stewardship Theory

This theory illustrates the concepts that integrate both compensation and business strategies. It expresses the framework of managerial behavior that shows that people, in general, are encouraged to work for companies that entrust them. The workers will accomplish the tasks and responsibilities once they attain the sense of belonging. The employees are pro-organizational collective minded after attaining the conducive working environment. Therefore, they will work to help attain group, organizational and societal goals since doing so will enhance their dignity and satisfaction (Bryant & Allen, 2013).

Business Strategy

Business strategies and compensation strategies are strategic issues that govern an organization. The two are interdependent in that the business strategy affects the efficiency of the compensation systems especially if it does not work towards employee motivation and self-governing behaviors. Most companies have compensation systems that are designed for tangible pay structures (Bryant & Allen, 2013). Such structures are based on different factors including group versus individual pay, short-term versus long-term pay, market versus compensation level based pay and skills versus job-based pay. These strategies have failed to support the compensation structure for the workers.

A well-designed business policy should promote a desirable employee conduct to facilitate a justified compensation for the workers. Cost leadership business strategy is among the top strategies applied by firms. This structure demands effective development that entails overall control and strict cost, efficient-scale facilities, elimination of marginal customer accounts and cost control in sectors including advertising, services, and sales operation among others. The companies must, therefore, align their compensation strategies to achieve the goals set. An instance where the strategies clash is a scenario where the company applies the cost leadership business strategy. On the other hand, the same company might have employed a unionization of pay structure. The two systems cannot function interdependently.

Firms operating in different industries have to create effective strategies that determine how they will operate in the market. The strategies must also cater to the needs of the total compensation system to ensure the requirements of the employees are considered. All organizations have compensation policies and techniques that enable them to be unique and competitive regarding employee maintenance and the achievement of goals and objectives (Michie & Sheehan, 2005).

Methods

In supporting factors’ regarding compensation strategy and business strategy an abductive approach was used. This method combined both inductive and deductive approach since it handles qualitative data from different researchers and studies. In these approaches different theories were used to form a hypothesis. Therefore, this approach enables a research foundation to be formed. The studies used in this approach include the journal “Compensation” by George T. Milkovich and Jerry M. Newman (2002) among others. The theories in the journals were used to form the results concerning the two strategies. For instance, the stewardship theory is emphasized and organizational culture was among the contents deeply analyzed in the journals. Further, a deductive approach was applied to form theoretical foundations based on the assumptions from the researchers (Gomez-Mejia et al., 2014). In general, the abductive approach was based on the observation and analysis of the theories and information attained to see the answer to the questions of ”why” and ”how”.

Results

Equity was found to be a key factor that determines whether the total compensation system of a firm is successful. It involves the employees of an organization being treated fairly regarding the job allocation and compensation; hence, promoting their productivity and happiness in the entity. It is also an external factor since employees are involved in comparing their compensation systems with others from different firms. Equity, in this case, can be analyzed using three different forms (Gomez-Mejia, Berrone & Franco-Santos, 2014). Workplace equity is a business strategy that involves creating policies that ensure all the employees working in a firm are treated fairly: no employee is considered to be more special than others.

Therefore, the principles and laws implemented by the management are expected to govern and regulate all the employees equally. External pay equity, on the other hand, involves ensuring the employees are being compensated fairly compared to employees working in other organizations. This means that the compensation system of an entity should be designed in a manner that recognizes the systems used in other firms to promote external pay equity. Individuals operating in similar job positions, but in different companies are expected to receive the same level of salaries and benefits (Gomez-Mejia et al., 2014).

Discussions

Firms entering a new industry are involved in conducting market research and surveys to enable them to create an effective compensation system (Wasserman, 2006). This is because through the surveys, the firms identify how their competitors compensate their employees depending on the different job positions. Lastly, the business strategy must ensure the workers operating in similar positions enjoy the same benefits and rewards to promote their productivity and morale. For the system to be successful, the management must first design and establish a range of pay for the different organizational positions in the entity. Equity is a key factor, which should be considered when implementing a business strategy since it affects the policies and techniques utilized in the total compensation system of an organization (Wasserman, 2006).

Legal Compliance

The internal and external laws and principles that govern businesses also affect the total compensation system of an organization since they provide guidelines on how employees should be remunerated. In this case, the internal policies of a firm may provide information regarding the entity’s compensation process. The laws and policies are a business strategy since they determine how business operations will be conducted to ensure the organization achieves its set goals and targets (Brown, Sturman & Simmering, 2003). The external policies may also influence the compensation system since the authority or government may create new requirements regarding the minimum wage.

Recommendations

In aligning compensation strategy and business strategy, it is recommended that the organization must first set up measurable business goals. The vision of the company must be clear and the means of achieving them must be established. Second, the alignment must take place in all the departments of the organization so that the workers can come to terms with the company goals. Another recommendation is that the organization must ensure equity in target setting in that the roles must be effectively defined and they must be assigned fairly. Lastly, most companies are advised not to underestimate the intangibles like the employee’s will (Michie & Sheehan, 2005).

Conclusion

Therefore, from this study, one can identify the different factors that can affect a company’s compensation system. The compensation may either be direct or indirect financial payments where they include salaries, wages, commissions, retirement benefits, and employee services. A company’s business strategy may affect its compensation system policies and techniques since the strategy determines how business practices are organized to ensure it achieves its set goals and objectives. Some of the strategies, in this case, include equity, organizational culture, and legal compliance.

References

Brown, M. P., Sturman, M. C., & Simmering, M. J. (2003). Compensation Policy and Organizational Performance: The Efficiency, Operational, and Financial Implications of Pay Levels and Pay Structure. Academy of Management Journal, 46(6), 752-762.

Bryant, P. C., & Allen, D. G. (2013). Compensation, Benefits and Employee Turnover: HR Strategies for Retaining Top Talent. Compensation & Benefits Review, 45(3), 171-175.

Gomez-Mejia, L. R., Berrone, P., & Franco-Santos, M. (2014). Compensation and Organizational Performance: Theory, Research, and Practice. Routledge.

Michie, J., & Sheehan, M. (2005). Business Strategy, Human Resources, Labour Market Flexibility and Competitive Advantage. The International Journal of Human Resource Management, 16(3), 445-464.

Milkovich, G. T., Newman, J. M., & Milkovich, C. (2002). Compensation (Vol. 8). New York: McGraw-Hill.

Wasserman, N. (2006). Stewards, Agents, and the Founder Discount: Executive Compensation in New Ventures. Academy of Management Journal, 49(5), 960-976.