Next, there are nine criteria for Developing a Compensation Plan. Internal Equity is the perceived fairness of the pay structures within a firm. External equity is the perceived fairness of pay in comparison to what other employers are paying for the same job. These two equity perceptions are referred to as the Internal versus External Equity and make up one of thee nine criteria. Another important compensation criterion is Fixed Versus Variable pay. Becoming more popular is variable pay based on company profits. For example, Anderson Windows pays it’s employees up to 50 percent of their total compensation in the form of a bonus based on the company profits for the year. However, variable pay is often more rewarding for those higher salaried employees. For employees earning more than $750,000 in base pay receives 90 percent variable compensation while and employee earning $25,000 per year in base pay only receives 5% variable pay.
Companies must determine where pay decisions will be made. Often Human Resources (HR) is the centralized source for payment/compensation decisions. In contrast, a decentralized system, pay decisions are delegated into the firm, commonly to unit managers. While there are pros and cons to centralization and decentralization of pay decisions, in most cases, it may be more appropriate to centralize pay decisions. This becomes especially important if the organization faces frequent legal challenges. Too much centralization however does not handle equity concerns very efficiently.
Compensation tools include job-based and skill based approaches. Job-based approaches is the most widely used compensation programs and assumes that work gets done by people who hare paid to accomplish specific tasks. These jobs are normally accomplished by several people, units or departments. The skill based approach is rare and assume that workers should be paid by how flexible or capable they are at performing multiple tasks. For example, the greater variety of the job specific skills a workers has under his/her belt, the more they are paid.
Legal aspects of Compensation come in the form of the Fair Labor Standards Act (FLS) of 1938 which affects most pay structures in the United States. Employers must keep accurate records of earnings and hours worked by covered employees and report this information to be in compliance. The minimum wage set by the FLSA is $5.15 at the time of this writing. However, there is much debate as to whether the minimum wage is enough to secure a decent standard of living. Santa Cruz, California requires a minimum hourly wage of $12.55 as posted in the Emerging Trends Magazine. The Equal Pay Act (EPA) was passed in 1963 as an amendment to the FLSA. The EPA requires men and women to be paid the same amount of money if they hold like positions and are basically equal in terms of skill, effort and responsibility. There are exceptions however which include more seniority, better job performance, greater quantity or quality of production and nigh shift differential.
Compensation is a very complicated topic of discussion and a critical aspect of the success of any company. While many companies are out-sourcing to decrease the amount of expenses compensation will continue to be a major focus. Careful planning and skill must be utilized to design and implement an adequate compensation system.
