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According to Mondy, compensation is any means of a reward provided to organization’s employees in return for their performance with a purpose to retain, attract and motivate employees. Compensation comprises both variables and fixed components as well as employee services, benefits and the optimum combination of pure elements that influence the employee performance, which in turn contributes to organizational competitiveness. Firstly, studies show that when employees are satisfied at their place of work, they feel the sense of achievement, fulfillment and joy, which are put into consideration as positive factors for employee creativity and productivity and can lead to organization profitability. Job satisfaction encourages employees to be steadfast and committed to the organizations they work for (Namasivayam and Zhao 575- 576).
Another mode of compensation used by most academics and managers is total reward strategy. These types of rewards entail all elements of reward that deal with money value, employee development and learning opportunities, employee privileges and opportunities, and the quality of the working environment. Organizations will attain significant returns if there is a use of integrated total rewards strategy. Such an approach will enhance staff performance and serve as an appropriate ground to address some compensation issues that organizations face. This contributes to the improvement of organization competitiveness hence the abilities to survive on the stiff global marketing warfare. With reference to Herzberg’s theory, motivators are more related to the job content while maintenance factors are related to the job context, for example, health insurance, vacations, and retirement benefits. The absence of maintenance factors contributes to high negative feelings like job dissatisfaction leading to poor performance. According to Vroom’s theory, extrinsic rewards as indicated by Herzberg should be regarded as valuable to employees to contribute to better performance. This concept is known as valence, which increases employee’s motivation to perform (Markova 45- 47).
Most Western governments provide health care to all citizens, implying that all employees can receive health care. It is compulsory for any company to provide a health insurance for workers to attract employees with top talents in the field. Health insurance for the specific company must be better than that of the competitor so as to attract many more employees. Life insurance is a means of compensation similar to health insurance, where employees receive this service as a part of a group through their employer. This is crucial especially if someone runs an organization with high rates of on-the-job casualties like construction. Retirement plans are essential for all employees who dream to stop work at a given time and enjoy the benefits of their work. Employers should help employees save for their retirement, which can be through matching funds and retirement plans. This provides a very attractive form of compensation. Other forms of compensations are stocks and profit sharing, bonuses and commission, training and development, paid time off, telecommunicating and flextime and keeping the employees (Danish 160-163).
Equity compensation, on the other hand, is a way to attract and retain employees especially for a startup company. This is because most companies lack the initial fund to acquire high quality employees, so they use equity compensation to fulfill this need. It is a non-cash compensation that gives a representation of some form of ownership interest in the company. The implementation of equity compensation program is complex, so the company must plan and use appropriate legal accounting, tax advice, and planning. Equity compensation gives employees stock options with the right to purchase shares of the given company stock at an agreed price. This method encourages employees to remain loyal to the company for a long time (Newstrom and Davis 46).
In the compensation process, there are conditions that determine the type of compensation used, for example, organization, labor market, the job, and employees. In any organization, there are compensation policies established either formally or informally, and these policies determine whether it will pay the leader, pay the follower, or make a strive for an average position in the initial labor market. Another determinant is organization politics, which can lead to equation. Managers should be aware of the possibility that organizational politics can destroy sound compensation systems and take the required action. An organization must assess its ability to pay compensation, which is important because it determines the pay level. This is because financially successful organizations are able to pay higher than average companies are. Job description is a determinant because organizations actually pay for the actual value they attach to certain responsibilities, duties, and other job related factors. In a job evaluation, the firm determines the relative job values as compared to another, while in a job analysis, contents of the job becomes the determinant (Newstrom and Davis 48).
Employee qualification is also a key determinant when it comes to financial compensation. This is because the job, labor market and other factors that are related to the employee qualification are essential in determining the employee equity and payment. For example, performance-based pay, bonus, competency-based pay and skilled pay, seniority, experience, membership in the organization and potential. Under employee qualification determinant there is executive compensation, where firms prefer to relate the salary growth of the highest-level managers to the actual overall corporate performance in determining the executive compensation. Labor market plays a major role in the compensation determinant, in which potential employees located within a specific geographical area receive recruitment and comprise the labor market. The key determinants are compensation surveys, in which large organizations conduct compensation survey regularly to determine the prevailing pay rates within the labor market. Others are the cost of living, labor unions, society, economy, and legislation (Newstrom and Davis 49-51).
The performance appraisal process is an actual review on an employee’s performance of the assigned responsibilities and duties. It is based on the employee’s performance, and not personality and character. This process is useful in measuring one’s skills and accomplishments with reasonable uniformity and accuracy. Although performance appraisal helps on the improvement of employee job performance, it still comes with its problems. The problems encountered in the process are mistake commitment, especially when evaluating people and their performance. This may be because of biases and judgment errors. Other problems may include poor appraisal forms, lack of rater preparedness, ineffective organization practices and policies (Arvey 424).
Appraisal performance allows employees to have an intensive face-to-face communication with their supervisors with the aim of reviewing the accomplishments of the previous year and planning future performance objectives. These can be remedies to the deficiencies and reinforcing strength while addressing development opportunities. For both employees and supervisors to achieve maximum benefit from the appraisal interview, the supervisor must follow the necessary steps such as planning and preparing for the interview, assembling the data documentation notes, recording observations and documenting formal letters and written warnings on employee performance throughout the review period in order to support the ratings. They should schedule a convenient place, time, and date for the interview and allot ample time to allow a meaningful and constructive discussion. They should begin the interview with putting the employee at ease by creating a conducive atmosphere for the interview, inviting the employees to conversation by asking them to outline their major accomplishments in the previous year while listening attentively and taking notes (Arvey 424).
The supervisors are to be direct and specific in communication, avoid getting personal and judgmental. They should also avoid focusing on personality problems or attitudes unless those problems affect individual and group performance negatively. They should provide constructive critics when necessary in a way that will preserve the employee’s sense of worth and dignity while remaining patient, calm, and centered in handling difficult employees and soliciting the input from employees about problem elimination. Employees should be encouraged to talk throughout the interview by acknowledging their performances and identifying the areas of improvement as well as addressing the performance gaps. Lastly, the supervisor must make sure that all questions raised are covered appropriately and that the session ended on a positive note (Arvey 426).