5.8 Determining base pay  (Page 6/7)

Pay for performance

By Bonggi Yim and Chanakiat “Art Samarnbutra”

Compensation techniques

According to Kulik, it is important for companies to attract “quality job applicants, motivate employees to be high performers, and encourage long-term employee retention” (Human Resources for the Non-HR Manager, 2004). Doing these things can increase companies’ competitive power today. Compensation systems usually consist of three categories: “base salary, short-term incentive systems, and long-term incentive systems” (Kulik, 2004). Reward systems really affect work performance.

Reward systems can be applied to employees with different formula. Poorly designed and administered reward systems can do more harm than good. It is important to design reward systems carefully, taking into considerations base salary and incentives according to the different tasks of specific employees.

Companies should have well-designed base salaries. Nowadays, many websites (e.g. salary.com , jobstar.org , wageweb.com ) provide detailed information to employees according to company mission (Kulik, 2004). When a company designs a base salary, they have to consider the company’s unique aspects: locations and acquisition period of skills and so on. Depending on ranking system of the company, employees need to be evaluated differently. A CEO’s evaluation is different from that of management and evaluation of management is different from that of employees.

Companies also provide short term incentives to employees. Most companies’ compensation systems include “variable pay” (Kulik, 2004). Depending on work performance, many companies reward their employees without affecting base salary. To achieve a set goal, many companies use bonuses. For example, “Nucor set its base pay at about half of the competition’s. By emphasizing a bonus system, Nucor has shifted the risk onto the employee’s shoulders” (Kulik, 2004). Companies should have exact evaluation systems that support bonus pay. Many companies such as GE, HP, and Sun Microsystems are using software that directly evaluates employees’ behavior with respect to customer service.

Long-term incentives are also a part of reward systems. Stock options and profit-sharing plans are representative long-term reward systems (Kulik, 2004). Even though employees are motivated by these incentives, they do not receive benefits until after few years. For example, employees cannot sell stock options until after a few years after they receive stock options. “In a profit-sharing plan, employees are promised a payment beyond base pay that is based on company profits” (Kulik, 2004).

Components of pay for performance

According to Dr Cynthia Fukami, a professor from the University of Denver, these are the main components of pay for performance (Fukami, Reward Systems, 2007):

1. The company pays the employee beyond his or her job value.
2. Many forms for improving the pay system are available.
3. The company can divide up the pay into 3 levels that are individual, team, and company-wide.