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Effective Compensation System

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What is compensation? Explain. What are the two primary concerns when developing a compensation system and why is it important that each of these concerns be addressed? How might one apply expectancy and equity theories in the endeavor of developing a compensation system? What information would one need in order to develop an effective compensation system and how would you collect this needed information? Why?

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Hi,

Interesting questions! Let's take a closer look.

RESPONSE:

1. What is compensation? Explain.

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction, to further the existence of the company. Compensation may be adjusted according the business needs, goals, and available resources (http://www.hr-guide.com/data/G400.htm).

Compensation may be used in various ways, such as to:
· Recruit and retain qualified employees.
· Increase or maintain morale/satisfaction.
· Reward and encourage peak performance.
· Achieve internal and external equity.
· Reduce turnover and encourage company loyalty.
· Modify (through negotiations) practices of unions (http://www.hr-guide.com/data/G400.htm).

Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertise those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expense of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing (http://www.hr-guide.com/data/G400.htm).

2. What are the two primary concerns when developing a compensation system and why is it important that each of these concerns be addressed?

The compensation system needs to be perceived fair by the employees. Thus, it is important that there be a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee for motivation and high performance and effort. The employees also need to know what to expect, what they need to do in return for being compensated, and what to expect from the company. These two issues are dealt with through designing a compensation system that includes job descriptions, salary ranges/structures, and written procedures, which are informed by researching the industry for salary ranges, and the likes (http://www.hr-guide.com/data/G400.htm).

3. How might one apply expectancy and equity theories in the endeavor of developing a compensation system?

Expectancy theory: The amount of work that employees exert on a specific task depends on the expectations of the outcome. That is, if people expect a positive and desirable outcome, they'll usually work hard to perform at the level expected of them. Therefore, the compensation system must be designed in such a way at to communicate this to the employee. For example, clear job descriptions and written policies provide the expectations and when linked to an equitable compensation, then high effort and high performance should be ...

Solution Summary

This solution explains what compensation is. It also discusses two primary concerns when developing a compensation system and why is it important that each of these concerns be addressed. This solution also explains how to apply expectancy and equity theories in the endeavor of developing a compensation system as well as the type of information a person would need in order to develop an effective compensation system and how a person would collect this needed information, and why.

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