Compensation Strategy

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Various compensation strategies

are being used by organizations to define its management and perceptions of employees’ pay and benefits. According to Adler & Ghiselli (2015), an effective compensation strategy should motivate an organization's current employees and additionally, the strategy should be able to attract new employees. Most managers view compensation strategy as a component of employees’ salary, however, this is not usually the case as the strategy is composed of various elements including the employees’ pay and key organizational benefits. As conveyed by Downes & Choi (2014), there is a positive association between employees’ pay and their organizational performance. As a result, corporate firms should design compensation strategies that are appropriate enough to improve the performance of the employees as this not only benefits the workers, but the company also benefits regarding revenues and attracting more customers.

Some issues arise when organizations fail to offer competitive packages

to their workers. Although it’s quite hard to determine the compensation and benefits to be provided to the workers, the companies' management may use various tactics to identify some of the motivations that the employees may need. For instance, before designing a pay incentive to an employee, the management must first consider the needs and requirements of the given worker (Gupta & Shaw, 2014). Some of the critical issues involved in determining how the employees will be paid are discussed below.

Labour unions

The labor unions are quite significant in determining and regulating employees' pay and other benefits. Through collective bargaining, the unions tend to demand higher pay for the employees through the representatives of the management. In designing an effective compensation strategy, the organizations' management should consider the opinions of the labor unions as failure to allocate the employees with the agreed compensations may make the employees resort for a strike. This has a significant influence on the concerned employees as they may require their managers to meet the demands of these labor unions.

Cost of living

According to Gupta & Shaw (2014), the cost of living may require the organizations to adjust the employees’ wages. The compensation strategy should, therefore, be adjusted when the cost of living is high as this enables the employees to meet up with their demands. This approach varies money wages depending on the cost of living index which results from the rise or fall of the consumers’ price index and the general price level (Gupta & Shaw, 2014). If this is not resolved, there may be challenges and misunderstanding between the firms' management and their employees.

Government legislation

The laws and labor policies passed by the governments are also significant determinants used to define employees’ compensation and benefits. The companies are not able to fix the wages and salaries below the scales prescribed by the various governments although each government has its compensation strategy. Some of the factors that the government recommends to be considered before designing a compensation strategy include the number of hours an employee engages in organizational activities, minimum wage, equal pay for similar duties, salary and incentives and other motivation strategies. These elements have been associated with increased productivity within the organizations if administered appropriately to the employees.


Gupta & Shaw (2014) assert that there is sufficient evidence to support the positive correlation between increased employees' compensation and organization productivity. As a result, productivity is a tactic that should be put under consideration and should be used as an approach to designing more effective compensation strategy and employees’ benefits. With improved compensations and motivation strategies such as paid time offs, promotions, and other pay incentives, employees feel motivated, and this enhances the retention capabilities of the specific organization. High wages have been associated with increased productivity as the workers end up offering quality products and services to the company’s clients. Additionally, factors such as an individual’s education level, experience, expertise, skills set, supply and demand, and the industry in which a company operates in should also be considered while designing compensation scales for individual employees. In most organizations, such factors are used to define the different salary scales that an organization has for its employees (Downes & Choi, 2014).

Organization’s supply and demand

According to Adler & Ghiselli (2015), wages are the prices that are offered to the employees after solving a given task within the organization or after rendering some services to the firm. The organization desires employees' services, and as a result, the compensations paid off to the employees should be able to align with the firm’s supply and demand curves. This implies that there should not be any underlying deficits while trying to meet the workers' needs and requirements, especially in their compensations. Although the labor unions provide a guideline on how organizations should design the compensation strategies and the most appropriate approaches that should be implemented, the procedure usually relies on the ability of an organization to pay and to meet all the wage demands. These issues have posed a lot of challenges to the companies’ management while trying to come up with effective compensation strategies and employees’ benefits.


Adler, H., & Ghiselli, R. (2015). The importance of compensation and benefits on university students’ perceptions of organizations as potential employers. Journal of Management and Strategy, 6(1), 1.

Downes, P. E., & Choi, D. (2014). Employee reactions to pay dispersion: A typology of existing research. Human Resource Management Review, 24(1), 53-66.

Gupta, N., & Shaw, J. D. (2014). Employee compensation: The neglected area of HRM research. Human Resource Management Review, 24(1), 1-4.

January 19, 2024
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