Setting the Stage for Strategic Compensation and Bases for Pay Essay

Setting the Stage for Strategic Compensation and Bases for Pay - Essay Example However, it is important that compensation structures are aligned with the strategic objectives of the business. Three of the main goals of compensation departments in organizations are to attract talented personnel from the industry and help provide a certain amount of flexibility to the needs of the department; improve morale of employees and motivate them to ensure the existence of an innovative and knowledgeable workforce; as well as maintain salary standards which are competitive in the industry. Contextual influence posing greatest and least challenge for companies’ competitiveness Some of the external, as well as internal, conditions of a firm can determine the nature of pay structure which it would design or which would be appropriate for it. Most importantly, the supply and demand of labour in the market would be a serious consideration while designing its pay structure. Shortage of a particular skill in the market might imply that the organization might have to pay a higher price for those skills, and vice versa. In fact the demand and supply of labour in the market is the determinant of the existing wage rates at that region too (Prakashan, 2009, p.14). The other very important factor which would pose serious challenge before an organization is the prevailing market rates. This can be also termed as the comparable wages or the ongoing wage rates. The compensation policy fixed by an organization must necessarily confirm to the wage rates paid by other competitors in the industry. Otherwise, it might result in employees leaving the organization getting attracted towards those with higher salary packages. The cost of living also accounts for an important criterion based on which organizations develop their compensation structures and plans. It is crucial to make adjustments in pay depending on the increases or decreases in the cost of living index. When organizations fail to reset their salary structures according to the changes in the living ind ex, it can face resistance from employees and unions demanding higher wages. This could be challenging for the organizations (Prakashan, 2009, p.14). Apart from the above serious threats there are certain issues which are also crucial for determining compensation structures but which pose challenges before organizations to a lesser extent. The ability of an organization to pay or its affordability is crucial to determine its pay structure. Degree of profits, costs of production, sales revenues are some aspects which must be evaluated before designing pay structures. Psychological and sociological factors greatly determine the extent to which an employee would be willing to put in effort in his job. A person’s psychological perception helps him equate his wage or salary levels as a measure of the extent of success he has earned. Lastly, rapid technological developments have been the main cause of rapid development of skills of employees. The level of wages of these employees h as also been changing correspondingly. Thus, it is important that organizations keep track of changes in skill levels and wage level of