Academic journal article
By Ismail, Azman; Shariff, Mohd Noor Mohd
International Journal of Business and Management Science , Vol. 1, No. 1
Compensation is a strategic human resource management function (Mani, 2000; Rynes et al., 2002) where it may be defined from organizational, individual, and language perspectives. In terms of language, compensation is also known as salary and wage, remuneration, reward and/or pay system and is often used interchangeably in organizations (Henderson, 2006; Milkovich and Newman, 2008). From an individual's perspective, compensation is seen as non-membership and membership rewards that are necessarily needed by employees to meet their basic needs and improve standards of living in society (Henderson, 2006; Maurer et al., 1995). From an organizational perspective, compensation is often viewed as an employer's designs and administrations of the various types of pay systems (i.e., non-financial and financial payments) in rewarding its employees who perform job or service (Becker and Gerhart, 1996; Heneman, 2002). Traditionally, most employers design pay systems based on internal organizational variables whereby the type, level and/amount of pay are allocated to employees based on job structure. This perspective emphasizes on pays based on tenure, length of service, seniority, and/or membership and service (Anthony et al., 1996; Heneman and LeBlanc, 2003; Sliedgart et al., 2001). These pay systems are perceived as Taylorist's product, suitable for manufacturing-based industries operating in s table and predictable business conditions and focusing on organizational tactical objectives as a direction (Anthony et al., 1996; Henderson, 2006). In an era of globalization, many organizations shift traditional job-based pay to that based on organizational strategy and culture. Under this perspective, pay systems are designed based on external organizational variables whereby the fluctuation of pay types, levels and/amounts are allocated to employees based on merits, knowledge, skills and/or performance (Brown et al., 2003; Lawler, 1995, 2000; Yanadori and Marler, 2006). Although the rules for distributing pays based on performance and job are different, they may be used as complementary to attract, retain and motivate competent employees to support organizational and human resource management's strategies and goals (Anthony et al., 1996; Lawler, 1995, 2000).
It is a crucial pay design issue where it is often defined as the average of the group of rates which includes a combination of several pay components such as base pay, increases, benefits, allowances and perquisites (Henderson, 2006; Gerhart and Milkovich, 1990; Trevor and Graham, 2000). The average of the array of pay rates received by an employee for his/her job differ according to jobs in the organization, jobs in a specific department, or a combination of any job types in the organization for achieving external competitive equity (Anthony et al., 1996; Henderson, 2006). Pay level is often established for the similar and/or different work groups based on the balancing between external equity variables (e.g., economic pressures, government policies, laws and regulations, stakeholders and cultures, and customs) and internal equity variables (e.g., corporate strategy, management philosophy, type of job, and level of productivity). Survey and job evaluation methods are often used to assess the significance of such variables, and information gathered from such methods will be used to set up pay level policies for the various types of job categories in organizations (Gerhart and Milkovich, 1990; Groshen, 1991; Henderson, 2006; Trevor and Graham, 2000).
Most organizations implement three types of pay level, namely the lead, the match, or the lag policies (Bloom and Milkovich, 1998; Gomez-Mejia et al., 2000; Klaas and McClendon, 1996). The lead policy is normally set-up by an employer to provide higher wages for its employee than the average wage paid by competitors. For example, incentives are often provided as a variable pay when an organization increases productivity, quality improvements, cost saving and/or profit (Bloom and Michel, 2002; Maurer et al. …