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Compensation Basics - Understanding the Role of Base Pay

Prepared by Barbara D. Morrow, MBA, CCP

Understanding your organization’s compensation program is critical for developing human resource (HR) strategies that help your employees feel motivated, recognized, and rewarded. Compensation can be characterized by two basic elements:  base pay and variable pay. The focus of this article is base pay which is defined as nondiscretionary compensation that does not regularly vary according to performance or results achieved.

An ideal compensation program has many of the following characteristics:

  • Internal equity - how an organization values each of its jobs in relation to one another.

  • External competitiveness - a measure of an organization’s pay structure compared to that of its competitors for talent

  • Affordability - reflects how costly a compensation program is to a company.

  • Legal defensibility – adherence to specific laws designed to provide fairness in how employees are paid.

  • Understandable - must be well communicated.

  • Easy to Administer - should be simple and straightforward as possible to maintain and administer.

  • Flexibility - must be capable of changing as needed without requiring a redesign every time a new need arises.

  • Meets the Organization’s needs - each company is unique within its own industry and/or geographical area.  

Compensation Philosophy

The foundation of a well-defined compensation program is the organization’s compensation philosophy which may encompass some of the characteristics listed above. A good compensation philosophy, which is developed with input from senior management, will identify:

  • Who the organization defines as its competitors for employees

  • How the organization prefers to set pay levels for its various positions compared to the market (i.e. below market, at market, above market)

  • The balance between internal and external equity

  • Whether rewards be based on individual or group performance

  • What amount of pay will be fixed versus variable

  • The role of recognition programs

  • How this philosophy will reinforce the organization’s overall business strategy

Source:  WorldatWork’s Handbook of Compensation, Benefits & Total Rewards

Barbara Morrow

 

Barbara Morrow is a Compensation Consultant at Strategic Workplace Solutions, Inc. She helps organizations understand total reward strategies and develop base and incentive compensation programs.


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