A Range of compensation Approaches
Companies regard pay as an important tool for recruiting, motivating, and retaining good people. Indeed, those goals change little over time, but the ways in which some companies approach them differ dramatically from previous approaches. performance based pay, tailored to the strategic circumstances of each organization, may consist of base pay, and annual bonus, a profit sharing plan, stock options, and a choice of various other benefits. Such a "total rewards" package would have been uncommon for a worker in 1950. but it is increasingly common today.
The "human capital" within a firm that is performing well is likely to want to split the gains with the owners or shareholders. Variable pay combined with base pay can do that. Variable pay also shifts some of the risk of running a labor-intensive business from the company to the employees when the company is not doing well. Figure 12-4 presents some of the choices organization must make regarding compensation approaches.
Traditional Compensation Approach
For some organizations a traditional compensation approach makes sense and offers certain advantages in specific competitive situations. It may be more legally defensible, less complex, and viewed as more "fair" by average and below-average employees. However, the total reward approach helps retain top performers, can be more flexible when the economy goes up or down , and is favored by top-performing companies. It clearly will not work in every situation.
Traditional compensation systems have evolved over a period of time to reflect a logical, rational approach to compensation employees. Job descriptions identify tasks and responsibilities and are the used to decide which jobs are more valuable. These systems calculate the value that each job contributes to the organization based on job evaluation. That value then is used to establish a pay range that reflects a person's progression as he or she grows and presumably gets better at the job.