Rightly so, most HR leaders are concerned with the ever-increasing pressure to attract, motivate, engage and retain its employees, especially those high potential and key management ones. Show
Accordingly, they implement a wide variety of HR programs that are designed to do just that. However, all HR programs rely on one key assumption - that the majority of employees feel that they are being fairly compensated in relation to the performance results they have achieved and their pay level is equitable both internally with other employees in their job and externally with the outside labor market. To achieve that goal, the company's salary administration and bonus administration practices must be administered fairly which, in turn, will provide the rock-solid foundation upon which almost all HR programs rely. In the end, if a lot of employees feel that their compensation is not fair or equitable, the benefits of various HR programs, such as on-boarding, recruitment, engagement, leadership, management training and skills developments, are likely to be greatly diminished. Any compensation plan, whether it is for salary or bonus administration, strives to be fair while paying for performance. Being fair means that the compensation amount was impartially and honestly determined in an objective manner based on merit without any favor or prejudice. Paying for performance means that the compensation amount was determined by a thorough analysis of specific performance results wherever possible, rather than a subjective evaluation by the supervisor. Lastly, external equity means that the compensation amount is comparable to others doing the same type of work in the relevant outside labor market, while internal equity means that the compensation amount is appropriately placed within the salary or bonus range in comparison to other employees within the same job and/or salary range, taking into account any performance differences. Though existing company practices for salary and bonus administration tend to take precedence, there are several key principles that should be understood and considered for use. Such principles fall into either a general or specific category. Salary AdministrationGeneral
Specific1. The total amount of merit/salary increase for any one employee should be based primarily on performance, with additional consideration for any external inequity as represented by his/her position in the salary range and internal inequity when he/she is unfairly compensated in comparison to lesser performing employees in the same position. 2. When faced with both external and internal inequities, give more emphasis to the internal equity problem. 3. Though merit increase guidelines vary widely from company to company, the following represents a typical set of recommended merit increases percentages and review time intervals between increases for a company with no affordability issues. 4. Since the division or business unit head will much prefer to spend the majority of the salary budget monies on the key positions and departments that are crucial to the upcoming business plan, HR can provide valuable departmental position-in-range data, similar to the following, to help achieve that end: The above data suggests that the Senior Software Developers and Software Developers are significantly below the market and should be given higher than normal salary increases to help correct the problem. Such a salary action will minimize the risk of these key employees leaving the company. 5. Promotional salary increases should consist of a pro-rated merit increase along with a promotional increase percentage. 6. HR Compensation department should work closely with the Finance department to ensure that monies provided by their merit/promotional salary guidelines fit within the company's financial/budget plan. Bonus AdministrationGeneral
Specific1. Annual, end-of-year bonuses are based on the division or business unit meeting one or a mix of certain financial objectives, such as operating profit, net income, earnings per share, sales, etc., in which the target objective represents 100%. Typically, the dollar amount of the 100% target is placed into the annual financial plan and budget. 2. Usually, if the final financial results for the end-of-year bonus are less than 90% of the target; no bonus pool monies are paid out. If the final results are between 90% and 99.9%, a lower, prorated amount of the bonus pool would become available, such as 60% or 70%. The results at or over 100% might typically be represented by the following chart: 34. Regardless of the bonus plan calculation for the total division or business unit bonus pool, what matters most is the amount of money that has been reserved by the Finance department for this purpose. If the division or business unit head desires to exceed the dollar amount, such an overage will have to be absorbed in some other part of the Income Statement. 4. The bonus target for any individual employee is set as a percentage of salary. So, if the division or business unit achieved a 105% bonus pool, the consideration of a bonus for any individual employee would typically start out at 105%. Then, based on the evaluation of the employee's performance results, the final percentage would go up or down from that starting point. If the employee's overall performance was far less than satisfactory, either no bonus or a dramatically lower one would be considered. 5, To ensure that the bonus plan continues to be perceived as an incentive for improved performance only; payouts should not be used to correct any internal or external inequity problem. 6. When the final bonus payout awards are determined, an updated total cash compensation amount for each appropriate employee should be calculated for use in any future compensation analyses or pay comparisons. 7. Specific dollar amounts for spot bonuses should be set aside in the budget and used exclusively for that purpose, regardless of the division or business unit's financial performance for the annual, end-of-year bonus. Such bonus amounts should be administered separately and the spot bonus monies should not be commingled with the annual, end-of-year bonus pool monies. In conclusion, if the majority of employees feel that they are being fairly and equitably compensated, they will tend to appreciate and take advantage of the full value of all other HR programs. However, if they do not feel that way, the reverse is the case and the company will diminish the benefit of such programs. How can equity theory be applied in a workplace?Applying equity theory in the workplace. Equity theory can be a model for measuring how satisfied an employee is in their job. According to John S. Adams, your staff try to keep a balance between how much they give to you (inputs), and what they receive from your business in return (outputs).
What theory proposes that employees become motivated when they feel they are treated fairly?Equity theory proposes that people value fair treatment, which motivates them to maintain a similar standard of fairness with their coworkers and the organization.
What theory is described when employees seek to maintain equity and fairness?Adams' Equity Theory calls for a fair balance to be struck between an employee's "inputs" (hard work, skill level, acceptance, enthusiasm, and so on) and their "outputs" (salary, benefits, intangibles such as recognition, and more).
What are the key elements of equity theory?Equity theory focuses on whether there is a fair balance between an employee's inputs (such as hard work, enthusiasm, and skills) and their outcomes (such as recognition, salary, and benefits). According to the theory, striking this balance is necessary for a strong and productive work relationship.
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