Effective Compensation Strategies for Employee Motivation

Compensation is considered a most important factor in workers' decisions to change companies.

1. Compensation Concepts and Components

Compensation is often the most direct motivational factor, encompassing:

1.1. Maslow's Hierarchy of Needs and Motivations (1943)

• Salary
• Social Benefits
• Status
• Recognition
• Promotion

1.2. McClelland's Theory of Three Employee Needs (1962)

• Achievement
• Affiliation
• Power

1.3. Herzberg's Dual-Factor Theory (1968)

• Hygiene Factors: (neutral or demotivating)
• Motivating Factors: (motivational)

1.4. Motivation Factors (Juan A. Pérez López, 1993)

• Salary
• Social Benefits
• Status
• Recognition
• Promotion
• Service

Other Compensation Elements:

• Vacation Days
• Company Expenses
• Health Coverage
• Company Pension Fund
• Company Car
• Flexible Timetable

2. Determining Factors in Compensation

External Factors:

These are factors related to the labor market. Supply and demand are key variables that establish retribution levels, influencing salary levels and the company's type of activity.

Internal Factors:

• Company Size: Generally, larger companies have stronger compensation structures.
• Company Strategy:
  • Defensive: Higher short-term salaries compared to mid-to-long term.
  • Prospective: Lower short-term salaries compared to long-term.
  • Challenging: Higher mid-to-long term salaries compared to short-term.
• Company Activity: The nature of the company's business.

3. Compensation Design

Company Salary Policy:

Companies typically choose one of three alternatives: paying above, below, or at the market average. This decision, within the company's capacity, significantly affects its ability to attract and retain top talent.

Salary Market Reference:

The salary market reference should be unique and applicable across the entire organization, categorized by job families.

4. Main Compensation Systems

Fixed Compensation System:

• Internal and external analysis allows for the determination of the salary structure.
• It can be adjusted simply by an axis line.
• Establishing salary ranges for each job family. This implies determining a midpoint, which can be symmetric or asymmetric to the range bracket. The wider the range, the more flexible the system.

Variable Compensation System:

For variable compensation to be effective, it must be perceived as valuable by employees. It requires a high level of trust between the company and its employees, and a clear understanding of how the compensation program works.

Bulk Work Plan:

An incentive is guaranteed for each unit produced. Commonly used in production environments.

Standard Working Hour Plan:

Based on the time employed in a standard work activity.

Sales Incentive Plans:

• Used to incentivize sales: reaching or exceeding sales budgets.
• The incentive is typically called a commission.

Management Incentive Plans:

• Consist of bonuses.
• May allow management to buy stock with lower tax rates.
• Aims to minimize the plan’s impact on company earnings.

Merit Incentive Plans (MIP):

These plans often have a strong subjective component and are linked to salary raises, typically affecting the base salary.