Based on the article below, is internal alignment alone enough to recruit and retain your employee? Explain.

Article

The alignment of compensation & business strategies

It is essential that a fair, competitive and attractive compensation plan is created in order to ensure the future success of the company. If the compensation plan is carried out properly it can improve organisational effectiveness, support human capital requirements of a business, and motivate and reward achievement of key corporate strategic and financial goals (OConnell, 2007: 20).

It is thus essential that compensation plans are well thought out and effectively designed. Compensation is the answer to attracting, retaining and motivating employees who have the necessary competencies to carry out the business strategy and handle greater responsibilities (Milkovich, Newman & Gerhart, 2007).

Managers must take note of the rewards that motivate their employees. If this is not done, it may result in a mismatch between the strategies being used by managers to motivate their employees and the motivational rewards that the employees prefer (Arnolds & Venter, 2007).

This mismatch, as well as failure on the part of managers and employees to reach common ground in the pursuit of organisational objectives, can result in firms failing to successfully implement their business strategies.

Employees will perform at a low level, doing only what is least expected of them when the reward systems are not aligned to their needs. They will not be motivated to put in extra effort so that the organisations goals can be achieved (Arnolds & Venter, 2007). It is therefore important for all firms to regularly assess the rewards that motivate employees.

Different organisations have different compensation policies in place. Matching compensation policies to business strategy leads to greater organisational performance (Montemayor, 1996).

Some organisations are quick to introduce a new compensation program based on what they have heard about it. The problem is that it may not fit with their organisations strategic direction. Only programs that can move the organisation further along its strategic path should be identified and implemented (Kaplan, 2007). Ultimately, compensation strategies seek to either decrease costs or increase revenues relative to competitors (Milkovich et al, 2007).

For example, if a companys strategy is to be innovative, the strategy will focus on new products and a short response time to market trends. The compensation strategy must be tailored to align with the business strategy. A supporting compensation strategy will thus place less emphasis on evaluating skills and jobs and more emphasis will be placed on incentives designed to encourage innovations (Milkovich et al, 2007).

A cost cutting business strategy will focus on efficiency and doing more with less. To support the business strategy, the compensation policy will focus on competitors labour costs, variable pay will be increased and productivity will be emphasised (Milkovich et al, 2007).

A company with a customer-focused business strategy will focus on pleasing customers and employees will be paid according to how well they do this. The compensation strategy will thus include customer satisfaction incentives (Milkovich et al, 2007).

In order to do better than its competitors, a firm must come up with ways in which it can add value by matching its business and pay strategies. When business strategies change, pay systems must also change (Milkovich et al, 2007). Organisations want to see the returns that they are getting from paying incentives, benefits and even base pay.

Companies are starting to realise that by sharing in the economic gains of achieving targets, they keep employees motivated to reach increasingly difficult goals. When there is a clear line of sight between work and reward, employees will work harder to achieve the goals and receive the rewards (Ulrich, 1997).

It has been suggested that performance-based pay works best when there is success to share (Milkovich et al, 2007: 54). An organisation can pay larger bonuses and stock awards when their profits or market share is on the rise. By paying bonuses fairly, employee attitudes and work behaviours improve, which in turn improves their performance (Milkovich et al, 2007). One of the major challenges in managing total compensation is to understand how the pay system can add value and create a more successful organisation.

Compensation methods have undergone a number of changes over the years such as the use of performance pay and other contingent systems of reward, the flattening of pay scales with fewer but broader pay grades and flexible cafeteria-style benefit systems (Brewster, Carey, Grobler, Holland & Warnich, 2008). This new approach to compensation is known as strategic pay and is much more suitable to todays changing organisational environments and structures. Strategic pay flows from and implements an organisations business strategy. The old methods of compensation were associated with job-evaluated pay structures, time and seniority (Brewster et al, 2008: 188). These old methods were appropriate for hierarchical organisations who operated in a stable environment.

An organisation will achieve much better results if the structure is aligned. The structure must be perceived as fair by the employees and it must motivate them to achieve the organisations goals. If there is a big pay differential between an entry level job and the highest level job in an organisation, it can encourage employees to stay with the employer and increase their training and experience. It can also result in greater co-operation with co-workers and for employees to look for more responsibility within the organisation (Milkovich et al, 2007).

the pay scales. More weight is often placed on the salary being offered rather than on the other types of compensation, like benefits and intrinsic rewards (Grobler et al, 2006). In order to remain competitive within the local labour market, employers usually offer salaries that are similar to those offered by competitors. Employers thus need to know what the going rate is for jobs within the local labour market. Wage surveys as well as published market data can be used to determine the average salaries for various positions. These methods assist the organisation in maintaining external consistency with other organisations (Grobler et al, 2006).

An important strategic decision must be made as to whether the organisation should mirror what its competitors are paying, or whether it should design its own pay structure that differs from its competitors but is aligned to the business strategy. The pay level can be set above, below or equal to that of competitors. The mix of pay forms must also be determined relative to those of competitors (Milkovich et al, 2007).

The following three factors shape external competitiveness: labour market factors, product market factors and organisation factors. Together these factors influence pay-level and pay-mix decisions (Milkovich et al, 2007).

As mentioned above, organisations usually claim to be market-driven. Looking at the demand and supply of labour gives one a greater understanding of how the markets work. The demand side deals with the actions of the employer i.e. the number of new employees they require, and what they are willing and able to pay them. The supply side deals with the potential employees i.e. their qualifications and the pay that they are likely to accept (Milkovich et al, 2007). The market rate is found at the point where the demand for labour meets the supply of labour.

In the short run, the only way that an organisation can change its level of production is by changing its level of human resources. The other factors of production, such as technology, capital and natural resources are fixed in the short run. The marginal product of labour is the additional output associated with the employment of one additional person (Milkovich et al, 2007: 207). However, each additional employee hired will produce less than the previous employee due to the fact that the factors of production are fixed. Each employee thus has fewer resources to work with. The additional amount that each new employee produces is known as the marginal

The integration of internal alignment & external competitiveness

In order for a compensation strategy to be successful it must blend internal consistency with market competitiveness, and must be structured to recognise the credentials, knowledge and performance of the individuals involved (Martocchio, 2001). An appropriate compensation policy is designed around the organisational structure, competitive position, leadership style and the strategic plan of the organisation (Santone, Sigler & Britt, 1993: 86).

A mentioned above, one of the main causes of employee turnover is inadequate compensation. The competitiveness of pay will affect the organisations ability to achieve its compensation objectives, and this in turn will affect its performance (Milkovich et al, 2007: 221). It is common for organisations to match the rates paid by their competitors. If organisations fail to do so, the existing employees will be unhappy and the organisations ability to recruit will be limited (Milkovich et al, 2007). Such a policy will result in the organisations wage costs being similar to that of its product competitors and the organisations ability to attract new employees will thus also be similar to its labour market competitors (Milkovich et al, 2007).

Job evaluation, whereby the worth of a job within an organisation is determined, is performed in order to develop a system of compensation that employees will find fair. In this way, internal consistency among jobs is obtained (Grobler et al, 2006). However, if a competitor is willing to pay an employee a higher wage to do the same work, the employee will leave their current job to earn better pay elsewhere. An employer must therefore not only consider what they are willing to pay for a particular job but also what the competitors are paying for the same job. This is important if they want to attract and retain quality workers.

Conclusion

It is important that companies ensure that their reward systems are aligned with their organisational goals, strategy and culture. Strategic compensation allows employees to earn incentives if they accomplish company goals. Compensation has a huge effect on recruiting, retaining and motivating people. The compensation strategy of an organisation also has a direct impact on its performance. Internal alignment and external competitiveness should be integrated when forming the pay structure.