Compensation Philosophies: Entitlement vs. Performance Philosophy
The proper compensation philosophy of the company plays a crucial role in the human resource management and directly influences the motivation and effectiveness of the employees. The confrontation between two compensation philosophies - entitlement and performance – is caused by the different vision of the compensation nature and individual’s performance. The current research paper will analyze the benefits and negative sides of each of the named philosophies will identify the companies experience and practice in the application of both compensation philosophies and will present the key findings of the above-said investigation.
The importance of the compensation system in the company is well-known and its correlation with the motivation and incentives for the work is evident. However, the proper compensation policy is one of the more complicated tasks for the HR managers as it depends on few factors that are distinguished by researchers (Bogardus, 2006):
Compensation philosophy of the company;
Financial constraints of the budgets;
Total reward program that is applicable to the employees;
Structure for administering pay.Besides, the corporate culture and the corporate structure should be taken into account as different jobs and positions require various approach and compensation scale. The complexity of the compensation policy lies in the necessity to find the balance between the attractiveness of the benefits for the best employees and reputation of the company as the one that does not pay excessive compensation for people (for avoiding public criticism and excessive expenditures). As an example of the last disproportion the data of one of the USA companies could be quoted: “In 2009 Merrill Lynch allocated three and half billion in bonuses to its employees while AIG paid two hundred eighteen million in bonuses” (C. Martin, 2011). Hence, the well-developed policy of the human resource is a key to many parts of the company effectiveness and the compensation level should be synchronized with the level of contribution.
Theoretical data relating to both compensation philosophies
The theory offers two types of compensation philosophies that are opposite in their approach and vision. Those are Entitlement and Performance Philosophy. The entitlement philosophy is one in which salary and promotion decisions are based on length of service (Bogardus, 2006).
Mathis L. and J. Jackson, 2005 give a more detailed definition: “Entitlement philosophy assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences”.Both given definitions underline that compensation is stable and comes with every single year independently from the economic situation or the company’s performance. This philosophy is more typical for public organizations like federal or governmental structures as they do not depend so drastically on market conditions. This compensation policy for a long time has been dominated in the companies.
It has some benefits for the employees as well as for the company, which are presented below:
Payment of scales raises annually;
Compensation stability in spite of the market or economic fluctuations;
Seniority basis (Mathis, Jackson, 2005).
As it could be …