HR’s Role in Compensation & Incentive Plans

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HR’s Role in Compensation & Incentive Plan Creation

It probably goes without saying that favorable compensation and incentive plans are what attract prospective employees to an employer and if hired, encourage them to stay. Salary, benefits, bonuses, raises and other forms of payment also have the potential to encourage all levels of staff to work hard and strive for success. If Human Resources professionals design compensation and incentive plans intelligently, they will propel the company or organization to meet its vision.

In small enterprises, a human resources manager may oversee all HR duties, where compensation and incentive planning is just one of the roles. In larger companies and organizations, HR might be divided into several departments, where one specifically focuses on compensation and incentives.

Developing Compensation Plans

The Human Resources professionals responsible for developing compensation plans have a complex job to pull off. They have to consider many factors, such as the employer’s budget, the salaries offered by competing businesses or groups, how existing and past employees are responding to compensation plans, how employee credentials affect their salary and how often raises should be issued. It is also a dynamic process that is continuously re-evaluated.

Here are some examples of tasks that HR must perform when developing compensation plans:

  • Research similar or competing employers to see what they are paying their employees.
  • Coordinate with each department head to understand the roles performed by staff in order to develop fair and competitive compensation amounts.
  • Potentially develop a hierarchy of income band levels, based on experience, education, seniority, etc.
  • Research various benefits packages and select ones that are within the employer’s budget while considering their competitiveness.
  • Perform data analysis to develop optimal compensation/benefits plans.
  • Ensure compensation and benefit plans are in line with all relevant laws and regulations.

Development of Incentive Plans

When HR professionals develop incentive plans, they must consider the organization’s goals. For example, one way to encourage staff to be long-term employees is to have long-term incentives, but not TOO long-term. “In general, long-term incentives are better suited for retaining employees on a long-term basis or for creating capital appreciation, but if the performance period is too long, employees may lose their motivation,” states Lee Smith Publishers LLC for

Incentives take on many forms depending on the employer’s vision and the type of employee. These include bonuses, commissions, and property, such as stock options.

It is imperative that Human Resources representatives evaluate the effectiveness of their incentive programs, especially if they backfire. For example, if a salesperson receives a lump-sum bonus for meeting a sales quota, he or she may not be as inspired to work as hard after surpassing that quota. Or managers who have stock options as incentives may benefit from the market even if their performance is of low quality. “Because there can be many variations to incentive plans, it is important to analyze the advantages and disadvantages of potential incentive plans prior to implementation,” advises Forbes Magazine’s Lisa Quast. “Determining the optimal incentive plan design will not only help improve performance, it will promote ethical behavior that is in the best interest of the company and shareholders.”

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