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Aligning Business Strategy and Compensation Strategy

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Business strategy is a long and short-term plan which aims at realizing set goals and objectives. Compensation plan, on the other hand, is a plan containing the description of remuneration components and is used by firms to create a competitive advantage in the market. In order to establish a successful entity, firms need to align the two strategies. As a matter of fact, the two strategies assist the company to achieve its strategic goals and objectives.

The two strategies can be aligned by increasing incentives to the employees, such as the shared gains, employees ownership and participations in the decision making process. Firms can also choose to emphasize more on team work than on individual attention. This will eventually help to reduce payment differences between people working on the same level. The firm may also opt to promote employees internally, instead of outsourcing or recruiting from outside. Such move significantly motivates workers as it encourages some career growth in them. Additionally, the firm may continuously engage themselves in training and skill development of their workforce. This will not only add value to their people, but it will also enable them to implement egalitarianism strategy (Heneman, 2002).

Firms should, therefore, choose a compensation strategy which effectively rewards and reinforces their strategic objectives. They should also undertake regular evaluations of the compensation strategy to ensure effective implementation and realization of goals. However, before any alignment is done, a firm needs to articulate its business strategy first. This is because in the overall strategic planning process, compensation strategy always comes at the end. It must, therefore, be designed effectively to ensure it rewards the performances and behaviors, which ultimately will allow the firm to realize its goals.

Majority of business strategies are set to include both the financial and non-financial objectives of their companies for three and above years. The financial goals enable the firm to increase its profitability ratio and net income, which is ought to be translated into goals which are understandable to the people in the lower organizational level. For instance, firms should understand that the manufacturing team significantly contributes to the overall firm’s profit margin. Therefore, establishing an effective compensation strategy will motivate the type of performance appropriate for realizing such objectives.

Before developing a compensation strategy, decision makers should first find out the organization’s goals and objectives and identify how they can be reinforced through the reward system. In case of a shift in the business strategy, appropriate change needs to be done to the compensation strategy. Here the company could decide to re-educate the affected employees in order to meet the desired results. Appropriate compensation system should also be designed to support the realization of the new strategic goals (Deb, 2006).

Firms should develop their compensation strategies wisely in order to ensure alignment to the company’s strategic goals and objectives. Such alignment particularly suit companies which use the unit per share as their core measure of performance. Here the firm is able to identify the individual and group contribution and their impacts to the overall company success. The reward system should, therefore, aim at compensating the individual and group performance in the firm.

An effective alignment should seek to establish what level of pay is at risk. For instance, firms should understand that limiting pay and incentives to the high level workers is not an option. Instead, they should extend such variable incentives and payments deep into the organization in order to align the employees’ focus to that of the company. By doing so, the employees attention will be restricted towards realizing the expected profit margin and effective customer service. It is also advisable for the firm to maintain its salary base at a competitive market level at all times. Sometimes, firms may choose to pay their salaries slightly higher than the market level in order to motivate their staff and significantly reduce turnover rate (Berger & Berger, 2000).

By aligning business strategy and the compensation strategy, firms are able to pay high wages and get value for their money. The high wages motivate workers, who consequently maximize their output in the firm. Besides, by aligning the two strategies, job security is increased, as firms would not wish to incur loss by losing them.

It should also be noted that the company does not necessarily have to change its entire compensation program just because it has changed the company strategy. Instead, some partial change or alignment of the program to accommodate the new goals and objectives should be done. Such periodic review not only enables a firm to increase its profitability, but it also enables it to secure skilled and competent labor force from the market (Berger & Berger, 2000).

The periodic evaluation of business strategy and compensation strategy enables a firm to keep the two aligned to each other. It also enables a firm to effectively judge its compensation approach. Whenever a firm finds itself closer to its strategic goals and objectives, it means that its compensation strategy is aligned and works efficiently. Managers and other policy makers should also avoid changing the goals, targets and objectives without actively involving their employees. This is because such changes may not be positively welcomed by employees, who may choose to follow their own direction. For instance, the performance targets should be set at a reasonable level, not too low and not unrealistically high to frustrate the employees. A firm, however, needs to establish a sustainable compensation strategy in order to win its employees loyalty and commitment (Berger & Berger, 2000).

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