Managing Compensation as a Retention Strategy

Madhu Paudel

The concept of ‘Employee Retention’ emerged during the 1970s and early 80s. Before the emergence of this concept, the status of an employee used to be just an ordinary worker who works for an employer at their convenience. Employee turnover has been a gripping issue for many organizations for a long time.

Organizations have been facing significant challenges regarding employee retention as increased competition in the job market. In today’s globalized economy, the importance of opportunities for development, innovation, and work-life balance varies from a case to case basis. The variables for employee retention may express but not be limited to career growth, job security, work environment, work-life balance, learning and development, and compensation. Here, I will focus on compensation as a retention strategy.

In this era of globalization and digitalization, getting efficient personnel who work for the organization’s benefit has become a challenge for businesses. Similarly, it is a dare to pay employees per their performance which also contributes as a stimulus. The ability to attract, develop, retain, empower, and reward a varied array of adequately skilled employees is critical to an organization’s success or failure, and it is crucial in cultivating performance. HR specialists are becoming increasingly vital to organizations’ overall strategy in terms of acquiring and retaining people.

Compensation policies at the company level are subject to the overall legislative and other mandatory principles/framework established by the government. A variety of considerations, both objective and subjective, evaluate the determination of compensation policies at the company level. There is a need for a fit between organization design and company policies.

Monetary compensation is not often the only component that employees consider when evaluating a job; total compensation also incorporates a total incentives approach.

In this article, my attempt is to lay out the methods for establishing and implementing a new salary structure, as well as resources for developing compensation as a retention strategy. In order to retain employees, human resource professionals must be well-versed in a variety of factors other than money. In compensation management, there are a variety of methodologies, techniques, and instruments available. Managers must observe approaches employed by peers across the industry, comprehend what they are doing, and implement what is appropriate when establishing the pay plans.

Basic salary, dearness allowance, house rent allowance, incentives, communication allowance, traveling allowance, festival allowance, profit-linked bonus, retirement benefits, medical allowance, and so on, are the familiar components of remuneration in organizations operating in Nepal. The components of pay vary from one industry to another, and even from one organization to another. This really is due to the fact that our practices are not uniform and harmonious across all employee levels. This is also a reason why employees are switched from one company to another. The unfortunate situation is that certain firms are not even adhering to the basic principles of minimum wage and labor laws.

In practice, compensation policies and structures are determined by (i) unilaterally by the employer; (ii) jointly by management and workers’ union(s) through collective bargaining; (iii) through consultations among the three parties that include government, management and labor representatives (iv) under the minimum wages legislation; and (e) courts through adjudication. Collective bargaining is the most effective strategy among these options.
Out of several thoughts and schooling, we can use approaches to develop compensation as a retention strategy.

1. Designing a Compensation Structure from the Top-down Approach Aligning with the Organization’s Policy
In this model, we may use the techniques below to create remuneration in a scientific manner such that employees stay with the company. A HR specialist must be familiar with the organization’s policies, as well as its business and cultural strategic objectives, in order to comprehend the existing job requirements and provide guidance for prospective hires.

Assuring employees’ commitment to the planned employment and tenure so that a long-term investment in human capital can be made. We should prepare the job analysis and job description before preparing the compensation package for the hiring.

It’s usually a good idea to verify and evaluate internal and external pay equality so that employees don’t have the opportunity to compare perks with similar roles, which also eliminates the possibility of a quick job transition.

2. Competency-based Compensation System and its Need for Retention 
For employee retention, we can use the method of competencies-based compensation that includes;

a. Personal abilities such as self-development, initiative, generating results, demonstrating commitment, and flexibility.
b. Interpersonal skills such as persuasion, relationship-building, counseling, teamwork, service orientation, cultural awareness, communication, and openness.
c. Strategic thinking, business knowledge, conceiving, innovation, processing, analyzing, and comprehending are examples of information-oriented competencies.
d. Leadership, directing, developing teams, facilitating the performance, inspiring, mentoring people, and transferring information are all people management competencies.

Competency models are used in HRM to integrate HR operations. Competencies are, in reality, the common thread that runs through the entirety of human resource subsystems. Understanding the factors that contribute to successful compensation to achieve their goals is very important. Compensation systems like other management practices, have undergone significant changes in businesses.
Steps in developing a competency-based compensation system are as below:

3. Employee Participation, Compensation and Retention
Employees with low pay are less likely to engage in activities such as delegation, consultation and suggestion, leading to a low degree of employee retention. When employees have some influence and authority over their job decisions, they are more likely to stay. Fair and honest remuneration policies can have an impact on this connection.

An effective retention strategy has several components that must be addressed in order to retain employees. Employee satisfaction is the key to motivation which leads to desired output and retention as a whole. Only a total compensation can lead to job satisfaction.

In order to retain employees, a good retention strategy must address several components. Employee happiness is the foundation for empowering staff, which leads to optimum production and total retention. Only a complete compensation plan can contribute to employee satisfaction. More money isn’t always an option for certain businesses. It’s worth noting that there are plenty of other factors that can boost applicant attraction and employee engagement. Employees could no longer be counted further to stay with the company until they retire. Employees work “at will,” which means they can leave at any time if a better offer comes through in terms of career, money, learning and a good work environment. Many employees will enter companies with abilities and experience which will allow them to be positioned beyond the minimum pay range.

The focus on managing compensation linked to retention must be given by Nepali organizations which is important also for organizations to avoid becoming ‘training houses’. The bottom line rule is that the total compensation must meet the cost of living and be in a timely manner to meet the co-current expenses of employees. We must keep in mind that the cost of frequent hiring is higher than the cost of retention.

Paudel is General Manager of Synergy Corporation. He is also former Vice President of Human Resources Society Nepal.

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