RSS icon

Top Stories

The Advantages of a Two-component Approach to Compensation

May 1, 1993
Related Topics: Compensation Design and Communication, Variable Pay, Featured Article
The two-component approach to delivering pay combines lump-sum bonuses, which recognize annual achievements, with base-salary increases, which recognize lasting contributions to the company. Such an approach to compensation offers the following powerful business advantages to companies:

  1. Reducing fixed payroll expenses.
    Lowering base-salary increases will reduce the fixed-expense portion of total pay. This will make companies better able to tie total pay levels to their ability to pay. In a profitable year, companies can fund large lump-sum pools. In lean years they can fund smaller pools. These actions can be taken without fear of the long-range business consequences that variant salary-increase pools can cause.

  2. Reducing benefit costs.
    Many benefits are tied to the base-salary levels of employees (life insurance, disability, retirement and so on). To the extent that base-salary levels are reduced, these benefit costs also are reduced. (Companies can choose to offset the benefit reduction to employees by modifying the basis for benefits or offering larger lump-sum bonus pools.)

  3. Supporting employee-development initiatives.
    Under the two-component pay program, the primary use of base-salary increases will be to reward employee development.

  4. Providing annual motivational rewards.
    To the extent that companies reduce base-salary increases, they can fund whopping lump-sum bonus pools that will capture the attention of even the most apathetic employee.

Personnel Journal, May 1993, Vol. 72, No. 5, p. 158.

Recent Articles by R. Bradley Hill

Comments powered by Disqus

Hr Jobs

View All Job Listings