Recognizing Employee

HRM 500 Week 10 Assignment 4: Recognizing Employee Contributions

HRM 500

Professor Alberta Thrash

March 11, 2015


As the HRM manager for a fairly new retail company it has come to my attention that we need to develop a new incentive based plan in order to retain our high quality employees. The base level compensation package is no longer effective in retaining this talent so it is now my responsibility to develop an incentive plan that expands the benefits to our employees. Currently the benefits included on top of the salary are only at federally mandated levels. If this continues our employees will strongly consider leaving, this would put our company at a strategic disadvantage as the current employees are extremely productive.

Determining Incentive Pay

In order for incentive plans to truly be effective it must balance the limitations of company resources with the proper motivation for employees to perform at company required levels. Depending on the size and structure of a company not every incentive plan will prove fruitful in creating the results desired. Therefore a company must analyze the benefits and limitations of each pay method prior to implementing them. A few of the incentive plans that a company might consider include but is not limited to the following.

For an incentive plan to be effective the company must align its core business strategy and various business elements with a transparent standard of compensation to all employees of that company. The incentive strategy must be transparent in an effort to make employees realize their contribution to the company’s core business strategy. The incentive plan should help the employees to identify the individuals who are in a position to impact various outcomes required for the company to be successful. This would require that performance indicators be properly defined or the incentive plan will lose all effectiveness. Performance indicators bridge the gap between the employee and the incentive plan. As a part of the incentive plan the performance indicators help the employees to learn ways to improve their performance and to change key behaviors to not only better serve the company but to help grow their own careers. If these performance indicators are not clearly defined they may actually serve to demotivate the employees and create a feeling that there is little to no alignment between their roles and the rewards they earn through successful completion of these roles.

  1. Individual Incentives
  2. Team Based Incentives
  3. Spot Cash Awards
  4. Profit Sharing

In order to consistently design the appropriate measures for an incentive plan a company must take into consideration the following principles.

By following these principles a company can take into consideration two differing approaches in developing its incentive plans.

  1. The goal of a quality incentive plan should be the overall improvement in shareholder profits.
  2. Profit based drivers should be the targets for the incentive arrangements and should be communicated with the employee
  3. Incentive plans should select key performance indicators that should be reachable by the employee in that certain incentive plans.
  4. Under the profit based approach to developing an incentive plan the company will determine a percentage of annual profits which will be allocated back to the employees. A predetermined formula will be used to determine how this profit will be distributed amongst the employees. This formula is mostly centered at improving or maintaining annual profits and performance of the employees. Since the rewards gained in this incentive plan are based on company performance it is not focused on the individual which means if the company opts to use this plan they would need to have a strong performance management system in place. The performance management system would outline how the employee’s performance contributes to the company’s profitability which would then be reinforced through the profit sharing reward system. Additionally if the company chooses this incentive plan they must be transparent about defining profit to the employee. Defining profit reinforces the fact that sales and other incomes don’t translate to a hundred percent profit, this will keep expectations of the profit sharing system realistic. Lastly the company needs to communicate to the employees the percentage of profit that will be shared among the employees.

    1. Profit Based Allocation
    2. Targeted KPIs (Key Performance Indicators)
    3. The KPI approach will use company, departmental and individual metrics to determine incentive rewards. For this incentive plan to be effectual the company must select the appropriate metrics to drive performance. Indicators must be identified in each department for instance the improvement of levels of accounts receivables by the collections department. These indicators should also focus on the individual so that they address personal performance. Once addressed at an individual level these indicators should roll into the company wide indicators such as return on equity, return on assets, EBIT, customer satisfaction and profit per employee.

      Overall the incentive plan that a company uses must be aligned with the business strategy that the company uses in order for the incentives to help achieve this strategy. Incentive pay needs to reward employees on their day to day job duties. If incentive pay is tied to duties that are extra than the normal job description it will no longer be effective in motivating that employee to perform the crucial tasks required by the company as a whole(McCoy, 1992).

      Core Legal Requirements

      In today’s competitive environment there are many laws protecting the employee which a company must take into consideration when evaluating their benefits packages. Some of those laws include the following:

      These laws dictate the treatment of employees when it comes to compensation packages. The following laws dictate what types of benefits are required at the very least.

      1. The Employee retirement security act. This dictates that a company must offer a health insurance plan or a retirement plan.
      2. Americans with disability act. This act ensures that a company does not discriminate in compensation and benefits that are offered to employees based on disabilities.
      3. Age discrimination act. The purpose of this act is to protect elderly employees from any discrimination in compensation and benefits.
      4. Health insurance portability and accountability act. This act states that a company must ensure the secrecy and security with any group health insurance plans.
        • The consolidated omnibus budget reconciliation act. The aim of this act is to help protect the employee from losing health benefits in the case that the employee becomes jobless due to downsizing of the company or any other economic reason. According to the act employees may keep health insurance from the past employer for up to 18 months.
        • In addition to the above laws companies must consider IRS laws and other acts such as MMA, USERRA, and title seven of the civil rights act.
      5. What we can take from the laws and restrictions listed above is that the legal system in our modern society play a huge role in the structure of any compensation package. In addition to the legally required compensation employers can offer additional benefits like medical, dental, eyesight insurance, stock options, employee assistance programs and prepaid legal benefits or services. These add on benefits can be used in order to attract and retain high quality employees.

        1. Social security. Every company needs to pay the social security taxes at the same percentage being paid by the employee.
        2. Unemployment insurance. It is required for a company to pay this insurance at a state level which means the rate can change depending on the location of the business.
        3. Workers compensation. This provides benefits which cover cost incurred by employees who are disabled by illness or injury while on the job.
        4. FMLA (Family and medical leave act). For companies that employ fifty or more employees they must provide leave according to the FMLA. The act specifically requires that the company provide 12 weeks leave with job security and up to 12 month leave which can be unpaid.
        5. Additional Benefits that can be offered

          In addition to the added benefits listed in the last section of this report there are many other options for employers to layer in benefits to attract and retain skilled employees. This may include.

          Flex time – This benefit allows the employees to work a more flexible work schedule. It would work very well in the retail environment and often serves to attract female employees as it allows for a much better work life balance for those with children.

          Family Events–One of the best things a company can do is embrace the employee’s family. The employee’s family is their support structure and most people like for their family to see what they do for work. Family events give the employee to show their family what they do and experience the support of their employer. These events could include movie nights, picnics; take your loved ones to work days etc.

          Workplace Wellness Programs – Companies can arrange plans that assist employees with living a better more healthy life. This may include quitting smoking, losing weight, or fighting stress or depression.

          Corporate Memberships – Larger companies have the ability to engage in agreements with other larger companies to offer memberships or discounts for recreational and entertainment activities.

          When considering these additional benefits that could be offered a company must consider two very important aspects for the employee, work life balance as well as legal requirements or restrictions that may impact the benefits.

          Effective Compensation Communication

          As was mentioned earlier any compensation plan or incentive plan must be effectively communicated to all employees in order for them to be confident in the work required of them, which will lead to better motivated employees as they see a direct connection between work and reward. The communication strategy used by a company to inform the employees of the compensation plan must be aligned with the overall human resource strategy and must be fully supported by the top management of the company(Sibson, 1990). Some of the channels that compensation can be communicated to the employee include the following

          Regardless of the channel that is used to communicate incentive and compensation plans every company must structure the communication in a similar way. Every employee should have access to information regarding the compensation plan. The plan should be presented in clear and concise language. The main goal of the communication strategy should be that it clearly details how the employee’s efforts contribute to the company’s greater strategy and plans. Lastly the statement should include all important information related to the compensation strategy including compensation, benefits and other incentives.

          1. Compensation Statements
          2. Newsletters
          3. Meetings
          4. Human Resource Workshops
          5. One way to ensure that the compensation communication in clearly understood is to use multiple channels to relay the information to the employee. The communication should also start by laying out the basics of traditional benefits so that the employee understands the differences between what the company offers and what is standard. Lastly the communication must be simple and easy to understand with basic language that can be understood by all employees with little to no explanation needed (Tess C. Taylor, 2014).

            Ethical Risks

            Some of the ethical concerns or risks that may arise from a diverse compensation package can be subtle yet undermining to the overall goal of the compensation plan. One risk is that bonuses and stock options may lead to unethical behavior from some employees. These strong incentive plans can cause employees to cross ethical and moral values in order to achieve them. Many well-known ethical scandals that we see in literature and the news are caused by greed and the goal of getting the incentives offered by the company. Additionally incentives can lead to pay inequalities due to natural turnover in the work force. There have been studies that indicate that executives may leave a company due to pay inequality directly caused by the financial incentives (Knowledge@Wharton, 2014).

            There are some recommendations that a company can follow to reduce the impact of these risks. First the company should have a well-planned and operated internal control system so that there are a constant checks and balances that help to pinpoint and correct any compensation errors or internal fraud. In addition to the internal control system the company should have a code of conduct that dictates the employee’s response to the compensation strategy. Lastly the company can hire an outside auditor to review their compensation plan and determine and help prevent any internal fraud.


            As the HRM manager of this retail company I believe that following the above report as a road map to creating an effective compensation plan will lead to long term success for the entire company. By offering a more diverse and comprehensive compensation and incentive plan we will be able to retain our best performing employees and capitalize on our recent success while ensuring our future success.


            Knowledge @ Wharton,.(2014). The Problem with Financial Incentives – and What to Do About It – Knowledge@Wharton.

            Tess C. Taylor, T. (2014).Communicating total compensation to employees in a meaningful

            McCoy, T. (1992).Compensation and motivation (1st ed.). New York, NY: AMACOM, American Management Association.

            Sibson, R. (1990). Compensation (1st ed.). New York, NY: American Management Association.