Compensation and Benefits Essay

Excerpt from Essay :

Compensation and Benefits

The United States Postal Service (USPS) which has been experiencing periods of stagnant or declining revenue was discovered to have a large issue with their compensation and benefits system. It was discovered that the organization provides its employees with lucrative packages which are much higher than those offered by its private sector competitors. Most of the USPS employees are unionized and the unions have been able to negotiate great packages for the employees with the USPS paying 100% of their employee life insurance premiums as compared to other federal agencies that pay about 33% and also pays 80% of their employee health benefit premiums as compared to other federal agencies that pay only 72%. It was found that an average USPS employee receives $79,000 in compensation and benefits as compared to $59,900 for employees at the same level in private agencies. This data is, however, not adjusted for factors such as skills of workers and working conditions Carbaugh & Tenerelli, 2011.

Edwards (2010)

argues that postal service unions have done extremely well in negotiating great packages for their members but these benefits for USPS workers are expected to continue increasing as a result of growing healthcare and pension costs which will lead to increased expenditure on compensation and benefits for the USPS amidst stagnant or declining profits.

The data reported by Carbaugh and Tenerelli (2011)

above is consistent to research conducted by Wachter, Hirsch, and Gillula (2001)

who found out that the USPS provides workers with a total compensation premium of 44% on wages and benefits as compared to the private sector workers. The wage only premium is 36%. Most important is that their analysis provides important controls for differences in skills and working conditions for the workers as well as other variables such as training differences, educational background and other demographic variables. The researchers also found that postal workers have low levels of unmeasured skill as compared to private sector employees. This cannot provide a justification for the wage premium paid by the USPS. However, the wage premium has helped the USPS to have a lower turnover rate than private companies as well as higher job application rates.

The ability of the USPS to find a solution for its arbitration process is greatly hampered by the legal mandates that restrict negotiations between the USPS and the postal service labor unions. Therefore, though the USPS is working out collective bargaining agreements with the labor unions that will include items such as work rules, layoff protections and cost-of-living adjustments, legal mandates prevent the reduction of wages, hiring of part-time workers or outsourcing of USPS services. This creates an even larger problem for the USPS since their expenses on employee compensation and benefits will remain high.

Literature review

Empirical evidence shows there is a link between human capital and organizational performance. Dessler (1997)

posits that for any organization to succeed, compensation of their employees must be at par with the input that the organization requires. This argument is supported by Gomez -Mejia, Dalkin, and Cardy (2006)

who state that capital investment is not as important as human resource investment for the success of the organization. Cascio, 2003()

argues that in ensuring the employees have the motivation and attitude required for the success of the organization, an effective compensation program needs to be designed. This involves both direct and indirect compensation. Direct compensation is about the wage or salary aspect while indirect compensation is the fringe benefits that the employee enjoys. By integrating the two types of compensation, the organization is able to motivate their employees towards the success of the organization. A similar compensation model is given by McNamara (2008)

who states that an effective compensation package caters for issues regarding wages or salaries such as remuneration, job descriptions, merit-based and performance-based incentives, while benefits include issues such as retirement plans, health and disability insurance, vacations, and stock plans.

Compensation in federal government and government agencies

Since the early 20th century, the U.S. government has taken an active role in ensuring its workers receive good pay and benefits. This led to various Acts such as the fair labor standards act of 1938 that dictated equal pay for equal work. Twenty years after this act was enacted, the economy was hit by recessions which made this difficult but twenty years later when the economy boomed, the government played an important role in the American workplace by enacting the equal pay act in 1963. Today, employment by federal government and other government agencies has evolved to make them more lucrative employers than the private sector. Differences between federal compensation and private sector compensation depend largely on their highest level of education. For those whose highest level of education is a bachelor's degree, the cost of total compensation is an average of 15% more than for federal workers than for private sector employees in the same level. For employees who their high school diploma is their highest level of education, the federal government pays them 36% more than private sector employers. Lastly, for Master's and doctorate degrees, the total compensation for federal employees was 18% lower than for private sector employees at the same level. Overall, the federal government paid their employees 16% more than the private sector employees after putting into consideration the observable characteristics of employees such as education background and experience levels.

Extrinsic and intrinsic rewards

In all organizations, monetary pay is the single most important reward and it is considered to be an ever-present and significant factor in the success of the organization (Milkovich and Newman, 04). Gardner et. al 04, however, argues that monetary pay is not merely a motivation factor for employees. It is also a factor in employee retention and organization's ability to attract employees. Adams 63, however, hinted that the distribution of financial rewards in any organization may create issues related to inequity and may also destabilize the possibility of positive impact of the monetary pay given to employees thus leading to negative consequences. Herzberg et. al 57 pointed at the dichotomy of rewards as either intrinsic or extrinsic. He labeled achievement, advancement, and recognition as intrinsic rewards which motivate employees more than extrinsic rewards which include salary, job security and working environment. This led to the argument brought by Chiang and Birtch 07 that the utility of the reward system and the enticement that is entrenched in it is of great value to the organization. Zhou et. al 09 stated that extrinsic rewards have a utilitarianism value and could be used to modify employee behavior towards organizational success. His argument is that by providing employees with extrinsic rewards, their performance could be greatly enhanced. He also argues that intrinsic rewards have romanticism value. This is because they boost the innovation and creativity foe employees. Despite these two definitions of extrinsic and intrinsic rewards being difference, there is a commonality that comes in the ability to influence a person's behavior through the use of rewards.

Strategic compensation

Compensation is a key element in the relationship between employers and employees and in most organizations it is the single greatest operating cost. Scholars have thus advocated for its use as a tool to enhance organizational performance and sustain competitiveness. This has led for the development of contemporary approaches to compensation that emphasize the importance of aligning behaviors of employees to the strategic goals and objective of the organization. This has led to the adoption of strategic compensation which though limited, through the creation of managerial difficulties for implementing the compensation, has potential to push organizations forward.

It is also argued by Lawler 90 that the starting point of the design of a compensation system is the strategic direction of the organization. Therefore, it is important for the compensation design to be aligned with the organization's strategic direction which creates a powerful means for attracting and retaining desired talent. It also elicits desired behavior outcomes in terms of employee motivation, loyalty and commitment which are requirements for positive organizational performance. Thus employee compensation may be made to be contingent upon a combination of team performance, organization performance and individual performance. This performance-based compensation system creates economic value for the organization by reducing the expenditure on employee compensation and benefits during difficult economic periods while securing sustained competitive advantage for the organization. Pffeffer 94.

Job satisfaction

Job satisfaction is also an important factor in motivation of employees and the organization's ability to attract and retain employees. Herberg's duality theory made a proposition towards job satisfaction as a function for motivating employees. Job satisfaction is defined by Locke 69 as an emotional situation that is related to a positive or negative judgment on the individual's job experiences. Linda Evans 97 in her study found that job satisfaction is determined by the degree to which the job-related needs of the employee are being met by the organization. These needs include extrinsic rewards such as money, power and prestige. This argument is supported by Kreitner and Kinicki 06 who argue in…

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