Factors Influencing Compensation Policies

¶ … drive decision making about compensation is known as the compensation philosophy of a company. In general terms a compensation philosophy details that reasons and the ways of the choices it has and the decisions taken based on the choices to pay employees and other stakeholders. While such compensation philosophy differs from organization to organization, it company tries to formulate a compensation philosophy so that it is able to attract the best talent available in the market and retain the best talent. The sentiment or the philosophy for compensation is expressed in the settlement or compensation packages given to employees or o the stakeholders (Armstrong & Stephens, 2005).

There can be several types of philosophies that result in several types of compensation. Some companies follow the percentile-based compensation philosophy that is based on percentiles spells out where wages will fall in relation to the regional wage markets and comparable to the best practices in a particular industry. For example, if a company pays its employees at the 50th percentile of the regional wage market means that its employees will earn more than 50% of the general market rate.

Other businesses follow the principle of specific numbers for compensation and have their compensation packages graded according to various parameters like experience, education, etc.

Some other companies follow the compensation package breakdown where the package includes all the compensation that the company would be liable to pay and employee or a stakeholder (Gerig Meyer, n.d.).

Nonspecific compensation philosophies generally describe and follow policies of compensations that would motivate and inspire employees to strive towards excellence such as rewards or bonuses to top performers without clearly stating the amount for the same.

In this paper we discuss the compensation philosophy of Tesco Plc, one of the oldest and largest retail traders of the world. We choose this company as their philosophy for compensation is interesting and is well thought out to attract and retain the best talent in the industry.

Compensation Philosophy of Tesco Plc

The company in this question is Tesco Plc. Tesco's compensation philosophy is directed towards the upholding of the interests of the shareholders and in doing this the company believes that the compensation philosophy and the resulting policy should be such that it enables attracting, retaining, and motivating top quality management personnel, especially executive officers (Tesco-careers.com, 2015).

The Tesco Plc compensation document says: "we believe that we will be able to align the interests of our executive officers with those of our shareholders." The company wants to achieve the above by offering competitive compensation packages that maintain an appropriate relationship between executive pay and the creation of shareholder value (Tescoplc.com, 2015).

This means that the philosophy for compensation of its employees, especially the managers and other critical decision makers in the business, would be so formulated that the best is got from them which would translate into greater financial gains for the company and its shareholders (European commerce sector: Tesco PLC, 2007).

The principles that emerge out of this compensation philosophy of Tesco for the executives and other employees of the company are:

The annual base cash compensation packages for employees would be such that the a level would e set which makes the company competitive in the market and in relation to the rivals for business opportunities and attracting talent

The achievements of short-term objectives by employees should be recognized through annual cash bonuses and (www.tescoplc.com, 2015)

In order to ensures maintenance of a continuing stake of the management in the company's long-term success, the long-term objective of growth through innovative technology and the long-term goal of creating value for the company's shareholders, equity-based incentive awards such as stock options, restricted stock units and performance stock units for executives, should be able to contribute ot financial progress (Tesco-careers.com, 2015).

Possible changes in the Philosophy

The company compensation philosophy suits the company's objective of achieving satisfaction and value addition for the shareholders of the company. However the philosophy is largely tilted towards looking into the compensation policies for executives and not much thought seems to have been put into the compensation policies of the general employees who are engaged in the day-to-day working of the company.

It is necessary for the company to spell out its compensation philosophy for the general employees and no executive employees also.

According to documents of the company, the salary structure at Tesco is linked to a combination of job function and acquired competencies. It further states that salaries can vary according to parameters such as performance and experience. The company calls this policy 'the work level' compensation formula (www.tescoplc.com, 2015).

This is however quite different from the philosophy of compensation that the company follows for executives and for those in the managerial positions. In the case of executives the philosophy is to offer competitive compensation packages that are in comparison to rivals in the industry with the aim of attracting the best talent.

Therefore it is suggested that the company should follow the same principle, in part at least, for non-managerial positions as well. The general employees who are not executives and yet play very critical roles in the day-to-day functioning of the business needs to be hired based on the competitive compensation packages in the industry. This policy would help attract the best of talent at the lower level of employees and help the company garner better performance from the employees. The same philosophy needs to be followed for efforts to retain employees.

These steps would serve the ultimate objective of the company -- to cater to the best interests of the shareholders and provide value addition for the shareholders by increasing company performance (Tesco.com, 2015).

Factors Influencing Compensation Policies

There are several factors that influence the compensation policy of Tesco Plc.

As is obvious from the discussion of the company's written statement in this matter, the primary factor that drives and shapes the compensation policy of the company is the interest of the shareholders. The shareholders are identified to be the most important stakeholders of the company and hence their interests, especially financial interest, are supreme. With respect to compensation philosophies, the company wants to hire the best talent form the industry so that they can give the best output which translates into greater financial gains for the company and ultimately the shareholders (Tescoplc.com, 2015).