Compensation, also known as remuneration or total reward in some countries, is a process that entails conferring rewards to employees for the services that they render to the organization. These services usually generate a particular benefit to the organization. Different countries have laws that dictate employees’ benefits and compensation in different circumstances. As such, the organization then rewards the employees by providing compensation and other forms of benefits.
Compensation can be divided into variable pay, guaranteed pay, equity compensation or benefits. In most companies, compensation is a handled by the human resource department. Influencers or factors that determine the amount and formula for compensation can be either internal or external. As such, classes of compensation that employees receive can differ largely in different companies, even when they are in the same industry. In the case of Mr. Paulson, his employees receive compensation from the various classes.
The first class of compensation accorded to employees is the base salary. A base salary or base pay is a guaranteed amount of money that is not pegged on any form of requirement. At Paulson’s store, employees receive a base salary of $500 every week. Employees in Paulson’s shop also receive compensation in the form of benefits. The variety of benefits that they receive includes a complete medical and dental coverage and two-weeks paid vacation. Additionally, they can also go for unpaid holidays subject to their availability. Yet another form of compensation that Paulson accords his employees is variable compensation through commissions. Whenever an employee makes sales exceeding 7000 in one week, they get to earn 2.5% over the amount of their sales. Even though the position is not a straight commission compensation system, the package still fails to cater for the equitable pay component.
According to the expectancy theory of motivation, individuals will choose a particular behavior over other behaviors since they are motivated by the rewards that they expect that behavior will generate. As such, the desirability of the outcome of a particular selection is what will motivate individuals to work towards it. Based on this theory, organizations tailor rewards and performance pay strategies in such a way that they are directly rewarded. Under this motivational framework, organizations also endeavor to ensure that the rewards availed to employees are those that are deserving and desirable to them.
Paulson’s compensation adopts the expectancy theory by pegging commissions to weekly performance. Employees are paid a low base salary. However, they can achieve a greater total income by working towards the sales target that has been set out. Since a higher total income is desirable, especially due to the low basic income, it is Paulson’s expectation that the employee will be motivated to work harder in order to acquire the commission, and a higher overall total salary. Paulson asserts that he has no desire for a lazy workforce of individuals who just sit around and wait for their sales check. He argues that the pay package is designed for “hungry employees who want to sell” (Sherman and Vallas 2).
To put this in perspective, an employee who manages to make sales of $10000 will receive a commission of $250. This is 50% of the base pay, which by any standards is a handsome amount. It is based on this reasoning, that such an amount would be desirable that Paulson has developed his compensation system. A similar analysis can be done regarding part-time employees, where if they make sales of say $1200, they receive a commission of $30, which is about 46% of their basic pay.
Paulson’s rationale may seem an appropriate strategy to him. However, it did not go down too well with his former employees. Some of the possible reasons why the employees may have disagreed with this rationale include that they probably felt that the sales targets were unreasonable, especially considering the fact that the weekly revenue for the store were $6500. The former employees may also have disagreed with this rationale since the basic pay was too little, a fact that Paulson himself acknowledges. The rationale compels the salespeople to pay more attention towards making their commissions than towards enhancing customer loyalty or pleasing the customer. Finally, employees may also have disagreed with the rationale since it tended to over-generalize sales target. The commissions were only earned for weekly sales exceeding $7000. This may make the employees harbor the perception that they are being exploited.
The equity theory purports that employees seek fair treatment, and that this fair treatment is what motivates employees. To evaluate the fairness of their treatment at the organization, employees utilize the ratio of their input to their outcomes. When individuals feel that they are underpaid, or their colleagues are over rewarded, they experience distress. Some can interpret the situation as discrimination. Such a situation can cause employees to feel demotivated and therefore, lead to poor output. It can also lead to poor employee-to-employee relationships, and this can affect the organization negatively.
In the case of Paulson’s shop, one can perceive a hint of inequality. This is especially in the case whereby an employee receives the commission for selling over $7000. If one employee manages to meet the required sales target to earn a bonus, and another falls short of the required target by $200, then the latter is likely to feel that the reward system is inequitable. From another perspective, employees who do not meet the sales target set out in order to earn a commission all receive just the basic salary, regardless of how far or how close to the target they were. Thus, an employee who makes sales worth $500 and another $4000, and yet another $6800 will all receive just the basic $500 weekly salary, with no amount of commission whatsoever. Under these conditions, employees will definitely perceive the compensation scheme to be inequitable.
Paulson employs a compensation package philosophy. He has designed packages in which he outlines the different compensations and benefits that his employees can expect to receive, based on a myriad of factors. These factors include the nature of the employee and the amount of sales that they make. Currently, Paulson offers two packages. The first caters for full-time employees. The package for full time employees entails a base salary, medical and other benefits and a commission provision. However, the package does not provide compensation for overtime hours. The second caters for part-time employees. It outlines the days on which they work, the basic wage they receive as well as the commission they can receive and the terms for receiving that commission.
This compensation philosophy is not an effective one for a number of reasons. First, the guaranteed pay is barely enough to cater for the employees’ survival. The guaranteed pay is important in ensuring that employees carry out their basic duties without any form of duress. On the front of variable pay, the philosophy also fails because it does not provide a sound mechanism for commissions. It only provides commissions for a certain weekly amount, which is way beyond the weekly sales revenue figure of $6500. In addition to this, the variable pay is also ineffective since it does not provide overtime pay for employees.
Finally, the philosophy also fails because it does not provide equitable pay for the employees. This issue has already been observed because the current scheme rewards all employees equally, up to the sales target mark of $7000 dollars. However, the philosophy is can be deemed effective in terms of providing benefits for its employees. It provides medical and dental coverage to employees. Additionally, it also provides employees with two-week paid vacation. These benefits seem to be the only effective component of the compensation philosophy.
It has been observed that Paulson’s current philosophy is not effective on a number of fronts. It is therefore, essential to develop a possible compensation system that would be more effective than the current one. There are four compensation areas, and of these, there are three that need to be addressed in the case of Paulson’s payment philosophy. The new payment scheme is discussed below, with a mention of how this would improve employee morale and change customer-employee interaction at the store.
The first thing that should be addressed under this new scheme is the guaranteed pay component. The amount should be increased from 500 dollars to about 1200 dollars. This amount will be enough to cater for the weekly needs of the employees, and as such, their sales will be more focused on pleasing the customer rather than earning a commission. Furthermore, the employees will be under less pressure, and therefore, focus on building customer loyalty for the store.
The second area that needs to be addressed is the variable pay component. On the front of commissions, the target sales should be downsized so that they are more realistic. Instead of tying up commissions to weekly sales, commissions should be paid out as a result of each sale. If not so, perhaps the commissions should be based on daily sales, which themselves should fall within the store’s sales revenue margins so that the employees perceive them as achievable. Furthermore, the store can retain the weekly sales commission.
However, this time the sales target should be a more achievable one, in order to ensure that the company achieves actual results. Apart from the commissions, the variable pay component also needs to address the issue of overtime pay and pay for any overtime and weekends. This will lead to increased job satisfaction, and possibly lower the turnover rates for the business.
The third component, the benefits component, has been observed to be effective. Finally, the last component is the equitable pay component. This aspect can be addressed by having a breakdown of sales commissions in such a way that there are a number of levels. At each of these levels, the ratio of the amount of employee input to outcomes should be within the same range. This will help to ensure that there is an equitable pay system, and in line with the equity theory, lead to increased employee satisfaction.