Role of Compensation in Talent Retention


Roleof Compensation in Talent Retention

Roleof Compensation in Talent Retention

Employeesare the most viable assets to organizations as they drive the companytowards achievement of its objectives thereby enhancing growth andcompany’s competitive advantage. Employee turnover therefore couldlead to significant effects on the organizations strategic goalswhich may consequently lead to reduced productivity. Phillips &ampEdward, 2008 estimated the cost of employee turnover to be 150% ofthe Salary of the leaving employee. This is so because the companyhas to incur recruitment cost and training costs in replacing theoutgoing employee and loss of performance due to the induction timetaken to orient new employees to business activities and adopt to thenew environments which may be quite different from the new employee’sprevious employment. As such, it is important for organizations toemploy measures aimed at retaining key employees for long term growthand the success of the company.

Eventhough the rate of unemployment is relatively high in the UnitedStates, there is labour shortages in the labour markets. Also, thereis an increasing trend in voluntary terminations and increasedunemployment for people with college degrees. This was reported bythe U.S, Bureau of Statistics in 2011. Similarly, even where thereis high unemployment rates, the demand for key talents is always ondemand and the challenge of retaining such employees will increasewith the improving economy. Employee retention therefore, is theprocess in which employees are encouraged to remain in a particularorganization for a maximum period of time (Taylor, 2002). Retainingkey employees would not only ensure customer satisfaction andeffective strategic planning but it will also improve investors’confidence in the company. Such investors are mainly concerned withthe capacity of the company to perform which determines the value ofinvestment that they will be willing to put in the organization. Theinvestors’ confidence is directly proportional to their value ofinvestments in a particular organization. An organization with ahighly motivated human resource delivers high and more consistentreturns to the shareholders thereby attracting more investors(Milkovich et al, 2005). Employee turnover is therefore, a globalproblem and the organizations should try and retain it at minimumlevels.

  1. Rational basic salary system help organization attract talent from different level

Studiesshows that the compensation and benefits can be used to improvemorale of the employees and consequently reduce turn over if appliedstrategically. Milkovich and Newman (2005) have argued that amongother employee rewards, monetary rewards are considered to be themost effective and significant factor in employee retention. It isalmost obvious that if an organization pays a good remunerationpackage they are likely to retain their employees unless theircompetitor can offer better rates. It is therefore important fororganization to make their pay as competitive as possible. Offeringbonuses or even a raise annually, would ensure that employee’s lookforward to another year in your company. Compensation and benefits isan efficient weapon in retaining employees. Maslow’s identifies thebasic needs of the employees. He explains that the employees’ needsare physiological needs, followed by safety needs, thenlove/belonging needs, esteem and finally self-actualization needs.Compensation and benefit policies are considered to be most effectiveas they respond to the five needs highlighted by Maslow’s.Employees are able to achieve emotional salary, meet the basic needs,improve their day to day life and consequently prepare for thefuture. It is worthwhile for the companies to match theircompensation package with skills expectation and the market rate forsuch skills in order to curb employee turnover. Compensation however,cannot achieve full job satisfaction for the employees. Though it isnegatively proportional to job turnover, it is worthwhile forcompanies to incorporate professional development and corporatesocial responsibility plan (Reily et al, 2010).

  1. Comfortable working environment make employee performance high-efficient

Similarly,comfortable working environment contributes to effective employeeperformance. Organizations should therefore focus on creating goodworking environments by meeting the current and future needs of theemployee. Good working environments include matters such aswell-ventilated rooms, permitted breaks, safety and comfort ofmachinery where applicable, normal manning levels, disciplinaryprocedures and communication (Carsen, 2002). The basic determinant ofthe work environment is the use of communication. Organizations mustbe able to communicate their short term and long term goals and keepthe employees informed about the organizations strategic plan. Thiswill enable the employees to work towards the achievement of suchgoals thus securing the strength and stability of the organization.Involving employees in the processes of decision making makes theemployee own the process and take his own initiative to execute theprocess.

Researchshows that organizations that are transparent and those that involvetheir key employees in problem solving techniques are able to retainthe key employees during the dark times in the economy(Carsen, 2002).Thus the key to retaining employees is to create a workingenvironment that employees voluntarily choose to work in given theavailability of the job opportunities. Job autonomy is also animportant aspect of good working environments. The employees shouldbe independent to determine work discretion, content and the time toexecute the job. When employees have the independence of controllingtheir own work outcomes, they are more motivated to stay since theirefforts and decisions are valued by the organization.

Employersshould limit the behaviours that are likely to cause unfavourableworking environment for the employees and appraise values that workfor the common good of the organization work ethics. Behaviours suchas obnoxious behaviour in the office or discrimination of any kind,senior management in absentia, where such managers do not get timefor meetings or even interacting with other employees, unfairpromotions should be prevented, overly detrimental disciplinaryprocedures. Instead, all employees should be required to conform towork ethics, respecting each other’s cultural, social or religiousdifferences. Promotion should also be based on merits.

  1. Promotion can motivate employee toward success

Inaddition, promoting from within the organization is an effectiveretention strategy. First, it keeps other employees motivated toexecute their jobs efficiently as they feel that their skills arerecognized in the company. Of course, it is more economical topromote from within instead of hiring from outside as the hiringattracts extra costs from the organizations unless the organizationfeels that there is no one in the organization who has the requiredexpertize for the position. Promoting from within is one of thestrategies that organizations adopt to facilitate career growth anddevelopment (Dibble, 1999). Promotions are the employee’sdevelopment strategies which are also viewed as a reward for goodperformance and realization of the employee’s capabilities (Reily,et al, 2010). The human resource professional should thereforeincorporate a clear succession plan within the organization sincesuch measure is likely to draw long term commitment from theemployees Where there are no new positions, organizations shouldestablish hierarchical job groups to ensure that one does not stay inone position for long thus prevent stagnation which may demotivateemployees. Similarly, many organizations incorporate opportunity fortrainings and skills development that improves their employee’semployability to the organization and the external labour market(Updhyay, 2009). Research shows that employees who benefit from theorganizations training and development opportunities are likely to bemore loyal and committed to the organization. As such, human resourceprofessionals should create measures that manage career stagnation inorder to keep job turnover at minimum levels (Phillips &amp Edwards,2008).

  1. Benefits make employees feels safe and make them loyal

Lastly,an organization may also incorporate employee benefits in theirpayment scheme. Employment benefits are the various types of non-wagecompensation provided to the employees in addition to their basicremunerations. Employee benefits include the perks which arediscretionary in nature and the fringe benefits. Employee benefits inUnited States range from medical insurance plans which cover the costof physicians, prescriptions, dental and optical expenses (Taylor,2002). Some medical covers also extend to benefit the employeesdependants. Disability insurance is a benefit that promises toreinstate the lost income in case the employee is disabled or unableto perform his duties due to injuries or illness. It can be shortterm or long term depending on the cover.

Employeesmay also be entitled to flexible spending accounts. In addition, theretirement benefit plans are funds set aside to benefit the employeeswhen they end their careers. They include the defined benefit pensionplans and the contribution plans. Employees may also be entitled tofringe benefits. These benefits that are taxed on the employer.Theyinclude tuition assistance, flexible spending accounts, group- termlife and long term care insurance plans, child care benefits.Fringebenefits accident and health plans, group-term life insurance up to$50,000 dollars are exempted from federal tax on the employee. TheTax is charged on the employer. Other benefits include paidvacations, formal or informal employee discounts from identifiedvendors, Cafeteria plans that involve menu arrangements where theemployees enjoy certain meals at a subsidized rate or at the expenseof the company (Taylor, 2002). Such benefits are aimed at raisingemployee’s satisfaction, corporate loyalty and employee retention.

Inconclusion, good compensation policy will help the organization toretain its staff. The human resource professionals should thereforecome up with a clear definition of key talents depending on thenature of the organization and make sure that such talents are wellmanaged. Managing such talents involves paying them above the medianrate to ensure that competitors do not lure them away and ensuringthat their pay is consistent to the relevant external market. Suchprofessionals should seek to know the perception of the key talentson the reward system and the opportunities for development andadvancement. They should, at all times, ensure that the reward systemis perceived as relevant and fair and that the key talents are wellinformed of the advancement opportunities. They should also seek toknow the reasons for voluntary turnover so that they can deviceeffective retention strategies. Most important, the human resourceprofessionals should be aware of the fact that the key talents are inhigh demands and will always attract their competitors. Therefore,coming up with a clear succession will ensure that the organizationdoes not suffer from the transition.


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Milkovich,G. T., Newman, J. M., &ampMilkovich, C. (2005).&nbspCompensation.Boston, Mass. Montréal: McGraw-Hill/Irwin.

Phillips,J. J., &amp Edwards, L. (2008).&nbspManagingTalent Retention: An ROI Approach.New York, NY: John Wiley &amp Sons.

Reilly,D. J., New York University.,&amp New York University AnnualConference on Labor. (2010).&nbspEmployeebenefits and executive compensation: Proceedings of the New YorkUniversity 59th annual conference on labor.Alphen aan den Rijn: Kluwer Law International.

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Upadhyay,S. S. (2009).&nbspCompensationmanagement: Rewarding performance.New Delhi: Global India Publications.