A Policy-Constrained Wage Fund Allocaton Model For Payment Medium Selection in Compensation Planning

Abstract

The U.S. labor force currently receives 80% of National Income through a variety of cash and in-kind compensation form. Employers use more than 80 different forms of compensation, herein called payment medium, to deliver employee wages. How firms select the set of payment offered to their employees is the focus of this study. Some firms recognize that flexible compensation, i.e. giving employees a choice among alternatives, may allocate compensation more effectively. This view underscores the belief that labor's need satisfaction may be complementary to the firm's interest and goals. This belief is not new, but its recent recognition in cafeteria type programs revives an interest in how to match individual employee need satisfaction with a firm's objectives. Given that firm and employee relationships are complex and dynamic, is compensation planning possible? This question addresses the problem of integrating firm goals, employee needs, and available resources into a dynamic planning method. Corporate financial and human resource policies in this problem are inextricably related. This study develops a method for planning corporate compensation policy. The proposed planning method evaluates alternative compensation policies congruent between firm and employee goals. Corporate policies, payment media and employee requirements are explicitly identified and a decision model is constructed using goal programming.