HR Knowledge: Understanding Stakeholders Compensation Systems

November 11, 20194:35 pm18116 views

The role of stakeholders

“The success of HR departments depends on how well they serve various stakeholders.”

Joseph J. Martocchio discussed in his book that each stakeholder has its own set of expectations regarding certain department’s activity.  Each of them holds their own standards for effective performance and for assessing the extent to which a department’s activity meets its expectations. 

Multiple stakeholders often compete directly or indirectly for the attention and priority of a personnel department.  They don’t have to be equity shareholders because they bring a different role to business operations. The stakeholders can be your employees, freelancer, manager, or government who have a stake in your company’s success and incentive for your products to succeed. Thus, stakeholders can affect or be affected by the organisation’s action, objective, and policies. 

In the short term, stakeholders can be considered as an “investor” in a company whose actions determine the outcome of a business decision.

See also: Labour Law HR Should Know When Employing Interns

Stakeholders compensation systems

Commonly, there are five main stakeholders compensation systems in an organization, including employees, line managers, executives, unions, and government. However, Davis and Landa (2000) discussed that some businesses include more stakeholders compensation systems such as customers and labour market.


Compensation professionals must educate employees about their training options and how successful training outcomes will lead to increased pay and advancement of opportunities within an organisation. The compensation professionals should not assume that employees will necessarily recognise these opportunities unless they are clearly communicated. Thus, written memos and informational meetings conducted by compensation professionals and HR representatives could be effective communication media.

The objectives of employees’ compensation program as a stakeholder should include protection programs, paid time off, and services. However, companies might or might not include all the protection and benefits program to meet business objectives/goals, therefore, compensation professionals and union representatives must determine which objectives are the most important for their particular workforce.

Line managers:

Compensation professionals use their expert knowledge of the laws that influence pay and benefits practices to help decide compensation judgments for line managers. For example, Labour Act prohibits sex discrimination in pay for employees performing equal work, hence, compensation professionals should advise line managers to pay the same hourly rate or annual salary for men and women hired to perform the same job.

On the other hand, line managers can turn to compensation professionals for advice about appropriate pay rates for jobs. And the compensation experts should oversee the use of job evaluation to establish pay differentials among jobs within a company. In addition, compensation specialists should train line managers on how to evaluate jobs properly.


Compensation specialists serve company executives by developing and managing sound compensation systems. Executives usually will look to the system to ensure that the design and implementation of pay and benefits practices comply with pertinent legislation. Violating this rule could lead to penalties.

Further, executives will need the help of compensation professionals to design pay and benefits that will attract and retain talents.


Collective bargaining agreements describe the terms of employment reached between management and the union. In this matter, compensation professionals are responsible for administering the pay and benefits policies specified in collective bargaining agreements.


Compensation specialist is responsible to apply their expertise regarding pertinent legislation to design legally sound pay and benefits practices.

Labour market:

Labour market plays a significant role in compensation management because it can change the compensation rate such as the development of price level, changes in the standard of living of employees, or income distribution.


Employee compensation can result in better customer service and retention which affects shareholder value in customer loyalty. That said, some companies bet high on employee compensation to ensure good service and responsive customer service. Yet, some large companies would prefer to design a cost down compensation program because of their influence and market share.

HR guide to compensation system

As mentioned earlier, stakeholder compensation is important to ensure business operations run normally. It also helps build a connection between an organisation team with their work or between shareholders and company. Thusly, to take the lead, here is compensation checklist for human resources department based on Martocchio’s book.

  • HR should work with line managers to fully understand which roles and types of employees will best support the execution of company strategy.
  • HR should collaborate with compensation specialists to run an analysis of market factors to get indicators of compensation norms and standards in order to keep the company’s compensation practice competitive.
  • HR should create, together with line managers, pay structures wherein roles are placed into appropriate pay grades. Each grade will have a corresponding range that will serve as the basis for assigning pay rates for roles.

If you are a line manager, here is how to lead the system:

  • Do educate the staff, along with other business leaders, in order for all to understand what strategy is being employed to achieve specific company objectives.
  • Do educate HR on certain aspects of roles that could improve intrinsic motivation which could benefit employees and employers.
  • Work together with HR to implement a plan that ties the compensation plan for successful recruitment, training, and development plan.

Read also: HR Knowledge: Psychology Theory of Work Motivation (Chapter II)

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