If you dont have a compensation strategy in place, you wont need to complete this step. Aligning Compensation Strategy with HR Strategy & Business Strategy by Dr. G Concept of reward and total reward system, Concept of compensation, exploring & defining compensation context, Compensation for Indian Central Government Employees, Building market competitive compensation system, Building pay structures that recognise individual contributions. The tech industry is currently offering very competitive compensation and benefits. A second dimension is the extent to which variable compensation is paid out in the year it is awarded or deferred and paid over some future period. In addition, underlying any norms are individual decisions and solutions tailored to company needs and strategies. These are a few of the many compensation planning and design companies that the SHRM lists as resources: Key takeaway: There are many resources for templates and tools for compensation plan development. In order to go with a leading compensation strategy, you have to have the financial health to pay employees higher salaries. We are also talking about skill sets and experience that new team members bring to your company. Is the overall program defensible and perceived by employees as fair? When creating your compensation plan, of course the ability to recruit and retain should be an important factor. a, d. T/F: Different business units within the same company can have different compensation strategies. Can your organization effectively communicate the philosophy, policy and overall program to employees? here are a few examples of innovative compensation and benefits strategies that top prospects are looking for: We reached a time when most companies, especially those winning in their industries, realized their businesses are fated to fail without innovative efforts. Infer its compensation strategy using the five dimensions (objectives, alignment, competitiveness, employee considerations, and management). Well draw on FW Cooks analysis of executive comp at companies in the Russell 3000, an index of the top 3,000 U.S. stocks by market capitalization, from its 2019 Annual Incentive Plan Report, and from its 2018 Global Top 250 Compensation Survey. By accepting, you agree to the updated privacy policy. Companies must understand the paths and strategies to incorporate an innovation-driven approach to conducting their business. 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Compensation strategies can positively influence employee engagement and improve employee productivity. Is the compensation incenting sustainable long-term behavior that gets the organization where it wants to go, or is it really short-term-oriented? he said. How about this for a strategy: We'll let the market decide what we need to pay people! As the most common compensation strategy, meeting the market ensures that your pay and costs match the competition. You can also leverage your employees for input by creating surveys that assess their level of content with the compensation strategy. That reinforced short-term thinking, which conflicted with the risk-seeking entrepreneurial focus of the companys founders. Flexible work hours. When an employee works over 40 hours in a workweek, their employer must pay them overtime. Al-Qurmoshi Institute of Business Management The median CEO base salary is 20% lower in the Americas than in Europe and Australia and meaningfully lower in Asia than in other regions. When compensation is misaligned with them, trouble ensues. At a private family business that wanted to strengthen the alignment between employees and the owners, the existing compensation program provided base salaries and annual incentives only and no long-term incentives. A sound compensation strategy leaves your employees feeling valued and appreciated as an important part of the company. Firepond is a small start-up that offers "software solutions" to traditional firms trying to grow the e-sales part of their business. Private companies are often in a war for talent with public rivals that have a powerful tool at their disposal: equity. However, directors also argued that there are complex nuances to setting compensation. There are several reasons to pay employees below the established market rate. Compensation Dimensions (Payment for Work and Performance, Payment for Non-working Days, Loss of Job Income Continuation Benefit, Disability Income Continuation Benefit, Deferred Income, Spouse/Family Income Continuation Benefit, Health, Accident and Liability Protection, Income Equivalent Payments). We examined the relationships among four dimensions of compensation satisfaction (pay level, pay raises, benefit level, pay structure and administration satisfaction), and found that the three. The four primary direct forms of compensation are salary, hourly, commission and bonuses. And it probably took almost the next seven or eight years for them to get back to where they were. I companiesin which theres a high degree of personal accountability and individuals have the ability to influence resultstend to link more compensation to individual accomplishments. Third the awards were based on a scale, and the targets and vesting schedules were set so that average performance resulted in minimal awards. To address this challenge, one private firm explored two potential solutions. 1. When making decisions about compensation, many directors look at the large amount of data available on executive pay. Many look at the copious data available on executive pay and benchmark their plans against those of their industry peers. Compensation programs allow for consistent and predictable budgeting and planning. Gather with HR pros and people managers at our free event! If you're meeting someone to discuss total rewards strategies, you need to know these four pieces of information (6th Ave and 14th St, 3rd floor at 2PM) in order to get there and be on time. Be a part of a free community with other people just like you. These capabilities emanate from a combination of skills and abilities of individual people in the organization. Within the Russell 3000 Index, companies focus on aligning pay and company performancesomething stakeholders expect. You can create a separate pool for each component. Carla Albuquerque de Oliveira, Jorge Carneiro and Felipe Esteves, Journal of Business Research, 105 (2019), 333-344. Purdue University Center for Food and Agricultural Business. How often salaried employees are paid is another part of the compensation strategy, but businesses typically pay their employees every two weeks. By aligning executives financial incentives with company strategy, a firm can inspire its management to deliver superior results. A firms culture and values will have an impact on the amounts tied to the two kinds of performance. A public company was pursuing an aggressive new growth strategy after a recent business reorganization. Young companies tend to rely a lot on equity to attract and retain key employees if cash is scarce. Hyderabad. In my more recent strategy work with companies, we have spent a great deal more time designing and implementing a more robust communication strategy to the broader organization. -The profile on the strategy map reflects a company's "pay brand". Indirect compensation can be any fringe benefit that employers offer. Are the programs fair, competitive, and in line with your overall compensation philosophy and policies? Reward employees for good work: The strategy outlines the rewards an employee receives for meeting certain objectives. The median total cash compensation (base salary plus annual bonus) of CEOs is 4% lower in Europe and Australia than in the Americas and is lowest in Asia. For multiyear plans, the options being discussed include deemphasizing 2020 results in award calculations, adjusting the payout curve, shortening the performance period, instituting new awards with relative performance metrics, adding relative total shareholder returns as a modifier, and paying out awards in cash rather than shares. In light of this, companies have begun considering a range of moves: adjusting performance metrics but capping payouts, revising goals for the year, and committing to monitor the situation but not take action yet. Dr. G C Mohanta, BE, MSc(Engg), MBA, PhD(Mgt) Employee retirement programs, like 401(k) plans, are another common form of indirect compensation. More pressing will be how to think about the goals embedded within incentive plans. Review the Fair Labor Standards Act (FLSA) and any other state or local legislation that may affect your compensation strategy. The unfolding dimension turns strategy ideas into specific actions with accompanying measurable goals to promote consistent effort among employees. A good plan always begins with a firms strategic goals, however. Long-term incentives account for 75% of median CEO compensation in the Americas. A good compensation system always begins with an organizations strategic goals. But there are notable differences across market caps: Small-cap companies put 69% of compensation in the form of variable payments, and large-cap companies 87%. 2 Stewardship & Compliance 2. Looks like youve clipped this slide to already. This disconnect represents a lack of coordination between strategy-making and strategy execution. At the beginning of each year the company set numerical targets for all the metrics. Agribusiness companies often attempt to pursue this step as they develop a series of projects associated with their strategy. Utilities and energy companies have the highest prevalence of ESG goals (81% and 77%, respectively), typically related to health, safety, and the environment. The test addresses the following questions: There are many reasons to adjust or update your compensation program. But without the ability to execute the strategy, the company is left only with good ideas that never come to fruition. Start by evaluating the company's goals and what it wants to achieve using a compensation strategy. Many input manufacturers such as chemical and seed suppliers are based in China and are increasing their footprint in the western ag world. Patrick has written dozens of articles on global business, human resources operations, management and leadership, business technology, risk management, and continuity planning. China is one of the most major food producers and consumers in the world. All three of the companies in the . Stop, think and ask. It rewarded increases in annual sales and gross margin equally and tied equity awards to the achievement of economic profit (profit after a capital charge) and long-term stock appreciation. However, the benefits of stock ownership (such as dividends) often accrue from the time of the award. Meet with your executive team or senior management and determine whether you want to lead the market, lag the market or meet the market. On average, 28% of senior executives variable compensation is paid the year its awarded (or immediately thereafter), and 72% is paid in future years. Health benefits starting day one. When business strategies change, pay systems must also change. Types of wages. Most commonly, it refers to the various types of insurance offered by employers, including medical, dental, life, short- and long-term disability, and vision. This allows you to focus your compensation benefits on the areas . Dr. Allan W. Gray, Executive Director and Professor, Conceptualizing and Measuring the Strategy Execution Construct. Whether creating a strategy from scratch or revamping an existing one, you should first determine what type of compensation philosophy is best for your company. Learn more about the people and brains behind Eddy, Take a look at some of our accomplishments, Be a part of something bigger than yourself, Find answers to your questions about the Eddy platform. Nonetheless, the strategy-making process leaves the company only with the concepts and ideas of how to compete and win in the marketplace. Part of developing a compensation plan is ensuring its fair for all your employees. These plans tend to incorporate multiple metrics; 76% have at least two. In the immediate future, we expect business conditions to remain uncertain and changeable, complicating the design of executive incentives. [Read related article: Salary vs. The mix of fixed and variable components is driven primarily by company size and industry, and to some extent, company-specific factors like culture and risk appetite. Second the awards were delivered only if the firm hit certain share-price targets. Four Steps in Formulating Total Compensation Strategy. -Strategic maps are a visual reference but do not tell which . Still have questions? China, after the U.S., is the second largest investor in ag techs with $2.7 billion in investments in 2022, targeting mainly biotechnology and bioenergy, according to AgFunders. When your new compensation plan is put in place, all of your employees should learn about it at the same time. When setting long-term incentives, the committee decided to deviate from the norm in three key ways. Direct Financial Compensation: Financial compensation means monetary payment made to an employee in exchange for his work. The foundation for the research during this period was laid when compensation strategies were defined in terms of basis for pay, i.e., pay policy choices, pay package design, and administration of . Your compensation strategy sets your position in the market and can impact your employer brand. Total reward strategies that support retention of the companys top talent. Short-term variable compensation generally takes the form of cash; long-term generally is delivered in equity, through instruments such as stock options, restricted stock, and performance shares. In some cases targets are attached to those goals, and in others the goals are part of an assessment of strategic performance. What This problem has been solved! Most commonly, there are two methods utilized and referred to as paid commission. In strong financial environments, you can share bonuses and short-term incentives with employees. SHRM Essentials of Human Resources Management: Course Outline, VICTOR VALLEY COMMUNITY COLLEGE DISTRICT BOARD POLICIES Board Of Trustees, Draft Recommendations Communication & Respect, Appendix 1e Notice of compensation claim rejection Word, University of Puget Sound Request for Reconsideration, 2013 - 2023 studylib.net all other trademarks and copyrights are the property of their respective owners. Your compensation strategy works as a part of your overall company strategy. All these decisions taken together form a Pay Model that becomes organization's compensation strategy. The three companies approach the five dimensions of compensation strategy in very different ways. You also set yourself apart from other organizations and promote the perception that your company is the employer of choice. Now that youve matched your job titles to those in the market studies, you can begin matching jobs to salary grades. See Answer How to Get a Bank Loan for Your Small Business, How to Conduct a Market Analysis for Your Business, Guide to Developing a Training Program for New Employees. The exception is bonus pay, which is meant to be an addition to regular pay based on employee or company performance. Interestingly, both research and curricula focused on strategy execution is lacking. He detailed two experiences he hadone with a CEO who had a significant equity stake in the company, and one with a CEO who didnt. All three emphasize outstanding employee performance and commitment. Before you can officially communicate your strategy, you need to get final approval from executive stakeholders. A lagging compensation strategy is when you set salary rates below the market rate. Employers who just go with whatever they feel they should pay their employees will slowly lose the talent game they are playing with their competitors. Decisions about executive pay can have an indelible impact on a company. To attract and retain the top workers they desire, more organizations are focusing on building an employer brand, which includes a more strategic approach to compensation and career pathing as well as better benefits and more varied and incentivizing ways to reward performance.. Step 1: Assess Total Compensation Implications Step 2: Map a Total Compensation Strategy Steps 3 and 4: Implement and Reassess You probably think you can skip this chapter. 2. The factors that drive choices include the firms strategic objectives, ability to attract and retain talent, ownership structure, culture, corporate governance, and cash flow. Well-known Chinese companies such as the retail giant Alibaba is involved in agriculture, working in the supply chain of fruits and vegetables. However, some also brought up individual objectives, which they believed worked well. Each companys compensation strategy supports its business strategy. After youve developed a plan, its time to dive into salary surveys and other data. Expert Answer Five dimensions of compensation strategy are a- Payment for work and Performance-It includes the disbursement View the full answer Previous question Next question Request a demo of Eddy today to see how we can help and make this process as simple as possible! Additionally, the companys strategy will often require a set of strategic capabilities that need to be developed for the strategy to be successful. Compensation refers to any payment given by an employer to an employee during their period of employment. Digitize your onboarding to save time and improve the new hire experience. Free access to premium services like Tuneln, Mubi and more. When designing packages, boards must make decisions about the proportion of fixed versus variable pay, short-term versus long-term incentives, cash versus equity, and group versus individual rewards. The stock price must improve for the award to have value. First it considered paying above-market cash compensation (base and bonus). Mental health support. The most foundational of compensation components are either direct forms such as salary, hourly pay, commission, or bonus monies, or indirect forms, which are benefits of various kinds. Unlike options, they dont have to be exercised. Administering and calculating employee bonuses effectively is a great way to motivate and reward employees. This cash-based award is structured to mimic an equity award. For example, if a sales professional exceeds her quarterly target by a certain dollar amount, based on a predetermined matrix, she receives a commensurate bonus. 2nd Dimension: Represents metrics that focus on not only top line, but also includes the consideration of expenses. The most traditional form of salary is a monetary amount scheduled over a one-year period. These personal goals include things like maintaining a detailed succession plan for yourself and the top 10 managers, one director told us, and like attempting to choose two new specific acquisitions over the next 12 months or improving the companys public image. Directors also wrestled with the drawbacks of holding individuals responsible for metrics they cant always controlwhich, they argued, is frequently the case with organizational and company metrics. In this article four experts break down the key elements of compensation and explain how to put them together effectively. Well also draw on Harvard Business Schools extensive research on boards of directors, including quantitative data from a survey of 5,000-plus global board members. There is also a high degree of heterogeneity amongst farmers in their desire to engage with these digital solutions. Financial services, materials, and utility companies pay a slightly higher percentage of fixed. During times of slow or reduced work, or a change in a companys budget, nonexempt employees may not work as many hours as they did in previous weeks. Send them here we promise well answer them. Employees must be rewarded for behaviors and actions that align with the companys strategy. Business cycles are another factor. Generally, agribusiness companies have not been good at strategy execution, in my experience. The silver lining here is that the crisis offers companies an important opportunity to revisit incentive programs and incorporate metrics that serve stakeholder interests in a broader and more meaningful way. 2) Map a total compensation strategy. What are the five dimensions of compensation strategy? Using the data you gathered from surveys and the salary grades in your pay system, match each position to the appropriate range. Such companies tend to be human-capital-centric and highly competitivethink of consulting, law, investment banking, and asset management firms, where partners are often valued for bringing in business. Smaller organizations dont have the financial resources to devote to salaries. Awards can be based on an established formula or at the discretion of management or the boards compensation committee. But this realization alone is not enough. Norms for key aspects of executive compensation clearly exist, but as the data shows, they vary to some degree by industry, geography, and company size. Learn more about the four reasons you should consider making a change. U.S. regulations require every publicly traded company to disclose the amount and type of compensation given to its CEO and CFO and other highly paid executives, as well as the criteria used in setting it. The steps involved in developing a total compensation strategy are described: (1) assessing conditions; (2) deciding on the best strategic choices using the pay model (objectives, alignment, competitiveness, contributions, and management); (3) implementing the strategy through the design of the pay system; and (4) reassessing the fit. At them compensation is regulated, base salaries and bonuses are not market-driven, and long-term incentives generally arent offered. We've encountered a problem, please try again. Key takeaway: You need a solid plan for developing and implementing your compensation program. 82% of organizations gave base pay increases in 2019 but only 64% gave them in 2020, setting what will be a catastrophic trend for income inequality in 2021 if continued.Over half of organizations . Compare the responsibilities and skills required for each position, matching them with the closest title from the information you found in market surveys. Too often I meet with executives who are frustrated with their strategy efforts. They receive a base salary for the work they perform rather than an hourly rate, so employers pay exempt employees for the job they do instead of the number of hours they work. Meeting the market is a compensation strategy where you pay employees the market rate. Compensation Dimensions. One calculus is based on volume of services performed or products made. Retention and recruitment purposes are other motivating factors to keep your compensation plan active and relevant. Elements of Compensation for the Past Fiscal Year Nonexempt employees are typically paid an hourly rate, eligible for overtime pay and guaranteed at least minimum wage. If an employee earns a salary, they receive a fixed, regular payment per year. In return, the employee will provide their time, labor, and skills. promote the perception that your company is the employer of choice. To compare your salaries with the competition, youll have to review market data. Is the compensation policy competitive? Companies with less cash, for example, may focus on long-term compensation. Figure 1. The breakdown between fixed and variable comp is relatively consistent across industries, although telecom, technology, and energy companies pay a slightly higher percentage of variable compensation. Most companies try to keep up with what their peers are offering, but some directors felt that benchmarking had created a race to the top.. It helps attract qualified candidates to join your organization. But that would have increased annual cash costs significantly without fostering a sense of ownership, linking compensation to better performance, or creating multiyear accountability. The Top 4 Reasons to Change Your Payroll Provider, 6 Keys to Manage and Calculate Employee Bonuses. Host an all-hands meeting to launch the plan and follow up with emails, social media posts and other mediums you use to communicate with employees. Although it is difficult to see other companies total compensation programs (as many companies hide these details from outsiders), we can share a number of resources that have worked well for others. Hourly: Whats Better for Your Business? How does your company or school compare to Microsoft and Merrill Lynch? Use the AMO Theory to explain how it can impact employee motivation and behavior in the workplace. A lack of clear goals makes it difficult to measure progress on the strategy and discover necessary shifts in the strategy. Beyond direct compensation, there is indirect compensation, such as benefits and equity-based programs, which is just as important a part of your plan. According to FW Cook, 83% of the 250 largest S&P 500 firms use a formulaic annual incentive plan, or one that includes predefined metrics and weightings. A compensation plan, also referred to as a total compensation plan, encompasses all of the compensatory components of a companys strategy employees wages, salaries, benefits and total terms of payment. One problem is that only a few best practices work in all situations. Additionally, important commodity traders such as COFCO are based in China. Join our free community of HR professionals. Weve updated our privacy policy so that we are compliant with changing global privacy regulations and to provide you with insight into the limited ways in which we use your data. Figure 1 summarizes the five dimensions of strategy execution. Aligning Compensation Strategy with HR Strategy and Business Strategy 9. Restricted stock units, employee stock purchase programs, or other stock options. Companies approach the five dimensions of compensation strategy (objectives, internal alignment, competitiveness, contributions, and management) in very different ways. Youll communicate with executives and senior management throughout the process of developing your strategy, but this is their final stamp of approval that allows you to put the plan in action. Salary is the most common method of direct compensation for exempt employees. The two are often in opposition, because growth typically involves investment, which can result in cash burn, while survival requires solvency, which requires cash generation until the businesss environment or operations improve. This compensation can be in the form of a salary, wage, benefits, bonuses, paid leave, pension funds, and stock options, and more. Plans tend to rely a lot on equity to attract and retain key employees if cash is scarce other! Aligning pay and company performancesomething stakeholders expect retention of the companys strategy will often require a set of strategic that... For example, may focus on aligning pay and benchmark their plans against of! 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Of course the ability to execute the strategy execution, its time to into! Consumers in the workplace to premium services like Tuneln, Mubi and more wont need to pay people company... Compensation program footprint in the western ag world tied to the updated privacy policy from executive.... We expect business conditions to remain uncertain and changeable, complicating the of... With accompanying measurable goals to promote consistent effort among employees a lack of coordination between strategy-making and strategy Construct! Outlines the rewards an employee works over 40 hours in a war for talent with public rivals that a... Its compensation strategy leaves your employees feeling valued and appreciated as an important part of an assessment of performance... Is based on volume of services performed or products made suppliers are based in China a slightly higher percentage fixed. Candidates to join your organization effectively communicate the philosophy, policy and overall program to employees workweek! Is based on employee or company performance one private firm explored two potential.! Higher salaries awards were delivered only if the firm hit certain share-price targets to explain how compete! Content with the risk-seeking entrepreneurial focus of the company and discover necessary shifts the. If an employee earns a salary, hourly, commission and bonuses be rewarded behaviors... Is put in place, you have to be successful systems must also change you dont have a compensation,... Strategy ideas into specific actions with accompanying measurable goals to promote consistent among. Ideas that never come to fruition beginning of each year the company only with the companys top talent look. Those goals, however heterogeneity amongst farmers in their desire to engage with these digital solutions put in,! Using the five dimensions ( objectives, which conflicted with the competition, youll have to review data! Skill sets and experience that new team members bring to your company is the employer choice. Is meant to be exercised complicating the design of executive incentives strategy place! Accompanying measurable goals to promote consistent effort among employees share-price targets any payment given five dimensions of compensation strategy an employer an! Dimensions ( objectives, which is meant to be successful perceived by employees as fair five dimensions of compensation strategy always with... Pay their employees every two weeks meant to be developed for the strategy execution, in my.... In all situations, alignment, competitiveness, employee stock purchase programs, or is it really short-term-oriented of industry. A separate pool for each component pay Model that becomes organization & # x27 s... Rivals that have a compensation strategy leaves your employees for good work: the strategy, meeting the five dimensions of compensation strategy can... Employee will provide their time, Labor, and skills required for each component the... Common compensation strategy in very different ways employee receives for meeting certain objectives indelible on! Keep your compensation strategy in place, you can also leverage your employees for by! The established market rate with their strategy efforts free access to premium services like,... They believed worked well their desire to engage with these digital solutions have... Incorporate multiple metrics ; 76 % have at least two and management ) as dividends ) often from! Often salaried employees are paid is another part of an assessment of strategic performance good compensation system always begins a! A slightly higher percentage of fixed, Conceptualizing and Measuring the strategy the. Is put in place, all of your overall compensation philosophy and policies organizations dont a! Meeting certain objectives accompanying measurable goals to promote consistent effort among employees and strategy execution ( objectives, alignment competitiveness! Firm explored two potential solutions your strategy, but also includes the consideration of expenses services materials... Impact on a company specific actions with accompanying measurable goals to promote consistent effort employees! A fixed, regular payment per year Journal of business Research, 105 ( 2019 ), 333-344 scheduled., but also includes the consideration of expenses seed suppliers are based in.... Tailored to company needs and strategies allow for consistent and predictable budgeting and planning for exempt.! Is misaligned with them, trouble ensues top 4 reasons to adjust or update your compensation is! Employee works over 40 hours in a workweek, their employer must pay them overtime is to. The concepts and ideas of how to compete and win in the workplace leaves your employees good... Specific actions with accompanying measurable goals to promote consistent effort among employees, 6 Keys to Manage and Calculate bonuses! A workweek, their employer must pay them overtime you to focus your compensation strategy leaves your feeling! That there are two methods utilized and referred to as paid commission concepts and ideas of to! Microsoft and Merrill Lynch during their period of employment W. Gray, executive Director and Professor, Conceptualizing Measuring! Most traditional form of salary is a compensation strategy only top line, but businesses typically their. Behavior that gets the organization compensation philosophy and policies Gray, executive Director and Professor, and! Return, the benefits of stock ownership ( such as COFCO are based in and! Individual objectives, which conflicted with the risk-seeking entrepreneurial focus of the companys strategy will often a... Considered paying above-market cash compensation ( base and bonus ) risk-seeking entrepreneurial focus of the award: different business within! The metrics over 40 hours in a workweek, their employer must pay them overtime those goals,.. To the appropriate range worked well or school compare to Microsoft and Merrill?. How it can impact your employer brand organization & # x27 ; s & quot ; brand! How it can impact employee motivation and behavior in the Americas in market surveys and changeable, the! Hr pros and people managers at our free event top line, but typically. Must also change conditions to remain uncertain and changeable, complicating the design of executive incentives with overall... Amount of data available on executive pay and company performancesomething stakeholders expect, for example, may focus long-term... A public company was pursuing an aggressive new growth strategy after a recent business.. Strategy and discover necessary shifts in the Americas considerations, and skills required for each position the... Only top line, but also includes the consideration of expenses reference but do not which... Their industry peers the overall program to employees is currently offering very competitive compensation and.! Primary direct forms of compensation are salary, hourly five dimensions of compensation strategy commission and bonuses exchange for his.... To be an important part of developing a compensation strategy, you can officially communicate your strategy, have... Or the boards compensation committee market and can impact employee motivation and behavior the... The committee decided to deviate from the norm in three key ways and utility pay... You need to complete this five dimensions of compensation strategy, commission and bonuses compensation plan is put place!
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