International Conference on Global Economy, Commerce and Service Science (GECSS 2014)

Analysis on the Measures to Improve Compensation

Management in SMEs in China
Xinghua Su
Langfang Teacher’s College
LangFang HeBei China
E-mail: [email protected]

Abstract—The paper first analyzes the problems of compensation the enterprises. Compensation management must be
management in SMEs (small and medium-sized enterprises) in coordinated with overall corporate strategy and human resource
China. Besides, the paper combines with practical cases and puts strategy, thus functioning as an important supportive method to
forward suggestions and measures on improving the realize the corporate strategy. In particular, it is of great
compensation management system in SMEs in China accordingly, significance for SMEs to formulate compensation strategies,
aiming at providing help for the human resource managers in which exerts effects on whether they can attract and retain
SMEs. talents. However, at present, the majority of SMEs in China do
Keywords: SMEs; compensation management; measure; not design their compensation management system from the
analysis perspective of their corporate strategy. They do not consider
combining compensation management with the corporate
I. INTRODUCTION strategy. As a result, there is a severe disconnection between
compensation management and goals of the corporate strategy.
Since the 1990s, the SMEs in China has rapidly developed
and made great achievements. They have become an important B. Unreasonable Performance Appraisal and Poor
component in national economy. However, because human Incentives of Compensation
resource management in SMEs in our country started at a late
period and the foundations were rather weak, a number of The SMEs in China all adopt performance-based
problems emerged. In particular, the unreasonable and non- compensation system, i.e., employees’ compensation is
standard compensation management has hindered the further composed of fixed compensation and performance-based
development of SMEs. As a result, in order to strengthen the compensation. However, the fact is that employees’
market competition, attract and retain key employees, SMEs compensation is not connected with their performance in
must carry out profound analysis into the problems in their essence. First and foremost, it is because of the large proportion
compensation management under the guidance of scientific of fixed compensation in the system, even reaching 90%. The
management notions. On this basis, they should formulate low ratio of performance-based compensation fails to stimulate
appropriate compensation system to maximize the incentive employees’ initiatives and creativity. Second, the performance-
functions of compensation, boost employees’ initiatives and based compensation system in SMEs is established based on
ultimately enhance the comprehensive competitiveness of the long-term goal, which results in employees’ little focus on
SMEs. the long-term development goal of the enterprises. In addition,
they cannot enjoy the benefits that the corporate long-term goal
will bring. Last, most SMEs do not have scientific and
II. PROBLEMS IN COMPENSATION MANAGEMENT IN SMES reasonable performance evaluation standards, which causes the
IN CHINA failure to give accurate assessment on employees’ performance.
When designing the compensation system, SMEs consider As a result, the compensation cannot match the performance,
more about technology, approaches and other factors and thus the incentives of compensation are weakened. Therefore,
ignore some significant decision-making in other aspects. With how to reach a reasonable composition of compensation and
the rapid economic development in China and the shock of establish rational and reasonable performance evaluation
globalization, SMEs are encountering more and more fierce system is a key aspect worth the managers’ concerns in SMEs.
challenges. The problems in compensation management appear
more salient, which are manifested in the following aspects. C. Compensation Level’S Lack of External Competitiveness
Restricted by the small corporate scale, financial support
A. Disconnection between Compensation Management and and other factors, the SMEs in China cannot stand too high
Corporate Strategies labor cost. Therefore, the employees’ comprehensive
When formulating compensation system, SMEs in our compensation level is lower than the average market level.
country consider more about technology, approaches, tools and Besides, SMEs carry out few investigations into the market
other factors. However, there is an absence of comprehensive compensation level. Even if they launch some investigations
strategic contemplation. Corporate strategy serves as the long- passively, the scope is quite limited. The SMEs only briefly
term plan and a forceful tool to gain competitive advantages in understand the overall compensation level on the market. The

© 2014. The authors - Published by Atlantis Press 345

lack of authenticity of data they obtain results in the absence of employees’ doubts, effective compensation negotiation can
rationality of the compensation level. In addition, the position also convey the value and corporate culture orientation to
evaluation system in SMEs is not well-improved. The employees and correctly guide their behaviors. Besides,
compensation standard in many SMEs does not base on the compensation can also effectively enable managers to spot out
significance and contributions of the employees. Instead, it is the problems in corporate compensation management, thus
determined by the corporate managers subjectively without facilitating the solution of the internal contradictions inside the
explicit basis and rationality, which thereby causes the lack of corporate and eliminating their dissatisfaction. As a result, the
competitiveness in SMEs and severely destroys employees’ lack of effective compensation management is also one
initiatives. Sometimes, it even leads to employee drainage. important reason for the low efficiency of compensation
management.
D. Incomplete Employee Welfare System
Employee welfare is an important part in corporate III. PERFECT THE MEASURES FOR COMPENSATION
compensation system. It is the reward for employees in the MANAGEMENT IN SMES IN CHINA
form of physical objects or services provided by the enterprises. From the above analysis, we can see that the compensation
Welfare can satisfy employees’ demands in different aspects, management system in SMEs in China has numerous problems
thus forming short-term, middle-term and long-term incentives which severely hinder the promotion of the management in the
together with basic compensation and bonus. In many SMEs, enterprises. If SMEs seek for sustainable and rapid
however, welfare does not arouse the manager’s adequate development, they must apply scientific technology and
attention. Hence the welfare system in SMEs is not complete. approaches and combine their own actual situation to improve
Many managers in SMEs even deem welfare as cost burden. the above problems in order to retain and stimulate the
They invest a little into employees’ welfare. Moreover, some employees.
SMEs even do not conform to the national laws and
stipulations in terms of “Five insurances and pensions”, let
A. Compensation Management should Combine with
alone their own welfare in the enterprises. Furthermore,
Corporate Strategy
although some SMEs have their own welfare system, they only
clarify the welfare items when the corporate benefits are sound. SMEs should clarify their corporate strategy primarily in
Such a system lacks pertinence and guarantee at the mechanism order to perfect their compensation management. Generally
level. In addition, it does not take into consideration the actual speaking, the corporate strategy can be divided into two levels:
situation of the enterprises and real needs of employees. In a first, the development strategy of the enterprise, i.e., to figure
word, the welfare items have no incentives. out the problem about expanding the scale, keeping the status
quo or narrowing the scale; second, the competition strategy,
E. Ignore the Application of Non-Economic Pay i.e., to obtain competitive advantages through product
innovation, low cost or providing services for regular
Besides the basic compensation, performance-based customers. Different strategies selected by the enterprises will
compensation, welfare and other economicpay, there are also also generate varied compensation management strategies.
non-economic pay in the enterprises which includes Only when the compensation strategy matches the strategy of
participation into corporate decision-making, the balance corporate development and competition can it really adapt to
between work and family, autonomy of work, challenging the demands of the enterprises’ development so as to push
work and opportunity for personal development, etc. Relevant forward the development of the enterprises.
psychological researches indicate that economic pay can only
encourage employees in a middle and short term. However, For those SMEs lack long-term strategies and plans, the
non-economic pay can form long-term incentives among managers should first inspect the corporate vision and
employees and enhance their satisfaction. Many SMEs tend to operational goals and clarify the main areas where the
ignore the non-economic pay for employees when designing enterprises want to achieve success to select their own
the compensation system, however. They regard economic pay competition strategy, based on which SMEs can determine
as the only one approach to encourage employees. They their human resource strategy and compensation strategy. In
mistakenly believe that as long as they pay enough addition, they can further transform the compensation strategy
compensation, they can stimulate employees’ initiatives. Under into detailed compensation system and compensation
the effect of such a wrong idea, employees in SMEs cannot management procedure. In doing so, SMEs can link the
gain the spiritual satisfaction. As a result, their sense of corporate strategy and employees’ personal demands by means
belonging to the enterprises and faithfulness reduces, thus of compensation management. As a result, the compensation
weakening their working efficiency. can effectively guide employees’ attitudes and behaviors,
instruct them to focus on obtaining competitive advantages for
F. Absence of Effective Compensation Negotiation the enterprises, formulate common values and goals among
Mechanism employees and enterprises, maximize the effects of
compensation and better retain and encourage the talents
Many SMEs in China adopt compensation secrecy system. needed by SMEs.
However, a majority of employees are sensitive toward the
fairness of compensation policy. The compensation secrecy
system may arouse doubt toward the compensation system,
thus reducing the employee satisfaction. Besides explaining

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B. Perfect performance-based Appraisal System and information, we can find and improve the problems in the
Strengthen the Incentive of Compensation System compensation system of the enterprises and provide basis for
The formulation of compensation structure in SMEs serves managers’ decision-making. At the same time, through the
as a guide to employees’ behaviors. If the fixed compensation analysis on the data and information, we can predict the market
takes a large part in the compensation structure in the compensation level in a certain period in the future, thus
enterprises, it will weaken the incentive function of salary. As a providing basis for compensation decision-making in the next
result, SMEs should reasonably increase the percentage of step.
performance-based compensation in the whole structure. According to the results of compensation investigation,
Moreover, the percentage of performance-based compensation SMEs can position the compensation level of core employees
should increase with the elevation of the position level and the above the average market compensation level and pay the high-
responsibilities so that SMEs can really realize the connection level managers, key technical and sales talents and other core
between employees’ compensation and their performance. employees with higher compensation than the average market
Therefore, the compensation system can give full play to its compensation level. For those who can be easily recruited on
positive incentive roles. the labor market, we can determine their compensation in
Because the results of performance appraisal are directly accordance with the average market level. In this way, we can
linked with employees’ compensation, the rationality ad reasonably control labor cost and alleviate the corporate burden.
fairness of performance-based appraisal directly affect the
reasonableness of the compensation system. In order to D. Perfect Welfare Items and Design Diverse Welfare System
guarantee the appropriateness and effectiveness of the Welfare can satisfy employees’ demands in different
performance appraisal system, SMEs can apply the notion of aspects, so SMEs must perfect and bring forth new welfare
balanced scorecard into the design of performance appraisal system. On the prerequisite of implementing welfare regulated
system from four perspectives, i.e., finance, customer by laws, SMEs should design diverse welfare items in
satisfaction, internal operation, employee learning and growth. accordance with the enterprises’ own characteristics and
Then SMEs can decompose key company-level performance employees’ demands to enhance the effectiveness of welfare
indicators to each department which formulates departmental cost.
performance plan in accordance with the business
characteristics in the department. Finally, the departmental In terms of perfecting the welfare system, SMEs should
goals can be decomposed to each post. In this way, through first carry out welfare investigation which includes the survey
level-to-level decomposition, SMEs can scientifically and into the welfare situation in other enterprises and the
reasonably determine the key performance indicators in each adjustment on the employees’ welfare needs. Through
department and position. Therefore, the comprehensive understanding competitors’ welfare situation, SMEs can design
performance indicator system from enterprises to individuals and adjust their welfare system accordingly, thus maintaining
can be reached ultimately. their competitiveness in external labor market. The
investigation into competitors’ welfare system can be carried
out simultaneously with compensation investigation as part of
C. Carry out Compensation Investigation to Ensure the
it. Different staff may have varied welfare demands and biases.
External Competitiveness of the Compensation System in Therefore, the welfare investigation among employees enables
SMEs the new welfare system to be more pertinent. Besides, the
The compensation level with external competitiveness can investigation among the employees can be implemented
help SMEs attract, retain and stimulate employees, especially through questionnaires and interview. SMEs can also provide
the most excellent employees in the enterprises. Low personalized welfare items for employees according to the
compensation level might cause the drainage of employees. investigation results.
Therefore, SMEs have to know clearly the compensation status
in their competitor companies so as to make competitive SMEs should notice two problems when perfecting the
compensation management strategy. welfare system, i.e., the financial situation and the effectiveness
of welfare expenses. The perfection of welfare system should
Compensation investigation refers to the activity providing be within the financial tolerance of the enterprises. Besides
basis for managers’ decision-making by exploring into the enhancing employee satisfaction, scientific welfare system
compensation level and structure of relevant positions in a should also deliver some information orientation to employees,
certain scale with some scientific methods. Through such as the welfare system should be connected to employees’
compensation investigation, SMEs can provide the performance, corporate strategy, enterprise culture and so on.
compensation with external competitiveness and guarantee the
effectiveness of the expenses on labor cost. SMEs can obtain E. Give Full Play to the Effects of Non-Economic Pay
the data and information about compensation through
Employees’ demands are multilayered. Besides economic
telephone interview, investigation questionnaires,
pay, employees also want some internal return, such as
communication with other enterprises and management
challenging work, sound opportunity for personal development,
consultation companies. The information and data include both
sense of career achievement, participation into decision-making,
the compensation level of corresponding positions in other
autonomy of work, etc. If SMEs can provide more
companies in the same industry and the average compensation
opportunities for employees to develop their career, participate
level on the local talent market. Through the data and
into decision-making and increase their autonomous right and

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other non-economic benefits which then can better activate the REFERENCES
employees’ contributions to the enterprises and promote the [1] Liu Xin, Compensation Management (Third Edition) [M]. Beijing:
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forging positive enterprise atmosphere and uniting employees
with enterprises to work hard toward the common mission and
purposes. The enterprises should also pay attention to the
challenges of the work and employees’ career planning. The
challenges and sound prospects of the work can stimulate
employees’ passion and fully excavate their potentials. SMEs
can also pay attention to emotional investment and formulate
favorable communication mechanism and atmosphere among
managers and employees. Employees and enterprises can
establish the partnership based on mutual understanding, trust
and respect. Through the application of above non-economic
returns, the dual goal of the co-growth of SMEs and employees
and realization of employees’ self values can be realized.

F. Establish Effective Compensation Negotiation Mechanism

Effective compensation communication can eliminate
employees’ confusions, enhance employees’ trust on the
enterprises and realize the internal transparency of
compensation management system. SMEs can communicate
with the professionals and employees who are familiar with the
compensation system. The staff members can be experts from
human resource department or financial department. They can
also be the high-level administrators in charge of human
resource management. In order to improve the efficiency of the
communication in terms of compensation, managers in the
human resource department can first understand the
employees’ comprehension, doubts, opinions and suggestions
on the compensation system in the enterprises. On the basis, the
managers can formulate the communication strategies in terms
of the contents and modes of communication. The enterprises
can also carry out communications with employees by means
of bulletin board, internal journals, theme meeting and so on.
Besides, they should also pay attention to the timeliness of
communications so as to find out problems and correct them in
time.

IV. CONCLUSION
As an important component in human resource
management, compensation management is of vital
significance to the sustainable development in SMEs in China.
As for these enterprises, they should formulate the
compensation strategies suitable to their own development and
perfect the structure of the compensation system by combining
the actual situation. Besides, they should make adjustments on
the compensation system continuously in accordance with the
needs, enhance the effectiveness of compensation incentives
and ultimately realize the goal of attracting, retaining and
stimulating employees.

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