Compensation
Chapter 1
What is compensation?
Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship
Compensation affects how people behave. There is a link between behaviour and company effectiveness.
Want to hire the right person. Not necessarily the “best” person. The right person may be someone that has more practical experience vs someone with a PhD.
Different perspectives
Society
Stockholders
Managers
Employees
Society
Some people see pay (and benefits) as a measure of justice
Society thinks about compensating people as a means of seeking justice. So that there is fairness and equality in how we do things in an organization.
Ex: pay inequalities between men and women
Pg 3 exhibit 1.1 - shows where Canada falls with equity with men vs women
Job losses (or gains) in a country is partly a function of labour costs (and productivity)
Stockholders
Some stockholders say using stock to pay employees creates a sense of ownership
Others argue it dilutes stockholder wealth
People will work harder when they have a sense of ownership
Stockholders have a particular interest in executive pay
Linking executive pay to company performance increases stockholders’ returns
Managers
Compensation is a major expense that must be managed
It is also a major determinant of employee attitudes and behaviors
Employees
Pay is usually a major source of financial security
Employees may see compensation as:
A return in an exchange
An entitlement for being an employee of the company
An incentive to take/stay in a job and invest in performing well or
As a reward for having done so
Exhibit 1.3 - total rewards
Total rewards
Total compensation:
Pay received directly as cash payments, such as base pay, merit pay, cost-of-living adjustments, and incentives
Pay received indirectly as benefits, such as vacation, pensions, and health insurance
Relational returns
Psychological returns, such as recognition and status, employment security, learning opportunities, challenging work
Total rewards = Total compensation + Relational returns
Cash compensation: base pay, merit/COLA and incentives
Base pay: cash that an employer pays in return for the work performed, based on the skill or education an employee possesses
Merit increases are increments to base pay based on performance
A cost of living adjustment (COLA) is made to base pay on the basis of changes in costs of living
Incentives (or bonuses) are paid in a lump sum rather than becoming a part of base pay, based on performance. Can be long or short term
Benefits
Health insurance: health insurance (medical/dental/vision), life and disability insurance
Pension: retirement and savings programs
Allowances: often grow out of short supply
Example: housing and transportation allowances in China
Relational returns
Nonfinancial returns that substantially impact employees behaviour, such as employment security and learning and developmental opportunities
A network of returns: created by different forms of pay; useful if bonuses, development opportunities, and promotions all work together
The Pay Model
3 basic building blocks:
The compensation objectives
The policies that form the foundation of the compensation system
The techniques that make up the compensation system
Compensation objectives
Pay objectives guide the design of the pay system and are standards for judging success
Efficiency: improving performance, increasing quality, and controlling costs
Fairness: both the process and outcomes of pay decisions should be fair
Compliance: conforming to federal, provincial, and territorial laws and regulations
Need to always assess compensation plan, whether it is successful.
Examples: Pay system objectives
4 strategic policies:
Internal alignment
Refers to comparisons among jobs or skill levels inside a single organization
Pertains to the pay rates both for employees doing equal work and for those doing dissimilar work
Pay relationships affect the compensation objectives of efficiency, fairness and compliance
All policies play a role in objectives
External competitiveness
Refers to pay comparisons with competitors external to the organization
How do we compare to our competitors with our pay? May want to pay higher or lower than competitors
Pay is ‘market driven’
Objectives:
To ensure that pay is sufficient to attract and retain employees
To control labor costs to ensure competitive pricing of products / services
Employee contribution
Refers to how employees are rewarded
Understanding the basis for judging performance, helps perceive pay as fair
Management
Making sure that the right people get the right pay for achieving the right objectives in the right way
Pay techniques
Techniques tie the four basic policies to the pay objectives.
Techniques refer to the tools and mechanisms that are used to achieve the strategic objectives.
Many variations of pay techniques exist.
Chapter 2
Strategy and strategic choices
Strategy: the fundamental business directions that an organization has made in order to achieve its strategic objectives.
A strategic perspective focuses on those compensation decisions that help the organization gain and sustain competitive advantage.
The greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization.
Want to make sure what you do in compensation aligns with your corporate strategy
Different industries may have different pay strategies, but there can be:
different strategies within the same industry, e.g. Google, Microsoft, and SAS;
different strategies within the same company, e.g. SK Holdings.
Class activity:
Google vs Nucor vs Merrill Lynch
What business should we be in? → what are the company objectives? This is the starting point. Corporate level
How should HR help us win? Compensation level?
Support Business Strategy
Pay systems should align with the organization's business strategy
A supporting compensation strategy for an innovator, places more emphasis on incentives encouraging innovations.
Attracting and recruiting people that align with this strategy.
Compensation in a cost cutter strategy encourages productivity increases.
Want to make sure compensation strategy aligns with that
The customer-focused strategy uses customer satisfaction incentives in the compensation strategy.
Everything you do is based on customer satisfaction
When business strategies change, pay systems should also change
Support HR Strategy
Pay systems should align with the organization's overall HR strategy and systems which include hiring, training and development.
Compensation is key to attracting, retaining, and motivating employees with the abilities necessary to execute the business strategy.
This is for group project. When we make a total compensation strategy, refer to this exhibit
Step 1: what is the culture and how does that play a role? Is there a union and what are the implications of that?
Step 1: Assess Total Compensation Implications
Business strategy and competitive dynamics – understand the business
HR strategy – pay as a supporting player or catalyst for change?
Culture/values – pay system mirror image and reputation
Culture is the overall value and belief system. Is it a culture of inclusion? Is it a toxic culture with lots of harassment?
Social and political context – affects compensation choices
Government policies, legislation
Employee preferences – wide-ranging, choice is good, up to a certain point
Employees cannot get everything they want
Union preferences – adapt pay strategies to union-management relationship
Is there a union? If there is a union, what are some things to be mindful of?
Step 2: Map a Total Compensation Strategy
Exhibit 2.5
Map a total compensation strategy using the five elements of the pay model. What are these five elements?
Looking at the overall objectives of organization, looking at internal alignment, external competitiveness, employee contributions then management
Decisions in the pay model work in concert and the totality of decisions form the compensation strategy
Example: Whole Foods
Objectives: increase shareholder value, satisfy and delight customers, and seek employees who will help the company make money.
Internal alignment: store is organized into self-managed teams, executive salaries capped at 19X average full-time employee pay, and all full-time employees qualify for stock options.
External competitiveness: offers a unique total compensation package compared to competitors.
Employee contributions: uses a shared fate technique and monthly performance affects team pay.
Shared fate: measure team and then compensated accordingly by team
Management: uses a “no-secrets” management technique making salaries known to all and a “you decide” technique allowing employees to chose their health insurance.
Lots of colours, very vibrant
Steps 3 and 4: Implement and Reassess
Step 3 involves implementing the strategy through the design and execution of the compensation system.
Step 4 recognizes that the strategy must change to fit changing conditions and involves periodic reassessment. Periodic reassessment is needed to continuously learn, adapt, and improve.
Competitive Advantage: 3 tests
Is it aligned?
Is the compensation strategy aligned with the business strategy, economic and sociopolitical conditions, and the overall HR system?
Does it differentiate?
Is the compensation strategy different and difficult to imitate?
Does it make you a standout to others?
Does it add value?
Does the compensation strategy add value by providing a return on investment?
“Best Fit” vs “Best Practices”
“Best fit” approach suggests that a company is more likely to achieve competitive advantage if pay practices are aligned with business and overall HR strategies. reflects the company’s strategies and values.
“Best practices” approach suggests that there exists a set of best-pay practices, which can be applied universally across all situations, results in better performance with almost any business strategy.
Universal, it is a best practice approach that can be universally applied
Contemplate the following:
Recall our discussions about differences and similarities in strategy between Google, Nucor, and Merrill Lynch. What strategy does each company seem to reflect - “best fit” or a “best practice” approach?
Do you think one approach is better over the other? Does context significant?
Summary
To improve organizational effectiveness, managers should align the compensation strategy to the organization’s strategy.
The steps to develop a total compensation strategy are: assess total compensation implications, map out a total compensation strategy, implement the strategy and reassess and realign the strategy to ensure achievement of the objectives.
The tests used to determine competitive advantage are: Does it align? Does it differentiate? And does it add value?
The “best fit” perspective on compensation suggests that compensation be aligned with the specific business strategy. The “best practices” perspective suggests there is one set of best pay practices that can be universally applied across situations and strategies.
Chapter 3
Internal Alignment
Refers to the relationships among different jobs/skills/competencies within a single organization → job structure. Often referred to as internal equity
Structure needs to:
Supports organization strategy
Supports workflow
Workflow is the process by which good and services are delivered to the customer
Motivates behavior
“line-of-sight” – relationship between each job and the organization’s objectives
Need to be able to see upwards
Internal Pay Structure
Refers to the array of pay rates for different work or skills within a single organization.
An internal pay structure can be defined by:
the number of levels
the pay differentials between the levels
the criteria or bases used to determine those levels and differentials
Exhibit 3.1 - Engineering Structure at Lockheed Martin
Differentials
The pay differences among levels are differentials.
Higher pay is usually due to work:
requiring more skill/knowledge
performed in unpleasant work conditions
work that adds more value to the company
To motivate people to strive for promotion to higher-paying levels
Differentials go up by over 10,000
Criteria
Content: work performed in a job and how it gets done
A structure based on content ranks jobs based on skills required, complexity of tasks, problem solving, and/or responsibility
Ranks jobs based on work required, tasks, responsibility etc
Value: the worth of the work
A structure based on value focuses on the relative contribution of the skills, tasks, and responsibilities of a job to the organization’s goals
Job- and Person-Based Structures
A job-based structure relies on the work content – tasks, behaviors, responsibilities.
Based on the job
A person-based structure shifts the focus to the employee.
The skills, knowledge, or competencies the employee possesses and if they are used in the job.
What do employees bring to the job?
Note: Most structures integrate both types. Why?
Ex a consultant may be more of a person-based structure, meanwhile entry level may be more job-based structure
What Shapes Internal Structure?
External factors
Economic Pressures
Government Policies, Laws and Regulations
Stakeholders
Cultures and Customs
Organizational factors
Strategy
Technology
Human Capital
HR Policy
Employee Acceptance
Cost Implications
Internal Labour Markets
Refer to the rules and procedures that:
determine the pay for the different jobs within a single organization, and
allocate employees among those different jobs.
To do: illustrate the internal labour market for these organizations or institutions from entry level positions to upper positions, using Exhibit 3.5 as a guide:
Faculty of your university
Law firm
Accounting firm
Elementary School (or High school)
Beauty/hair salon
Elementary school
Student teacher - hire
Education assistant - hire
Substitute teacher
Full time teacher - promotion
Lead grade teacher - promotion
Vice principal - promotion
Principal - promotion
Superintendent - promotion
Strategic Choices in Designing Internal Structures
Tailored
Adapted by organizations with a low-cost, customer-focused strategy.
Has well-defined jobs with detailed steps or tasks.
Has well-defined pay structure
Examples: McDonald’s, Walmart
Loosely Coupled
Adapted by organizations that require constant innovation.
Jobs are flexible, adaptable and changing
Pay structures are more loosely linked to the organization to provide flexibility.
Example: 3M
Good for tech firms
Egalitarian
Good for companies with Fewer levels and smaller differentials.
Equal treatment can mean knowledgeable employees feel underpaid, who may quit or change their behaviours.
Results in higher performance when collaboration is required.
Hierarchical
Have multiple levels
Have detailed job description
Results in higher performance when work flow depends on individual effort.
If people need to work together, could result in hierarchical
Structure A: Layered
Chief engineer
Engineering manager
Consulting engineer
Senior lead engineer
Lead engineer
Senior engineer
Engineer
Engineer Trainer
Structure B: Delayered
Chief engineer
Consulting engineer
Associate engineer
Equity theory: Fairness
People compare the ratio of their own outcomes to inputs with that of others.
Employees judge fairness by comparing:
to jobs similar to their own
their job to others at the same employer
their pay against external pay levels
Tournament theory
Relationship between motivation and performance
Example: players perform better where prize differentials are sizeable
Works best in situations where individual performance matters most
Institutional theory
Copy others and conform
Organizations use “best practices”, and are simply copied
What aligns with the strategy of one organization may not align with that of another
It may not be possible to have “competitive advantage” by simply imitating practices
This theory is used, companies rarely start from scratch in compensation
Consequences of an Internally-Aligned Pay Structure
Efficiency
Aligned structures lead to better performance
Fairness
Fair differentials motivate
Small differentials facilitate cooperation and commitment
Compliance
Comply with regulations of the country
Potential outcomes of an internally-aligned pay structure
Undertake training
Increase experience
Reduce turnover
Facilitate career progression
Facilitate performance
Reduce pay-related grievances
Reduce pay-related work stoppages
Laws (class activity)
Minimum wage
Pay equity act
Employment standards
Human rights legislation - cant discriminate on basis of age, disability etc
Anti harassment laws
Sexual harassment laws
Chapter 4
Structures Based on Jobs, People or Both
Job-based structures: look at what people are doing and the expected outcomes
Person-based structures: look at the person - Skill- and competency-based structures
The underlying purpose remains the same for both: so in both job-based and person based one may:
Collect and summarize work content information that identifies similarities and differences
Determine what to value
Assess the relative value
Translate the relative value into an internal structure
Job analysis
The systematic process of collecting information about the nature of jobs.
Involves the identification and description of what is happening on the job
required tasks, duties and responsibilities
required knowledge and skills
working conditions
Some Major Issues in Job Analysis include the following:
Why perform job analysis? Q – What are primary reasons?
For recruitment, to see if candidates may need specific experience or background ex a Masters degree
What information is needed?
How to collect information? } (See Slides 9 to 12 about these issues)
Who should be involved?
How useful are the results?
Job family: grouping of related jobs (jobs that relate to one another) and have similar content. E.g. marketing, engineering, office support, technical
Job: group of tasks performed by one person that make up the total work assignment of that person. E.g. customer support representative
Task: smallest unit of analysis, a specific statement of what a person does ; e.g., answers the telephone. Similar tasks can be grouped into a task dimension; e.g. responsible for ensuring that accurate information is provided to the customer
Information to be Collected
Related to the job:
Job identification - includes job titles, departments, and the number of people who hold the job
Job content - elemental tasks or units of work, with emphasis on the purpose of each task
Related to the incumbent (person holding the job)
Employee characteristics
Internal relationships
External relationships
Method for Collecting Information
Interviews
Focus groups
Questionnaires
Observation
Journals and diaries
Note: collection methods fall into 2 categories: conventional and quantitative
Question: why have conventional methods given way to more quantitative data collection?
Who Collects and Who Provides?
Who collects?
Human resource generalists and supervisors.
Someone thoroughly familiar with the organization and its job
Who provides?
Jobholders and supervisors.
Subordinates and employees in other jobs that interface with the job under study.
Number of incumbents from which to collect data varies with the stability of the job and ease of collecting the information.
What About Discrepancies?
Collect more data and discuss discrepancies, asking for a sign off on revised results
Disagreements can:
Clarify expectations, learn a better way to do a job, and document how the job is performed
Support of top management, and union officials, is critical
Outcomes of Job Analysis
Job description
A written record of the tasks, duties, and responsibilities that make up a job.
Identifies and describes the job title, job summary, relationships to other jobs.
Job Specification
Specifies the knowledge, skills, and abilities necessary to perform the job.
Additional points about job descriptions:
Use generic job descriptions.
Be mindful that descriptions of managerial/professional jobs are often more detailed.
Verify the description with jobholders and supervisors
Job Analysis and Globalization
Offshoring: refers to the movement of jobs to locations beyond a country’s borders
Hourly compensation and productivity differ across countries
Availability of qualified workers and proximity to customers are considerations
Both low-skill jobs and white-collar jobs are at risk for offshoring
Managerial jobs and positions where local knowledge is essential are not as susceptible
Judging Job Analysis and A Judgment Call
Judging Job Analysis – must aim for these aspects –
Reliability
Validity
Acceptance
Current (Timely)
Useful
A Judgement Call:
Work-related information is needed to determine pay
Differences in work determine pay differences.
The real issue should be: How much detail is needed to make these pay decisions?
Enough to set pay levels, encourage continuous learning, increase the experience / skill of the workforce, and minimize the risk of pay-related grievances