Compensation
Also known as
Total Returns for Work Or Total Rewards
Total Returns for Work
Framework for Analyzing Employment
Relationships
HIGH PAY – LOW COMMITMENT HIGH PAY – HIGH COMMITMENT
Hired Guns Cult - like
(Stockbrokers) (Microsoft)
TRANSACTIONAL
LOW PAY – LOW COMMITMENT LOW PAY – HIGH COMMITMENT
Workers as Commodity Family
Low
(Employers of Migrant (Starbucks)
Farm Workers)
Low RELATIONAL High
Strategic Choices
How do we win (gain
competitive advantage) in those How should HR help us win?
businesses?
Business unit
HR strategies
strategies
Corporate objectives,
strategic plans, vision,
and values Strategic
Social, compensation
What business should we be in? competitive, decisions
and regulatory
environment
Compensation
systems
How should total
compensation help us Employee
win? attitudes and
behaviours
Competitive
advantage
Strategy
• A fundamental business decision that an
organization has made in order to achieve its
strategic objectives e.g., what business to be
in, how to gain competitive advantage
The greater the alignment, or fit, between
the organizational strategy and the
compensation system, the more effective the
organization
Strategy
Google Medtronic
Objectives •Emphasis on innovation •Focus on customers
•Commitment to cost •Fully present at work and in
containment personal lives
•Recognize contributions •Recognize personal accomplishment
•Attract and reward the and share success
best •Attract and engage top talent
•Control costs
Internal •Minimize hierarchy •Reflect job responsibilities
Alignment •Everyone wears several •Support promotional growth
hats opportunities
•Emphasize collaboration •Foster team culture
Strategy
Google Medtronic
Externally •Explore novel ideas in •Market value of jobs
Competitive benefits and compensation establishes overall pay
•Generous, unique benefits parameters
•Choices in benefits
Employee •Recognize individual •Incentives directly tied to
Contributions contributions business goals
•Unrivaled stock programs •Opportunity to earn above-
market pay
•Recognition of individual and
team performance
Management •Love employees •Clearly understood; open
•Technology support •Technology support
•Employee choice
Exhibit 1.5: THE PAY MODEL
POLICIES TECHNIQUES OBJECTIVES
Work Descriptions Evaluation/ INTERNAL
ALIGNMENT
analysis certification STRUCTURE
EFFICIENCY
• Performance
• Quality
Market Surveys Policy PAY
COMPETITIVENESS definitions lines STRUCTURE
• Customers
• Stockholders
• Costs
Seniority Performance Merit INCENTIVE FAIRNESS
CONTRIBUTORS based based guidelines PROGRAMS
COMPLIANCE
MANAGEMENT Costs Communication Change EVALUATION
Exhibit 1.5: THE PAY MODEL
(1) the compensation objectives
(2) the policies that form the foundation of the compensation system
(3) the techniques that make up the compensation system
Compensation objectives: efficiency, fairness, and compliance
Exhibit 1.5: THE PAY MODEL
POLICIES
Work Descriptions Evaluation/ INTERNAL
ALIGNMENT
analysis certification STRUCTURE
Determining what is an appropriate difference in pay for people performing different
work is one of the key challenges facing managers
Internal alignment pertains to the pay rates both for employees doing equal work and
for those doing dissimilar work
Refers to comparisons among jobs or skill levels inside a single organization
Compared in terms of their relative contributions to the organization’s business objectives
Exhibit 1.5: THE PAY MODEL
POLICIES
Market Surveys Policy PAY
COMPETITIVENESS definitions lines STRUCTURE
comparison with competitors – external competiveness
What mix of pay forms—base, incentives, stock, benefits—will help achieve the
compensation objectives
Ensures that the pay is sufficient to attract and retain employees
Aims control labour costs so that the organization’s prices of products or services can
remain competitive
Exhibit 1.5: THE PAY MODEL
POLICIES
Seniority Performance Merit INCENTIVE
CONTRIBUTORS based based guidelines PROGRAMS
It directly affects employees’ attitudes and work behaviors
Different performance-based pay programs at the individual, division, and companywide
level
Should the company share any profits with employees? With all employees?
Performance-based pay also affects fairness in that employees need to understand the
basis for judging performance in order to believe that their pay is fair
Exhibit 1.5: THE PAY MODEL
POLICIES
MANAGEMENT Costs Communication Change EVALUATION
Ensuring that the right people get the right pay for achieving objectives in the right way
Management means understanding and communicating how the pay system works
and doing so in ethical and fair ways
Are we able to attract skilled workers? Can we keep them?
Do our employees believe our pay system is fair?
Do they understand what is expected of them?
Do they understand how their pay is determined?
How do the better-performing firms, with better financial returns and a larger share of the
market, pay their employees?
Are the systems used by these firms different from those used by less successful firms? How
do our labour costs compare to those of our competitors
THE PAY STRATEGY
Pay strategy - A source of sustained competitive advantage – How?
(1) Is it aligned?
(2) Does it differentiate?
(3) Does it add value?
Alignment:
(1) align with the business strategy
(2) align externally with the economic and sociopolitical conditions
(3) align internally within the overall HR system
Differentiate - sustained competitive advantage comes from how the pay
system is managed
Add Value - “It is easier to count the bottles than describe the wine”
