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Are paid only after the employees’ efforts generate the predetermined financial resources.

The pay mixan the growthstage is competitive base pay, high incentives, and low benefits. The
grown stage places the organization in a stronger financial position relative to the start-up stage, and
the organization is then able to offer the competitive base pay that may be neceseitated by shortages in
the labour market. The major drawing card to attract and retain the “high flyers” (creative and
innovative employees) continues to be high incentives, as was the case in the start-up stage. The
organization still needs to invest its resources in activities that will provide a continuing impetus to
growth. The mechanics of high incervatives
give the organization the flexibility it needs
to channel its resources into growth and at
the same time to meet the expectations of
its high performing employees.
In the maturity stage, the
organization has carved out a relatively
stable market niche for itself and
environmental uncertainty has been
considerably reduced. Cash flow is now
more predictable and generally reflects the
higher revenues and earnings that result
from economies of scale and a stable
market share. The pay mix in this stage is
competitive base pay, incentives, and
benefits. The reduced emphasis on
incentives reflects (a) the organization’s
capacity to pay a relatively higher base pay
and benefits than before, and (b) the
changing business environment of the
organization, which now does not require
that employess be motivated to be
entrepreneurial and risk takers to the same
extent as in the previous two stages.
The stability stage of the product
life cycle is a natural sequel to the maturity
stage. The old products, with some model
changes and improvements, continue. But
there is no heavy investment in research
and development. The market share is
maintained, nad sometimes increased, by competitive pricing made possible by a greater emphasis on
cost-efficient operations. The pay mix will be high base pay and benefits, for the same reasons as in the
maturity stage. Although incentives form part of the mix, they play a relatively limited role. They are
used mainly to improve productivity and ensure cost-efficient operations.
In the decline stage, the pay mix is really not one of the organization’s choosing. To retain its
present employees the organization may be compelled to pay a high base pay and benefits. In a
declining market, it would be anachronistic to offer incentives to improve productivity and output that
the market is unable to absorb. Hence incentives do not form part of the pay mix.
In the renewal stage, the organization adopts strategies and actions similar to those in the
growth stage. Therefore, the pay mix at the reneawal stage will be identical to that of the growth stage,
that is competitive base pay, high incentives, and low benefits, and for the same reasons.
The Analyzer-type organization combines the features of the Defender and Prospector
strategies. Although the analyzer organization operates in both the stable and changing product market
domains, its operations are characterized by a balanced approach that seeks to minimize risk and at the
same time to explore profitable opportunities, Consequwntly, the compensation philosophy programme
of the Analyzer organization will also be characterized by a similar balance between internal and
external equity, between fixed and and variable rewards, and between rewards that emphasize
performance and those that reflect the position in the hierarchical levels and their relative differentials.
Canaian Pacific is a good example of the Analyzer-type organization.

Product Life Cycle

The preceding review
underscores the fact the compensation
programme of the organization must be
congruent with and supportive of the
business strategies if the organization is
to have success in achieving its objectives.
The effectiveness of the business
strategies, however, is also affected by
the stage of the life cycle of its products.
As hofer (1975) observed, appropriate
business strategies are required for the
growth, maturity, and decline stages of
the product life cycle. There is
considerable empirical support for the
fact that the environmental uncertainties
that result from technological changes,
product innovations, and product market
conditions are significantly different in
each stage of the product life cycle (Hofer
1975; Tilles 1966; ,Morison 1966; Gupta
and Govindarajan 1984). Any effort to
cope with these differences demands the
total mobilization of the organization’s
social and technical systems. It is
therefore inevitable that the
comoensation system – particularly the
mix of the base pay, incentives, and benefits – shoud also be adapted to the business strategies and
needs of each stage of the product life cycle.
What then is the appropriate pay mix for each stage of the product life cycle? What is the
rationale for such a mix? To address these questions means to explore the conditions in which the
organization finds itself in each stage of the product life cycle – start-up, growth, maturity, stability,
decline, and renewal. In the start-up or introduction stage of a product, the organization’s resources and
efforts are devoted to entering the market. With high expenditures and low revenues, the organization’s
ability to generate cash flow is extremely limited and so is its ability to include high base pay and
benefits in its pay mix. The organization, nevertheless, needs to attract employees who will bring a high
level if innovation, and creative energy, and will expect a variable income plan. These expectations can
be met by making incentives a major component of the pay mix, the other elements of the mix being
low base pay and benefits. High incentives are also compatible with the organization.
Firm. Anotable difference, however, was that in the high-tecg firms benefits were twice aslarge as
salary, whereas in the non-hogh-tech firms the proportion of benefits and salary was about equal.
Benefits cause a relatively lesser drain on cash and are, therefore, suitable for high-tech firms, which
are usually cash short. An incentive-based compensation strategy was alsofound to be more effective as
a recruitment and motivational tool for firms at the growth stage rather than at the mature stage of the
profduct life cycle.
Blakin and Gomez-Mejia (1987) recognize that
their findings may be skewed by the preponderance of
high-tech firms in the sample. Hence it is necessary to
recognize the limitations of the products-life-cycle
approach to developing the pay mix. First, not all the
products of an organization are at the same stage in the
product life cycle. Second, the conditions of shortages
and surpluses in the labour market can, and often do,
compel the organization towards a pay mixdifferent from
that dictated solely by condiderations of the stage in the
product life cycle. Third, it is not too clear in which
direction the life cycle affects the pay mix or vice versa.
Finally, because the issues of the organization’s business
strategy and product life cycle stage are macro-level
issues, they are nebulous and do not easily lend
themselves to empirical testing. One can therefore
understand the difficulties involved in attempting to
relate these issues to the design and management of a
comoensation system whose effectiveness can only be
judged by the extent to which it succeeds in ensurring that the employees, who are the beneficiaries of
the system, have perfomed in manner that has helped the organization to achieve its objectives. The
business strategies and the product life cycle stages are useful, and even necessary, starting points in
reward gesign. They provide the compensation specialist with an overal sense of direction, information
on thr likely availability of resources, and a guide to the optimal allocation of these resources. The
compensation analyst will incorporate these factors in the process of reward design and management.
In the ultimate analysis, the effectiveness of a compensation system will be judged bythe extent to
which it has enabled the organization to be successful in three areas: (1) in attracting and retaining
employees with the required knowledge, skills, and abilities. (2) in maintaining their morale, and
motivating theme to high performance and growth on the job; end (3) incomplying with the legal
provisions relative to compensation. To ensure that the organization is successful in these area the
compensation specialist must focus on the micro-level issues that lead to asound understanding of how
the compensation package influences the motivational dynamics within employees and their
consecuent behaviour. Such a focus is the thrust of the remaining chapters of the book.
This discussion of the stages of the
product life cycle and the pay mix
associated with each stage, as summarized
in |Figure 2.3, suggests that the stage in
the life cycle clearly has an impact on the
organization’s capacity to pay. It also
demonstates that the design of the pay mix
can be stategically managed in the
implementation of the overall strategies of
the organization. Balki and Gomez-Meija
(1987) have found that incentive pay forms
a greater proportion of the totoal
compensation package for firms at the
growth stage than at the mature stage of
the product life cycle. This finding was true
for high-tech- firms as well as for non-high-
tech firms, expect that in the high-tech
firms, incentives formed a substantially
larger component of the pay mix. Fixed
income (base pay and benefits) on the
other hand, constituted a greater
poportion of the pay mix for firms at the
mature stage than at the growth stage of
the product life cycle. This finding was also
true for both high-tech and non-high-tech
According to miles and Show, the characteristics of the business strategy types are:
 The defender strategy: a limited product line, single, capital-intensive technology; a functional
structure; and skills in production efficiency, process engineering, and cost control. (1984, 37).
 Thye prospector strategy: a diverse produc line; multiple technologies; a product or
divisionalized structure; and skills in product research and development, market research, and
development engineering. (1984 ,38)
 The analyzer strategy: a limited basic product line; search for a small number of related
product and\/or market opportunities; cost-efficient technology for stable products and
project technologies for new products; mixed (frequently matrix) structure; and skills in
production efficiency, process engineering, and marketing. (1984, 38).
In the Defender-type organization, the
products, markets, and technology are all relatively
stable. This stability gives the tremendous advantage
of accumulating expertise and know-how within the
organization, which permits the organization
toacquire human resource from aoutside at the
entry level and then to develop them internally. The
consequence for compensation management is that
internal equity, rather than external equity, becomes
the major preoccupation. The emphasis on efficiency
and rigorous cost control requires a close monitoring
of the performancereward tie-up, with frequent
performance evaluationsusing quatitative measures.
It is quite common to use gain-sharing plans of the
Scanlon type, whose requirement of stable
performance conditions is more consistent with the
defender organization. The high degree of
centralization in the control process also causes the
compensation structure to reflect to agreater degree
the organization’s hierarchical levels and their
relative differentials. The orientation towards the
organizational hierarchy ids also derived from the
fact that the incentive for long-term personal
development inevitable in the Defendef-type organization is through internal promotion. These
characteristics of the compensation system are found in the Lincoln Electric Company, which is regarded
as a classic Defender.
The impact of the prospector strategy on compensation is just the opposite of that of the Defender
strategy. Performance-based compensation is the primary consideration. The Prospector-type
organization needs to acquire human resources from outside the organization not just at the entry level
but at all levels. The external lanour market tends to heavily influence the compensation structure,
which now needs to focus much more on external equity, and is oten based on a pay level higher than
that of the market. Furthermore, the innovative people required by the organization can only be
attracted by a compensation programme that is performance based and allows creative individuals to
share in the gains genereated by their innovatrions. Hewlett-Packard and Texas Instrument are
examples of firms that follow th Prospector strategy.
What is the impact on the design and management of the organizational reward system under the
descriptive and prescriptive assumptions that underlie the internalwork culture? When management
assumes that its employees have a high internal locus of control, high growth needs a high potential for
development and are willing to defer immedlate gratification for the returns that result from long-term
career growth and development, then the reward system will place a greater emphasison skill-based
and performance-based py, onfringe benefits that are the same for all levels, on non-economic rewards
(such as participation in decision making autonomy) that provide opportunities for growth and
development and on rewards (such as stock-ownership plans) that permit employees to participate in
the future growth of the organization. All employees will generally be on an all-salary basis, and status
symbols will be eliminated or restricted to jobs as necessitated by the extenal needs of the busines. In
such a reward system, managers will expect, value, and reward employees who are resourceful and
innovative and who take, if necessary,personal risks in anticipating and meeting task challenges. In
evaluating employee success, the key criterion will be the attainment of predetermined job targets
without too much concern for how these are attained.
On the other hand, when management
views employees as having an external locus of
control, low growth needs, limited or fixed
potential for development, and an interest only
in the immediate gratification of physical,
security, and social needs, then the reward
system will emphasize economic and
socialrewards, status symbols, and fringe
benefits that vary according to the level of the
organization. In such a reward system
management style and orientation, and
generally follow the Theory X model of
management (McGregor 1960)—the carrot-
and-stick aproach to rewards design and
The preceding discussion described how
the reward system flows from and reflects the
internal work culture of the organization. The
next section explores the direct impact of
business strategies on the reward system.

Business Strategies

A strategy is “the pattern or plan that integrates an organization’s major golas, policies, and
action sequences into a cohesive whole” (Quinn 1988, 3). The reward system of an organization must be
congruent with and supportive in two ways: (1) itattracts and retains the people with the knowledge,
abilities, skills, and willingness to support the business strategy; and (2) it motivates the employees to
manifest behaviours (e.g.,
Technological change
Rapid advance in computerization offer organizations the opportunity to step into the
postindustrial age. In varing degrees, tecnology is becoming a critical vehicle for implementing an
organization’s business strategy, or a critical strategy in itself. In Canada, altought the output from the
manufacturing dector between 1967 and 1980 remained at 19 percent of the Gross Domestic Product,
this output was achieved with fewer workers because of the increasing use of new tecnologies. But
technology alone is not sufficient. For example, in the course of developing the Saturn car project,
General motors (GM) learned that increasing employee involvement was equally critical to, if not more
critical than,technology for both product quality and for the effective deployment of technology (Treece
1990) . Nevertheless, incorporating technological
innovations reamins a critical strategic choice for
organizations. That choice will, in turn, have an
important bearing on the design and management of
the reward system. For example, in the Saturn car
project, GM formed a unique partnership with its
employees not only through improved relations with
the union but also through radical compensation
pratices such as the abolition of status differentials. For
example, all employees are on salary and are eligible
for productivity bonuses; furthermore, executive
bonuses are similarly linked to the project’s profits and
not, as has been traditional, to the profits of GM’s
subsidiaries. Another example of the impact of
technologu on the reward system is that increased
computerization facilitates decentralization, and
decentralization enriches jobs, making them
pdychologically more rewarding. Computerization also
makes the organization better able to generate
performance measures that contribute to a more
equitable administration of compensation

Government Regulations.
The impact of economic conditions and technoligical changes on compensation is primarilly
indirect, flowing from the organiization’s strategic decisions. The impact of government regulations is
direct. The objective of regulations is to ensure social justice and to address societal concers involved in
the employer-employee relationship. Achieving such objectives cannot be left entirely to the discretion
of organization.
;egislation in this fiels traditionally regulated wages overtime and vacation pay, and working
conditions; and provided financial protection in the event of loss of emplotment, work accidents, and
retirement. Some examples are the Minimum Wages Act, and the Canada (quebec) Pension Plan. In the
1970s, Canada took a bold step in the field of pay equity, unprecedented among the western
industrialized nations (expect
Ment of society plays a cricial role in influencing and shaping the beliefs, attitudes, and action
preferences of its members. Employees bring to the workplace their cultural values and norms, which
are instrumental in the formation of their expectations of, and responses to, influence the effectiveness
of reward systems.
Hofstede’s (1980a) empirical model differentiated the cultues of different countries on four
1. Power distance, that is
The extent to which a society accepts the fact that power in institutions and organization is
distributed unequally (1980b, 45)
2. Uncertainty avoifdance that is,
The extent to which a society feels threatened by uncertain and ambiguous situations by
providing career stability, esrablishing more formal rules, not tolerating deviant ideas and
behaviors, and believing in absolute truths and the attainmentof expertise (1980b, 46)
3. Individualism which
Implies a loosely knit social framework in which people are supposed to take care of themselves
and their immediate families only, while collectivism is characterized by a tight social framework
in which people distinguish between in-groups and out-geoups; they expect their in-group
(relatives, clan, organization) to look after them, and in exchange for that they fell they owe
absolute loyalty to it. (1980b, 45)
4. Masculinity that is,
The extent to which the dominant values in society are “masculine” that is, assertiveness, the
acquisition of money and things, and not caring for others, the quality of life, or people.

In terms of these culturaldimentions, the

sociocultural environment of developed countries like
Canada can be characterized by high indivual ism and
masculinity, and low powerdistance and uncertainty
avoidance (Jaeger and Kaningo 1990). These
characteristics manifest themselves in an organization in
several ways. For example, high individualism suggests
employee preferences for independence, slef-reliance,
and individual responsibllity, and high masculinity
denotes a perfoemance rather than a people orientation;
low power distance suggests that subordinates believe
that they can participate with superiors in hoint efforts to
achieve organizational objectives, nad low uncertainty
avoidance implies a willingness to take risks and accept
varied ways of achieving organizational objectives.
Employees who are socialized in sociocultural
environment dominated by these characteristics will
likely expect their reward system to focus primarily on
material reawards that reflect indivual