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Introduction, Pay Model and Legal Issues in Compensation

1. What is compensation? What are forms of pay? Compensation refers to all forms
of financial returns and tangible services and benefits employees receive as part of
an employment relationship.
2. What are the building blocks of the Pay Model? What sort of process does
compensation policy development follow? compensation objectives, policies
that form the foundation of the compensation system, and techniques that make
up the compensation system
3. What are the main policy choices we must make in terms of compensation
decision making? External competitiveness, internal alignment, employee
contributions, management of the pay system.

Internal alignment- comparisons among jobs of skill levels inside a single

organization
External competitiveness- compensation relationships external to the organization
(comparison with competitors)
Employee contributions- pay for performance- such as bonuses, merit pay
(performance-based pay affects fairness
Management of the pay system-
4. What are the main objectives of compensation?
5. Is there a link between compensation and ‘performance’? it can 1) increase
motivation and performance and 2) can enhance organizational performance

1. What is the Fair Pay Act and what are its provisions?
2. What is pay discrimination? The denial of particular jobs, promotions, or training
opportunities to qualitied women or minorities

Strategic Perspectives

1. What are the two types (basic types) of competitive advantage that a firm can
possess? Low cost or differentiation
2. What is a ‘strategic perspective’ to compensation? focuses on those compensation
choices that help the organization gain and sustain competitive advantage.
3. Why and how should compensation support business strategy? pay systems
should s the business strategy because if a business becomes more competitive
they have to be more flexible and focus on the customers more. so the company
can pay their employees based on their performance and how they are with
delighting customers (companies should help align their business goals with the
employees).
4. What are the steps in formulating a total compensation strategy? Assess total
compensation implications, map a total compensation strategy, implement
strategy, reassess
a. How do these map onto the strategy and policy choices at Whole Foods?
5. What are the three tests of competitive advantage? Is it ALIGNED? Does it
DIFFERENTIATE? Does it add VALUE?
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Internal Alignment

1. What is internal alignment?

addresses relationships inside the organization. often called internal equity, refers
to the pay relationships among different jobs/skills/competencies within a single
organization.

2. What is a pay structure and what are its component parts?

refers to the array of pay rates for different work or skills within a single
organization. The number of levels, the differentials in pay between the levels,
and the criteria used to determine those differences describe the structure.

3. What are content and value?

Content refers to the work performed in a job and how it gets done (tasks,
behaviors, knowledge required, etc.). Value refers to the worth of the work:
its relative contribution to the organization objectives.

4. How and why are egalitarian and hierarchical structures different?

Egalitarian structures have fewer levels and smaller differentials between
adjacent levels and between the highest- and lowest-paid workers. (this is an
advantage)
- Egalitarian structures send the message that all employees are valued equally
- A disadvantage is that averagism brings to light that equal treatment can mean
more knowledgeable employees feel underpaid
5. What is tournament theory, how is it related to internal alignment and is there any
evidence to support the theory?

WALMARTS COMPENSATION STRATEGY

Walmart's Compensation Strategy is to emphasize wages for managers (asst. SM and
SM), to pay below market for all jobs except management, and to really emphasize P4P
but only for SM position.
- Walmart is a good fit because the company offers good prices for the
customers and they’ll have more traffic in stores.
- store manager plays a key role so doing p4p makes sense by maintaining
their strategy of low cost
COSTCO
- costcos compensation strategy - To emphasize the wages of Cashier and Store
Manager, (IA), to pay above market for all jobs (EC), and to de-emphasize P4P
(EC)
- has a very agalaterian (equal) culture
- their business strategy is all about quality and customer service
- they don’t really emphasize pay for performance
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Costco they are paying too much for Cashiers; the wages are misaligned with
their culture; whereas at WM there is utter and total efficiency in terms of
their wages which is a perfect fit with their culture and their BS of being a
CLB (cost leader broad).

Extra Questions:
1. Which of the following is a better predictor of discrimination claims by
employees: A) perceptions of fairness or B) actual fair treatment
Answer- A

2. Which of the following is most strongly related to job satisfaction? A) Wages B)

Manager Support C) Challenging Work D) Commute Time to Work
Answer- C

3. True or False? Total compensation includes financial returns, tangible services,

benefits, relational returns, and merit pay?

4. True or False? Total returns includes financial returns, tangible services,

benefits, , and merit pay?
Answer- True

5. What are some ways that firms can lower their costs?
Lower wages, cut production costs, produce in bulk, outsourcing

6. High Performance Work SystemHPWS = mutually reinforcing set of HR policies

and practicesCostco -> Sophisticated selection + LTD + high wages + Perf
MGMT = HPWS

7. What was IBM's business strategy when it was very young?

Answer- nothing they were the only ones around

8. What are the three pay policy choices that we have to answer to form our
compensation strategy?
Alignment, Competitiveness and Contributions (aka Pay for Performance)

(internal alignment, external competitiveness, pay for performance)

9. KNOW THE THREE TESTS OF COMPETITIVE ADVANTAGE

Is it ALIGNED? Does it DIFFERENTIATE? Does it add VALUE?

10. What is a pay differential?

Pay differences among levels

11. Why is the consultant engineer job paid so much more than other jobs in the pay
structure?
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they usually work independently to undercover and resolve problems associated

with development and implementation of operational programs. In one word —
it’s value

12. How was work organized at Merill lymch?

To be a differentiation based firm that specialized in providing high levels of
customers service especially to high net worth clients.

How does their compensation strategy need to change?

IA - one broad level; EC - wages were consistent with the market (at market); P4P
was to use 2% commission.IAOne broad level to having 5+ levels45 to 125K
Moving from at market to above marketP4P2% commission (bonus) … 5%
commission (different pay levels)

13. What are other characteristics that would fit with an egalitarian culture
De-emphasis on P4P or differentials

14. Tournament theory: motivation and performance

- All players will play better in the tournament where the prize differentials are
larger
- Greater difference between an employee’s salary and the boss’s, harder he/she
will work
- Steep differentials are effective when they attract a talented applicant pool
- And motivate them to perform for “top prizes”

15. People are more motivated and work harder when there are more levels and really
large differentialsIs tournament theory true in its application in general to pay
structures? NO
HOWEVER … when you get executive ranks, the theory in its application is true
Just because a firm has more levels and/or larger differentials does not necessarily
mean that employees on average will be more motivated and/or work harder. BUT
this does apply to the executive ranks.

16. Total compensation is comprised of cash compensation, pay for performance, and
benefits? A) True B) False
17. Cascade of domino effect? Yes
18. PFP is merit pay and incentives and is a form of cash comp
19. What are some of the reasons that two firms with the same job families
would have different levels and differentials for the work? Which of the
following is NOT one of the resons? A) Different competitive strategies, B)
Different industries, C) Different sizes, D) Elephants, E) All of the above
20. Internal alignment- Content and ValueContent = KSOAs + TDRs
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21. The four types of cash compensation covered in class include all of the
following except:
A. Merit/cost of living
B. Income protection
C. Short term incentives
D. Long term incentives
E. None of the above
22. In terms of internal alignment, which of the following is NOT a consequence
of a well designed pay structure?
A. Workers are motivated to seek higher-level jobs
B. Workers seek additional training
C. Workers feel it is fair the next highest job is paid more than their job
D. Workers are motivated by productivity incentives
E. All of the above are consequences of an internally aligned pay structure

23. In class, we compared Walmart and Cosco. We concluded from that

discussion and analysis that there is more alignment between compensation
and business strategies at Costco as compared to Walmart.
B false
24. Which of the following gis not part of the description of pay structure?
C pay for performace
25. Are employees motivated in general by incentives?
Yes

26. the four types of cash compensation covered in class include all of the
following except-
income protection

27. Which of the following relationships within pay system is accurate?

Compensation objectives shape pay policies

28. In terms of internal alignment, which of the following is not a consequence of

a well-designed pay structure?
Workers are motivated by productivity incentives
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STUDY GUIDE QUESTIONS

Chapter 1

1. Define compensation
Compensation refers to all forms of financial returns and tangible services
and benefits employees receive as part of an employment relationship.
a. Know the various forms of cash compensation and their purposes (pg. 32)

 Base wage: employer pays for work performed. Based on certain

skills/experience or education (Base vs Salary)
 Merit Pay/ Cost of Living adjustments: Merit pay based on
performance. Cost of living adjustments give everyone increases.
Periodic adjustments to base wages may be made on the basis of changes in what
other employers are paying for the same work, changes in the overall cost of living, or
changes in experience or skill.
 Incentives: tie pay increases to performance. DO not increase base
wage and must be re earned each pay period. Ex: Sales commission or
real estate broker.
1) Long term incentives: Gives managers stocks of the company
to focus long term objectives over one year. Long-term incentives
are intended to focus employee efforts on multiyear results. Typically they
are in the form of stock ownership or options to buy stock at a fixed price
2) Short Term incentives: Measures performance within 1 year. (Ex:
Funding for each department in a company)

2. Describe the various components of the Pay Model

a. So far, we have covered Internal Alignment in relatively more depth, so be
able to fully explain how internal alignment fits into the pay model, and
the various components of internal alignment (strategy, job analysis).

- Internal alignment is comparisons among the jobs or skill levels in

an organization. Jobs and people’s skills are compared in terms of their
relative contributions to the organization’s business objectives. Internal
alignment pertains to the Pay rates both employees doing equal work and
dissimilar work. Internal alignment fits in the pay model by analysis,
descriptions, Evaluation/Certification and Internal structure (pg. 37)

b. Be able to differentiate the 4 policy choices (pg 41-42)

1) External Competitiveness: pay comparisons with competitors. To ensure

pay is sufficient to attract and keep employees. Control labor costs to price
products to remain competitive.
2) Employee Contributions: “nature of pay mix” Jobs and people’s skills are
compared in terms of their relative contributions to the organization’s business
objectives. Affects employee attitudes and work behavior. From pay mix
(base, incentives, stocks). (ex: higher pay at In N Out)
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3) Internal Alignment: Comparisons among jobs or skill levels inside a

single organization.
4) Management: Management means ensuring that the right people get the right
pay for achieving the right objectives in the right way . must answer the “so what”
question.

c. Compare/contrast internal alignment vs. external competitiveness

Internal Alignment is the set of strategies, policies, and systems laid by
an organization. They are also the comparing between jobs, skills, and
competencies within an organization. External Competitiveness refers
to how an organization pays for jobs in relation to its competitors.

3. Explain what our Compensation Objectives are

Designed to achieve certain objectives includes efficiency, fairness, ethics and

complying with laws and regulations.
1. Efficiency- Efficiency can be stated more specifically: (1) improving
performance, increasing quality, delighting customers and stockholders, and (2) controlling
labor costs.
2. Fairness- (fundamental objective of pay system) to ensure fair
treatment and recognizing family and personal well-being. Compliance
is when companies have to pay the minimum wage by law and follow
international laws. The fairness objective calls for fair treatment for all employees by
recognizing both employee contributions (e.g., higher pay for greater performance,
experience, or training) and employee needs (e.g., a fair wage as well as fair procedures).
3. Ethics- efficiency, fairness, and compliance combined. All three must be achieved. The
tension of working toward all objectives at once creates fertile grounds for ethical dilemmas.
Ethics means that the organizations cares about how its results are achieved. Shows in a
companies key behaviors, our values, and code of conduct.
4. Complying with laws and regulations (Compliance)- conforming to federal and
state compensation laws and regulations. If laws change, pay systems may need to change,
too, to ensure continued compliance. As companies go global, they must comply with the
laws of all the countries in which they operate.

a. How do the various aspects of compensation we have covered so far in

class help us meet these objectives?

Regarding to Cost of living relates to fairness because employees have

responsibilities outside of work. If employees are worked 24/7 then employees
and managers will work for other competitors. Incentives influence efficiency
because this will prevent managers and employees from going to competitors.
Incentives also increase employee morale to achieve more goals and
objectives of the company.

2. What is the link between compensation and performance?

Compensation is important to managers because managers are paid by salary and

will go to competitors if not compensated for their efforts when gaining new clients
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or partnership. Compensation will also persuade managers to work for the

organization in the long run.

Chapter 2

1. Explain the different strategy types

a. Be sure to be familiar with the examples given in class
1. Cost Leadership: Strategy to be lowest cost producer in industry.
Ex-Southwest airlines (has the lowest cost of operation in the industry.
– Must find economies of scale, and other cost-saving mechanisms, such as
proprietary technology and preferential access to raw materials
2. Cost/ Differentiation Focus: Compete based on price and aims at
a narrow market. (Renting movies and videos at Redbox). to be
unique in an industry on dimension(s) that are valued by consumers
a. And charges a premium price.
(Ex: Iphones)

2. What does it mean to take a “strategic perspective” to compensation?

A strategic perspective focuses on those compensation choices that help the

organization gain and sustain competitive advantage

3. Describe the “cascade” of strategic choices

Corporate objectives and vision/values, Business unit strategies, HR strategy,

strategic decisions (social, competitive, environmental), compensation system,
employee attitudes and behaviors, competitive advantage.

4. What are the tests of competitive advantage?

Is it Aligned? , Does it differentiate, Does it add value?

Chapter 3

1. What is internal alignment?

Internal alignment, often called internal equity, refers to the pay
relationships among different jobs/skills/competencies within a single
organization.

2. Define and explain pay levels and differentials (Ch .3 slide 4-5)
Pay structure- based on reporting relationships (Branch manager reporting
to VP of operations) Motivating power by promotion or higher job title (The
Office, Dwight becomes Assistant to the Regional Manager).
Differentials- determined by knowledge, skills, working conditions, added
value of company. Differentials is to motivate to strive for perform for
promotion to higher pay.
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a. Be able to explain why different companies have different levels and

differentials for similar job families
Strategy, Industries, Size, and Culture.
b. Explain the Lockheed example (Ch.3 slide 6)
The Lockhead example shows that six different engineer job titles. There are
technically engineers but determines the difference in pay scale could be
knowledge and skills. Engineer is entry level is paid the lowest whereas the
consultant engineer has the highest pay and most recognized authority.
Consultant Egr-value

3. Explain the Criteria of internal alignment

a. Content: the work performed in a job and how it gets done
Skills required, complexity of tasks, problem solving skills and
responsibilities. (Ex: US presidents and Congress making choices on
behalf of American people) Note: Content=KSOAs+TDRs

b. Value: the worth of the work; its relative contribution to the organization
objectives
Contribution of skills, tasks and responsibilities to company’s goals.
( Amazon, Apple, Samsung, etc.) Note: Value=relative contribution of
the job to the firm

4. What some are the organizational factors that shape internal alignment?
- Organization strategy
a. Levels & differentials need to be related to/support strategy
- Organization's human capital
b. KSAs
c. Greater amounts of KSA = greater pay
d. Also, greater value to org. = greater pay
e. More variability in KSAs within an org. might lead to greater variability
in jobs, i.e. levels
- Organization work design
Work to be performed
Skills/Knowledge required to perform work

Strategy, Human Capital, HR policy and employee acceptance.

5. Explain the Merrill Lynch example

Merrill Lynch example
i. Customer associates (calls) & financial advisors (FA)
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ii. Realized high-net worth clients add most value

iii. Redesigned work according to net worth of clients
IV. FA now has five levels with more pay dispersion

Merrill Lynch strategy was clients with high net worth add most value to the company
due to their investments and assets. Restructured based on clients net worth meaning for
someone’s net worth is $200,000 could be saving to buy a home or investment advisory
whereas someone with $50 billion net worth is wealth transfer.