Prepared by

Cheryl Dowell,
Algonquin College,
and
Greg Cole,
Saint Mary’s University
 Chapter 6

Copyright © 2014 by Nelson Education Ltd. 6-2

1. Describe the constraints that limit the design of a
compensation strategy.
2. Explain the compensation strategy formulation process
and describe each step.
3. Discuss the considerations in deciding whether to adopt a
lead, lag, or match compensation-level policy.
4. Describe utility analysis and explain how it can be used.

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5. Apply the compensation strategy formulation process to
specific organizations.
6. Explain how to evaluate a compensation strategy prior to
implementation.
7. Discuss the special issues involved in compensating
contingent workers, executives, and international
employees.

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Copyright © 2014 by Nelson Education Ltd. 6-5
 • Sets minimum standards for pay and other conditions of employment
Employment
standards

• Defines the rights of parties involved in a collective bargaining

Trade union relationship
legislation

• Prohibits discrimination in hiring or employment on the basis of race,

Human rights ethnic origin, religion, gender, marital status, or age
legislation

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 • Income and corporate tax laws,
which encourage certain pay
approaches and discourage others
• Tax laws have played a significant
Tax role in the movement away from
legislation direct pay (which is fully taxed)
and toward indirect pay (which
often is not)

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 Labour
Product / Service Financial
market
• Constraints on • Constraints on • Unprofitable
compensation compensation • Growth stage
strategy flowing strategy caused • Funding
from the relative by the nature of
levels of the product or
demand and service market
supply for in which the
particular firm operates
occupational
groups

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Copyright © 2014 by Nelson Education Ltd. 6-9
• Regarding membership behaviour: What are the costs of
turnover? Is affective commitment necessary, or is
continuance commitment sufficient?
• Regarding task behaviour: Are tasks simple or complex?
Do employees work under supervision? Are high
performance levels required?
• Regarding citizenship behaviour: How important is
cooperation for each company unit and the individuals in
it? To what extent can extra employee initiative or ideas
make a difference to organizational performance?

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• Classical organizations tend to focus on economic
needs as the main motivator of behaviour.
• Human relations organizations focus on
social needs.
• High-involvement organizations focus on
employee needs for participation, growth,
and development.

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• A gift shop operated by UNICEF to generate funds to help
Third World children provides no role at all for compensation.

• Membership and task behaviour are motivated by intrinsic

rewards, including the knowledge that volunteers are helping
save young lives.

• Task behaviour is motivated by the knowledge that

performing these mundane tasks is helping save the lives of
Third World children.

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• A tree-planting firm, which has contracts with major forestry
firms to undertake reforestation work

• There may be some intrinsic motivation for individual tree

planters, to the extent that they see reforestation work as
socially valuable and that they enjoy the autonomy and task
identity the job provides.

• Clearly, the key motivator here is money. Pay can be used

both to foster the necessary membership behaviour and to
direct task behaviour.

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• This firm practises a high-involvement strategy because the
success of any new product depends on creativity, innovation,
and cooperation among all parts of the organization.

• There is considerable intrinsic satisfaction in designing

a successful product, and they derive some extrinsic rewards
from advancing their own expertise and knowledge through the
extensive training the firm provides.

• The primary purpose of compensation is to motivate

membership and to foster citizenship behaviour through
profit-sharing and employee stock ownership programs.

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 Lagging the Leading the Matching the
market market market
• A compensation level • A compensation level • A compensation level
strategy based on strategy based on strategy based on
paying below the paying above the paying at average
average compensation average compensation compensation levels
level in a given labour level in a given labour in a given labour
market market market

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• Utility analysis is an approach to analyzing whether a lead,
lag, or match strategy would be most efficient for a given
organization.

• Suppose you are the head of compensation at a credit union,

and you are trying to decide on the pay level strategy for your
400 tellers.

• You anticipate that changing the policy would have

an impact on turnover and on the quality of employees you
hire.

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• You first need to calculate the costs of turnover. What is the
cost of recruiting each teller, and what is the cost of training
them?

• Let’s suppose that training costs $4,000 per employee,

counting out-of-pocket training costs and reduced
productivity during the training period.

• You now need to estimate the change in performance that will

result from a change in the quality of your workforce due to a
lag or lead policy.

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• The actual calculations are quite complex.

• The lag policy would normally apply only to new hires, and
the pay of the existing employees would reduce gradually
over time, during which no scale increases would be granted.

• It does appear that adopting a lag strategy would be the most

efficient, eventually generating a saving of nearly $1 million
per year relative to the present “match” policy.

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• A compensation-level strategy that varies across employee
groups or compensation components

• A firm could choose to lag for entry-level positions,

especially if applicants are plentiful, but to lead in higher
level positions in order to avoid turnover of highly trained
personnel.

• The nature of the compensation mix affects the amount of

compensation you can afford to pay.

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• Three of these criteria:
1. Affordability
2. Legality
3. Employee attraction

• The above can be considered screens through which the

strategy must pass. If it can’t pass all of these, the strategy is a
nonstarter.

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 Contingent workers
Job sharing

Expatriate
& Foreign Executives

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• Contingent workers: workers who are not employed on a full-
time permanent basis

• By 1996, around 19 percent of Canadian employees were

part-time workers, an increase of nearly 50 percent since
1976.

• Other types of contingent workers—temporary full-time

employees, independent contractors, and persons hired from
temporary help agencies—also made up an increasing
proportion of the workforce.

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• Executive pay has been escalating while the pay of
rank-and-file employees has been stagnating; partly
because disclosure laws have made executive pay
more visible.

• Some top executives have profited handsomely while

managing their companies right into bankruptcy.

• In the United States, which leads the world in executive

pay, executive compensation jumped from an average of
43 times the pay of the average worker in 1960 to more
than 100 times by 1990.

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Copyright © 2014 by Nelson Education Ltd. 6-24
1. The amount of performance pay relative to base pay and
indirect pay
2. The amount of short-term (annual) performance pay versus
longer-term performance pay
3. The nature of the performance pay itself
4. The specific performance indicators used as criteria for the
performance pay
5. The stringency of the performance criteria
6. The time period to be used as the performance period for
the incentive

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• A key question is whether the employees are foreign nationals
or expatriate Canadians sent to play a role in operating foreign
subsidiaries.

• The compensation policy issues are very different for each of

these groups.

• The key question is how to create a compensation package

that ensures that expatriates do not lose financially compared
to their home-country peers
but is still cost-effective for the company.

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1. Balance sheet: provides a standard of living comparable with
the home country
2. Negotiation: A process in which the employer and employee
negotiate a mutually acceptable package
3. Localization: Practice of paying expatriate employees the
same compensation as local nationals in equivalent positions
4. Lump sum: Various allowance amounts are paid directly in
home-country currency

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• For a definition of the distinction between an employee and
an independent contractor, go to the Canada Revenue Agency
website, Employee or Self-Employed?

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-08e.pdf

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1. Discuss and explain the five main steps in the
compensation strategy formulation process (Figure
6.1). Which do you think is the most difficult step?
2. Discuss specific considerations in deciding whether
to adopt a lead, lag, or match compensation level
policy.
3. Discuss the special issues involved in compensating
contingent workers, executives, and international
employees.

Copyright © 2014 by Nelson Education Ltd. 6-29