Entire TRM Milkovich Newman

COMPENSATION
Third Canadian Edition

Milkovich, Newman, Cole
1-1
© 2010 McGraw Hill Ryerson

Compensation
Compensation refers to all forms of
financial returns and tangible
services and benefits employees
receive as part of an employment
relationship.
1-2

Contrasting Perspectives of
Compensation
Society’s Stockholders’
Views Views
Global
Views
Employees’ Managers’
Views Views
1-3

Total Returns for Work
Total Returns
Total Compensation
Relational Returns
Benefits
Learning
Opportunities
Recognition
Cash Compensation & Status
Life, Allowances
Long-term Health, and Employment Challenging
Incentives Disability Security Work
Base Merit/Cost
Insurance Work/Life
of Living Short-term Programs
Incentives
1-4

Relational Returns from Work
Recognition Employment
& Status Security
Employee
Engagement
Challenging Learning
Work Opportunities
1-5

THE PAY MODEL
STRATEGIC TECHNIQUES STRATEGIC

POLICIES OBJECTIVES
INTERNAL EFFICIENCY
ALIGNMENT STRUCTURE
 Performance
Quality
PAY
COMPETITIVENESS
STRUCTURE  Customers &
Stockholders
INCENTIVE
CONTRIBUTORS PROGRAMS  Costs
FAIRNESS
MANAGEMENT EVALUATION
COMPLIANCE
1-6

Compensation Objectives
Efficiency
Fairness
Compliance
1-7

Pay System Objectives at
Medtronic and Whole Foods
Medtronic Whole Foods
 Support Medtronic mission  We are committed to increasing long-
and increased complexity of term shareholder value
business  Profits are earned every day through
 Minimize increases in fixed voluntary exchange with our
costs customers
 Attract and engage top talent  Profits are essential to create capital
 Emphasize personal, team for growth, prosperity, opportunity, job
and Medtronic performance satisfaction and job security
 Recognize personal and  Support team member happiness and
family total well-being excellence
 Ensure fair treatment  We share together in our collective
fate
1-8

Pay System Policies
 Internal alignment
 comparisons between jobs or skill levels inside a
single organization
 External competitiveness
 comparisons of compensation with competitors
external to the organization
 Employee contributions
 relative emphasis placed on employee
performance
 Management
 policies related to managing the pay system
1-9

Conclusion
 the model presented in this chapter provides a structure for
understanding compensation systems
 the three main components of the model include:
 the objectives of the pay system
 the policy decisions that provide the system’s foundation
 the techniques that link policies and objectives
 two key questions should constantly be asked:
 first, why do it this way? ->there is rarely one correct
way to design a system or pay an individual
 second, so what? ->what does this technique do for us?
->how does it help achieve organizational goals?
1-10

COMPENSATION
2-11

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
2-12

Strategic Perspectives Toward Total
Compensation (1 of 2)
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
•Attract and reward the accomplishment and share
best success
•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
2-13

Strategic Perspectives Toward Total
Compensation (2 of 2)
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, ant to •Clearly understood; open
know it •Technology support
•Technology support •Employee choice
2-4
Strategic Choices
Business unit
HR strategies
strategies
Corporate objectives,
strategic plans, vision,
and values Strategic
Social, compensation
competitive, decisions
and regulatory
environment
Compensation
systems
Employee
attitudes and
behaviours
Competitive
advantage
2-15

Strategic Compensation
Decisions
 Objectives
 Internal Alignment
 External Competitiveness
 Employee Contributions
 Management
2-16

Key Steps to Formulate a
Compensation Strategy
1. Assess Total Compensation Implications
• Competitive Dynamics
• Core Culture / Values
• Social and Political Context
• Employee / Union Needs
• Other HR Systems
4. Reassess the Fit 2. Map a Total Compensation Strategy

• Realign as Conditions Change • Objectives • Contributions
• Realign as Strategy Changes • Alignment • Management
• Competitiveness
3. Implement Strategy
• Design System to Translate Strategy
into Action
• Choose Techniques to Fit Strategy
2-17

Competitive Advantage
 Three tests to assess competitive advantage
of a strategy:
1. Does the pay strategy align with the business
strategy, economic and sociopolitical
conditions, and the overall HR system?
2. Is the pay strategy different and difficult to
imitate?
3. Does the pay strategy add value by providing
a return on investment in compensation?
2-18

“Best Fit” versus “Best Practices”
 “Best fit” approach suggests that aligning

compensation decisions with strategy will
be most effective
 “Best practices” approach suggests that a
set of practices exist that work with almost
any strategy
 Emerging evidence suggests that a focus on
“What practices pay off best under what
conditions?” will be most effective
2-19

Conclusion
 Managing total compensation strategically means
aligning compensation and business strategies
 The three tests for whether pay strategy provides
competitive advantage are: (1) does it align?; (2)
does it differentiate?; and (3) does it add value?
 The four-step process to develop a compensation
strategy is:
1. assess environmental conditions
2. decide on the best strategic choices
3. implement the strategy, and
4. reassess the fit
2-20

COMPENSATION
3-21

THE PAY MODEL

POLICIES OBJECTIVES
INTERNAL EFFICIENCY
ALIGNMENT STRUCTURE
 Performance
 Quality
PAY
COMPETITIVENESS  Customers &
STRUCTURE
INCENTIVE Stockholders
CONTRIBUTORS PROGRAMS
 Costs
FAIRNESS
3-22
COMPLIANCE
Compensation Strategy:
Internal Alignment/Equity
Supports Organization
Strategy
Supports Workflow
Motivates Behaviour
3-23

Internal Alignment/Equity
the pay relationships between the jobs/skills/

competencies within a single organization
the relationships form a pay structure that:
supports organization strategy
 supports the workflow
motivates behaviour of employees
3-24

Job Structure at an
Engineering Company
 Consultant Engineer: Exhibits an exceptional degree of
Recognized ingenuity, creativity, and resourcefulness. Acts
Authority independently to uncover and resolve operational
problems.
 Advisor Engineer: Applies advanced principles,
theories, and concepts. Assignments often self-initiated.
 Lead Engineer: Applies extensive knowledge as a
generalist or specialist. Exercises wide latitude.
 Systems Engineer: Wide applications of principles and
concepts, plus working knowledge of other related
disciplines. Under very general direction.
 Senior Engineer: Full use of standard principles and
concepts. Under general supervision.
Entry Level  Engineer: Limited use of basic principles. Close
supervision.
3-25

Pay Structure
refers to the array of pay rates for different work

or skills within a single organization, created
through the use of:
the number of levels
 differentials in pay between the levels, and
the criteria used to determine those
differences.
 Pay structures change over time
3-26

Pay Structure at an
Engineering Company
Recognized  Consultant Engineer $162,000

Authority
 Advisor Engineer $120,000
 Lead Engineer $93,000
 Systems Engineer $73,000
 Senior Engineer $58,500
Entry Level  Engineer $48,000
3-27

What Shapes Internal
Structures?
EXTERNAL FACTORS:
Economic Pressures
Government Policies, Laws, Regulations
Stakeholders
Cultures and Customs
ORGANIZATION FACTORS:
Strategy HR Policy
Technology Employee Acceptance
Human Capital Cost Implications
INTERNAL STRUCTURE:
Levels, Differentials, Criteria
3-28

Illustration of an
Internal Labour Market*
Hire Consultant
Engineer
*Internal labour Advisor
markets combine Engineer
both external and Lead
Engineer
organizational
factors Systems
Engineer
Senior
Hire
Engineer
Hire Engineer
3-29

Strategic Choices Among
Structure Options
1. Tailored (well-defined jobs; small differentials)
versus
Loosely Coupled (jobs flexible, adaptable, changing)
2. Egalitarian (few levels; small differentials)

versus
Hierarchical (many levels; large differentials)
3-30

Structures Vary in Number
of Levels
Structure A Structure B
Layered De-layered
Chief Engineer Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer Consulting Engineer
Senior Engineer
Engineer
Engineer Trainee Associate Engineer
3-31

Strategic Choice:
Hierarchical vs. Egalitarian
Hierarchical Egalitarian
Levels Many Fewer
Differentials Large Small
Criteria Person or Job Person or Job
Fit Tailored Loosely Coupled
Supports Individual Performers Teams
Fairness Criterion Performance Equal Treatment
Behaviour Rewarded Opportunities for Cooperation

Promotion
3-32

What The Research Tells Us
 Equity Theory: Fairness
 my pay for my inputs
vs. others’ pay for their
inputs
MY PAY OTHERS’ PAY

My qualifications Their qualifications
My work performed Their work performed
My product value Their product value
3-33

 Tournament Theory: Motivation and
Performance
 Players perform better where prize
differentials are sizeable
 works best in situations where individual
performance matters most
3-34

 Institutional Model: Copy others
 Copy “best practices” of others
 No analysis of whether the practice fits
the organizational strategy
3-35

Organizational Outcomes
of an Internally Aligned
Structure
Undertake training
Increase experience
Reduce turnover
Pay structure Facilitate career progression
Facilitate performance
Reduce pay-related
grievances
Reduce pay-related work
stoppages
3-36

Consequences of Structures
Efficiency
Internal Fairness
Structure
Legal Compliance
3-37

Conclusion
 Internal alignment refers to the pay relationships
among jobs / skill / competencies within a single
organization.
 Pay structures – the array of pay rates for different
jobs within an organization – are defined by levels,
differentials, and the criteria for determining these.
 Acceptance by employees of the pay differentials
between jobs is a key test of an equitable pay
structure.
 The goals of the entire compensation system must
be kept in mind when designing internal pay
structures.
3-38

COMPENSATION
4-39

Many Ways to Create Internal
Structure
Business and Work-Related
Internal Structure
Job-based Person-based
PURPOSE
Collect, summarize Job analysis

work information Job descriptions
(Chapter 4)
Skill Competencies(
(Chapter 6) Chapter 6)
Determine what to Job evaluation:
value classes or (Chapter 5)
compensable factors
Assess value Factor degrees and (Chapter 5)

weighting
Translate into Job-based structure (Chapter 5)

structure
4-40

Job Analysis
the systematic process of
collecting information about the
nature of specific jobs.
4-41

Determining the Internal
Job Structure
Job analysis Job descriptions Job evaluation Job structure
Collecting Summary reports that Comparison of jobs An ordering of jobs

information identify, define, and within an based on their content
about the nature describe the job as it is organization or relative value
of specific jobs actually performed
Some Major Issues in Job Analysis
•Why collect information?
•What information is needed?
•How to collect the information?
•Who should be involved?
•How useful are the results?
4-42

Job Analysis
 Job analysis involves the identification

and description of what is happening on
the job.
 Job analysis identifies:
 required tasks
 knowledge and skills
 working conditions
4-43

Job Analysis Terminology
Grouping of related jobs with broadly 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,
FAMILY e.g. customer support representative.
JOB
TASK
Smallest unit of analysis, a specific
statement of what a person does; for
example, answers the telephone.
Similar tasks can be grouped into a task
dimension, e.g. responsible for ensuring
that accurate information is provided to
customer.
4-44

General Procedures for
Conventional Job Analysis
1. Develop preliminary job information

2. Conduct initial tour of work site
3. Conduct interviews
4. Conduct second tour of work site
5. Consolidate job information
6. Verify job description
4-45

Job Analysis:
Data Related to Job
Job Identification Job Content
 Title  Tasks and activities
 Department in which job  Effort (physical, mental,
is located emotional)
 Number of people who  Constraints on actions
hold job  Performance criteria
 Critical incidents
 Conflicting demands
 Working conditions
 Roles (e.g., negotiator,
monitor, leader)
 Responsibility
4-46

Job Analysis: Data Related to
Employee
Employee Characteristics Internal Relationships
 Professional/tech. knowledge  Boss & other superiors
 Manual skills  Peers
 Verbal skills  Subordinates
 Written skills External Relationships
 Quantitative skills  Suppliers
 Mechanical skills  Customers
 Conceptual skills  Regulatory
 Managerial skills  Professional/Industry
 Leadership skills  Community
 Interpersonal skills  Union/Employee Groups
4-47

Job Analysis: How Can the
Information be Collected?
 Conventional Methods
 Position Analysis Questionnaire
 Many other questionnaires
 Quantitative Methods
 Website questionnaires with statistical
analysis
4-48

Who Is Involved in
Job Analysis?
 Job analyst collects the information
 Job incumbents and supervisors provide
the information
 Discrepancies resolved by collecting
more information
 Top management and union support is
critical
4-49

Writing Job Descriptions
 a written record of the duties and
responsibilities of a specific job compiled
through job analysis
 identifies and describes the job title, job
summary, relationships to other jobs,
essential responsibilities and tasks
 Job specification is the qualifications
required to do the job; may be included in
the job description
4-50

Judging Job Analysis
Reliability Validity
Acceptability Usefulness
4-51

Conclusion
 After deciding that job characteristics will be the basic
unit of analysis supporting the pay structure, it must be
decided:
 What data will be collected
 What method(s) will be used to collect them
 Who should be involved in the process
 The best way to ensure acceptance of job analysis
results is to involve both employees and supervisors
 Job analysis can be tedious and time-consuming
 Job content remains the conventional criterion for pay
structures
4-52

COMPENSATION
5-53

Many Ways to Create Internal
Structure
Internal Structure
Job-based Person-based
PURPOSE

work information Job descriptions
(Chapter 4)
Skill Competencies(
(Chapter 6) Chapter 6)
value classes or (Chapter 5)
compensable factors
Assess value Factor degrees and (Chapter 5)

weighting
Translate into Job-based structure (Chapter 5)

structure
5-54

Job Evaluation
 process of systematically determining the
relative worth of jobs to create a job
structure for the organization
 a process that helps gain acceptance of
pay differences between jobs
 job evaluation based on job content and
internal job value
5-55

Determining an Internally
Aligned Job Structure
Job analysis Job description Job evaluation Job structure
Some Major Decisions in Job Evaluation

• Establish purpose of evaluation
• Decide whether to use single or multiple plans
• Choose among alternative approaches
• Obtain involvement of relevant stakeholders
• Evaluate plan’s usefulness
5-56

Major Decisions
 Establish purpose
 Supports organization strategy
 Supports work flow
 Fair to employees
 Motivates behavior toward
organization objectives
 Single vs. multiple plans
 Benchmark jobs
 Choose between methods
5-57

Job Evaluation Methods
 Job Ranking
 Raters examine job description and arrange
jobs according to their value to the company
 Job Classification
 Classes or grades are defined to describe a
group of jobs
 Point Method
 Numerical values are assigned to specific job
components; sum of values provides
quantitative assessment of the job’s worth
5-58

Comparison of Job
Evaluation Methods
Advantage Disadvantage
Ranking Fast, simple, easy to Cumbersome as
explain. number of jobs
increases. Basis for
comparisons is not
called out.
Classification Can group a wide range of Descriptions may
work together in one leave too much
system. room for
manipulation.
Point Compensable factors give Can become
basis for comparisons; bureaucratic and
communicate what is rule-bound.
valued.
5-59

The Point Plan Process (1 of 2)
Step One: Conduct Job Analysis
 A representative sample of benchmark jobs
 The content of these jobs is basis for
compensable factors
Step Two: Determine Compensable Factors
 Based on the work performed (what is done)
 Based on strategy and values of the organization
(what is valued)
 Acceptable to those affected by resulting pay
structure (what is acceptable)
5-60

The Point Plan Process (2 of 2)
Step Three: Scale the Factors

 Use examples to anchor
Step Four: Weight the Factors
 Can reflect judgment of organization leaders,
committee
 Can reflect a negotiated structure
 Can reflect a market-based structure
Step Five: Communicate the Plan
Step Six: Apply to Non-benchmark Jobs
5-61

Characteristics of
Benchmark Jobs
 Contents are well-known and

relatively stable over time
 Job is common across several

different employers
5-62

Compensable Factors
 characteristics in the work that the
organization values, that help it pursue
its strategy and achieve its objectives
 Useful factors are:
 Based on the strategy and values of the
organization
 Based on the work performed
 Acceptable to the stakeholders affected by
the resulting pay structure
5-63

Categories of Factors
 break down the factors into three major
categories:
1. Universal Factors
2. Sub-Factors
3. Degrees or Levels
5-64

Universal Compensable
Factors
Skill
Effort
Responsibility
Working Conditions
5-65

Factors
 Skill: the experience, training,
ability, and education required to
perform a job under consideration
5-66

Sub-Factors: Skill
 Educational levels
 Years of experience required
 Technical knowledge
 Specialized knowledge
 Specialized training
 Interpersonal skills
5-67

Factors
 Effort: the measurement of the
physical or mental exertion needed
for performance of a job
5-68

Sub-Factors: Effort
Diversity of tasks
Complexity of tasks
Creativity of thinking
Analytical problem solving
Physical application of skills
Degree of assistance available
5-69

Factors
 Responsibility: the extent to which
an employer depends on the
employee to perform the job as
expected, with emphasis on the
importance of job obligation
5-70

Sub-Factors: Responsibility
 Decision-making authority
 Scope of the organization under control
 Scope of the organization impacted
 Degree of integration of work with
others
 Impact of failure or risk of job
 Ability
to perform tasks without
supervision
5-71

Factors
 Working Conditions: difficult or
unhealthy aspects of the conditions
in which the work is done
5-72

Sub-Factors: Working
Conditions
 Hazards:
Exposure to dangerous chemicals

Stress
 Physical
surroundings of the job
Cramped quarters
Outdoor location
5-73

Degrees/Levels of Sub-factors
 Description of several different degrees

or levels of a sub-factor in jobs
 A different number of points is
associated with each degree/level
5-74

Points for Different Degrees
of One Sub-Factor
Factor: Problem Solving
Sub-Factor: Scope for Initiative and Judgment
Degree Points
A some degree of judgment and initiative required 80-
188
B moderate degree of judgment and initiative required 133-295
C significant degree of judgment and initiative required 186-348
D high degree of judgment and initiative required 293-400
5-75

Factor Weights
 Weighting assigned to each factor to
reflect differences in importance
attached to each factor by the employer;
for example:
 Skill 40%
 Effort 30%
 Responsibility 20%
 Working Conditions 10%
100%
5-76

Overview of the Point System
Degree of Factor
Factor Weight 1 2 3 4 5
Skill
 Education 20% 4 8 12 16 20
 Experience 20% 4 8 12 16 20
Effort
 Physical10% 2 4 6 8 10
 Mental 10% 2 4 6 8 10
Responsibility
 For safety 15% 3 6 9 12 15
 For budget 15% 3 6 9 12 15
Working Conditions
 Hazards5% 1 2 3 4 5
 Weather5% 1 2 3 4 5
5-77

Who Should Be Involved?
 The Design Process Matters
 Attention to fairness can help achieve
employee and management commitment,
trust, and acceptance of the results
 Appeals / Review Procedures
 Procedural fairness
 Political Influence
 Minimize susceptibility to political influences
5-78

Resulting Internal Structures:
Job, Skill, and Competency Based
Managerial Group Technical Group Manufacturing Administrative
Group Group
Head / Chief Assembler I

Administrative
High
Vice Presidents Inspector I
Scientist Assistant Value
Packer
(points)
Division General Senior Associate
Managers Scientist Principal Adminis-
Materials Handler trative Secretary
Inspector II
Managers Associate Scientist Administrative
Assembler II Secretary
Project Leaders Scientist Drill Press Operator
Word Processor
Rough Grinder
Low
Supervisors Technician Machinist I Value
Clerk / Messenger
Coremaker (points)
Job Evaluation Competency- Based Skill–Based Job Evaluation
5-79

Conclusion
 differences in the rates paid for different jobs
and skills matter: affects ability of managers to
achieve business objectives; influences
employees’ perceptions of fair treatment
 job evaluation has evolved into many different
forms and methods; consequently, wide
variations exist in its use and how it is
perceived
 no matter how job evaluation is designed, its
ultimate use is to help design and manage
work-related, business-focused, and agreed-
upon pay structure
5-80

COMPENSATION
6-81

Many Ways to Create
Internal Structure
Internal Structure
Person-based (Chapter 6)
Job-based
PURPOSE Skills Competencies
(Chapters 4-5)
work information Skill analysis Core
Job descriptions
competencies
value classes or Skill blocks Competency sets
compensable factors
Assess value Factor degrees and Certification Competency

weighting process indicators
Translate into Job-based structure Person-based Person-based
structure structure structure
6-82

Skill-Based Pay Structures
 link pay to the depth or breadth of the skills, abilities,
and knowledge a person acquires that is relevant to the
work
 pay individuals for all the skills for which they have been
certified regardless of whether the work they are doing
requires all or just a few of those particular skills
 very different approach compared to a job-based plan,
which pays employees for the job to which they are
assigned, regardless of the skills they possess 6-83

Types of Skill-Based
Pay Plans
1. Specialist: In-Depth
2. Generalist / Multiskill-Based:
Breadth
6-84

Purpose of the Skill-Based
Structure
 support the strategy and objectives
 support work flow
 fair to employees
 motivate behaviour toward organizational

objectives
6-85

Skill Analysis
 a systematic process to identify and

collect information about skills
required to perform work in an
organization.
6-86

Skill-Based Pay Structure
Skill certification Skill-based pay
Skill analysis Skill blocks structure
Basic Decisions
• What is the objective of the plan?
• What information should be collected?
• What methods should be used to determine
and certify skills?
• Who should be involved?
• How useful are the results for pay purposes?
6-87

Competency-Based Pay Structure
Core Competency Behavioural Competency –

competencies sets descriptors based pay structure
Basic Decisions
• What is the objective of the plan?
• What information should be collected?
• What methods should be used to determine
and certify competencies?
• Who should be involved?
• How useful are the results for pay purposes?
6-88

Competencies
 underlying, broadly applicable knowledge,

skills, and behaviours that form the
foundation for successful work performance
(exhibited by excellent performers more
consistently than average performers)
6-89

Competency-Based Pay
Terminology
Taken from mission statement; for example, “business
awareness.”
CORE COMPETENCY SETS
COMPETENCY Grouping of factors that translate core competency into
observable behaviour; for example, cost management,
business understanding.
COMPETENCY
INDICATORS
Observable behaviours that indicate the
level of competency within a competency
set. For example, “identifies opportunities
for savings.”
6-90

Competency Analysis
 a systematic process to identify and
collect information about the
competencies required for successful
work performance
 collect information on:
 personal characteristics
 visionary competencies
 organization-specific competencies
 establish certification methods
6-91

Top Twenty Competencies
• Achievement orientation• Developing others
• Concern of quality • Team leadership
• Initiative
• Technical expertise
• Interpersonal
understanding • Information seeking
• Customer service • Analytical thinking
orientation
• Conceptual thinking
• Influence and impact
• Organization awareness • Self-control
• Networking • Self-confidence
• Directiveness • Business orientation
• Teamwork & cooperation • Flexibility
6-92

Internal Alignment: Job- or
Person-Based Structures
 Purpose of job- or person-based pay plans
 Internal pay structure to help achieve
organizational objectives
 Aligned with internal alignment policy
 Supports business operations
 Managing the plan
 Manual
 Communication to foster employee
acceptance
6-93

Avoiding Bias in
Pay Structures
1. Define the compensable factors and scales to include
the content of jobs held predominantly by women.
2. Ensure that factor weights are not consistently biased
against jobs held predominantly by women. Are factors
usually associated with these jobs always given less
weight?
3. Apply the plan in as bias free a manner as feasible.
Ensure that the job descriptions are bias free, exclude
incumbent names from the job evaluation process, and
train diverse evaluators.
6-94

Contrasting Approaches (1 of 2)
Job-Based Skill-Based Competency-Based
What is valued Compensable factors Skills Competencies
Quantify the value Factor degree weights Skill levels Competency levels
Mechanisms to translate into Assign points that reflect Certification and price skills Certification and price
pay criterion pay structure in external market competencies in external
market
Pay structure Based on job Based on skills certified/ Based on competency

performed/market market developed / market
Pay increases Promotion Skill acquisition Competency development
Managers’ focus Link employees to work Utilize skills efficiently Be sure competencies add
Promotion and placement Provide training value
Cost control via pay for job Control costs via training, Provide competency –
and budget increase certification, and work developing opportunities
assignments Control costs via
certification, and work
assignments
6-95

Contrasting Approaches (2 of 2)
Job-Based Skill-Based Competency-Based
Employee focus Seek promotions to earn Seek skills Seek competencies

more pay
Procedures Job analysis Skill analysis Competency analysis
Job evaluation Skill certification Competency
certification
Advantages Clear expectations Continuous learning Continuous learning
Sense of progress Flexibility Flexibility
Pay based on value of Reduced work force Lateral movement
work performed
Limitations Potential bureaucracy Potential bureaucracy Potential bureaucracy
Potential inflexibility Requires cost controls Requires cost controls
6-96

Conclusion
 internal pay structures need to be aligned with
the organization’s business strategy and
values, the design of the work flow, and a
concern for the treatment of employees
 techniques for establishing internally aligned
structures include the job-based approach (job
analysis and job evaluation) and person-based
approaches (skill/competency-based plans)
 these techniques can aid in achieving the
objectives of the pay system when they are
properly designed and managed
6-97

COMPENSATION
7-98

THE PAY MODEL

POLICIES OBJECTIVES
INTERNAL EFFICIENCY
ALIGNMENT STRUCTURE
 Performance
 Quality
PAY
COMPETITIVENESS  Customers
STRUCTURE

INCENTIVE Stockholders 
Costs
FAIRNESS
7-99
COMPLIANCE
External Competitiveness
 refers to the pay relationships among

organizations - the organization’s pay
relative to its competitors
 shaped by three factors:
1. labour market (supply and demand)
2. product/service market (competition)
3. organizational factors (e.g., size)
7-100

Pay Level and Pay Forms
Pay level refers to the average of the array

of pay rates paid by an employer.
( Base + Bonuses + Benefits + Options)
# of Employees
Pay forms refer to the mix of the various types of

payments that make up total compensation.
7-101

Policies
1. pay level that is above, below, or

equal to competitors, and
2. the mix of pay forms relative to
those of competitors.
7-102

Objectives
Control Labour Costs
Attract and Retain

Employees
7-103

Pay Level Decisions Impact
Labour Costs
Number of
Labour Costs = Employees x Pay Level
7-104

Labour Demand
 The marginal product of labour is the
additional output associated with the
employment of one additional human
resource unit, with other production factors
held constant.
 The marginal revenue of labour is the
additional revenue generated when the firm
employs one additional unit of human
resources, with other production factors
held constant.
7-105

Supply and Demand at the Market and
Individual Employer Level
Market level Employer level
$100,000 $100,000
De Ma
ma rg
nd ina
pro l re
Pay for business graduates

Pay for business graduates
du ve
ct nu
e
$50,000 $50,000
Supply to
individual
pply
Su employer
$25,000 $25,000
100 1000 0 5 10 15 20 25
Number of business graduates available Number of business graduates hired
7-106

Labour Demand Theories
and Implications
Theory Prediction So What?
Compensating Work with negative characteristics Job evaluation and compensable
differentials requires higher pay to attract factors most capture these negative
workers. characteristics.
Efficiency wage Above-market wages will improve Staffing programs must have the
efficiency by attracting workers who capability of selecting the best
will perform better and be less willing employees. Work must be structured
to leave. to take advantage of employees’
greater efforts.
Signaling Pay policies signal the kinds of Pay practices must recognize these
behaviour the employer seeks. behaviours by better pay, larger
bonuses, and other forms of
compensation.
7-107

Labour Supply Theories and
Implications
Theory Prediction So What?
Reservation wage Job seekers won’t accept jobs Pay level will affect ability to
whose pay is below a certain recruit.
wage, no matter how attractive
other job aspects.
Human capital The value of an individual’s skills Higher pay is required to

and abilities is a function of the induce people to train for
time and expense required to more difficult jobs.
acquire them.
7-108

Product Market Factors and
Ability to Pay
 Two key product market factors affect
ability of a firm to change price of its
products or services
 Level of product demand – Puts a lid on
maximum pay level an employer can set
 Degree of competition – In highly
competitive markets, employers are less
able to raise prices without loss of revenue
7-109

Organization Factors
 Industry and technology
 Employer size
 Employee preferences
 Organization strategy
7-110

Competitive Pay Policy
Alternatives
Pay with Competition
(Match)
Flexible Policies Lead Policy
Lag Policy
7-111

Pay Mix Policy Alternatives
Performance - Driven Market Match
Benefits Benefits
17% 20%
Options Options 4%
16% Base 50%
Bonus 6%
Bonus 17%
Base 70%
Work - Life Balance Security (Commitment)

Benefits
Benefits 20%
30% Base 50%
Options
10% Base 80%
Bonus 10%
7-112

Some Consequences
of Pay Levels
Contain operating Increase pool of
expenses (labour costs) qualified applicants
Increase quality and

experience
Competitiveness of total
Reduce voluntary
compensation turnover
Reduce pay-related Increase probability of

work stoppages union-free status
7-113

Conclusion
 there is no ‘going rate’, conscious pay decisions
are made by managers
 both product/service market and labour market
competitors impact the pay level and mix decisions
 alternative pay level and mix decisions have
different consequences
 pay policies need to be designed to achieve
specific pay objectives
 the pay level and mix must be properly positioned
relative to competitors
7-114

COMPENSATION
8-115

Determining Externally Competitive
Pay Levels and Structures
Draw Merge Internal & Competitive Pay

Set Define Conduct
Policy External Levels, Mix and
Policy Market Survey
Lines Pressures Structures
Some Major Decisions in Pay Level Determination
 Determine pay level policy
 Define purpose of survey
 Define relevant labour market
 Design and conduct survey
 Interpret and apply results
 Design grades and ranges or bands

8-116

Set Competitive Pay Policy
 Lead the market with respect to pay
 Match average pay of competitors
 Lag behind average market pay rates
8-117

Compensation Survey
 the systematic process of collecting and

making judgments about compensation
paid by other employers
 provides data for translating pay policy

into pay levels and structures
8-118

Purpose of Compensation
Survey
 Adjust Pay Level – How Much to Pay?
 Adjust Pay Mix – What Forms?
 Adjust Internal Structure?
 Study Special Situations
 Estimate Competitors’ Labour Costs
8-119

Define Relevant Market
Competitors
 employers who compete for the same
occupations or skills required
 employers who compete for

employees within the same geographic
area
 employers who compete with the

same products and services
8-120

Relevant Labour Markets by
Geographic and Employee Groups
Geographic Production Office and Technicians Scientists & Managerial Executive
Scope Clerical Engineers Professional
Local: Within Most likely Most likely Most likely
relatively small
areas such as
cities
Regional: Within Only if in Only if in Most likely Likely Most likely
a particular area short supply short supply
of the province or critical or critical
National: Across Most likely Most likely Most likely
the country
International: Only for critical Only for critical Sometimes

Across several skills or those in skills or those
countries very short supply in very short
supply
8-121

Design the Survey
 Who should be involved?
 compensation staff and/or

 consultants
 How many employers should be included?
 Can use publicly available data

 Can use internet data
8-122

Design the Survey
 Which jobs should be included?

 Benchmark jobs
 Low-high approach (for person-based plans)
 Benchmark conversion approach
 What information to collect?

 Base pay
 Total cash
 Total compensation
8-123

Advantages and Disadvantages
of Measures of Compensation
Base Pay Tells how competitors are Fails to include performance incentives
valuing the work in similar and other forms, so will not give true
jobs picture if competitors offer low base but
high incentives
Total Cash Tells how competitors are All employees may not receive incentives,
(base + bonus) valuing work; also tells the so it may overstate the competitors’ pay;
cash pay for performance plus, it does not include long-term
opportunity in the job. incentives.
Total Tells the total value All employees may not receive all the
Compensation competitors place on this forms. Be careful; don’t set base equal to
(base + bonus + work competitors’ total compensation. Risks
stock options + high fixed costs.
benefits)
8-124

Job Matching
 the degree of match between the

organization’s jobs and survey jobs must
be carefully assessed on job content
rather than on the basis of job title only
8-125

Analyzing Survey Data
 no single best approach

 check accuracy of data and anomalies
 statistical analysis based on two pieces
of data on each benchmark:
Survey data - dollars
Our own data - job evaluation
points
8-126

Analyzing Survey Data
 frequency distribution organizes data
 measures of central tendency
 averages or means
 weighted means
 medians
 measures of distribution, or dispersion
 standard deviation
 percentiles and quartiles
 range spread
8-127

Age/Trend the Market Data
 Pay rates are constantly changing

 Survey data represents pay at the date
it was collected
 Adjust survey data to represent pay at
the current or future date when pay
decisions will be implemented
8-128

Combine Job Evaluation
and Market Survey Data
 Each benchmark job has:
 Job evaluation points
 An average wage paid by survey companies.
 Scatterplots are useful to see what the data
look like.
 Summarize the data further by fitting a line
through the points  the MARKET PAY LINE
 Can “eyeball” data or use regression
techniques
8-129

Scatterplot
SURVEY 6
monthly 5
salary
($000) 4
PAY 3
80 120 160 200 240 280 320 360

OUR Job Evaluation Points
8-130

Scatterplot With
Regression Line
7
6
SURVEY
monthly 5
salary 4
($000)
PAY 3
2 Market Pay Line

1
80 120 160 200 240 280 320 360

8-131

Adjust Market Data to Reflect
Organization’s Pay Policy
Lead the Market:
 pay level above market for the year and equal at year end
 update factor will be equal to the projected market increase
Match the Market:

 pay level above market for first half of year and below for second
half
 update factor will be half of the projected market increase
Lag the Market:

 pay level below the market for the entire year
 no adjustment will be made to account for the projected market
increase
8-132

Developing a Pay Policy Line
lead
match
7
lag
6
OUR
monthly 5
salary
4
($000)
3 Pay Policy Line :
PAY using market-survey data
2 (updated and aged to reflect
Market pay line pay policy)
1 (beginning of year)
80 120 160 200 240 280 320 360

8-133

Pay Structure
 two components:
1. Pay policy line: represents an
adjustment to the market pay
line to reflect the organization’s
external competitive position in
the market
2. Pay ranges: upper and lower
limits on pay
8-134

Why Use Pay Ranges?
 External Pressures:
 quality variations (KSAs) among market employees
 differences in productivity from quality variations
 differences in the mix of pay forms competitors use
 Internal Pressures
 recognize individual performance variations with pay
 employees’ expectations that their pay will increase
over time
 encourage employee retention
8-135

Constructing Ranges:
1. Develop Grades
a pay grade is a horizontal
grouping of different jobs that are
considered substantially equal
for pay purposes
all jobs within a single grade will
have the same pay range
8-136

PAY GRADE STRUCTURE
8
6
Our
monthly 5
salary 4
(000)
PAY 3
2
Pay Policy Line
1
I II III IV V Pay Grades

100 150 200 250 300 350
Our Job Evaluation Points
8-137

Constructing Ranges:
2. Establishing Midpoint, Minimum,
and Maximum
 pay ranges refer to the vertical
dimension of the pay structure – an
upper and lower limit on pay for all
jobs in a pay grade
 each pay grade has a pay range
consisting of a midpoint and a
specified minimum and maximum
8-138

PAY RANGES
8
7
Pay Range
6
Our
monthly 5
salary 4
(000)
PAY 3
2
Pay Policy Line
1
100 150 200 250 300 350

Our Job Evaluation Points
8-139

Range Midpoint,
Minimum, and Maximum
8-140

Range Spread
 Spread = range maximum – range minimum

e.g., $65,875 - $43,917 = $21,958
 Spread percentage = spread/range minimum
e.g., $21,958/$43,917 = 50%
8-141

Range Overlap
8-142

Broadbanding
 collapses the number of salary ranges

within a traditional salary structure into a
few broad bands
 purpose is to manage career growth
and administer pay
 an alternative to traditional salary grade
structures
8-143

From Grades to Bands
8-144

Contrasts Between
Ranges and Bands
Ranges Support: Bands Support:
 some flexibility within controls  emphasis on flexibility within
 relative stable organization guidelines
design  global organizations
 recognition via titles or career  cross-functional experience
progression and lateral progression
 midpoint controls,  reference market rates,
comparatives shadow ranges
 controls designed into system  controls in budget, few in
 give managers “freedom with system
guidelines”  give managers “freedom to
 Up to 150 percent range manage” pay
spread  100 – 400 percent spreads
8-145

Market Pricing
 establishing pay structure by relying

almost exclusively on external market
pay rates
 market pricing becoming more common
in Canada
8-146

Conclusion
 most organizations survey other employers’ pay
practices to determine the competitors’ rates
 survey results used to construct market pay line
 pay policy line adjusts market pay line based on
the decision to lead, match or lag market pay
 pay grades and ranges/bands designed around
pay policy line to integrate internal and external
pressures
 increasing interest in broadbanding and market
pricing
8-147

COMPENSATION
9-148

Employee Benefits
 that part of the total compensation

package, other than pay for time worked,
provided to employees in whole or in
part by employer payments (e.g., life
insurance, pension plan, workers’
compensation, vacation)
9-149

Why the Growth in Employee
Benefits?
Cost Employer
Effectiveness of Impetus
Benefits
Unions Government
Impetus
9-150

Key Issues In Benefits Planning,
Design, and Administration
 Establish plan objectives
 Integrate benefits with other
compensation components
 Ensure external competitiveness
 Ensure adequacy of benefits
 Benefits Administration
 Who should be covered?
 How much choice for employees?
 How should benefits be financed?
9-151

Financing Benefits Plans:
Alternatives
 Non-contributory
 employer pays total costs
 Contributory
 costs shared between employer and
employee
 Employee-financed
 employee pays total costs for some
benefits
9-152

Factors Influencing Choice
of Benefits Package
Employer Factors
1. Relationship to total compensation costs
2. Costs relative to benefits
3. Competitor offerings
4. Role of benefits in attraction, retention, motivation
5. Legal requirements
6. Absolute and relative compensation costs Benefits
Package
Employee Factors
1. Fairness in relationship to what others receive
2. Personal needs as linked to demographic
characteristics such as age
9-153

Flexible Benefits: Advantages
 employees choose packages that best satisfy
their unique needs
 flexible benefits help firms meet the changing
needs of a changing workforce
 increased involvement of employees and
families improves understanding of benefits
 flexible plans make introduction of new
benefits less costly
 cost containment - organization sets dollar
maximum; employee chooses within the
constraint
9-154

Flexible Benefits:
Disadvantages
 employees make bad choices and find
themselves not covered for predictable
emergencies
 administrative burdens and expenses
increase
 adverse selection - employees pick only the
benefits they will use; the subsequent high
benefit utilization increases its cost
9-155

Administering the
Benefits Program
 communicating the benefits program
 claims processing
 cost containment
9-156

Cost Containment
 probationary periods
 benefit maximums
 coinsurance
 deductibles
 coordination of spousal benefits
 administrative cost containment
9-157

Categorization of Employee
Benefits
1. Legally required payments
2. Retirement and savings plans
3. Life insurance benefits
4. Medical insurance
5. Income security benefits
6. Pay for time not worked
7. Miscellaneous benefits
9-158

Workers’ Compensation
 a mandatory, government-sponsored,
employer-paid no-fault insurance plan
that provides compensation for injuries
and diseases that arise out of, and while
in the course of, employment
 provides benefits for
 Lost earnings due to temporary disability
 Lost earnings due to permanent disability
 Health care expenses
 Survivor benefits after fatalities
9-159

Workers’ Compensation
 completely employer funded

 regulated by provinces/territories
 compensation varies from 75 to 90
percent of net earnings (two jurisdictions
provide 75 percent of gross earnings)
 cost control is an ongoing concern
9-160

Canada/Quebec Pension Plan
 a mandatory, government-sponsored
pension plan for all employed
Canadians
 funded equally by employers and
employees
 provides benefits upon
 retirement
 disability
 death
9-161

Employment Insurance
 a mandatory government-sponsored plan
for all employed Canadians that provides
workers with temporary income
replacement as a result of employment
interruptions due to circumstances beyond
their control
 funded by employer and employee
contributions
 basic benefit is 55 percent of average
insurable earnings
9-162

Employer-Sponsored
Pension Plans
 plans that provide income to an employee at
retirement as compensation for work performed
now
 Defined benefit plans: employer agrees to
provide a specific level of retirement pension, the
exact cost of which is unknown
 Defined contribution plans: employer agrees
to provide specific contributions but the final
benefit is unknown
9-163

Relative Advantages of Different
Pension Alternatives
DEFINED BENEFIT PLAN DEFINED CONTRIBUTION PLAN
1. Provides an explicit benefit Unknown benefit level is difficult to
which is easily communicated communicate
2. Company absorbs risk Employees assume these risks
associated with changes in inflation
and interest rates which affect cost
3. More favourable to long service More favourable to short-term

employees employees
4. Employer costs unknown Employer costs known up front
9-164

Life Insurance
 group life insurance

 accidental death and
dismemberment insurance
 dependant life insurance
 optional, employee-paid insurance
 retiree life insurance
9-165

Employer-Sponsored Medical
Plans
 cover expenses not payable under
provincial/territorial plans
 prescription drug coverage considered most
important benefits by employees
 medical cost control is biggest issue facing
benefits managers today
 cost control through
 deductibles, coinsurance…
 preventive health care/wellness programs
9-166

Income Security Benefits
 Short-term disability plans
 provide continuation of part or all of earnings
during absence due to non-work related illness
or injury
 Sick leave plans
 provide specified number of paid sick days per
month or per year
 Long-term disability plans
 provide continuation of part of earnings during
long-term absence due to non-work related
illness or injury
 claims and costs rising sharply
 psychiatric disabilities fastest-growing
9-167

Pay for Time Not Worked
 Paid rest periods, coffee breaks, travel

time…
 vacations
 holidays
 leaves
 bereavement leave
 jury duty
 …
9-168

Employee Assistance Plans
(EAPs)
 provide confidential counselling
and/or treatment programs for
personal problems including
addiction, stress, and mental health
issues
9-169

Conclusion
 employee benefits are a major cost of doing

business
 cost savings on existing benefit packages
will come from tighter administrative
controls, and from benefit reductions
9-170

COMPENSATION
10-171

THE PAY MODEL

POLICIES OBJECTIVES
INTERNAL EFFICIENCY
ALIGNMENT STRUCTURE
 Performance
 Quality
PAY
STRUCTURE

Costs
FAIRNESS
10-172
COMPLIANCE
Employee Performance
Employee performance = f (S,K,M) where:
S = Skill and ability to perform task

K = Knowledge of facts, rules, principles,
and procedures
M = Motivation to perform
10-173

Performance Measurement Relates
to Compensation Strategy
Variability in Organizational Performance
Low Variability: few High Variability: regular and
swings in overall large swings in overall
corporate performance corporate performance.
Variability and Unstable, Cell A – provide wide Cell B – provide wide

ease of unclear, and range of rewards beyond range of rewards beyond
measurement in changing just money. Include just money. Emphasize
individual objectives significant incentive base pay with low
performance component. incentive portion.
Stable and Cell C – emphasize Cell D – emphasize

easily monetary rewards with monetary rewards. Large
measured large incentive base pay with low incentive
component. portion.
10-174

What Behaviours Do Employers
Care About?
 How do we get good employment
prospects to join our company?
 How do we retain these good employees
once they join?
 How do we get employees to develop
skills for current and future jobs?
 How do we get employees to perform
well on their current job?
10-175

What Motivates Employees?
In the simplest sense, motivation

involves three elements:
1. what is important to a person, and
2. offering it in exchange for some
3. desired behaviour
10-176

What Motivation Theories Say
 Content Theories (what is important to a person)
 Maslow’s Need Hierarchy
 Herzberg’s 2-Factor Theory
 Process Theories (the nature of the exchange)
 Expectancy Theory
 Equity Theory
 Agency Theory
 Reinforcement Theories (desired behaviour)
 Goal Setting
 Reinforcement
10-177

Does Compensation
Motivate Behaviour?
 Do people join a firm because of pay?
 Do people stay in a firm (or leave)
because of pay?
 Do employees more readily agree to
develop job skills because of pay?
 Do employees perform better on their
jobs because of pay?
10-178

Performance Appraisal
Process of evaluating or
appraising an employee’s
performance on the job
Often plagued by errors
10-179

Common Errors in
the Appraisal Process
 halo error
 negative halo error
 first impression error
 recency error
 leniency error
 strictness error
 central tendency error
 similar-to-me error
 spillover error
10-180

Strategies to Better Understand
and Measure Job Performance
(and reduce errors)
 Improve appraisal formats

 Select the right raters
 Understand how raters process
information
 Train raters to rate more accurately
10-181

Performance Appraisal
Formats
 Comparative
 ranking
 alternation ranking
 paired comparison
 Attribute
 graphic rating scales
 Behavioural
 BARS
 Results/outcomes
 MBO
10-182

An Evaluation of
Performance Appraisal Formats
CRITERIA
Employee HR
Format Development Administration Research Cost Validity
Ranking poor poor average good average
Standard
average average average good average
Rating Scale
BARS good good good average good
MBO excellent poor poor poor excellent
10-183

Select the Right Raters
 supervisors
 peers
 self
 customers
 subordinates
 360-degree feedback
(may include all five of the
above raters)
10-184

Information Processing Errors
Errors in rating process
Errors in observation
Information (attention)
Processing Errors in storage and
Errors recall
Errors in actual
evaluation
10-185

Training Raters to Rate More
Accurately
 rater-error training
 to reduce psychometric errors
 performance dimension training
 reviews dimensions to be used in rating
 performance-standard training
 provides frame of reference
10-186

Effective Performance
Evaluation Process
1. Performance dimensions should be relevant to the
organization’s strategy
2. Involve employees at every stage
3. Raters need to be trained
4. Raters must be motivated to rate accurately
5. Raters should maintain a diary of employee
performance
6. Raters should diagnose in advance whether
problems are due to motivation, skill deficiency, or
external environment
10-187

Designing a Pay-For-
Performance Plan
Efficiency Equity or Fairness
 Strategy  Distributive justice
 Structure  Procedural justice
 Standards Compliance
-Objectives  Comply with
-Measures existing laws
-Eligibility  Enhance and
-Funding maintain firm’s
reputation
10-188

Linking Pay with Performance
Merit pay grids combine 3 variables:

1.Level of performance
2.Distribution of employees within pay
ranges
3.Merit budget increase percentage
10-189

Merit Pay Grid
Performance
Position in Unsatisfactory Satisfactory Very good Excellent

Salary Range
4th quartile 0% 1% 2% 3%
3rd quartile 0% 2% 3% 4%
2nd quartile 0% 3% 4% 5%
1st quartile 0% 4% 5% 6%
10-190

Conclusion
 employee performance depends on skill, knowledge,
and motivation
 process of performance appraisal can be time-
consuming and stressful
 training supervisors in performance appraisal can
improve the quality of appraisals
 designing a pay-for-performance plan involves
efficiency in setting clear standards that support
strategic objectives; fairness; and legislative
compliance
 merit guidelines and promotional increases are forms
of pay for performance
10-191

COMPENSATION
11-192

Pay-for-Performance Plans
 pay that varies with some measure of
individual or organizational performance
 also called variable pay plans
 these plans have a positive impact on
performance if they are designed well
11-193

Short Term
Pay-for-Performance Plans
 Merit Pay
 Lump-Sum Bonuses
 Individual Spot Awards
 Individual Incentives
11-194

Individual Incentive Plans
Method of Rate Determination
Units of production per time Time period per unit of
period production
(1) (2)
Pay constant function of Straight piecework plan Standard hour plan
production level
Relationship
between
production level (3) (4)
and pay
Taylor differential piece Halsey 50 - 50 method
Pay varies as function of rate system
production level
Merrick multiple piece rate
system
11-195

Advantages of Individualized
Incentive Plans
 substantial contribution to:
 increased productivity
 lower production costs
 increased earnings of workers
 less direct supervision is required to maintain
output than under pay for time
 payment for results (if accompanied by improved
organizational and work measurement) enable
labour costs to be estimated more accurately than
under pay for time
 helps costing and budgetary control
11-196

Disadvantages of Individualized
Incentive Plans (1 of 2)
 conflict between employees seeking to
maximize output and managers concerned
about deteriorating quality levels
 attempts to introduce new technology may be
resisted by employees concerned about the
impact on production standards
 reduced willingness of employees to suggest
new production methods for fear of
subsequent increases in production standards
11-197

Disadvantages of Individualized
Incentive Plans (2 of 2)
 increased complaints that equipment is
poorly maintained, hindering employee
efforts to earn larger incentives
 increased turnover among new employees
discouraged by the unwillingness of
experienced workers to cooperate in on-
the-job training
 elevated levels of mistrust between
workers and management
11-198

Team / Group
Incentive Plans
 Gain-Sharing Plans
 Profit Sharing Plans
 Earnings-at-Risk Plans
11-199

Sample Group/Team
Performance Measures (1 of 2)
Customer-Focused Measures Financially-Focused Measures
 Time to Market Measures  Value Creation
 On time delivery  Revenue growth
 Cycle time  Resource yields
 New product introductions  Profit margins
 Customer Satisfaction  Economic value added

Measures  Shareholder Return
 Market share  Return on invested capital
 Customer satisfaction  Return on sales / earnings
 Customer growth and retention  Earnings per share
 Account penetration  Growth in profitability
11-200

Sample Group/Team
Performance Measures (2 of 2)
Capability-Focused Measures Internal Process-Focused
 HR Capabilities Measures
 Employee satisfaction  Resource Utilization
 Turnover rates  Budget-to-actual expenses
 Total recruitment costs  Cost allocation ratios
 Rate of progress on  Reliability / rework
developmental plans  Accuracy / error rates
 Promotability index  Safety rates
 Staffing mix/head-count ratio  Change Effectiveness

 Other Asset Capabilities  Program implementation
 Patents and copyrights  Teamwork effectiveness
 Distribution systems  Service / quality index
11-201

Different Types of Variable
Pay Plans
Cash Profit Sharing
Stock Ownership or
Options
Balanced
Scorecard
Productivity / Gain-
Sharing
Team / Group
Incentives
11-202

Gain-Sharing Plans
 under gain-sharing plans,

employees share in cost-
savings or productivity gains
11-203

Key Elements in Designing a
Gain-Sharing Plan
 strength of reinforcement
 productivity standards
 sharing the gains
 scope of the formula
 perceived fairness of the formula
 ease of administration
 production variability
11-204

Three Gain-Sharing
Formulas
Scanlon Plan Rucker Plan Improshare
(single ratio
volume)
Numerator of Payroll costs Labour cost Actual hours
ratio (input worked
factor)
Denominator Net sales (+/- Value added Total standard
of ratio inventories) value hours
(outcome
factor)
11-205

Profit-Sharing Plans
 variable pay plans requiring a

corporate profit target to be met
before any payouts occur
11-206

Earnings-at-Risk Plans
 incentive plans sharing profits in

successful years and reducing
base pay in unsuccessful years
11-207

Advantages of Group
Incentive Plans
 positive impact on organization and individual
performance of about 5 – 10 percent per year
 easier to develop performance measures than
for individual plans
 signals that cooperation, both within and
across groups, is a desired behaviour
 teamwork supported by most employees
 may increase participation of employees in
decision making process
11-208

Disadvantages of Group
Incentive Plans
 line of sight may be lessened
 employees may find it more difficult to see how
their individual performance affects their
incentive payouts.
 may lead to increased turnover among top
individual performers because they must
share with lesser contributors
 increases compensation risk to employees
because of lower income stability
11-209

Long-Term Incentive Plans
Employee Stock Ownership

Plans (ESOPs)
Stock Options
Broad-Based Option Plans

(BBOP)
11-210

Special Groups in
Compensation Management
 supervisors
 top management
 corporate directors
 professional employees
 sales staff
 contingent workers
11-211

Components of an Executive
Compensation Package
1. base salary
2. short-term (annual) incentives or bonuses
3. long-term incentives and capital
appreciation plans
4. executive benefits
5. executive perquisites
11-212

Examples of Long-Term
Incentives for Executives
1. Appreciation-Based Plans
 stock options
 stock appreciation rights
2. Full-Share Plans
 restricted stock plans
 restricted stock units/phantom stock plans
 Deferred share units
3. Performance-Based Plans
 performance share / unit plans
11-213

Pay Components for
Professional Employees
 dual career ladders
 maturity curves
 performance bonuses
 attaining professional licenses
 perks
 flexible work schedules
 Campus-like environment
11-214

Key Factors in Designing a
Sales Compensation Plan
 the nature of the people who enter the
sales profession
 organizational strategy
 competitor practices
 product/service being sold
11-215

Key Issues in Contingent
Workforce Compensation
 equity/fairness relative to
permanent employees
 boundaryless careers
11-216

Conclusion
 the design and effective administration of
pay-for-performance plans is key to their
success
 special employee groups
 compensation must address high
potential for conflict in these jobs
 compensation treatment differs from that
for other employees
11-217

COMPENSATION
12-218

THE PAY MODEL

POLICIES OBJECTIVES
INTERNAL EFFICIENCY
ALIGNMENT STRUCTURE
 Performance
 Quality
PAY
STRUCTURE

Costs
FAIRNESS
12-219
COMPLIANCE
Government as Part of the
Employment Relationship
 government is a key stakeholder in
compensation decision making.
 governments’ usual interests are whether:
 procedures for determining pay are fair (pay
discrimination)
 safety nets for the unemployed and
disadvantaged are sufficient (minimum wage,
employment insurance)
 employees are protected from exploitation
(human rights, pay equity)
12-220

Employment Standards Acts
 minimum wage
 paid vacation
 paid holidays
 standard hours of work and overtime pay
 pay on termination of employment
 minimum age of employment
 equal pay for equal work by men and
women
12-221

Human Rights Laws
 based on Charter of Human Rights and

Freedoms in Canadian Constitution
 equal treatment in employment and
opportunity for employment regardless of
race, colour, religion, sex…
 prohibit harassment in the workplace
12-222

Pay Equity
 issue relating to the gender wage gap

 gender wage gap is the amount by
which the average pay for female
workers is less than the average pay for
male workers
12-223

Reasons for Gender Wage Gap
 differences in occupational attainment;
women historically segregated in small
number of occupations e.g., sales, nursing
 differences in number of hours worked
 differences in industries and firms
 differences in union membership
 presence of discrimination
12-224

Pay Equity Legislation
 intended to redress the portion of the wage gap
assumed to be due to discrimination, through
comparison of male- and female-dominated jobs
 four job evaluation factors required:
 Skill
 Effort
 Responsibility
 working conditions
 compare male and female job classes:
 job to job method
 proportional value/wage line method
 proxy comparison method
12-225

The Impact of Unions in Wage
Determination
 impact on general wage and benefit
levels
 impact on the structure of wage

packages
 impact on non-union firms (spillover)
 impact on wage and salary policies and

practices in unionized firms
12-226

Union Impact on General
Wage Levels
 union workers earn about 10 percent
more than non-union workers
 size of the gap varies from year to year
 union impact higher during periods of
higher unemployment and slow economy
 union impact smaller during strong
economy
 union benefits 20 to 30 percent higher
than non-union
12-227

Union Impact on Structure of
Wage Packages
 Division between wages and
benefits
 Union benefits 20 to 30 percent
higher than non-union
 Two-tier wage plans
 Lower wages for lower seniority
workers
12-228

Union Impact:
The Spillover Effect
 employers seek to avoid unionization by
offering workers the wages, benefits, and
working conditions won in rival unionized
firms e.g., Dofasco
 non-union management continues to enjoy
the freedom from union “interference” in
decision making
 non-union workers receive the “spillover” of
rewards obtained by unionized counterparts
12-229

Role of Unions in Pay Policies
and Practices
 collective agreement/contract specifies:

 basis of pay (regular, overtime)
 occupation - wage differentials
 experience / merit differentials
 vacations and holidays
 wage adjustment provisions (COLA)
12-230

Unions and Alternative
Reward Systems
 some collective agreements include
alternative rewards:
 lump sum awards
 piece rates
 gain-sharing
 profit sharing
 pay-for-knowledge (skill/competency-
based pay)
12-231

Conclusion
 governments assess fairness and legislate

employment standards, human rights, and
pay equity rules that affect compensation
management
 unions affect compensation management
directly through collective agreements, and
are facing the need to adjust compensation
due to international competition
12-232

COMPENSATION
13-233

Managing Labour Costs
Labour Average cash + Average benefit

= Employment x
Costs compensation cost
Core Base Pay
Variable Pay
Contingent
13-234

Managing Labour Costs
 controlling employment: head count and

hours
 controlling average cash compensation
costs
13-235

Controlling Salary Costs: Top
Down
 current year’s rise
 ability to pay
 competitive market
 turnover effects
 cost of living
13-236

Three Distinct but Related Concepts
and Their Measures
Personal Expense
Employee’s cost of Budget
living
Goods/service Labour market

Consumer markets price wage changes Pay
Price Index changes Surveys
13-237

Controlling Salary Costs:
Bottom Up
 instruct managers in compensation policies and
techniques
 distribute forecasting instructions and worksheets
 provide consultation to managers
 check data and compile reports
 analyze forecasts
 review/revise forecasts and budgets with
management
 conduct feedback with management
 monitor budgeted versus actual increases
13-238

Inherent Controls
 range maximums and minimums
 broad bands
 compa-ratios
 variable pay
 analyzing costs of wage proposals
13-239

The Compensation
Communication Cycle
Defining the Objectives
What are the goals?

Evaluating the Program
Obtaining the Information
Was the program successful?
What is the current situation?
Conducting the Sessions Developing the Strategy
How should the sessions be What is the best overall

implemented? approach?
Determining the Media
What “tools” are most
appropriate?
13-240

Compensation Components
Communicated to All Audiences
 job descriptions  incentive plan design

 job evaluation  performance appraisal
 market data collection system
and analysis  salary management
 pay structure administration procedures
development  benefit plans
13-241

Conducting Formal Communication
Sessions for Various Audiences
EXECUTIVES MANAGERS EMPLOYEES
Components explained Components thoroughly Fairly detailed explanation of
in a general way explained throughout the components
communication process
Emphasis on strategic Reviewed at the formal sessions Emphasis on both process and
implications of the policy information
compensation system
Executive Emphasis on development and Particular attention paid to the

compensation motivation of employees using workings of the incentive plan
explained in detail in salary management,
one-on-one meetings performance appraisal, and
incentive plan
13-242

Structuring the Compensation
Function
 centralization – decentralization
 flexibility within corporate-wide
principles
 reengineering and outsourcing
13-243

Conclusion
 pay administration includes control of

how managers decide individual
employees’ pay and of overall costs of
labour
 the salary budgeting and forecasting
processes impose additional controls
 pay systems are tools that must be
evaluated in terms of usefulness in
achieving an organization’s objectives
13-244

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COMPENSATION

Third Canadian Edition

© 2010 McGraw Hill Ryerson

© 2010 McGraw Hill Ryerson

© 2010 McGraw Hill Ryerson

© 2010 McGraw Hill Ryerson

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STRATEGIC TECHNIQUES STRATEGIC

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Objectives •Emphasis on innovation •Focus on customers

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4. Reassess the Fit 2. Map a Total Compensation Strategy

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© 2010 McGraw Hill Ryerson

 “Best fit” approach suggests that aligning

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© 2010 McGraw Hill Ryerson

STRATEGIC TECHNIQUES STRATEGIC

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the pay relationships between the jobs/skills/

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© 2010 McGraw Hill Ryerson

refers to the array of pay rates for different work

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Recognized  Consultant Engineer $162,000

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2. Egalitarian (few levels; small differentials)

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Levels Many Fewer

Differentials Large Small

Criteria Person or Job Person or Job

Fit Tailored Loosely Coupled

Supports Individual Performers Teams

Fairness Criterion Performance Equal Treatment

Behaviour Rewarded Opportunities for Cooperation

© 2010 McGraw Hill Ryerson

MY PAY OTHERS’ PAY

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Collect, summarize Job analysis

Assess value Factor degrees and (Chapter 5)

Translate into Job-based structure (Chapter 5)

© 2010 McGraw Hill Ryerson

© 2010 McGraw Hill Ryerson

Job analysis Job descriptions Job evaluation Job structure

Collecting Summary reports that Comparison of jobs An ordering of jobs