1. Compensation Strategy Extent of Pay for Performance –type of performance rewarded –individuals vs groups Market comparisons –Who is the reference group? (local, industry) –Is it linked to organizational performance? Internal comparisons –Elite vs egalitarian? Extent of benefits –Long-term orientation? Process issues –Secrecy, participation

2. Setting Pay Levels Comparison groups local, national, international industry Market Leader vs Average Player culture, form of commitment business cost structure Variance within the organization levels, functions, business lines culture of organization relative value of different areas

3. Determining Pay Mix 10-20% minimum at risk to be meaningful Depends on performance desired (differentiated vs consistent) organization type (entrepreneurial vs stable) organization culture (elite vs egalitarian) business lines (integrated vs separate) nature of work (individual vs group)

4. Base Pay Benefits develop stability cafeteria model Job-based pay Benefits: external comparisons, internal comparisons, centralizes control, appears objective Problems: narrow jobs, hierarchy, internal focus, preserves status quo, focuses on promotion Skill-based pay Benefits: horizontal flexibility, vertical understanding of big picture, participative culture Problems: higher rates, difficult market comparisons, complex administration, ceilings

5. Performance Pay Incentive Pay (piece-rate pay) –Best for work that is stable, repetitive, worker paced, and easily measured –Fits best with low interdependence Merit Pay –Requires quality performance appraisal –Often too small to be motivating –Often is an annuity based on the past rather than the present –Issues: Bonus systems, system factors, teams rather than individuals

6. Performance Pay (cont) Gainsharing Gain relative to controllable costs is split with employees Encourages participative management Must be understood and influenceable Profit Sharing Tied to overall company performance Increases variability of compensation costs Employee Ownership

7. Compensation Design Competitive Strategy HR Strategy Compensation Strategy Pay Level Pay Mix Base: Benefits, Job vs Person Performance: Incentive, merit, gainsharing, profit sharing, ESOP $$