© 2010 McGraw Hill Ryerson 3-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson 3-2 STRATEGIC POLICIES TECHNIQUES STRATEGIC OBJECTIVES EFFICIENCY  Performance  Quality  Customers & Stockholders  Costs FAIRNESS COMPLIANCE ALIGNMENT COMPETITIVENESS CONTRIBUTORS MANAGEMENT INTERNAL STRUCTURE PAY STRUCTURE INCENTIVE PROGRAMS EVALUATION THE PAY MODEL

© 2010 McGraw Hill Ryerson 3-3 Compensation Strategy: Internal Alignment/Equity Supports Organization Strategy Supports Workflow Motivates Behaviour

© 2010 McGraw Hill Ryerson 3-4  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  motivates behaviour of employees Internal Alignment/Equity

© 2010 McGraw Hill Ryerson 3-5 Job Structure at an Engineering Company  Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts 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.  Engineer: Limited use of basic principles. Close supervision. Recognized Authority Entry Level

© 2010 McGraw Hill Ryerson 3-6  refers to the array of pay rates for different work or skills within a single organization, created through the use of: number of levels  the number of levels  differentials  differentials in pay between the levels, and criteria  the criteria used to determine those differences.  Pay structures change over time Pay Structure

© 2010 McGraw Hill Ryerson 3-7 Pay Structure at an Engineering Company  Consultant Engineer$162,000  Advisor Engineer$120,000  Lead Engineer$93,000  Systems Engineer$73,000  Senior Engineer$58,500  Engineer$48,000 Entry Level Recognized Authority

© 2010 McGraw Hill Ryerson 3-8 What Shapes Internal Structures? EXTERNAL FACTORS: Economic Pressures Government Policies, Laws, Regulations Stakeholders Cultures and Customs EXTERNAL FACTORS: Economic Pressures Government Policies, Laws, Regulations Stakeholders Cultures and Customs ORGANIZATION FACTORS: StrategyHR Policy TechnologyEmployee Acceptance Human CapitalCost Implications INTERNAL STRUCTURE: Levels, Differentials, Criteria

© 2010 McGraw Hill Ryerson 3-9 Illustration of an Internal Labour Market* ConsultantEngineerConsultantEngineer AdvisorEngineerAdvisorEngineer LeadEngineerLeadEngineer SystemsEngineerSystemsEngineer SeniorEngineerSeniorEngineer EngineerEngineer Hire Hire Hire *Internal labour markets combine both external and organizational factors

© 2010 McGraw Hill Ryerson 3-10 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)

© 2010 McGraw Hill Ryerson 3-11 Structures Vary in Number of Levels Structure A Layered Layered Chief Engineer Engineering Manager Consulting Engineer Senior Lead Engineer Lead Engineer Senior Engineer Engineer Engineer Trainee Structure B De-layered De-layered Chief Engineer Consulting Engineer Associate Engineer

© 2010 McGraw Hill Ryerson 3-12 Strategic Choice: Hierarchical vs. Egalitarian HierarchicalEgalitarian LevelsManyFewer DifferentialsLargeSmall CriteriaPerson or Job FitTailoredLoosely Coupled SupportsIndividual PerformersTeams Fairness CriterionPerformanceEqual Treatment Behaviour RewardedOpportunities for Promotion Cooperation

© 2010 McGraw Hill Ryerson 3-13 What The Research Tells Us  Equity Theory: Fairness my pay for my inputs vs. others’ pay for their inputs MY PAY My qualifications My work performed My product value MY PAY My qualifications My work performed My product value OTHERS’ PAY Their qualifications Their work performed Their product value OTHERS’ PAY Their qualifications Their work performed Their product value

© 2010 McGraw Hill Ryerson 3-14 What The Research Tells Us  Tournament Theory: Motivation and Performance Players perform better where prize differentials are sizeable works best in situations where individual performance matters most

© 2010 McGraw Hill Ryerson 3-15 What The Research Tells Us  Institutional Model: Copy others Copy “best practices” of others No analysis of whether the practice fits the organizational strategy

© 2010 McGraw Hill Ryerson 3-16 Organizational Outcomes of an Internally Aligned Structure Pay structure Undertake training Increase experience Reduce turnover Facilitate career progression Facilitate performance Reduce pay-related grievances Reduce pay-related work stoppages

© 2010 McGraw Hill Ryerson 3-17 Consequences of Structures Efficiency Fairness Legal Compliance Internal Structure

© 2010 McGraw Hill Ryerson 3-18 Conclusion  Internal alignment  Internal alignment refers to the pay relationships among jobs / skill / competencies within a single organization.  Pay structures  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.