1. Part 4: Compensating Human Resources
Chapter 10: Compensation Strategies and Practices
Prepared by Linda Eligh, University of Western Ontario
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

2. Learning Objectives
After you have read this chapter, you should be able to:
Identify the two general types of compensation and the components of each.
Discuss four issues associated with strategic compensation design.
Describe the various pieces of legislation that impact on compensation strategies and practices.
Describe the two means of valuing jobs using job evaluation and market pricing.
Outline the process of building a base pay system.
Explain two ways individual pay increases are determined.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

3. Nature of Compensation
Types of Rewards
Intrinsic
Intangible, psychological, and social effects of compensation
Extrinsic
Tangible, monetary, and non-monetary effects of compensation
Types of Compensation
Direct compensation
The employer exchanges monetary rewards for work done.
Indirect compensation
Employer-provided benefits—like health insurance—that are provide employees for being a member of the organization.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

4. Components of a Compensation System Fig. 10-1
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5. Typical Division of HR Responsibilities: Compensation Fig. 10-2
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6. Strategic Compensation
Objectives of a Strategically Supportive Compensation System:
Legal compliance with all appropriate laws and regulations
Cost effectiveness for the organization
Internal, external, and individual equity for employees
Performance enhancement for the organization
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7. Compensation Philosophies
Entitlement Philosophy
Assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences.
Pay-for-Performance Philosophy
Requires that compensation changes reflect individual performance differences.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

8. Continuum of Compensation Philosophies Fig. 10-3
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9. Compensation Approaches Fig. 10-4
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10. HR Metrics for Compensation Fig. 10-5
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11. Compensation System Design Issues
Host-Country Nationals
Third-Country Nationals
Global Compensation Issues
Expatriates
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12. Typical Components of Expatriate Compensation Fig. 10-6
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13. Global Compensation Approaches
Balance Sheet Approach
Compensation plan that equalizes cost differences between identical international and home-country assignments.
Global Market Approach
Compensation plan that attempts to be more comprehensive in providing base pay, incentives, benefits, and relocation expenses regardless of the country to which the employee is assigned.
Tax Equalization Plan
Compensation plan used to protect expatriates from negative tax consequences.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

14. Compensation Quartile Strategies Fig. 10-8
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15. Market Competitiveness and Compensation
Meet the Market
Attempting to balance employer costs and the need to attract and retain employees.
Lag the Market
Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a loose labour market.
Lead the Market
Paying for higher qualified, more productive workers.
Lead/Lag the Market
Lead market salaries for the first half of the year and lag the market for the remaining six months.
Mix of Strategies
Adopt different strategies for respective employee groups.
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16. Competency-Based Pay Competency-Based Pay Systems KBP/SBP
Limitations (How many?)
Pricing Competencies
Competency-Based Pay Systems KBP/SBP
Maintenance of Competencies
Training
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

17. Individual vs. Team Rewards
Using Team-Based Reward Systems
Use skill-based pay for the base.
Make system simple and understandable.
Use variable pay based on business entity performance
Distribute variable rewards at the team level
Maintain a high degree of employee involvement
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

18. Perceptions of Pay Fairness
Equity
The perceived fairness between what a person does (inputs) and what the person receives (outcomes).
External Equity
Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other organizations.
Internal Equity
Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their responsibilities and accomplishments.
Procedural Justice
Perceived fairness of the process and procedures
used to make decisions about employees.
Distributive Justice
Perceived fairness in the distribution of outcomes.
Pay Openness/ Secrecy
The degree of openness or secrecy that an organization allows regarding its pay system.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

19. Equity Considerations in Compensation Fig. 10-10
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20. Employment Standards Acts(ESA)
Provisions of the Act
Minimum wage requirement sets wage floor
Requires overtime payments for “non-exempt” employees
Child labour is prohibited
Establishes hours of work
Regulates definition of “Independent Contractors”
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

21. Independent Contractor Regulations
Four Factor Test:
Control Test:
Considers how much say an employer has over the individuals’ completion of work.
Integration test
Is concerned with how integral the assignment is to normal running of the business.
Economic Reality Test
Looks at the risk of profit or loss to the individual.
Specified Result Test
Determines how much control the individual has over completion of the task.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

22. Legislation on Equal Pay and Pay Equity
Pay Equity Legislation –
Enacted in Canada in 1987 to address the historical wage gap between men and women
Governed by the Canadian Human Rights Act and the Equal Wages Guideline
Three important but different ideas to consider:
Equal Pay for Equal Work
Equal Pay for Work of Equal Value
Pay Equity Laws
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

23. Development of a Base Pay System
Job Evaluation
Formal, systematic means to identify the relative worth of jobs within an organization.
Evaluating every job in the organization on:
Skills, Effort, Responsibility and Working Conditions
Job Evaluation Committees –
Committees whose task is to conduct job evaluations as may be required and/or to determine compensable factors. Most often chaired by key compensation officials from human resources. Membership should be a diverse as possible to ensure widespread input.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

24. Compensation Administration Process Fig. 10-13
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25. Job Evaluation Methods
Ranking
Classification
Job Evaluation Methods
Factor Comparison
Point Method
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26. Paired-Comparison Job Ranking Table Fig. 10-14
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27. Compensable Factor Weights, Points and Degrees Fig. 10-15
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28. Example of Defined Degrees of Subfactor: Responsibility for Financial Resources Fig. 10-16
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29. Valuing Jobs Using Market Pricing
Use of pay survey data to identify the relative value of jobs based on what other employers pay for similar jobs.
Advantages of Market Pricing
Ties organizational pay levels to what is actually occurring in the market, without being distorted by “internal” job evaluation.
Communicates to employees that the compensation system is “market linked,” rather than distorted by internal issues.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

30. Valuing Jobs Using Market Pricing (cont’d)
Disadvantages of Market Pricing
It relies on market survey data that is limited or may have been gathered in methodologically sound ways.
The responsibilities of a specific job in a company may be somewhat different from those of the “matching” job identified in the survey.
The market data’s scope (range of sources) is another concern.
Tying pay levels to market data can lead to wide fluctuations based on market conditions.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

31. Pay Surveys Pay Survey Benchmark Jobs Internet-Based Pay Surveys
Collection of data on compensation rates for workers performing similar jobs in other organizations.
Benchmark Jobs
Jobs found in many organizations and performed by several individuals who have similar duties that are relatively stable and require similar KSAs.
Internet-Based Pay Surveys
Pay survey questionnaires are distributed electronically rather than as printed copies.
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32. Using Pay Surveys Participants Broad-based Survey Data Relevance
Job Matches
Timeliness
Methodology
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33. Pay Structures Job Family Common Pay Structures Pay Grades
A group of jobs having common organizational characteristics.
Common Pay Structures
Hourly and salaried
Office, plant, technical, professional, managerial
Clerical, information technology, professional, supervisory, management, and executive
Pay Grades
Groupings of individual jobs having approximately the same job worth.
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34. Establishing Pay Structures Fig. 10-18
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35. Pay Structures (cont’d)
Market Banding
Grouping jobs into pay grades based on similar market survey amounts.
Market Line
Graph line that shows the relationship between job value as determined by job evaluation points and job value as determined by pay survey rates.
Shows the distribution of pay for the surveyed jobs, allowing a linear trend line to be developed by the least-squares regression method.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

36. Market-Banded Pay Grades for Local Bank Fig. 10-19
*Computed by averaging the pay survey summary data for the jobs in each pay grade.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

37. Pay Ranges Broadbanding
The practice of using fewer pay grades having broader pay ranges that in traditional systems.
Benefits
Encourages horizontal movement of employees
Is consistent with trend towards flatter organizations
Creates a more flexible organization
Encourages competency development
Emphasizes career development
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

38. Example of Pay Grades and Pay Ranges Fig. 10-20
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39. Individual Pay Rates Out of Range Pay Compression
Red-Circled Employees
An incumbent (current jobholder) who is paid above the range set for the job.
Green-Circled Employees
An incumbent who is paid below the range set for the job.
Pay Compression
A situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

40. Determining Pay Increases
Performance and Merit Increases
Merit Pay
Merit pay programs reward employees with permanent incrses to base pay according to differences in performance.
Just noticeable difference (JND)
The minimum pay increase that employees will see as making a substantial change in compensation. Sometimes referred to as just-meaningful pay.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.

41. Pay Adjustment Matrix Compa-ratio
The pay level divided by the midpoint of the pay range.
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42. Pay Adjustment Matrix Fig. 10-21
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43. Determining Pay Increases (cont’d)
Seniority
Time spent in an organization or on a particular job that is used to determine eligibility for organizational rewards and benefits.
Cost-of-Living Adjustments (COLA)
A percentage increase in wages to maintain real wages in a period of economic inflation.
Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).
Lump-Sum Increases (LSI)
A one-time payment of all or part of a yearly pay increase that does not increase base wages.
Copyright © 2008 by Nelson, a division of Thomson Canada Limited.