The Pay Model

What Is Compensation
Pay as a measure of justice
GENDER WAGE GAP - Difference between wages earned by
men and wages earned by women - Gendered concentration
in different fields, men make more $
Differences in compensation b/w countries
Society
Pay as the cause of price increases
Shareholders
Equity for the operation of a business
Company's success = their success
Believe stock as pay creates sense of ownership & improved
performance
Others argue: too much ownership dilutes stockholder
wealth and may not be incentive enough to create the
behavior intended
Interest in executive comp
Supposed to be tied to performance (i.e. paying executives
based on company performance), there is debate on this
Managers
Compensation directly influences their success in 2 ways
1. It is a major expense
Competitive pressures (global/local) force managers to
consider the affordability of their compensation decisions
Labour costs often account for more than 50% of total
costs
Compensation costs are even higher for certain industries
Ex. financial, professional services, government,
education
Small grocery stores and family run businesses often have
labour costs between 15-19% but are driven away by big-
box stores such as Walmart that can offer the same
product at a lower price AND have lower labour costs
2. Managers have to influence employee behaviours to
improve organizational performance
The amount and way that people are paid affects
The quality of their work
Their attitude towards customers
Their willingness to be flexible, learn new skills or
suggest innovations
Their interest in unions or pursuing legal action against
their employer
 Pay as a major expense that has to be minimized or
optimized
Pay's role in improving productivity, effectiveness &
organizational behaviour
Employees
See pay as
The return in an exchange between their employer and
themselves
Contribute their time and energy to a workplace:
Work performed
Invest in education and training
An entitlement for being an employee of the company
A reward for a job well done
Global views
English definition: something that counterbalances, offsets, or
makes up for something else
Chinese definition: symbols for logs and water, therefore
compensation provides the necessities of life
More recently, compensation in China refers to how one is
being treated: wages, benefits, training opportunities, etc.
Japanese definition: characters meaning giving something
More recently, compensation in Japan refers to “taking care
of something” which runs in accordance to many Japanese
company policies of providing the employee with family,
housing and commuting allowances
Clear definition = essential
COMPENSATION - All forms of financial returns & tangible
services an employee receives as part of an employment
relationship
Forms of Pay
TOTAL REWARDS - All rewards received by employees,
including cash compensation, benefits & relational returns
RELATIONAL RETURNS - Psychological returns employees
believe they receive in he workplace
Learning opportunities
Recognition & status
Challenging work
Total compensation - More transactional & includes pay
received directly as cash
Base pay
Merit increses
Incentives
Cost of living adjustments
Indirect total compensation benefits
Pensions
Health care
Life insurance
Programs to help work/life balance
Cash compensation: base pay
BASE PAY - The cash compensation an employee receives
for work performed - Reflects value of work/skills & ignores
individual differences
SALARY - Pay expressed at an annual or monthly rate
WAGE - Pay expressed at an hourly rate
Cash compensation: merit increased & cost-of-living
adjustments
MERIT INCREASE - Increment to base pay in recognition of
past work behavior
Assessment of past performance is made and the size of
the increase is varied according to performance
COST-OF-LIVING ADJUSTMENT - Percentage increment to
base pay provided to all employees regardless of
performance
Same % increase to everyone to maintain pay levels in
accordance with cost of living increases
Cash compensation: incentives
INCENTIVES (VARIABLE PAY) - One-time payments for
meeting pre-established performance objectives in a future
time period
Both incentives & merit increases influence behaviour but
differ - Incentives = future behaviour - Merit = past
behavior
1. Incentives do not increase base wage, reearned each
pay period
2. Potential size of incentive payment generally known
beforehand
Can be based on individual or team based, total business
uni performance
Performance objective may be expense reduction, volume
increases, customer satisfaction, revenue growth, return
on investments, increases in total shareholder value, etc.
Do not have a permanent effect on labour costs because
incentive pay is a one time payment
Long-Term incentives
Intended to focus employees on multi-layered results
Usually in the form of stock ownership or options to buy
 stock at specified, advantageous prices
The idea behind stock ownership is that employees with a
financial stake in the organization will focus on long term
financial objectives as return on investment, market share,
and return on net assets
Extended to different people depending on organization
Key performers (magna international)
Every employee (google, westjet, starbucks)
Their hope is that employees will behave as though they
are owners
Benefits: insurance & pensions
Part of total compensation
Some insurance programs are required by law (CPP, EI,
Workers Comp)
Some companies provide EEs with a pension plan in
addition to CPP
39.2% of Canadians benefit from an ER sponsored
pension plan
Common benefits: health, dental, life insurance and
pensions are common benefits
Protect EEs from financial risks inherent in every day life
Regarded as an increasingly important form of
compensation
Benefits: work/life programs
Programs that help EEs better integrate their work and life
responsibilities
Access to services to meet specific needs
Drug counseling, financial planning, child/elder care
Flexible work arrangements
Non-traditional schedules, non-paid time off,
telecommunicating
Appeals to changing workforce demographics
Benefits: allowances
Compensation to provide for items that are in short supply
Japanese companies offer a rice allowance
In Europe, managers expect a car to be provided
In China, housing (dormitories and apartments) and
transportation allowance
Nunavut offers a cost of living allowance to make up for
the elevated prices in Nunavut in comparison to its
southern provinces
Companies who do not offer this type of compensation must
attract talented employees in other ways
 Total earnings opportunities: present value of a stream of
earnings
Compensation decisions have temporal effect
Present value perspective shifts choice from comparing
today's initial offers to consideration of future bonuses, merit
increases & promotions
Some employers claim to have rationale for their
seemingly low starting salary offers
Selling present value of their future stream of earnings
Few EEs analyze it this way
The organization as a network of returns created by different
forms of pay
Challenge: design network that leads to success
More useful if bonuses, development opportunities,
promotions all work together
A Pay Model
Strategic Compensation Objectives
Three objectives
1. Efficiency
3. Compliance
Conforming to various federal, provincial, and territorial
compensation laws and regulations
As changes occur, pay systems might need to be
adjusted
2. Fairness
Fundamental objective of pay systems
Objectives guide design of pay system
Different objectives guide the design of different pay
systems
Serve as standards for judging the success of the pay
system
Four policy choices
INTERNAL ALIGNMENT - Pay comparisons between jobs or
skill levels inside a single organization
Jobs and skills are compared in terms of their relative
contribution to the organizations objectives
Refers to the pay rates both for EEs doing equal work and
for those doing dissimilar work
Internal alignment/pay relationships within an organization
affects all 3 compensation objectives
Affect employees decision to stay with a company, to
become more flexible by investing additional training, or to
seek greater responsibility
 Fairness is determined by EEs comparisons to their pay to
the pay of others in the firm
Compliance is affected by the basis used to make internal
comparisons
EXTERNAL COMPETITIVENESS - Comparison of
compensation with that of competitors
Employers have several options
Base pay + team incentives to offer higher pay if team
performance warrants (Whole Foods)
Set the pay to match competitors, but tie bonuses to
performance and offer stocks based on performance
(Medtronic)
Benefit programs with an emphasis of work/life balance
Must ensure pay is sufficient enough to attract and retain the
EE
Must control labour costs so that they remain competitive in
the global economy
Employee contributions - The relative emphasis placed on
performance
Directly affects EEs attitudes and work behaviours
ERS with strong pay for performance policies but greater
emphasis on incentive and merit pay
Others emphasize stock options
Emphasis of performance at unit, division and company-
wide levels
Employees need to understand the basis for judging
performance in order to conclude that their pay is fair
Management
In order for the pay model to achieve internal alignment,
external competitiveness, and employee contributions it
must be managed effectively
Ensures the right people get the right pay for achieving the
right objectives in the right way
Strategic thinking-managing pay as part of the business
Impact of pay decisions is easily managed and understood
Trying to understand how to attract and retain the right
talent and engaging it is the new goal
Pay techniques
The way you go about paying EEs
Why We Should Care About Compensation
How people are paid affects their behaviour & therefore
organization's success
Compensation = major total cost of running business
Well designed comp system helps sustain competitive
advantage