1.

Steps in developing compensation strategy

Step 1: Understanding the Organization and People in the Organization - the

reward system is part of the total ORnal system and must fit with and support
the other parts

 Key Focus: To develop an effective compensation strategy, you must first understand the
organization's goals, culture, and the demographics and motivations of its employees.
 Considerations:
o What are the strategic objectives of the organization?
o What motivates employees?
o How do different roles contribute to achieving the company’s goals?

Step 2: Formulate Your Reward and Compensation Strategy – determine mix of

compensation components in include and total level of compensation
compoments to include and total level of compensation to provide, relative to
other employers.

 Key Focus: Align the reward and compensation strategy with the organization’s strategic
goals.
 Approach:
o Decide on how to position your pay (e.g., lead, lag, or match the market).
o Formulate a plan that integrates base pay, performance-based incentives, and
benefits to support retention and motivation.

Step 3: Determine Your Compensation Values – Establish the processes for

determining actual dollor values for jobs and for individual employees. Including
job evaluation, labour market surveys and performance appraisal

 Key Focus: Establish the value of different components of compensation based on both
external competitiveness and internal equity.
 Considerations:
o Conduct salary surveys and job evaluations to set compensation benchmarks.
o Determine how much of the total compensation will be direct pay (salary) vs.
indirect pay (benefits, incentives).

Step 4: Design Your Performance Pay and Indirect Pay Plans – include group
compensation

 Key Focus: Develop performance-based pay and indirect compensation plans that
support organizational goals.
 Performance Pay:
o Create systems for rewarding individual, team, and organizational performance
(e.g., bonuses, profit-sharing).
  Indirect Pay:
o Design benefit programs (e.g., health insurance, pension plans, paid leave) that
align with employee needs and organizational objectives.

Step 5: Implement, Manage, Evaluate, and Adapt the Compensation System –

Key issues here include procedures for implementing the system, communication
information about the system, dealing with compensation problems, budgeting
and controlling compensation costs.

 Key Focus: Put the compensation system into action, ensuring proper administration and
continuous monitoring.
 Implementation:
o Communicate the compensation system to employees clearly.
o Train managers and HR personnel on how to use the system effectively.
 Evaluation and Adaptation:
o Regularly assess the effectiveness of the compensation plan.
o Gather feedback, monitor market changes, and adapt the system as necessary to
ensure continued alignment with organizational goals.

2. Extrinsic and intrinsic rewards

Extrinsic Rewards – coming from outside and satisfy basic on human needs

 Definition: These are tangible, external rewards provided by the organization to

employees. They are usually financial or material and are designed to satisfy basic needs
and encourage certain behaviors.
 Examples:
o Salary: A regular paycheck or hourly wage.
o Bonuses: Performance-based financial rewards.
o Benefits: Health insurance, retirement plans, paid vacation, and other perks.
o Promotions: Advancing to a higher position, often accompanied by higher pay
and status.
o Recognition Programs: Public acknowledgment or awards, such as employee-of-
the-month programs.
 Purpose:
o These rewards help to meet an employee's basic financial needs.
o They are used to reinforce specific behaviors (e.g., achieving performance targets)
and ensure employee retention.

Intrinsic Rewards – comes from someone associated job itself like ourselves, and
jobs
 Definition: These are intangible rewards that come from within the employee. They are
related to the psychological satisfaction and personal fulfillment one gets from the job
itself.
 Examples:
o Job Satisfaction: Enjoyment and fulfillment derived from doing meaningful
work.
o Autonomy: The freedom to make decisions and have control over one's work.
o Sense of Achievement: The pride of accomplishing challenging tasks or reaching
goals.
o Growth Opportunities: Opportunities for personal and professional
development, including learning new skills.
o Recognition for Effort: Receiving praise and acknowledgment for hard work
from peers or supervisors.
 Purpose:
o Intrinsic rewards are crucial for fostering long-term engagement, creativity, and
job satisfaction.
o They support personal growth, fulfillment, and motivation beyond material
compensation.

3. Strategic framework for compensation

Should focus on two parts: contextual variables and structural
variables.
business vision, mission, values, vertical fit, horizontal fit;
- Structural variable includes: job design, reward system,
coordination and departmentation, decision-making and
leadership structure, communication and information
structure, and control structure
- Managerial strategy including classical-pay for time
worked, human relations- user friendly and contextual-high
involvement managerial strategy .
- Contextual variables is the factors in the firm’s context that
indicate the most appropriate managerial strategy and
organizational structure, including organization’s
environment business strategy, technology, size( large OG
usually use classical or human relations, small to medium
OR easier to implement high involvement) and
workforce(highly-skilled, well-educated EE are suit to hig-
invovlement OR
structural variables
- Structural variable includes job design, reward system,
coordination and departmentation, decision-making and
 leadership structure, communication and information
structure, and control structure

4. Managerial strategies

Managerial strategy is one of the three main patterns or

combinations of structural variables that can be adopted
by an organization. including classical-pay for time
worked, human relations- user friendly and contextual-high
involvement managerial strategy.

5. Three key job attitudes

1. Job satisfaction – we only attract and retain EE, we
don’t impact their productivity, including Decreased
work stress, decreased grievances, absenteeism
2. Work motivation – commitment- increased job effort
3. Organization identification– include work
engagement- decrease turn over, positive group
norms and cooperative behaviour, innovatiove
behaviour

6. Content and process theories of motivation

Content: Theories that focus on understanding motivation by
identifying underlying human need, what we can do
1. Maskow’s needs hierarchy, 2. herzberg’s two factor theory,
3. hackman’s job characteristics theory
Process theories: focus on understanding motivation by determining
the process humans use to make choices about the specific actions
they will take- how can do
We have 1. reinforcement theory, positive reinforcement takes place
when a reward follows a valued behaviour

2, Expectancy theory , only all of them yes, can fulfill 3. Attribution theory,
economic theory

7. Advantages and disadvantages of indirect pay

- Ad:
Competitive pressure
Matches unionizes firms
Favourable tax treatment
Economics of scale in purchasing
 Profect financial security and peace of mind
Protect EE from adversity
Can support Managerial strategy -like human erlations and high
involvement strategy.
Promote consequences that benefit the OR
- Disad:

Cost can be substantial

Rigidity

Difficult to eliminate once provided

Difficult to develop efficient benefits package

Admin and communication costly

Does nor motive task behaviour

May cause excessive employee stability

May encourage undesirable behaviour

Impact of indirect pay in performance still uncelar

8. C4Issues in developing a skill-based pay system

Deciding which employees groups to include
Designing the skill blocks
Linking skill blocks to pay high-low method
Providing learning opportunities
Certifying skill achievement
9. C5 Goal-sharing and gain-sharing plans
Goal- sharing is a group performance pay plan in which a work group
receives a bonus when it mets prespecified performance goals
AD:
More flexible than gain sharing
Less costly to operate that gain-sharing plans
Can be adjusted as circumstances require
Powerful motivational took for groups and individuals
May create positive group norms
DIS:
Can be arbitrary in goal levels and bonus amounts
No established basis for judging value of meeting a goal
Setting appropriate goals can be difficult
Situational factors can affect goal development
 May cause frustration if efforts fall slightly short
Can produce conflict
High discontinuation rate

Gain sharing – A group performance pay plan that shares cost savings
or productivity by a work group with all members of that group
Advantages:
Self-funding if designed properly
Can simulate higher productivity
May create positive group norms
May lead to internalized worker commitment and reduce need for
external control
Can increase EE Knowledge of external control
Can be applied to not-for-profit and government
DISA:
Cost of establishing and administering plan
Not amenable to changing circumstances
May focus attention on group’s interests only
May create more opportunities for labour management conflict
May create “free riders”, to be unfair
High discontinuation rate

10. Three types of employee stock plans

EE stock bouns: a plan through which EE receive shares in their ER firm at no

cost to the EE

EEshare purchase: a plan through which EE may purchase shares in their ER

firm

EE Stock options: A plan through which EE are provided with options to

purchase shares intheir ER at a fixed price within a limited time period

Base pay and Pay for performance supporting managerial strategies

• Compensation strategy in high- involvement managerial systems

Base pay is a foundation pay component for most employees, generally
based in a unit of time, base pay accounts for about 75%-80%of
compensation for a typical employee, including wages or salary

Base pay increase membership behaviour, the date comes from job
evaluation, market pricing and pay for knowledge.

How Base Pay Supports Managerial Strategies:

 Attracting and Retaining Talent: A competitive base pay is critical for attracting skilled
employees, especially when a company needs to fill key positions aligned with its
strategic objectives. Offering fair and competitive base salaries helps retain employees,
reducing turnover and ensuring stability in executing managerial strategies.
 Fostering Internal Equity: Base pay helps ensure that employees feel fairly
compensated for their roles, fostering a sense of equity and trust within the organization.
This can improve employee morale and cooperation, supporting strategies that require
teamwork and collaboration.
 Promoting Job Security: By providing employees with a stable source of income, base
pay can contribute to a positive work environment, reducing anxiety about financial
insecurity. This stability helps employees focus on long-term projects and goals that are
part of managerial strategies.
 Supporting Long-term Focus: Base pay provides a foundation that allows managers to
implement strategies that take time to yield results. Employees are less likely to focus
solely on short-term goals and more on sustainable, strategic contributions when their
income is stable.

Pay for performance is EE monetary rewards to some measure of

performance. 5% - 10% of compensation, can be individual performance,
group performance and organization performance.

How Pay for Performance Supports Managerial Strategies:

 Aligning Employee Efforts with Organizational Goals: Pay for performance motivates
employees to align their activities with the organization’s strategic objectives. By
rewarding employees based on specific targets (e.g., sales goals, efficiency, customer
satisfaction), managers can ensure that employees focus on the areas that drive the
company’s success.
 Driving Innovation and Productivity: Managers can use pay for performance to
encourage creativity, problem-solving, and increased productivity. By offering rewards
for achieving innovation targets or improving efficiency, employees are incentivized to
actively contribute to the organization’s strategic priorities.
 Encouraging High Performance: When employees know their compensation is linked
to their individual or team performance, they are more likely to put in extra effort. This
 can support managerial strategies aimed at achieving higher performance, such as
increasing market share or improving customer service.
 Promoting Accountability: P4P systems make it clear that compensation is tied to
outcomes, holding employees accountable for their contributions to the organization’s
goals. This can support managerial strategies that emphasize performance management
and results-driven work cultures.
 Facilitating Flexibility: Pay for performance allows managers to adapt their
compensation strategies quickly in response to changing business environments. For
example, managers can introduce performance bonuses for achieving targets in new
markets or in response to competitive pressures, supporting dynamic strategic shifts.
 Classical managerial strategy manufacturing
 Base Pay(70%-80%): Provides stability, reinforces standardization, and supports
retention, which are key elements of classical management strategies that emphasize
structured, task-oriented environments.
 Pay for Performance: 20-30% sales environment,
Drives employee behavior to align with organizational goals, enhances efficiency, and
rewards merit, which fits with classical strategies that focus on maximizing productivity
and maintaining control over work processes.

Human Relations Managerial Strategy Example: Focus on Well-Being and

Collaboration

Base Pay (60-70%): Focus on Employee Well-being:


o In a healthcare setting where nurses are employed, Human Relations strategies
would ensure that nurses receive a competitive base salary (e.g., $80,000/year).
This salary would be designed to reflect not only their job responsibilities but also
their importance to the organization’s overall mission of patient care and well-
being.

Pay for Performance (30-40%): Team-Based and Interpersonal

Performance Metrics Growth and Development Opportunities:


o Performance bonuses could be tied not only to patient outcomes but also to
metrics that emphasize employee engagement and team collaboration. For
example, a nurse could earn a bonus if they contribute to a healthy work
environment by participating in team initiatives or employee wellness programs.
This bonus might be 30% of their base salary, depending on both individual and
team achievements.

In a High-Involvement Managerial Strategy, the focus shifts significantly

towards empowering employees, increasing their participation in decision-
making, and fostering a sense of ownership within the organization. This
strategy aims to align employees’ goals with organizational goals by
involving them deeply in the business processes, encouraging innovation,
and enhancing engagement.

High-Involvement Managerial Strategy Example:

 Base Pay (50-60%): In a high-tech company, a senior software engineer might earn a
base salary of $90,000. The base pay ensures financial security but is lower than in other
managerial strategies due to the focus on variable pay tied to organizational success.
 Pay for Performance (40-50%): The engineer could receive bonuses based on both their
individual contribution to innovation (e.g., developing a new feature) and the overall
success of their team in completing the project. If the product becomes successful in the
market, they may receive an additional 50% of their base pay through bonuses and stock
options.

profit-sharing program where employees earn bonuses based on the

company’s quarterly profits.