d

ll

F
T

T
T
George

T Milkovich

Cornell Univeisiry

Jerry Newman
Srare Universiry of

NewYork-Buffhlo

Bruce Gerhart
Universiry of Visconsin-Ma&son

Nina Cole
Ryerson Universiry

Margaret Yap
Ryerson Universiry

I
I

mffif,.}r::

1
Chapter 2

Chapter

I
Chapter 3
Chapter 4
Chapter 5
Chapter 6

The PaY

lnternal Alignment: Determining the Structure 34

Job

AnalYsis 56

Job-Based Structures and Job

Person-Based Pay

107

Structures

81

t
tI

Level 134

Defining Competitiveness 137

Designing Pay Levels, Pay Mix, and Pay
Employee

lll
Pay

60

189

Pay 215

for Performance: Performance Appraisal and Plan Design 217

Pay-for-Performance

lV

12
Chapter 13

Benefits

Structures

Employee Gonributions: Determining lndividual

10
Chapter 11

Chapter

Evaluation

Elcernal Competitiveness: Determining the Pay

Chapter

PART

J
J

Defining lnternal Alignment 36

PART

PART

Strategy: The Totality of Decisions 17

PAHT

Il
Chapter 7
Chapter 8
Chapter 9

Model

II
II
I

Plans

247

Managing the System 28O

The Role of Governments and Unions in Compensation 282

Compensation Budgets and Administration 301

Appendix: lnternational Pay Systems 324

Endnotes 347
Glossary 368
Name

lndex

Subject

371

lndex

373

I
I
I
I

t
t
T
T

The Pay

'Why

Model

Should

\fe

DifferentSuategieswifiin theSameCompany 19
Strategic Choices 19

Care about

Stated versus Unstated Strategies 23

Developing a Total Compensation Stratery:
Four Sreps 23
Step 1: Assess Total Compensadon.
Implications 23
Step 2: Decide on a Total Compensation
Suategy 26
.Net\fonh: Nedlix Freedom and Responsibiliry

Stockholders 4
Managers 4
Employees 4

GlobalVews

Forms of Pay 5
Cash Compensation: Ba,se Pay 5
Cash Cornpensation: Merit Increases and Cost-

'

of-LivingAdjustments 6
Cash Compensation: Incentives
Long-Term Incentives 7

in Rewards 27

Implement the Saategy

27
and Reassess the
Source of Competitive Advantage : Three Tbsts 27
Steps 3 and 4:

Benefits: Insurance and Pensions 7

Benefits: \7ork/Life Programs 7
Benefits: Allowances 7
.Net'\florth: What Do Employees Want? 8
Toml Earnings Opponunides: Present Value

Align

The Organization

A Pay Model

as a

Four Policy
Pay

Book

Choices

AddValue

Nerwork of Rerurns 9

Plan

14

Review Questions

l5

12

15

Strategy: The Totality of Decisions 17

Similarides and Differences in Strategies 17

Different Strategies within che Same

Industry
vt

Case

13

19

28

Conclusion 30
Chapter Summary 30
KeyTerms 3l
Review Questions 3l

Techniques '13

Conclusion 14
Chapcer Summary
KeyTerms 15

Case

Objectives

28

"Best Fit" Versus "Best Practices" 28

Guidance from the Evidence 29
Vmrous and Vicious Circles 29

Srrategic Compensation

Fit

DifFerentiare 28

ofa Sueam ofEarnings 8

Relational Rerurns from'Work 9

The Pay Model Guides Strategic Pay Decisions 22

Sociery 2

Support HR Strategy 22

\flhar is Compensation? 2

Suppon Business Suategy L9

Compensation? I

31

PART I
lnternal Alignment: Determining
the Structure

B4

Defining lnternalAlignment 36
Compensation Suategy: Incernal Alignment 37
Suppons Organizacion Strategy 37

Concns

:S,rppottsVorkflo-n' 38
Modvates Behaviour 38
Srructurcs Vary Benreen Organizations 38

Levcls 38
Differeritals

EconorrfF[T0lisures 42

Job Descriprions Summarize the Dau. 68

lJsing Gencric Job Descriptions 68
Describing ManageriaUProfessional Jobs 68
Verify the Description 69
.Net l7onh: Nationd Occupational

GovernmentPolicies, laws, andRegulations 42

"ExternalStakeholders 42

Culturcs and Customs 43

.NetVorth: Molson Coors Executives
Thlce Pay

Cut

Classiftcadon 70
Analpis
and Glob,li"-rion 72
Job

43

OrganizationStrategy 44

Job Anafruis and

Organization's Human Capital

Organizadon and rf7ork Design 44

Job

Reliabiliry 72
Validiry 73

Acceptabiliry 73

Currency
AJudgment

53
Review Questions 53
Case 54

81

Multiple Plans 85
BenchmarkJobs 85

Both

Common

PerformJobAnalpis?

57

58

58

Procedures 59
\7'hat Information Should be Collectcd?
Job Data: Ideffification 6L
Employee Data 62
Level ofAnalysis 62

Evaluation

81

Single versus

56

Daa: Content 62

Evaluation

Esrablish the Purpose(s) 84

Structures Based onJobs, People, or

Job

Job-Based Structures and Job

Defining Job Evaluadon: Conrcnc, Valuc,

and External Market Links 83
Job Content aodJob Va.lue 83
Linking Content with the Extcmal Market 83
Differenr Perspectives on Job Evaluadon 84
'How to": Major Decisions 84

KeyTerms

Job Analysis

Job-Bascd Suucrures: Job

Legal Compliance 52
Conclusion 52
Chaprcr Summary 52

IilZhy

75

76

Case 76

51

Job-BasedApproach: Most

74

Review Questions 76

Fairness 52

Analysis

Call

Condusion 74
Chapter Summary

KeyGrms

ConsequencesofStrucnrres 5l

Job

73

Uscfulness 73

EquityTheory:Fairness 49
ToumamentTheory: Motivation
and Performance 49
Insdtutional Theory: Copy Others 50
(More) Guidance Frorn the Evidence 50

Borders 72

JudgingJobAnal)rsis 72

Internal Labour Markets: Combining External

and Organizational Faccors 45
ErnployeeAcceptance: A KeyFactor 46
PavSuuctures Change 46
Suategic Choices in Designing Intemal Suucn:res 46
Tailored versus Loosely Coupled 47
EgalitarianversusHiirarchical 47
Guidance from the Evidence 48

Efficienry

Susceptibiliryo OGhoriog 72

Andpis Information and C-omparability

across

Overdl HR Policies 44

'

65

- 65-

QuantitativeMethods 65

4l

'-'

Conventional Methods

ri7ho Collecr the Infonnation? 67

\7b.o Provides the Information? 67
\Etrat about Discrcpancies? 67

39

Crireria: Content and Vdue 39

Iilflhat Factor*,Shape Intcrnal Strucnrres?

''*'

How Can the Infornation bc Colleqed?

6l

Choose berween Methods 86

Job Evaluadon Methods 87
Ranking 87
Classifrcation 88

Point Metlod 89
.Net Worth: Federal Government Classiffcation
System

Modernizadon 89

ITho should be involved? 97

Evaluating the Usefulness of Results 98
The Design Process Macers 98

PART

Appeals/Rwiew Procedures 98
Polidcal Influences 98
The Final Result: Job Structure 98
Balancing Chaos and Control 99

Conclusion 100
Chapter Summary
KeyTerms 101

External Competitiveness: Determining

the Pay Level

fi

100

Review Questions 101

0efining Competitiveness 137

Compensation Suategy: External

Competitiveness 138
Conuol Costs 138

Case 102

Person-Based Pay

Structures

Attract and Retain

'!7hat

107

Person-Based Pay Strucnrres: Skill

TypesofSkillPlans

Plans

co

Collecr?
Involve? l13

l,abour Demand 142

Marginal Product of labour 142

Iabour Supply 144

111

Modifications to rhe Demand

Establish Cerdffcation Me*rods Ll3

Ourcomes of Skill-Based Pay Plans: Guidance
from Research and Experience 1 13
Person-Based PayStructures: Competencies 174

DeftningCompetencies

Compensating

I
I

SigndlingTheory

I
I
I
I

,
118

Objective i 19

119

Employcr Size 150

Employees'Preferences 150

to Involvel t 19
Btablish Certiffcation Methods L23

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I

Competencies and Employee Selection

andTlaining/Dwelopment 123
Guidelines from rhe Research on
Competencies L23
One More Time: Internal Alignment Reflected
in Suuctures 125
Managing rhe Plan L25
Evidence of rhe Usefulness of Results

t25

Reliabiliry of Job Evaluadon

Techniqucs 126

Conclusion 129
Chapter Summary

Keytrms

130

130

Review Questions 13L

Case

vllt

131

Markea

150

Deffning the Reler"ent Market 150

Competitive Pay Policy Alternatives ltL

Paywith Competition (Match)

151

LeadPolicy I52

LagPolicy 152

.
.

Different Policies for Different Employee

Groups 153
Pies L54

Consequences of Pay Level and Pay

Validiry/Usefirlness 126
Gender Bias in Internal Pay Strucrures

Organizarion'sStraregy 150
Relevant

Pidalls of

Mix

Decisions L56

Acceptabiliry 127
ThreeTypesofSructure 128

147

HumanCapitalTheory 147
Product Market Factors 748
A Dose of Realiry: \ftrat Managers Say 148
More Reality: Segrnented Supply of
Labour 149
OrganizationFactors 149
Industry andTechnolory 149

.Net \?'onh: Global Leadership

Cornpetencies I 18

Collecd

Side

Reservation'WageTheory I47

117

\7h.at Information to
'Whorn

144

146

Modifications to the Supply

ll7

lHowTo": ComperencyAnalysis

Side

DifferentidsTheory 145

Efficiency\TageTheory 145

Purpose of rhe Compercncy-Based

Structure

138

Competitiveness? 141
Iabour Market Factors I41

108

108

\iVhat Information to

Talent

Shapes External

Purpose ofthe Skill-Based Structure 110

"HowTo": Skill Andysis 1l l

I(tom

II

t27

.Net Vonh: Compensation Strategy and Market

Rates L57
Conclusion L57
Chapter Surnrnary 158

I(ryGrms
Review

Case

158

Questions
159

159

t'-

F=I

Contencs

Governmentlrnpcrus :90

Unions

Designing Pay Levels, Pay-Mix, and-Pay

Structures 160

Employer

Major Decisions
Specify Competitive PaY ?olicY 161
The Purpose of a Compensation Survey 161
Adjust Pay Level-How Much rc PaY? L62
Adjust Pay Mix-lfhat Forms? 162
Adjust PaY Structurc? 162

TheVdue

Types

Interpret Survey Results and Consuuct a Marker

Childcare Serviccs

Rcdur@dcfid[ Jffi

I
I
I
l
I

Chapter Summar;r zLA

KeyTerms

2Il

Review Questions 211

Case 271

Vonh:

PAFT

tII

915

Employee Contributions:
lndividual Pay

Detarmiilg

185

ChapuSummary
KeyTerms 186

185

Review Quesdons 186

187

9*.

onfor

Design

PerformmceApl*c

217

'What

Behavious de F'.mFlo),cs GlE

About? Linking Orgaaizariooal SE
to Compensation and Perfolnalc

q[

Analysis I 88

Benefits

Pedormance:

and Plan

Appendix 8-A: Calculating a Market Line Using

Employee

2M

Conclusion 210

From Policy to Practice: Broadbanding t8l

Regression

X06

Eldercarc Services 208

Flexible Benefit Plans 208

179

184

(EAFs)

.Net'Worth: Mcnal Illncss

180

Pricing

2fi1

Pbss

Ottrer Bcneffts 206

Eseblish Raage Midpoints, Minimums,

Condusion

f 9S

Retirement Pcnsion

Employee Assistancc Plans

Ratis 176
From Policy to Practice: ttre Pay Policy Line 177
From Policy to Practice: Grades and Ranges 778
'!7hy Bother with Grades and Ranges? L79

Market

198

Medicd lnsurance 2O3

Income Securirp Disabilhf Hmc eD5
Pay forTime Not'WorL'd M

Siatisticd Analpis I73

Age/Tfend the SurveY Dara 174
Consuuct a Market Pay Line 175
Combine Internd Sructure and External Market

ReconcilingDifferences 183

ofBenefits

kg"Xy Requircd Bcocfiu

Life Insurance 203

Line 169
Verify Data 170
Pay

183

I
I
I

Claims Processing 197

Cost Conraiameru 197

\Vhich Jobs to Include? 167

Strucrure

i$A

Employee Prefrreoces L95

Administering de Bcn.f,* kopon i96
Employee Bencfia Coo.uunicrcilo 196

\fh.at Information to Collect? 167

the Pay

:rn'*

Administrarionlssucs I92
Facors ln_fluen.i'g Bcncfir P,hln:ioE ]9
EmployerPrcfercne 193

Design the Compensation Survey 165

\lfho Should Be Involved? 165
How Many EmploYers to SurveY? 165

Second-Generation Banded Salary

Sptems L83
Bdancing Internal and External Pressures: Adjusting

lm

Benefir Planairy and Dedgc

EstimateCompetitors'IabourCosts L62
Competitors 163

.Net

Plroling DedS.

andAdministratioo

Select Relevant Market and

Fuzzy Markets 165

Overlap

191

Bcocfrs l9t
ofEmployecBc,itr igi

Key Issues In Benefirs

" Study Special Situations 162

Maxirnums

t*p.*

Cost-Effectivencss of

161

and

191

Management Zl8

189

lntroduction to Employee Benefits 190

lVhy dre Growth in Employee Beneffts? 190

\7hat Does itTake to Get rhesc Bcbzrtwf W&ru

TheoryandResearchSaY 2m
'\il7hat
Does itTake rc Get rhese Bcbeviroud S&m

'

Comperuation Practidoners SzY

lI
!

--.-..

Conenrs

Total Rewerd System: Orher Reuarrds Bsidcs

Money Influence Behaniour! 223
Does Compensation Motivate Behaviour? 226
Do People Join a Firm Because of Pry? 226
Do People Stay in a Firm (or Irave) Because of
Pay? 227
, Do Employees More ReadilyAgree rc Develop
Job Skills Because

ofPay?

Types of Group

Gain-Sharing
Profit-Sharing

227

Incentive Plans 262

Explosive lnrerest in Long-Term Incentive
Plans 264

227

StockOpdons 265
Broad-Based

(ESOPs) 265
Pay-for-Performance for Specid Employee

Groups 266
Compensation Suategy for Supervisors 267
Compensation Straregy for Corporate

Directors 267
Compensadon Suategy for
Compensadon Saategr for
Employees 272
Compensation Strategy for
Compensation Strategy for

ChaprcrSummary 277

'KeyTerms 277
Review Questions 278

Pay-for-Performance

Case

11

278

280

KeyTerns 242

PAHT IV

Review Questions 242

Managing the System

Case 244

Pay-for-Performance

Plans

247

Salespeople 274
Contingent

\Torkers 276

Tool 24I
Conclusion 24L
ChaperSummary 242

Execudves 267
Professional

Conclusion 276

Perfornance 240
as a

Option Plans (BBOPs) 265

Employee Stock Ownership Plans

Fairness 240
LegisladveCompliance 240
Linking Pay with Subjectively Appraised
Promotional lncreases

261

Group Incentive Plans: Advanmges

and Disadvantages 262
Comparing Individual or Grogp In-cpntive
i&T::is&:j:: :Plans 262"-The Choice berween Individual and Group

The Role of PerformanceAppraisds in

CompensationDecisions 228
Strategies to Better Undersrand and Mcasurc Job '
Performance 228
Suateg;i One: Improve Evaluarion Formats 229
Strategy Two: Select the fught Raters 234
StrategyThree: Undersnnd How Rarers Proces
Infornation 235
.Net Worth: Performance Appmisal in a Diverse
\Torkforce 237
Strategy Four: Tfain Raters ro Rate More
Accurarely 238
Putting it all Together: The Performance Appraisal
Process 238
Designing a Pay-for-Performance Plan 239
EfficiencT 239

'

Plaru

Earnings-at-fuskPlans 261

Do Employees Perform Better on rheirJobs

Bccause ofPay?

Iniirtive Plans 258

Plans 258

l2

rn

Role

of Governments and unions

in Compensation 282

\7hat is a Pay-for-Performance Plan? 247

.Net'Wonh: Drivers of Change in Variable

Governmenr as Part of the Employment

PayPlans 249

Spaiftc Pay-for-Performance Plarrs: ShonTerm 249

Merit Pay 249
Lump-Sum Bonuses 252

Relationship 283

Supplyoflabour 283
Dernand for Iabour 283
Employment Snndards Acrs 283

IndividualSpotAwards 252

Minimum \ffage 284

Individual Incenrive Plans: Types 253

Individual Incentive Plaos: Advanrages
' and Disadrantages 255
Group Incentive Plans 255
Chdlenges with Group Incentive Plans 258

PaidYacation 285

'

PaidHolidap

?,85

SandardHoursofW'orkandOvenimePay 285
Pay on Termination of

Employment 285

MinimumAge of Employment 286

Concn:s

Equal Pay for Equd

Vork

bY

Human Rights Iaws 286

PayEquiry 286

Thc Gender\0'age

GaP

Conclusion 319
Chapter Summary 320

KeyGrms

287

PayEquiryLegisladon 289
.Ner

t
t

Reengineering and Ouaourcing 319

Balancing Flocibility and-Control - -3 19

Men

and'Wornen 286

\fonh: A 28-Year Quest for

Pay

Equiry at

CanadaPost 290
Condusions 292

Rcview Questions 320

Case 321

Appendix

Pay Equiry

320

3-A: CompensationWebsites 323

The Impact of Unions on \7age

Appendix: lnternational Pay Systems 324

Determination 293

Union Impact on General Wage lcvels 293

Thc Suucnrre of'Vages 294
Union Impacc The Spillover Effect 294
Role of Unions in \fage and Salary Policies

KeyTerms 298
Revicw Quesdons 298

The Global Context 325

The Socid Contract 325
Centralized-Localizcd Dccision
3?3
^iakng
Culture 327
Culture Maners, but So Docs Grla'-l
Diversity 328
Tiade Unions and Employee Isvolvmt n9
Ownership and Financid Markca 329
ManageridAutonomy 329
Comparing Cosa 330

aorp.nsation Budgets and Administration

Cornparing Systems 333

ThcTotal Pay Model Suaagic

and Practices 294

Unions and Alternative Rewad Systems 296

Condusion 297
Chaprcr Summary 297

'Case 298

'l 3

Managing and Controlling Labour

Costs

301

Choices 333

3A2

Conuolling Employmenc Number of Employees

and Hours 303
ConuollingAverage Cash Cornpensation 304

kvel Top-Down 304

Rise 305
Ability to Pay 305

Conuol Salary

Nadond Sptems: CompantircMindnt !E4

Japanese

Cornpetirive Market Rates 305

Tirrnover Effect 305
Cost ofliving 305
RollingItAllTogerher 307

Conaol Salary Level Bonom-Up 307

'

Ethics: Managing or Manipulating? 309

Embedded Conuols 309
RaageMaximumsandMinimums 309

Compa-Ratios 310

Pay 310
Ana$ngCosts 311
Variable

Communicadon: Managing the Message 314

Amount of Informadon to Communicate 315
.Net \forth: Pay Communicadon Impact on Pay

Satisfaction 317
Pn)" Change Agent in Restructuring 3L7
Suucturing the Compensation Function 318
Cenualizarion-Decenffdization 3i8
Flo<ibiliry within Corporate-wide

Principles 318

Sysem iY
Sysem 337

National

Gerrnan Nationd

Suacegic Comparisons Japar"

C'qr,

Canada 338

CurrentYear's

ffi

Smndardofliving: BaskctofGo&

Evolution and Chaage in T.rrditiooal

andGernanModels 339
Strategic Market

Mindsct

F?G

Locdizer: "ThinkGlobal,AdL@f fi
Exporter: "Headquarters IGom Bcs{h
FitsAll" 340
Globdizer: "Think and Art CJohaet

and locallj"
Expatriate Pay 341
Elements of Expauiate
Thc Bdance ShcetApproad
F,xpatriate Systems' ObjectiteC

Cornpoir :}E
#t
+-l

Dommage! 345
Bordedes Vorld

Bordcdess

Pryi

Globdism 36
Conclusion 346
Endnotes 347
Glossary 368
Name

Index

371
373

Subjectlndex

!
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!
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I

A few books can change your life. This is probably not one of them. However, ifyou read it, you
will bener undersend rhat pay matten, After all, you car't pick up a newspaper, power up a comPuter, or read a blog today without someone tdking about pay. The Great Recession (our rerm)
has had huge ramificadons for pay. Some employees have had their hours cur or pay reduced.
lVhy? Because itt a more effective way to cur costs without laying
off workers. \Torkers still left
on payroll after all the recent cost-curing moves are the best of the besr Layoffs would mean
cutting the hean of the organization. Suryeys suggest workers faced with layoffs or reducdons
in hours almost always will choose shorter worhveeks ... at leasr in the shorr run! The recession
has also focused attention on executive compensation, In some cases, huge bonuses were paid to
execudves of compaaies receiving ftnancial aid from rhe governmenr.
Pay also mafters-around rhe globe. For examp.le, if you are a Russian asffonaur, you can
earn a bonus of$1,000 for every spacewalk (technically known as "exrravehicular activity," or
EVA), up to three, per space tiip. A concract lisdng specific tasl<s so be done on a space mission
permia you ro earn up to $30,000 above the $20,000 you earn while you are on the ground. (In
conlras! to the Russian asuoonauls, wealrhyAmericans are lining up ro pay $t5 million [plus
an addidond $20 million airfarel rc the Russian Space Agency for their own personal EVA)
Conclusion; Pa! m.ttters.
Some problems ue global. A British telephone company paid a cash bonus based on how
fast operators completed reques$ for information. Some operarors discovered chat rhe fastest way
to complere a reque$ was to give out a wlong number or-even faster-just hang up on the
caller. "'Wete acually looking at a new bonus scheme," says an insighrful company spokesperson.
Conclusionr lVhat yu pal for mdtterl
In *ris book, we suive to cu.ll beliefs from facts, wishful thinking from demonstrable results,
and opinions from research. Yet when dl is said and done, managing compensadon is an art. As
with any arr, nor everphing rhat can be learned can be taughr.
This fourth Canadian edition concinues to respond to the dernand on the part of Canadian
faculty and students for a Canadian version of the unique perspeciive on compensation taken by
M ilkovich/Newm anl Gerharr/Cole/Yap.
The textbook is based on the strategic choices in.managing compensation, These choices,
which confronr managers in Canada and around the world, are introduced in the rotal compensation model i.n Chapter 1. This model provides an integradng Framework used throughour, Major
comPensation issues are discussed in the context of current theory research, and pracrice. The
practices illusuate new developmenw as well as esablished approaches to compensadon decisions.
Each chapter guides the sudent to a \(/'eb F,xercise on the Connect website to point you to
some of the v:rst compensation.informadon on the lnterner. The case study ac rhe end of each
chapter asks the student to apply rhe concepts and techniques discussed in rhe chapter. For
example, the case in Chapter 11, "Pay-for-Performance Plans," guides che student g1so"gh sweral
exercises designed to explain how stock opcions work and how to vdue them. It also connects the
student to real-tirne srock prices for up-to-dace scock option valuarions.

xi!'

He

WHAT,S NEW

Ail

rhe chaprcrs of &is edition bf,t e

been added. This edition

becn

reinfors our

cotrYictioo

I
I
I
I
I

revisd and niofe Canadian eamples hale

dat

beTond how mtrch, how people are paid

mllc how o cnft a oel compcnsadon suategy and examines the

really maters. Chapter 2
research on best pracriccs. Thc chapars on pe6rmance&sed pay dig into all forms of variable
pay, such as stock oprions, profit shariog gin <fizrin$ and rcarn-based approaches. Person-based
,l*r "t conuased with joLbascd pl'"e, induding recent dwelopmests in skill and competency
,ppro"ch.s. Changes in compedciw merlrq analFis caused by rhe focus on rotal cornpensation
as well as dre increascd use of -,*.t pridng aad broadbanding.
.r.
"ou.r.d,
ernployee benefia chapter has bcco updared- J[s rhzFrcr on comperuarion budgea and

The
administration has had several company &nples added to -"ke rhe material more realiry-based.
twe have dways used internacional examplcs in everF scction; we have also updarcd the appendix
on global compensarion. M*y of rf,e Wcb crciscs, cascs, and .Net Won*r features have been
updated or replaced.

The book inciudes a margin icon aext to material that is direcdy relevant to rhe 25
compensation-related Required Professional Capabiliria covced in rhe National Knowledge
Exam, orie of the requiremenm for thc C-cnificd Ffuman Resourccs Professional (CHR?)
designadon from dre Canadian Council of Ffuman Rcsourccs Associadons. A lisr of eJl 250
comlensadon-relarcd sub-capabilities maf bc found on &e Milkovich Compensation Connecr site.

@
fficormect"

ORGANIZATION OF THE CANADIAN EDITION

Conzpetration, Fourth Canadian Edidon, is
1.

2,
J.

4.

t
t

dividd into four para:

Part I Internal Aliepment Detetmining the Stnrcture

Part II F,xternal Competitiveness: Deternidng the Pay I-wel
Part III Emplope Contributions: Determining Individud Pay
Part IVl/tanaging the System

The "meat" of each chapter irr these pans (f3 chapters in total) is interspersed with and
followed by additional material provided to supplement the chapcert contents and provide both

I
I
I

con[ext and relevance, as follows:

The PayModel: The unique Milkovich Pay Modd around which the
tent is based is introduced up front, and is integrated tluoughour all
subsequent chapter discussions.

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Eh{dhffiffi6Fl*ds!6l@

.NetVorth boxed feature, which

highligha a comprehensive, real-world cxamplc of the material in

Each chapter includes a

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the chaprer.

xiii
--..--J.!r

I
I
I
I
I

PrcFacc

Keylbas

highlighted in boldface

rype in each chapter are deff.ned in the

margins, and a list of drem is provided
ar tle end of rhe chaprer and in rhe
Glossary

with page references.

,.:ija"di.:.:aJ1"r

...

Key Terms
allowances
compensation
cost-of-tiving
adjustment

internal alignment
merit increase
procedufal fairness

external

relational returns

incentives (variable

ompetitiveness

pay)

salary

total rewards
wage

work/life programs

Frhibits are interspersed throughout

the tent to illushate concepts and
provide a visual frameworlc for students.

ExHEn

1,1

Siltt;tT"I"*',,grT

Eaminss or RJll'Time Emplovees, eoosl*

EM

15
10
5

ifarsrrrE:grgr4.E

ffi

"1.4q.6.t$"p
ru
.dningE ot

96

M.

ffiinEE

gFF

source: OECD F.mily

Review Questions and Erperiential

Earcises are suggestid at the end of

carh c[2pLt In response to instructor

sugestions, these real-life exercises
Equhe the application of learned
concepts and techniques.

ffi

b ekulaled 4 lhe diflcma brMen dEdEn Mhgs ol

and wffin nLdE b median
Cooilis c. ra*!d in d@clig ord.r of lhe gHd.r @9e gEp. Ed@l6 of Ehingi q.d ln the clslrloF cls b
of fulLtim! mge .nd sLry M*cE.
lhb delinitim n., lightly rary lom one @nuy b ilothr

'lhe gEnd$ w.ge

ir un.djded.

dd

Hffi,

dilebsq

.r6rd

m 02082012.

Review Questions
1,

How do differing peEpectives affect ourvlews ofcompensation?

2.

How does the pay model help organize one! thinking about compensation?

3.

What can a pay system do for an organization? For an employee? Are these mutually
ex(lusive?

Experiential Exercises
1. What is your deflnition of compensation?

Which meaning ot compensation seems mosi

appropriate from an employee's view-return, reward, or entitlement? ComparE your
ideas with someone who has more experiencg with someone from another counw, with
someone from another field of study.

2.

List all the forms of pay you receive from work. Compare to someone elseS list, Explaln any

differences.

3,

is the "nEt^rork of retums" upon your completion ofthe program at your cur.ent
institution? Do you think these are achievable? What are the some o{ the things you can
offer your employer?

4.

Answer the two questions in this chaptE/s Conclusion, above (Why do it this way? 50
what?), for any study or business article that tells you how to pay people. Such artlcles can
be found inlhe WorldatWork lournal or Compensation and Benefib Review.

xtv

what

Pr&cc

I eernitg,Outcomes have been highlighted at rhe

[.gi*itg of .ac! cha.eter, and the Ch3pter Sr'--ary
,Jri"g . ,ho. learning objectives is induded ai the

end of rhe chaPter'

LEARNING OUTCOMES

.
.

dfltiry he bur

adil'r

.
.

Eteps to

bdop

btalcompensation stategy,

ElQlain why managc ihodd tailor rheir pay 5ysreffi ro support

6e oqad-

straEgy.

Ihsibe $e lhrce EsG used to dtemine whth.r a pay snetegy

' of conpetilive adentaga
Conrast $e 'bn fft' pecpecliR on
practicE' pEFcriE

is a

souie

doapsatim wlth $e 'be!t

Chepter Summary

four:cp rc d*lop e onl ompcmr'or rrnapr ae {l) ess oal onFetbn

lmplldbE, including bsiru *nrgr ud ompcddx dymkr HR rmcp orlod
hh6. Kid ild poli.i6l onrct cmploltdunlo pcFmo rnd ft wtfi odv HR rp.
rcm; (2) mrp out r tol @mp.wion rrnrcgt (J) lmplcmcm dr aegn rnd fimlly,
(,t) @
lnd Elltn lhG rncFf b msE Ghi*hcnr oldn oliaie
!.'Ib imFft 016 nladodl cftcircnc, m!ilt r drold rlign.h mpffitiotrecgro
dE o$ilir..iont rnkll3. Thc rhrc ur Gcd o darmlnc whahr r p:yrrn!.&. i. snc of ffi Pdilk rdEnaF
rE (l) D.s ir ili8it (!) Dos k dlGM.'6E rod (31 D6 ir.dd dlC
,1. Thc -bcr fir" prap<cir m tmpcnede sgEdu lh* onp<r*im lc diped, or 8r,
wirh rhc +dflc buitc srnrgr :dopcd by thc orgaiE.ion' tiEn is lnvionmq ltr
qds .o msinh! ohp.drivc dnnaga Thr'lc* pmica' pcr4ciw:uggs dtln it
s! *. of bd. pdt pmkg d* on bc rpglld sninclll rcm dmdu rd:anqi*
rnffiiag spcrbr ffipln E6 tho rlEn err : windrg :l*pt
l.

A\Feb F.xercise for each chaprcr can be found on the Milkovich

Compensadon Connect site.'Thc ITeb errcrcise will familiarize the

srudenr with the wedrh of compensation-related materid available
on rhe Internet. Also induded at ttre end of each chaprcr is a
comprehensive C.ase requiring application of the chapter material'

Thc

Csse

bl&lffilF

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r--rJtl-lqt

@
ll

Prefacc

of the icon shown here. Whenever you see dris icon in the margin beside chapter content, simply
look to the inside &ont-covrerbf dris book for a link to the required comperency. Note: For rhe
sake of brwity and simplicicy, we have included only the Total Compensation competencies fgr
which the scudent will be responsible in the CHRP exams; these RPG are not cross-referenced rc
other functiond areas. A list of all 250 compensation-rglated sub-capabilities rnay be found on rhe
Milkovich Co rnpercation Connect site.

ffiffi"

McGraw-Hill Connect"' is a rtrfleb-based assignmenr and

assessmenr plaforn that gives students the means ro better connect with their coursework, with their insrructors,
and with rhe imponant concepn *rat they will need to know for success now and in the future.
\7ith Connect, instructors can defiver assignments, quizzes, and tesr online, Instructors
can edit existing quesrions and author entirely new problems; uack individual student performance-by question, assignment or in reladon to the class overall-with detailed grade reports;
incegrate grade reports easily with Learning Managernent Systems (LMS) such as'\fl'ebCT and
Blackboard; and much more!
By choosing Connect, instructors are providing their studenrc with a powerftrl tool for
improving academic performance and tnrly masteririg course material. Connect allows studena
to practise irnportant skills at their own pace and on their own schedule. Importantly, students'
assessment results and instructors' feedback are all saned online-so studenm can continually
rwiew their.progress and plot their course to success,
Connect dso provides 2417 onllne access to an e-book-an online edition of the text-to aid
them in successfully complecing rheir work, wherever and whenever they choose.

Insuuctorts Manual
'Western
prepared by Narasha Koziol, University of
Ontario, contains
listing
chapter
and
a
oflearning
objectives,
a detailed lecture oudine,
a shorr topic oudine ofrhe
answers to review questions, eriperiencial exercises, summary of chapter content and a casc
discussion outline.

Thi Insuuctort Mangal,

Computerized Test Bank

The computerized version of the Test Bank allows instructors to add and edit questions, save and
reload multiple test versions, select questions on the basis of qrpe, &fficulry or keyword, and
use password protecdon. Questions test three levels of learning: (1) knowledge of key terms, (2)
undersranding ofconcepts and principles, and (3) applicatioa ofprinciples.

Microsoft' PowerPointn Prescntations

The slideshows for each chapter, prepared by text authors Nina Cole and Margaret Yap, are built
around the learning objecdves and include many of the figures and tables from the coctbook, as
well as additional slides that suppon and expand the text discussions. Slides can be modiffed by
insuuctors with PowerPoinf .

(lfanagement) Asset Gallery-for Instructors and Students

The (Management) Asset Gallery is a one+top shop for a wealth of McGraw-Hill management
asseu, making it easier for instructors to locate specific materials to enhance their courses, and
for studenm (Student Asset Gallery) to supplement their knowledge. The Insmrctor Asset Gallery
iocludes non-text-specifrc rnanagement resources (Self-Assessments, Gst Your Knowledge
exercises, videos,* Manager's HotSeat, and additional group and individual exercises) along with
suppordng PowerPoinf and Instructor Manual rnaterials.

xl/t

*The 'Managcment in thc Movies" vidcos are not liccnscd for distribution ouaide
adopting instrucrors arc able to access the Instructor Notes.

of rhe United

Stetes; however,

I
t
I

Prcga

The Managert Hodeat is a rcsource within the Asset Gallery that allows srudents to watch
apply thglr=years of orperience to confront daily issues such as ethics, diverover l4real man4gers
rh. rnirurl workplace. Srudents are prompted for their feedback thioughout
""'*. "r-*orf., "ttl
olh r.rnuio and asked to submit a repon cridquing the managert choices, while defending rheir
for grouP or classroom discussions.
own, Thg Managcrt HotSeat is ided

Superior Learning Solutions and Support

any of our producs,
The McGraw-Hill Ryerson team is ready to help you assess and integrate
learning
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and
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For more informadon on rhe latest technology and Learning Solutions offered by McGraw-Hill
Rycrson and its panners, please visit us online: www.rncgrawhill.calhe/solutions.

cffi

mj

I
I
t
I
I
I
I

difference'
jl?lE.
fits. "

Technotogy that
i +::H'i:?&'lif;

rHI

!|

custom
tuint&
asilat t

I
I

ACKNOWLEDGEMENTS
Many people have contributed to our understanding of compensation and to the prepararioa
of rhlr io.rbook ln parricular, we thanlc dre following inssuctors whose cornments and suggesrions chroughout the review and development process gready added to the value ofthis four&
Canadian editioa:
Anna Bortolon, Cone*oga Colhge, School of Business
'
Julie Bulmash, George Brown Colhge
'Wenlu
Feng, Centennial Colhge, School of Busines
Roger Gunn,/R Shau School ofBusines
Ying Hong, McMaster Uniaersity DeGroote School of Business
Michelle lnnes, [Jniaersity of Albma
Sara Mann, Untuenity of Gaelph
Jody Merrin, St. Chir College
David Morriso n, Durham Colhge, School of Businas, IT and Mailngement
Jude Udediba, Crrant McEwan UniaeniE, School of Buines

Jeffrey D. Young, Mount SaintVincent Uniuersity

Finally, we thank the McGraw-Hil[ Ryerson publishing team-Kim Brewster, I\bl:uher;

and Lori Mclellan, DelelEnnnl Editon; Graeme Powell, Supenistng Minn
Michelle Saddler, Team Lead, Production; and Rodney Rawlings, Copyedinr-for 6eir dedicarcd
work in rhis collaboradve undertaking.
BeElcy Ranger

d
.,-3[.

LEARNING OUTCOMES
LO1 Describe how compensation is viewed differently by sociery, sio(iri:':e-:
managers, and employees in Canada and around the world'

[02

Define the term compensation.

LO3 Discuss major components of total rewards.

LO4 ldentify and explain the three strategic objectives of compensa::-

105

Describe the four strategic policies in the pay model anC

associated with them.

r_I

WHY SHOULD WE CARE ABO!.JT

COMPENSATION?

lvhy

care abour compensation? Perhaps you find life goes more smoothly when there-is at ieast
ofwhy you
as much mooey.o*irrg in as going ouL Perhaps you would like to solve dre mystery
in the
people
too,
about
are
curious,
you
do.
Perhaps
*rey
*.y
,h.
paid
get
yo,,
or people
aia Beyonci earn $80 million one yar, whereas Britney Spears earned
news and rheir pay.

Lo*

lfni

$2.2j million?t'\flhy did Jusdn'Bieber earn $53 million and Selena Gomez only $5.5 million?2
'Why
did workers ar General Morors in the United States get total compensation of-about

$60 per hour, whereas U.S. workers ar Toyota got $48 per hour? \flhy was the average total comperrsarion per hour in manufacruring$25 in the U.S., but $16 in Korea and $3 in Mexico? !7hy
iia Cl.r,b.'Wesron (Execurive Chairman of.Loblaw) earn about $3.9 million in 20i0, wher-'
fuchard lfaugh (CEO of RBC) earned almost $14 million?
More im'po.tantly, does ir mac[er how much and ho* fiese people get paid] \fle will certainly ta.lk about employee and executive pay in this book. Lett take a brief look at a few examples

in which pay does seem to have mattered'

General Mocors (GM) has paid its workers weli for decades-too well perhaps for what it
received in rerurn. In 1970, GM had 150 U.S. plants and 395,000 hourlyworkers. In sharp
conffasr, GM anricipates having only about 35 plants a$d 38,000 hourly workers in the very
near future.3 In June 2009, GM had to file for bankruptcy (avoiding it for a while thanks to
giganric loans from the U.S. government-i.e., U.S. taxpayers). Not all of GMt problems were

fte

te r le:

Chaptcr

The Pay

Moltl

compensadon-related- Of course, building vehides that consumers did not want was also a problem. Buc having labour cosa higher than the comperition, without corresponding advantages in
efficienqy, qualiry, and customer service, does not seem to have served GM or its stakeholders
well. Its stock price, which pealred at$93.62 per share in April 2000, closed recendy at arouad
$27 per share. Ia market value was about $60 billion,in 2000. Shaeholder wealth will be wiped
our in banlruptcy; the U.S. taxpayers are out billions of dollars; and hundreds of thousands of
jobs have been lost wirh concomitant effects on the communicies involved.
On thc other hand, Nucor, the l4rgcltproducer of steel in dre United Sates, pays its workers veqF well relative to what other companies inside and outside of the steel industry pay. But
the company also has much higher producdviry than is typical in the steel industry. The result:
borh the company and its workers do well. Similarly, Google and SAS also pay their worlcers well.
Google announced a 10 percent pay raise and $1,000 cash bonus to all its workers in January
2011, went on a hiring spree for over 6,000 googlers and its stock price recendy hit $600 per
share. Revenues at SAS, the worldt largest privately owncd software company, have been on the
rise since its inceprion ia 1976, despite all the turmoil in the rnarkct.
'\?'ould
grearer expertise in the dcsign and cxecution of compensation plans have helped?
The U.S.'Congress and President Barack Obama seem to think so. They have put into place new
legislation, the Troubled Asset Relief Prograrn (TARI), which includes restrictions on executive
pay that are designed to discourage er.ecutives from tating "unnecessary and erccessive risks." In
Canada, we have "say on pay," which dlows shareholders to hold an annud vote on the pay of
an organizarion's executives. In 2011, about 70 major public companies have volunarily offered
their shareholdets a "voice'"
In a recent opinion piece in the Wall Street Journal, "How Business Schools Have Failed
Business," rhe former Director of Corporate Finance Policy at the United States Treasury wrote
that "misaligned incentive programs are at tle core of what brought our financial rystem to its
'knees."4 He says rhar we "should ask how many of the business schools amended by Americat
CEOs and direcrors educate rheir srudens about che best way to design managerial cornpensation
slzstems," His answer: not many. This book, we hope, can play a role in helping to bemer educate
you, the reader, abour the design of compensacion systems, both for managers and for workers.
How people are paid affecm their behaviour at work, which affects an organization's chances
of success.5 For mosr employers, compensation is a major part of total cost of running a business, and often it is the single largest part of operating cost. These wo facts together mean that
well-designed compensation q/stems can help an organization achieve and sustain competitive
advantage.6 On the other hand, as have recently seen, poorly designed compensation q/stems clur
likewise play a major role in undermining organizition success.

T_I

WHAT IS COMPENSATION?

How people view compensation affects how they behave at work, It does not mean the same
thing to everyone. Your view probably differs depending on whether you look ar compensation
from the perspective of a member of sociery a stockholder, a m,rnager, or an employee. The following is a discussion of these various perspectives on compensation.

LO1

Society
Some people view pay as a mff$ur of justice. For example, a comparison of earnings of women

with those of men highlighrc inequides in pay decisions. In 2008, women earned 83.3 cents for
every dollar earned by mer, up from75.7 cents two decades earlier in 1988.7 Despite this narrowing, and despirc pay equiry legisladon, *rE'gap persists. Economists have identified a number
of conuiburing hctors ro we deterninadon, including human capial (work e<perience, educarion, and tenure), demographic characteriscics (marital status, having children living at home)

:
Chapter

I I

fhe nay Modzl

of establishment, and rype 9f wof). Based on data from

iob characterisrics (industry, size
.ll'"1,'""*Z*"aa, rhere arc a few.observations that may have contributed to the gender w-age gap:
ly to study health and education, whereas men ire more likely to study
j""1J"..*
:ue more willing th'n men to adjust *reir
-ta other technology ffelds; that women
children and elderly Parents' and to do
young
care
of
to
take
ordlt
hoo*
work in sales
dJ of r;e "unpaid" housework; and finalln ncarly onc in three lvomen
and
rranspon,
uades,
in
men are likely to work in construction

..d

il:H;;;mor.lik
*d

il"tdff;
:";;;;;;

i'

occupations,_whereas

"nJr.*iaa
as eq uiPment

-:

'_'

i:j;
oPerators'!
*re
gendel
shows
1.1
Exhibit
.gap in
lo.s Canada do, relative to otfier countries?
is definitely
Canada
countries.
oEcD
in-various
of full+ime employees working
France, and Norway'
rh:all counuics like l(orea and Japan, but worsc than Ausualia,
as e ca'se of loss of
are
listed
countries
b.*..tr
compensatioo
differences in
labour costs in
orample'
For
States'9
the
United
even
and
China,
C"r"ai* jobs to Mexico,
in
productivirJ'(fie
di-fferences
when
Howwer,
Canada.
in
of
those
iioi.o rr. "bo,rt 13 percent
considerably,
fo, .".h dollar of pay) are factored in, the wage advangge

-'tii*

-.d;;i"gs
lrt"J.".,
"*"3;;;;,

;.il; ;6;.
i.."*. ftfJ*""" productiviry

ls.5duced

is at only 39 percent of the Canadian level.lo

compensation as r-he canse of price increases' They may not believe
see
sornetimes
consumers
Yet o*rer consurners have lobbied universides to insist
rhar higher labour costs are to their benefrt.
in Guarernala who sew shirts and caps bearing the university logo'11

".,

ir"i., *"*.,

;;il;;.

for labourers
news broke abour working con&dons and pay of vrorkers at Apple's largest
to raise its wages by i6 rc 25 percent.r2
if;", *d .5. company ha.

,;:.ndy,

,"ppfr.r],

"gr.J

Gender Gap in Median Earnings of Full-Time Employees, 2OOg*

or latest year available

40,
I

35t

30

520

Ets
10
5

T
T

t
I

t
I

HHH

\
is calculated as the.differenct
sender wage sap is unadjusted, and

*rg.

b"tt*iT:1?l-1tjli'g::l,T:,::1Y"f:i.?':m:: Il'Jil

o'o.r of t'. sender waee eap. Estimates orlarninss used in the calculations rerer to
thddefinition may slightly vary from one country to another'
However,
workers:
;nJtrlury

#ffi:]o|:;ll3,ll-l*!'i",lrj;i:'#"6.;*il
gross earnings of full-time

t
t
t

I
I

s2s
(!

*The

Source: OECD Family database, www.oecd.org/sociawamily/database,

accessed on

O7nBn012'

I
t

Chapter

I I Thc Pay Modrl

Stockholders
From *re perspeccive of the stockholders, thosc who provide equiry for the operation of businesses,
compensation mancrs. For ocample, some stockholdca believe that using stock (shares of company) to
pay employees creates a sense of ownership that will imBrove performance (think \ilesrJet), which will

in rum

increase stockholder wealdr.

But others argue that grandng employees coo rnuch ownership

dilutes stockholder wealth and sometimes may not incentivize the behavior

as one originally intends.

Stockholders also have an interest in cxecutive compensation. Compensation should supposedly be ded to performange. To rhe degree thac the interesc of executives are aligned wirh rhose
of stockholdcrs or shareholders (..g., by paying e.:cccutives on the basis of company performance
measures such as sharcholder return), the hope is tlat company perfornance will be bemer. There
is debate, however, about whether e:(ecutive pay and company performance are suongly linked.l3
In tlre absence of a solid persistent linkagc, concefi$ arise that executives might somehow use
their influence to obmin high pay without necessarily perForming well.

Managers
From the perspcctive of the managers, compensation direcdy influences their success in rwo
ways, First, it is a rnajor o(pense. Competidve pressures, both global and locd, force managers
to consider rhe affordabiliry of their compensation decisions. Srudies show that in many enterprises, labour cos$ account for more than 50 pelcent of toral costs,!4 In some indusuies, such as
financial or professional services, or in education and governrnent, this figure can be even higher.
However, even within an industry (e.g., automotive manufacnrring financial services), labour
cosr as a percentage of total cosm varies among individual firms. For example, small neighbourhood grocerystores, with labour costs berween 15 percent and 19 percent, have been driven out
of business by supermarkets that delivered the same products at a lower cost of labours (9 to
12 percent). Supermarkets today are losing market share to the warehouse club stores such as
Costco and'!V'almarr, which enjoy an even lower cost of labour (4 to 6 percent).
In addidon to seeing pay as e major expense that has to be minimized or optimized, a
manager uses it to influence employee behaviours and to improve organizational performance.
The amount and rhe way pcople ue paid affects the qualiry of their work, their attirude toward
cusromers, their willingness to be flexible or learn new skills or sugtest innovations, and even
ttreir interesr in unions or pursuing legal action against their employer. This potential to influence

employees'behaviours, and subsequently the productivity and effecdveness ofthe organization,

importan! reason co be clear about the meaning of compensation.15

is an

Employees
The pay individuals receive in return for the work they perform is usually the major source of
their ffnancial security. Hence, pay pl+ a viul role in a person's economic and social well-being.
Employees may view conpensation as the return in an exchange between their employei and
themselves, as an entideme4t for being an employee of the company, or as a reward for a job well
donc. Compensation can bc all of these things.
Describing pay as reward may sound far-fetched to anyone who has reluctandy rolled our
^
of bed to go to work Even tlough writers and consultants use the term "reward," no one ever
says, "They gave me a reward increase," or "Here is my weekly reward cheque ," Yet, if people
see thcir pay as thc return for their contributions and investments rather than as a reward, and
if wrirers and consulents persist in trying to convince them that pay is a reward for employees,
this disconnect may mislead both employees and managers. Employees invest in education and
training; they contribure their time and enerry at the workplace, Compensation is their return
on those investments and contributioru.16
In sorne circumstances, employees in large, state-owned countries (e,g., China) and in
highly regulated counuies (e.g., Sweden) sometimes believe their pay is an endrlement-their

Chapccr

I I

The Pa1

Mokl

of rheir performance or rh2t of their employers. It is not uncommon for politiunioos, and employer ftderarions in countries such as Sweden and Germany_-uade
IJ-L"j"",
policies that are zupponive of their country's sociopolirical as well as
compensation
negodare
.t,,e- resardless

ro
economic Priorides'r/

GlobalViews
*compensation" refersm something that counterbalances, offsets, or makes up for
.o-.rhing else. Howwer, if we look at the origin of thc word in different languages,-we get a
,.*. of J. richness of its meaning, which combines enddement, rerurn, and reward.lS
In China, the traditiond characters for the word 'compensation" are based on the syrnbols
for logs and water-<mpensadon provides thc necessities in life, In the recent pa$, ttre sate
o,"n.J r[ *..qprises and compensadon was treated as an enddement. In todays China, howener,
the refonns of the last decades have led to use of a new word, dai ya, which refers to how one
is being gearcd-your wages, benefits, training opporcunities, and so on. Compensation now

In English,

reflccs a broader sense ofreturns.l9

Cornpensadon in Japanese is fouyo, which is made up of two separate characters (4u and
yo), bogh mcaning "giviag something." I{ya s an honorific used to indicate that the persoa
ioing rhe giving is of higfr rank, such as a feudal lord, emperor, or Samurai leader. Tiaditionally,
compensadon is rhoughr of as somerling given by onet superior. Today, business consulants in
word bou-syu,which means reward and has no association with nodons
Japan try ro substinrte the
many
that are part of Japanese compensation q/stems translate as
dlowances
The
superioriry.
of
uatc, wltrch means "aking cals 6f ssrngthi ng." Ttatc is regarded as compensation that takes care
of emplcyees' financid needs. This concept is consistenr with the hmily, housing, and commuting allowances still used in many Japanese companies.2o

Thesc contrasting perspecdves

on compen$tion-societal, stockholder,

managerial,

employce and even global-add richness to the topic. But these perspectives can also can$e confi.sion unless everyone i5 nlking about the same thing, so a clear definition of compensation is
essentid. Compeosaton rders to all forms offtnancial renuns and tangible services and bcncffts
that employees rcceive as parr of an employment relationship.

TT

LO2
compensation
all fozl:r of financial rewms

and angible xrvka arfr

benefra ttat employes
reeive as Fftof an emplalment re/atrbnshrp

LO3

FOBMS OF PAY

Exhibit 12 shonn the variery of rerurns people receive from work. They are categorized as rotal
compensadon and reladonal rerurns. The relational renuns (learning opportunides, recognition
and *atus, challenging work, and so on) are the psychological returru people believe they receive
in t}re workplace.2l Totd com;rcruation is more transactional and includes pay received direcdy

merit increases, incentives, cost-of-living adjustments) and indirecdy as

benefits (e.g., pensions, heahhcare and life insutance, prografirs to help balance work and life
demands). \il7hile tlis book focuses on totd compensation, we mus! not forget that total rewar&

as cash (e.g,, base pay,

'

include cash compensation, beneffrc, and reladonal returns.

,'6@
relational returns
psychologial rewrns enpbyees bdieve they

rreive inthe

workplae

total rewards
Cash Compensation: Base Pay
Base

pay-wage or salary-is rhe ca,sh compensation an employee

receives for dre

work performed.

pay tends to reflect the valtie of the work or skills and generdly ignores differences amibutablc
to individual employees. For orample, the base wage for mac.hine operators may be $18 an hour.
Howerrer, some individual opera[o6 might receive more because of their experience and/or perforBas.e

mance. Some pay qrcrcms ser base wage as a function of the skill or educadon an employee possesses; this is common for engineers and schoolteachers. A distinction is often made bewreen a wage.
aad a sakry, the lamer referring ro pay o(pressed at an annual or monthly rate rather than hourly.

all rewards received by

employeet including cash
compensation, benefis, and
rdational returns

wage
pay erpressedatan hatrly

aE

salary
pay expressed at an annual or
monthl.v .ate

*-.--&!

Chaptcr 1

Tltt

PaX

Modet

Learning

Recognition and
Status

Employment
Life, Health,
Disability lnsurance,
and Pension
Base Pay

MeriVCost

of Living

T
T
T
T

t
I

t--

Long-Term
lncentives

Security

Opportunities
Challenging
Work

Allowances

Work/Life
Programs

Short-Term
lncentives

cash compensation: Merit lncreases and cost-of-Living Adjustments

mrit

increase

itE'tgtt to

tqnitinof

base

pay in

pa*vwrk

Ddravfur
cost-of-livin g adjustment

reerrcge

increment to base

Fy pnnided

rqadlsof

to all employee

pedormance

Ahnost all Canadian ffrms use merit pay increases.22 Merit increases are given as increments
to the base pay in recogni-tion of past work behaviour. Some assessment oflast performance is
made, with or without a forrnal performanie evduadon progre-m, and the size of the increase is
varied according to performance. Thus, outstanding performers could receive a 6 rc 8 percent
merit increase 8 monrhs after their last increase, whereas an evere performer might receive a
2 to 3 percent increase after 12 or 15 months. By conuasr, a cost-of-livilg adiustment gives the
same petcentage increase to evrrrone regardless of performance in order to maintain paylevels
relative !o increases in the cost ofliving.

Cash Compensation: lncentives

incentives (variable pay)
ute-time payments for meetirg preaubl is he d pe rformane objxtiva in a fuwrc
time

peiod

Incentives (or variable pay) de pay increases direcdy to perfornance. Howwer, incentives differ
from merit increases. First, incendves do not increase the base wage, arrd so must be reearned.each
gay geriod. Second, the potentid size of the incentive paymenr generally will be known beforehand. \ilfhereas merir pay programs evaluate th. pCIt-p.rfo.*i.. of L nd.irrid,ral an4 rhen
decide on the size of the increase, what must happ'en in order to receive the incentive paymenr is
called out veryspecifically ahead of rime. For example, an auto sales agent knows the commission
tJre sale. Thus, aldrough both
merit pay and incendves can influence performance, incentives do so by offering pay to irifluence

on a BMIT versus the commission on a Honda prior to making

fururc behaviour. Merit, on the other hand, recognizes and rewards past behaviours. The distinction is a mamer of timing.

Incentives can be ded to the-performance of an individual employee, a team of employees,

a
total business unit, or some combinadon of individual, team, andLit. The performanc. ob;.o
tive may be expense reducdon, volume increases, custorner satisfacdon, ,*..ua growth,
return
on investments, or increases in total shareholder value-ttre possibilities
errdl.Ir.z3

"r.

Chapter

I I

*
The Pat

I
I
I

Modcl

paymen6, they do no[ have a permanent cffect on labour

Becaue incendves are one-dme
declines, incentive pay automatically declines, too. Consequendy,
p-erformance
cosmllflhen
are hequendy refened rc x uariable pay'

i""rrrft"

Long'Term Incentives
inrcnded to focus employee
Incendves may be short- or long-term. Long-term incentives are
or options to buy
form
of
stock
ownership
are
in
the
they
Typically
resula.
mulriy."r
""specified, advantagcous prices. Th-e idea behind stock ownerships is that employees with
iro.t "r
no-.i4 stake in the organization will focus on such long-term ffnanciel objecdves
of *ock
"
on-iou.*-.or, market share, and rerurn on net assets. Magna Internationd grants shares
success. Some
ftrmt
contribudons
to
the
made
outstanding
have
who
employees
key
,o ,.L.,.d
stock ownership beyond the ranla of managers and professionals. Sun
.o*o*i., have erctended
'Wesdet, and Starbucls offer stock opdons. to all their employees. These
Mi.roryrr.-r, Google,
believe rhat having a stake in the companysuppor$ a culture of ownership. They hope

il

.ff;

* T.*l

.o-o-i.r
,t

",.-ploy.o

n'ill

J
J

behave like owners'24

Benefits: lnsurance and Pensions

Exhibir 1.2 shows that emplope benefits, induding life/health/disabiliry insurancc and pension, worlc/life programs, and dlowances, are also part of totd compensation. Somc insurance
tiqtired by law. For example, in CanadA employcrs (and employees) have to
Drograms
"t
L"i'e .orruibt tions to rhe Canada/Quebec Pension Plan, Employmcnt Insufancc, and Worken
Compensation. Differenr counuies have different mandatory benefits. Somc Canadian comPanies also provide rheir employees with a pension plan, in addition to the mandatory Caaada/
pe*ion Plan. In iOOg, Zg.Z percent of working Gnadians benefft from an employer-

euebec

sponsored pension plan.25

'

Health insurancg dental insurance, ;rcnsions, and life insurance are cornmon bcnefia. They
help protccr employees ftom the financid risk inherent in daily life. Often, companies can
prwii. these protections to employecs more.hoply than employees can obtain them for themi.lr"r. Bec**. tle cosr of prwiding benefis has been rising they are regarded as an increasingly
imponant form of compcnsation.26

Benefits: Work/Life Programs

'Worl/Efe

progrems that help employees bener integrate their work and life responsibilides
from work (e.g., vacations, .iury duty), access to services to meet speciffc
include ti*.
"*"y
(e.g.,
needs
drug counselling, financial planning, referrds for child and elder care), and
(e.g., tdecomrnuting, non-ffadidonal schedules, non-paid time
flcxiblc -otk
"r"-g.ments
off). Rcsponding
to thc tight labour market for highly skilled employees and the changing

worUlife programs
prognmstltat help

..fnplqes betbrintegnte
theirwot* and life
rsponsibilities

d.mograihio oi th. *otkforce (e.g., two-income families who demand employer floribiliry

thai family obligations can be mec), rnany Canadian employers are gving higher p-rioriry
to thcse forms of b-encftts. Buffett Thylor & Associates, a leading wellness consulting ftrm in
Vhitby, Ontario, follows its own advice by offering a bcst-in'class wellness Program in its own

so

workplace.2T

Benefits: Allowances
Allowances often grow out of whatever is in short supply. In Vietnam and China, housing
(dormircries and apanments) and uansportation allowances are frequendy _PaE of the pay
package. Some Japanese companies continue to offer a "rice dlowance' based on the number

allowances
.

co m

penntion tg Ptovide fot

hon atpplY

items that are in

-.--+-L

J
J
J
J
J

J
J
J
J

I:

Chapter

The Pay

Modd

Findings of the 2010 Global Workforce Study by compensation consultan8 Towers

Wa8on showed workers' increasing desire for security and stability in the current
recession-battered times. As employers continue to find efficiencies in their operations,
workers feel employrnent security is fast disappearing. Employees realize their responsibilities toward their financial well-being as well as their career and performance; how-...ever; they are concerned about current leaders' competencies and ability to inspire.
What employees want is managerial support so that they can more freedom and flexibility in doing their work, and contribute to the success of the organization.
.

Drawing on findings from this study, fielded with over 20,000 employees in 22 markets
between November 2009 and January 2010, and the broad economic. social, and business trends, the emerging "deal" in the employment relationship depends on the organization's ability to create a more personalized work experience for segment of the
.workforce, aligned with how people add value to the business. The presures in today's
work environment will continue to alter how businesses operate and how employees
connect to their organizations and work. Relational returns become all the more impor-

tant to ensure business

success.

Source: @2010 Global Workforce Study. Towers Watson.

ofdependents an employee has, a practice that grew out ofpost-\trorld 1i7ar II food shortages.
Almosr dl companies starting operations in China soon discover drat housing, $ansponadon,
and other allowances are expected. Companies that resist these allowances have to come up with
otler ways to afiract and retain talented employees. In many European counries, managers
expect a car to be provided. The issue then becomes which make and model.
In Canada, some organizations in Fort McMurray, Alberta, offer their employees housing
allowances due to t.he housing shortages and the high cost of accommodadons. The Government
of Nunavur provides its employees Norr"r.ot Northern Allowance to make up tlre differences in
"
the cost of living between Nunavut communities and larger "designated" southern centres, and
to egualize the compensation of Government of Nunavut employees across Nunavut who may
fue different economic conditions in different communities.2s

Total Earnings Opportunities: Present Value of a Stream of Earnings

Up to this point, cornpensation has been treated as something paid or received at a momnt
in time. But compensadon decisions have a temporal effect. If an employee with a job offer of
$50,000 stays with the fum for five years and receives an annual increase of 4 percent, he or she
will be earning $60,833 a ye.u at the beginning of the sixth year. The totd coss to clie employer
over the ftve years based on the decision to hire turns out to be over $270,816. Ifyou add in
an additional 25 percent for beneftts, the decision to hire you irnplies a commitment by the
employer of over $338,520.
A present value perspective shifis the choice from comparing todays iaicial offers to considerition of future bonuses, merit increases, and.promotions. Some employers claim that rheir
reladvely low starting offers will be overcome by larger future pay increases. In effect, they are
selLing the present value of the furure stream of earnings. But few candidates apply that same
analysis in calculating the furure increases required to offset the lower initial offers,

ChaPw

t I 77x tul Me':

from Work
Relational Returns
\XArydoGooglemillionairescontinuetoshowupfolrytti*tymorning?Thereisoodo"-r-j-:effect on employees behavio*r Exhibit 1-2
work have a substantii
J"r]n"*.lirerurns from
recognition and status,

employment securicy, chalieaging

to learn. Other Jadonal rerurns mighi include personal sadsfactioa
work, and oppo.turri.io
rearning with great_co-workers, and the like. Such fac-.orelational retuins such as
includes such

;;;;;riily
::;.,Frle
*tt Pfr.".'J;

facing new challenges,

iompensadon'
roral ,.i"rdr, which is a broader umbrella than total
of rdadonal retu'rs
inportance
the
box here provides some insighn inro

#;;

environment'
in co&Yk "economic

of Returns
The Organization as a Network
Sometimes

returns
ir is useful to rhink of an organization as a nework of

creaced by

all thae
is to

and relational rerurns' The chdleoge

pay, including rotd
"olr,p.ruacion succeed' As in rhe case of rowers prrllirg
ro
organization
th1
hips
it
&",
oBe
likely if "tt are pulling in unison rather than worki-og again'sr
on rheir oars, success is rnore
dardop
boauses,
if
usefirl
o.*orl of r.*r.rs is_-or. likely to be
another. In che same;;
,ll worlc cogecher. Even drough this book focuses on to=l
menr opporilr,i.i.r, -]'p*-oJsos
,o.r.*.rrrb., rhat clompensadon is only one of many facors aftocompensation, i, i,
ing icople's decisions about worlc

atff.r.", f"r*s of

;.rn"';il;",*..k *

;.

i-p"ri*,

I--I

A PAY MODEL

q4as boti a framework for examining alfen! Pay

The pay model shown in Exhibit 1.3 serves
(1)
strategic
the
blocla:
building
basic
drree
It contairu
tems and a guid.e to most of tlis boolc
policies rlat form the foundadon of t-he compensadcn
(2)
strarcgic
the
obl..tiuo,
compensadon
Because objectives drive the system' thty *
sysrem, and (3) .h. .."t-iquo of coripensation.
discussed

first'

ro4

Strategic Compensation Objectives

Tte basic objectives'

and managed to achieve certain suategic objectives'
in Exhibir 1.3, indude efficienry, fairness, and compLiimproving per*f,fr U*r'*a reg,rlations.'Efficiency can be stated more specificalll:.(1)
(2)
conuolling labour
and stockholdels; and
formance, increasing qualiqf delighting customefs
and \?hole Foods are contrasted in Exhibit 1'4'
costs. Compen*.io., oU;."t*
""tutei*ooi.
cardiac pacemakers' lts compensaMed.tronic is -.di..l iechnology company that pioneered
"
minimizing ftxed costs, and anracdog
don objectives emph"siz. ferfor#*.e tu.io.ss ,'l..or,
grocer' Its qarkcts
and energizing top talent.'Vn"[ f""at is a large organicdescribes. ia
company
The
.la
wel+taffed.2e
celebration of food": irigh,, *.ll-"o.k
are
responsibiliry'
as
a.shared
fgoi;
processed
least
qualicy and
commirment to offering
shareholder vdue''l
Its first compensation o-b1..,i.rn."1, "committed to increasing
objecdves' fairness means
Medtronic's
In
systems.
pay
of
Fairness is * fund*m.ntal objecdve
Foods' pay objec*ensure
well-being'"
family
and
p.*oo"l
.ogot".
fair trearment"
""J:t
.,shared
beyold base wages is^linked
fare." In rlei, .gdit"ri* work .itor., pay
tives discuss a
.*ployto -!"ut 1o*t say about *ho i1 o1 their team' The fairness
to team performance,
for rll e-ploy..s by recognizing.both employee conuiburions
objecdve calls for f"i,
needs (e'g'' a
(e.e,. hieher oay for greater performance, experientt' ot tt"ittittd and employee
to
processes
the
with
concerned
.used
). ho cdiat fairness k

Pav svstems are designed

Jffi;ff;;;:il"f
*..

,ilply i.aa

j. hd;;,

i, *J

*{:l}i*fuods

Vt:k

*J
*."*r.i.

ff ii;il ;.i ;'fil;;;Jil

I
{

10

Chaprer

II

Th, Pal Modrt

The Pay Model

Work

INTERNAL ALIGNMENT

Analysis

EXTERNAL COMPETITIVEN EsS

EMPLOYEE CONTRIBUTIONS

MANAGEMENT

Evaluation/

INTERNAL

PolicY Lines

PAY
STRUCTURE

Descrlptlons certification srRUcruRE

Market
Definitioits

Surveys

5eniority- Performance-

Based

Based

Costs Communications

Merit

Guidelines

Change

INCENTIVE
PROGRAMS

EVALUATIoN

as important
make decisions about pay.30 It suggests that the wey a P^y decision is made may be
decision'
of
the
to employees as the result
io*pli*.. as a pay objective involves conforming to various federal, provincial, and territorial colpensation la-s "ttd regulations. fu these laws and regulations change, Pay systems
might need to be adjusted to .rrr.ri. continued compliance. As companies go global, they musc
also comply with the laws of all the counffies in which they operate '
Ther.'"r. probably as many statements of pay objectives as there are employers' In.fact,
highly diversifii firrrrr'ru.h as George'S7'eston Ltd. and One< Corp., which comPete in multiple
at
lin-es of business, mighr have different pay objectives for different business units. Objeccives

Chaper

i I

The Pal

Model

comparison of Pay system objectives at Medtrrnic and whole Foods

MEDTRONIC

WHOLE FOODS'

Support Medtronic mision and increased complexity

We are commit6d to
shareholder value.

Minimize increases in fixed coss.

Profits are eamed erery day tfrough voluntary

exchange with our o.rtornec

Attract and engage top talent.

Profits are essential to create apital for grorarth, prosperity, opportunrty job sadsfaction, and job seiurity.

Emphasize personal, team. and Medtronic performance.'

Support team member happiness and excellence.

Recognize personal and family.total well-being.

We share together in our collective tate.

of business.

Ensure

inceaing long-term

fair treatment.

6cse companies emphasize dre incrcased complcxiry of rhe business and imponaace of integrity
(orsmmers, qualiry), compedtiveness (costs), abiliry to aaiact and rerain qualiry people (pcrforoaoe), and having fun.
The tcnsion of working toward all the suaagic objecdves of efficiency, frirness, and ompliaae at times makes it ineviable that managing pa)r creates erhical dilemmas. Manip'bdng
resrlts rc ensure execudve bonus payouts, miql5iag (or failing to undersand) sgtisrics uSed to
rre:$urc comPetitors' Pay rates, re-pricing or backdadng stock opdons ro increase their nlue,
cocouraging employees to invest a portion of their wagcs in compary srock while executiv=s are
be.iling out, offering just enough pay to get a new hire in the door while ignoring the relationship
o co-wodcers'pay, and shaving dre hours recordcd in employecs'time cards are all-roocommon

rr

t
I
t

*"-ples of erhicd

lapses.

but not ali, compensation proftssionels and consultanrs remain silenr during edical
misconduct and outright malfeasance. Absent a professiond code, compensadon rnanagers musr
look to their own ethic+and the pay modd, which c.lls for combining the objectives of c&
ciency and fair uearmenr of employees as well as compliance.3l
Some,

I
I

so objecdves serve severd purposcs. Firsc thcT guide the design of the pay
rysem- c-oddcr
the employer whose objective is to reward s6s6slrling performance. That objective sill
mine the pay policy (e,g.ipay for performancc) .. *.ll
the elements of pay plans (c g,
increases and/or incentives). Another employer's objectives may be to develop a
, ootinuously learning workforcc drrough job desip, training and team-building rechniqucs A pcy
qystem'digned with thi. s employert objecdves might have a poliry of prying salaries et kzrt oqd

f-il't

dG*it

to those of competitors and that go up with incrcased skills or knowledge. This qlsco
-lgl'r
be very different &orn our ffrst examplc in which the focus is on p.rform.nce. Thu,s, dffi**
objectives guide the design of differenr pay q/stcms. Thcy also ,.-i ,. standards for jr$iog 6c
success of the pay $ystem. If the objective is to attract and rctain rhe best and rhe brigbc$,
Fr
skilled employees are leaving for highcr-paying jobs elsewhere, the system may nor bc pclh@ing effectively. Atrhough drere may be many non-pay reasons for rurnover, objeciwsFilidc

standards for waluadng the effecdveness of a pay qrstem.32 Policies and tcchniques are thc
to reach the objecrives.

*r.

I
I
I

._.._r-!

I
I

Chapter

LO5

The Pal

Mo&l

Four Policy Choices

Every employer must ad&ess rhe suategic policy decisions shown on the left sidc of the pay
model in Exhibit 1.3: (1) internd alignment, (2) ocrernal competiriveness, (3) employee.contributions, and (4) management of tie pay s)6tem. These policies form thc foundadon on which
pay slzstems are built. They also serye as guidelines for managing pay in ways drat accomplish the
system's objectives.

Internal Alignment Internal alignm66 refers to pay comparisons beween jobs or skill levels
inside a single organization. Jobs and peoplet skills are compared in rerms of theit relative contribution to the organizationt objecrives. For o<ample, how does the work of the prograrnmer
compare to the work of the systems analyst, the softrvare engineer, or the software architect? Does
one conribute more tfian another to providing solutions to custorners and satisfring stockholders? Does one require more knowledgp or experience than another? Internd dignmenc refers ro
rhe pay rares both for employees doing equal work and for those doing dissimilar work. In fact,
derermining an appropriate difference in pay for people perforning different work is a key chal-

internal alignment
pay comparisons
jobs

beveen

or skill levels inside a

single organization

lenge facing managels.

'

Internal dignment policies, or pay relationships within an organizadon, affect all three compensadon objecdves. They affect employee decisions to stay with the organization, to become
more flexible by investing in additional training, or to seek greacer responsibiliry. By motivating
employees to choose increased uaining and greater responsibility in deding with customers, pay
relationships indirecdy affect the capabilities of rlle workforce and hence the efficiency of the
enrire organizadon. Fairness is determined by employees' comparisons of their pay to the pay of
others in the organization. Compliance is affected by rhe basis used ro make internal cornparisons. Basic fairness is provided by Canadian human righs laws, which make pay decisions made
on the basis of race, gender, age, and other grounds discriminatory and illegal.

extenial competitiveness

Extetnal Gompetitiveness F,xternal competitiveness refers to cornpensation relationships

ernpison of compenmtion

eicternal to rhe organizadon (i.e., compared with competitors). How should an employer position
its pay relative to what competitors are payiirg? How much should one employer pay accouncanu
'!7hat
mix of pay forms-base, i.ncendves,
in comparison to what other employers pay them?

with that of competito,s

stock, beneffa-will help achieve t-he compensation objectivcs? Employers have sweral policy
opdons. lfhole Foods combines base pay and team incentivcs to offer higher pay if team performance warrants. Medmonic sets iE base pay to match its competitors', but ties bonuses to
performance and offers stock to aII employees on the basis of company performance.33
Further, Medtronic believes chat its benefirc, particularly im emphasis on programs that balance work and life, make ir a highly attracdve place to work. It beliEves that how pay is posidoned
and what forrns it uses creates an advantage over competitors.
Many organizations claim their pay q/stems are market-driven, that is, based on what
competitors pay, Howwer, "market-driven' gets translated into practice in differenc ways. Some
employers ser their pay levels higher than those of their competition, hoping to acract the best
applicants. Of course, this issumes that someone is able to identify and hire the "best" from a
pool ofapplicana.

Externd comperidveness decisions-botlr how much and what forms-have a twofold

effect on objectives: (l) they ensure that the pay is su-fficient to attract and reain employee*if
employees do not perceive their pay as competitive with what other organizations are offering for
similar work, they may leave-and (2) thef control labour costs so that the organization rernain
comletirive in the global economy. Thus, enernal compctitiveness directly affects both efficiency
and fairness, And the organizatlon must respond in a way that complies with rdevant legisladon.
Employee Contributions This refers to the relative emphasis placed on performance. Should
one programmer be paid more than another because of beaer performance or greater senioriry?

Chaprcr

I I Thc Pay Modcl

should all employees share in rhe organizationt ffnancial success via incentives based on profft?
sharing ffnancial losses? Should more-productive tarns of employees be paid more
irfi",

"bou,
seams?
chan less-Productive

The degree of emphasis placcd on performance is an important policy decision, because

ir directly "f[""a *ploy.es' attitudes and work behaviours. Employers with strong pay-forn.rfor**". poiicies pur greater emphasis on incentives and merit pay. Starbucls emphasizes
of corporate performance widr its employees. General
lcock oprions and sharing the success
at the unit, division, and company-wide level. Recognition of
performance
El..rri.'.-phasizes
employees have to understand dre basis for judging
contribudons also affects fairness, because
their
pay is fair'
conclude
drat
to
in order
performance

Management A policy regarding managernent of the pay system is rhe last building bloclc in
the pay model in Exhibit 1.3. Ahhough it is possible to design a qrstem that is based on internal
.ligrr-.n., octernal compeddvenes, and employee conffibudoru, the qatem will not achieve its
that the
obiecdves unless ir is managed properly. Proper management of the pay system ensures
right
the
right
way.
the
objectives
in
for
achieving
pay
right
the
get
people
riehr
- 1.l. groqnd under compensation management is shifting. The uaditional focus on how to
adminisrer various techniques is long gone, replaced by more strategic drinking-managing Pay
parr of rhe business. It goes beyond simply managing pay as an et(pense to beaer understanding
and anilyzrngthe impact of pay decisions on people's behaviours and organizations' success. The
impact of pay decisions on expenses is one resuh thar is easily measured and well understood' But
as

orher mexures, such as pays impact on atuacdng and retaining the right talent, and engaging
this elcnt productively, are not yet widely used in the managcment of compensation. Effons to
do so are increasing and che perspective is sffiing from "how to" toward "so what."

Pay Techniques
The remaining ponion of the pay model in Exhibit 1.3 shows the pay techniques. The exhibit prodroughout the rest of this book. Techniques
de the four basic policies to the pay objectives. Uncounted variadons in pay techniques ocisB
many are examined in this boolc Many consuldng firms tout lheir surve]'s and techniques on
their websites. Informadon on various practices can be obtained simply by surffng dre'Web.

vides an overview only, pay rechnigues are discussed

TL

'

f-

E"
E4-

BOOK PI.AN

Compensation is such a broad and compelling topic that several books could be devoted to it.
The focus of dris book is on the design and management of compcnsation systems. To aid in
understanding how and why pay systems work, our pay model, which emphasizes ttre key strategic objectives, poLicies, and techniques, provides the structure for much of the book
ih"pt.r C dir"*ro how to formulate and implement a compensation suategy. It anabzes
what it means ro be strategic about how pioplc are paid and how compensation can help achieve
and sustain an organizationt competitive advantage. The pay model plays a central role in formulating and implementing an organizationt pay sffatery. The pay model identifies four basic
policy decisions that are the core ofthe pay straregf.
After suatery is discussed, the next sections of thc book will examine each basic policy
decision in detail. The first, internal alignment (Chapters 3 duough 6), examines pay relatiooships within a single organization. Two chapters in the next secdon (Chapten 7 and 8) CI<aminc
ercernal compeciriveness-thc pay relationships among compedng organizations-and analyzrs
the influence of market-driven forces.
Once compensarion rates and sructures are established, other issues emerg. How mucL
strou
should each employee be paid? How much and how often should an employeet pay be increascd.

13

14

Chaprcr

I I rkbModd
aad on s/har basis-<xpcricncc, senioriqr, or performance? Should pay furcreases be condngent
on the organizationt and/or the employee's performance? How should the organization share its
success (or failure) with employees? Stoci< awards, profft-sharing bonuses, merit pay? Thcsc are
questions relating to employee conuibutions, the third building block in the model (Chapters 9
and l0). Employee services and beneffts will be e4mined in Chapter 11. The role of governments and unions in compensation is explored in Chapter 12. The concluding chapter focuses
on rhe maragement of the compensation system (Chapter 13), which indudes understanding,
communicating, budgeting, and evaluadng resuks. More detail on global compcnsation systems
is provided in the Appendix.
Although this book is divided into sections that reflect rhe pay model, pay policies and
decisions are not discrete. In fact, all policy decisions are interrelated. Together, thry influence employec behaviours and organization performance, and can be a source of competitive
advantage.

Conclusion

The model presented in this chaprcr provides a stfl.rdure for undersanding compensation
sysrems. The three main components of the model include the objectives of the pay slstem,
the policy decisions that provide the qrstemt foundation, and the techniques that link policies
and objeccives. The following sections of the book ocamine each of the four policy decisionsinternal dignment, e<ternal competitiveness, employee conuibutions, and managemsnl-as $/gll
as rcchniques, new directions, and related research.

Two questions should constandy be in the minds of managers and readcrs of this text. First,
it this wry? There is rarely one correct way to design a systm or pay an irdividual.
Organizations, people, and circumstances are too varied. But a well-uained managr can sclect
or design a suitable approach.
Second, what does this technique do for us? How does it help achieve our organizational
goals? If good answers are not apParent, there is no point to the tcchnique. Adapdng the pay
q/stem ro meer rhe needs of the employees and helping to achieve the gods of the organization
is what this book is all about.
The basic premise of this book is that cornpensation systems have a profound impact. Yet,
too often, traditional pay systems seem to be designed in response to some historical but longforgotten problern. The practices continue, but the logic underlying them is not alwa;rs clear or

why do

even relevant.

D
i.

Chapter SummarY
People may have different perspecdves on compensation. From dre socieml perspective,
compensadon is viewed as a measure of jusdce as well as a cause of incieased taxes and price
increases. Stockholders believe that paying employees in stock creat* a sense ofownership
that will improve organizational performance. Managers view cornpensation as a major
o(pense and a means to influence employee behaviour. Employees view cornpensation as a
rerurn in an exchange with their employer, ar entidement, ot a reward. In other countries,

compensadon relates to being taken care of.

Cornpensation refers ro dl forms of financial reuns and tangible services and benefits that
'
employees receive as parr of an employment relationship.
The rwo major components of total rewards are total compensation and relational reuns.
Tord compensadon is composed of cash compensation (base pay and incentives) and benefits. Relationd reffns indude psychological aspects ofwork such as recognition and status,
challenging worL,

*d

learning oPPomunides.

Chapar 1

4.

compensadon are (1) e{ficiency in performance and qualiry- satThe srraregic objecdves of
and conqglling cq$!s, (2) fairness, and (3) compliance
irfring .ur-ro*ers and stockholders,
wirh laws and reguladoru'
cornpetitiveTh. fou, strategic policies in rhe pay model are internd alignment, ecternal
associated
techniques
structure
The
internal
management.
and
n.rr, .*ptoy.. conuibutions,
pay
suucture
The
and
evaluarionicenification'
job
descriptions,
analysis,
are
*i,n Aij"*."r
are market definitions, surveys' and pay policy
cornpedtiveness
wich
associated
techniqies
are senioriry-based,
lin.r. th. incentive program techniques associated with contribudons
and merit guidelines. The evaluation techniques associared witi man-

o.rfor**..-based,

.g.rn.rr. are planning, budgeting, and communication'

Key Terms
allowances
comPenSation
cost-of-living

adjustment
external comPetitiveness

incentives (variable pay)

total rewards

internal alignment
merit increase
relational returns

wage

work/life programs

salary

Review Questions
1, How do differing perspectives affect our views of compensation?
2. How does the pay model help organize one's thinking about compensation?
3, What can a pay system do for an organization? For an employee? Are these mutualy
exclusive?

2.

What is your definition of compensation? Which.meaning of compensation seems most

appropriate from an employee's view-return,.reward, or entitlement? compare yow
ideas with someone who has more experience, with someone from another country vrll't
someone from another field of study'
List

allthe forms of pay you receive from work. Compare to someone else's list. Explain any

differences.

3,

What is the "network of returns" upon your completion of the program at your curre.':
institution? Do you think these are achievable? What are the some of the things you cz.,'
offer your employer?

4.

Answer the two questions in this chapter's Conclusion, above (Why do it this way? Sc
what?), for any study or busines article that tells you how to pay people. Such artides ca:
be found

l,{&i

15

r
l
r
I

F
F
F
:

Experiential Exercises
1.

Tfu Pq

inthe wortdatwork lournal or Compensation and Benefits

Review.

Case
Inside lnternships
Many recent graduates work as interns as they begin to establish their careers. Career Eige
organization is a national not-for-profit service provider established in 1996' that arange

Ii

T
F

t
F
t
;

16

Chaper 1

77n Pcy

Ltdd

paid internships by partnering with leading Canadian host employers including major
banks, telecommunications and financial firms, and public-sector employers including

major bank, telecommunications and financial firms and public sestor employees like local and
provincial governments. The first online job board in Canada (www,careeredge.ca), Career
Edge Organization, to date, has recorded over 11,000 internships, and continues to offer
paid internships through the Career Edge, Ability Edge, and Career Bridge paid internship
programs.

The Career Edge program provides meaningful entry-level work experience for recent Canadian
graduates. lt is designed to help recent graduates launch careers in their chosen field. For
employers, Career Edge offers access to a diverse, qualified talent pool via cost effective 4 to

12 month paid internships that does not affect headcount. lt is also a robust option for
onboarding recent graduates. For a very reasonable stipend, these interns can help with special
projects, add diversity to company operations, and cover temporary staffing shortages. lnterns
gain practical work experience, develop employability skills such as teamwork and criticalthinking, benefit from networking and receive a stipend.

Kim Burgess, a business analyst at Bell Systems & Technology, benefited tremendously from
Career Edge. She says, "After taking a year off work to return to school, reentering the workforce was difficult. Career Edge gave me the opportunity I needed to apply my new skill set and
learn within a working environment. Your internship is what you make of it and Career Edge
will provide exactly what you need to excell"

Questions

1.
2.
3.

What do employers receive from summer interns? What retums do recent graduates get
from these intemship opportunities?
Should interns be paid? lf so, how much? How would you recommend an employer decide

the answers to both these questions?

What added information would you like to have before you make your recommendations?
How would you use this information?

Source: "lnside lnternships," www.careeredge.calen/job'seekers/testimonials/7

(accessed

February 22,20121.

ffi

Practise and learn online

with Connect.

Connect allows you to practise important concepts at your own pace and on your own schedule, with
2417 online access to an eBook, Practice Quizzes, Study Tools, and more.

t
F
t
t
il

LEARNING OUTCOMES
101

Explain why managers should tailor their pay systems to support the organi-

zation's strategy.

LO2 ldentify the four steps to develop a total compensation strategy.

103

Describe the three tests used

to determine whether a pay strategy is a

source of competitive advantage.

LO4 Contrast the "best fit" perspective on compensation with the "best
practices" perspective,

thcy.let
some managers adopt a compensadon sEategy by simply pafing mlket rates; rJrat is,
thdt
rhe marker d.ecide how rnuch to pay people. Unfortunately, a dose of realiry quickly reveals
employers cannot behave so simply.

I--I

SIMILARITIES AND DIFFERENCES

IN STRATEGIES
In Exhibir 2.1, compensation scraregies at Google, Medtronic, and Merrill Lynch are compary{.
Google is a popular Inrernet serrch engine comPany. Medtronic is a pioneer in implantable
medic"l devices such as pacemakers and stents. Merrill Lynch, now part of Bank of America after
the meltdown in September 2008, is a financid services organization that advises companies and
clienrs around rhe world, All three are innovators in their indusry. Their decisions on the ffve
dimensions of compensarion strategy are both similar and different.

All three formulace their

supporr rheir business sffaregy. All *rree emphasize outstanding employee performance and commitment. However, there are also major differences'

pay sraregy ro

Google positions itself as sdll being *re feisry start-uP populated by.nerds and. math whizmilemployees such g.n.iou, stock options that many of them have become
(Yes,
is a
there
competitors.
lionaires. Its beneftts
beyond the basics" compared to its
"r.''*"y
cash
downplays
lot.)
Google
Free lunch, a gym,
piano, and roller hockey in the parking
co*p.nr"don--(base^grandbon,rs.s), bur it does match its competirors on these pay forms.

zes.

ft offers all its

il,rs

ii
it
t

I
I

I
f
f

18

Chaptcr

EXHIBIT

2.1 |

Objectives

2|

Snatcg: Thc Totalitl of Dritions

Compensation Strategies at Google, Medtnonic, and Mernill Lynch

ffi
GOOGLE

MEDTRONIC

Emphasis on innovation

Focus on customers

Focus on customer

Commitment to cost
containment.
Recognize contributions
Attract and reward the best

Fully present at work and in per-

Attract, motivate, and reGin

.l

MERFULI TYNCH

fl

the best talent

sonal lives
Recognize personal accomplishment and share success

Fair, understandable policies

and practices

fl

Attract and engage top talent

Control costs

lnternal

Minimize hierarchy

Alignment

Everyone wears several haG

Emphasize collaboration

External

Competitiveness

Explore novel ideas in benefits and compensation

Generous, unique benefits

Reflect job responsibi lities

Support promotional growth
opportunities
Foster team culture

Job sized on four factors:

knowledge/skill, complexity, business impact, stra-

Market value of jobs establishes

overall pay parameters
Choices in benefits

Market competitive in base

and benefits
Market leader in bonus and

Pay

fairly within ML

tegic value

stock
Employee

Recognize individual

Contributions

contributions
Unrivalled stock programs

Management

Love employees. want them

to know it

lncentives directly tied

ness goals

to busi-

Opportunity to earn abovemarket pay

Recognition of individual and
team performance

Clearly understood; open

Employee choice

fl

fl

Bonus based on individual,

unit, and company success

Differentiate on bonuses
and stock

ln high-profit years, top

bonuses significantly
larger
ln less-profitable years,
top performers' bonuses
decrease much less than
poorer performers'
U

nderstandable, consistent
message

fi
fl
.t

!f,
f,t

fl
flI
xt
{t

W
$
che office holiday parry includes invited guescs whose lives have been prolonged thanks to Meduonic medicd devices. The yearly gathering brings alive to employees thar
what they are doing makes a real difference. So it is not surprising that Medcronic's pay strategy

At Medtronic,

seela employees "Toal \7ell Being'-programs designed to ensure that employees are "fully
presenr ar their work and in rheir personal lives" in order to focus on the customer. Addidondly
rhere is a srrong emphasis on performance-based pay that is based on individual, team, and organization accomplishmena. These programs offer Medtronic employees the opportunitf to earn
well above what drey would earn at competitors,
Merill Lynch pay objectives are straightforward to atuact, moti te, and retain rhe best talent.
Menill Lynch focuses on toral compensation, which indudes compecitive base pay, very aggressive
bonuses, and equdly aggressive stock awards based on each individualt accomplishmena. Pay for
performance is ,h. k y. Differences in toml pay for top vrsus poor performers are significant. ln good
yeas, roral compensation for top performers is hard rc bear In lean years, the bonuses and stock
awards significandy decrease, with greater reductions for poor performers than for top performers.
This aggressive pay-for-performance culrure at Merrill Lynch was traditionally seen as a
key factor in generating substandal wealth for bodr ics shareholders and rnany ofits ernployees.

-!l
:i4

ljl

fl
$

I
$
1ix

,d

$
dt

-T'

Chapter

t9

2 | Saatgr Tk Toafu of Dccbions

iI

held vicw is rhat this aggressive approach led rc too -,t;[ 65[-plrint and
However, a widely
by managers, and consequently the economic meltdown in late 2008.
behaviours
u".r663l
are in very diffcrent businesses servi.ng different cusro-ots, and
companies
threc
These
So
fre differenccs in their pay srategies may trot bc surprising. Pay
elenr
different
ernploying
r-ong
companies compedng for the sarne talent and similer orstomers.l
di$er
also
can
,rr*.gi.r

Different Strategies within the Same Industry

Google, Microsoft, and SAS dl compete for software engineers and marketing professio."ls_. Io its
earlier years, Microsoft a&pted a very similar strateg;t to Google's, erccept its employees aacepted

I
II
I

pay to join a companl whosc srcck value was increasing exponentially.2 But when ics
srock quir performing so spcctaorlady, Microsoft shifted irc suategy to increase base and bonus ro
rhe 65rh percentile from the 45& percentile of competitors' pay. It still recained its suong emphalug eliminztsd its longstanding broad-based stock opdoa plan
s.is on stock-related compensatioa,
condnue to lead the marker.
Its
beoefiqs
gran$.
stock
of
in frvour
SAS Institute, the world's largest prirzEty owned software company, takes a very different
approach. .lc emphasizes ics wodr/lift prograos over cash compensation, and gives only limisgd
bonuses and no stock awards. SAS headquaners in Cary, Nonh Carolina, includes fue on-site
childcare centres' subsidized privare schools for "hildr* of employees, rwo doctors on site for fi,.e
medical care, plus recreation facilities.3 Vo*ing more than 35 hours per week is discounged
By removing as many of the frusuations and disuacrions of day-to-day life as possible, SAS, like
Medtronic, believes people will focus on workyfien thcy arc at work and wont burn out. Googlc
so far retains the excitement of a scart-up, Microsoft has morphed into "the new Boeing-a solid
place ro vsork for a great salary,"a and SAS emphasizes its worl:/life balance programs.
These examples illusuate rhe rariane in suarcgic penpeccives among companies in differenr industries (Google Medrronic, and Merrill Lynch) and even among companies in the same
industry (Google, Microsoft, and SAS).
less base

Different Strategies within the Same Company

unia wirhin rhe same corporation will ha're very different competidve condidons, adopt different business srrategies, and fius fft diffirent compensation strategies.
The Korean company SK Holdings has a wide variery of business units. They indude a gasoline
retailer, a cellular phone manufacnrrer, and SK Construction. SK has different compensation
suategies aligned to each of its very diffixent $rrsingsses.5
Somerimes different business

Thus a strategic persPecdve on compensadon is more complex'rha. it fust appears, Tlking a

strategic perspective requires a focus on compensadon decisions that help the organization gain
and susuin competitive advantage.

r_I
'

STHATEGIC CHOICES

Strategrrefen to the fundamenul busines decisions that an organization has made in order to achieve
its strategic objectives. An organization defines its stratery thrcWh the tradeoft it makes in droosing
what (and what not) to do.6 Exhibit 2.2 relztcs these strategic choices to the quest for cornpetitive
advanage. At the corporate lwel, the fun&menral srategic choice k: Vhat ba:ines should ue be in?At
che business unit level, *re droice shifts to: f/o w do tu gain and suswin comp*itiae ad:uanage in this butizeniAt the fi:nctiond level, the suategic choice is: How should nul compensation help this brsiness gain

andsustain comp*itiue aduannge?'Ilteukimarc pqpose is to gain and sustain competitirrc advantageT

Support Business Strategy

A currendy popular rheory found in almost every book and consulrant's report tells managers to'
tailor their pay sysrems to align with the business strateg'y. The rationde is based on contingency

strategic perspective

afons onantcrnrttion
drisiots dut Mp the organizatiot gah md atsain
comFtitiwafunF/ge

,@
LO1
strategy
thefundamenal htsines
dxisbns an organization has
made to achieve i6 strategic

&jective,

sudr

uwhat

bushess to be rh and how to

obli n comFtitive adva ntag e

competltive advantage

ir**

a busin* pnctice or
that resuls in better peior-

mance than one's competr'tors

I
I
I
t
;

20

Chaprer

EXHIBIT 2.2

2 | SFeg:

Tbc

foafu of DdAns

Strategic Choices

ffi

ffi
. What business
should we be in?

. How do we win (gain

competitive advantage)
in those businesses?

. How should

HR

.#

help us win?

. How should total

compensation '+
help us win?

re
notions, That is, differences in a fum's strategy should be supponed by corresponding differences
resources strategy, including compensation. The underlying premise is that the
grearer the dignment, or.fit, between the organization and the compensation q/stem, the more

in its human

effective the organization.

Exhibit 2.3 $va an erample of how compensation systems might be tailored to three general business strategies.S The innovator stresses new products and short response times to markec
trends. A supporting compensation approach puts less emphasis on evduadng skills and jobs
and more on incentives designed to encourage innovations. The cost curtert effrciency-focused
strarery s6esses doing more with less by minimizing costs, encotuaging producdvity increases,
and specifring in greater denil oracdy how jobs should be performed. The customer-focused
business suategF srresses delighting customers and bases employee pay on how well they do this.
Other business strategy frameworla rely on similar ideas. In Mic"hael Poner's model, furns that
' cut costs would be said to follow a cost leadership strarcry, while those that seelc m provide a unique
and./or innorative product or sewice at a premium price are said to follow a differentiation strategy.
Lit<e:,is:, Miles and Snow refer rc defendm as those that operate in sable markets and compete

Chaper

Tailon

STRATEGY

lnnovator: lncrease

Product ComPlexitY
and Shorten Product Life

.o:,"

2|

Strateg: The Totahry of Dttitio*

the Compensation System to the Strategy

BUSINESS RESPONSE

HR PROGRAM ALIGNMENT

COMPENSATION SYSTEMS

o Product Leadership
Shift to Mass

tustomization

Committed to Agile,
Risk-Taking, lnnovative
.'
People

Cycle Time

.
.

Reward lnnovation in
Products and Processes
Market-Based Pay

Flexible-Generic Job
Descriptions

Cost Cutter: Focus on

EfficiencY

. -Operational Excellence

Do More

with

Less

Pursue Cost-Effective

.
.
.
.

Solutions

Focus on Competitors'
Labour Costs

lncrease Variable Pay

Emphasize Productivity
Focus on System Control

and Work Specifications

Customer-Focused: lncrease
Customer ExPectations

.
.

Deliver Solutions
Customers
Speed

to

Delight Customer,
Exieed Expictations

to Market

.
.

Customer Satisfaction
lncentives
Value of Job and Skiils
Based on Customer'

Contact

ffi
on cosr, whereas pmspecturt are more focused oo innsvadon, new marke6, and so fonh. These
are known is generic ttratqt fnmauozk Conventiond wisdom would b that competing on cosl
requires lower compensation, whereas compecing tirough ianovation is likely to be more successfi.rl
with high-powered incentive or pay for performance progra-ms. Most firms, however, do not have
generic strategies. Instead, they tend to have aspects of cost and imovation, Lil<ewise, compensarion
suategies do not necessarily line up neady witlr generic business saategies, Southwest Airlines rely
heavily on cosr leadership in their stratcgies, but pay their employees well above market (e.g., using
stock and profit-sharing plans) when fum perforuunce is suong. SAS follows a customer and innovarion suateg)', but uses litde in the way of pay for performance. Thesc generic business stratery and
pay strategy ideas provide a starting point for organization to fashion its orrrn unique way of adding
value and gaining competitive advantage duough aligniog its business suategywith ia pay strategr.

A dassic
emphasis on internal alignment
(e.g., well-developed job evaluation plan, clear hierarchy for decision making worky'life balance
benefits, policy of no layoffs) had served it well during the decades when the company dorninated
the marker for high-profir, mainframe computers. But it did not provide flexibiliry to adapt to
compeddve changes in rhe new centurf A redesigned IBM now focuses on the high-growth,
high-value segmenr of rhe IT induitry and offers a broad mix of businesses and capabilities that
provide business insighr and solution for its dients. A new business strategy requires a new com'pensarion suaregy. At IBM, rhis meant streamlining the organization by curting layers of rnanagemnr, redesigning jobs to build in more fleribiliry, increasing incentive pay to more suongly
differentiate on performancq, and keeping a constant eye on costs, IBM changed ie pay strategy
ft

also follows thar when business suategies change, pay strategy should change too.

example is IBM'S strategic and cultural transformaeion.

IBMI

and system to supporr im changed business strategy.

Towers \fauon and World at Work recendy completed their Nonh American 20 1 1 /20 1 2 Tirlent
Management and Rewards Study, The srudy surveyed HR professionals in 21 8 U.S. and 98 Canadian
organizadons and found drat organizarions with reward and ta[int management programs that support their business goals are more fian twice as likely to repon being high-performing companies.g

21

Chaptcr

22

2 | erqETb ftab, 6Mbff

Support

HR Strategy

it

is critical thar an organizadon have a compensation strates/ that suppons is

It is also imperacive thar there be alignment between its compensation sftaEery and its overall HR suategies. HR systems will be most effecdve when roles are designed o
allow employees to be involved in decisioru and have an opportuniry to make an impac, when
employee ability is developed through selective hiring and training and development, and when
the compensarion system rnotivates employees to act oh their abilides and take advantage ofthe
opportuniry ro make a difference. Compensation is the key to attracting, retaining, and motiwting employees with rhe abilities necessary to execute the business strategy and handle greater

As discusse4

business $:rate6r.

,6@

decision-making responsibililies.
Consider alignment beween compensation and other aspects of HR at SAS, Rather than
being sold in a one-time $ansaction, SAS's softvvare is licensed, This is part of a business strategy
bywhich SAS gers ongoing and substantial feedback from customers regarding how produce can
be continually improved and also regarding what new products custotners would like, To suppoft rhis long-term customer reladonship, SAS seeks to have low employee turnoyer. Im heavy
emphaiis on benefits in compensation helps to reain employees. SAS also gets many job applicarions, which allows it to be very selective in its hiring. The deemphasis on pay for indMdual
performance reduces the risk that competition among employees will undermine this objecdve.
Hence, alignment of an organizationt cornpensation stratery and ia HR strategy are central to
successful. business strategy

r-I

,@

ecicution'

THE PAY MODEL GUIDES STRATEGIT

PAY DECISIONS

The competitive advanrage of \il7hole Foods, inuoduced in the previous chapter, is apparent with
the ftrst visit to one of its grocery stores, described as "a mouth-watering fadvaj of colors, srnells,
and textures; an homage to the appetite."lO !flhat surted out in 7978 as a small heilth food store
in Atsdn, Texas, has, through straregic decisions, grown to becorne the worldt leading natural
and organic foods supermarkec Along the way, the company has designed a total comPensation
sysrem ro support the company's phenomenal growth (from 10,000 team mes.rbers or enlployees
and $900 million in sales in 1996 to over 64,000 team members and sales of over 10 billion in
2011) while remaining uue to the foundert vision'
Using the pay model discussed in the previous chapter, the following is an analysis of the five
suategic compensation decisions facing Whole Foods managers:

1.

Objeaiues: How should compensadon support the business suateg/ and be adaptive to

the cultural and regulatory pressures in a global environment? fWhole Foods: increase
shareholder value through proffts and growth;,go to extraordinary lengds to satisfr and
delighr customers; seek and engage employees who are going rc help the company make

money--{very new hire must win a two-thirds vote from team members beforc being given

Z.
'
3.

a permanent position.)
Interzal alignment: How differendy should the different types and levels of skills and work
be paid wi*rin the organization? (Whole Foods: store operations are organized around eight
ro ten self-managed tearns; egalitarian, shared-fate philosophy means that executive salaries
do not exceed 14 times the everage pay of full-time employees; all full-time employees
Sualify for stock opdons; nd 94 percent of the companyt options go to non-execudve

emPloj'ees')
competitiveness: How should total compensation be positioned aginst competitors?
($fh.ole Foods: offer a unique deal compared to competitors.) \Vhat forms of compensadon
should be used? (!7'hole Foods: provide heahl insurance for all full-time employees and
20 hours of paid dme per year to do volunteer worlc,)

Exirnal

:
Chapter

2|

Snaug: Thc Totaliq of Dcctbns

on individual and"/or team perfori, o"experience and,/or condnuous learning on improved skills, on changes in cost of
^in
(e.g., housing, uansportation, hedth services), and/or on each busiliuirr*, o1 p.tronal needs
(Whole Foods: a shared fate-every four weeks, the performance
ness-unirt performance?
in terms of revenue per hour worked, which direcdy affects what
measured
is
of each ream
why sraff:rl are given a say in who gets hired-<o-woricers
reason
is
one
This
they ger paid.
Should pay increases be based
Emrloyec conrtbations:

who will help them makc monel)

open and uansparent should rle pay decisions be to all employees? Who
How
Management:
in designing and managing the slntem? (lfhole Foods: "no secrets"
involved
be
shodJ
mana$ernent-every store has a book listing the prwious yeart pay for wery employee
incluJing execudves; employees make decisions-fr.y vote to pick their health insurer

*rn,-ro-.ot.

rarher than having one imposed by maaagement.)

together,
These decisions, taken
strateg/'

Stated versus Unstated Strategies

F
:

ri

compensadon suategY at work.

L(}2

DEVELOPING A TOTAL GOMPENSATION

STRATEGY: FOUH STEPS
Develop.ing a compensation stratery involves four simple steps, shown

in Exhibit 2.4. Vhile rhe

drem is complex. Tbial and error, orperience, and insight play majql
,.3teps are simple, executing

i roles. Research evidence can also help'Iz

Step 1: Assess Total Compensation lmplications

The facrors in *re business .environment thar have contributed to a companyt success a-od
that are likely to become more (or less) imponant as the company looks ahead are dassified ia
Exhibir Z. ,They are: business suategy and cornpecitive dynamics, HR suategr, culcurclvdues,
'i social and polirical context, employee/union needs, and other HR systems.

.,It

ii
i,i

i,r,

F
F
F
T

form a panem that becomes an organization! coinpensation

AII organizatioru that pay people have a compensatiotr stratery. Some may have written, or state4
cbmplnsarion suaregies for all to see and understand. Othe5s may rrot even realize they have a
.omp.ns.rion strategy, daiming that "'We do whatever it m-kes." Their compensadon suategy
.-.rgo from the pay decisions they have made. Unstated compensacion suategy is inferred
from-.o*pensation practices.ll The point is that managers in all organizations make the frvc
suatcgic decisions discussed earlier. Some do it ia a rational, plalned walt; others do it more
.haotically-as ad hoc responses to pressures from t.he economic, sociopolidcel, and re.gulatory
conrexr in which rhe organization operates. But in any organization that pays people, there is a

r'

23

\Business Strategy and Competitive Dynamics-Understand the Business This ffnt step
includes an undersnnding of *re speciffc industry in which the organizadon operates and how it
ilans to compete. To cope with turbulent, compedtive dynamics, fo**g on factors in the business environment (i.e., changing custoirer needs, cornpetitors' actions, changing labour market

'lfhat

conditions, qhanging legislations and regulations, globalization) is important today.

will be
importanr in rhe future?
It is imponant to learn ro gauge the underlying dynamics in a busincis, such as its business srategy, and to consider how the compensation system should change to support and

be part

of rhat suategy. Aligning different compensation

strategies

to

different

business

t
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24
EXHIBIT

Chapter

2 | Smry: Tb Toulitl

of &cinorc

2.4 I f"y Steps in Formulating a Total Compensation

Stnategy

I
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;lti;:,

: r:,:,,i.::,:,,';,i'1lr.jillr'l:.:

i{ij

suategis-cost-cutter' customer-cetrtred, and innoyator (see Exhibit

2.3)-fu

aheady been

discussed. But realiry is more complex and chaotic. Organizadons ale not necessarily innovators,

cost cutters, or customer-cenued. Instead, th.y iue some of each, and more. So the iational,
planned, and orderly image conveyed in Exhib-it 2.3 does not adequately capnrre the turbulent

competitive dynamia underlying this process.

13

comparing pay between counlabour

cose
and productivity (output per
hourly
in
differences
1,
uies is complex. In Chapter
in the average length of the
differ
Counuies
also
noted.
were
countries
between
dollar of wages)
the
kinds
of
social
holidays,
paid
of
number
,h.
worh,yeelc,
Programs' and even how pay
"u"og"
is.detegnined.lS Therefore, mana8ers in muldnationd firms must become knowledgeable about
the cornpetitive con&tions and pay practices both globally and locally'

bompetitive

dynamics can be assessed globally.ta However,

lor Ghange? Compensation or

this stratery, a
HR
stracery.'SThatever
with
the
overall
pay srrateg)r is influenced by how it fts
os
in the higha
can
play
supponing
role,
is
critical.
Pay
it
of
pay
within
decision about the role
HR Strategy: Does Pay Play a Supporting Role or a Catalyst

performance approach, or

it

can tel<e the lead and be a catalyst for change. The pay strategy is

.t'

Chaprer

2|

Strateg: Thc Tonliy of Dn;storu

-r.. nardally influenced by how well ir fia wid o&er HR qFcms ia dre organization. A highly
Ilr";1,rraand confidential pay syst - courolled h " f.. people in a corporate unit wi! ncg
nexibfg oPetr orBanizadon-'Whatever rhe role, compensadon is

,uoooa a highly decenualized,

."if.aa.a in the total HR

approach'r6

pay rystem reflecc the nlucs th't gurde an employert behaviour and underrreacment of employees. In many orgaoizadons, core values guide employer' behaviours and
iie
in dte pay qrstems. The pay systern mirron the companyt i-age and reputation.
reflected
are
.Exhibic 2.5 shows Medronic! vdues. The fi.fth rralue recognizes employees'wonh by fostering

Gultulefllalues A

ir

"oersond satisfaccion in work accomplished, securiry, advancement oppomr.niry and means to

in ihe company success." Its compensation strategy reflecs this rralue by induding work/
security, incendves, and stock opdons co share in 6c companyt success.
Ufe balance programs for
But there are somc skeptics out there. One snrdy described mission statements as "an assemOn the other halrd,. Johnson and Johnson considblaee of rire phrases" that impressed no on..17
"recipe
for busines success."l8
compass"
and
"moral
its
.rr]* ,,",.*arrr

jur.

I
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;
;

Context

Contact refers to a wide range offactors, including legal and reguqhonging workforce drnographics, orpectations, and so
differences,
latory requiiements, cultural
is very people-intensive. Consequendy, \fhole Foods
its
business
Foods,
on. In thi case of lfhole

Social and Political

25

diverse worldorce and increasingly diverse forms of pay

educarional reimbursements, employee assistance
counselling,
dependency
chemical
(chilfcare,
(other supermarkets) to imitate.
competitors
difrcult
for
be
and
value
add
may
programs)

maners may find that an increasingly

As governments are major stakeholders in derermining compensation, government relations

ro influence laws and reguladons may also be parc of compensation suategies. For orample, the
European Uniont 'tocial contracC' becomes a mar[er of interest to managers.l9 And in China,

**y .o-p*ies have discovered rhat building relationships

widr government officids is

essen-

tial. So &om a strategic perspefiive, managers of compensation may try to shape the sociopoliticd
environrnent as well as be shaped by ir

Employee Prelerences The simple fact that employees differ is too easily overlooked in
formulating a compensarion strategy. Individual employees join the organization, malce investmenr decisions, interact with customers, design new products, assemble componenc, and so on.

EXHIBIT

2,5

Medtrohic Mission and Values

MEDTRONIC VALUES
30 years ago, our mission statement gives purpose

Written more than

and is the motivation behind every action we take.

to our worl( describes the values we live by,

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3.

.4.
5.

ry

;
:

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2.6

Chagter

2 | SW1: Tb Teb, of Dccitiarlt

Individual employees receive the pay. A major lirriitation of contempor{y

PeY

qtste1s is how

ro becer o.i"fy ioaiuiaual needs and preferences. Offering more choice is one approach- Older,
highly paid *ork o may wish ro defer to(es by puning their pay into retirement funds, wherea5
y"""g.. employees may have high cash needs to buy a house, support a &mily, or ftnance an
Ldrr."tioo. Durl-."r.., couples who have healthcap coverage in bodr workplaces may prefer to
use rlore of rheir combined pay fot child care, automobile insurance, financid counselling, or
other benefits such as flexible schedules. Employees who have young children or dependent parents may desire dependent care .overage.2o

A number oftontentporary pay systen$ in Canada do offei some choice. Flcxible

and. choices among healthcare coverage and choices

ocamples. This approach adds value and is

of cornpeddve advantage.

beneftm

in investment funds for retirement plans

diftcult for other companies to

imiste-it

are

is a source

SoLe studies have found tfiat employees do not always choose well. They do not always
understand the alternadves, and roo many choices simply confuse them. Thus the value added
by offering choices and sadsfring preferences may be offset by the expense of communicating
and simply confusing people.2l In addition to possibly confusing employees, offering too many
choiceis would also be a challenge to design and manage'
Union Preferences Pay strategies also need to be adapted m the nature of the union-management relationship.z2 Union influence on pay systems in Canadaremains significant. In2007,
unionized worL.o at Loblaws in Ontario approved pay cuts for one-third of their members
cmployees represented by the
in order to remain competitivc with \ilalmart.3 Bombardier
'W'orkers
recendy negodated a flexible
Aerospace
and
of
Machinists
Association
International
forms of pay (e.g., retirement
diffcrent
for
preferences
Uoion
members.z4
their
plan
for
beneffts
and healthcate plans) and their concern widr job securiry also affect Pa)t stratery. For orample,
in the last ,ouod of ,r"gotiations bctween Air Canada and its 3,800 customer service staff(repto
resenred by *re CA\f)-in 2011, Air Canada was pushing to switch from a deffned benefia
vehemendy
of
course,
union
was,
The
ncw
hites.
a deftned tontribution pension plan for its
that
opposed to the change and the issue was sent to arbitration, The arbitrator ultimately nrled
from
their
benefit
of
pan
would
receive
hires
New
plan.
pension
Ai, C*"& h"d ,o o1",. hybrid
the existing deffned beneffts plan-under a reduced formula, and part from a defined contribution

rc by both workers and the cmployer'

contributed
^plan,Ir,t
rn"tionally, the role of unions in pay dctermination

also rtaries gready.z5

In

Europe,

unions are major players in all strategic pay decisions. The point here is that union interests are
of the environsrental pressules that help shape compensation strategies.
'part Ir,
,rr*, assessing the compensadon implications of many factors-including the organithe competitive dynamics, its culure and vdues,. the sociopolitical
zationt business ,t
"Lry, preferences, and how it ffts with other HR slntems-is necessary to
conterft, employee/union
formulate a compensation strategy'

'

Step 2: Decide on a Total Compensation Strategy

The compensation stratery is made up of the five decisions oudined in the pay rnodel: set objecemployee
tives and specify rhe fourlotcy choices of internal alignment, external comPetitiveness,
It
requires
strategy.
cornpensation
a
2
in
developing
is
step
This
contriburions, and management,
noted,
already
As
environment.
and
business
the
organization's
ih"t
fft
decisions
compensadon
decisions should suppon different business strategies. The organization's objective
"omp.rrsatior,
is to make the right compensarion decisions based on how the organization decides to cornPeteThe .Net Worth box here illustrates this concept.
The rest of rhis book discusses *rese compensation decisions in detail. It is important to
realize, however, that the decisions in the pay model worh in concert. It is the rctaliry of these
decisions that form the compensation suategy'

F'Chaprer

2|

SFat g,t Thc Toutiry of Drcisiotx

Netflix is the world's leading lnternet subscription service for movies and W series. They
launched their operations in Canada in September 2010. With more than 27 million
streaming members in the United States, Canada, Latin America, the United Kingdom,
and lreland, their strategy is all about innovation, and their corporate culture is defined
as freedom and responsibility. The strategy requires a high-performance workforce, and
therefore they "hire adults and expect adult behaviour." The company has no formal
structure, no career paths, no health club, no ping-pong tables, no recognition program,
and no performance bonuses. Benefits are traditional.
When it comes to rewards, freedom and responsibility rule, The company considers the
opportunity to do challenging work to be the greatest reward. Compensation is very
generous (9fth percentile). Employees decide at the beginning of each year how to split
their compensation between cash and immediately vested stock options. Up to
15 percent of compensation can be used to buy deeply discounted, immediately vested
stock through the employee stock purchase plan.

Employees can take as much vacation time as they want as long as their manager and
team members agree. Turnover is considered a good thing because they dont want
employees to stay with the company unless they really whnt to be there.

The Netflix approach to total rewards is closely aligned with their strategy, and the
results have been excellent. The company has been rated the #1 Web site for customer
satisfaction five times and their stock price has held strong in the volatile high-tech
sector.

C. Fuoce.Karasinski, "Netflix Bucks Traditional Total Rewards," Workspan, August

2007, pp. 38-42.

Sor"irces:

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poliry decisions) and rhe pay system (procedures for paying people) as well as the imporoF people's percepdons and behaviours is vitd to implementing a pay strategy. The results

(grand

need to be assessed against the objectives.

SOURCE OF COMPETITIVE ADVANTAGE:

THBEE TESTS

Designing and implemencing a pay suareg)r that is a source of competitive advanuge is easier
Nor all compensation decisions are suaregic or a source of compedtive advantage. Three rests determine whether a pay strategy is a source of competitive advantage: (1) Is it
aligned? (2) Does it differentiate? and (3) Does ir add value?26

said than done,

This step recognizes that thc compensadon strat-

rc frt changing conditions. Thus, periodic reassessment of the fit is needed to

condnuously learn, adapt, and improve. Managing the linla between ttre compensation suategy

egy musr change

. T-tr

Step 3 is to implement the strategy .hto"gh the design and execution of the compcnsation sysrem. The compcnsation qrsrem cranslates stratesr into practice. Employees infer the underlying
strategy based on how they are treated by &eir employer duough compensadon qrutem.

tance

Steps 3 and 4: lmplement the Strategy and Reassess the Fit

Step 4, reassess and realign, doses the loop.

27

LO3

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2A

phaptcr

Align
Alignment of the pay stratery includes three aspects: (1) alignment with the busines $raregrr,
(2) dignment octerndly wittr the economic and sociopolidcal conditions, and (3) alignment
internally with rtre overall HR qystern. Alignment iq. probably the easiest test to pass,

Differentiate

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Some people believe thar the only

from everyone elset.27

*ring that really matters about a strategy is how it is different

simple for a cornpetitor to copy, it cannor be

If apay system is relatively

a source of competitive advantage.

The pay suarery is woven into the fabric of the companyt overall HR stmtery. Copying one
or another dirnension of a strategy means ripping apart the overall apgroach and patching in a new
one. So irr a sense, the alignment test (weaving the fabric) helps ensure passing the differendation
test. Microsoft's use of stock awards for all employees, often wonh considerably rnore than base pay,
is difficult for its competicors to copy. The SAS work-family balance and Medtronic total-presenceat-the-workplace strategies are difficult ro copy. It might be reladvely ea,sy to copy part of what a
compedtor does (e.g., grant stoclc options to more employees, offer more choices in beneffts), but
the idea of a straregic perspecdve implies that it is the way the various programs ff.t together and
fit the organization; and that is difficult to copy. Simply copying others-blindly benchmarking
and following so-called best practices-amounts to trying merely to stay in tJre race, not ro win it.

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2 | S@E 7b ToEh afffiet

Add Value

Organizations today look for the return they are getting from their incentives, benefiu, and even
base pay. Compensation often is a companyt largest controllable expense. Because consultants
and some researchers treat different forms of pay as investments, t-he task becomes how to come

up with ways ro calculate the return on those investments (ROI). But this is a diffrcult proposition. Costs are ruy to fit into a spreadsheet, bur any vdue created as a result of those costs is
difficult rc specifr, much less measure.Zs
Trying to measure an ROI for a compensation strategy implies tlat people are "human
capital," just like other factors of production. M*y people ffnd this view dehumanizing. They
argue that viewing pa)' as an investment with measurable returns diminishes the importance of
ueating people fairly.z9 Of t}re three tests of suatery-align, differentiate, add value-the last is
the rnost difficuh
arrd services, fust movers (innovators) have well-recognized
advanages that can offset the risls involved-high margins, capruring market share and rnindshare
(brand recognition).3o But it is not known whether such advantages accrue to innovators in totd
compensarion such as Microsoft (one of the first to offer very large stock options to all employees)
orAmerican Express (among the fust to offer flenible benefft programs in Canada) now that many
competitors are doing the.same thing. It is not known whether a compensation innovator atcracts
more and bener talent, induces talent to stay and contribute, or provides cost advantages. Studies
are needed to ffnd the answe$.

Ir is known that in products

LO4

I_-I

"BEST FIT" VERSUS "BEST PFACTICES"

premise of any strategic perspective is that if managers align pay decisions with
the organizariont stratery and values, are responsive to employees and union relations, and are
globdly competitive, the organization will be more likely to achieve competidve advantage.3l The
challenge is to design the "fit" with the environment, business suategy, and pay plan. The bener
the fit, the greater the competitive advanage.

Tie underlying

Chapter

2 | &raag:

Thc Toulfry of Dccisions

Bur not everyone aSees. tn conErast to the notion of suaregic fit, some believe that
ll) a ser ofbesr pay practices exists and (2) thesg pracdces can be applied universally across
iiru"rionr. Rarher than a bcner fft between business strategy and compensation plans that
f.rr.t performancc, thgy say a set of best practices resula in bercer performance with
,rt.ta.
t
business strateg;r.32 The chdlenge here is to selecr from various recommended lists
l^or, *y
nthe" best practices. Research from the past few years is beginning to provide guidance
,hr,

"r.
on our "choices"'

:i

rr
.
.
.
,
,

Intazal aligztncnt Borh smaller and larger pay differences anong jobs inside an orgaoizadon can affect results. Smaller internal pay differences and larger internal pay differences can
both be a'besr" practice. !?hich one depends on the conterct, including the fft with lrrsinsss
srarery, other HR pracdces, and organizational culture.33

Extertal com?titioenest: Paying higher than the avere paid by competitors ca-a aftct
results. Is higher compedtive pay a "best" practice? Again, it depends on tte conterc.x
Ern?lEee conrtbutions: Performance-based pay can affect results. Are performance incentires
a "best" pracdce? Once again ir depends on the contoct.35

Managtng compmsation: Rather than focusing on only one dimension of the pay stffcgf,
such as pay for performance or internal pay differences, dl dimensions necd to be considcred

sffateg!: Finally, embedding compensadon stratery within the broadcr

results. Compensation does no! act done; it is part of the overall
affects
straregy
CompensatioTt

HR
HR

So speciffc pay practices appear to be more beneficial in some @ntetcr than othen,s and
"best pracdces versus best ftt" does not appear to be a useful way to frame the quesdon. A morc
useful question ls: Vhat pmctices pay of best undcr uhat condirtozri Much of the rest of this book
is devoted

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together,36

approach.3T

to this question.

VIRTUOUS AND VICIOUS CIRCLES

Srudies have shown rhat performance-based pay and stock opdors grana may be orarnple of best
practices. However, some snrdies suggest tfiat performance-based pay worls best when the organization is performing well. This phenomenon is like a vimrous circle. As depicted in Exhibit 2.6,

with increasing profits or market share is able to pay larger incentives in rhe form
of bonuses and *ock awards. And paying these incentives fairly improves employee anitudes
'1, and
work behaviours, which in turn improves their performance and ulrimately results in bemer
an organization

'.

GUIDANGE FHOM THE EVIDENCE

objectivcs:

I
;

There is consisrent rer.earch evidence rhat the following practices do maner to the organization's

organizational performance.3g The cirde gains upward mornenturn.40 Employees receive returns
that compensate for rhe risks they Blce. And they behave like owners, since they are sharing in
the organization's success.
It cannot have escaped your attention that circles can also ga.in momenrum going downward to become a vicious circle. As depiced in Exhibit 2.6, when organization performance
declines, say h a recessionary period, perforrnance-based pay plans do not pay oft drere are no
bonus'es, and the vdue of srcck dedines-rrith potentidly negacive effecrs on organizational
performance.4l Declining organizadonal performance increases the risla facing employeesrisks of demotions, wage cucs, and wen layoB. Unless the increased risks are offset by larger
retruns, the risk-return imbdance will reinforce declining employee acitudes and speed the
downward spiral.

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-z*'. -

ur-

F
Chagter

2|

Stmtcg: Thc TouIitT of Decisim

strategic perspective

strategy

Review Questions
1. Read a$anthe values statements

in Exhibit 2.5. Discuss how if at all, these values might be

system.
Are these values consistent with "letting the market
a
compensation
reflected in

decide"?

2.
3.

What are the three tests used to determine whether a pay strategy is a source of competitive advantage? Discuss whether these three tests are difficult to piss. Can compensation
really be a source of competitive advantage?
Contrast the essential difference between the "best

fit" and "best practice"

perspectives

on comPensation.

4,

Explain why performance-based pay may not always be a best practice.

Experiential Exercises
1.

lnterview a compensation specialist about his or her organization's compensatjon stta'.egy, specifically the five isues--objectives, internal alignment, external competitive'
ness, employee contributions. and management. How does this organization compare
to Google? To Whole Foods? \rVhat business strategy does it seem to fit (i.e., cost cutter,
customer-centred,

2.

in

novatoc or somethin g else)?

Set

up a debate over the following proposition: "Best practices' is superior to the 'best

fit"

approach when designing a compensation system,

3.

ten people about their total rewards preferences. What conclusions can you dralt
from the results?

4.

Set up a debate over the following proposition: Nonfinancial retums (great place to
work, opportunities to learn, job security and flexible work schedules) are more important than pay.

Survey

Case
Difficult to Copy?
One of the best ways to maintain strategic competitive advantage is to have a strategy tf.a: s
difficult for competitors to copy. The more the different aspect of a strategy are intere'lated
or interconnected, the more difficult it becomes for others to replicate. Consider the compejration strategy at Netflix. discussed in the .Net Worth feature in this chapter. On the face of L
this strategy look easy to copy (or at least to articulate). But determining which corrpensatoc
strategy best fits an organization's business strategy and culture as well as the exten':al cne5sures it faces may make the strategy more difficult to imitate. lt is the relaionship, the fiC the
way a pay system works with other aspects of the organization, that makes h difficuh to lrritate
and adds ,value. lt is not the techniques themselves, but their interrelationshlps that make a

strategic perspective successful.

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competitive advantage

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Strdr,:

ruTaah,

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Mnons

Questions
1

.2,

Spend iome time looking at the website for Netf lix. What can you infer about the business
strategy and the organizational culture? 'l

Find some information on

does Netflix face?

the moviedW series rental industry. What external

pressures

3.

After you have a sense of what Netflix is like decide whether you think its compensation
strategy fits its business strategy, organizational culture, and external pressures.

4.

How would you change compensation at Netflix?

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Practise and learn online

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to practise important concepts at your own pace and on your own schedule, with
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Nothing is routine at a CSl crime scene. And nothing is routine during the creation of the hit
TV series, Every yeaL nine writers struggle to come up with a plot for the season finale that

will ensure millions of viewers tune in again next season.

Carol Mendelsohn, one of three executive producers and also the "show runner" (the
ultimate decision maker), leads the team of creative writers and manages the cast, support

crery and production crew. ln addition to the writers and actors, jobs on the series include
director of photography, editor; story editor;'executive story editor; gaffers, and special-effecS
makeup (severed heads and other body parts).
What determines the pay for all the different types of work involved in creating C5l?
Executive story editors get paid more than editors. How much more? Does it matter? Can an
editor be promoted to the executive story editor for this or some other series? Writers can
become

producers-Ms. Mendelsohn staned her career as a writer-but can stunt coordina-

tors become producers? ls the editor paid more than the stunt coordinator or the gaffer? And

what's a gaffer anywaY?

What criteria are used to set pay-the content of the work itseli the value of what is
contributed to each episodg the person's skill/experience/reputation? Perhaps the ratings for
the show? How do pay differences between jobs in the organization affect behaviour? Do
they support the organization's business strategy? Do they help attract and retain employees? Do they motivate employees

to do their best work? 0r are the pay procedures bureau-

that drive away creative talent?

5o many questions! Two of them lie at the core of compensation management (1) How
is pay determined for the wide variety of work performed in organizations? and (2) How do
the pay differences affect employees' attitudes and work behaviours? These questions are

. cratic burdens

examined within the framework of the pay model introduced in Chapter 1 and shown again

Chaprer

3|

Dcfning

InErul

37

LO1

COMPENSATION STRATEGY INTERNAL

ALIGNMENT
in a suategic approach. Internal alignmsnl
second, addresses relationships inside *te organization- How do
' )i. Lr*.riUilitic of a vine fastener, pruner, or weeder relate to each other? How do they
.:PTfd * P:
rhe responsibiliries of r}rc cook, the $e ste11a, or.rhe accoun.T,
: ;";
jobs inside an o_rganization form a job
lir-. fr"*.ftolit Tl. relatioruhips among different
behaurhar should suppolt the organization! strategt sa?Port the uorhflow, and motiuate
obiecdves was our first pay policy issue

1,,

Ab"wt

"-*i.o
i;, i":r"rJl eqniry), our

intemal alignment
(inremal eguity)
fie rdatfudrix bet*een
tln joixwithh a
ogan:zathn

'rele

;;r;.

objecdves'
,.
ioar toward organization
: r:--''
job
a
structure for the engineering and scientiffc work at an engineering
shows
3.-1
Exhibir
by
rnmDA'v. The suucture indudes six levels that range from entqT to consultant, as evidenced
six
levels
the
much
to
pay
how
ofworlc
Deciding
level
J. Ja"jonrtrips among rhe ddes for each

.,r 'creates a Pay stfuch[fe'

,r'GD
pay shrcture
the aray of pay ratrs fot dif-

wo* ot skills within a

ingle organization; the number o( leve9 the differentials

ferent

Supports Organization StrategY

Internal job strucnrres
The organizarion's srategy indicates how it plr"s to achieve its purpose.
decided that six levels of
company
engineering
ir.
The
ro
achieve
h"lp
rhe
srrategy
Ai"r.4],o
*[in..rirrg work would suPPort the companyt stratesr of researching, designing, and developing advanced rcchnologY sYstems'

in pay

belwftn the

levels,

and the criteria used to deter-

nine

these differences

ffeate

th sfructure

Job Stnuctune at an Engineening Company

Engineer

Limited use

of basic principles and concepts. Develops solutions to limited problems. Closely

supervised.
Senior Engineer
Full use of standard principles and concepts. Frovides solutions
eral supervision.

to

a variety

of problems. Under gen-

Systems Engineer

knowledge of other related disciplines..

Wide aoolications of principles and concepts, plus working-solutions
ale imasinative, thoroush, and
p;;;d;";i;ii;;; t" ; wid! variety of difiiculi problems.
practicable. Works under only very general direction'
Lead Engineer

problems that
Aoplies extensive expertise as a generalist or specialist. Develops solutions.to complex
direction.
appreciable
performed
wjthout
Work
is
creativity.
and
ot
ins.niity
;J.il; th";;;;i;ft
i*lr.ir"t consi-derable latitud-e in dltermining technical objectives of assignment'

Advisor Engineer
Aoolies advanted principles, theories, and concepts. contributes to the development of new-prinsolutions thet are h.ighlv
Hi-;;;"J;;"pt!. w.it i t" unuruilry complei problems and provides
i;;;;"ti"";;Jiig"nious. Works undeiconsultative direction toward predetermined long-range
goals. AssignmenB are often self-initiated.
Consultant Engineer
Applies and/or develops
Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness.
technolog-ies, scienfrfic principles, theories. and concepts. Develops information
ftiifrf"
"Ju"n."i iriilii"g 5";;,aaries of icnowiedse in a. given field..often acts independentlv to
il:t #;;;;il;
.tto.i"t"O with thE develdpment and inlplementation of operational
r;il;;"li;t

il;il;ln]

programs.

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PamI I InarnalAligflmcflt: Dcftrmining

38

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Supports Workflow
refers to rhe process by which goods and services are created and deiivered to t]re customer. The suucture should support the efficient flow of that work and the design of *re organizadon.3 For example, drug companies traditionally basg t.he size of their sales force on the number of
physiciaru to b. .rll.d In p.i a"y and. the number 3f *o.Li.tg days per year. The drug manufac-

V'orlflow

workflow
process bywhich goods and

senices are delivered

the

customer

rurer Merck decided to mlce a non-tra&tional approach to organizing sales and markedng. Mercki
analpis indicated that the abiliry of physicians to choose speci.ffc &ugs was being consuained by
governrnenr regulations and company health plan restrictions r-hat conuol access to products for
their members. Vith physicians no longer the sole decision makers, Merck created sales teams
consisting ofaccount execurives, client representatives, and medical information scientists to serve
a broader clienrele ofinsurance companies and physicians. A cross-functional team responsible for
a distincr geographic area (rather than a list ofphysician-clients) provides a relationship-building
approach ro selling products. Rather than handing out free samples, the Merck teams got to
know rhe clienr and provided them witl up-to-date information about trends and research.
. They became a source of knowledge useful to the physicians and the insurance companies. The
teams keep cliena apprised of regulations and cover drugs for a wider range of medical conditions.
One rcam even uanslared brochures that explain a coutse of reatment into Chinese, Russian, and
Spanish for a physician whose patients induded non-English-speaking immigrants. (Of course, the
,..o-*.ttd.J ueaunenr did include Merck producrs.) Suci a response would have been beyond
the resources of a single sdes representative under Merckt old approach.
To suppon rhese new work teams, Merck designed a new compensadon structure. Pay differences binve.n account execulives, customer representatives, and medical information scientists
who served on the same rams \Mere a major issue-just as tJrey had been for dre vingrard owner
described in the parable, and just as they are for the engineers'

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Motivates Behaviour
Internal job and pay suuctures influence employees' behaviour by providing pay increases for
promotions, more challenging work, and.greater responsibility u employees move uP in the job
5ru*.. The strucrure should make clear the reladonships between each job and rhe otganiza'
tioni objecdves. The abiliry for an employee to see the linkage berween what he or she does and
*re organizationt suategic goals is often called line-of-sight. Ernployees should be able to "see" or
,rnd.rJtand links berween their work, the work of ochers, and the organizationt objectives. For
example, sales representatives can clearly see how their work is helping to achieve a suategic goal
of sales growth. e"a *. sffucrure needs to be fair to employees. The vineyard ownert internal
,*,ro1,rJ might have been aligned with his business strategy, but the employee dissadsfaction
raises concerns about its fairness to employees.

I-

STRUCTUFES VARY BETWEEN ORGANIZATIONS

An internal pay srrucrure !s deffned by (1) the number of Inek of work, (2) the pay dffirentiah
berween the levels, and (3) rhe criteia used to determine those lEvels and differentials. These are
the faccors that a manager may varlz ro design a structure that supports ttre workflow and directs
employee behaviours toward objectives.

Levels
One feature of any pay srrucrure is its hierarchicd nature:the number oF levels and reponing
relationships, Because pay srructures rypically reflect the flow of work in the organizadon, some
iue more hierarchical wiih multiple levils and others are compressed with few levels.a As noted
earlier, in comparison to the engineering companyi six levels for a single job group (Exhibit 3.1)'

a healthcare .o*p*y uses five broad levels, described in Exhibit 3.2, to cover all professional
and execudve work,

;
Chaprer3 | Dfining Intemal Al@mnt

Career Bands at GE Healthcare

BAND
Associate
professional
Lead professional
Senior Professional
GE

Executive

NATURE OFWORK

Front line. administrative and secretarial

Developing professionat
Team leadqr, supervisor, or bxperienced lndividual contributor

Manager or seasoned professional

f,1"l"Hl|;trofignasement

team and/or indilidual contibutor with major

Driven by job scope, accounhbility, and skills

Source: GE Healthcare'

Differentials
The pay difFerences benveen levels are referred to as diffetentials. If an organization has a compensarion budget of a ser amount to disribute among in employees, there are a number of wap
lo do ro. It can divide the budger by rhe number ofemployees, giving everyone the same amount.
But few organizadons in the world are so egalitarian, and, in most, pay rnries among ernployees.
\?'ork that requires more human capitd--knowledge, skills, and/or abilides-that is performed under less desirable working conditions, and./or whose results are more valued is usually
paid more than work with lesser requirements.S Exhibit 3.3 shows the differentials amached rc dre
engineering company's pay sffucnue. One inrention of these djfferenrials is to motivate people to

srive for promodon to

higher-prying le.vel'

Criteria: Content and Value

'Work

content and work rralue are the most cornrnou bases for determining internd structures.
Content refers to dre work performed in a job and how it gets don (us[s, behaviours, knowledge
required,
and so on). Value referc to the worth of the worh its relative consibution to the organi;
zation objectives. A strucrule based on content typically ranks jobs on the basis ofskills required,
complexity of tasks, and/or responsibiliry. By contrast, a strucnre based on the vdue of the work
focuses on rhe relative contribution of the skills, tasks, and responsibilides of a job to the orgarrizationt goals. Although rhe resuldng suuctures rnay be the same, there are imporrant differences.
]n addition ro induding relative conuibudon, value may also indude ercternal market pressures
(such as skills shonages). Or value rnay include rates that have been agreed upon tluough collective
bargaining or even legislation (e.g., minimum wage). Job vdues across all organizations in
i
Cuba
are set by a governmenr agency. The universal $rucrure dictates 8 Ievels for industrial work
'
. ers, 16 levels for rechnicd and engineering workers, znd26levels for governrnent employees.

'

39

Ur. value reflects the vdue of goods of services an employee produces in a job. F;cchange
value is whatever wage the employer and employee agree on for a job. Jobs such as software
engineer mighc have rhe same use value but different exchange vdues if, for example,'one job is
located in Bangalore and the other in New York,
Job- and Percon-Based Structures A job-baied *ructareLools ar work sensslrs-gaslc, behaviours, responsibilities. Aperson-based ttruct ffe shifts the focus to the employee: rhe shilk, hnowledge, or competencia the employee possesses, whether or not chey are used on the panicular job the
employee is doing. The engineering srrucrure (Exhibit 3.1) uses che work perforned as the criterion. The heakhcare suucnre (Exhibir 3.2) uscs the competencies required at each level of work.

differentials
pay

job

diffuencu betvtren
levels

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195,000
185,000

s't82.4s6
Consultant

75,000

Engineer

55,000

155,000
145,000

$140.3s1

Advisor

135,000

g(!

E
o

B
o

Engineer

a)

28% Pg
o

.Cl

11s,000
$109.649
Lead

J4

Engineer

.g

co

26% o

95,o0o
$87.023
Systems

85,000

Engineer
75,000

$70.180

Senior
Engineer

55,000
$-58.000

45,000

co

12s,000

55,000

J4

Engineer

Chaptcr

*a
1",

3|

Defning Intanal Alignmmt

is hard rc describe a job wirlout reference to *re job holder's knowledge

In the real world, it
it is hard to define a peco-at job.celated knowledge or competencies wir:hrt lUr. Conversely,
,.f*rrt to work content. So ratler than a job- or person-based suucture, realiry includes

borh job and Person'

Wl-lAT FACTORS SHAPE

INTERIUAL

Loa

STRUCTUHES?

structures are
The maior organizadon facors-borh externd and internal-thar shape incernal
facors might better be represented as a web, with all factors convariorx
The
3.4.
f*ttiLir
i"
Jfr"*"
No single theory
n.."a *a inreracdng, Fxacdy how these facors interact is not wdl understood.
factors.
competing
cenain
facors;
others
omit
emphasize
for all factors. Some rheories

.**"

What Shapes lnternal Stnuctures?

41

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Partl I InernalAligrrne* Damhittg&c Stretwe

42

Economic

Pressures

'i

Adam Smith was ar early advocate of lecdng economic marlcet forces influence pay srructures.
Smith ascribed to human resources both an exchange value and a use value. Exchange value is
whatever wage the ernployer and the employec agreepn. Use value reflects rhe value of the goods
or services labour produces. New technologies associaied with rhe Indusuial Revolution increased
the use value of labour virithout a corresponding increase in exchange ra.lue.
Karl Marx accused capimlistic economic s)rstems of basing pay structures oq gxchange value.6
He said that employers unfairly pocketed the surplus value creared by rhe difference berween
what owners were willing to pay workers and what owners earned from workers' efforts. He urged
workers to overthrow capitalistic systems in order to reap the benefits of their labour and become
owners themselves. In solne sense, broad-based stock ownership by employees is following Marxt
suggestion that employees become owners.
marginal productivity

theory
the theory that unless an

employeean produce
something of value from

hbher job equal to the

value received in wags, it
will not be wofthwhile for
an employu

to

hire that

enployee

In the face of rising wages in the last half of the 19th century, new theories began to examine
the demand for labour. Marginal productivity theory says that employers do in fact pay use
vdue.7 Unless an employee can produce a value equal to the value received in wages, it will nor be
wordrwhile for *re employer to hire that worker. Pay d.lfferences among the job levels reflec differences in use vdue associated with different jobs. One job is paid more or less dran another because
of differences in reladve produ$iviry of the job and/or differences in how much a consumer values
the output, Hence, differences in productivity provide a rationale for t.he internal pay structtue.
In addidon to supply and demand for labour, supply and demand for producu and services
aiso affecs internal suuclrues. Rapid, often rurbulent changes, in eirher compecirors' producs
and/or services (as in the rise of the Incernet for making purchases) or in cusromers' rastes (as in
the populariry of fuel-efficient vehicles) means organizacions must be able to redesign workflow
and employees must condnuously learn new skills. fiubulent, unpredictable ocernal conditions
require pay srructules that support agile organizarions and flexible people.8 For ocample, jobs
requiring concinuous learning may be paid more than others, as thqf are so important for *re
achievcment of scrategic goals.

Government Policies, Laws, and Regulations

,@

In Canada, human rights legislation forbids pay systems that discriminate on the basis of gender,
race, religion, serual orienation, national origin, arrd many ottrer grounds. Therefore, a benefit
plan that provides beneftts only to males over the age of35 is illegal. Pay equity acm require "equal
pay for work of egud value," in male- and female-dominated jobs based on a job evaluation process tlat considers the skill, effort, responsibiiity, and working conditions requir.ed for the jobs.
For example, male-dominated police jobs and female-doririnated nursing jobs have often been
found to require egual skill, effon, responsibility, and working conditions, and the nurses pay
has been increased to dre same level a.1 that of police officers. An ioternal $rucrue may contai[
any number of levels, with differentials of any size, as long as the criteria for sening them do not
include gender, race, religion, or national origin.
Much pay-related legislation attemprs to regulate economic forces to achieve social welfare
objectives. The most obvious place to affect an internd sffucnrre is at the minimums (minimum
wage legislation) and maximums (special reporting requiremenc for executive pay). But legislation also aims at the differendds. Most countries have various legal standards regulating pay structures. '$Thatever thqz are, organizations operating

within

these countries must abide by them.g

External Stakeholders
Unions, stockholders, and even political groups have a stake in establishing internal pay structures.
Unions are the most obvious case. Most unions seek smaller pay diffcrenccs among jobs as well as
senioriry-based promotions in order to promoti solidariry among members. At a minimum, unions
seek to ensure that the interests of their members are well represented in decisions about strucrures.

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Chapra

3 | Dfining InteraalAlignmnt

43

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pay artencion to execudve pay. The linkage (or iack rhereof) between execStockholders also
'Western
performance has come under incrasi.ng public scuEiny as
organizaion
tive oAy

nd

have faced ongoing economic problems in recent years. Boards of direcrors have been
reduce executive pay when suategic outcomes ale not being achieved, and panicuro
l..rr,rr.d
tlrrl'
rrrh.n profits have not materielized. Execudvc pay reduccions ar Molson Coon in 2010 are
in che 'Net W'onh box'

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Cultures and Customs

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Culrure is the shared norms and values that a group of people share in cornmon. Such shared
judgment of whar size of pay di-fferenriel is fi.ir. In ancient
,oindr.r, within a society may forrn a
:ue
strongest when dre richest earned a maximum of four
socieries
Greece, Plato dedared that
a
favoured
five-times limit.
Aristode
pay.
dmes rhe lowest
Western Europe, ctre church endorsed a "just wage"
in
l4tl-cenrury
how
describe
Hisrorians
the exisdng class strucn[e in the sociery. The docthat
supported
of
wages
strucrure
a
docrrine,
chaos resulting from ttre death of one-third of
and
social
the
economic
to
end
effon
an
trine was
The
plague.
shonage
of workers thar resulted from r-he devastation
bubonic
from
populadon
rhe
to
bid
the
wages
for
surviving
craftspeople. By allowing the church
up
landholders
and
nobles
led
and royalry ro determine wages, market fories such as scarcity of skills were explicidy denied as
appropriate determinants of pay suuctures.

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Molson Coors Executives Take Pay Gut

The beer industry has faced lower sales volumes due to the impact of the global recession. Despite a slip in sales volume, Molson Coors increased its share of the Canadian

beer market by nearly one percentage point in 2010, and it remained the secondlargest brewer with about 40 percent market share. Coors Light was the top-selling
brand with 14 percent market sharg while Canadian was No. 3 with 8 percent the

in its annual report. lncome from continuing operations decreased

to $668.1 million from 1729.4 million despite a 7 percent rise in revenues to

brewer said
8.4 percent

$3.2s billion.

ln light of the decrease in profits, Molson Coors Brewing Co. executives took pay cuts
amid last year's slump in results, with chief executive Peter Swinburn's total remuneration slipping 18 percentto U5$7.76 million from $9.45 million. Swinburn's base salary
increased to $941,667 in 201 0 from $875,000 in 2009, and increased again to $1.07 million

on April 1,2011. Howeve4 stock awards and cash incentives decreased to

$a.tg million from $5.5 million a year earlier.
Molson Canada CEO David Perkins's remuneration decreased to $3.56 million from
to $532,000 but stock awards decreased to
$630,000 from $1 million. Non-equity incentives, stock awards and pension changeV
deferred compensation all increased. other compensation was down by $574000 from
2009, when he was appointed to head the Canadian division.
$4 million in 2009. His base salary increased

Chief financiai officer Stewart Glendinning's

total remuneration

decreased to

$2.58 million from $3.15 million in 2009.

Source: G. Hughes, "Molson Coors Execs Take Pay Cuts," Ihe Canadian Press, April 18, 201 1.,

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Intetnal

Alignnat Datmining dn

Structure

Even today culu:ral factors continue to shape pay sffucnues around dre world. Pay equiry
is a Canadian example in which advocates have been changing societal judgmena about what
constitutes a just wage. These judgmens change in response to pressure. For example, many
traditional Japanese employers emphasize senioriry in their internal pay structures. But pressures from global compedtors and an aging workforce have made age-based pay strucilres yery
expensive. Consequendy, some Japanese employers are shifting older employees ro lower-paying
business units, emphasizing perfornance, and downplaying senioriry.l0

Organization Strategy
The last chapter explained that organizatioh suatcgics influence internal pay suuctures. Different
business suategies may require different pay srucrures to support them. The basic belief of a
strategic perspective is that pay strucrures not aligned with the organization strategy may become
obstacles to the organizationt success. An empirical study of 449 organizatiors conduded thar
"compensation professionais can substantially improve the effecdveness of their pay programs by
focusing on aligning their reward philosophy, stratery arrd coinpensation policies, programs and
practices with their business stratery"ll 6. il

Organization's Human Capital

human capital
the education, a<perience,
knowledge, abilities, and skills
that people possest

Human capital-the education, experience, knowledge, abilities, and skills that

people
major influence on internal sffuctures.12 The suonger the link bemreen
these skills and o<perience and an organizadont strategic objective, dre more pay tJrese skills will
command. The engineering Etrucrure in Exhibit 3.1 results in p.pog consultant engiaeers more
tlan lead engineers or senior engineers, because the human capital ofconsultant engineers brings
a greater reflun to rhe company. It is more critical to the organization's success.

possess-is regarded

as a

Organization and Work Design

in

producing goods a4d services influences the organizational design, the

to perform tle work. The technolory
required ro produce medical i*aging machines differs from that used to manufacture cupets.
Such differences conuibute to t'he different strucrures in Exhibits 3.I and 3.2.
The dcsign of organizations is undergoing profound changes. A lot of people who work in
organizarions are not employees of those organizations. They might be employed by either a supplier (such as an IT supplier) or perhaps a temporary stalf supplier (such as Manpower Services).
Or rley might be working under a temporarl conuact for a limited amount of time or on a
limircd project. The security guards, software engineers, or accountants rnay be supplied by outsourcing specialisu. Pay for these people is based on the internal sffucture of their own employer.
Ano*rer major work design change is delayering. Entire levels of work have disappeared at HP
because of complaints about slugish response to customer needs. Levels of managernent wirc cut
from 11 ro 8, and custome$ immediately applauded the reducdd response time.l3 Delal'ering can
reduce unnecessarywork that does not conribute to strategic objectives. It can also add wo* to other
jobs, enlarging them. Through the use of self-managed work teams in production work, entire levels
of supendsory jobs are removed and the responsibility for their decisioas is delegated to the teams.14
Self-management changes the vdue ofjobs on the team and hence changes the job structure.

Gchnology used

worlc ro be performed, and the skills/knowledge required

Overall HR Policies
The organizationt other human resources policies also influence pay structures. Most organizarions tie money to promotions to induce employees to apply for higherJevel positions. If
an organization has more levels, it can offer more promotions, but there may be smaller pay

Chapter

3 | Dfrning

Intenat Alignnuzt

beclreen levels. The belief is that more frequent promotions (even without signiffdjfferendals
offer a sense of.career Progress to employees.t5
l^-o, p^y increases)

lnternal Labour Markets: Combining External and Organizational Factors

combine borh externd and organizational facrors. Internal labour marInternal labour marhets
that (1) determine the pay for t.he different jobs wirhin a sinprocedures
and
nrles
thc
ro
ke,, refer
(2)
allocate
employees
to *rose differenr jobs.t6 fu depicted in Exhibir 3.5,
and
ol.- orEarizacion
and
only
for specific entry-level jobs (an engineer would be
recruited
hired
to
be
rend
i.',auiiurtr
a senior engineer would have a few years' experience), and are later
ofuniversity;
our
right
hired
jobs. Because the employer competes in the o<ternal
allocared (promoted or transferred) to other
jobs,
entry
their
pay is linked to the enernal market. It musc be
marker for people co ffll drese
qualfied
pool
ofapplicants.
By contrast, pay for non-enry jobs (those
a
hieh enough ro aruact
such
and
promotions,
as
via
transfer
sys[ems engineer, Iead engineer, advisor
.eff.d ittr.rrrdly
rhe
example
engineer
in
shownin
Exhibit 3,5) is buffered &om externd
consulmnt
engineer, and
internal
by
factors
influenced
such
as the organizadon's suategy, tec.hheavily
more
and
forces,
and
HR
systems.
External
factors are dominant influences
reguired,
otler
capiml
human
nology,
jobs
jobs,
for
non-entry
the
differences
to reflect the organizacion's
but
tend
entry
for
pay
on

internal labour martEts

rulaand

g"{,?d,refut

#-

determine tire pyiw

fgrentiobs Hrdlrr a slngre

uganbtian

endq$b

ard;larfu.E
lhoe

irfier-

entiofu

inrernd factors'

lEffig.5Tlllu"t

"tion

of

"n

I
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I

lntr.n"l L"bou, M".k"t

r;rr'..:.t:,.;...'r.''.'.,.-

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Partl I Invnal Aligmax

45

I
T
r

*e Sruenn

Employee Acceptance: A Key Facto

de fairness of their pay through comparisons with the compensation paid orhwork relaied in some fashion to rheir own.l7 Accordingly, an impomanr factor influencing the internd pay strucrure is its acceptabiliry to.che employees involved.ls Employees rnake
muldple pay comparisoru to assess the fairncss of an internal pay strucrure. They compare their
pay to that for other jobs in the same internal job suucrure and ro the pay for rheir job in the
Employees judge
crs for

,#@

e:<ternal market at competing employers.19 Consider the pay fairness comparisons

made by thc five employees in the following scenario:

Sally is a soft-spoken, solid citizen and performer who quietly takes what she is

tlat rnight

given-which is

be

less

than she deserves. Hot shot Mark was hired at a ridiculous premium. Deirdre's pot was sweetened
when she threatened to quit. Tom's salary was enhanced following the successful completion of an
imporunt project-as a kind of thank you. Bart, who is a decent performer, hasn't gotten a raise in
two years because of his misfortune of working in an underachieving division. Lionel has been with

f,

t
!t

the company forever and has proiited through the cumulative effeqts oftime.2o
Tryo aspects of fairness are important: the procedures for determining rhe pay strucrure, called.

ju:tica and the results of those procedures-the pay strucrure itself-called dbtribujasrtce.
tbe
Procedurd justice refers to the process by which a decision is reached. Distributive
justice refers to the fairness of t.he decision outcome. Researchers report that employees'percepdons ofprocedural fairness significandy influence cheir acceprance ofdre results. Employees are
more willing to accept lower pay if they believe thar the way the decision was made was fair. The
research dso suggests riat pay procedures iue more likely to be perceived as fur if (1) rhey are
consisrently applied to all employees, (2) employees participate in the process (altlough recent
research suggesrs an exception when wages :ue very lo*),21 (3) appeals procedures are included,
and (4) the data used are accurate.
Appligd ro internd structures, proceduri justice addresses how design and administration
decisions are made and whether procedures are applied in a consistent manner. Distribudve justice addresses whether dre acrual pay differences among ernployees are acceptable.

procedural
procedural justice
faimess of a procas by whidr
a deciion is reached

distributive justice
faimss of a deciion
outcone

Pay Structures Change

As previously noted, pay structures change in response to changing external pressures such as skill
shortages. Over time, the distorted pay differences become accepted as equitable and customary;

efforts to change them are resisted. Thus, pay structures established for organizational and economic reasons at an earlier time may be maintained for cultural or other political reasons. It may
take another economic jolt to overcome the cultural resistance. Then, new norms for emplciyee
acceptance are forrned around the new strucrure. This "change and congeal" process does not yet
support the continuous change occurring in todayi economy. New norms for employee acceptance probably will need to indude recognition that people must get used to constant cfrange,
even in internal pay reladonships.
The pay for airpon securiry screeners reladve to other airpon jobs illustrates the change
and congeal process. Prior to 9/11, airport screeners were paid minimum wage witJr no beneffts.
Today, wages are comparable to police and fire protection jobs. Employees in other airport jobs
had to revise their comparisons to the securiry jobs.z2

LO4

IT

STRATEGIC CHOICES IN DESIGNING

INTERNAL STRUCTURES

Internally aligned pay structures support the way the work gets done, fft the organizationt business
tair to 'employees. Greater internd alignment-ftt-is more likdy to lead ro success.
Misdigned strucrures become obsades, They may motivate employee behaviour that is inconsisrent

suetegJr, and are

!4.:

Chapter

J I Dfining IntemalAlignmmt

47

strateg)r. But whar does it mean to ffr or ailor rhe pay suucg111e ro be
wirh rhe organizadont
suaregic choices are involved: (1) how tailored ro organization design and.
Tho
aligned?
inrernally
structurc and (2) how to disqribute pay tluoughout rhe levels in the su!61|lre.
woldlow ro rnake the

Taitored versus LooselY CouPled

A low-cost, cusromet-focused business suatgy such

as chat followed by McDonaldt or !7almarc

tailored stmcture, Jobs are well defined, wirh detailed msks or steps
69 follow Anyone going into a McDonaldt in Vancouver, Prague, or Shanghai will find that they all
are very similar. Tlejr p1y suuciures are, too. The customer reprsenradve-and the food pr.p*io.
jobs are very well defined in orrder to eliminate variabiliry .in how they are performed. The amounc of
k ,.}tup that goes on the burger is pre-measured, and even the krys on rhe cash register are labelled
wirh menu itcms rather than prices' And the difference io pay benveen jobs is relatively small.
In contrast to McDonald's, 3Mt business strategy requires constanr producr innovarion and
may be supponed by a dosely

short product t'esi8n-m-1a1ket cycle times. Companies ftke 3M need to be very agile, constantly
innovadng and adapting. The compedtive environment these organizations face iirurbulent and
unpredictable. The.ir engineers may work on several teams developing several producrs at dre same
time. 3Mt Pay system needs to accommodate this flexibiliry. Hence, they need a more flexible
pay suucrure, often called a loosely coupled structure, in order ro allow for rhe consunt change.

tailored structure
pay structure for well4efined
iobs with relatively smalt differences in pay

loosely coupled structure

jM

pay structure fu
ttlat
are fles<iile, adaptabte anci
changing

Egalitarian versus Hierarchical

from egalirarian at one exueme to hierarchical ar the other. Egalitarian
suuctures have fewer levels and smaller differentials benveen adjacent levels and between the
highest- and the lowest-paid workers. Exhibit 3.6 shows some variations in strucnrres, Structure
A has eighr different levels, with relatively small differentials in comparison ro suucrure B, which
has only three levels. Strucrure A is hierarchical in comparison to the egalitarian suucture of B;
Pay structures can range

the multiple levels rypically indude detailed descriptions of work done at that level and deli11eare
who is responsible forwhat. Hierarchic'l structures are consistentwith a belief in the motivadonal effects of frequent promotion. Hierarchies value rhe differences in individual employee
skills, responsibilities, and conrriburions to rhe organizarion.z3

Structures Vary in Numben of Levels

STRUCTURE A
LAYERED

Chief

STRUCTURE B
DELAYERED

Engineer ,

Ctriet Engineer

Engineering Manager'
Consulting Engineer

't':

.:

.,

,'

Senior Lead Engineer

Lead

Engineer

Consulting Engineer

Senior Engineer

''.'
Engrneer .
Engineer

Trainee

1'

Associate Engineer

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48

Den

I I Intanal Aligmtzt

Dccmizhg dx S*act t

"

Struccure B can also be characterized as "dclayered," or compressed. Several lwels of respon_

sibility and supervision are removed so that all employees at all levels become resporuible ior

broader range of tasls, but also have greater freedom to determine how best to accomplish what is
expected.of them. An egaliurian suucture implies a belief thar more equal tre"t*.r,t
improve
employee sadsfaction, supporr cooperarion, and therefore improve workers' performance.24
Stantec Inc., an Edmonton-based engineering consuldng company, includes the following
in irs compensation objectives:

*i[

Take a one leam Approach-Members of our senior management team are expected to work
together to contribute to the success of the Company as a whole. Our compensation program should
reward both individual and Company-wide achievement of objectives.

.
LO5

Accordingly, executives have lirde variance in thet pay; base salary for the highest-paid ffve executives ranged from $275,009 rc $386,366 in 2010.25
There are drawbacla to this approach. Equal treaunenr can resuh in more knowledgeable
. employees with more responsible jobs (stars) going unrecognized and uruewarded,
which may cause
them to leave the organization. They mayleave physically for anodrer job, or thry may simply slack
offor tune out and refixe to do anything not specifically required of tlem. Their change irl behaviour
will lower overall performance, So a case can be made 51 6ofl1 'gqlitarian and hierarchical suucgtues.
Exhibit 3.7 clariffes the differences between egalitarian and hierarchical strucnrres. Keep in
mind, though, the choice is not cithcr/or. Rather, the differences are a maner of degree, So levels
carr range from many to few; differentials can be large or small, and the criteria can be based on the
job, the person, or some combination of the rwo. The question to be resolved is: \Vhat size should
the pay differentials be benveen the adjacent enginceiing levels? Exhibit 3.8 shows that the differentials between engineeringjobs range from $10,500 (Engineer to Senior Engineer) to $42,000
($dvisor Engineer to Consultant). Both the :rmount and.rhe percenrages increase at each level,

I__I

GUIDANCE FHOM THE EVIDENCE

Before rnanagers recommend which pay srrucnue is best for

tleir

organizations, we hope they

wili look not only at r.he hsors in their drganization, such as workflow, what is fait, and how to
motivate employee behaviour, but dso look to theory and research for guidance. Bodr psychologisa and economists have something to tell us about the efiFects of rnrious srrucrlues.

EXHIBIT

3.7

Strate gic Choice : Hierarchical vensus Egalitania n

E!r

Chaprcr

3 | Dfiniag InunalAlignc*

Pay Differentials

Dollars
(bonus + base)

Job

Consultant

$162,000

AdvisorEngineer

$120,000

Lead

Engineer

Senior

$73,000

Engineer

$58,500

Engineer

Percentage

rl

II

$+8,OOO

Equity Theory: Fairness

As noted earlicr, employees judge the fairness or equity of their Pzy by comparing it to that
for othcr jobs at their own employer (internal equity) arrd to that for jobs at other employers
(external cguiry).A recent srudy of 2,000 teachers found that those higher up in the internal pay
strucnre perceived the srrucnrre as fair, and that lower-paid teachers perceived it as fair ifthey
worked in a highly paid school disuict. The resulm &om these cornparisons depend in part on
the accuracy of employee knowledge of other employees' jobs, internd strucnues, and external
pay levels.% Ttachers' pay schedules are generally public knowledge, but rhis is seldom the case

'1

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$93,000

Engineer

Systems

Differential

Dollars

49

in private organizarions. Past research has shown that employees are often misinformed about
their relative standing in the pay structure.27 Thus, equity theory might suppon eirher egditarian or hicrarchical sructures, depending on the cornparisons and the accuracy of information
about them.

Tournament Theory: Motivation and PerformancE

Ecbnomism have focused rnore direcdy on the motivationd effects of strucrures. Their starting
point is a golf tournamenr arwhich *re prizes rotal, say, $100,000. How thar $100,000 is disuibuted affects rhe performance of all players in t[e tournament. Consider three prizewinners,
with rhe first-place winner getring over half rhc purse, versus ten prizewinners, widr only slight
differbnces in the size of the purse :rmong rhe ten. According to (ournarnent theory all piayers

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Partl I

Internal

Aligwnat Dntubiry

dte Strudurt

play bercer in toumamens in which the prize differentials are sizable.2s Sorne research srp*
porrs rorunamenr rheorF. Raising the total prize money by $100,000 in the Professional Golf
Association rournament improved each playert score.29 And *re closer the players got to the top
prize, the more

&ply*g

tleir

scores improved.

these resule

to organizadons, the grg.ter the differendal berween an employeet

presenr salary and his or her boss's salary, the harder the employee (and everyone else) will worlc.
Suppose that the engineering suucture contains ten advisor engineers at the second-to-the-top

$i20,000, and each compering for rwo consultant posirions, forwhich the
pay is $162,000. A tournamenr model says that if the consultanrs instead are paid $200,000,
everyone will work even harder. Rather than resenting the big bucks paid to the consultants,
lerrel, each making

engineers at all levels in the suucture will be motivated by the greater differential to work harder
to "wirf' prornotion to the next lwel.
But most work is not a round of gol4 nor does it lead to the company presidency. Vinually
all the research that supporrs hierarchical structures and tournament theory akes place in situations in which individud performance matters most (e.g., auto racing bowling, golf tournaments), or ar be$ in which the demand for cooperation among a small group of individuals is
relatively low (e.g., professors, stoclSrokers). In contrast, team spofts provide a sefting in which
both individual players' performance and the cooperative efforts of the entire team make a difference.30 Using eight years of data on majorJeague baseball, one study found that teams with
egditarian suucflnres (practically identical player salaries) did better than those witl hierarchical
srrucrures (very large differentials bewveen plafrs). In additiou to affecting team perFormance
(e.g., games won, gaie receipts, frandrise value, total income), internal suucnrres had a sizable
effect on players' individual performance (e.g., batting avcrages, errors, runs baaed in). It may
also be that the egdirarian pey sffucture reflec$ a more flecible, supportive organizational culturc
in.which players are given the raining and support they need.

lnstitutional Theory: Copy Others

Internd pay strucf,ures are sometimes adopted because they bave become so-called "best practices."3l
Organizadons simply copy what odrers are doing. Rccent examples of such "benchmarking"
behaviour indude outsourcing and competency-based pay q/stems adopted without regard
to wherher these practices fft the organization or its employees and wherher they add value.
Institutional theory predics t-hat very few fums are 'Erst rnovers." Instead thry copy innovadve
practices after innovators have learned how to make the practices worlc The copiers have limle
concern for alignment and even less for innovative pay practices.

{More) Guidance From the Evidence

Exhibit 3.9 summarizes the effects amibuted to internally aligned

.
.
.

suuco.:.res,

which are:

More hierarchical structures are related to greater performance when the workflow depends
more on individual contributors (e.g., consulting and law practices, surgical units, stockbrokers,

wen unii'ersiry researchers).

High performers quit

less under more hierarchical systems when pay is based

on perfor-

mance rather than seniority and when people have knowledge of the structure.
More egalitarian suucrurcs are related to grearcr performance when close collaboration and
sharing of knowledge is required (e,g,, fireffghting and rescue squads, manufacturing teams,
'
hod customer service staff, global software design rcams). The competition fostered in "winner take all" tournament hierarchies appears to have negadve effecs on performance when
:
the workflow and organization design require
the
odrer
strucnrre
on
organization
affected
by
internd
perforrnance
is
The impact of any
dimensions of rhe pay model pay Ievels (competitiveness), employee performance (conuibutions), and employee knowledge of the pay sffucture (management).

teamwork

t"

Chapter

3 | Dlfuhg i@rd Atglnlu:tr

Some Organizational Outcomes of lntennally Aligned Struch,rre

5lt

-fl
Undertake training
lncre6se experience
Reduce turnover

Facilitate career progression

Facilitate performance

Reduce pay-related grievances

Reduce pay-related work stoppages

E
'.
.
,

Beyond these points, much ;ggleins to be srudied, There is praccically no research on r.he
optimal size of the promotional increase or its effects on behaviours, satisfaction, or performance.
Nor is much known about wherher smaller, more frequent promotions are befter (or worse)
than fewer, larger, les frequent promodons. Perhaps informal expectations are developed at each
workplace. ("You can er.pec to be promoted here after about three years, and a 10 percent raisc
usually goes with it.") Lide is known about how these ru.les developed and what rhe origina.l logic
was. Buc they do rnat[er, Promodons sooner (or larer) tharr enpe*ed, accompanied by a larger (or

smaller) pay increase, send a powerfirl messag.

So what size should the pay differentials be berween rhe adjacenr levels

within the engineering company? To answer this question, it is necessary to understand how differenrials within the
career path support the business suategy aad worlflow, motivate engineers to conuibute to the
company's success, arrd are considered fair by the engiaeers. The ne<t several chaprcrs di5s'se hevv
to manage these internal stnrctures.

IT

GONSEOUENCES OF STRUCTURES

LO6

'Why

The "so what?" question and the pay model

worry about internd alignment at all? \fhy
not simply pay employees whatever it takes to get rhem to take a job and show up for work every
day? Why not let external market forces and what competitors are paying determine internal wage
differentials? Or why not let a governmetrt agerrq decide?

Efficiency
that an aligned pay strucilre can lead to better organizacion performance.32 If
ihe structure does not motivate employees to help achieve the organizationb objectives, then ir
is a candidate for redesign. lnternal pal strucilres irrply furure rewards. The size of the pay differential between the entry level and rhe highest level in the suucnrre may induce employees to
remain widr the organization, increase theiiexperience and training, cooperarc with co-workers,
and seek greater responsibiliry.33 Thus, rhe number of levels and tides in a career parh may be
rewarding beyond the pay aaached rc the tides. Microsoft added a "distinguished engineer" tide
to its strucnrre. The coruulting firm McKinsry and Company added an "associate parmer." Their
ruionalc was that cmployecs are morirrated by &eguent steps in the career ladder. These a.re new
tides and levels not yct reflected in the cxternal market.
Research shows

,@

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PanI I IntcnalAlignnc*

52

MhE*Ssltan

Fairness

Vrirers have long agreed thar departures from an accepcable wage structure will result in higher
turnover, grier"ances, and diminished motivation.3a But that is where agrcement ends. Onc group
if fur (i.e., sizable) diffcrentials .betwecn iobs are not paid, individuals may harbour
ill will toward the employer, resist change, change einployment if possible, become depressed,
or "lack rhat zest and enthusiasm which makes for high efficiency and personal satisfacdon in
work.'35 Others, including labour unioru, arguc for small differendals, in the belief that more
egalitarian structures support team cooperation, high commitment to the organization, and
argues rhat

improved' performance.

Legal Compliance
decision, che design and management of intcrnal pay structures must comply
with thc regulations of the countries in which the organization operates. Although the research
on internal alignment is informative, there is sdll a lot *rat is not.known.'Sf'hat about tfie

As

,#@

with any pay

appropriate numbcr of levels, thc size of the differentials, and the criteria to advance employees
,hro"Sh a strucrure? It is believed that the answers lie in undersunding the Ectors discussed in
rhis chapter: the organization's strategic intent, organization design and worldlow, human capital,
and the external condidons, regulations, and customs it faces. It is also bclicned that aligning the
pay structures to fit the organizadon and thc surrounding conditions is more likely to lead to

competitive advantage for the organization and a sense of frir trcatment for employees.

Gonclusion

This chapter discusses the strategic policy of internd alignment and how it affects employees,
managers, and employers. Internd alignment refers to the pay relationships-among jobs, skills,
within a single organization. The potential consequence$ of internd Pay struc*d
"omper.ncies
rures are vital to organizations and individuds. Recent research and ercperience offer guidance
concerning the design and management of internal Pay smcrures.
Pay sio.turo-rhe array of palz rates for different jobs within an organization-are deffned
by levels, differentials, and the criteria for determining these. Pay structures are shaped by socieal, economic, organizational, and other facors. Employees judge the hirness of pay strucrures
by comparing their pay to other jobs within the organization and to what competitors Payfor
pay differentids between jobs is a key test of an
lobs similar to theirs. Accepmnce by employees of
eguirable pay srrucrure. Pay structures rue part ofthe network ofreturns offered by organizations.
TLey offer career paths to higher-paying jobs and a sense ofachievement.
The goals of che entire comperuation system must be kept in mind when thinking about
internal p"y rttt-,*.r. Widespread orperience and, increasingly, research suPPort the belief that
differences'in internal p"y rtrrr"r,r..r, particularly employee career paths, influence people'i aaicudes and work behaviours,.and therefore the success oforganizations.

tl
1.

2.

Chapter Summary
Internal alignment refers to t}le pay relationships between jobs, skills, and competencies
wirhin a single organization. The relationships form a suucture rhat supports organizationd
srrarery, supporrs t.he worldlow, ald rnocivates ernployee behaviour toward organization
objectives. A pay structure is the array of ^pay rates for different work or skills'
The three types offactors that define how internal pay structrues are designed are (l) the
nurnber of levels of work, (2) rhe pay differentials between the levels, and (3) rhe criteria
used to determine these levels and differentials.

Chaptcr

3 | Dfining Incrnal Alignnnt

The Fecors rhar shape inrcmal pay strucrures are: (1) external hctors such as economic pres(2) organizational factors
sur$ goverilnen.r policies, laws, and regulario_ns, and ctlture and
5f .i t "rt.gt, human capital, work design, and employee accePence.
Tle rwo snaregic choices involved in designing internd pay srruffures are: (1) how closely to
lok ghc paF srruauIe to organization design and worldlow (tailored or loosely coupled) and
(?) hwr ro di*ribute pay droughout the levels in the structure (egalimrian or hierarchical).
Thrc deoredcal approaches to determ.ioing which pay structure is best for an organization
arc equiry 6cory tournament rleory, and the institutional model' Equiry rheory focuses on
hcr employees compare their work, qrrrliff64gien5, and pay to those of orhers. Tournament
dcory suggcsrs dat the greater rhe differences beween salaries in the pay strucnrre, the
harder cmployees will work. Irudrurional theory suggests that organizations copy the "best
pracdces" of others.
nces

?ho. .o*.q,t

of an internally aligned pay suucnrre are efficiency, fairness, and legal

comPliance.

Key Terms
differentials
distributive justice

internal labour markets

human caPital

marginal productivity
theory
pay structure

loosely coupled structure

internal alignment
(internal equitY)

Review Questions
Why is internal alignment an important compenstion policy? What happens when a compensation policy is not intemally aligned?
Judging from your own experience, which factors shaped the internal pay structure at your
most recent employer? Provide examples that support your choice'

Would Researdr ln Motion, makers of the BlackBerry be better served by a tailored pay
gtructure or a loosely coupled pay stnrcture? Explain your arlswer.
Explain the consequences of internal alignment for competitive advantage, fairness to
employees. and legal comPliance.

Experiential Exercises
Look into any organizatiot{our university/college, workplace, or the grocery store
where you shop. Describe the flow of work. How is the job structure aligned with the
organization's business, the workffow and the organization objectives? How do you think

it influences employee behaviours?

Prepare a list
pay rates.

of at least five Canadian laws at various levels of government that impact

Itlustrate the internal labour market for faculty at your university/college, using Exhibit 3.5
as a guide.

53

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Paml I InnrnatAlignze* Dcterttining

the Structan

Case
The Orchestra

f"

Orchestras employ skilled and talented people, joined together as a team to create products
anfl services. Job descriptions for orchestras look simple: Play the music. Molins play violin
parts; trumpets play trumpet parts. The pay structure for a regional chamber orchestra is shown
'b-elbw.
The pay covers six full orchestra concerts, one Carolling by Candlelight event, three
Sunday Chamber Series Concerts, several Arts in Education elementary school concerts. two
engagements for a flute quartet, and one Ring in the Holidays brass even! as well as regularly
scheduled rehearsals.
Orchestra Compensation Schedule

INSTRUMENT
Concertmaster
Principal Bass and Conductor
Principal Viola
Principal Flute
Prlncipal Trumpet
Principal Cello
Principal Clarinet

Molin,

PAY

$5,790
$5,070
$5,036
$4,337
$4,233
$4181

i4,146

Trumpet

$s,e:e

Principal

$3,615

Oboe
Principal violin ll
Prirrcipal Horn
Keyboard I
Cello
Principal Percussion
Violin I
cello
Principal Bassoon
Violin I
Violin I
Violin I
Violin I
Violin ll
Violin ll
viola
Viola
oboe
Trombone
viola
Violin ll
Violin llA/iola

$s,+as
$3,390
$3,361

$3,228
$3,049
$2,899
$2,882
52,824
$2,685
$2,483
$2,483

j2,483
$2,483

iZ,qe3
$2,4s3

i2,212
$2,20G

i2,137
$2,033

$t,szs
$1,784

.E,-

Chapter

3 | Defning

latcrnal

Alignmnt

55

Questions

1.
Z.

Describe

the orchestral pay structure in terms of

levels, differentialt and

job. or

person-based.
Discuss which factors may explain

the structure. Why does a member of Violins I receive

more than the oboist or trombonist? ls

it

because the violins play more notes? Why does

the principal trumpet player earn more than the principal cellist and clarinetist, but less
than the principal viola and flute players? what explains these differences? How does
the relative supply versus demand for violinists compare to the supply versus demand for
trombonists?

3.

How well do equity and tournament models apply?

ffi*

Practise and learn online

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"..eis

with Connect.

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LEARNING OUTCOMES
LOl

Explain job analysis and why

it has been called the cornerstone of human

resources management.

LO2 Describe the step-by-step approach to conducting conventional

job analysis.

LO3 Describe the information that must be collected for job analysis and explain
recent changes iri how this information is collected.

the differences between job descriptions and job specifications,

LO4

Discuss

105

Explain the pros and cons of job analysis and different ways to judge

job analysis.

Three people sit in front of dreir keyboards scanning their monitors. One is a sales representadve
in Montreal, checking fie progress of an order for four dozen smartphones from a retailer ir
Vancouver, who has just placed tlre four dozen into his shopping can on the companyk website.
A second person is an engineer, logging in to the project design sofrware for the next generation
of these phones. Colleagues in China working on the same projeo last night (day in China)
sent some suggestions for changes in the new design; tlre team in Canada will work qn the
project today and have their work waiting for their Chinese colleagues when they come in to
work in the morning. A third employee, in lreland, is using business sofrwa.re recently installed
worldwide to analyze the latest sa,les reports. In todayt workplace, people working for the same
company need no longer be down the hallway from one another. On-site or overseas, nerworks
and business software link them all. And ill these jobs are part of the organization's internal
structure.

If pay is to be based on work performed, some systematic method is needed to discover and
describl the differences and similarities among drese jobs-observation alone is not enough. Job
andysis is that method

E'

Chaprer4 | JobAnaSsit

57

STHUCTUBES BASED ON JOBS, PEOPLE'

OF BOTH

ti":T.

::1

!:qt1.t:"f:t 1f:*

;il;;;;r.t*ination

II

ilil;j
.lJ J*.

and person-based structures:.(1) collect,an1,T""Tt:t t*t*."t:"i"Sat identiffcs

(3)
;,li"J"riri.r"*a differences in jobs, (2) determine *q t: valued about th; lob, quanti$ the
(The blank
jobs
an
internd
struture'
of
into
(4)
vdue
relarive
uanslate
jobs,
and
*f"rJ.u1u. of
and
chapter
This
6.)
get
to
Chapter
in
when
we
frlled
will
be
s*ucrure
fI,." f", rhe peison-based
job-based
struclure'
the
on
next focus

i ffi.,o5.

lhe

Many Ways to Cneate lntennal Job Structure

Business and Work-Related

lnternal Structure

Job-based
I

\ \

I
I

Person-based

/\
/\
/\
Skill
(Chapter 6)

ComPetermtus

(ChaPw

61

PURPOSE

f
f

I
Collect, summarize

work information

Job analysis
Job descriptions
(Chapter 4)

I
I

*
Determine what
to value
I
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I

Assess value
I

I
I

Job evaluation:
classes or

compensable factors
(Chapter 5)

Factor degrees and

weighting
(Chapter 5)

Translate into

structure
T

J
tl

job
.:-b:
4.1 oudines m1pro.Tr, for constructing a work-related internal.
of pav' No,rnatt;r thlaryroach'
Pt?::::
,tfre
the people are doing and the expected outcomes;
**U. Job-based slrucrures look at the tasls
rhe
However, the underlying purpose of
at
person.
",
compecency-based structures iook
column
of
the. exhibit) relains,the.tT..Pt
(shown
left-hand
in
the
of rhe process

*rr,uu

Job-based structure

(Chapter 5)

'llt'll

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PartI I Intrnal Aligma*

58

LO1

job analysis
the qTstematic process ofcollecting information about the
nature of spxifrc jobs

l--I

Sfractw

JOFBASED APPFOACH: MOST COMMON

Exhibir 4.2 shom how job analysis and the resulting job description are the first steps in the
process of creating an internal job structure. Each step is defined and rdated to designing the
strucnrre. Job andpis provides the underlying in{ormation for preparing job descriptioru and
evaluating jobs. The contenr ofthe job is idendffed via job analysis; this content serves as input
for describing and valuing work.
Exhibit 4.2 also lisa rhe major decisions in designing a job analysis: (1) \fhy are we colleeling job information? (2) \7hat information do we need? (3) How should we collec it? (4) \fho
should be involved? (5) How useful are the results?

Why Perform Job Analysis?

,@

Potential uses for job analpis have been suggested for every major human resources function, The
qpc of job analpis data needed varies according to firnction. For enample, job analysis identiffes
the skills and experience required to perform the work, which clarifies hiring and promotion standards. Tbaining programs may be designed with job analysis data; jobs may be redesigned based
on such data. ln performance evaluation, both employees and supervisors look to the required
bchaviours and results expected in a job to help assess performance.
An internd structure based on job-related information provides both managers arrd employees wirh a work-related rationale for pay differences. Employees who understand this rationde
can bemer direct tfieir behaviour toward organization objectives. Job analysis dara also help managers defend thcir decisions when they are challenged.

In compensation, job

analysis has

two critical uses: (1) It establishes similarities and differ-

ences in the content ofjobs and (2) it helps establish an internally fair and alignedjob strucrure.
If jobs have equal cortent, rhen in all lilcelihood, ,h. p"y established for them will be equd. If,
on the other hand, thc job content differs, then those differences, along with the market rates
paid by compctitors, are part of the rationale for paying jobs differendy.
The key issue for compcnsation decision rnakers is still to ensure that the daa collected serve
the purpose of rnaking decisions and arc bcceptable to the ernplopes involved. As the arrows in
Exhibit 4.2 indrczte, collecting job information is only an interim step, not an end in iaelfi

EXHIBIT

E'

4.2 |

Determining the lnternal Job Sffucture

JOB ANALYSIS

JOB DESCRIPTIONS

;
'

'

: :summary reioiti that

identify, define;
and describe the,

job as it is actually

,re

JOB EVALUATION

JOB STRUCTURE

Cornparison of
jobs within an

An oidering of jobs
on.the basis of
.their content or
relative value

.organization.
: : ..-

:performed
SOME MAJOR ISSUES IN JOB ANALYSIS

Why collect information?

o What infori-nation is needed?

.
.
.

How

to colled information

Who should be involved?

How useful are the results?

-"

Chapter4 | JobAnalsit

JOB ANALYSIS PROCEDURES

LOz

4.3 summarizes some job analysis terms and their relationship ro one anorher. Job analycolleca information about speciftc tasks or behaviours. A group of tasla performed by
usually
sis
up a posidon. Idendcal positions make a job, and broadly similar jobs combine
one person makes
EyJrtbic

into

lob famlY'l

Latge organizadons, often the biggest users ofjob analysis dara, usually follow a srep-by-srep
job aaalysis. Snndard procedures, shown in Exhibir 4.4,
approach to conducting conventional
developing preliminary informadon, interviewing job holders and supervisors, and then
to create and verify job descripdons, The piccure rhat emerges from the
rhe"information
using
workPlace
where the division from one job m the nexr is clear, widr linle
stable
a
is
of
exhibit
jobs
follow a steady progression in a hierarchy ofincreuing responworkplace,
this
In
overiap.
sibiliry. The relationship berween jobs is dso clear, and so is what is required to qualify for promodon into a higherJevel job. Alchough some argue that such a uaditional, stable srructure is a
shrinking part of*re workplace landscape, such suuctures neverrireless persist, in varying degrees,
in many latge organlvations. Thus, this depiction of conventional job analysis provides a usefirl

naua.

descripcion of r-he Process.

EXHIBIT

4.3

Job Analysis Terminology

I
I

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f,

'-

L
I
T

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60

Pautl I Innnal Aligmnzr

eem;niry $c &racnn

General Procedures for Conventionbf Job Analysis

STEP
THINGS TO REMEMBER OR DO
r.
.
1' Develop ' ' ' Review existing document in order to develop an initial ,,big picture,, familiarity
rrv with
uv'- the
i Pr"eliminaw job-its main ;issio;, iis malor outiei oi run.ii*l,
-"tiriiittrJri ;;ti;;;r.'""""or
liriirnution ' fJff;tff :*liminary list of duties which wili sertje as.a framework for conductins lplg
'l
'
^. ' '
' Make a note of major items that are unclear or ambiguous or that need to be clarifieij during
the data-gathering-process.

2' conduct
initial tour
of work site

o The.initial tour is designed to familiarize the job analyst

with the work layout, the tools and
eouipm.ent
used, th-e

the end-to-end

'

leneral conaitions-o?

p"*;;;;il;;f

t-ne

major duties.

*"*o';:",

and the mechanics associated with

th.,:?l*l,l-1uj,I-111i:il?,1v_helpful for those.jobs in which

a first-hand view of a compricated .

or untarniliar piece of equipment might save the interviewee the thousand
words required to
the unfamiliar or technical,

describe.

'

Forcontinuity,.itisrecommended.thatthefirst-level supervisor-intervieweebedesignatedas
the guide for the job-site observations.

3' conduct e lt is recommended that the first.intervjew be conducted with the first-level supervisor who
is
to be. in a better position th;; ihel;b iliiln to provide ,; o;"rvi"* ;l the job
.' .:. ,lnt-i"*1,.
i?Tidered
; ,,' . . and
how
:1 '.
the
major
duties
fit
together.
:' ,
' l' , ', ' " I For scheduling purposes, it is recommended that no more than two interviews be conducted
. per day, each lasting no more than three hours.
. ,
.
on
' The interviewees are considered. subject-matter experts by virtue of the fact that they per'votes
selection of
form the job. (in the case of job
interuiewees the case 6f first-level supervisors).inculnbe;tsl; .iJi"ti.nrtur" t"i g;tti"il#jon'aon" 1in
.

2.

The job. incumbent

to be interviewed should represent the typical employee who is knowlthe trainee who is'just tearnins ihe iop"i oi ir,"oui#"naing
L!:,19.?,grot
memDer ot the work unit).
3. Whenever feasible, the interviewees should be selected with a view toward obtaining an
appropriate diversity mix.

'

dg:lll-?:yt

* !^t:111^..- I ]h9lecond tour of.the work site is designed

re Lrar
clarify,
rrv' LU.rrrllr'
confirm, alq
and ornerwls
otherwise rerrne
=rrY:rEu to
refine the intor'
infor' . ;: Fgtond
to,ur, .:. ;"iil;1i""'Gi
l" i-6;i;iiliil.
of wgrk.1tu
. l 4: y
Jh" initiaj,tour, it.is recommended that the same first-level supervisor-interviewee con...::...,.i,'....ductthesecondwalk-through.-.--.-'
5' consolidate ' The consolid.ation phase of the job study involves piecing together into one coherent and
comprehensive job description ihe data'obtained
iob
i.ueiui ior.."r---u"p"riiiiijou n"rainformation ers, on-site touri, and written materiars uuori tl" irom
jou. -r Past experience indicates that one minute of consolidation is required for every minute
of
interviewing' For planning purposes, at least five hours should b'e set ariJ" i.itfr" ..nsolidation phase.
A t:!i:,1IA"J_1p1f tP_rld be accessible as a resource person to the job analyst
'
during the
'
consottdation phase. The supervisor_interviewee fills this role.
' check your initial preliminary list of duties and questions-all must be answered or confirmed.
e. verlfu;ob. , description
I ,t,]'.,,."f, .,.'' :.
. . 1.: " ..,i.

-,i ',t

,1,

,:r

,;,l',;.i 1';i,

r,,, .i:,1.,'

Chapw4 \ Jo6,{shil

WHAT INFORMATION SHOULD BE COLLECTED?

a.Jpild
fu Erdibir 4.4 suggests,

stafts with a review of informadon alreadylollectidTn

ddes, major dudes, task dimensions, and
ord.,
dready
exist.
may
However,
this
informatiotr may no longer be accurare.
workflow informarion
exisdng
clarifr
information,
too.
must
So rhe andyst
Generally, a good job andysis collecm sufficient information ro adequately identifr, define,
and describe a job. Exhibit 4.5 lists some of the information usually collected. The informarion job" or "related to the employee."
is caregorized as'ielated to r"he
,o develop a framcwork for.

T.lni,

funher_an"lfit.

l*

Job Data: ldentification

lob tides, deparcmenu, and che nurnber of people who hold the job are enamples of informadon
rhar idencifies a job. Although a job tide nury seem pretry suaightforward, it may noc be. For
example, the Canadian federal government has hundreds of job tides, some of which are.hard
to intcrpret; such as Light Keeper, Scientific lllusuator, Boarswain, Head, Hydrometeorologicd
Srreamflow Studies, and so on.2

EXHIBIT

4.5

Typical Data Collected for Job Analysis

LO3

61

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t
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,\

PutI I h*matAlignmnt:

62

Job Data: Content

This is rhe heart ofjob analysis. Job conrent data llvolve the elemental tasks or units ofworh with
emphasis on rhe purpose of each ask. An excerpt from a job analysis questionnaire that collects
t"sk d"," is shown in Exhibit 4.6. The inventory denggribes the job aspect of "Communicetion' in
terrns of acrud tasks, for enample, "read technicd pirblications" and "consult with co-workers." It
akes eight items to cover "obtain rechnical informarion" and another seven for "exchange tecL
nical informarion." In fact, the task inventory from which the exhibit is orcerpted contains 250
item'i-ind covers only sysrems and analyst jobs. New task-based questions need to be designed

t
I
I
I
I

for each new st ofjobs.

In addirion to the emphasis on the task, the other distinguishing characteristic of che inventory in the exhibit is the emphasis on the objecdve of the ask, for example, "read technical
publications to keep current on'indusry" and 'tonsult with co-workers to exchange ideas and
techniques." Task data reveal the acnral work performed as well as its purpose or outcorne.
In Canada, it is very important to collect information relating to pay equity legislation. In
particular, rhorough information about the skill, effort, responsibiliry and working condidons

ofeach job is essential.

Employee Data

Position Analysis

Qu6stionnaire (PAQ)
a struciJrcd job anafipis

I
I
I

Once we have specified the tasks and outcomes' we c;ul lotlk ai the lcinds of behaviours that
outcomes. F.xhibit 4.5 categorizes employee data as employee characteristics,
internal relationships, and o<ternd relarionships. Exhibit 4.7 shows how "Communications'
can be described with verbs (e.g., negotiating, persuading). The verbs chosen are related to the
employee characteristic being identiffed (e.g., bargaining skills, interpersonal skills). The rest of
d.. ,t"t.*"ot helps identifr whedrer the behaviour involves an internal or enternal relationship.
The excerpt in Exhibit 4.7 is from the Position Analysis Questionnaire @AQ), which
groups work informadon into seven basic factors: information iaput, mental proccsses, work
Ioap,rr, relationships with other Persons, job conto<t, other job characteristics, and general
dirriensions. Similarities and &ffercnces dmong jobs are described in terms of these seven factors,
rather than in rerms of specfic aspects unique to each job.3 The communications behaviour in
dris exhibit is part of the "relationships witl other persons" 6ctor.
The endre PAQconsists of 194 iterns. Its dwelopers claim that these items are sufficient to
znalyzeany job. Howwer, you can see from Exhibit 4.7 thar the reading level is quite high. Many
employees will need help to get through the whole thing.
^
Fio*.u., appealing it mighr be to rationalize job analysis as the foundation of all HR decisions, collectinj all thislnformation for so many difierent purposes is very enpensive. In addidon,
rhe resulting inlormation may be too generalized for any single purPose' is6h'ding compensadon.
If the information is to be used for multiple purposes, the analyst must be sure it is accurace
and suficient for each use. Trying to be all things to dl people often results in being nothing to

will result in rhi

t
t
t
I
t

Determining thc Smatun

qustionnake used lor analyz.

on the basb of I 94
job elenena that de.ribe
ing jobs

genericvw*

behaviours

anyone,

Level of Analysis

1i
;r

I
I
I

li
I

The job analpis terms defined in Exhibit 4.3 are arwged in a hierarchy. The level in this hierar
job
chy at which'an analysis begins may influence whether dre work is similar or dissimilu. At the
family level bookkeepers, tilletr, *d accoundng clerks may be considered similar, yet at the job
level they are very different. Arr andory might be looking at two grains of salt under a rnicroscopc
jobs are similar,
as against looking ar ihem as part of a sewing of french fries. If job daa zuggest
the jobs mrrst be paid equa$'; if ,iobs are different, they can be paid differendy.
In pracdce, many employers are ffnding it difficult to justifr the time and ercpense of collecting task-lwel information, particularly for 0exible jobs with frequendy changing tasls. Thry may

_\

Chaprer4 | lobAnalysts

l.Markthecircleinthe"DoThis"columnfortasksthatyoucurrentlyperform.
2, At the end of the task list, write in any unlisted tasks that you

currentty

/
/-

/Timespentlncurrcntposition

a**
"E ^C -r**

':::::,taskthatyouperformforrelative.,'",:;*''".*,
" the appropriate circle in the "Time Spent" column.
Please use a No. 2 pencil and

fill all circles complete

PERFORM COMMUNICATIONS ACTIVITTES

Obtain technica I information

421. Read technical pub lications about competitive products.
.

422. Read technical publications

423.

to keep current on industry.

Attend required. recommended, or job-related courses

and/or seminars.
Study existing operating systems/programs

C oo@@@@o@o

to

gain/maintain familiarity with them.

Perform literature searches necessary to the development

of products.
Communicate with system software group to see how their
recent changes impact current projects.
427. 5tudy and evaluate state-of-the-art techniques

C
C ooo@o@o@@
c ooo@o@o@@

to remain

competitive and/or lead the field,

4i0.

is

specified.

Consult with co.workers to exchange ideas and techniques.

431. Consult with members of other technical groups within the

company to exchange new ideas and techniques,

432. lnterface with support consultants or organizations to

clarify software design or courseware content.

433. Attend meetings to review project status.

434. Attend team meetings to review implementation strategies.

435.

Discuss department plans and objectives

C o@o@@@o@@

;
;

429. lnterface with coders to verify that the software design

as

T
T
;

Exchange technical information

being implemented

t
T
t
t

o ooo@@@o@@

Attend industry standards meetings.

63

with manager,

o o@o@@@@@@
o o@@@o@o@o
o
o o@@@o@@@@
o o@o@o@@@o
C o@@@@@o@@

I
t

Partl I lt*naUili'g,on

64

:
EXHIEIT

4.7

rt hE ttrtg*c

Sa:acttat

Communications: Behaviour+Jased Data [from the PosiLion Analysis

Buestionnairel
''*"

lmportance to This Job

Section 4: Relationships with Others
This section deals with different

of interaction between
people involved in various kinds
of work.
aspeqts

N Does not apply

1 Very minor
2 Low
3 Average
4 High
5 Extreme

4.1: Communications
Rate. the following in terms of how important the activity is to the completion of the job. Some jobs may
involve several or all of the items in this section.

4.1.1: Oral (communicating by speaking)

99

100
101

1O2

103

104

t05

.l06

Advising (dealing with individuals in order to counsel and/or guide them with regard to problems
that may be resolved by legal, financial, scientific, technical, clinical, spiritual, and/or professional
principles)

Negotiating (dealing with others in order to reach an agreement or solution, for example, labour
bargaining, diplomatic relations, etc.)
Persuading (dealing with others in order to influence them toward some action or point of view,
for example, selling, political campaigning, etc.)
lnstructing (the teaching of knowledge or skills, in either an informal or a formal manner, to
for examplg a public school teacher, a machinist teaching an apprentice, etc.)
lnterviewjng (conducting interviews directed toward some specific objective, for example,
interviewing job applicants, census taking, etc.)
Routine information exchange: job-related (the giving and/or receiving of job-related information
of a routine nature, for examplg ticket agent, taxicab dispatcher, receptionist, etc.)
Nonroutine information exchange (the giving and/or receiving ol job-related information of a
nonroutine or unusual nature, for examplg professional committee meetings, engineers discussing
new product design, etc.)
others,

Public speaking (making speeches or formal presentations before relatively large audiences, for
example, political addresses, radio/TV broadcasting. delivering a sermon, etc.)

4.1.2: Written (communicating by wrifien/printed material)

107

Writing (for example, writing or dictating letters, reports, etc., writing copy for ads, writing
newspaper articles. etc.; does not include transcribing activities described in item 4.3, but only
activhies in which the incumbent creates the written material)

Source: E. J. McCormick, P. R. Jeanneret, and R. C. Mecham, Position Analysis Questionnaire, @ 1969 by Purdue Research
Foundation. West Lafayette, lN 47907. Reprinted with permission.

collect only jobJevel data and ernphasize comparisons in the external market in sening wages.
Howcvcr, designing career paths, staffing, and legd compliance may also require more detailed
information. Using broad, generic descriptions that cover a large number of related tasks doser to
the job family level in Exhibit 4.3 is one way to increse floribility. Two employees working in the
same broadly defined job may be doing entirely different sets of related tasls. But for pay purposes,
they are doing work of equal value. Enrployees working in these broadly defined jobs carr swirch
to other tasks thdt fall within the broad range without the bureaucratic burden of making job
uansfer requests and wage adjustrnents. Thus, employees c:ln more easily be matched rc changes
in the worldlow. Reauiter, compensation analyst, and training specialist could each be analyzed x
a separate, distinct job, or could all be combined rnore broadly in the job "HR Associate."
!

t.-.*

Chapter4 | lobAnalyt:

view deserves consideration. A promodon to a new job tide is usually

Sdll, a counterv"ailing
speciffc distinctions among jobs represenr career padrs to-employees.
More
reward.
a
finsidered
of levels in a sfiucture may.reduce the opponunities to reinforce positive
number
the
il.du.ing
.-otou.. behaviour. Reducing ddes or labelling all ernployees as "associates" may signal an egaliiltL .U,ut . But it may also sacri.frce a sense of advancement and oppomrnity.a

!l

HOW CAN THE INFORMATION BE COLLECTED?

.r',, Conventional Methods

ii

i,

;:,.

i,
i,

i.

job information is to ask the people who are doing a job to

Thc most cornrnon way to collect
Sometimes
an analyst will interview the job holdcrs and dreir supervi6U ou, a questionnaire.
the
questions
and that the information is correct. Or the analyst
understand
rhey
sors to be sure
work
and
take
notes
on what is being done. Exhibit 4.8 shows part of
at
person
rhe
inay observe
"Give an orample of a panicularly difficult
&om
quesdonnaire.
Questions,range
a lob andysis
in
your
work.
\Vhy
does
it
occur?
face
How often does it occur? \Zhat special
you
thar
pioblem
to
solve
this
difficult
needed
problem?"
are
to "r0[hat is the nature of any
resources
and/or
ikills
contact you have with individuals or companies in countries other rian Canada?" These examples
are drawn from the "Complexicy of Dudes" section of a job andysis questionnaire used by 3M.
Orher secdons of the quesdonnaire are "Skills/Knowledge Applied" (19 to choose ftom), "Impact
This Job Has on 3Mt Business," and "\Torking Condicions." The questionnaire condudes by
asking respoodents how well they feet rhe andpis has captured their particular job.
The adnntage of convendonal questionnaires end interviews is rhat the involvement of
employees increases tleir understanding of the process. However, the results are only as good as
the people invohcd. If imporant aspecr of a job are onined, or if the job holders rhemselves
either do not realize or are unable ro xpress fie imporance of certain aspeos of the job, the
resulting job descriptioos will be hulty. Considering the number of jobs in an organization,
ir is unrealisric ro xpect a single analm o undersand dl the different rypes of work and rhe
imporunce of dl job aspecs. Different people have different perceptions, which may result in
differences in inrerpretation or emphasis. The whole process is open to bias and favouritism.5 As
a resuft of this potendal subjectivity, as well as the huge arnount of dme dre process rakes, convendonal methods have givca way to rnorc quantitative (and systematic) data collection.

Quantitative Methods
will direct job holden ro a website where they complete a questionnaire
online. (Exhibirs 4.6 and 4.7 are excerpts 6om quandmtive questionnaires.) Such an approach
is charactcrized as qurntitatirc job andy:is, because the results can be analpcd arithmedcally. A
quancitadve quesdonnairc gpically asks job holders to assess whether each item is or is nor part
',, of
rheir job. If it is, drey arc asked to rate how imponant it is, and the amount of job time spenr
ion it. The results can be machinc scored like a muldple-choice test (except there are no wrong
'answers),
and thc results
be used rc develop a profile of the job. Questions can be grouped
eround compensable factors (discussed in Chaprcr 5) such as skill and working condidons. Skill
can be fi.uther subcategorized as formal qualifrcations, o<perience, occupational skils, atrd
management skills. Assistance is given in t}.e form of prompting questions and a list of jobs rhat
hive answercd each question in a simila-r way. Results can be used to prepare a job profile based
on the compensable Factors. Ifmore than one person is doing a particular job, resula ofseveral
people in the job can be compared or averaged to develop the profile. Profiles can be compared
across job holders in the same or in different jobs.
Increasingly, an analyst

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Some connrlting ffrms have dweloped quantiative inventories they can tailor to the needs
of a speciffc orgaaization or to a specfic family ofjobs, such as data/informadon processing jobs.

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Perc

EXHIBIT

4.8

I I Inmnal

Alignment Dettmbzing the Straoure

3M's Structured lntenview Guestionnaine

Chaprcr

4 | lob

and cost-effeccive rc modify these exisdng inventories rather

Many org,gr.ruzrLons ffnd it pracdcal
p ttreir own analysis &om ground zero. But it must be remembered that dre rcsufts
asPec
a.*na o" ihe qualiry of che input. The itcms on rhe questionnaire maner._If imporcant
&e
aspects,
certain
of
jobholders
not
realize
importance
do
the
are omired or if the
"it" i"U
on
arnounts
studl
the
ofstockbrokers
In
one
responses
Faulty.
will
be
orulri"g;oU dcscriptioru
some msks differed from thosc of low performers. The_implicadon is rhar any
oF dme spenr on
include
good performers to ensure that the work is usefully enAyz.ed"6
to
i..d,

,l-'a*!t

."AnO

Who Collects the lnformation?

Collecdng

job analpis information rhrough one-on-on inerviews can be a thankless raskLo* *.ll ir is done, nor everyone will be happy witl rhe resulting job descriptions.

No -"n.t
employee (oftcn justifying the assigoAlhough organizations frequendy assrgn the task to a new
new
employee
become familiar wi*r rhe conpanyi
the
will
help
it
thar
gronnds
rhe
*n, oi
with de organizatioo and its
thoroughly
hmiliar
someone
done
by
is
bemer
analysis
the
iobs),
*d rained in how to do dre analysis ProPerly'7

;obr,

Who Provides the lnformation?

(job holders, supervisors, and/or analyso) hinges on
The decision regarding rhe sourcc ofthe data
data Experdse about the work resides with the
accepnble
and
acduare,
coruisrenr,
ensure
to
how
*re principal sources. For key rnanagerid/professional
iob holders and supervisors; hence, th.y
jobs, sup.rvisors rwo levels above have also been suggested as valuable
T*"T, because th.y
In other instances, suborjobs
the
overall
organization.
fft in
i,"u. . -or. macro view of rhe way
job
also may be involvedunder
study
with
the
jobs
interface
that
dinares and employees in other
varies with thc
probably
job
collect
data
which
to
frorn
per
The number-of incumbenrs
or changAn
ill-deftned
rhe
information.
collecdng
the
ease
of
job,
as
with
as
well
subiliry of rhe
of
careful
selection
a
rnore
or
more
of
respondents
involvement
rhe
either
job
reqoire
will
ing
rhe
elgensive
and
dme-consuming
tle
rnore
involved,
people
more
rhe
.
Otviously,
*-pond.nt

-"y

proces (although computerization rnitigates rhese objections).

What about Discrepancies?

'Vh"r h.pp*, if the supervisor and dre ernployces present different picrures of the job? Al.ho"gh
in theory-supervisors ought to know fie jobs well, they nay not, parcicularly if the jobs arc
changing or ill-defined. People actually worlcing in a job may change it,_perhaps by finding ways
a{9 suPto do thingr more cfficiendy, or pcrhaps because they rnay not realize that certain

t+

posed ro b! prrt oftheirjob. The crossffre from differing perspectives on the nature ofajob indicates why conducting a job analnis can be a dangerous activity for a brand-new HR employee'
I 3M had an interisting problcm when it collected job information ftom a group of engineers.
iThe engineers listed a no*t.t of responsibilities they viewed as pan of their jobs; however, che
*.n"g.i realized that those responsibilities actually belonged to a higher level of work. The engienlarged their jobs biyond what they were being paid to d9-. No one wanted to tell this
"...rl"d
trighly productive group ofemployees to throtde back and slack off, so instead 3M looked for

to recognize and rcward them,

' ways What
sf,odd thc managcr do if employecs and their supervisors do not agree on what is
parr of rhe job? The answer is: Collecr more data. Enough data are
accluare, and acceptable resulu. In general, the morc unusual the

reguild to ensure

consistent,

job, the more sources of &ta

required Discussing discrepancies with everyone, rhen asking both employees and supervisors
ro sign offon th.
analysis, will help ensure agrement, or ac least understanding of

the results.

f.opo..d

At

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Partl I Innnal Alignutt Dutninbg *c

6a

Structura

Top Management {and Union} Support ls Gritical" In eddirion to involvemenr by andysts,

job holders, and their supeniisors, support of top managemenr and unions is edsential. They
must be alened to the cost of a thorough job andysis, ia time-consuming narure, and rtre fact

that changes may result after it is completed. For example, jobs may be combined or pay rates
If top management and unions are not willlng to crury cluough, or ar lea$ ro seriously
weigh, any changes suggested by the job analysis, the process probably will not be wonh the
adjusted.

drer and

expense.

;i-

LO4

job description
written stmmary of a
job, itxluding raponsi b iI ities, q u a Iifi c:,ti o n s,

and relationships

job specifications
qualifiations requi red to

behirdfora job; naybe

included in theiob delrcdgtion

T_T

JOB DESCRIPTIONS SUMMARIZE THE DATA

So now the job information has been collected, maybe even organized. But it still has to be summarized in a way that will be usefi.rl for HR dccisions, induding job evaluation (Chapter 5). That
surnmary of the job is the job description. Thc job description provides a word picture of the job.

Exhibit 4.9 gives part of a job description for a registered nurse. fiace the connection
job analysis &ta colleced. The job is identiffed
by dde ind its reladonships to other jobs. The relationships dernonsuate where rhe job fits into
berween different para of the description and the

ttre organization-whom is supervised by this job holdcr, who supervises this job holder, and the
nature of any internal and exernal relationships. A job summary consiss of a short paragraph
that provides an overview of the job. The section on essendal responsibilitics elaborates on the
sunmary. It includes dre tasks. Relaed tasks may be grouped into task dimensions.
This particular job dercription also includes very specific standards for judging whether an
essential responsibiliry has been met (e.g., "Provides a wrinen assessment of patient within one
hour ofadmission and at least once a shift"). A ffnal section lists the qualiffcations necssary to
be hired for the job. These are the job speciffcations that can be used as a basis for hiring-the
knowledge, skills, and abilities required to adequately perform the tasks. But keep in mind that
the summary must be relevant to pay decisions and therefore must focus on similarities and differences in content.

Using Generic Job Descriptions

To avoid starting from scratch (if writing a job desciption for the ff.rsr tirne) or as a way to

it can be useful to refer to generic job descriptions tfiat have not yet been
tailored to a specific organization. One readily accessible source is rhe National Occuparional
cross-check octernally,

Classification (NOC), described in dre

.Net'lforth

box here.

Describing Managerial/Professional Jobs

In addicion to deftniag and describGg jobs,

descripdons of manageriaVprofessional jobs often

include more detailed information about the narure of the job, its scope, and accountabilioT. One
challenge is that an individual manager may influence the job contenr.8 This is a classic er<ample
ofholrjob-based and person-based approaches blend in practice, even *rough the disdnctions
are ersy to make in a te:ctbook. ProfessionaUrnanagerial job descripdons must c:rprure the relationship between the job, the person performing it, and the organizacion objecrives-how the job
firc into the organization, dre results expected, and what the person performing it brings to che
job. Someone with strong inforrnation systenu and compurer orpertise performing the cornpensation manageri job will probably shape it differendy, on the basis of this expertise, dran someone with suong negotiation and/or counselling erpenise. Exhibit 4.10 excerpts this scope and
accountabiliry information for a nurse manager. Rather than emphasizing rhe tasla to be done,
this descripdon focuses on the responsibilides (e.g., "responsible fo?the coordination, direction,
implementation, evduation and management of personnel and services; provides leadership;
particrpates in strategic planning and deffning fucure direction').

Chapter4 | JobAnalyis

EXF1EIIJ:9

Contemporary

lol

lescniRtigl fo1 Bes_istered

N_unse

Job Title
Registered Nurse

Accountable for the complete spectrum of patient care from admission through transfer or
discharge through the nursing process of assessmen! planning. implementation, and evaluation.
Each RN has primary authority to fulfill responsibility of the nursing process on the assigned shift
and for projecting future needs ofthe patienVfamily. Directs and guides patient teaching and
activities for ancillary personnel while maintaining standard of professional nursing.
Relationships
ReporB to: Head Nurse or Charge Nurse.
Supervises.' Responsible

for the care delivered by

LPNs,

nursing assistants, orderlies,

and transcriben.
Works with: Ancillary Care Departments.
Exter na I re I ationships: Physicians, patients, patients' fam i I ies.

Qualifications
Education: Graduate of an accredited school of nursing.
Work experiencel Critical care requires one year of recent medical/surgical experience
(special<are nursing preferred), medical/surgical experience (new graduates may be considered
for non<harge positions).
Licence or registntion requiremenb: Current RN licence or permh in the Province of Alberta.
Physical requirements: A.
B.

Ability to bend, reach, or assist to transfer up to 23 kilograms.

Ability to stand and/or walk 80 percent of 8-hour shift.

C. Visual

and hearing acuity to perform job-related functions..

Essential Responsibilities
1. Assess physical, emotional, and psychosocial dimensions

3.

of patients.

Standard:

Provides a written assessment of patient within.one hour of admission and at

least once a shift. Communicates this assessment to other patient care providers
in accordance with hospital policies.

Formulates a

written plan of care for patienB from admission through discharge,

Develops short-term and long-term goals within 24 hours of admission. Reviews
and updates care plans each shift based on ongoing assessment.

Standard:

lmplements plan of care.

Standard:

I
;

Job Summary

2.

69

Dembnstrates skill in performing common nursing procedures in accordance with

but not limited to the established written RN skills inventory specific to assigned
area, Completes patient care activities in an organized and timely fashion, reas-

sessingprioritiesappropriately.

Note: There are additional responsibilities, omitted from exhibit.

Verify the Description

The final step in the job analysis process is rc veri& the accuracy ofthe resuldngjob descriptions
(step 6 in Exhibit 4.4). Veri{icarion often involves the interviewees as well as their supervisors
to determine whether the proposed job description is accurate and complete. The description

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PttI I Intnul Aligmtnt Dctrmining th. Smtcturc

National Occupational Classification

ln Canada. many companies turn to the federal government's National Occupational

Classification (NOC) for reference when prepJlring job descriptions' The NOC is an excellent source of standardized job information, based on systematic field research by

Human Resources and Skills Development Canada. lt contains comprehensive descriptions and qualifications for over 40.000 occupations. NOC information is available online
at wrnrwS.hrsdc.gc.ca/NOOEng lish/NO020 1 lAtVelcome'aSpx'

The NOC classifies occupations into Major Groups based on two key dimensions: skill
level and skill type. The Major Groups, identified by two'digit numbers, are further
broken down into Minor Groups, with a third digit added, and unit Groups, with a
fourth digit. For example, Major Group ll: Professional occupations in business and
finance includes Minor Group 112: Human resources and business service professionals,
which includes Unit Group 1121: Human Resources Professionals:

1121 Human Flesources Professionals

and
Human resources professionals develop, implement and evaluate human resources
employers
and
managers
procedures
and
advise
and
programs
labour relations policies,
on human resources matters. Human resources professionals are employed throughout

profes'
the private and public sectors, or they may be self-employed. Human resources
duties:
following
the
all
of
or
perform
some
sionals

plan, develop, implement and evaluate human resources and labour relations strat'
egies including policies, programs and proeedures to address an organization's

human resource requirements

policies,
Advise managers and employees on the interpretation of human resources
compensation and benefit programs and collective agreements

tabour
Negotiate collective agreements on behalf of employers or workers, mediate
relations
labour
and
on
employee
provide
advice
and
grievances
disputes and

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Research and prepare occupational classifications,

and competency appraisal measures and systems

r
.
r

plan and administer staffing, total compensation, training and career developprograms
ment, employee assistance, employment equity and affirmative action
Manage programs and maintain human resources information and related records

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job descriptions, salary scales

systems

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Hire and oversee training of staff

Co-ordinate employee performance and appraisal programs

Research employee benefit and health and safety practices and recommend
changes or modifications to existing policies'

Adult
Source: Current And Forthcoming Minimun Hourly Wage Rates For Experienced
H uman
workers in canada. httB:/isrv 1 1 6.services.gc.caldimt-wid/sm-mw/rptl aspx? lang=en9
permission of the
with
the
2012.
Reproduced
canada,
Skills
Development
and
Resources
Minister of Public Works and Government Services Canada, 2012'

with the analyst, taking note of any omissions, ambiguides, or needed

and fiankless task). Outside sources of job descriptions'
(often
excruciating
an
clarifications
can be used
such as the National OccupationiChssiffcation profiled in the .Net \0'orth box

is discussed, line by iine,

L__.

for reference.

Chaper4 |

NAuIF

Job Description for a Manager

DfiIBIT 4.1O

Title: Nurse Manager

Department

ICU

Date Posted: July 25,

r':

Status: OPen

l,
I

Position Description:
Under the direction of the Vice-President of Patient Care Services and Directors of Patient Care
Services, the Nurse Manager assumes 24-hour accountability and responsibility for the operations of
defined patient specialty services. The Nurse Manager is administratively responsible for the coordination, direction, implementation, evaluation, and management of human resources and services.
The Nurse Manager provides leadership in a manner consistent with the corporate mission. values,
and philosophy and adheres to policies a4d procedures established by Saint Joseph's Hospital and
the Division of Patient Care Services. The Nurse Manager participates in strategic planning and
defining future direction for the assigned areas of responsibility and the organization.

l'

Qualification:
Education: Graduate of accredited school of nursing. A bachelor's degree in Nursing or related field
required. Mastert degree preferred. Current licence in the Province of Nova Scotia as a Registered
Nurse.

re

Experience: A minimum of three years' clinical nursing is required. Minimum of two years' management experience or equivalent preferred.

have been iareresting to hear the discussion bennecn a nursc from 100 years o,
job is described in Exhibic 4.11, and her supervisor. Thc job description paints a vivid
picrure of expeftadons at fiat rime. It is unJikely that she would havc had much opponuniry for
input 100 yea$ ago.

ft would

whose

Job Description fon Nurse 1OO Years Ago

EXHIBIT 4.11

E']..,.,].:''']''l'.']1',!ii.:E
ln addition to caring for your 50 patients, each nune will follow these regulations:

2.

Daily sweep and mop the floors of your ward, dust the patienfs furniture and window sills.
Maintain an even temperature in your ward by bringing in a scultle of coal for the day's

3.

business.
Light is important

1.

4.

5.
6.

7.
8.
9.

ry

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71

to observe the patient's condition. Therefore, each day, fill kerosene lamps,
clean chimneys, and trim wicks. Wash the windows once a week.
The'nurse's notes are important in aiding the physician's work. Make your pens carefully; you
may whittle nibs to your individual taste.
Each nurse on the day duty will report every day at 7 a.m. and leave at 8 p.m..except on the
Sabbath, on which day you will be off from 12:00 noon to 2:00 p.m.
Graduate nurses in good standing with the director of nurses will be given an evening off
each week for courting purposet or two evenings a week if you go regularly to church'
Each nurse should lay aside from each pay day a goodly sum of her earnings for her benefits
during her declining years, so that she will not become a burden. For example, if you earn $30
a month you should set aside $15.
Any nurse who smokel uses liquor in any form, gets her hair done at a beauty shop, or frequents
dance halls will give the director good reason to suspect her worth, intentions, and integrity..
The nurse who performs her labours and serves her patients and doctors faithfully and
without fault {or a period of five years will be given an increase by the hospital administration
of five cents a day, provided there are no hospital debts that are outstanding.

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Partl I IntenalAligrntat Dcerzxitbry{r

I---I

Ya*

JOB ANALYSIS AND GLOBALIZATION

Job Analysis and Susceptibility

to Offshoring

offshoring refers to *re movement of jobs to

offshoring
movemattof iohs ta lcr.a'
tions beyond lnme-country

boters

lgcations.

b.yo4.home-couatY

borders.

are subHistoricalf, rnanual, low-skill jobs have been most siuceptible to offshoring, as t-here
workers.
for
rnanufacturing
counties
across
cost
cornpensation
standal differences in hourly
.This reality has played an important role in decisions about where to locate productigt oPlo:
have had
tioru. Siiar diff.reo..s in iost in other low-skill occupations (e.g', in call centres)
as there are producdvity
in
decisions,
such
facor
one
only
is
cost
Labour
ramifications.
similar
cascs be offiet
differences across countries as well, rneaning that lower labour cosu may in some
is another
skills
and
by lower productiviry. Availabiliry of workers with the required education

pot.oti"l'corrrtraiot,-"s is proximiry to customers. sometimes it makes business

sense

to move

offshore and sometimes it does not.

jobs. Irhite-collar
Increasingly, susceptibiliry to offshoring is no longer limited to low+kill
and outputs can
inpua
when
to
outsourcing
suscePdble
are
jobs are ,lro b-.iog outsourced. Jobs
litde local
required,
ii
wotkers
other
with
interaction
litde
electronically,
..rify f.
not only
jobs
include
susceptible
Highly
routinized'g
be
workcan
the
knowledge is required, and
as data entry oPerators and telemarketers'
such
and
training,
education
little
,tor",h",,"q,ri*
to outsourcing
but also *-1u,", programnicrs and toc PreParers' Jobs with low susceptibiliry
(e'g',
marketing
include managerial-pori,iorrr, posidons in nt-hich local knowledge is required
or in
world),
the
of
regigns
o."i ro k ro* .orrso*er preferences in particular
is
necessary.
architects)
*hi"h"b.irrg on rhe ground (lircrdly, in ttre case oflandscape

.r*ri.i*d

t.

;;;;;i."

Iob Analysis lnformation and Comparability across Borders

need to arnlYzc jobs to
As fums spread work across multiple counties, there is an increasing
the
ways in which jobs are
to
rneasure
be
able
either maintain consistency in iob iontent or else
equdly effe5tivdy
work
to
teatn
dwelopment
similar and differenr. For e*"-pI., for a software

*a nai",

the job descriptions and job speci-ftcations need to be

and
is that norms or perceptions regarding what
challenge
a."rty ,riaorrcod. One potential
-is
different
three
of
a
study
Howwer,
courtrias.
job
across
vary.
may
*t i, nor parr of " p"rti"ul*,
and computer.programmer) in the united states'
g.o.."l gffice
jobs". (FusrJine supewisor,-li.*
'Chio",
Zealand found that ratings of the imponance and amount of work
iorrg Korrg, *d
,!qrrir.*.rrt were 'quite similar" across countries, suggpsting that job andysis
activides
"rri;oU
inforrnadon "is Iikety to ffansPort quite well across countries"'Io

;irt;tdr-mers

in

Canada

cl+

Los

I_-I

JUDGING JOB ANALYSIS

both employees and cmployers'

Beyond beliefs about its usefulness, or lack thereof, for sadsfring
t!.r" several ways to judge job analysis'

"t

Reliability
the meaIf something is measured tomorov/ and the results are the same as those from today,
nieasures
repeated
that
is
right-only
mean
it
doesnt
This
reliablc.
surement is-considered to be
reliability
corsist?nq of re5'ultrhom
repeated aqqlications of a
'-measure

S*

";

,r-.

,.r,rlr. Reliability is a measure of thc consistency of results if tlre same measure

is

repeated many times.

the reliabiliry of job analysis

Research findings on employee and supervisor agreement on
of a
information are mixed. For instance, experience may change an employee's perception
supervisor
The
it'
rc
tasks
have found new wa)ts to do it or may have added new

job-

i"lrt. -"y

Chapter

4 | lobAna$is

cases, the job the employee is actually doing rnay

may nor realize rhe ofienr of change. In such
noi b. ,h. same as the job originally assigned by rhe supervisor. Obviously, the way to increase
job analysis helps
reliabiliry in a job analysis is to reduce dle sources of variance. Quantitative

T3

to be sure that we do not eliminate the richness or the nuances of

the
variance.
eliminating
a job while
reduce variance. Bu3 we need

ValiditY
job analysis masures whac it claims to measure.
Vatrdity is rhe extent to which a process such as
to
whether
the analysis creates an accurarc portrait of the
as
the
question
widr
concerned
It is
statistically
the ertent to which an andysis is accurate,
no
of
showing
almost
way
is
There
work,

oanicularly for cornplex jobs. Consequently, validiry o<amines convergence of results among
sources of data and rnethods. For example, validiry might be assessed by measuring *re
exrenr ro which rhe job andysis resuhs represent the entire range of acdvities and responsibilides
rcquired by rhe job, and by measuring the extent to which there is agreement becween a variety of
oeople ftmiliar wirh rhe job riat the job andysis results are representative of the job. However, a
,ign-offon the resufts does not guarantee validiry. It might only mean everyone was sick to death
oi,h. pto..s and wanted to get rid of the analyst so they could get baclc ro work.

hiff.r.n,

AcceptabilitY
I6job holders and managers are dissarisfi.ed with the initial data collected or with rhe process, they
are nor likely ro buy ilrto either rhe resulUng job sructure or the pay rates evenrually anached to
rhat strucure. A-u analpt collecdng informadon through one-on-one inrerviews or observation
is not alwap accepced because of rhe potenrid for subjectiviry and favouritism. However, more
quanrirative approachcs also may run into difficulty, especially if they give in to the ternptation
ro rry to collect too much information for too many PurPoses

Currency
To be valid, acceptable, and useful (see bdow), job informadon must be up to date. Sorne jobs
rtry relatively stable over dme, wbjle odrers may changc in important wa1n, even ovet short time
periods. .As F:xhibit 4.12 shows, most organizations report that tley have up-m-date job informaiiion, but a substantial minoriry reporr rhat job information is not up to date. That can hinder
d.crtio.t making but also employe selection, trainin", md
not O"ty compensation pracdce

i
it

"id

or bi-annual)
development.-Mosr organizarions do not engage in any regular G"* * annual
when
information
updatejob
to
likely
more
b.ing
,.rpd".irrg of job analysii information, i*tod
compensation
for
job
reevaluated
is
being
dae
when
Puror
slgnifr;r .Lrrrgo have occurred
job
information
when
for
ev"aluating
protocol
a
systematic
ro
develop
pf.er.tl It *"y f,. useful
needs to be updated.l2
Usefulness
\Jsefulness refers

i
:'

to the

usefrrlness

of the information collected. For pay PuPoses' job analysis

job-it

helps deterprovides work-related infognadon to help determine how much to pay for a
in
a reliable,
does
this
job
andysis
mine
job is similar or dissimilar to other jobs. If
nttid,
then thetechnique is of pracdcal t'se'13
,
".".ptil.way,
such
As we have nored, soroe see job analysis information as useful for muldple purposes,

yhJ;;;;
*d

u hiring

than is required to
ar,J toirrlrrg. But multiile puposes rnay require more information

jl-.rr.o-p"tting quantiadve job andpis plans' with their

ply. The praciical u*liry of
.ompl}'procedures and analysis, remains in doubl Some advocates are so taken nqidl their

*ro,

validity
accuracy

ofa

rneas.r'e

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74
EXHIBIT

Pa,n

4.12

I I Intenal

Alignment: Detcrmining the Struaute

Updated Job DescniPtions

t
I

tI

judgment mtrst continue to play

stitistics and computers that they ignore the role that human
todap "I wish to emphasize the
in job analysis. A ,t"r.*.ot *"a. *t 30 years ago still holds
sa..ri"A -iJ pfayed in all these procedures by human judgment. I know of no methodology,
supplement'
nor
of,'
importance
the
air,i"J *.fuifq"e or objective ,rr.."rr..-.nm that can negate
rational judgment."la

A Judgment Call
why on earth would you
In the face of all rhe difficulties, time, expinse, and dissatishction,

as a

informathat your employer bother with job analpis? Because. work-related

;"g*;J;end
is no
There
pay differences'
tion is needed to determine pay, and differences in work deterrnine
will
or
related
work
will
be
,Jra.r"ry r"bstirute th". ."r, .rrr*. tlot the resulting pay structure
provide

ii"bl.,

acculate data co make and explain pay decisions'

detail is needed to
If work informadon is required, the reJ issue should bel How much

individual employees' Pay' encouragemake these pay decisions? The answer is: enough to help-set
*otkfotce, and minimize therisk of
th.
of
tkill
conrinuous learning, ir,.r."r. the experience "ia
employees who drive awav
is
dissatisfted
detail
this
of
omiuing
The risk

;;;;;J;;;;;*".;'.

about managementi inabiliry to justifu their dicidump the andysis;

nr. Iawsuim. The response to irr"d.gu"t analysis should not be to

customers with rheir poor service,

,*r, .,

.o-pl"i',

rather, the resPonse should be to do more usefi'rl analysis

Conclusion

objectives and fostering

Encouraging employee behaviours that help achieve an organization's
pay structure' One
internal
e sense of fairness among employees are *o h"[*"tlt of a usefirl
as opposed
internally
strucrirre
a
of the frrsr srrategic p"y'a."i.ioi, is how much to align Pay

Clrapter

r.i;,

4 { lo6'azaly;s

is not achieving intcrnal

ro aligning it to external markq forces. Do not be misled. The issue
with
external
markct
R"th.r, the stategic
alignment
forces.
required.
Both
are
versus
alignment
the
op-timal
balance
responsive
of
and
externally
on
susraiiilng
internally
digned
focuses
d.Iision
help the organization achieve its mission. This section of the book is about
Day srruclures that
on. of the ffrst decisions you will face in designing pay systems: how much to emphasizc pay
srrucrirres that are internally aligned with the work performed, the organizariont structure, and
'$7'hatever
the choice, it needs to support (and be supponed by) rhe organization's
its suategies.
overall human resources suatery'
Noct, managers must decide whether job and/or individual employee characteristics will bc
rhe basic unit of aodysis supponing the pay structure. This is followed by deciding what dae
will be colleqed, what method(s) will be used to collect them, and who should be involved in
rhe process.

A kry rest of an effecdve and fair pay structue is acceptance of resuks by managers a-nd

employees, The best way to ensure accepunce ofjob analysis results is to involve ernployees as
well as supervisors in 6,e process. fu a minimum, all employees should be informed of the purposcs and Progress ofdre accivity.
Afthough almost everyoae agrees about rhe importance of job analysis, that does not mean
rhat everyone does it. Unfomrnateh, job analpis can be tedious and dme-consuming. Often,
the job is given to newly hired compensation analyse, ostensibly ro help them learn about the
organizadon; but there may also !s 3 hinl of "rite of passage" in such assignmens.
Alternatives to job-based $rucnues, such as skill-based or competency-based qystems, are
being experimented wirh in ma:ry ftrms. The premise is that basing strucnues on r"hese ottrer
criteria will encourage employees to become more flercible, and fewer workers will be required
for r}e same level of ourpuL Bur as ocperience increases with these alternatives, managers are
discovering that they can be as timc-consuming and bureaucratic as job analpis. Bear in mind
rhat job content remains the coaventiond criterioo for strucnrres.

E
L
2.
3.

4.
5.

Chapter SummarY
Job analysis is rhc rystematic process of collecting information about the narure of specfic
jobs. Job analysis data are used is vimrally every major HR function, lncluding recruitiag
and selection, uaining, compensation, and so on.
Therc is a six-step approach to job analpis: develop preliminary job information, conduc!
initial tour of work site, conduct interviews, conduct second tour of work site, consolidar
job ffirmation, and verifr job description.
The information that must b colleced for job analysis includes job identiffcation &ta job
conrcnt data, and data on qualifications nece.ssarl to do the job. Job content data are 6e
hearr of job analysis, and indude the tasks involved, their purpose, reponing relitiooship+
working conditions, and otler specifrc job information. Conventional methods of collecdng
job analysis data such as qucsdonnaires and interviews are being replaced by o"line qucsdonnaires, because the lattcr are more objective and less time-consuming'
Job descriptions provide a wrimen summary of a job, including responsibilities, gualifications, and rclationships. Job specificadons are the qualificacions required to be hired for a

job, and may bg indudcd in the job description.

Thc bcnefit of uadidonal job analpis is that it provides the basis for defensible joLrdarcd
decisions, and cstablishes a foundation for career paths. However, it is somedmes ossidcred
tob rigid for today's more flexible organizations with fluid work assignmena. Job anabrsis can
be judged based on reliabiliry (consisrcnry) of the infornation obtained, *lidi.y (acolracf)
of rhe information obrained, acceptability of the data and the process by employecs aod
managers, and practicaliry (usefulness) of the information collected.

rli

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76

Dererminitg the Smrctun

job analysis
job description
job specifications

offshoring
Position

Analysis

,F..
"

reliability
validity

Questionnaire (PAQ)

Review Questions

1.
2,
3.
4.

Ir

I
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What are the two critical uses of job analysis for compensation decisions?
Describe the major decisions involved in job analysis'

Distinguish between task and behavioural data.

How should discrepancies between job analysis information provided by employees and
supervisors be resolved?

Experiential Exercises
1.

to several managers and find one who claims to have never heard of job analysis' Ask
the manager how job descriptions (if there are any) in the organization are developed' Ask
whether there are any problems because of jobs that overlap, problems with performance
evaluations. and problems with concerns about pay fairness. How might these problems
be related to the lack of job analysis information?

Talk

Z, a.

Think of a specific job you presently hold or have held in the past (including a parttime job or volunteer work). use the information in this chapter to develop a job
analysis questionnaire that you believe would adequately capture all relevant information about that job. Then complete the questionnaire for your specific job'

b.

pick a teammate (or the instructor will assign one) and exchange questionnaires with
your teammate'

c.

Write

d.

Exchange descriptions. Critique the job description written by your teammate. Does it
adequately capture all the important job aspects? Does it indicate which aspects are

job description for your teammate's job, Does the questionnaire give you sufficient information? ls there additional information that would be helpful?
a

most imPortant?

Case
The Customer Service Agent
Read the following articl6 on a day in the work life of Bill Ryan. Then write a job description
for the job of customer service agent. Use the exhibits in this chapter to guide you in deciding
what information in the story is relevant for job analysis.

F
T

I I Intemat Alignment:

Key Terms

F
F

I
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Part

1.
2.
3..

Does

the day diary include sufficient information?

ldentify the specific information in the article that you found useful.

What additional information do you require? How would the information help you?

pick a teammate (or the instructor will assign one) and exchange job descriptions with your
teammate.

a.:

Chaptcr4 | lobAtalyit

1.
2.
3.

How similar/different are the two descriptions? You and your teammate started with
exactly the same information. What might explain any differences?

What process would you go through to understand and minimize the differences?
What are some of the relational returns of the job?

Bill Ryan often deals with difficult people. lt's what he gets paid for. He's one of 30 customer
service agents at Half.com, an online marketplace owned by eBay Inc., the Internet auction
company. Like eBay. Half.com attemptsto match buyers and sellers in a vastflea marketfeaturing millions of products ranging from trading cards to camcorders. But unlike eBay, there! no
bidding. Half.com lists items only at a fixed price. lf you see something you like, pay the price
and it's yours.
The other big difference from eBay is that for most products listed on Half,com, there's no way
for buyers and sellers to interact directly. Usually there's no need to. To make a purchase, buyers
use their credit cards or chequing accounts to pay Half.com, which then automatically credits
the amount to the seller's card or account, minus a transaction fee. Once the payment is made,
the seller ships the product.
Despite a well-oiled system, however, questions arise. Things can go wrong. A purchased item
doesn't arrive, or isn't in the condition the buyer expected. Or maybe an interesting product is
listed but its description isn't clear. And that's where Ryan and his colleagues come in, handling
the buckets of e-mail and intermittent phone calls from curious, addled. and upset users. They
pass information between buyers and sellers, answer questions, and resolve the occasional dispute. Half,com says that fewer than 1 percent of the site's transactions require customer service
involvement. But with more than 15 million items for sale-well, you do the math,

In fact, the customer service department receives about 1,500 to 2,000 e-mails per day, of
which nearly a third are complainb about transactions. The rest are mostly questions about the
goods and how the site work. Ryan himself on a typical day fields between 60 and 100 e-mails
and half a dozen phone calls. The calls are the most stres#ul. "People panic and they want
answers," says Ryan. "lf they are calling, they're not happy."
For Half.com-as well as for mosl other e-commerce companies---customer service agents like
Ryan are the crucial link between the faceless website and the consumer. And how they deal
with the public can make or break a busines. As Half.com's vice-president for operations says,
"lt costs too much to get a new customer only to fumble the relationship away." Half.com
won't discuss salaries, brfi Ryan and his colleagues, who are split into two shifts covering 8 a.m.
to midnight, seven days a weeh say they're satisfied with their wages, which include quarterly
bonuses.

What he likes about his work Ryan says, is the kjnd of customer problem that requires research
and deep digging to find the resolution. What he sometimes doesnl like about his work are the
routine questions that generate stock responses. Here! a day in Ryan's work life:

The Answer Man

the Half.com office in Lethbridge, Alberta, a short drive from his
home, The company's single-storey grey building is a former tire factory in this Colonial-era
industrial town in the south of Alberta. Ryan works in a low-slung black cubicle toward the
back ofthe office. his space sparsely decorated. The atmosphere at Half.com is decidedly young
and casual. Jeans are the uniform. Ryan certainly fits in, although at 32 he's a few years older
than most of his cubicle mates.
8:00 a.m.: Ryan strolls into

He started doing strictly customer service, answering customer e-mails. Now he also does what
the company calls "trust and safety work": investigating fraud and looking for things on the
site that are "funky." For instance, when Half.com receives a complaint from a buyer about
a seller. itl Bill Ryan's job to contact both parties and niake sure there is no fraud occurring.

This day, because the site has received a high volume of e-mails, he's on regular customer service duty. After checking the few internal e-mail messages he receives each day. he gets right

7t

78

Paml I latenalAlignwc

Dutriniq *c Stnc*rc

Ryan downloads his first batch of ten e-mails for the day. He says it usually takes him
about an hour to get through ten messages.

to work.

8:10 a.m.: The first e-mail is from a woman interestedln buying an audio book on CD she saw
listed on the site. she wants to know whether the CD will work on her DVD player. But because
she doesn't specify the exact lirting, Ryan is stuck. He can't search for it among all the listings
or contact the seller. The best he can do is suggest that she send him an item number so that
he can contact the seller with her question.
comes from a user who sold the Diana Krall CD When I Look in Your
but lost the buyer's shipping information. The seller is concerned that a delay in her shipment will give the buyer reason to give her a negative rating on the site. After each irurchase is
made, the buyer gets a chance to rate the seller's performance on a scale from 1 to S-"poor"
to "excellent." Every rating sellers collect is displayed along with their user name ne)iltto subsequent items they list, Just one negative rating can ruin a sellert reputation, depending on how

8:15

a.m.:lhenext e-mail

Eyes,

many sales he or she has made overall.

trBck down the details on this particular transaction in the Half.com user database. He
identifies the buyer and writes an e-mail to explain that the seller lost the shipping address
and "wants to let you know they are sorry for the inconvenience," He then e-mails the buyer's
shipping address to the seller.
Ryan

Ryan says he doesnt find the e-mails tedious. "There is such a variety oftopics to respond to,"
he says. "l.never get 50 of the same questions in a row." But a few e-mails later, he shrugs with

disapproval. The user! guestion could easily have been answered by going to the help section
of the website: "Do I include shipping in the sale price or is it added later?"
Says Ryan, "lt's a general question. I like the detailed research questions." He pastes in an
answer from a database of stock responses the customer service team has put together. He then
tacks onto the end of the email a salutation that he draws from a list of suggested message
closers provided by Half.com. The list, the company says, makes it easier for the agents to write
so many e-mails. For this message, Ryan chooses, "lt was my pleasure to assist you."

Got Juice
9:30 a.m.: After answering a few more messages, it's time for a coffee break. Ryan says he
drinks two cups of coffee a day, a habit he picked up since starting at Half.com. "A year ago I
wouldn't have touched the stuff," he says. He heads to the kitchen, which is just down the hall
from his desk, The well-lit room is stocked with free cappuccino, juice, pop. cereal, cookies, and
other munchies. The cafeteria also doubles as a lounge, with a satellite television playing TSN,
a Foosball table, and a ping-pong table. This early in the morning, however, most people are
interested in the coffee.
9:48 a.m.: An e-mail arrives from a Half.com colleague in charge of the stock-answer database.
He writes that a response Ryan submitted on how users can sign up for direct deposit-linking
their Half.com transactions with their chequing account-would be included in the database.
"There are so many things we don't have responses to," Ryan says. "lt makes everyone's life
easier to have the database."

l0:00 a,m.:The first ten e'mails are done, Ryan downloads ten more. One is from a father who
several days earlier ordered the latest Sony Play5tation 3 for his sonS birthday and is concerned
because it hasn't arrived yet. Half,com's policy is that if a buyer hasn't received an item within
30 days of purchase, he or she can lodge an official complaint, The PlayStation seller is thus
a long way from the delivery deadline. Nevertheless, as a courtesy, Ryan sends the seller and
e.mail asking whether he can provide a shipping date and tracking number that Ryan can pass
on to the restless father.
Half,com believes that help like this-beyond the requirements of its own rules---5eparates its
customer service approach from that of other companies. When the company was starting out,
says training supervisor Ed Miller, customer service tried to respond to as many messages as it
could, as fast as possible. What the company learned, however, is that "customers don't mind if

--'rt

.8,I

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Chaprer4 | JobAnalyis

79;

;
I

you take a little more time to answer their specific question," Instead of just firing off e-mails,
Half.com now sees it as important to personalize each message. Even with the personalization,
Half.com says it resPonds to most messages within 24 hours. Communications with customers
have a consistent and pleasant tone. E-mail messages conform to the "grandmother rule,,, Each

message should "make sense

to my grandmother."

10:10 a.m.: Washroom break.

l0:15 a,m.:"All right," Ryan says eagerly, returning to his desk. He cracks his knuckles and starts
typing."A buyer who purchased a video game two months ago but never received it writes to
thank Half.com for "hounding" the seller to send him the item. But he wants a refund. Ryan
verifies the buyer's version of events in Half.com's records, then refunds the buyer,s money
and charges the seller's account for the amount of the sale. Ryan sends e-mails to both parties
informing them of his action. Half.com's rules say that when an official complaint has been
lodged, the other parlry has five days in which to respond. ln this case, the seller didn't respond,
so the buyer won the dispute by default.

10:25 a,m,: Snack time. Ryan breaks into a high-energy Balance

him ready for what comes next.

bar-a little nourishment to get

Wrecking Crew
10:30 a.m.: Time to knock down some walls. Lively human resources worker Alicia Di Ciacco
invites Ryan and his colleagues to pick up sledgehammers and knock through a wall at the
end of the office. Half.com's staff has doubled in the past yea4 and the company is expanding
into adjacent space in the old tire factory. Everyone in the office takes turns whacking at the
wall. Some of the younger males dish out screams of "l'm not going to take it anymore!,, and
"Where's the Pink Floyd?"-a reference to the 1970s rock album The Wall.
Ryan eats up the office energy. "lt's exciting to work here," he says. "We're growing. We had
the second launch of the site. (Half.com expanded the product line in April.) We're doing construction. ltt good to come to work when the company is doing well."

with a batch of ten e-mails, Ryan downloads ten more, including two sepafrom customers who can't redeem special introductory coupons Half.com offers to

11:15 a,m,: Finished

lXTi:""::

I 1:47 a.m.: Ryan gets an e-mail from a seller responding to a message from Half.com. A poten
tial buyer has asked Half.com whether the sellert 75-cent copy of Carolyn Davidson's Harlequin
romance The Midwife is a paperback or hardcover. Half.com forwarded the question to the
seller, who now is writing back to say it's a paperback. Ryan sends two e-mails: one to the buyer,
answering his question, and one to the seller, thanking him for the information.

l2:10 p.m.: Ryan eats his turkey wrap in the company cafeteria with some colleagues and heads
back to his desk by 1 p,m.

p.m.: E-mail from a user who can't find the new Stephen King novel on Half.com, The she
supposed to list all new books from major publishers, even if no one is selling them. That way.
if a user is interested, he or she can put it on a wish list and the site will automatically e.mail
him or her when a copy has been posted for sale. Ryan searches for the book meticulously,
checking by title, author, and publisher's ISBN number. Once he! sure the book isn't listed, he
e-mails Matt Walsh, who is in charge of fixing catalogue errors. Ryan then e-mails the user and
instructs him to check back at the site soon.
1:06

is

1:21 p.m.: First phone call of the day. Because Half.com prefers to conduct customer service
on e-mail, to keep its costs down, it doesnt display its phone number on its website. Still,
persistent users get the number through directory assistance or other sources. This caller, an
agltated buyer of the video Valley Girl, a 1983 comedy starring Nicolas Cage, says she received
a damaged tape. She has lodged an official complaint against the seller on the site, brt.t the
seller hasn't responded, Ryan tells her that the five days the seller has to respond aren't up yel
He assures her that if the seller doesn't respond within the allotted time, he will refund her

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PanI I InarnalAlignunt Dc*mhing

dtc Stracnrc

money and charge the seller! account. LJntil then, there's nothing Ryan can do except comfort
the caller with apologies and explanations.
ln the event that the seller disputes the buyer's clairii about the tape. Half.com is still likely to
grant.the refund, especially on such an inexpehsive item. Half.com makes it clear; however, that
its customer service team keeps a close watch on users'complaints, looking out for fraudulent
refund requests. lf Half,com suspects foul play, it doesn't grant refunds so easily.
2:02 p.m.: A seller of the video I Know What You Did Lart Summer got the package returned,
marked address unknown. Ryan looks up the buyer's information in the user database and
e-mails him, asking for an updated address to forward to the seller. He then e-mails the seller,
telling him the address should be on its way shortly.
2:21 p,m.: Ryan downloads ten more e-mails.

Home Stretch
2:30 p,m.: The day is starting to get long, at least to an obseryer. But Ryan says sitting still all
day doesn't cramp his style. "Sometimes itt tough to work at a desk, but it doesn't really bother
me," he says. "l work out after work, and that really loosens things up."
3:00 p.m.: Washroom break.

p.m.: With the clock ticking toward quifiing time, Ryan works on finishing his last batch
lt! more of the same: a user unsure how Half.com works; a seller who wants to list
a 1976 edition of The Grapes of Wrath but can't figure out where to put it on the site; a buyer
who wants a book shipped second-day air, even though the order was already placed.

3:1 5

of e-mails.

3:30 p.m.: A call from a buyer interrupts Ryan's streak of dispensing e-mails. The buyer felt
that the quality of a book she bought was not up to snuff. The book, a $2 copy of Danielle

torn cover, The buyer is upset, but Ryan remains calm, calling
on skills he learned in a one-day seminar "Dealing with Difficult People." ln the class, which
he took before coming to Half,com, he learned to paraphrase what the customer is saying to
make sure he understands the complaint. Ryan also takes care to speak clearly with a strong
sense of empathy. At one point he says, "l understand your frustration." When he explains that
the buyer will have to wait some time for a final resolution of the matte[ he makes sure to
preface it with a heartfelt "l'm sorry to let you know . , ." An observer listening to Ryan gets
the sense that he is not acting.
Steel's Secre8, apparently had a

"lf you don't understand what they are saying, then you have a problem," he sap. Though he
can't satisfy this customer then and there, he promises to talk to his supervisor and to call her
back tomorrow with more information.
p.m.: The day is done. Ryan finishes his last e-mail, closes up his desk, and heads home. A
new shift of workers picks up where Ryan left off, toiling from 4 p.m. to midnight. When they
finish, the customer service staff in eBay's facility in Salt Lake City will take over. Tomorrow
Ryan will be back on duty at I a.m.. downloading his first ten e-mails.

4:OO

Source: Alex Frangos, The Walt Street Journal,July 16, 2001.

ffi-

Practise and learn online

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I
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LEARNING OUTCOMES
LO1 Define job evaluation and explain the different perspectives regarding this
'activity.

LO2 Describe the ranking method of job evaluation and explain two specific
methods of ranking,

LO3

Discuss

the classification method of job evaluation and how benchrna"ir::r:

are used in this method.

LO4 Explain the six steps involved in the point method of job evaluatlon

describe the three common characteristics of point plans.

105

Discuis who should be involved in job evaluation.

How does any organizacion go about valuing work? Ac a supermarket, there are many rypes
of work; store managr, produce manager, front-end manager, deli workers, butchers, stock
clerks, checkour people, balcers-the lisc is long, and the work surprisiirgly diverse. Specifically,
whar rechniques are used to value work, and would the techniques really matter?
This chapcer and rhe next discuss techniques used to value work. Both chapters focus on the
"how ro"-rhe specific sreps involved. Job eva.luadon techniques are discussed in this chapter;
person-based techniques, borh skill-based and competency-based, are discussed in Chapter 6.
The objective of all the rechniques is an inrernally aligned job suucture on which to base pay
decisions. Uldmacely, the pay srrucrure helps the organization sustain its competirive advancage
by infl uencing employee behaviours.

--II

JOB-BASEB STBUCTURES: JOB EVALUATION

Exhibic 5.1 is an elaborarion of Exhibit 4.i in dre previous chapter. It describes the process of
building a job structure on which to base the ultimate pay sffucftre. Job analysis and job descriprions (Chaprer 4) collected and summarized work information. In this chapter, the focus is on
horv ro derermine what to value in the jbbs, how to quantifr that value, and how to uanslate

LO1

R','

':.r --

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Put

I I Inarnal Akgarurt Danizhtg & Stutsz

EXHIBIT 5.1

Many Ways to Create lnternal Structune

Eusiness and Work-Relatej

lnternal Structure

\
Person-based

Job-based

/\
/\
Skill
(Chapter 5)

Competencies
(Chapter 6)

PURPOSE

I
Collect,

work

summarize Job analysis

information

lr
r

(Chapter4)

it
Determine what

to

value
I
|

Job evaluation:
classes or

++

Assess

Job descriptions

value
'

compensable factors

(chapter 5)
Factor degrees and

weighting
(Chapter 5)

into
structure

Translate

job structure
hierarchy

of

att

johs

basd

'

b the oryaniation;
provides the basis for the pay

on value

structure

job evaluation
the procas of systematically determining the relative
worth of johs to create a job
structure for the organization

Job-based structure
(Chapter 5)

that value into a job structure. Job evaluation is the process of determining and quantifring
potentid to blend internal forces and o..rrrJ marker forces is both a srength and a
challenge for job evaluation.
Tiadidonal job-based approachcs to creating internal structure (dating back to the 1930s)
were predictcd by some to bccome obsolete when newer persqn-based approaches (discussed in
Chapter 6) bccamc popular during thc 1990s. However, two decades later, job evaluation is sdll
nalue, The

alive and wdl, although jobs themselves have changed considerably.l

Exhibit 5.2 shows how job svaluation fits into the process of determining the internd structure. The process begins widr a job analysis, in which information on jobs is collected, and then
job descriptions summarize this information and serve irs input for the ev.aluation. The exhibit
calls out some of the major decisions in the job waluadon process.

Chapter

| Job-Ba:el Struintns anlJob Etaluztion

83

Determining an lnternally Aligned Job Stnucture

jOB

ANALYSIS +

JOB

DESCRIPTIONS

JOB

EVALUATIoN +

JOB STRUCTURE

EVALUATION
SOME MAJOR DECISION5 IN JOB

.
.

Establish purpose
Decide whether

of evaluation.

to

use single

or multiple plans.

o Chorise among alternative approaches.

. Obtain involvement of relevant stakeholders'

o Evaluate plan's usefulness.

DEFINING JOB EVALUATION: CONTENI VALUE,

AND EXTERNAL MARKET LINKS
Job Content and Job Value

diffcr on whedrer job erraluation is based on job content or job value. A suucnue
job
conrenr refers to the skills required for the job, irc duties, and its responsibilities. A
based on
on job vrlue. refers to the relative conuibucion of the skills, dudes, and resporuibased
sffucflge
bilities of a job to the organizationt goals. But can this suucrure translate direcdy into pay rates,
without regard to the enternal market, goveflrment regulations, or any individual negodation
process? Mosr people think not. Recall drat internd alignment is just one of the building blocks
of the pay modd. Job characteristics matter, but they are noq the only basis for pay. Job value may
also include its value in the external nurket and/or its reladonship co some other set of rates that
has been agreed upon tbrough collective bargaining or other negotiarion process or to governperspectives

menr lcgislation (minimum wage).

'

Not only may th,e content be described and rralued differendy by different observers, but the
work may be more or less in one organization than in another. It wzs

,rnlue. added by t.he same

ftrm by a compensadon specialist whose earnings are

through sales of manu6cnrrcd goods or engineering orpenise may differ frorn the vdue
added by a spccialist to a consulting ftrm whose revenues come through rhe sale of compensation
ocpertise. So, dthough inemd job value (conuibucions to organization objeaives) may be equivalent, orternal market value may differ. There is not a one-to-one correspondence with pay rates.

observcd in Chapter 3 that the vdue added to a

generated

\ t inting Conteni with the External Market

job evaluation as a process that links job content with external market rates. Aspects
job content (e.g., skills required and customer contacts) take on vdue based on their relationship to market weges. Because willingness to work more closely with customers or higher skill
levels usually command higher wages in the labour markct, the nature of customer contacts and
skill level become usefirl crireria for establishing differences between jobs. If some aspect of job
contenr, such as working conditions, is not related to wages paid in tlte octernal labour market,
then rhat aspecr is orcluded in the job er"aluation. According to this perspective, the value of job
contenr is based on what it can command in the external market; it has no intrinsic value'4

',Some see
,rf

il"
il

84

P* I I Inmtal Ahgnu* Wq

* Saleat

But not evertone agrees. A daneloper of the Hay job evaluation plan (widely used by
large corporations) states rhat the "measures are independent of the market and encouage
rational determination of the basis for priciag job content."3 Hay claims *rat job evaluation
establishes the relative nalue ofjobs on the basis of their content, independendy of any link
to the market,

Different Perspectives on Job Evaluation

:F.-:tn_-

too, have their own perspectiYe on job ev-aluadon. Some say that if job value
can be quantified, then job evduation takes on the rappings of measurement (objecdve,
numerical, generalizable, documented, and reliable) and can be judged according to technical
standards. Jusr as with employment tests, the reliability and validiry of job evaluation plans
can be compared; rescarch will be able to tell us if ten compensable factors is too many, or if
three is too few.
Those involved in actudly making pay decisions have a different view. They see job evaluResearchers,

ation as a process rhat helps gain acceptance of pay differences between jobs-an adrninistradve
procedurc through which the panies become involved and committed. The process invites give
aqd take-an orchange of views. Employees, union representatives, and managers haggle wer
"the rules of the game" for determining relative worth. As in sports and games, we are more willing ro acccpt the resuft if we accepc the rules and believe they are applied fairb.4 This interpretatiJn is consistent with the history of job evaluation, which was begun :rs a way to bring labour
peace and order to the wage-setting process.
Some say the content of jobs has intrinsic value rhat the evaluation will uncover; others that
jUthough some claim contemrhe only hir measure of job valuc is found in the external rnarket.
fot"ry job evaluadon practi"es are just and fair,'others say they are just fur. All these perspectives

will

be caprured

in this chapter.S

"How to": Major Decisions

The major job evaluadon decisions are depicred in Exhibit 5.2. They are: (1) establish

the

p,trpose(s), (2) decide on single versus multiple plaas, (3) choose among alternative methods,
(<) oUt"i" involvement ofrelevant stakeholders, and (5) evaluate the usefirlness oftle results.

rI

ESTABLISH THE PURPOSEISI

Recall
Job evaluation is part of tte process For establishing an interndly aligned pay structure'
from Chapter 2 that an internally aligned pay suucrure supports organizational sffatery, suPPorts
the workflow, is fair to employees, and directs their behaviour roward organization objectives.

Suppotts Qrganizational Strategy Job evaluation aligns with the organizationt suategy by
stating*har it is abour a job that adds value.(i.e., conuibutes in pursuit of the organiz:tiont
objectives). Job evaluation helps answer the question: How does this job add value?
ring cach jobt pay j
or changing
unigue,
pay
for
new,
and
by
sening
to
the
organization
its
reladve
contribution
with
i

jobs.

i
:1

grierrances over Pay &ffcrences

berween jobs by esablishing a workable, agreed-upon structru that reduces the nili that chance,

ls Fair to Employees Job evaluation can reduce disputes and

favouritism, and bias may play in secing

pay.

I
i

'i

L_,.__

Chapter

Obiectives

5 | Job-Bucd Stracnret

and Job

Etalution

spells out for empio,vees

Job evduation
Motivates Behaviour towald 0rganization
values,
it is-they do that,s-rlppgrls the
that
the-organization
and-what
rheir-work
about
ir
,"rr", i,
strareg'y and promotes its ultimace success, Job wduarion also can help employees
^r""ni""riottr
,o change by improving cheir understanding of whar is valued in their assignments and

"j""0,that value might change'

h^w
If che purpose of the evaluation is not spelled out, ir becomes eaq' to get lost in complex
The job evaluation process becomes an end in itseL6
.rocedures, negoriadons, and bureaucracy.
Establishing the objecdves can help ensure that the
achieve
an
objective.
ro
means
a
lnrt.od of
is
che rational and qystematic process it is meant to be.
actually
.urluadon

SINGLE VEBSUS MULTIPLE PI.ANS

evaluate all jobs in the organization at che same dme. More rypijobs, for example, production, engineering, or marketing, will be
of
group
related
calln a
design different evaluation plans for different rypes of work
employers
Many
the focus.
work
content is too diverse to be evaluated adequately by a single
rhe
believe
they
because
jobs may vary in terms of working conditions, manipulative
production
example,
For
olan.
,kills, knowledge of scatisrical control, and working conditions. But these tasks may not
jobs do not vary on these factors, nor are these
be relevant to engineering, and marketing
jobs.
Instead, the nature of contacts with customers
factors particularly important in finance
universal
plan may not be acceptable to employees if
a
single,
may be relevant. Consequentiy,
there
are some plans r-hat have been successfi:lly
Even
so,
diverse.
is
highly
the work covered
work.
most prominent examples include the
The
depth
of
and
breadrh
a
wide
applied across
is advised when using muldple
Caution
Analysis
Position
rhe
and
Quesdonnaire.
Iiry p6"
of procedural fairness
issues
and
affect
perceptions
communication
complicate
may
it
as
plans,

Rarely

will an ernployer

and internal equitY.

Benchmark Jobs

lo l.

work are included in the evaluation, an organizatibn may

jobs.
In Exhibit 5.3, benchmark jobs would be identiffed for as
. smn with a sample of benchmark
many levels in che structure and groups of related jobs (office, production, engineering) as Posjobs.
;r.'sible. The heavy shading in the exhibit indicates t}re benchmark

1,

sure rhat all relevant aspecrc of

Penspectives on Job Evaluation

JOB EVALUATION

l5:

content
A measure of relative value
A link with external market
A measurement device
Negotiation

ASSUMPTION

Contqnt has innate valui outside'of externalirmarket.'

A measure of job

Relevant groups can reach consensus on relative value.

Job worth cannot be specified

witllout extelnal market info:rrat:'-

Honing instruments will provide objective measures.

.,

Puts face of rationality onto a social/political process. Establ6i:es :-game. lnvites participation. '

s :- :.re

85

A.-

Chapcr

5 | JoFBtd

JOB EVALUATION METHODS

of roughly 1,000 mernbers

87

Snucnra and Job Eualuation

LO2

of\forl&r\7ork, fie

association for compensadon professionin their organization. As F-xhibit 5.5 indicares,

lJi
"I7ell, noc really any job evaluation merhod." Ra*rer, using market
lor. "o*on rsponse'wa.s
(67 to 75 percent, depending on the job level) as dre primary
chosen
ovenr*relmingly
,"ro *
..od of job evduadon. lWhat is market pricing? This topicrdll be covered in more detail in
Tr,rrrr 8. In general, market pricing means direcdy matdring iN many of ttre,organization's jobs

Or .t . primary job

ilii"tUf.

ro jobsdescribed

ev-aluacion medrod used

jn theexter:.I

Piy,*T,T

used by the organization. To the

T*..rhT

made, &. P"y rate for a job witl be based on rtre survey dae. lnernal equrty is
rnarches can be
d..mphrrized (as is the organizadon's strategr-more on this in Chapter 8).

;1v

l-- t,or. thar Exhibit 5,5 does indicate that somewhere beuween I in 3 and 1 in 4 organizadons
i-ocinue ro use traditional job evaluation approaches as their primar:r methods. Funher, it is
,
job evaluation
Jn ay 't'.,
i.re, b"."us. it is usually not possible ro direcdy match all jobs to market survey jobs. Thus,
,h Juadon is sdll needed, and we now discuss three job evaluation merhods, with most of our
or point factor approaches'
f,rr.nriott given to point

i1.ti:-T:1,I1?f:^l:lciT,fT_1"._':YllT-{:: Hk

,Ranking
simply orders the job descripcions from highest to lowesr based on a global definidon of
ijrdadve.u"lu. or contribution t1
organization's
Ranking is. the simplest,
5he
F"t:, :T1T.
employees,
and
explain
to
the
least
ocpcnsive mcthod, at lcast initially.
and
understand
.-.Aoa ro
ir can crcate problems that require difficult and potentially expensive solutions, because

t.l.Ir;

,lHor*"t,

ft doesnt tell employees specifically what in their jobs is imponant.

i. Tro wap of ranking are cornmon: altemation ranking and paircd comparison. The akemation
.nnking method orders job descriptions dtemately at edr erueme. Agrecment

is reached among er"al-

which jobs are the most and least valuable, rhen *re next most and least v'aluablc, and so on,
dl ;obs have been ordered The paired comparison method uscs a matrix m compare all possible
'nd oflobs. The highr-rarked job is entered in the cell of dre mauix. 'When all comparisons have been
'pairs
.iompl.ted, rhc job mosr frequendy judged "more valuable' becomes drc highest-ranlced job, and so on.
Alternacion ranking and paired comparison methods may be more rdiable (produce similar resula
imore consistendy) than simple ranking. Nwenheless, ranking has drawbacks. The criteria on which the
i jobr rr. ranked usually are so poorly deffned-if they are speciffed at all-that tlre e'raluations become
.uators on

il

ranking
job evaluation method ttat
nnfs jofu from highutto

Iowestbaxdcr,aglobl
definition of nlue

alternation ranking
method
nnking the highest- a'nd
Iowst-va lued job s fi rst, then
the nextfiighest- and lowestjobs, repeatrhg the

valud

procs untilalljobs hate

been nnked

paired comparison
method
listing all jobs across cdumns
and down rows of a matrix,
comparing the lwo jobs in
each cell and indkating which
ol greater value, then

is

nnking

j&s

on the bais of
of times

the toal number

each is

rankd as fuing of

greater value

t
t
t
t
t
t
T
t
I
t
t
t
;

EXHIBIT

5.5

Pnimany Method of Job Evaluation

WHAT

METHOD OF JOB EVALUATION USED BY

YOUR ORGANIZATION?

IS THE PRIMARY

ALL OTHER

POINT FACTOR

MARKET PRICING

Senior management.

7SVo

14Vo '

11d/o

Middle management

70o/o

18o/o

12'/o

Professional

69%

Salbs

72o/o

16%

12o/o

Administrative

67o/o

19o/o . '

,14o/o

Production

680/o

:' t tQ"zo

World at Work, "Job Evaluation and Market'Pricing Practices,u February 2009'

'17 o/o

13Vo i

'

'

15o/o

I
;
;
;

T
T

Partl I IntmalAligrnar Dcurntuag *<

88

Strlcttttc

opiniors that are impossible to juscify in work-relarcd terms. Funhermore, evaluatods)

using this merhod mu$ be knowledgeable about every single job under study The numbers alone
rum what should be a simple ask into a formidable one-50 jobs require 1,225 compafisons-and as
organizations &*ge it is diftcult ro remain knowledgeable about dl jobs, Sorne organizations try to
ovelcome this difficulry by ranking jobs within singledepartmenr and merging the results. Howwer,
even though ranking appea$ simple, fasg and inexpensivg in rhe long nrn the results are diftcult to
defend and cosdy solutions may be required to overcome the problems created.
subjecdve

T'

T
T
T
T
T
T

LO3

Ctassification
Picnue a bookcase with many shelves. Each shelf is labdled with a paragraph describing the kinds of
an4 perhaps, one or lwo representative ddes. This same approach describes the
d""siffcation qrstem ofjob evaluation. A series ofdasses covers the range ofjobs. Class descriptions
are the labels. A job description is compared to rhe class descriptions to decide vfiich dass is t.he best
fir for that job. Each class is described in suc.h a way that it caprures suficient work detail, yet is general enough to cmrse litde difficulty in sloning a job description into ia appropriate "shelfl or dass.
The dxses may be described firther by induding cides of benchrnark jobs that fall into each dass.
'Writing
dass descriptioru can be uoublesome when jobs from several job families are covered
by a single plan. For cample, dass deffnitions written witfi sales jobs in mind may make it difficult
to slot office or adminisuative jobs and vice versa. An examination of the level (dass) descriptions
books on thar shelf

classilication
job emluation method baxd
on

job

dass descriptions into

which jobs are

etegorhd

for the Dpntistry: Scientiffc and Professional Category ofjobs in the federd governmentt dassiffcation system in Exhibit 5.6 indicates that the broad wording of the level desciptions seems to leave a
lot of room for judgmenc Including tides of benchmark jobs for each class helps make the descriptions more concrete. So, in practice, not only are the job descriptions compared to the sundard
dass descriptions and benchmark jobs, but they also can be compared to one another to ensure
rhat jobs within each class are more similar to each other than to jobs in adjacent classes. The ftnal
roulr i, a series of classes with a number of jobs in ea&. The jobs within each class are considered
to be equal (or similar) work and will be paid equally. Jobs in different classes should be dissimilar.

EXHIBIT 5.6

Level Descriptions

I
I

ttI
t
l

[:
[:

T
T
T
I

Source: Classification Standard: Dentistry Scienti{ic and Professional Category Treasury Board of Canada Secretatiat,20lZ. Reproduced with

L.---._

the permission of the Minister of Public Works and Government Services Canada, 2012.

I
Chapter

5 | Job-Bued Smtcnrcs

and Job Euahnian

Point Method

LO4

Poiot *.thods have three.o-rnon characreristics: (1) compens"bl. f*.torr, wirh (2) numericdly scaled factor degrees, and (3) weighu reflecting the relative importance of each factor.T Each
jobk relative value, arrd hence its location in the pay suucrure, is determined by the cotal poina
assigned

89

to it.

Point plans are r}re most commonly used approach to esrablish pay sffucrures in Canada
due co pay equiry legislation requirements for rhe evaluadon of skill, ifforr, ,.rporrsibiliry and
working conditions in jobs. They represent a significant change from ranlcing and classifflation
methods in that they make explicit the criteria for evaluadng jobs-compensable factors. The
'Worth box here illustrates
t-he ongoing rnodernization of the classifrcadon qrstem used by
.Net
rhe federal government toward the point method ofjob evaluation described in t}1e nexr scrion.

point method
job evaluation method that
assigns a number of poin6
to each job, based on
compensa bl e factos that
are numerically scaled and

weighted

,@

FEDERAL GOVERNMENT CLASSIFICATTON SYSTEM

MODERNIZATION
The office of the chief of Human Resources officer (ocHRo) within the Treasury Boar.d

of canada secretariat was formerly known

as the public service Human Resources

Management Agency of canada. ocHRo is modernizing the classification system usec
by the Government of Canada to evaluate jobs within the Core public Administratior. A
new classification standard for the Border services occupational Group has been cieve oped. This new classification standard is used to evaluate jobs using a point faccr':c
evaluation approach; see below.

WEIGHT

FACTOR

Knowledge
Analytical skills

MAXIMUM
NO. OF DEGREES

POINT VA,].U!5

17%

170

J'/o

150

Communication

': r::
lnteraction

skills

lCO

People and

15o/o

operational.

,'.t

managemeni't

15o/d'

tri

t,.''t,t

effort

Sensory

effort

Risk

to

health

I
;

I
I
I

t
I

Work environment
(psychological)

Worken'viicinment ,i
(nhYlicll),,,, .,,',':

:'

Total:

Decision making
Phvsical

.:
'li

ififi

Source: Classification Standard: Border Services Group, rvww.ts-s:- !::a/:*, /:i:r.:l

EC-eng.pdf, Treasury Board of Canada Secretaial, ZO|Z. Rep=c-"::::,8i.- fllliflr.
of the Minister of Public Work and Government Services Car=::

*,:-1*
ll l

t
il
t

1l

Pan

compensable factors
those charactefl3tics of the
work that the uganization
values, that hdp itpursue i6
statey and that achieve ia

objxtives

I I hfiral Akgnst funini4 tk Snaetare

Compensable frctors are deffned on the basis of the strategic direction of the business and
how &e work contributes to that suatery. The facors are scaled to refleff the degree to which
th.f * present io each job, and weighted to reflect their overall importance to rhc organization.
Points are then amached to eech facor weight. The point total for each job dercrmines its posi!
tion in the job $rucnre.
Exhibit 5.7 lists the six steps involved in the design of a point plan.

l.
2.
3.
4.
5.
6.

Conduct job analYsis.

Determine compensable factors'
Scale the factors'
'Weight the factors according to irnponance and assign poina to each
one.
Communicate rle plan and train users; prepa.re manual.
Apply to non-benchmark jobs.

The end product of this design process is a job scucrure that helps darelop and eglain the
Pay $rucnre'

Gonduct Job

Analysis Just as with ranking and

classiffcation, point plans begin with job

that is, benchrnark jobs, is drawn for andysis.
The content of these jobs seryes as the basis for deftning, scaling, and weighdng the compensable
analysis.

Tfpi."lly,

a representative sample of jobs,

factors,

EXHIBIT

tr

5.7

The Point Plan Process

Chaprcr

| lob-Based Stncturc: andJob &ta&aioa

2. Determine Gompensable Factors Compensable factors play a pivoral role in the point
olan. These factors refiect how work adds value to the organizacion. They flow from the work
irc.lf .nd from che strategic direction of the business. The four compensable factors required
jn pry eqriry legisladon across Canada are slcill, effort, responsibiliry and working condidons,
tjr.r.for. rhey are present in virrually all Canadian job evaluation pla:ts. Shill refers to the
"nj
experience, raining, abiliry, and education required to perform a job. Subfactors indicative
of rLill -"y include educational levels, years of experience required, technicd knowledge, specializedknowledge or training, interpersonal skills and many others. Efort referc to the physical,
mencal, or ernodond exerdon needed for performance of a job. Common subfacors indude
diversity of tasks, complexity of tas[<s, creativiry of thinking, analydcal problem solving, physical
srrengrh requirements, degree of assistance available, amount of emotion reguladon required,
.and so on. Reqonsibility refers to the extent to which an employer depends on ttre empioyee
ro perform t}re job as expected, with emphasis on the imporcance of job obligation. Subfacors
may include decision-making authority, degree of incegrarion of work with others, abiliry co
oerform tasks without supewision, responsibi.lity for financial (budgets) and human (number of
..ploy.o reporting direct and indirecdy to the position) resources, impact of failure or risk in
*re job, and orhers. The working condirtorr factor is intended to ensure that value is atached to
rhe difficuft or unheahhy aspeca of rhe condirions in whici the work is done. Subfactors can mry
widely, but they often relate to hazards such as expostue to dangerous chemicals o! stress and the
physical suroundings ofthe job such as cramped quarters, outdoor location.
A real-liFe example of compensable facrors and associated subfactors is shown in Exhibit 5.8.
To select compensable factors, an organization asks what it is about the work that adds value.
At the Universicy of Lethbridge, human relarions skills are considered a valuable aspe ct of jobs. As
shown in Exhibit 5.9, rhese skills are defined at tfuee levels: basic, important, or critical.
lo effecc, the Universiry of Lethbridge determined that its competitiue aduanwge depends on
the human relations skills their employees use in their work Hence, the universiry is signalling
to all employees that jobs will be valued on the basis of the nature of the human relations skills
required by those jobs. Jobs that require understanding and motivating people have a higher reladve wonh than jobs that require simple coumesy and effecdve working relationships.

,H

9.t

il
n
il

d
d

t
f

F
F

I
I
I
I
I

E]:,''.'.'::':,...'..'::..'.'':':l.''.'.''''..,.''.E
FACTORS

skill

Effort

,.''..
Responsibility

:'

'

Working conditions

E
h-

Source: @ Queen! Printer for Ontario, 2005. Adapted

with permission.

I
-

Pa;tI I InmnalAligmuar Dannhhg{r Sauast

92
EXHIBIT

5.9 |

kample of Compensable Factor Definition: Human Helations Skills

ffi
Human Relations Skills are the active, face-to-face skills needed by a job holdel for various relationships with other
people within and outside of the organization. Human Relations Skills range fFdm "1" (basic), to "2" (important), to
t3" (critical), lt must be kept in mind that "1" is not a "0." lt is assumed that atl jobs require a minimum of common
politeness. At the opposite extreme, a job that requires the ability to motivate, convince, or sell others to gain results
is a "3." Human Relations Skills are noi synonymous with being a nice person and they are not necessarily interchangeable. Level descriptions follow,
EXPLANATION

'1;Basic,

'l

:.

This

is

the base level,of interpersonal skill utilized by

p"*olrning tf'" joU.

Maintaining courteous and effective working relationships with others tq request or transmit
ask questions or get clarification.,

informgtioi,
2. lmportant

of interpersonal skill is required in jobs in which understanding and influencing people

are important requirements in the job.

This level

Skills of persuasiveness or assbrtiveness as well as sensitivity to the other person's pointof view
are often required to influence behavior, change an opinion, 9l tlrn.a situation around. The
requirement?or public contact does not necesgarily_demand this level of human relations skills,
particularly if the purpose is to provide or solicit information-

ln addition, positions which assign work and/or monitor and review work of other employees
(generally sr.ipervising AUPE positions) usually require at least this level of skill.

[eveil, but cotlsideration has

to be

E.'''|','.'''..''''.'.].]w
Source: Reproduced with the permission of University of Lethbridge, Human Resources Department.

To be usefi:l, compensable factors should be

.
.
.

of rhe organization
performed
Based on the work
Acceptable to the stakeholders affected by the resulting Pay strucnue
Based on the strategr and values

The leadership of arry organization is the be5t source of information on ttrateg, and ua[ua of
the otganization, specifically where the businQss should be going and how it is going to ger there'
Clearln leadershipt input into factor selection is crucial. So, for exarnple, ifdre business strategy
involves providing innovadve, high-qualiry products and services designed in collaboration with
customers and suppliers, then jobs with greater responsibility for produd innovation and customer
contacs should be valued more highly. Or if the business suategy is more like Walmartt, "providing
goods and services to delight customers at the lowest cost and greatest convenience possible," then
compensable factors might include impact on cost containment, customff relations, and so on.
Compensable facors reinforce the organizadont culture and values as well as its business

direcrion and the narure of the work,

If rlat direcdon

changes, dren rhe compensable factors

.*'
Chaprcr

5 | Job-Bued Strucnra

andJob Eualuation

93

il

ft

,t

t
For eample, strategic plans ar many companies call for increased globalization.
-.,r also change.
(P&G) and 3M include a "multinational resPonsibilities" factor similar
c"-bt.
&
l'.li*p..r.t
in Exhibic 5.10 in their managerial job evaluation plan. Multinational responsibilities
"". in rerms.of t-h^e rype of responsibiliry, the percentage of time devoted to international

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::;.
*l.n*a

*a

the number of countries covered'

also be eliminated.if they no longer support the busiaess stlategy. One railway
its job ev"aluadon plan ro omit the_factor "Number of Subordinates Supervised'"
to staif runs counter to t.he organization's objective
"o*r^rreuisei
i, J.'.ta.a that a factor that values increases
Major shifis in &e business strategy are no!
efficiency.
increasing
and
of r.au.ing bureaucracy
factors should be reexamined to ensure
compensable
occur,
do
rhey
when
o"",rir.".es, but

[*.r,
'""--F".,or,
may

Irii"
.h"r .re consistent with
-'-'

dre new directions'

ln the uorh actzally done inany organization-' Hence, it is important
E*ploy.o
be valued in the work iaelf. Some form of documentation
should
to
whar
answers
rc ,..k ,h"ir
and/or supervisory foc'r" groups) must suPPon the
job
employee
analysis,
descriptions,
ii,.., iob
helps gain acceptancc by employees and managers,
documentation
f"or6.'WotL-r.1"..d
of
.-ioi*
il.rri., ,o undersrand, and can withsrand a variery ofchallenges to the pay structure' For example,
may :ugue thac the salaries of t-heir employees are too low in comparison to those
a job candidate is too low. Union lcaders may wonder
of o*r".t .roptoy.o, o, ttrat *re salary offered
Allegations of pay discrimination may be raised.
anorherfrom
*hy on. ;ot is pdd differently
compensation
rnanagers must understand and be
and
leaders,
union
nrploy..r, line managers,
in factors that obviously are
Differences
the
same.
or
differendy
paid
is
work
Jl. ,o'opt"i" why
of challenges arising'
qnd
likelihood
the
diminish
rhat
rationale
provide
irself
work
on the
are rhe experts

**"*..,

based

Compensable Facton Definition: Multinational Responsibilities

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94

Parr

fuunttfr

It is important thet rhe compensable factors be acceptable to all suhehald.err. Accepance of

dre compensable faccors used to slot jobs into the pay structure may depend, at least in parr, oa
tradidon. For e:rample, people who work in hospitals, nursing homes, and childcare centres make
the poirrr tlat responsibiliry for people is used less often, and valued less, than responsibiJiry for
properry,s This deficiency may be a carryovq from..the days when nursing and childcare services
were provided by family members, usually women,"without reimbursement. People now doing
these jobs for pay say that properly valuing a factor for people responsibiliry would raise their

wages,

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Although a wide variCry of factors"iii used in standard existing plans, the factors tend to
fall into four generic groups: skill, effort, responsibiliry, and working conditions. These four are
required in pay equity legislacion across Canada . The Hay Guid.e Chart-Profle Method, used by
5,000 employers worldwide, is perhaps the most widely used. The classic three Hay factorsknowhow, problem solving, and accountabiliry-are also commonly used.
A remaining issue to consider is how marry factors should be included in fr. p1"". Some facrors
may have overlapping deffnitions or may fail to account for anphing unique in the criterion chosen. One wrirer calls rhis the "illusion of validity'-we want to believe that the factors are capturing
divergent aspeca of che job and that all are imporant.g
Another problem is cdled'tmall numbers."lo If even qnly one job in our benchrnark sample
has a pardcular characteristic, we rend to use that facsor for the endre work domain. A cornmon
example is working conditions. If even one job is performed in unpleasant working conditions, ir
is tempting to make it a compensable factor and apply it rc all jobs. Once a tactor is part of the
sysrem, orhers are likely ro say cheir job has it, too. For ecemple, office staffmay feel that ringing
relephones or lcakl toner carcridges constitute unpleasalt or hazardous condidons.
In one plan, a senior manager refi.rsed to accept a job evaluadon plan unless some kind
of working condirions factor was included. The plant designer, a recent universiry graduate,

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showed rhrough sralisdcd andysis *rat working conditions did not vary enough between
90 percenr of the jobs to have a meaningful effect on the resuldng pay sffucture. Nevertheless,
rhe manager rejected this argument, pointing out thar rhe plan designer had never worked in
rhe plantt foundry where working conditions mattered. In order to get the plan and pay decisions based on it accepted by the foundry workers, the plan was redesigned to include working
condidons.
This situation is nor unusud. In one gtudy, a 2l-factor plan produced the same job sffucture
r-har could have been generated using only 7 of the factors. In fact, the jobs could be coruecdy
sloned inco classes using only three facors. Yet the company decided rc keep the 2l-factor plan,
because it was "accepred and doing the job." Research as far back as the 1940s demonstrares that
the skills dimension explains 90 percent or more of the variance in job evaluadon results; three
factors generally account for 98 to 99 percenr of the variarice.l I But, as we have seen, other factors
often are included to ensure the plan's acceptance.

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I I Internal Aligtnat fuen**g *

Factors Once rhe factors are chosen, scales id.entifring and describing the.differenr degrees within each factor (or subfactor) zue constructed. Each degree may be anchored by
rhe rypicd skills, rasks, and behaviours taken from the benchmark jobs that illus*ate each factor
degree/level. Exhibir 5.11 shows the federal government's scaling for the subfactor "Research
and Analysis Skills" of the factor "Skill" for jobs in che Economics and Social Science Services

3. Scale the
factor degree/level
description of sevenl

different degrea or levels

of a fador in johs; a different
number of points will be
associated with each
level

dqreel

grouP.

A major problem in determining degrees is whether to ma.ke each degree equidismnt

frorn the adjacenr degrees (interv"al scaling) in terms of the nurnber of points for each level or
delree (assigned in the next step of the process). The following criteria for scaling factors have
been suggested: (l) limit the degrees to the number necessary to distinguish between jobs,
(2) use understandable terminologr, (l) anchor degree definitions with benchmark job tides, and
(4) make ir apperent how the degree applies to the job. Using too many degrees makes it difficult
for evaluators ro accurately choose the appropriate degree. This in turn reduces the accepabiliry
of the system,

.iE':

Chaptcr

5 | Job-Btd

Strucnrcs and Job Eualuatiotr

Se(etariat,2012' Reproduced
source: classification standard: Economics and social Science Services, Treasury_Board of Canada
per;l;;iln of the Minster of Public Work and Government Services Canada, 2012'

'"ithid"

Once the degrees have been assigned, th1 hctol

weights= must be determined. Different weigha reflect differenccs in imponance anached to each
factlr by the employer, and may reflect the organizationt suategic objectives and priorities' For erampl., hirring *rrrprry *lght assign greater wdht to working condidons given the requirement for
"
ro
of iL
to t. p.tfor*.d in dangerous underground conditions compared to an account-

i4.

Weight the Factors and Assign

-*y

ing firm where

loft
*ork is p.rfor*.d

Points

in an office environment,'!?'eights often are.dercrmined through an

adiisorycommiae.,]11.r[ooro l00percentofrhevalueamongthefaaors.l2Theweighsarethem
used to disuibute the total number of points (which is arbitrarily determined) among the factors.
Then the n'mber ofpoints for each level of each subFacor is determined, as shown in Exhibit 5.12'

factor weights
weighting assigned to each
factor

to reflxt

differences in

impottance attached to each

factor by the emPloYu

Pm

96
EXHIEIT

5.12

I I Intcrnal

Alignna* Deanbi4

&

Jllzatutt

Factor Weighting and Assignment of Points

ffi
SUBFACTOR

FACTOR

POINTs

12

16

20

12

16

20

10

Mental effort (10%)

10

12

15

Education (20%)
Experience (20%)
Physical

Working conditions (10.%)

LEVEL 3

skiil (40%)

Responsibility (30%)

POI\ITS

(wElGHT)

Effort (20%)

LEVEL

LEVEL 2

WEIGHT)

effort (10%)

POTNTS

LEVEL

POINTS

LEVEL 5
POINTS

For safety (15%)

For budget (15%)

12

15

Hazards (5%)

Weather (5%)

100

rc
To.illustrate the use of the table shown in Exhibit 5.12, coruider the job of !?'eb Designer.
The job might be evaluated at 12 poins for education, 12 points for experience, 2 poinu for
physicd effort, 8 poina for mental effort, 3 points for responsibiliry for safeql 6 points for
responsibility for budget, 1 point for hazards, and I point for weather; thc job would thus be
evduated at 45 poinu. The job of Office Cleaner might be erreluated at 4 points for education,
8 points for enperience, 8 poina for physicd effon, 2 points for mental' effort, 6 points for
responsibility for safery, 3 poinrs for responsibiliry for budget, 3 points for hazards, and 1 poinr
for weather; *re lob would thus be evduated at 35 points.
Contemporary job evaluadon often supplements committee judgment regarding weighrc
with staristical analysis. The commimei recommends the criteion pa! ttruch#e they wish to
duplicate with the point plan. The criterion structure may be the current rates paid for benchmark jobs, market rates for benchmark jobs, rates for predominandy male jobs (in an afiempt
to eliminate gender bias), or union-negotiated rates.l3 Once a criterion strucrure is agreed on,
statisdcal modelling techniques such as regression analysis are used to determine the weight of
each factor that will best reproduce the chosen suucture. The statistical approach is often labelled
poliE capnring to contra$ it to the committce judgrnent epplo^ch. Not only do the weights reflect
the relative importance of each factor, but research clearly demonstrates that the weighs influence the resulting pay structure,l4 Th*, selecting ttre appropriate pay rates to use as the criteria
is criticd. The job evduation result are based on it.15
Perhaps the clearest illustration can be found in the criterion struclrues used in municipali
ties. if only market rates wete used, fireftghters would be paid much less than police. Yet many
'successfully
negotiated a link between their pay and police rates. For
fuefighters' unions have
o<ample, in 2008, Thunder Bay firefighters were awarded wage pariry with the ciry police.l6 The
negotiared pay structure now deviates from a market sffucture.

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5. Gommunicate the Plan and Train Users Once che job ev-aluation plan is designed, a manual
is prepared so that ocher people can apply the plan. The manual desiribcs the method, defines
the compensable factors, and provides enough information rc permit usrs to disdnguish varying
degrees of each factor. The point of the manud is to allow users who were not involved in the planb
'denelopment to apply the plan as ia developers intended. Users will require craining on how to
apply dre plaa, and background infornation on how the plan is integrated with thc organization's
toml pay system. An appeals process may a-lso be included so that employees who feel drat their

-'Chapter

| Job-Bascd Strrcturcs andJob Euahation

evaluared have some recourse. Employee accepance of the process is crucial

;^h. are unfairly

t"ii^^o""il-ro

h"yg"!y

hope that employeesw-ill *ggp-!

th.,iq!!\!I}c pal

as

if the

fai@ ot{.-:,9

Uifa,l" accePtance, .o*"^ii"tion to allemployttt

Yloi'l"l:Tlfl::_f_*fTt:::1:
iriJ A. strucrure is required. This communicadon may be done *uough informational meetings,

;;;*,

or other metho&. In some cases,'the cndre job evaluation process is carried out online.

Jobs Recall rhat rhe compensable faccors and weighrc were derived
ApOly to Non-benchmark
jobs.
The final step in the point plan process is to apply the plan to the
of benchmark
"","i'"
a manual is written that describes the method, defines the comusually
do
so,
To
i"1..

G.

o-ot
J,jiJS-f"oo",

and provides enough information to permit users to disdnguish var)4ng degrees

poinr of the manud is to allow users who were not involved in im dcvelopment
The
iil..f, f"or"
require training and background informadon on the total Pay qrstem.
Users
plan.
*re
Io ,ooly
--'it
. fini oor.o*. of the job evaluation process is a job hierarchy based on the number
wh.ich to
ooints assigned in the job evaluation process. The hierarchy provides the basis upon
^f
data
to
determine
system. It will be combined with market pay

"""r"U.

Jr.rj*. irr*r""t equiry in rhe pay

rhe pay for

jobs (to "price" the jobs),

as

will descibed in Chapter 8'

r.--A WHO SHOULD BE INVOLVEB?

LO5

and comIf the inrernal srucnrret prupose is to aid managers, and if ensuring high involvement
the
results
in
a
smke
with
and
employees
rnanagers
*iorr.o, from employees is imponant, dl *rose
cornminees,
to
use
is
approlh
A
common
it.
desigrring
should be involved in the process of
gark for..s, or teanN th.at indude representatives from key operating funcdons, induding nongroups role is advisory
-.rr"goi"l .*ployees. In some cases, the

only; in others, it designs the evalu-

.Looro compensable factors, and approves all major changes. Organizations with
"riorr"rpp.".tr,
it advantageous to include union representadon as a source of ideas and to help
find
uoionr'oft*

differpromote accptance of the resutts. However, some union leaders believe *rat philosophical
acdve panicipation. They take the position tlut collective bargaining lields more
.qoitrbL resula. As a result, the o<tent of union participation varies. No single perspecdve exisa
enists'
on rh. udu. of acdve participation in the process' just as no single management perspecdve
discussed
members
\Torldat'\7ork
Exhibit 5.13 shows further resulrs From rhe suwey of
earlier. It shows that compensation professionals (i,e., usually compensation analysrs, sometimes

.rr.., pr*.rr,'rh.ir

higher levels such as che compensadon manager) are primarily -responsible for most
job ernJuationslAl*rough that holds tro" fot senior rnanagement_ j+ as_weli it is clear that the
'higher-l*.I
manager is more likely to be responsible for the job evaluadon in this
"o*p.nr".iir
.as.
that gonsultants also play a much larger role here.
"nd
also those at

Who Typically Conducts the Job Evaluation?

Note: Number of respondents ranged from 91 1

to

1,1 19 organizations.

Source: World at Work, "Job Evaluation and Mirket-Pricing Practices," February 2009'

97

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98

?*l I InumalAligrnnt:

IT

Dcfiminhrg th? Sxtcr*rc

EVALUATING THE USEFULNESS OF HESI.JLTS

The Design Process Matters

to the fairness ofthe design process and the approach chosen
(job evduation, skill/cornpetenry-based plan, and harket pricing) rather than focusing solely
on the results (the incernal pay structure) is likely to achieve employee arld managemenr commirment, trust, and acceptance of the resula.lTThe absence of participation makes it easier for
employees and managers to imagine ways in which the strucrure could have been rearranged to
rheir persond liking. If employees do not p.uticipare in decisions, they might easily assume that
Research suggests that anending

things would have been better ifthey hadAdditiond research is needed to ascertain whether the payofffrom increased participation
offsets rhe potential cost (.g,, time involved co reach consensus, potendal problems caused by

disrupting cuffent perceptions), For example, in multinational organizations the involvernent of

both corporate compensation and country managers raises che potential for conflict due to their
differing perspectives. Country managers may wish to focus on the panicular business needs
in rheir counrry whereas corporate manaBers may want a qrctem chat operates equally well (or
poorl, across all countries. The country manager has operating objectives, does not wanr to
lose key individuals, and views compensadon as a mechanism to help accomplish these goals.
Corporate managers, on the other hand adopt a worldwide perspective and focus on ensuring
that decisions are consistent with the organizationt overall global suategy.

Appeals/Review Procedures
No matteq rhe technique, no job evaluation plan anticipates dl situadons. Ir is inevirable that
will be evaluated incorrectly, or at least that employees and ma4agers may suspect thar

sdme jobs

ttrey were. Consequendy, rwiew procedures to handle such cases and to help ensure procedural
fairness are required, Often the compensation rnanager handles reviews, but peer or team reviews
are increasingly being used. Somedmes these reviews take on the trappings of formal grievarce

procedures (e.g., documented complaints. and responses and levels of approvd). Problems rnay
also be handled by managers and employee relations generalists through informal discussions

with employees.ls
Once the evaluations are completed, approvd by higher levels of management usually is
required. An approvd process helps ensure that any changes that result from evaluating work are
consistenr with the organizationt operations and directions.

Political lnfluences
A recent study found drat more powerfi.rl departments in

universitywere more successfi.rl in using

the appeals process to change the pay or the classiffcadon of a job than were weaker depanments.l9
This result is consistent with other research that showed that a powerful member of a job'evalu-

arion commitree could sway the results,2o Consequendy, procedures should be judged for their
susceptibiliry rc political influences. "It is *re decision-making process, rather than the instrument
irself that seerns to have the greatest influence on pay outcornes," writes one researcher.2l

rT

THE FINAL RESULT JOB STRUCTURE

The ffnal result of the job andysirjob description-job evduation process is a job sffucrure, a
hierarchy ofwork. This hierarchy translates inro pracrice the employert internal alignment policy,
Exhibit 5.14 shows four hyporherical job suuctures wirhin a single organizadon. These.structures
were obtained via differenr approaches to evaluating work. The jobs are arrayed within four
basic firnciions: managerial, technical, manufacturing, and adminisuarive. The managerial and

.*',=
Chapter

| Job-Based Struc*rcs anlJob fuais-cnt

Flesulting lnternal Structures-Job-, Skill-, and Competency-Based

Head/Chief
Scientist

Division General
Managers
Managers

Senior.Associate

'

lcientist,

Associate Scientist

Project Leaders

99

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technical and
ad.minisuative strucnues were obrained via a points-based job ev"aluation plan, and
plan
(Chaprcr
manufacnrring
the
plans
person-based
O;
rwo
different
via
work
manufacturing

the union. The exhibir illusuates the resulu of evaluaring vv61k-5u'udures

job'
th"t ,,r[pon a policy of internd aligirment when detegnining how much to pay for each
that
approaches
multiple
Org"rri"*rior6 commonly have *uttipt. structures derived through
might
one
structure
in
employees
some
,pply to- diff.r.nt funcdonal grouPs or units. Although
the procedurl us.d in another structure to their own, dre underlying premise in
*irt ro
"o-p.re
pracrice is that interna.l alignrnent is most infiuenced by fair and equitable treatment of employees

was

negotiatei

wit!

doing similar work in the same skill/knowledge group'

t_L

BALANGING CHAOS AND CONTROL

Looking back at rhe material that has been covered in the past three chapters (determining interaligiment, job analysis, job evaluation), it is clear that a lot of time and money has beenspent
,o d.vilop ,o-. .o*pio techniques. But it is still not clear how much to pay each employee'
\'/hy botler with all Airl Vfry nor jusr pay whatwer it takes and get on with it?
prior to the widespread ur. oflot Juarion in the 1930s and 1940s, employers had irradonal
pay srrucnues, th. l.ga.y of decenualized and uncoordinated wage-setdng practices. Pay dif,erences were a major source of uffe$ among workers. Employment and wage.records were rarely
kepq only the for.man lcnew with any accruacy how many workers were employed in his dcpan-

,nal

the rates they received. Foremen were thus lfree to manage," often using wage irrforma'
tion to vary the day rate for favoured workers or to assign rhem to jobs where piece rates were loose.

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100

Panl I

Intemal AlAgnnent Dc*nzining dze Stractun

Job evaluation, widr its specified procedures and documentable results, help...d to change
thar, The technique provided work-related and business-related order and logic. At the same
time, the wodd of work is changing, The work of most people now requires that they figure out
whar to do in a given siruarion insread of simply performing a predetermined routine. They must
identify problems and oppomrnities, make decisigls, plan courses of action, rnarshal supponr
and, in general, design cheir own work methods, teihniques, and tools. The challenge is to ensure
that job waluation plans allow for the flexibility to adapr to changing condidons.
Some balance between chaos arrd conuol is reguired. History suggests rhat when flexibiliry
without guidelioes exisrs, chaodc and irradonal pay rates ftequendy result. Removing inefficient
bureaucracy is irnportant, but balanced guidelines are necessary to ensure that employees are
rreated fairly and that pay decisions help the organizadon achieve ia objectives.

Conclusion

The differences in rhe rates paid for different jobs and skills affect the abiliry of managers to
achieve rheir business objectivcs: Differences in pay matter, They matter to employees, because
their willingness ro rake on more rcsponsibiliry and training to focus on adding value for customirnproving qualiry ofproducts, and to be flocible enough to adapt to change all depend at
DifiFerences in the rates paid for
differenr jobs and skills also influence how faidy employees bclieve they arc being treaced Unfair
trearment ultimately is counterproductive'
So far, rhe rnosr common approach to designing pay diffcrences for different worlc has been
er<amined: job erraluation. In dre noc chapter, wc will examine several alternative approaches.
However, any approach must be evaluated according to how well it will help design an internal
pay suuclure rhat is based on rhe work, that will help achieve the business objectives, and that is
ers and

least

in part on how pay is strucured for different levels ofwork.

acceptable to key stakeholders.

Job evaluation has evolved

into many forms and methods. Consequendy wide variations

ocist in its use and in the way in which it is perceived. This chapter discussed some of the many
views concerning the role of job Ev-aluation and reviewed the criticisms levelled at it. No mafter
how job eraluacion is designed, ia ultimate usc is to help design and manage a work-related,
business-focrsed, and agreed-upon Pay stnrcture.

Lr

Chapter SummarY

Job evduation is che process of determining and quantifring the value

tives regarding job eraluation include dre following

.
.
.
.
.

ofjobs. Different

PersPc-

Job evaluation can determine the innate value of jobs.

Job evaluacion can determine the reladve value ofjobs.
It is not possible to value jobs without exrernal rnarket information'
Job evduation is dependent on objecdve rneasurement insuurnents.

Job evaluation should be conducted participatively.loo"gh a process ofnegotiation.

The ranking rnethod of job eraluadon rank orders the jobs from highe$ to lowest on the
basis ofa global deffnicion ofvalue. Two rnethods ofranking are: (1) alternation ranking, in which

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the most- and least-valued jobs are selccted first, then the nent-most- and least-valued jobs, and so
on; and (2) paired comparison, in'which each job is ranked againsc dl other jobs.
The classiffcadon medrod of job evduation uscs dass descriptions to categorize jobs.
Descriptions of benchmark jobs (those that are well known, rclatively stable, and corrmon across
differenr employers) are used as part of dre class descriptions for clariffcadon. The find result is a
series of classes wirh a number of jobs in each.

E,=
Chepcr 5 | Job-BascdStrucnrc andtob Eualuation

The sir steps inrclrcd in

;
.
..
.
.
.

frc F inr -'t'd

ofiS

culuation are:

Conduct joFanalTsis
Deterrnine comPeasable 6ctors'
Scale dre facors'
!fleight tie 6son and o"sign Points'

Communicate the Plan'

jobeNply thc plan to non-bcnchmark

The three cosrmon characedstics ofpoint plans are compcnsable Gctors, numerically scaled
refccring the importancc of arh factor
facror degrees/lev-els, and weights
Cornminees, task forces, or tnms induding non-Eanagerial employees should be involved
job waluation in an advisoq' or decision-making capacitf. Unioa parricipation may also be

in

desirable.

Key Terms
method
job
classification
compensable factors
alternation ranking

benchmark

degreey'level
weighB
job evaluation
factor

paired comparison method

factor

point method
ranking

job structure

Review Questions
1.

How does job evaluation translate internal alignment policies (loosely coupled versus tight
(c) fairness,

fitting) into practice? What do (a) organizational strategy. (b) flow of work,
and (d) motivating employee behaviour have to do with job evaluation?

2.

Why are there different approaches to job evaluation? Think of several employers in your
area (e.g" hospital, Walmar! manufach.ring plant bank, university/college). What approach
would you expect each of them to use? Why?

3.

What are the advantages and disadvantages of using more than one job evaluation plan
in any single organization?

4.

Why bother with job evaluation? Why not simply market-price? How can job evaluation
link intemal alignment and external market pressures?

Experiential Exercises
1.

Consider your university or college. Develop compensable factors for your institution
to evaluate jobs. Would you use one job evaluation plan or multiple plans? Should the
school's educational mission be reflected in your factors? Or are generic factors okay?
Discuss. Ask your professor to help you identify the actual factors used (this likely will
involve contacting the HR department compensation staffl.

2.

you are the manager of ten people in a large organization. All become suspicious and
upset when they receive a memo from the HR department saying their jobs are going to
be evaluated. What would you say to try to reassure them?

101

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102

P* I I Intnal Alignwr Dc*miai4 tk Snran

Case
Job Evaluation at Whole

Foods

.f

Rather than wait until you are next in a supermarket to check out the different types of work,
we brought some of the jobs at Whole Foods to.you. Now that you have some background in
job evaluation, it is time to try it out. As a first step, Whole Foods has conducted job analysis
and prepared job descriptions. The results are shown below. Now a job structure needs to be
worked out, The manager has assigned this task to you.

1,

Divide into teams of four to six students each. Each team should evaluate the nine jobs
and prepare a job structure based on its evaluation. Assign titles to each job, and list your
structure by title and job letter. A broad hint: Remember from our discussion of Whole
Foods' business and pay strategy in Chapter 2 that teams play an important role.

2,

Each team should describe the process the group went through to arrive at that job structure. Job evaluation techniques and compensable factors used should be described, and
the reasons for selecting them should be stated'

3.

Each team should give each job a title and put its job structure on the board. Comparisons
can then be made between the job structures of the various teams. Does the job evaluation method used appear to affect the results? Do the compensable factors chosen affect
the results? Does the process affect the results?

Evaluate the job descriptions, What partswere most useful? How could they be improved?

tob A
KndofWork Provideexcellentcustomerservice-Followandcomplywithall applicablehealthand
sanitation procedures. Prepare food items: make sandwiches, slice deli meats and cheeses. Prepare
items on station assignment list and as predetermined. Stock and rotate products; stock supplies and
paper goods in a timely basis; keep all utensils stocked. Check dates on all products in stock to ensure
freshness and rotate when necesary. Use waste sheets properly as directed. Operate and. sanitize
all equipment in a safe and proper manner. omply with and follow Whole Foods Market Safety
Procedures. Follow established Weights and Measures procedures. Answer the phone and pages to
department quickly and with appropriate phone etiquette. Practise proper use of knives, slicer, trash
compactor, box baler, and all other equipment used during food preparation and cleanup. Perform
other duties as asigned, and follow through on supervisor requests in a timely manner.

Requiremenfr-

.
.
.
.
.
.
.
.

Some deli experience preferred

Clear and effective communicator

Patient enjoys working with and mentoring people

Ability to perform physical requirements of position
Ability to learn proper use of knivet slicer, box baler (must be 18 years of age or older),
and all other equipment'used during food preparation and cleanup
Ability to work well with others as a team
Knowledge of all relevant Whole Foods Market policies and standards
Understands and can communicate quality goals to customers

toi p
Kind of Work Assist and focus on customers during entire checkout process. Perform all cash
register functions according to established procedures. Maintain a positive company image

Chapter

| Job-Based Stntcnres andJob Evaharitn

groceries
bv providing courteous, friendly, and efficient customer service. Check out customer
professional
demeanour
at
a
PLU
code
test.
Maintain
Pass
entry-level
accurately.
and
eificiently
procedure.
all times. Stock registers with supplies as needed. Follow proper cheque-receiving
journal
Clean, stock. and detail front-end area with special attention to own register. Change
idenof
every
shift
to
produce
department
beginning
at
the
Walk
as
needed.
tapes and ribbon
tify and learn new produce codes. Comply with all posted provincial health and safety codes.

Requirements

a
a

Excellent communication skills necessary for good customer and team relations
Ability to work well with others
Ability to learn proper use of box baler (must be 18 years of age or older)
Desire to learn and grow
Ability to work in a fast-paced environment, with a sense of urgency
Understanding the importance of working as a team

Good math skills

Patience

lob

Kind of Work Reports to rtore team leader and to associate store team leader. Provides
overall management and supervision of Prepared Foods Department. Responsible for team
member hiring, development, and termination. Also responsible for profitability, expense control, buying/merchandising, regulatory compliance, and special proiects as assigned. Complete
accouniability for ail aspects of department operations. Consistently communicate and model
Whole FoodJ vision and goals. lnterview, select, train, develop, and counsel team members
in a manner that builds and sustains a high-performing team and minimizes turnover. Make
hiring and termination decisions with guidance of store team leader. Establish and maintain a
positive work environment. Manage inventory to achieve targeted gross profit margin. Manage
ihe ordering process to meet Whole Foods Market quality standards. Maintain competitive
pricing and lchieve targeted sales. Establish and maintain positive and productive vendor relaiionships. Develop and maintain creative store layout and product merchandising in support
of regional and national vision. Establish and maintain collaborative and productive working
relatitnships. Model and cultivate effective inter-department and inter-store communication.
Provide accurate, complete information in daily, weekly. monthly, annual, and ad hoc management reports. Maintain comprehensive knowledge of, and ensure compliance with, relevant
regulatory rules and standards.

Regur'rements

.
.
.
.
.
.

Two years' relevant experience as a team leader, assistant team leader, supervisol or bqter

Thoroughknowledgeofproducts,buying,pricing,merchandising,andinventorymanagement
Excellent verbal and written communication skills
Strong organizational skills
Knowledge of all relevant Whole Foods Market policies and standards
Computer skills

tirh D
Kind of Work perform all duties and responsibilities of Prepared Foods team mernber. Pro.ioe
excellent customer service. Assist team leader in nightly team operations. Repcrt a:' aeorts ci

103

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F
F
;
;

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I
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104

P* I I Intmal /!hgmn* W4

* Sl?eat

team members that violate policies or rtandards to the team leader or associate team leader.

Mentor and train team members. Maintain quality standards in production and counter display.
Comply with all applicable health and safety codes.,!elp implement and support all regional
programs.

Requiremenfs.

.
.
.
.
.
.r
.
.

Minimum six months' retail food production experience or equivalent

Overall knowledge of both front- and back-of-the-house operations
Comprehensive product knowledge
Comprehensive knowledge of quality standards
Excellent organizational skills
Excellent interpersonal skills and ability to train others
Demonstrated decision-making ability and leadership skills
Ability to perform physical requirements of position

Joh E
Kind of Work Performs all duties related to dishwashing: unloading khchen deliveries and cleaning all dishes, utensils, pots, and pans. May be prep work. Maintain food quality and sanitation
in kitchen. Maintain a positive company image by being courteous, friendly, and efficient. Wash
and sanitize all dishes, utensilt and containers. Assist with proper storage of all deliveries. Rotate
and organize products, Perform prep work as directed. Provide proper ongoing maintenance of
eguipment. Maintain health department standards when cleaning and handling food. Perform
deep-cleaning tasks on a regular basis. Take out all of the garbage and recycling materials. Sweep
and wash floors as needed.

Requircments

.
.
.
.
.

Entry-level position

Ability to perform physical requirements of job

Practices safe and proper knife skills

Ability to work box baler (must be 18 years of age or older)

Work well with others and participates as part of the team

tob F
Knd of Work Pertorms all functions related to breaking down deliveries and moving back
stock to floor. Assists in organizing a'nd developing promotional displays; maintaining back
room; training entry-level grocry clerks. Trained and capable of operating any of the subdepartmen8 as needed, Maintains and ensures retail standards during shift. Responsible for
implementing team's break schedule, Performs all duties and responsibilities of grocery team
member. Builds displays and requests appropriatesignage, Supervises shift to ensure standards
are maintained. lmplemenB break schedule for shift. Responsible for problem solving in team
leader or associate team leader's absence. Fully responsible for completion of all opening or
closing checklists. Responsible for checking in deliveries.

Requircments

.
r

Minimum one year! retail grocery experience or equivalent

Pqgfcient in math skills (addition, subtraction, multiplication, and division)

E'-

rr'?

Chaprer

5 | Job-Bacd

Struc*res andJob

---r-..-a
a

a
a

Ability
Ability
Ability
Ability

105

Etalzaiot

-_

.:-.1.1

to perform physical requirements of position

to properly use box baler (must be 18 years of age or older)
to direct team members and implement break schedule
to work well with others

rl

I
I
t
I
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t
;

toh
Kind

of Work Reports directly to Prepared

Foods team leader. Assists in overall management

and supervision of the Prepared Foods Department. Can be responsible for team member hiring,
development, and termination. Also responsible for profhability, expense control, buying/
merchandising. regulatory compliance, and special projects as a55i9ned. Complete accountability

for all aspectiof department operations. Consistently communicate and model Whole Foods'
vision and goals. Asiist in the interview selection, training, development, and counselling of
team members in a manner that builds and sustains a high-performing team and minimizes
turnover. Discuss hiring and termination decisions with guidance of others' Establish and maintain a positive work environment. Manage inventory to achieve targeted gross profit margin.
Manage the ordering process to meet Whole Foods Market quality standards, maintain competi-

product
tive piicing, and achieve targeted sales. Develop and maintain creative store layout and
collaborative
maintain
and
vision.
Establish
national
and
merihandising in support oi regional
interand produ6ivi working relationships. Modeland cultivate effective inter-department and
annual,
monthly,
daily,
weekly,
in
information
complete
accurate.
Provide
store communication.
and ad hoc management reports. Maintain comprehensive knowledge of, and ensure compliance with, relevant regulatory rules and standards.

Requirements

.
.
.
r
.
.
.

Over two years of department experience or industry equivalent

Analytical ability and proficiency in math needed to calculate margins, monitor profitability,
and manage inventory
Clear and effective communicator
Patient and enjoys working with and mentoring people

Strong organizational skills

Knowledge of alt relevant whole Foods Market policies and standards
Computer skills

Iob H
whh all store
Kind of Work Rotate.among stores. Assist and suPport the store team leader
functions. lnterview select, evaluate, counsel, and terminate team members' Coordinate and
supervise all store products and personnel. Followthrough on all customer and team member'
questionsandrequests.Evaluatecustomerserviceandresolvecomplaints.Operatethestorein'

.an efficient and profitable manner. Have a firm understanding of store financials and labour
budgets. Establish and achieve sales, labour, and contribution goals. Review department schedules-and research productivity improvements. Order store equipment and supplies in a timely
manner. Enforce established iood safety, cleaning. and maintenance procedures' lnspect store,
ensure cleanliness, visit off-hours for consistency. Maintain accurate retail pricing and signage.
Ensure that product is cross-merchandised in other departments, Coordinate, supervise, and
report physiial inventory. Analyze product transfers,_waste, and spoilage. Manage expenses to
on all equipment
. maximize the bottom line. Provide; maintain, and safety-train team members
ensure
and tools. Resolve safety violations and hazards immediately. Maintain store security and
that opening and closing procedures are followed. Show EVA improvement over a designated

' '':1
:

i l,:. ii

..:

.:i i

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106

Pattl I la*ulAhgnnat funrnin;ng

&2

Stutw

period. Leverage sales growth to improve store profitability. Assist in handling liability claims
and minimize their occurrence. Establish and maintain good community relations. Create a
friendly, productive, and professional working environment. Communicate company goals and
information to team members. Ensure and support ieam member development and training.
Evaluate team member duties, dialoguet raises, and promotions. Keep regional leadership
informed of all major events that affect the store. Ensure that store policies and procedures are
followed. Visit the competition on a regular basis and riact to current industry trends.

RequiremenF

.
.
.
' .
.
.
.
.
.
.
.
.
.
' .
. .

A passion for retailing

Complete understanding of Whole Foods Market retail operations
Strong leadership and creative ability
Management and business skills with financial expertise
Well organized with excellent follow-through
Detail-oriented with a vision and eye for the big picture
Self-motivated and solution oriented
Excellent merchandising skills and eye for detail
Ability to delegate effectively and use available talent to the best advantage
Strong communicator and motivator; able to work well with others and convey enthusiasm
Ability to maintain good relationships with vendors and the community
Ca n train and inspire team members to excellence in all aspects of the store

Ability to make tough decisions

Love and knowledge of natural foods
Strong computer skills

loh I
Knd of Work Performs all functions relilted to breaking down deliveries and moving back
stock to floor. May assist in organizing and developing promotional displays; maintains back
room. Stock and clean grocery shelves, bulk bins, and frozen and dairy tase. Maintain back stock
in good order. Sweep floors and face shelves throughout the store. Comply with all applicable
health and safety codes. Provide excellent customer service. Log and expedite customers' special
orders. Retrieve special orders for customers by request and offer service out to car, Respond to
all grocery pages quickly and efficiently. Build displays and request appropriate signage.
Requirements

.
.
.
.
.
.

ffi-

Retail grocery or natural foods experience a plus

Proficient in math skills (addition, iubtraction, multiplication, and division)
Ability to learn basic knowledge of all products carried iri department
Ability to perform physical requirements of position
Proper and safe use of box cutter, bale[ and all equipment
AbiliU to work well with others

Practise and learn online

with Connect.

Connect allows you to practise important concepts at your own pace and on your own schedule, with
24[7 online access to an eBook, Practice Quizzes, Study Tools, and more.

f
;

t
F
t
t

the Pyrami&'
job evaluation was in use when the pharaohs built
Hisrorians say fiat.some form of
job
evaluation'
of
tsistance
l;'Gre"t \f^ll construccion with the
Chinese ernperors

**"gJ

Thelogicunderlyingtoday,sjob-basedpaystructuresflowsfromscientificmanagement'champi
steps and analped
,fr. .*fy t iObr. \7o.k *", broken into a series of
by Frederick Tayl",
oned

job (righc
perform-every.element of dre

"
most efficient way-to
besr way"-fte
fiac the
u. specified. su"t.gi. lly, Taylort apploach fit wid'
l.JJ
.orl)]
,hor.l
to
how
down co
done'
,rone

so

mass

to.revolutionize the way work was

production rechnologies that were beginning
their
rold rhey musr_go beyond the tasks specified in
,i.
But in rodays *.rk.i;.,;;;6,;;
for
responsibiliry
,tr. loul *i rrk P.t:irl
job descripdons. They *** r."o* *.r., .lrink *o.. o"
participaleaming and improvement, flo<ibility,
rheir resuls. pay qystems il;r;;p;;."nrinuous
pay s*ucPerson-based
today.
competitivJadvaorage
rion, and partnership ,r..rr.rrtii .o achieving

tureshoidoutfiatpromise.Thelogicsupportingperson-based^pp.^t:isthatstrucruresbased
agility'
be more ftoiuit and thus encourage
on differences in peopie's il;;;;;p.iJn.ioiiit
chapteq the usefi-rlthe iopic of this. chapter. At the end of this
person-based
o
ness

of the various

"pproo.'t

"r.

"pp..";f];ob-

"na

p.rro.r-bar.i-for determining internal

Pay

strucn''es

will be discussed.
underlying;"|:!*td and people-based
E*hibit 6.1 points our rhe similarities in the logic
is needed co (1) collect and zummarize
approaches. No marter rhe basis for the scruccur., ^-*ry
is oi u"lt'" to rhe organi don' (3) q@rufy
informarion about rhe work, (2) determine what
suucture. The previous wvo c,hapters
that value, and then (a) ranslate that value into internal
This chapter
f". j;;;Jl..r.,oro (job analysis and job evaluation).
discussed

discusses

*re

process

th. pio..ss for

person-based strucures'

I
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t
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l
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il

Purl I IntcnalAlignnnt

108

Denrmhing the Strucnrc

Many Ways to Create lnternal Smucture

EXHIBIT 6.1

ffi
Business and Work-Related,r-

lnternal

,/

,/

Job-based
I

PURPOSE

I
Job analysis
Job descriptions

Collect, summarize

work information

Structure
\

r!

Person-based

,/
.

skill

Skill analysis
(Chapter 6)

Core

competencies

(chapter 6)

(chapter 4)

t
t
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t

Competencies

I
I

,l

Determine what
to value

Job evaluation:

Skill blocks

Competency sets

classes or'

compensable factors

(chapter 5)

I
I

Assess value
I

{
Certification

Competency

weighting

process

lndicators

(Chapter 5)

I
I

Job-based structure
(Chapter 5)

Translate into

structure

,t

Factor degrees and

Person-based

Person-based

stru(ture

structure

(Chapter 5)

(Chapter 6)

I
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I_-I

PERSON.BASED PAY STHUCTURES: SKILL

PLANS

t
I

skill-based pay
structures
link pay to the depth or

breadth of the skills, ebilities,

and knowledge a person
bcquircs that are relevant to
the work

Skill-based pay plans are usually applied to so-called blue-collar work and competency-based
plans to ro-.dl"d white-collar work The distinctions tue not hard and fast' However, the majoriry of applications of skill-based pay have been in manufacruring and assembly work where the
be specified and.defined. The advantage of a skill-based pay strucnrre is that people
*ork
can be deployed in a way rhat better matches che flow of work, thus avoiding botdenecks as well
as idle hands.l Struccures based on skill pay individuals for all the skills for which they have been
certifted regardless ofwhether dre work they are doing requires all or just a few ofthose pardcular
skills. By contrast, a job-based plan pays employees for the job to which they are assigned, regard-

*"

Iess.ofthe skills they possess.

Types

l._-..

of Skill Plans

Skill plans can focus on depth (e.g., specialisu in corporate law, finance, or welding and hydraulic
maintenance) or breadrh (gsneralists with knowledgc in all phases of operations including mar'
keting, manufacturinp finance, and human resources).

Chapter

6|

Poson-Bascd Pa1

Specialist Depth The pay.stucnrres fs1 rlmmsT and hig! school teachers are usually based
on rheir knqwledge m"q"ured by cducerbr lenet A ryplca[ qaher's con'a". sPqcifi,e-C a r'rles L
sreps, with each $ep corresponrling rc a lcr=l ef e.frerios- A bachdor's degree in educadon is
srep one and is t-he rnidmum required f61 hirinB To adnnce a $ep to higher pay requires addi.tiond education. For example, the salary scbcdulc indudcd in the case at ttre end of rtris chaprer
requires 15 additional credirs beyond the h-rtrlnri degree rc rnove to a higher srep. Each year

wiri a pay iacreasc- The resulc can be thar two teachers may receive
for
doiag
asentidb
the =-e FLreaching F.nglisf, rc high school students.
rares
pay
different
knowledge
of
the
on
the
individ'ol doing &e job (measured by the number of
is
based
pay
The
universiry crediu and years ofteaching xPcri{:nce) rarher rh:n on job conrent or output (performance of ;tudencs).z The presumprion is .hrt teacbers wirtr rnore knowledge are rirore effecrive
and more flexible-able to teach many gradcs.
of senioriry also is associaced

GeneralisVMultiskill-Based: Breadth Ai wi& rcachers, employees in a muldskill sysrem earn

knowledge but rhe knowledge is qpeciffc to a range of related jobs.
Pay increases come with cerd.ffcation of new "l.ill.", rather *ran with job assignments. Employees
then can be assigned rc any of the jobs for which rhey are certi.ffed, based on the flow of work.3
An example from Balzer's filel Qs2ring (a global rool maaufacnrrcr induding Oerlikon Balzers
Coadng Cenue in Toronto) makes dre point- This compaay coa6 cutting tools by bombarding
them wirh, among other things, tiunium nitrate ioss. This coating makes the sharp edge last
much longer. Originally, eight differenr jobs were involved in the coating process. Everyone staned
ar rhe sarne rate, no maaer the job to which rheywere assigned. Employees received cross-uaining
in a variery of lobs, but without a speciffc E"ining path or level. Different locations started new
people in different jobs. In order to put some order into its system and make bemer use of its
employees, Balzer rnoved to a skill-based plan for all its hourly workers, induding adminisuative and sales employees. Ics new suucture indudes four different levels, from Fundamentd to
Advanced. Exhibit 6,2 shows the new suucture and rhe skill blocks io each level. New employees
are hired into the Fundamental level. Fundamemal skills indude familiarity with company fonns
and procedures, basic product knowledge, safery, basic computer use, end so or.
Once tley have been cerdffed in all the skills at the Fundarnental level, employees receive a
pay increase of $0.50 an hour and move to the Basic skill level, Cenification in each of the four
skill blocla (blasting, cleaning, suipping, and degas) in this level is wonh an additional $0.50
an hour. BasicJevel employees can be assigned rc any of the tasfts for which they are certified;
pay increases by acquiring new

EXHIBIT

6.2 I

Skill Ladden at Balzer Tool Coating

Strlcttru

r09

110

Pafi

I I Intnnzt

Aligrnaat

Darn*'a6 tb e*wt

*ill be paid vrhatever is their h;ghest certification rate. The same approach is used to rain
and certi$ employees ar thc Intermediate andAdvanced levels. A person cenified at the very top
of the suucture, who earns at least $10.50 an hour, might be assigned to any of the tasls in the
sgucn1;e. The advanage to Balzer is workforce flexibility, and hence stafing assignrnents that
can be berer rnatched to rhe worldlow.4 The adranEge to employees is that the more thcy learn,
r!ry

U:$mBaher

differs ftom the rystem forteachers in rhat rhe responsibilities assigned.

system can change drastidy over a shorl period of time' whcreas
multiskill
.o *.-pioy.e in a
do not vary from day to day. Adfitionally, Balzert s,'stcm is
job
responsibilities
reachers' basic
designed ro ensrue thar all the skills are dearly job-related. Tiaining improves skills that the company values. In contrasr, a school district has no guarantee that courses taken actually improve
teaching skills.

Purpose of the Skilt'Based Structure

To e,raluate the usefulness of skill-based structures, we shall use the objectives *lt "dy specified
for an internally aligned strucnue supports the organizationt strategy, suPPorB worldlow, is hir
to employees, and morh.ates their behaviour toward organizadon objectives. How well do skillbased strucrures perform?

Supports the Strategy and

Obiectives The skills on which a strucnrre is based should

be

related to the organization's objectivel and stratery. In practice, howeve6 the "line of
sighf tetween changes in the speciffc work skills (Fundamental to Advanced) required to oPerate
the titanium nitrate ion coarers and increased shareholder renuns is difficult to make clear' In
some sense, we know that these openting skills mamer, but the link to the plant's performance is

arl.tty

,@

clearer than is the

link to corporate goals.

Workflow One of the main advantages of a skill-based plan is that it

can more easily

many of
chain
moves
hotel
example,
one
national
For
workflow.5
changing
a
*"t"h p"opl" to
in.
of
check
majority
guests
andT
when
the
4
p.rn.,
betweeir
desk
6ont
hotelt
io
the
its p.oil.
Aft;t p.rn., these same employees rnove to the food and beverage service. area to march the
demand for room service and dining room seryice, By ensuring that guests do not have to wait
long to check in or to eat, the horcl provides a high lwel of service with fewer staff (The tasti
nesJ of the resulting food is another matter, reinforcing the point that skill-based systems focus

Supports

on inputs, not results.)

ls Fair to Emptoyees Employees like dre potential of higher pay that comes with learning.

And by encouraging employees to take charge of their own development, skill-based plans may
give them *ore-.ottttol o.'"r their work lives. Howwer, favouritism and bias maiy plry a role in
letermining who gets first crack at the raining necessary to become cenified at higher paying
-Emplol'ea
complain that rhcy are forced to pid< up the slack for those who are out
skill levels.
h"u" not yet been asked to nrle on the legality of wo people doing
for training. And the
"outts
the same task for different (skill-based) pay.

,@

Motivates Behaviour toward 0rganization Obiectives Person-based plans have the potential
to clarify new standards and behavioural er<pectadons. The fluid work assignments that skillbased plans permit encourage employees to take responsibility for the complete work process and
its resula, ,oiah l.rr direction from supervisors.6 Ifless direction from supervisors is needed, then
fewer supervison are likely to be needed. This conclusion was borne out by research at nine manufaauring plants that concluded rhat the number of managers in plana under skill-based paywls
as much i, 5O po""o, lower compared to tradidonal plana.T Having fewer supervisors can result
in substantial l"bo* *ra savings, bur, ofcourse, supervisors carl see this potential consequence

u'=
Chapcer

6|

111

Pcnan-Ba:ed Pa1 Strumtres

can certainly dalpen their,entfusiasm for skill-based p"y *1 the often related
of *i.rg tg11s and aovintlme decisill rlseo*iltry f1m suqlvisors to -rvorke1.8

;idl, *ti"h

'HOW TO": SKILL ANALYSIS

t
I

LO2

g.j
,

depicts rhe process for deterrnining a skill-based structure. Ir begins wirh a skill
which is similar to the task slatements in a job analysis. Related skills can be grouped
block; skill blocla can be arranged by levels into a skill sffucture. To build the srruc-

skill

pro..tt

is needed to describe,

process to I'den-

tW and coile](t infomation

yd:.,m:

:*,9:,,*d
:killt.,.. *"
6.3 dso identifies the major skill analysis decisions: (1) !flhat information should
g*iriUl

skill analysis

+igdziitrc

be

1$7h.o
should be involved? (4) How usefirl are
(2) \(rhat methods should be used? (3)
".ed?
are
exacdy
the
same
decisions
These
managers face in job analysis.
resulcs for pay purposes?

afuut skilh requircd to per-

fom wotk in an organizathn

in the use of terms in person-based plans than in job-based plans.

global chemical company Y+ t lanufacnrring faciliry in Prince George, British

far less uniformiry

assigns points and groups skills as foundation, core elecdves, and optional electives:

rllllr include a quality seminar, videos on materials handling and hazardous

a
macerials, rhree-day safery workshop, and a half-day orientation. All foundation skills are
mandarory and must be certiffed to reach the Technician I rate ($ 1 1 per hour).
Core electiucs are necessary to thc faciliryt operations (e.g., fabrication, welding, painting,
finishing, assembly, inspecdon). Each skill is assigned a point value.
Ottional electiaes are additional specidized competencies ranging from computer applica,'
r^--r^--L:- and -^-----,,building.
consensus k,.illi^tions to tearn leadership -^l

Foundarton

':.

it
:,itat ot*.fo, .:"h":.iT'.'-T'.
in Exhibit 6.4.
St
P:Fn.d
($tZ
core
40
elecrive points
hour),
per
Ii
Technician
to-reactr
ll
iddidon to rhe foundadon competencics. To

reach Technician

III,

(of 370) must be certified in

an additional 100 points of

electives must be cerdffed plus three optional electives.

A fully qualified Gchnician tV (e.g., certiffed

foundations, 365 points of core

work in a cell at the facility. Technician
doing. FMCI approach should look familiar

as mastering

and 5 optiona.l electives) is able to perform all

$17 per hour no matter tJre task.h.y *

any college and university student required coutses, required credits chosen among speciffc

s earn

and opdond elecdves.

Determinin g the lnternal Skill-Based Structu re

SKILL

ANALYSIS

SKILL

BLOCKS

.+

SKILL

CERTIFICATION

BASrC DECtSTONS

.
I
.
.

t
;

lnformation to Collect?

.i;
.,

What is the objective of the Plan?

What information should be collected?
What methods should be used to determine and certify skills?
Who should be involved?
How useful are the results for pay purposes?

..>

SKILL-BAsED PAY STRUCTURE

I
I
I
I

Partl I hnrnalAligmer Dcemhtirytfu Serc*n

112

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Chapar

6|

Person-Bard Pa1 Structuns

dc Lind of iribrqarion that underpins the skill-based plans, rhar

informadon
olr
specific
ffer)t aspcct of ths production process. This makes rhe plans
is,-vrry
'nuous flow tcchnologies
for
oon
suited
where employees work in reams.
particularly
The FMC plan illusaac

Whom

to lnvolve?

Ernployee involvemcnt is almct ahrays built iato skilLbased plans. Employees are the sources
of information for dcfning 1f,s -clcilL, arranging them-irrtoia hierarchy, bundling them into skill
blocla, and cenifying rfieder a person acn"rally possesses the skills. Ar Balzer and FMC, a commiree compossd 6f managers &om several sircs developed, wir-h input from employees, tle skill
Iisring and cerdfication proccss fss Frh of rhe four skill ladders.

Establish Certification Methods

Pracrices for cenifying
Some organizaciorx use

Sat

cmployees possess dre skills and are able

per rwiew, on$ejob

to apply them vary widely

dernoruuadons, and tes$ for cenfication, similar to

rhe nadidonal apprentice/journrymanr/mastcr padr. Honeywell evaluates employees during the six
mondrs after rhry haie leamed de sltill". Again, leaders and peers are used in the ccnification pioces. Srill others require s'rccnsfirl completion of formal courses. However, we do not need to point
our to a snrdent that siaing in &e clasroom doesnt guarantee that anything is lcarned. School disuica address this issue in a nricry ofwa1,s. Some are more resuictive rhan others about which courses
courses; others only for courses in the rcacher's
will increase readrers' pal. Some will cenify fot
subject area- However, no districts require evidence thac the course makes any difference to results.
Newer skill-based applicadons appear to be moving away from an on-demand review and
toward scheduling ftxed-rwiew poins during the year. Scheduling makes it easier to budget and
conrrol payroll increases. Oder changes indude ongoing recerdffcation, which replaces the uadidond one-dme ceniftcadon process and helps ensure that skills are kepr fresh, and rernovd of
ccrtiffcation (and the accompanying pay) when a particular skill is deemed obsolete.e Similarly,
the introduction of new skill requirements and the obsolescence of previous skills re quire recertiftcation. For example, HR professionals with the Certiffed Human Resources Professional (CHRP)
designation in Canada musr recenify every three yea$, as do forest compliance inspecdon

*y

by rhe Ontario Ministry of Natural Resources. Airplane piloa rnust go

through an emergency-landing simulation every 12 months. At theAppraisal Institute of Canada,

irroFessionals employed

mandatory requiremencs of designated memberq is participation in the Condnuing

li?rofessionil Development (CPD) program. The program requires all designared members to
a minimum of si:i continuing professional development credim each year and a rotal of
;,complete
I.fO credis over the entire five-year period of the CPD cyde. One credit is equal to one hour offor'hal learning in worlahops, confcrences, seminars as
well as through a varieq, of other activiries.lo

i.1one-of tl're

of Skill-Based Pay Plans: Guidance from Research and Experience

plaru are generally well accepred by employees, because it is easy to see t-he conneccion
plan, the worlq and rhe size of the papheque. Consequendy, thc plans provide suong
ion for individuals to increase their skills. "learn to earn' is a popular slogan used in rhese
One srudy connected the ease of communication and undersanding of skill-based plans to
gpneral perceptions of being treated fairly by the employer.ll The design of the certficaproces is crucid in this perception of fairness. Three studies have related use of a skills qrsrem
odycriviry- Two found positive resuls, the other did not.lz Another study found that younger,
educated employees with suong growth needs, organizational commitment, and a
positive aaitoward worlcplace innovadons were srore succes$:l in acquiring new skills.l3 Nevenhdcss,
for
not made clear, dre studys auhors recommend allocadng raining opportunities byseniority,
r che

113

114

Palt

I I In*nalAlig,wat Mn@

fu

Snatttuc

Skill-based plans become increasingly ocpensive as the majoriry of employees become

cenfid

at the highest pay levds. As a result, the employer may have an average wage higher than compedtors who are using conventiond job evaluation. Unless the increased floribiliry peffniEs leanet
staffing, the employer may also experience higher labour cos$. Some employers are combafting
this by requiring that employees stay at a rate for a gnain lengh of rime before they can nke the
taining to move to a higher rate. Motorola abandoned irs skill-based plan, because, at the end of
tfuee years, evryone had topped out (by accumulating *re necessary skill blocks). TRS( too, found
that after a fewyears, people ar cwo manufacturing plants on skill-based rysrems all had rcpped out
They were flocible and well rained. So now what? tVhat happens in rhe next years out? Does everybody autornatically receive a pay increase? In a ffrm with labour-intensive producs, the increased
Iabour costs under skill-based plans may dso become a source of competidve disadvanrage Overall,
consultingsuweys show that rhe percentage of firms ruing skill-based pay has been declining,la and
a recenr sudy concluded that despie ir advanmges, skill-based pay is underutilized.l5
So what kind ofworkplace seems best suited rc a skill-based plan? Early longitudinal research
on skill-based plans found that about 60 percent of the companies in their original sample were
still using skill-based plans seven years later. One of the key factors that derermined a plant success wlrs how urell it was aligned with the organization's suategy, Plans were more viable in organizations following a cost-cutter strategy (focusing on operational efficiency-doing more with

The reduced numbers of highly trained, flexible employees chat skill-based pay promises fit
this suategy very well. 16
A find quesdon is whether a "jack of dl trades' might really be r-he master of none. Some
research suggests that the greatest impact on results occurs after just a small amount of increased
flexibility.lT Greater increments in flexibiliry achieve fewer irnprwemenm. So more skills may not
necessarily irnprove producdvity. Instead, there may be an optimal number of skills for any indi
vidual to possess. Beyond that number, productivity renuns are smalJer than the pay increases.
Additionally, some employees maF not be interested in giving up the job they are doing. Such
"campers" creare a bordeneck for rotating other employees into thar position to acquire those
skills. Organizations should decide in advance whether they are willing ro design a plan to work
around carnpers or force them into the system.
The bottorn line is that skill-based approaches may be only short-term iniciatives for specific
senings. Unfonunately the longitudinal study did not repon on ttre 40 percent of cases in wfuch
skill-based pay did not survive beyond six years.
less).

competencies
undeding, broadly appliable
knovvledge, skills, and behaviours that form the foundation for successful wo*
performance

LO3
competency-based pay

structure
links pay to work-relatd

comptencieis

l
r
I
I
I

L_,__

'lfhile skill-

and job-based systems focus on information about speciftc asls, a competency-based

approach pays for underlying, broadly applicable knowledge, skills, and behaviours that form the
foun&tion for successful work performance, called competencies. Exhibit 6.5 shows the.proces
of using competencies to address the need for internd alignment by creating a competencybased pay strucnue.

competencis requird fot

succssf ul wo* performance
in any job in the organization

Core competencies are thosc that form the foundadon for successfirl performance at all jobs
rhe organizadon. They are often linked to mission staremen$ that o<press an organization's
philosophy, vdues, business strategies, and plans.
Competency sets begin to translarc each core competency into action, For the core competency
of "business awareness," for erample, competencysea might be related to organizational understandirig, cosr managernent, third-party relationships, and abiliry rc idenrifr business opportunities.
Competency indicators are the observable behaviours rlat indicate the level of competency
within each set. These indicarors may be used for staffi.ng and evaluation as well as for gay purposes.
TRWi cornpetency model for im hurnan resource managemenr deparrment, shown in
Exhibir 6.6, includes the four core competencies considered crirical to the success of the business. All HR employees at TR'!Z are expected to demonstrate some level of these competen'cies.

spef,jific components of a
I

PERSON.BASED PAY STRUCTURES:

COMPETENCIES

core competencies

competency sets

IT

competency

competency indiiators
obseryab le be haviou rs that
indicate the levelof ampetency with i n each co m pe-

tenq

set

in

Chapter

6|

Pmon-Based Pay Smlr,tura

coREJcoMPETENcYcoMPETENcYCoMPETENCY-BA5ED
+
irutiildion'i' +
sEri---

115

PAYsTRUcTURE

coMpErENcrEs

BAslc DEClsloNS

.
,.

What ii'the oblective of the Plan?

What information should be collected?

. which methods should be used to determine

. Who is involved?

and certify competencies?

. How useful for PaY Purposes?

THW Human Resources Competencies

ff

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Pttl I Intatal Alignent Daaa*A dt brctun

116

=
be -rryected ro reach the highest level in all competencies. Rather, tlre
'
it possessed all levels of mastery of all the core competencies
HR function would wanr to b.
use the model as a guide to whatTRV
individuiemployeeswould
and
group,
HRM
widrin its
values and what capacides it wancs people to develop'
th. degrh of a competency required at each level of
indicarors

However, nor

dl would

,*.

-- ii. .o*p....r.y

"*hot
.o*pl.*i.y of th. *ork. Exhibit 6.7 shows five levels of competency indicators for a generic
.o*p.,.rr.y called "Impact and Influence." These behavioural anchors make the comPetency
,ooli

"uses exPerts or other

The lgvjs range ftom "uses direct persuasion" at level 1 to
include scdes of the
anchors
tfie
behavioural
Sometlrnes
5.
"tl.*l
the amountof effort
and/or
complexiry
irs
action,
the
of
impact
of
orr.don, rhe degree

"o".r.*.
p*** ro influence"

,iiri
J*r*if

indicators arcsimilar to job analysis quesdonnaires and degrees

*p."JJa. S*f.d

"o-p"rlrr.y
colpensable factors, discussed in pievious

of

chapters'

Sample Competency lndicator Description

influence to have a specific impact. lt includes the abilhy
lmoact and lnfluence: The intention to persuade, convince, or
of
others'
concerns
and
needs
the
to
ffi;itffi;;nolrespono

"lmpactandlnfluence"isoneofthecompetenciesconsidered"mostcritical'"
COMPETENCY INDICATORS

.'

Lets things happen'

.quotespolicyandissuesinstruction':.'''

.
.
.
.

..
.- Triesldifferent tactics when attempting to perzugde.without neceslarily
t" the ieveior ihprest of an audience (e's" makins
r;H;;;+i;".t i"

21

.....:

.'.:j

#;;;r;

.'

3: Builds trust and fosters

win-win mentalitY (expected
performance level)

4: lvlultiple actions

.
.
.

Looks

''

to appeal to the interest and level of other

for the "win-win" opportunities

detecting
Demonstrates sensitivity and understanding of others_in
to
concerns, inierests, or emotions, and uses that understanding
Jevetoir e-ffective responses to objections

;;";il"g

by

action to have a sPecific

.1.

'
.
.

l,

Tailors presentations or discussions

r.

"liiJt
aiguments or points in a discussion)
different
:

to influente

5: lnfluences through others

I

direct persuasion in a discussion or presentation

to reason; uses data or concrete examples
audience
Does not adapt presentation to the interest and level of the
opposition
with
confronted
Reiterates the same points when

Uses

Appeals

or other third parties to inJluence

with customers,
Develops and maintains a planned network of relationships
int"rnui peers, and industry colleagues
when reouired, assembles "behind the scenes" support for ideas regarding
opportunities and/or solving problems
Uses experts

I
il
l!

ll
l

t_

Employee Peiormancewilh permission from the American compensation

Reprinted from Rarsing the Ba, lJsing competencis to,Enhance
USA 85260; tel (602) 483-83s2' @ AcA'
M
'14040
kottsdale,
Blvd.,
r.ronni'6fti
(ACA),
r]\r.
Association

Chapter

6|

Pmon-Based

Defining ComPetencies
competencies are ffylng to get at what underlies work behaviours, rhere is a lot of fuzzines ia defining them. Early conceptions of competencies focused on ffve areas,lS
Because

l.

.,

3.
4.
5.

Skills (demonstration of expenise)

Ift owledge (accumulared informatiori)
Self-concepts (anitudes, vdues, self-image)
Tiairs (general disposition to behave in a cenain way)
Modves (recurrent thoughts that drive behaviours)

As experience with competencies has grown, organizations seem to be moving away from
of self-concepts, traits, and motives. Instead, thcy are puming greater emphasis
on business-related descriptions of behaviours that excellent performers exhibit much more
consisrendy than averagc performers, Competencies are becoming "a collection of observable
behaviours (not a single behaviour) that require no inference, assumption, or interpretation.'
rhe vagueness

Purpose

of the Competency-Based Structure

Do competencies help support an internally aligned srructure? Using thc by-now-familiar yardstick How well do competencies suppo$ the organizationi suategy and workflow, trear employees furly, and direct their behaviour toward organizarion objectives?

,..
:
,

Strategy Frito-Lay, which has used competency-based suucrures for over ten
four competencies for managerial work:

Organization
years, lists

1.

Leadingfor rcsulx: lJsinginitiative and influence with orhers to drive resula and promote
condtruous improvement
Building workforce effectiumesr: Coaching individual development and building capability of
operationd, project, or cross-funcdonal teams to achieve business rezults

t. Lnnaging
4.

technical and business slsterrzs: Acquiring and applying a depth and/or breadth
knowledge, skills,
eirperience to achieve functiond excellence
Doing it the ight way: Modelling, teaching and coaching company vdues

,.,There are duee levels of impact

of

-4

for each cornpetenqy. Aqthe ffrst level, ochibfuing the ompcoeocT

it has an'impact across reams. At the highest leyrl, ii bas an

the team. At the next level,

"g.*
impact on dre enrire locarion.I9

Workftow

Competencies are chosen !o ensure drat all the britical nee.l* of 6c orqlniurdro
it is common practice to write: "These slrill." 31s considcrod imporrrnr 6r
all professionals but the weighting of imporrance and the lwel of proficiency varicr
positions, organizations, and business condidons." \)(b.ere skill-based plans are tighdy
to today's work, competencies apply rnore Ioosely to work requiring morc ecit h-di.+
stated) knowledge and behaviour such as in managerial and professionzl *ud.
arc met. For enample,

'-'

;
i

,
'.

;'

'tail to Employees Mvocates of competencies say rhey caa copom

of rheir own development. By focusing on optim"m pcrfrm2np E

fr dftrtrr
o.'--l
- -.

D & t"F
-df*
IE &il arqF p&-

msiat2in SsirEarllct bllfot'z3ltoGE,."ii-dre

worry that the field is going back ro rhe middlc 6f fig Ls ..r*rrF rtrn brdq 1ry o
personal characeristics was standard pracdce.2l Basing pay on er c Gr rEE[
@.t'tB
tr
yct it was $andard pracdce at one dme. B.riog p"y on somcoail
idgre d:niil- E aoli
iotegriry raises a similar flag. Trying to jusdf)' pq' ditrcrcncs berad m incill ffiSffirr
creates risla thac need to be managed.
mance, competencies can help employees

petencies

Pq Smrcnrs

117

I
I

118

Panl I

were three general categories of global leadership competencies, as follows:

1.

Core Global Leadership Competencies

and
These competencies are fundamental to the development of other characteristics
represent global leadership potential:

.
.
.

t
t
t

2.

I--

Engagement in personal transformation

lnquisitiveness

Desired Mental Characteristics of Global Leaders

different

issues and

play a major role in guiding concrete actions and behaviour:

i
, .
.
.
.
.
.

3.

optimism
Self-regulation
Social judgment skills

Empathy

Motivation to work in an international environment

Cognitive skills
Acceptance of complexity and its contradictions

Behavioural'Level Global Leadership Competencies

These competencies represent more explicit skills and

tangible knowledge that refer to

concrete actions and producing visible results:

.
.
.

t
t

I
I

Self-awareness

These competencies affect the ways in which the leader approaches

I
I

Smcure

A Finnish researcher, Tiina Jokinen, reviewed- and integrated numerous previously suggested frameworks of global leadership competencies. Her work concluded that there

tbe

Global Leadership Competendes

I
I

Dcunining

Intcrnal Alignmcat:

Social skills

Networking skills
Knowledge

A Review and
Source: Adapted from T. Jokinen, "Global Leadership competencies:
pli*rion,"'.ro, rnal of European lndustrial Training 29(3) (2005), pp' 199-216'

Motivate Behaviour toward organization

0biectives

competencies provide guidelines for

basis for communicating

behaviour and keep people focused. They also can provide a common
as organizations
important
increasingly
become
has
and working.og.rir* Tii, I"tt , possibiliry
leadership posi
fill
experiences
and
viewpoinu
aif.ti"g
*ia.ry
go global, .-Id.I .*ployees with
'Worth box here summarizes an integrated frame.Net
The
globaL orianizations.

iioi, in rhese

work of globd leadership competencies'

r-n

"HOW TO": COMPETENCY ANALYSIS

comPrcncy_-based strucThe bottom part of Exhibit 6.5 shows dre basic decisions in creating a
the
objective of the plan'
clarifr
to
is
imponant,
the
most
far
by
and
decision,
first
ture. The

Chaptcr

6|

Pmon-Based Pa1

Strc*res

119

II

objective
been poinred ou! rhar one of rhe

,-hu ayady

pifalls oFcornpetency

systems is

trying to do too

^j"* Ai"*t wirh ill-suited q/srems. Competencies may have value for personal development
organization direcrion. However, the vagueness and subjectiviq (lfhat
lJ'-*l*icating
"oi"rl, u, this persont motives?) continue to make competencies
+ry foundation for a pay
"
of
the competency sets and
on
virtue
may
orist
paper
by
ilr.*."" The comperency structure
limle connection rc tlre work employces do'.In
"ol*Tr'
only way to gct people to pay attention to them. So the
the
is
competencies
ing for
perhaPs Pafng
analysis to clarify the purpose of the cornpetency system.
r; tJconduct

,'J"a U"tt*aural indicators, but have

tirr-,,lri

" "o-p"t"o.y

competencies have been proposed.z3 One of them uses three

A number of schemes for dassifring
grouPs:

l.

pmonal characteristics: These have r:he aura of the Boy Scouu about them: trusrworthy,
lolal, courreous, In business senings, ttre relevant characeristics rnight be persond integriry,
maruriry of judgmenr, flecibiliry, and respect for others. Employees are ocpected to come in
dre door

with

these characrerisrics and then develop and demonstratc thcm

in increasingly

compiex and arnbiguous job situarions'

Z.
-3.

competency analysis
a systematic procss to
identify and coilert iniiormation about ihe cornpetenobs

What lnformation to Collect?

Visiinary:These are the highest-lwel cornpetencies. They might be enpressed as possessing

new direcdons, and
a global perspective, taking the initiadve_in moving the o..ganizadon io
uen&
in
the markerplace, in
of
tf,e
organization
for
the
implicadons
toarriculare
bjrrg
"bi.
and in the local comrnuniry'
*orld.u**,
Organization-gecifc: Beween rhese rwo groups are those cornpetencics tied specificdly to
the-particular organization and to the panicular funcdon where they are being applied. These
g.n"rr[y irr.lode leadership, cusromel orientarion, funcriond o6penise (eg., able rc k3 4
U"ifA"gr and explain the-difference between competencies and compensable 6ctors), and
developing others-whatever reflecs the company mlues, cultute, and suategic intent.

rhe leadership competencies that 3M developed internally for its globd

cxecutives.24 Behavioural anchors are used to rate an ocecutive on each of these competencies'
Exhibit 6.9 shows the behavioural anchon for rhe "Global Perspective" cornPetency' Executives'
worldwide. Because 3M
ratings on drese cornpetencies are used to assess and
orecudve talent for
develop
help
competency
radngs
within,
fiom
, r"li.iho.nily on promorion
is
less clear.
to
gay
the
link
is
dear;
to
development
link
the
Again,
succession planning.

iI

rquired forsuccadulwo*
performance

I
iI
t
;
;

Bfiibir 6.8 shows

dgvelop

Becaur" they stem from each organization's rnission $atestent or irs suategr to achieve compedtive advantage, it might be conduded that r.he core competencies would be unigue to each
not. One andpis showed rhat most,organizations aPPear to choose
.o*p*y. In faci, th"y
competencies (see Exhibit 6.tO7.zs So if rhe competencies do not
from thi same list of 20
"ot"
differ, how can they be a source of competitive advantage? Vhat does aPPear to differ among
related
1 organizacions is the way in which rhey operationalize competencies. This parallels an issue
1 to-r,."t.gyr
It
is the
differ.
actions
rnay
the
but
in
the
words,
There rnay be only slight differences

'.acrions

llVhom
.

Jr.a

"r.

th. ,our.e olcornpetitive advanage.

to lnvolve?

Like campensable facors, cornpetencies are derived &om the ocecutive lcadershipt beliefs about
rhe organization and its straregic inrent. Howwer, anccdoul evidence indicates that not all
employees understand that conneccion. Employees at one bank iasisted that processing studetrt
tuirion loans was a different competency from proccssing auto loans. The law department at
Polaroid generated a lisr of over 1,000 cornpeteocies they felt were unique to the law depaf,tment
and thar created value for the organization-

t
I

I
t

,l
:T

-.
Chaptc

6|

Pmot-Bascd

Pq

Struc*res

121

Competency lndicatons fon One 3M Competency: Global Perspectives

GLOBAL PERSPECTIVE: BEHAVIOURS

o Respects, values. and leverages other customs, cultures, and values. Uses a global management team to better
understand and grow the total business. Able to leverage the benefits from working in multicultural environments.
. Ootimizes and integrates resources on a global basis, including.manufacturing, research, and businesses across
countries, and functions to increase 3M's growth and profitability.

.
.

Satisfies global customers and markets from anywhere in the world.

Actively stays current on world economies, trade issues, international market trends and opportunities.

"3Mt Leadership Competency Model: An lnternally Developed Solution." Human Resource

pp. 133-45. Reprinted by permission of John Wiley & Sons, lnc.
Management 39 (Summer/Fall 2000),

Source: Margaret E. Allredge and Kevin J. Nilan,

EXHIBIT 6.1O

The Top

20 Competencies

E
Concern

iI
ii
f

for quality

lnitiative
lnterpersonal understanding
Customer-service orientation

lnfluence and impact

Organization awareness
Networking
Directiveness

Teamwork and cooperation

Developing others
Team leadership
Technical expertise

lnformation seeking
Analytical thinking
Conceptual thinking

Self-control
Self-confid'ence
Business

iI
ri

Achievement orientation

orientation

ru
Source: P. K. Zingheim. G. E. Ledford, and J.R. Schuster, "Competencies and Competency Models," Raising the 9ar: Using Competencies
Enhance Employee Performance (Scottsdale, AZ: American Compensation Association, 1996).

j
;

iI

Exhibit 6,1I shows one of rhe eight competencies used by a major toy cornpany for the marketing depanment, Other depanments have sepaxate competencies. Notice the mind-numbing
level of detail. AJthough this approadr may be usefr.rl for career development, it is doubtfuI that
dl this informadon is usefirl, much less necessary, for compensation purposes, The initial promise
of simpliciry and flexibiliry in person-based systems remairu unfulfilled.

to

I
I
;

Partl I Intcnal Alignnutt Dta'mbtizg

122

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2..:

Chaprcr

6|

Pmon-Based

Methods
Establish Certification
plan is that employees get paid br the relevant skills or compbut not necessarily the ones chey use. Shll-bsd plans assume that possessto match workflow wifi $afing levels, so whether or not an
ine rhese skills will rnake it easier
Liiuid"al is using a panicular skill on a particular day is oot an issue. Competenry-based plans
are used all the dmd The assumptions are not clear.
assume . . . what? Thar all competencies
that
when people are paid on rhe basis of their comperequiremenr
the
however,.is
\Vhat is clear,
to
demonstrate
or certify to dl concerned that a person posscsses
way
be
some
must
rency, rhere
discuss
competencies as .compadble with 360-degree
W'hile
consultan*
competency.
of,
.harlevel
they
are
quiet
about how to objectively certify whether a
development,
pcrsonal
and
feedback

th, h."rr of the person-based

,.n.ia dey

possess,

Person Possesses

a comPetency.

Recall that internal pay suucnues are describcd in rerms of rhe number of
criteria on which the job suuctrre is based Ia pracdce, comperencybased structures generally are designed wirh relatively few leveLFfop5 16 si1-311d relatively
wide differenrials for increased flexibiliry. A generic structure based on four levels would look as
Besulting

Structure

levels, pay differentials, and

follows:
LEVEL

PHASE

TITLE

Expert

Visionary; Champion; Executive

Advanced

Coach; Leader

Resource

Contributor; kofessional

Prof icient

Associate

Such a generic job structure could be applied to almost arryprofessionalwodq even r.he work
of universiry faculry. Consequendy, internal alignment using competencies appcars looseb' lhked
ro the organizationt suatery.

Competencies and Employee Selection and Training/Development

In Chapter 2, ir was noted that human resources suategies can be thoughr of as influcocing decriveness .hro"gh their impact on worldorce ability, motivation, and abiliry o conrihute. In the
gse of comperencies, there is clear evidence that abiliry ftroadly de6-ued to indudc pcrsonality
u"aiu) is related to general competencies. Like Exhibit 6.11, Exhibit 6.12 shows a sct of generic
competencies, called rhe Great Eight, which seem to capnue in an efficieotwet &c demes fouod
in rhe array of competency ftameworks available. \7hat Exhibit 6.12 ad& are hypodcscs rEgarding how rhese cornpetencies relate to the individual characteristics ofpersonaliry ("Big Frve"),
motiration, and abiliry. So, for example, based on Exhibit 6.12, if we wis[ ss bav managels vfro
are comperent in leading and deciding, we need to select or rain and de'relop people high in
inced for povner, need for conuol, and who have exuoverted personalities. Failure to adequatd
s66g1 .-Floyees on these individual characteristics would not only put more pressure on trainihg end development, but dso potentially demotivate employees who are seeking'to acquire aad
demonstrate these competencies, bur who may not be well suited to do so. Competency-based
pay would be less likely to succeed in rhis situation.

Guidelines from the Research on Competencies

Although the notion of competencies may have value in idendfring what distinguishes rypical
from truly outsanding performance, there is debate on whetlrer cornpetencies can be uanslated
rnto a measurable, objective basis for pay. Competencies often morph into compensable factors.

Pq Sfi.@E

123

I
PartI I Intrrnal Akg,n

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'*o ,, ,, not surprising that limle empirical research aisa. Only

6|

Pctson-Bascd Pay Stnzctarct

one srudy has analyzed the com-

_l.r.nci.r/p.tformance relationship for managers, and it found that managers' competencies were

Lhr.d ,o rheir performance ratings, but *rat

there was no relationship ro unit performance level.26

with
potendal
applicadon
research
to cornpetencies deds with inrellectual capinl
of
An
Viewing
tJre
management.zT
comperencies
of an organizationt ernployees as a
and knowledge
to
a divcrsifted,ilvestmenl p:{:* htjhltCh: rhe. facr that not all competensimilar
ponfolio
',',,.
Li* u" unique nor equally valuable stratcgically.2s The focus then changes to managing erisdng
i .o6perencies and developing new ones in wap that maximize the overall success of the organizarion. As organizations globalize, they may need to rebalance their values and perspecdves to
allow a global sffategy to funcdon.zg They seek the right balance benveen the range and depth of
cultural, functional, and product cornpetencies in the global organization. Bur rhis is speculative
and remains to be translated into.pay Practices.
The basic question remains whether it is appropriate to pay for what an employee is capable
of doing versus what he or she is actually doing. It seems more likely rhat efFectiveness, for pay
purposes, relares to focusing on what is easily measurable and direcdy related to organizational
-e$ecriveness
(i.e., lcnowledge and skills thar are task/performance-related).30 Overall, consult, ing surveys show that the percentage of frms using competency-based pay has been declin'; ing,lr and recent srudies have concluded that despite ia advantages, comperency-based pay is
area

i'

underutilized.32

ONE MORE TIME: INTERNAL ALIGNMENT

REFLECTED IN STRUCTUBES
The purpose of job- and person-based procedures is reallyvery simple-to design and rnanage
an internal pay suuctue that helps achieve dre organizatioris objectives. As with job-based evaluadon, rhe ffnal result of the person-based plan is an internal strucnre of work in the organizadon. This strucnue should be aligned with the organization's internal alignment policy, which
in turn supports its business operations. Funhermore, managers [rust ensure that the strucnue
remains internally digned by reassessing wor!:/skills/comperencies rrhen necessary. Failure to do
so risks suuctures that lack work- and performance-related logic and opens the door to bias and
misdirected behaviours.

MANAGING THE PLAN

'Whatever

plan is designed, a crucial issue is the fairness of its managcmenr. Details of the plan
should be described in a manud that indudes dl information necessarl to apply the plan, such
as deffnitions of compensable factors, degrees, or details of skill blocks, competencies, and certiffcation merlods. Increasingly, online tools are available for managers to learn about these plaas
and apply rhem.33

hployee acceptance of the process is just as important here as for job analysis and job evaluation.
In order to build this acceptance, communication with all employees whose jobs ,ue p.ur
',
ofrhe process used to build the pay srnrcrure is required.

EVIDENCE OF THE USEFULNESS OF RESULTS

There is vast research literature on job evaluation compared rc person-based stuctures. Most of
it focuses on the procedures used rarher than its usefiJness in morivating employee behaviours or
achieving organizational objectives. In vimrally all the studies, job waluation is ueated as a measurement device; the research assesses ie rdiabiliry, validiry, and costs, as well as its compliance

LOA

126

Partl I I*rnat Akgnmmt: Detfffiining th. Stracarc

with laws and regulations. Any vdue added by job Evaluadon (e.g., reducing pay dissatificdon,
improving employees' understanding of how their pay is determined) has been largely ignoredl
contrast, research on person-based structures tends to focus on their effecs on behaviours and
organization objecdves and ignores questions of reliabiliry and validiry.

ln

't-

Reliability of Job Evaluation Techniques

A rcliablc evaluation would be one in which different evaluators produce the.came resuh. Most
studies report high agreement when different people rank-order jobs-correlations beween
0.85 and 0.96.3s This is important, because in practice several different people usually evaluThe results should not depend on which person did the evaluation. Reliabiliry can be
imprwcd by using evaluators who are familiar with the work and traincd in the job evaluation
process. Some organizations use group consensus to increase reliability. Each ev"aluator makes a
preliminary indepcndent evaluation. Then, all evaluators in the group discuss their results until
consensus emerges, Consensus cerainly appears to make the results more acceptable. However,
some snrdies reporr rhat results obtained through consensus were not significandy different from
those bbtained either by indcpendcnt waluators or by averaging individud evaluators' results.
Orhers reporr that a forcefirl or experienced pcrson on the committee can sway the resula. So
ate jobs.

can knowledge about the jobt present salary level.36

A. p*r of efforts to reduce costs, job ev-aluation committees are disappearing; instead, managers do the ev"aluations online as part of the organizationt "HRToolkit" or "shared services." The

reliabilicy and vdidiry of the results obained this way have not been studied.

Validity/Usefulness
Validity refers to the degree to which ttre cv'aluadon assesses what it is supposed to-the relative
worth of jobs to the organization. Vdidity of job oraluation has been rneasured in two ways:

(1) by agreement, rhat is, the degree of agreement between rankings that resulted from the job
evaluation compared to an agreed-upon ranking of benchmarks used as the criterion; and (2) by
"hir rates," thar is, the degree to which'the job eraluation plan matches (hits) an agreed-upon
ranking or pa)' structure,for benchmark jobs. In both cases, the predetermined, agreed-upon
ranking or pay srmctrue is for benchmark jobs. It can be esablished by organization leadenhip
or be based on orternal market dan, negotiations with unions, or the rnarket rates for jobs held
predominandy by men (to try to elirninate any general discrimination reflected in the market),
or some combination of these.
Many studies repon that when fifferent job eraluation plans are cornpared to each other,
they generate very sirnilar nnkings of jobs but very low hit rates-they disagree on how much
to pay the jobs.37 One study that looked at three different job evaluation plans applied to the
same set of jobs reponed similar rank order among evaluators using each plan, but substantial
differences in dre resultingpey,3s
So it is clear that the definition ofvalidiry needs to be broadened rc include impact on pay
decisions. How the resulis are judged depends on the standards used. For managing compensation the correct standard is the pay structue-what job holders get paid-rather than simply
the jobs' rank order.
Srudies ofthe degree to which different job evaluation plans produce the same results surt
with the assurnption that if different approaches produce the same resule, then those results
rnust be 'cor!ect," that is, valid. But in one study, three plans all gave the same result (they were

t"li"bl.), but all three ranked a police officer higher than a detective. They were not valid.39
\Zh.at accounts for rhe reliabiliry of invalid plans? Either rhe compensable frctors did not pick
up something deerned imponant in the detectives' jobs or the detectives havi{hore powr to
negotiat higher wages. So while these three plans gave the same results, they would have litde
acceptance among detectives'
t

----j--

*._
Chapter

6|

Penon-Bascl

Pq Stuctura

irnponant when an organizadon is facing challengcs by dissatisffed

MfStftg fiiS point 9qn Pur an orgadz-adon ar risk.4o
thei!
hvyErs,
or
employees
Such "details" are very

AccePtabilitY
and irnprove employee acceptabiliry. Al obvious one is to indude
who believe their jobs are evaluated incorrecdy should be
"
and/or
skills
reevaluadon. Most ftrms respond to such requesc from
re-andysis
.bl. tb t.quor
the process rc all employees, unless those employees are represented by
extend
few
but
nanagers,
have negotiated a griwance process.4l Another approach is to use employee artitudc
*anl
to asscss their perceptions of acceptabiliry.
are used
Several devices

to

assess

for,nrt appeals process. Employees

*t"

surveys

GENDEB BIAS IN INTERNAL PAY STRUCTURES

The condnuing &fferences in jobs held by rnen and women, and thc accompanying pay &fferences, have focused aftenrion on internal strucures as a possible source of discrimination. Much of
this attendon has been direced at job evaluation as both a potencial source of bias against women
and a mechanism ro reduce bias.az It has been widely speculated dnt job evaluation is susceptible
to sender bias; that is, whether jobs held predominandy by women are undervalued rclative to
pUi teta predorninandy by men, simply because of the job holder's gender. But evidencc does
nor suppon rhe proposirion that the gender of an individual job holder influcnces the evduation
of rh. Job.a3 Addidonally, rhere is no evidence that the job evaluatort gender affects the resulu.
However, a srudy found rhat compensable factors related to job content (such as contact
wirh others and judgmenr) did reflect bias, but that others pertaining to employee requirements

1'
,
'
'
,

(such as educadon and experience) did

not.4

second porendd source of bias affecs job ev-aluation indirecdy, through the current
wages paid for jobs. In rhis case, job evduation resula may be biased if the jobs held predominantly by women are underpaid. If this is the case, and if the job evaluation is bascd on thc currenr wes paid, then the job evaluadon results simply mirror any bias in the current pay rates.
Considering that many job evaluation plans are puqposely strucured to mirror the existing pay
strucrure, ir should nor be surprising that the current wages for jobs influence the resulrs of job

Th.

evaluation. One study of 400 compensation specialisa reveded that market data had a subsundally larger effect on pay decisions than did job ev-aluadons or current pay dza.as This study is
a unique look at severd factors rhat may affect pay structures. Several recommcndations seek to
ensure that job evduation plans are bias-fue, including rhe following:
1.

.t
I

2.

t3.

Deftne the compensable factors and scales to include the content ofjobs held predominantly
by women. For ocample, working conditions should indudc the noise and stress of office
machines and the repedtive rnovements associated with the use of computers.
Ensure that factor weights are not consisrcndy biased against jobs held predominandy by
women. fue facors usually associated with these jobs always given less weight?
Apply rhe plan in as bias-free a manner as feasible. Ensure that the job descriptions are biasfree, occlude incumbent names ftom the job evduacion process, and train diverse evaluators.

At the risk of poindng out rhe obvior:s, dl issues concerning job evaluation dso apply to
borh skilt-based and competency-based plans. For erample, the accepabiliry of the results of
skill-based plans can be studied from the perspective of measurement (e.g., rcliabiliry, validity)
and administration (e.g., cosrs, simpliciry). The various points in skill cerdfication at which
enors and biases may enter into judgment (e.g., different views of skill-block deffnitions, potential favouritism toward ceam members, deffning and assessing skill oStolo"tnce) and whether
skill-block poinrs and evaluators make a difference all nccd to bc srudied. In light of the detailed
bureaucracy rhat has grown up around job eraluarion, we conffdendy predict a growth of

LO5

127

124

Pan

I I b*rnal

/l&gntftzt

futaA*g

&c Sauctta"

bureaucratic procedures arou.nd person-based plans, too. In addition to bureaucncy to m2n2ge

to cenification may be fraught with potential legd vulnerabilities if
employees who fail ro be cenified challenge the process. Unfomrnately, no srudies of gender
effeca in skill-based or competency-based plans cxist. Litde attention has been paid to assessor training or validating the certificadon processpJust as employmcnt tests used for hiring and
proroocioridecisions must be demonstrably frec of illegel bias, it seems logical tlrat ceniff.cation
should Face the same requirement.
procedures used to
cosrs, rhe whole approach

d.**:::strucnues

r-T

THHEE TYPES OF STRUCTURE

Exhibit 6.13 conuasts job-, skill-, and competency-based approaches. Pay increases are gained
via promotions ro more responsible jobs under job-based structures or by acquiring more rtalued
skills/competencies under person-based suuctrues. Logicdly employees will focus on how to get
promoted (e.g., experience, performance) or on how to acquire ttre reguired skills or competencies (e,g., training, learning).

EXHIBIT

6.13

Contrasting Approaches

ffi

ffi
What is valued
Quantify the value

'

Mechanisms to trdnslate

.
.
.

Pay structure

Pay increases

Managers'focus

Compensable factors
Factor degree weights
Assign

point that

.
.
.

reflect criterion paY

structure

into pay

Based on

job

.
.

Promotion

to

Link employees

work

Promotion and

placement

'

Skill blocks
Skill levels

Certification and price

skills in external market
Based on skills

market

performed/market

.
.

COMPETENCY-BASED

SKILL-BA5ED

JOB-BA5ED

.
.
.
.

certified/

.
.
.
r

Competency

levels

Based on competency

Skill acquisition

Competency development

Utilize skills efficiently

Be sure competencies add value

Provide training

Control costs via training,

certification, and work

opportunities
Coritrdl costs via certification
and assignments

Seek competencies

Provide competency-developing

forjob and budget

increase

Employee focus
Procedures

Advantages

Seek promotions

to

Seek skills

earn more pay

. Job analysis
. Job evaluation
. Clear xpectations
. Sense of progress
. Pay based on value of

.
.
.
.
.

.
.

.
.

Continuous learnirig
Flexibility
Reduced workforce

.
.
.
.
.

Continuous learning
Flexibility
Lateral movement

Potential bureaucracy
Requires costs controls

.
r

Potential bureaucracy
Requires cost controls

Skili analysis
Skill certification

Competency analysis
Competency certification

work performed

Limitations

rc
T

Potential bureaucracy
Potential inflexibilitY

Certification and price competencies in external market

developed/market

assignments

Coritrbl costs via pay

Competencies

Chaprer

6|

Pmon-Bzscd

joffiscd plans focus on placing *re right people in the

to
skilUcompcrcncy$ased
plen-c 16vs1565 r-his procedure. Now, managers musl
Aswitch
riehr iobs'
\et
to
the
work
right
people,
i5, those with the right skills and competencies.
right
*r"
"r]im
conrols
co*s
by
only as much as the work performed is worth,
paying
approach
,q, iJb-based
tbe
employee
maypossess.
anygrcatcrslrill.s
So as Fxhibit 6,13 suggests, costs are
of
,.*rrdl.n
job
assignments
and
or
work
rates
via
ludgee.
#rolled
In conuast, skill/comperency-based plans pay employees for rhe highest level of skill/
comperency rhey have achieved, regardless of the work they perform. This maximizes flexibiliry.
Bur it also encourages dl employees to become certified at top rates. Unless an employer can
Managers whosc employ=a use

either coFtrol the rate at which cmployees can cenify skill/competency mastery or employ fewer
people, che organization may experience higher labour costs than competitors using job-based
The key is to offset the higher rates with greatcr productiviry. One consuldng firm

"ppio""h.r.
.i"ims th"t atr average company switching to

a skill-based system experiences a 15 to 20 percent

a
20
to
25
percent
increase
in training and development costs, and initial
rates,
wage
in
increase
to
allow
people
to
cross-rrain
count
and move around.46 But a research siudy
head
in
increases
found rhat costs were no higher.aT
In a.ldidon to porenridly higher rates and higher naining costs, skiJl/compercncy plans rnay
have rhe additional disadvantage of becoming as complex and burdensome as job-based plans.
Additiona,lly, questions still rernain about a skilUcomperency system's compliance with employmenr sandards legislation. If a female worker has a lower skill-mastery level and lower pay than
a male worker who is doing the samc worlq this would appear to violate the requirement in all
Canadian jurisdictions for equal pay for equal work. Similarly, pay equiry legislation could be
violared ifworkcrs in a femde-dominated job of equal value to a male-dominated job are not paid
equally due to a skill/competency system.
So whar is the best approach to pay structures? It depends. The best approach may be to
permit flocibility to adapt to changing condirions. Too generic an approach may not provide sufficient derail ro make a dear link berween pay, work, and results; too detailed an approach may
become rigid. Bases for pay that are too vaguely deffned will have no credibility widr employees,
will fail ro signd what is really important for success, and rnay lead ro suspicioru of favouritism

and bias.

This chapter condudes our section on internal dignment. Before moving on to externd
consideratioru, lett once again address the issue: So what? SThy bother with a pay structure? The
answer should be: because it supporcs improved organization performance. Arl intemally aligned
(1) help
.. pay srrucrure, whether strategically loosely coupled or tighdy fitting can be designed to
i derermine pay for the wide variety ofwork in the organizations and (2) ensure ttrat pay influences
peoples' attirudes and work behaviours and directs them toward organization objectives.

fl
i::l

..\

Gonclusion

This secdon of the book started by examining pay suuctures witlin an organization to ensrue
that jobs/people that add more value to the organization will be paid more than jobs/people that
:. add les value. The importance put on internd dignment in the pay structures is a basic suategic
. issue. The premise underlying internal dignment is lhat internal pay structures need to be aligned
with the organizationt business sffategF and values, *re design of the workflow, and a concern
for the fair rreatmeor of employees. The work relationships within a single organization are an
important part of internal alignment. Suucnrres acceptable to the sakeholders affect sadsfacdon
with pay, the willingness to seek and accept prornodon to more responsible jobs, the effort to
keep learning and underrake additional training, and the propensiry to remain wirh the employer;
"'
they also reducc the incidence ofpay-related grievances.
The techniques for establishing internally aligned structures include job analysis, job evaluadon, and person-bascd approaches for skilUcompetency-based plans. Although viewed by some

fuy Strucaaa

129

130

Part

I I M'lfunt

brhi4 & kuan

as bureauaatic burdns, rhesc rcchniques can aid in achieving the objectives of the pay qrsrcrrl
when tbey are propcrty designd and managed. lTithout them, the pay objecdves of improving
competitiveness and 6imgs are more difficult to achieve.
.Pan I of this book has now been completed. Suategic perspecdves on compensation, the key
straregic issues in compensation management, and qfe totd pay model that provides a framework
for the book have been discussed Managing compensation reguires creating the pay system ro
support the organizadon strategies, its culture and values, and the needs ofindividual employees.
The internal dignment of the pay strucnue, the techniques used to esrablish alignrnent, and the
effects on compensadon objecdves have also been considered, The noct Part focuses on the ner<t
suategic issue in our pay model-orternal competitiveness, including the critical decision on
basic rates of pay for either jobs or skill/compercncy lwels.

n
1.

Ghapter Summary
Skill-based pay plans and competency-bascd pay plans are conceptually idencical, but skills
are very speciffc and competencies are more general. Skill-based pay plans are usually applied
to blue-collar jobs and competency-bascd plaru to white-collar jobs.
The four basic steps in skills andysis are (l).decide what information should be collected,
(2) decide whatmethods should be used to collect che information, (l) decide who should be
involved, and (4) eruure that the resula are usefirl for pay purposes by establishing certifica-

tion methods.

The term comPetenE means the underlying, broadly applicable knowledge, skills, and
behaviours that form the foundation for successful work performance at any level of job
in the organization. Core competencies are competencies that are linked to the mission
sraremenr that ocpresses the organizationt philosophy, values, business strategies, and
plans. Competency sets translate the core competencies into speciffc actions. Competency
indicators are the observable behaviours that indicate the level of cornpetency in each com4.

Pe[ency set.
Employee acceptarce is crucid for person-based plans, beiause it is the key to employees
perceprions of fairness regarding the pay smrdrue. Comrnunication with employees during the building of the structure is the most important step to employee acceptance. Other
important actions to enhaace acceptabiliry are a formal appeals process, employee attirude
surveys, and audiu ofthe pay plan.
Two possible soruces of bias in internal pay strucnrxes are (1) bias in the job eraluadon of
traditionally female-dominated jobs and (2) bias inlcurrent wages that may be perpetuated
when job evaluation plans are suuctured to mirror ecisting pay rates.

Key Terms
competencies
competency analysis
compeiency-based pay
structure

t_

ompetency
competency

indicators
sets

core competencies

skill-based pay structures

skill analysis

Chapter

6|

Pnson-Ba:cd

Review Questions
1.
2.
3.

What are the similarities in the logic underlying job-based and person-based plans?

What

is

the difference between specialist skill plans and generalist skill plans?

Why is there not mo,fe varia+ion in core competencies b,,etween organizations? What does
differ?

4, lf you were managing

employee compensation, how would you recommend that your

company evaluate the usefulness of its job evaluation or person-based plans?

Experiential Exercises
1.
2,
3.

Conduct a skill analysis and design a skill certification plan for payroll administrators.
Find the mission statement for an organization with which you are familiar. Define core
conipetencies, competency sets, and competency indicators for this organization.
David Tyson, author ofthe Canadian Compensation Handbook, states, "There are a number of problems with skill-based pay. A major one is thaf in my opinion, it does not comply
with pay equity legislation anywhere in Canada" (p. 27). Familiarize yourself with the basic

components of pay equity legislation by visiting the Ontario Pay Equity Commission wets
site (www.payequity.gov.on.ca). Survey the human resources management professors at
your educational institution on the question "Do you believe that skill/competency-based
pay plans are consistent with pay equity legislation?" Then conduct a debate. starting
a summary of

with

the reasons given on both sides of this issue.

Case
Targeting Teachers' Pay
.The pay schedule shown in Exhibit 5.14 is.typical of many pay plans forteachers; it contains
steps by which a teacher's salary increases with each year of experience as well as with addi-

tional university credits beyond a teaching certificate.

Say Jane begins teaching in September ofthe current year. She has a bachelor's degree (Group lll)
and no experience. She will earn $51,733 during the current school year. Next year. she will move
up one step in the new schedule and earn $55,213, a raise of fi3,qlS, or 6.7 percent.

Once she has received her maste/s degree or qualified as a subject specialist, she will "move
over" to the next column (Group lV). Otherwise she will stay in the Group lll column and
advance one step each year until she reaches step 10 when she "tops out." Note that she will
receive the step increase as well as any entire schedule increases that the school board gives
each year. So any increase to the entire schedule translates into a larger increase for those
teachers currently being paid according to the schedule.

Questions

1.

Although the stepped salary schedule has many features of a knowledge-based pay
system, not everyone agrees. ls this a knowledg6-based pay system? How might you
change it to make it more like the person-based plans discussed in this chapter? What
features would you add/drop?

2.

ln the pay scale in the exhibit, notice that the column differentials increase with years of
experience; for instance, the difference between Group lll and Group lV at one year of
experience is fi3,197, whereas the difference at year 10 is $5,093. What message do these

Pq Strucnra

-1

132

Partl I In*rnalAlignmmt:

EXH|B|T

Determining rte Strucnre

6.14

Toronto Teachers' Pay Grid [$] as of

September 1,2011 ,n

Erm

ffi
LEVEL OF EDUCATION

'

GROUP III

GROUP IV

$45,zogi

$47,834

$s1,738

$ss;404'

48,124

51,371

55,213

58,410

Step 2

50,923

.53,297

58,8S7

Step 3

53,722

s6,230

62,5s3

65,573

Step 4

s6;soe

59,532

66,425

qp,736

Step 5

50,089

62,863

70,285

73,899

SteP 5

63,2:73

66,173

74,150

78;oss

Step 7

66,67

69,477

78,015

82,226

SleP 8

59-,552

s5,381

Step 9

72,834

72,7?4
76,107

81,p77

SteP:g
Step

GROUP

GROUP II

NO. OF YEARS TEACHING

Step 10

W:

'

76;,021,

7g,414

'

61,985'

85,746

90,545

89,614

g4,7:07:

Ere

Source: Reproduced with permission of the Ontario Secondary School Teachers' Federation/
Fddration des enseignantes-enseignants de l'Ontario.

increasing differentials send to teachers? What pay theories address this issue? How would
these differentials affect teacher behaviours? How would they affect school district costs?
Calculate the size ofthe pay differential for increased seniority versus increased education.
What behaviours do you believe these differentials will motivate? ln other words, what
pays better, growing older or taking courses?
Pay for performance for teachers is a hot topic in many school districts. How might the
salary schedule be made compatible with a performance-based pay approach? Evaluate
your ideas after you have completed Part lll of this book. which discusses employee

contributions.

;$l

iffi

ffi
!

t --'

Practise and learn online

with Connect.

Connect allows you to practise important concepts at your own pace and on your own schedule, with
2417 online access to an eBook, Practice Quizzes, Study Tools, and more.

Forbes magazine recently reported the earnings of some well-known people, some of whom
are included in Exhibit ll.1.One wasTigerWoods. His golfing prowess is legendary;so are
his earnings, David Letterman made $45 million. Jon Stewart, another late-night talk show
host, earned only $ 1 4 million. Why does Letterman earn more than Stewaft? Perhaps because
Letterman's show brings more viewers (and thus more advertising revenue).
There are many more examples of such stories, and the "pot of gold" that comes with suc-

$5.5 million? How

come AIex Rodriguez earned $36 million and Dion Phaneuf only $650,000? ls it because more
people love baseball than hockey? Because the New York Yankees have a lot more fans and
cess, Why did Justin Bieber earn $53 million, whereas Selena Gomez only

theToronto Maple Leafs?Why is itthat Barack 0bama, who runs the United States of America,

only earned

$+Oo,OOO,

while Prime Minister Stephen Harper made slightly over $300,000?

Look

like deans at Canadian business schools made more than our Prime Minister. Executives

seem

to make a lot of money, too. Ed Clark (President &

CE0, Toronto-Dominion Bank) and

William Doyle (President & CEO, Potash Corp. of Saskatchewan) both earned over $t i million.
Donald Walker (CEO of Magna lnternational) earned over $'16 million, but another Donald
(CEg of Tim Hoftons from 2008 to 2011) only around $:.S million. Michael Jackson seems io
be worth more dead than alive. Can Whitney Houston beat Michael Jackson? Apparently one
day after her death, 43 of the top

00 most-downloaded tracks on iTunes were Houston songs

Who decides who gets how much? ls pay determined without apparent reason or justice? Or is there some kind of logic? Can you rationalize the earnings of the people on the list
shown in Exhibit ll.1?

'

External competitiveness is the next strategic decision in the total pay model, as shown in
Exhibit ll.2.Two aspects of pay translate external competitiveness into practice: (1) how much to
pay relative to competitors-whether to pay more than competitorq to match what they pay, or

I
I
t
t
I
I
I
I
t
I
I
I

The next

two chapters will explain that a variety of answers exist. Chapter 7 discusses

choosing the external competitiveness policy, the impact of that choice, and related theories

and research, Chapter 8 has two parts: First, it disc.psses how to translate competitiveness
policy into pay level and forms. Second, it discusses how to integrate information on pay
levels and forms with the internal structure from Part L

EXHIBIT

ll.2 |

The Pay Model

INTERNAL ALIGNMENT

Work Job

Evaluation/

Analysis Descriptions Certification

INTERNAL
STRUCTURE

ffiI
ffit

li$l

.'ld
EXTERNAL COMPETITIVENESs

y#:i|"",

surveys

Policy Lines

PAY
STRUCTURE

ffi

':i$,ll

.ait
;"ql
.:91

,ft1

#t

.:.",*l

iA{

:,,4

':'fi
EMPLOYEE CONTRIBUTIONS

Seniority- Performance-

Based Based

Merit

Guidelines

INCENTIVE

PROGRAMS

E]

:#l
'-,i+l

ril!

.,':,Sl

|i{il
.iEd
lrr-ll

.,?rtl

.:.s]

MANAGEMENT

Costs Communications

Change

'.:t]rt

EVALUAIION

,rli1
i;$_i

::qi'l

:ifl

i.:{itl

"8il

:l#l

,ffi

ffi

LEARNING OUTCOMES
LO1 Describe external competitiveness, and the two specific actions taken in
practice that determ ne extema I competitiveness.
i

LO2 Discuss the three major factors that shape external competitiveness.
LO3 Discuss three labour demand theories and explain their predictions regarding pay.

LO4

Discuss

two supply side theories and explain their predictions regarding

LO5 Explain the three competitive pay policy alternatives.

is always a good rnondr for travel agents in Montreal. In addidon to the permanent PoPularion eager to flee r.he ciry's leaden skies, graduaring students from Monueal's various universides are calvelling ro job interviews with employers across dre country-at comPany expense, full
hre, no Sarurday nighc stayovers required.'l?-hen they return from these trips, srudents comPare
nores and ffnd *rat even for people receiving the same degree irl rhe same field ftom the same
universiry, rhe offers vary from company to comPany. !7hat explains the differences?
Location has an effecr: Firms in Toronto and New York Ciry make higher offers dran in
some other cities.l The work also has an effecc Jobs in recruitrtent pay a linle less than jobs

J*uaty

in compensation and employee relations. And rhe industry to which the different 6rms belong
has
eff.cc Pharmaceuticals, compurer software, and peuoieum ffrms tend to offer more than
"n
and natural resources fums.

computer hardware, telecommunications,

Students would like to artribure these differences to rhemselves: differences in grades, courses
talcen, interviewing skills, and so on. Bur as drey accept offers and reject ochers, many companies
rvhose offers wer. ,elect.d by rheir first candidates now extend the identical of[er to or]rer scudents.
So ir is hard to *"k. th. case that an individualt qrrelifisadsns totally explain the offers'

\fhy would companies emend identicd offers to most candidates? And why would different
companies .*r.nd diff.r.nt offers? This chapter discusses rhese choices and whar difference chey
make

for the organizadon.

The sheer ,r,rmb., of economic rheories related ro coropensation might rnake this chapter
heavy going. Another difficuiry is that fie realiry of pay decisioru doesnt necessarily march the
theoriei. The key to this chapter is to always ask- So what? How will this informadon help me?

pay.

il
ri

Pa*lI I

138

LO1

ll

pay level
the avenge
I

of the arny of

rata paid by an employer:

base + bonuss + beneflB +
stock optionslnu mbe r

of

pay forms

nix of

IT

WiE

s Dnnbrtgtk

Pay

hvcl

COMPENSATION STHATEGY EXTERNAL

COMPETITIVENESS

In Part I, comparisons insidt the organization wele oemined. In ocernal competitiveness, our
second pay policy, comparisons oilbide the organilrtiosl ars pevisnsd-comparisons with other
employers who hire the same kinds of employees. A major decision when designing a compensation strategy is whedrer to mirror what competitors are doing with pay. Or is ttrere an advantage
in being different? External competitiveness also includes choosing the mix of pay forms (i.e.,
bonuses, stock options, flexible beneftts) that is right for the business strareg)r.
External competitivcness refen to the pay relationships among organizationg-the organizationls
pay relative to its competitors. It is ocpressed in practice by (1) sening a paylevd that is above, belorr,
or equal to competitors' and (2) by considering the mix of pay foms relative to those of competitors.
Borh pay level and pay forms focus on rwo objectives: (1) ro control costs and (2) to anract
and retain employees.2

Control Costs

employe*

the

Exurnal

the yaious tYqes

of paymena that

make up

toE,l compensation

Pay lwel decisions have a signiftcant impacr

the pay level, the higher the labour coss:

Labour Colts

or

Pay Level

expenses. Other things being equal, the higher

X Number of Employees

Furthermore, the higher the pay level relative to what competitors pay, the greacer the relative cosrs ro provide similar products or services. So you might think that all organizations would
pay the same job the same rate. However, they do not. A report on graduates of the MBA program ar the Rotman School of Manernent at the Universiry ofToronto in 2008 showed thar
the average base sdary for investment researchers was $85,000. The range of salaries for t.he sarne
job ran from $65,000 to $125,000. Thus, some investmenr researchers were making nearly wice
what orhers were paid.3 The same work r paid differendy. !?'hat could justify a pay level above
whatever minimum amount is required to anract and retain financial services scaffi

,@

Attract and Retain Talent

One company m y peymore because it believes its higher-paid investment researchers are more
producdve rhan those at orher companies, They may be beaer trained; maybe they ale more
innovative in their rcsearch. Maybe they are less likely to quit, which saves recruiting and training
cosrs. Anorher company may pay less because it is differentiating iaelf on non-financial renunsmore challenging and interesting work, superior uaining, more rapid promodons, or even greater
job security. Different employers st different pay levels; that is, they ddiberately choose to pay
above or below what others are paying for the same work, That is why there is no single "going
rate" in the labour market for a specific job.a
Not only do the rates paid for siinilar jobs vary benrveen employers, a single company may set
a different pay lwel for different job 6milies.5 The company in Exhibit 7.1 illusuates the point.
The top chart shows that.this panicular company pays about 2 percent above the market for its
enffy-level engineer. (Market is set at zero in the exhibit.) However, they are 13 percent above
the market for most of their marketing jobs and over 25 percent above the market for rnarkedng
managers. Office personnel and technicians are paid below the market. So this company uses very
different pay levels for different job families.
These data are based on comparisons of base wage. tVhen we look at totd compensation
in.the bottom of the orhibit, a different pattern emerges. The company still has a different pay
Ievel for different job families. But when bonuses, stock options, and beneftts are included, only
markedng managers rernain above the market. Every other job family is now subsmntially below
the marker. Engineering managers take *re deepest plunge, from only 2 percert below dre market
to over 30 percent below.
The exhibit, based on actual company &ta, makes two poinm, First, companies often set
differenr pay level policies for different job familia. Second, how a company compares to the

E"

Chaprer

Anatyzing the

7|

Defning Compctitiaenes

Martet Position of a Company's Pay Str"ategy: Base Pay vensus

Base Pay
3Oo/o

25o/o

JZ

(o

20o/o

o
{U

15o/o

ctl

(!

10o/o

o
L
o

5o/o

(u

0o/o

-5o/s

Engineer Engineering Marketing

Manager

AnalYst

Marketing

Office

Manager

5taff

Technician

Total Compensation
15o/o

10%
P

5o/a

.E

Ao/o

7'
gl

-sw

fo -rox
-1s%
5
o.
=E -20o/o
9
o -zsu
-30%
-35o/o

Engineer Engineering Marketing

Manager

AnalYst

Marketing

Office

Manager

5taff

market depends on the companies rhey compare to and the pay forls lcluded in the comparison. it is ,rot
whether this comPany deliberately chose to emphasize markedng managers
"1.",
and deemphasize engineering in ia pay plan, or if it is paying the price for not hiring one of you
readers to desigo thit pl*.dEith"r*"y, rhe point is that even drough people love to talk about
"market rates," there is no single "going rate" in the marketplace'
;goirig
of pay forms. Exhibit 7.2 cornpares the mix of pay
There is also no single
(t"tL"tin! manager) at two comPanies in the same geograPhic area'
forms for the same

-i*"

;ob

139

I
I

140
EXHIBIT

re

Panll I Exteraal Compairttnu:

7.P I

Dcerminhg dx

bvel

Two Companies: Same Total Compensation, Different Mixes

re

Company

I
I

Pa1

A:

Total Compensation = $h2,349

Benefits
160/o

I
I
I
t

Company

B: Total Compensation

= $112,748

Benefits
17o/o

I
I

Benefits
2Oo/o

re

're
Both companies offer about the same total compensation. Yer the percentages allocated to
bonuses, beneffs, and options are very different.

base,

Chapcer

7 | Defning Competitivcna

WHAT SHAPES DffERNAL COMPETITIVENESS?

levd and mix. The facors
7.3 shows r-he facrors drat affect a cornpany's decisions on pay
skills; (2) colee.ution
for people
ort:o.*
labour.**.,
the
in
competidon
T&
il-"a. ttl
**l'o;r"".
andservice markets, which affects the ftnancial condition of the organization; and
ili i."**erisrics unique to each organization and its employees, such as its business strategy,
and rhe producdvity and experience of its workforce, These factors act in concert to

"_u,tir

.',
i
'

LO2

Xlootogr,

'-' ,onlr**pay

level and mix decisions'

LABOUR MABKET FACTORS

.:

of labour markets usually begin with four basic assumpdons:

Economic theories
1.

2.
9.
4.

Employers always seek to maximize profrrs'

people are homogeneous and rherefore inrerchangeable; for ercample, a business school graduate
is aiuciness school graduate is a business school graduate.
pay rates reflect all costs associated widr employment (base wage, bonuses, holidays,

The
benefis, even uaining).
The markets faced by employers are comPedtive, so there is no advantage for a single
employer ro pay above or below dre market rate'

oversimpli$ realiry, they provide a framework for undenunding

daim to be "market-driven," that is, they pay competitivelywith
often
l"bour marlirs, Organizations
Undersanding how markeis work reguires analysis of the
leaders.
market
are
rhe mai.ket or even
side focuses on dre actions of the employer: how many
demand
The
labour.
of
supply
demand ancl
andwillingto
paythem.The supply side loola atporcntial
able
theyare
*plopo,-1.ys..kandwh.t
dreir qualiffcations and the pay they are willing to accept in ochange for ttreir services.T

Alhough

chese assumprions

;;;;*,

What Shapes External Competitiveness?

,,

141

I
I
t
I
I
I
T

I
I
I
T

I
t
I
I
I
I
I
I

t
I

Pann |

142
EXHIBIT

7.4 I

4,rtu1&nEdidrc

Deetmiaiag &c

Pay

Leut

$upply and Demand for Business School Gnaduates in the Short Flun

re

$too,

I
I
I

+oo
E(E

cn
q

o
.s
=
.cl
L

o
o

o-

't

$25,000

Number of busini:ss graduates available

I
t
I
I

E
gives a simple illustation of demand and supply for business school graduates.
vertical axis represents pay rares &om $25,000 to $100,000 a year. The horizontal axis
depigts rhe number of business school graduates in the market. The line labelled "demand" is the
sum of all employers' hiring preferences for business grad.uates at various pay lwels. At $100,000,
only a small number of business graduates will be hired, because only a few ffrms will be able
to afford them. Ar $25,000, companies. can afford to hire a large number of business graduates.
llowever, the line labelled 'iopply'' indicates that there aren't a large number of business graduates willing to be hired at $25,000, In frct, only a small number are willing to work for $25,000.
A" p"y rates rise, more graduates become interested in working, so the labour supply line slopes
upward. The market rate is dre point where the lines for labour demand and labour supply cross.
ln this illusuation, the interaction among dl employers and all business graduates determines the
$50,000 market rate. Because any single ernployer can hire dl the business graduates it wants at
$50,000, and all business graduares are ofequal qudiry (assumption 2 above), there is no reason
for any wage other than $50,000 to be paid.

'The

Exhibit 7 .4

Labour Demand
So,

if $50,000 is rhe market-determined rate for business graduatei, how many business graduates

will a speciffc employer hire? To answer this question, an andysis of labour demand is required.
In the short rerm, rur employer cannot change any other factor of production (i.e,, technology,
marginal product of
labour

capital, or natural resources). Thus, its level ofproducdon can change only ifit changes the lcvel
of human resources. Under such conditions, a single employert demand for labour coincides with
its margind product of labour.

the additional ou@ut associated

of

wiill

the

emplogent

one additional human

rsources unit, with other

produaion factos hed
constant

L_,__

Marginal Product of Labour

Assume thar two business graduates form a consulting fum that provides services to ten clients.
The fum hires a third person who brings in four more clients. The margind product of labour

:,
Chapter

7|

(rhe change in output associated wirh the addidonal unic of labour) of employing rhe third
But adding a founh business graduate generates only try_o, new
business graduate is four clienrs.
marginal
producdviry resula &om the fact that each additional gradudiminishing
This
clienr,
of the orher Factors of producdon with which to work. In
smaller
share
a
progressively
has
are
such as office space, number of compurers, level of clerical
factors
of
producdon
term,
shorr
the
are
ffxed.
Unril these factors ofproducrion are changed, each addilines
relephone
and
supporr
donal new hire produces less than dre previous hire. The arnount each new hire produces is the
margina.l Product of labour.
marginal revenue of labour is the money generated by rhe sale of rhe marginal
oroduct-the additional output from the employment of one addidonal person. In rhe case of
rh. .onsulcing ftrm, it is the revenues generated by each addirional business graduate. If each
new dienr generates $25,000 in revenue, then the third employee's four new clients will generate

ihe

$100,000. Bur the fourth employee's nro new cliena will generate only $50,000. This $50,000
is exaccly rhe wage that must be paid ro that founh employee. So the consulting firm will break
even on the fourth employee but wili lose money if it hires rnore than that. Recall that the frrst
labour marker *reory assumption is thar employers seek to ma.ximize profits. Therefore, the consulting firm.will continue to hire rnore business graduates until the marginal revenue generated
by rhat last hire is equal to the costs associared with employing that business graduate. Because
orher pocential costs will not change in che shorr run, the level of demand that maximizes proftrs
is rhailevel at which rhe marginal revenue of thi last hire is equal to the wage rate for that hire.
Exhibic 7.5 shows the connection between the labour market model and condidons facing
a singlc employer. On rhe left is the same supply and demand model frorn Exhibit 7.4 showing
thar pay level ($50,000) is determined by the interaction of dl employers' demand for busiiress
graduates. The right side of *re exhibic shows supply and demand for an individual employer. At
rhe market-determined rate ($50,000), the individual employer can hire as many business graduares as it wanrs. Therefore, supply is now an unlimited horizonml line. Howevec the demand line
sdll slopes do'arnward. The rwo lines intersect at 4. So for this employer, the market-determined
wage rate ($50,000) equals the margina.l revenues of the fourth hire. The marginal revenue of the
fifth graduate is less than $50,000 and so will not add enough revenue to cover costs. The point
on che graph at which the incremental income generared from an addidonal ernployee equals the
wage rete is the marginal rvenue product.S

EXHIBIT

7.5 |

Supply and Demand at the Market and

o
o $100,000

the

a&itioral

-o

+o
$25,000

Number of business graduates available

nn gaw-

other pduaionfucrs
constant

the lndividual Employen Level

Marginal revenue

$so,ooo

rata

ated @ exh additiulal urit

of human remurcer, with

.c

Ol

(t

marginal revenue of
labour

(u

o-

:o

(o

o
'6
:t

t43

Dcfnmg Competinaetzs

o)

u
Et
P
o
o

123456
Number of business graduates hired

ffi

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144

Panlt I Etenal CarrF&*ne

Waag

&

Pa7

Lcwt

A manager 'sing &e nardnat rsvenue produc model must do only rwo things: (l) deermine the paf lerd ser b). merket forccs and (2) determine the marginal revenue generated by each
new hire. This will ell the rnaner how many people to hire'
The model provides a rnluable analpical framework, but it oversirnplfies the red wodd
In most organizations, it is rlmcm impossible to q.rtaflEry the goods or services produced by an
individual employee, because most production is tluough joint cfforts of cmploy.ees with a variety
ofskills. Eves-in serrings that use picce rates (e,g., 50 cenrs for each soccer ball scwn), it is hard
to separate dre conuibutions of labour from.tSese-of other resources (e.g., efficient machinery
sturdy rnaterials, good lighdng, vcntiladon)'
So neirher the marginal product nor thc marginal revenue is diricdy measurable. However,
managers do need some mensure rhat reflects vdue. In the preceding two chaprcrs, compensable
fa"tori, skills, and competencies wcrc discussed. For orample, if compensable factors deffne what
organizadons value in work, then job ev-aluadon reflects the jobt coriribution to the organization

*i -"y

be viewed as a proxy for marginal levenue product. However, compensable facors are
(e.g., skills required, problem solving required, resporui-

Gudly defined by organizadons as input

bilitied rarher *ran

as the

value of dre output. This same logic applies to skills and conpetencies.

Labour SuPPIY
closer look at the assumptions about the behaviour of potendd employee shows that fiis
model assumes that many people are seeking jobs, that they possess accurate information about
all job openings, and dat no barriers to mobilfty (discrimination, Iicensing provisions, or unioq
membership requiremcna) ocist beween jobs'9

ns in 6e a"alpis of labour deman4 tlese assumptions gready simplify the real world. As the
assumpdons change,.so does tfie supply. For example, the upward+loping supply assumes that as
p.ople will be willing to take a job. But if unemployment tates ,ue low,_offers
pay increases,

-ot"

of high"r pay may aot increase sup--ply;-everyone who lvants to work is already working. If cornpetiton qui"kly march a higher offer, the emFloyer may face a higher pay lwel but no increase in
,"ppln ,o thar it ends up payrry more foJ thc employees it already has, but is sdll shorthanded.
.-ployo who dominates the local labour market, such as Essar Stccl Algoma Inc. in
Sault Ste. Marie, Ontario, may also ffnd that raising wages doesnt necessarily amract more applicants, simply because the supply has &ied up. People who are conveniendy located and interested
there. Any additional applicants must be.induced to enter the labour supply,
in work.r.
"tt."ay
perhaps from schools, retirement, or more distant areas. So a dominant cmployer has a_relatively
'free
g:rist. However,
hand in determinirig pay levels, bccause ferv local labour market compctitors
attract more
in
the
levels
may
not
pay
once the local labour supply is exhausted, small increases
"step"
due
shape
a
firnction
upward,
but
it
may
takc
on
the
of
slopes
applicans. The supply still

--;t

to the large pay increases needed to artract.additional peoplc. Although many ffrms find lowering
drc job requirements and hiring less-ikilled workers a bettcr choicc than raising wages, this choice
incurs increased training costs (which were included in assumption 3 above).

LO3

TI

MODIFICATIONS TO THE DEMAND SIDE

The story is told of the economics professor and the srudentwho were suolling through campus.
"Look" the student cried, "theret a $i00 bill on the path!"
. "No, that cannot be," the wiser head replied. "lFthere were a $ 100 bill, someone would have
Picked

'

it

uP."

The polnt of the story is thatcconornic theories frequendy must be revised to account for
r."liry. !7b.n we change our focus from all the employers in an economy to a particular employer,
models musr be modiffed to help us understand what actudly occurs. A particularly uoublesome issue for economists is why an ernployer would pay more than what theory states is the

E'-

Chapcer

7|

Defning

Comptdtbre

t4!i

Labour Demand Theories and lmplications

THEORY

50 WHAT?

PREDICTION

Job evaluation and compensable iactors'must

Compensating Workwithnegativechiiacteristics

Jiffe;entials'Efficiency

wage

capture these negativg

Above-market wages will improve efficiency by attracting workers who will

leave.

Staffing programs must nave the capability of

selecting the best employees; work mr.rst be
structured to take advantage of employeet'
greater efforts,

Pay policies signal the kinds of behaviour

the emPloYer seeks.

with more pay, larger bonuses, and otherforrns

perform better and be less willing to

Siqnaliing
.

.?:uotn*cs

requires higher pay to atffact workers;

of compdnsation.

"whole of the advanMore than 200 years ago, Adam Smirh argued that individuals consider the
on the alternadve
based
tages and disadvantages of differen^t employmena" and make decisions
if the necessary
rhat
is,
job
characteristics,
has negative
wi-tt tt" grearesr "net advanrage."l0 If a
worliing conjob
is
tenuous-(stockbrokers),
(medical
security
school),
uaining iirr.ry op.ntive
(professional
are
low
ofsuccess
that
chances
(garbage
or
the
collectors),
ditions-are disagreeable
his is
feacures.
these
negative
for
to
compensate
wages
higher
offer
must
spons), dren employers
known as the compcnsating dlfferentials theory.
Compensatin! differeniials explain the presence of various pay rates in dre market. Although
the nocion is appealing, it is hard ro document, due co the difficuldes in measuring and control-

ling all the factors that go into a net-advanage calculation'

I
compensating ditrereo-

tials theory

fretdaafr*tt4 srcgEj

m&tcffitolpa-.
sate

fwnqgd,e ftmtel

i6

Efficiency Wage Theory

3.
4.

Reduce

5.

Reduce the need to supervise employees

-*ur"d

r.

hishWesmryirog-

effriaryatdlosfur
ql.ality4frr6Ydrrfl

say

when they mean "slacking off"), and

hiring better employees or modvating Present employees

to work r*"r,", or harder. The underlying assumption is that pay level decermines effon-agaia,
an appeding notion rhat is dif;frcult ro document.
Th.r. i. some research on efficiency wage theory.ll One study looked at shi*ing behaviour
by e<amining employee discipline and wages in several auto plants. Higher wages were associated

with lower si'irking,

efficiency wage tbeory

war*tlg,tder

"shirking" (what econornists

So basically, efficienry increases by

efiiciency and acrually

costsWffitttqt*J,E

Anract highernualiry applicanm

Lower turnover
Increase worker effort

-"y irr.r."r.

the number of disciplinary layoffs, Shirkingwas also lower when

of

1.

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Compensating Differentials Theory

wages

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Pay practices must recognize desired behavior-rs

to tle model rhat address this

rnarket-derermined rate. Exhibir 7.6 lools at three modiffcacions
and
signailing'
wage,
effi
ciency
differendals,
phenomenon: compensadng

Efficielcy wage theory says that sometimes high

lower labour costs if they

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146

?afin I

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T

drc Pry Leacl

oftet

Research shows

Signalling Theory
signalling theory
tl'F- idea that pay levels

aN.pay mix aredeignd

to silnal deired enployee
behaiiours

Dcfrla;nbg

the higher wagc bill.l2

that higher wages actually do anract more qualified applicants.l3 But they
applicants. Few companies evaluate their recruiting programs well
unqudifted
dso arrracc more
enough to show whether they do in fact choose only superior applicants frorn the larger applicant
pogl. So an above-market wage does not guarantee a more productive workforce.
- *..- Does an above-market wage allow an organizadon to operate with fewer supervisors? Some
research evidence says yes. For exarnplc, a study ofhospitals found that those d-rat paid high wages
to stafFnurses employed fewer nurse supervisors.l4 The researchers did not speculate on wherher
the higher wages artracted better nurses or caused average nurses !o work harder, nor whether rhe
hospital was able to reduce its overall nursing costs.
An organization's abiliry ro pay is related to the efficiency wage model. Firms with greater
proffts than competitors are able to share this success with employees. One srudy found thar pay
levels ar more profitable firms were about 15 percent greater t5an at firms widr lower profia.l5
'lVhat
forms to pay, the mix
Nocice that all the discussion so far has dealt with pay level.
quesdoil, is vinually ignored in these rheories. The simplifring assumption is that the pay lwel
includes rhe ralue of different forms. Abstracted away is rhe distinct possibiliry thar some people
find more performance-based bonus pay or bemer health insurance more a$racdye. Signalting
theory is more useful in understanding pay mix'
enough to

Wtre

high unemployurent nade it more difficult for fired or disciplined ernployees to find another job.
So, aldrough rhe hfher wegcs cut shirking, the authors were unable to say whether it was cut

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E*Et tzl

Signalting theory holds that employers deliberady design pay levels and mix as part of a stratry
16
rhat signals ro borh prospective and current employees what kinds ofbehaviours are sought Vielrd
and
a'brand
to
pay
what
pay
forms
are
offered
esablishes
how
much
lens,
a
markering
.brou$
drat sends a mcssage to prospeccive employees, just like brands of cornpeting products and services.lT
A policy of paying below the market for base pay yet offering generous bonuses or training

opponunides sends a different signd, and presumably atuacts different people, than a policy of
matching market wage wirh no performance-based pay. An employer who cor^$ines Iower base
with high bonuses may be signalling that it walts employees who are risk talers. The proponioo of
people within the organization who are eligible for bonuses signds whether the same pay rystem is
geared rc all employees or to managers only and helps to communicate performance orpectations.
Thke another look at Exhibit 7 .2, vftich shows a breakdown of forms of pay for two competitors, as well as rheir relationship to the markec. The pay mix at company A emphasizes base
(84 percent) more than at company B (64 percent) or the market average (67 percend. Company
A pays no bonus, no stock options, and somewhat lighter beneffts. Company Bb mix is closer to
the market average. \7hat is rhe message that As pay mix is communicating? The astute reader
will note thar ar A, one c:rn earn the $1L2,349 with very litde apparent liak to performance;
whereas at B, earning the $112,748 requires performance bonuses and stock opdons

as

well.'S7hy

would anyone work at B wjthout extra rerurns for the riskier pay?'\ilfithout a premium, how is B
able ro atrracr and recain employees? Perhaps with more interesting projects, flqible schedules,
or morc opponuniry for promotion-dl pan of Bt "total pay brand."
A srudy of universiry sruden$ approaching graduation found that both pay level and mix
affected their job decisions.ls Studenm wanted jobs that offered hgh p"y, but they also showed
a preference for indiiidual-based (rather than team-based) pay, fixed (rather than variable) pay,
job.-based (rather than skill-based) pay, and flexible benefits. Job seekers were rated on various
personal dimensions-rnaterialism, conffdence in their abilities, and risk 2vg13i6n-v/hich were
related to pay preferences. Pay level was most irnportant to materialists and less important to
rhose who were risk-averse. So applican$ appear to select among job opponunities on the basis
of the perceived match between their persond dispositions and the nature of the organization, as
signalled by the pay system. Both pay level and pay rnix send a signal.

Chaprer

7 | DSning

147

Compaitiuetza

Laboun Supply Theories and lmplications

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Signallirig works on the supply side of the model, too, as suppliers of labour signal to potendal employers. People who'are becer uained, have higher grades in relevant courses, and/or have
related work experience signal to prospective ernployers that they are likely to be berter performers.
(Presumably they sigod with dre same degree of accuracy as employers.) So both characterisrics
ofthe applicants (degrees, grades, ocperience) and organization decisions about pay lwel (lead,
match, lag) and mix (higher bonuses, beneftt choices) acr as signds that help communicate.

r-I

MODIFICATIONS TO THE SUPPLY SIDE

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Two rheories shown in Exhibit 7.7_tcr,ewaiLon wage and human capial-focus on undermanding employee behaviour rather than employers-the supply side of the model.

Reservation Wage Theory

Economists are renowned for their grert sense of humour. So it is not surprising that many
describe pay as "non-compensatory," because reservation wage theory says drat job seekers have
a reservarion wage level below which they will not accept a job offer, no matter how aruactive
the other job attriburcs.te If pay lwel does not meet their minimum standard, no otfier job attributes can make up (i.e., compensatQ for this inadequacy. Other theorists go a step funher and
say rhat some job seekerg-satisffers-take the ffrst job offer they get where the pay meets their
reservari<ln wage. A reservadon wage may be above or below the market wage. Thc theory seeks
rc explain differences in workers'tesPonses to offers.

reservation wage theory

dredee drafFbJee*ers
hate a reserrcOon tr,egr

latd|p/orvwf*hWd
not acrwt

rob,

howatwivetle

tn

rr:glter

dEib

atfibutEs.

Human CapitalTheory
Human capital theory, perhaps t'he most influentid economic theory for orplaining pay lwel
differences, is based on the premise that higher earnings flow to those who improve their potential productiviry by investing in themselves (by acquiring addicional education, training, and
experience).zo The theory assumes rhat people are in fact paid at the vdue of rleir margiod
product. Improving producdve abilities by inrresdng in training or even in one's physical hedth
will increase onet margind product. The value of an individual's skills and abilities is a funcdon
of the time, expense, and resources expended to acquire them. Consequendy, jobs that require
long and expensive uaining (engineers, physicians) should receive higher pay lwels chan jobs that
require less invcsrment (derical workers' demenury school teachers)'

human capital theory

dre Hea

tfut tttgfnr eamiEs

arenadebyrrgp*tttp

hrryweffiFisbt
FAr*+tyWqt*E

edcto.t a?*eq,dn

ryiere

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14A

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PRODUCT MABKET FACTORS

The supply and demand for labour arc major determinants of an employert pay lwel. Howevel,
any organization must generate, ovet time' enortgh revenue to cover exPenses' induding compensation. It follows that an employer's pay level is constrained by its ability to compete in the product/
service market. So product market conditions determine to a large offent what the organization
can afford to pay.
Product demand and dre degree of competidon are the wo kry product market 6ctors.
Both affect the abiliry of the organization to change what it charges for ia producs and services.
If prices annnot be chaoged without decreasing sales, then the abiliry of the employer ro ser e

higher. pay level is coastrained.

I
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Product Demand Although labour market conditions (and legd requirements) put a floor on
the pay level required to attract sufficient employees, the product market pua a ceiling on rhe
maximum pay level that an emplopr can set If the crnployer pa;ts above the maximum, it must
either pass on rhe higher pay level to consumcrs doo"gh price increases or hold prices ffxed and
allocate a greater share of total revenue to cover labour costs.
Degree ol Gompetition Ernployers in highly competitive markea such as rnanufacturers of
automobiles or generic drugs are less able to raise prices without loss of revenues, At the other
exrreme, single sellers of a lamborghini or the drug Magra are able to set whaterter price they
choose. Howwer, too high a price often invites *re rye of government regulators,
Other factors besides product market condidons affect pay level. Some of these have
already been discussed. The producdviry oflabour, the technology employed, the level ofproduction reladye ro plant capacity available+ll affect compensation decisions. These factors
vary more across than within indusries. The technologies employed and consumer preferences
m y vary beween auto manu6cturers, but the differences are relatively small when compared
to che technologies and product demand of auto manufacturers v.ersus the oil or financial
industry.

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A Dose of Reality: What Managers

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the Pay Leael

A number of additional factors affect the supply of labour. Geographic barriers to mobiliq,
betwecn jobs, union requircments, lack of information about job openings, the degree of r;s1g
involved, and the degrec of unemployment also influence labour markets.

Pelrf I FtE nal Coapaitma DetnAhg

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Discussions with managers provide insight into how all of these economic factors translate into
acual pay decisions, In one srudy, a number of scenarios were presented in which unemployrnent, profttabilicy, and labour market conditions varied-2l Managers were asked to make wage
adjustment recommendations for several positions. kvel of unemployment made almost no difference. One manager was incredulous at the suggestion: "You mean take advanage of the ftct
that ttrere are a lot of people out of work?" The company's profftability was considered a factor for
higher rnanagemenr in setdng the overall pay budget but not something manage$ consider for
individual pay adjustments. lfhat it boiled down to was "'$7'hatever the chief financial officer says
wi c* afford!" They thought it shonsighted to pay less, oren though market conditions would
have permirted lower pay. In direct contradiction to efficiency wage thcory managers believed
that problems in artracdng and keeping people were the result of poor management rather than
inadequate compensation. Thry offered the opinion that 'tupervisors try to solve with money
their difficuldes with managing people."u

ChaprerT

I Dd"t"C

Compethtuena

,l
:l

149

plore Reality: Segmented Supply of Labour

shiftiri$ iioniimic

rilso gives insight-into

how

prCssures
Observing nianafeii iCfnal ibspoiises'-to
into actual pay decisions. Significant differences in wages paid
econornic pressures translate
companies to cut pay,23
..ourd ,h. *orld and rle ease of outsourcing work overseas has led many

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Work Hospitals can staff nursing positions from four sources: regular
cemporary-help agencies specializing in nurses, and "ravellers"-11115ssg
part-time,
.'nilt-ii-.,
that send them to hospitds around che country for extended perio&, For
agencies
by
employed
This
segmentcd labour supply means using muldple sources of nurses from
rnonchs.
six
example
people Flow to the

muldplelocacions wirl muldple employment reladonships. The level and mix of cash and benefi,s p6d to each nurse depends on rhe source. Regular employees get pay and beneftts; part-timers
o., p"y bur no benefirs; agency nurses get pay and bcnefits from the agency; and "uavellers" get
iay-benefics, and living expenses from the agency.The hospiral pays a fee to the agency in addi,o th. nurses' compensation. The segmented supply results in nurses working the same jobs
side by side but earning different pay. This is a case of people flowing to the work, because a
frospitrl cannor send irs nursing tasks off-site to other cities or offshore to other nadons.24

,i*

Work Flows to the People{n-Sitq 0tl-Site, 0ffshore A computer sofrware design company
(contract
can staffa projecr with employees who are on-sire in rheir Canadian head office, off-site
employees duoughour Canada), or ofFshore in India or orler countries. To bid on projects, the
company needs ro know pay lcvels and mixes of forms not only in Canada, but other locations
including Long Beach, California; IGakow, Poland; Shanghai, China; and Bangalore, India.

There are three importaat poinc here:

It is nor rhat our theories are useless. They simply absuact

darifiing the underlying Fcors thar help us understand how reality wort<s.

Realiry is complex; rheory abstracts.

away the detail,
2.
7,

IT

Theories of market dynamics, rhe interaction ofsupply and demand, form a usefirl foundadon.
The segmented sources of labour mean chat determining pay levels and mix increasingly
requires undersending marker condidons in different locations worldwide.
Managers also need to know the jobs required to do dre work, the tasls to be performed,
and the knowledge and behaviours required to perform them (sound likc job analysis?) so
t.hat they can bundle the various tasls to send to different locations.

ORGANIZATIONAL FACTORS

Alrhough product and labour market conditions create a range of possibilities within which
managers creare a policy on external cornpetitiveness, organizadonal factors influence pay level
and mix decisions also.25

lndustry and Technology

The indusrry in which an organizadon competes influences the technologies used. Labour-intensive
indusrries such as education and services tend to pay lower than technology-intensive indusuies
such as petroleum or pharmaceuticals. In addirion to differences in technology acrosr indusuies,
the inuoduction of new technology uithin an indr.rsry also influences pay levels. For enample,
rhe use of universal product codes, scanners, scales built into the counter, and. self-checkout la.oes
have red.uccd the skiils reguired of cashiers. As a result, their average pay has dedined over time.6
The imporance of qualificadons and experience cailored co particular technologies is often
overlcibked in tleoredcal analpis of labour markers. But machinists and millwrighm who build
cars for Gcneral Motors in Oshawa, Ontario, have very different q""lifications from machinists
and millwrights who build airplanes for Bombardier in Quebec'27

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I
150

Pan

il | E*mal @az:c

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Pa1

Iatd

There is consistent evidence that large organizations tend to Pay more tha-n small ones' A snrdy
of manufrcnging fi1ms found that firms with 100 to 500 workers paid 6 percent higher wages
rhan did ,*d1gr 6r-s; ftrms of more rhan 500 workeql paid 12 percent more thall did dre smallest
frrms.z8 This reladonship bewreen organization size, ability to pay, and pay level is consistent
with economic rheory. Ii says that talented individuds have a higher margind vdue in a larger
organization because they can influence more people and decisions, which leads to more proffts.
Co'*p.r" the advertising revenue David Lemerman can bring to CBS versus the potenrial revenue
ro station CHD( if his late-night show were seen only in Peterborough, Ontario. No matter how
cool he is in Peterborough, CHD( could not generate enough revenue to be able to afford to
CBS can. However, theories are less usefirl for explaining
such as CBS, including janitors and compensadon
companies
at
bigger
*iy po"ti.rlly.everyone
everyone has Letterman's impact on rcvenues.
that
unlikely
It
seems
o,r,,"g.rr, is paid more.
pay Mr. Lemerrnan $45

hilion; but

EmploYees' Preferences

tvhat pay forcrs (health insurance, vision care, bonuses, pensions) do employees really value?
B.n , ,rrrd.rrt nding of employee preferences is increasingly imponant in deterrnining external
comperitivenesr. M"lk u, ,it i.ll,-in roL'" both employers and employees' choices'?g {:Y.u.t
'S7ho among us would be so
th"re .r. subsrantial &fficulties in reliably measuring preferences.
rank. money over cordial co-workers or challenging assignments in response
'"Srhat do you value mo$ in your w_ork?" Researchers ftnd that people
question,
to the survey
put more impo*". on Pay than they arc willing to admit'30
crass as

to (publidy)

Organization's StrategY
no-services strat-

'

Amriery of pay level and mix suategies exism. Some employers adopt a low-wage,
eff; &ey compere by producing goods Td services with as lide toal compensation

as possible.

5ike and Reebok rei.n dty do ttis. Borh rely heavily on outsourcing to manufacture their prodconuacuc$. Nil<e, for errrtrpL, outsources almost all of its foowear production to independent
working
and
lower
are
much
costs
tors in China, Vieto"m, lndonesia, andThailand, where labour
$mtegr.
conditions much worse 1}1an in North America. Others sdect a low-base, high+ervices
and
childcare
with
who
assist
socid
workers
to
a
hodine
Marrion offers irs low-wage room clcaners
others
Still
immigrants'
recent
for
avai]able
also
are
courscs
t,"nsporsrdon crises. Eng[sh
ry " rydt
"Fully present at work" approadr is an erample-of the
, base high-serui.., "pprl.h. Meduonict
high-..teiot appmach. Obviously, these are 5(uemes on a continuum of possibilities.
hjgt

-b;,

I_-I

RELEVANT MAHKETS

Econo*ists take

*the

market' for ganted, as in, "the rnarket determines wages." Howev.er, for

to pay'
rnandernent, deffning the relerant market a big part of ffguring out how much

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Employer Size

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Dtlrznhrirs

rh. ooioo of a single homogeneous labour rnarket may be an interesting anal)'trdemand and
cal device, each organization opeiates in manylabour rnarlcets, each with unique
pay pulposes and
for
are
relevant
that
markets
*re
define
must
supply. Cor,r.q,r.#y, -*"g"r,

i*oogh

I
I

coirpetitive positioru for their own markets. The drree faccors usually
"ppropri"te,.levant labour markets are the occupadon Gkill/knowledge required),
used to deterine'the
(other employers in dre
geography (willingness ro relocare and/or commure), and competitors

oi"itirf, th.

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Defining the Relevant Market

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p-d".t/service and labour

rnarlcets)'

on
How do ernployers choose their relevant market? Surprisingly litde-research has been done

rates will
this issue. S,rt ii U. markes are incorrectly defined, the estimates of competitors' pay
be incorrect and the pay level and mir inappropriately srablished'

E.?

='ChapterT

I D$ni:A

Coaanna

Two srudies do shed some light s11 rhi< issu-3l Thcy condude that managers look at both
locarion, and size-and {re jobr-the skiLls arrd k"gy_Ldgq
rheir comperirors-their produc6,
to
the
organizadon's success (e.g., lawyers in law fums, softntare
required, and their importance
on its locarion and size, a comPany may be deemed a
So,
depending
.niirr..n ac Microsoft).
a
producr
marker competitor. For example, an accounting
if
it
is
not
even
,r[u*, compruison
gs set pay rates for new accountants without
be
fssli.sh
would
Marie,
Ontario,
Sre.
frm in Sault
its
accountants.
A
nonprofft organizadon like rle Red Cross
paying
I(PMG
is
whar
knowing
will
want
to
lrrrow
oficer
t.he pay levels of senior finance positions
chief
financial
a
for
looking
across
the
country, whereas a new local Starbucla
for-profit
organizations
and
nonprofir
in both
only
concern
itself
would
wi*r local pay rates. (See Chaptcr 8
cashier/barista
a
for
looking
srore
defining
the
relev'ant
market,)
oq
discussion
detailed
moie
for
"
The data from product market competitors (as opposed to labour market compedtors) are
likely to receive greater weight when

1.

2,
3.
4.

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!
!

Employee skills are specific to the product marker (recdl the differences in General Motors
millwrights versus Bombardier millwrigha),
Labour costs are a large share oftotal cosu,
Product demand is responsive to price changes-that is, people wont pay $20 for a botde
VQA winq theyll have Fuzion instead, and
The supply of labour is not responsive to changes in pay (jobs drar are low-wage and require

low skill).
Compensation dreories offer some help in understanding ttre variations

in pay lwels we

observe beween employers. They are less helpful in understanding ditffi:rences in the rnix of pay
forms. Relevant markets are shaped by pressures &om rhe labour and product markets and the
organization. But so whar? How, in fact, do managers set pay level and pay mix policy, and what
difference does

il

it

make?

In dre remainder of this chaptel

COMPETITIVE PAY POLICY

these rwo issues

will

be discussed.

ALTERNATIVES

Recall drar pay level is rhe average ofthe array ofrates inside an organization. There are three
convendonal pay Ievel policies: ro lead, to meet, or to follow competition. Newer policies emphasize flexibiliry: among policies for different employee groups, among pay forms for individud
employees, and among elernents of the employee relatiopship they wish to emphasize ia their

'1,

external competitiveness policy.

\ftrar difference does the pay lwel policy make? The basic premise is that the competidveness of pay will affect the organization's abiliry to achieve its compensation objeccives, which in
rurn will affecr the organization's performance. The probable effecs of alternative policies are
shown in Exhibit 7.8 and. discussed in detail below. The problem wirh much pay level research is
that ir focuses on base pay and ignores bonuses, incendves, stock options, employment securiry
benefits, or other forms of pay. Yet the exhibits and discussion in this chapter should have convinced you that base p.y r.pr.r.na only a portion of compensation. Comparisons on base don
can mislead. In fact, managers seem to believe rhey get more bang for the buck by dlocating dollars away from base pay and into variable forms that more effectively shape employee behaviour.3z
Pay

with Competition (Match)

Given the choice ro match, lead, or lag, the most common policy is to match rates paid by compedtors.33 Managers historically justify this policy by saying that fulure to match competitors'
rates would cause dissadsfaction among present employees and limit the organization's ability to
recruit. Many non-unionized companies tend to match or even lead co.mpetition in order rc discouage unionization.3aA pay-with-competition policy uies to ensure that an organizationt wage
cosrs are approximately equal to those of its product competitors and that its abiliry to attract
Epplicants will be approximately equal to its labour market compedtors. Classical economic

151

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152
EXHIBIT

Palr\ | Fs*nal A@;ma:

7.8 |

Oa@

d* Pq Letel

Probable Flelationships between External Pay Policies and Objectives

il

models predict that employers will meet competitive wages. Although this policy avoi& placing
an employ.t at a disadvantage in pricing products, it may not provide an employer with a compeitive advaatage in its labour markets,

Lead Policy

to anract and reain gudity employees and minimizes

It
also
may offset less attractive feasures of the work Combat
with
pay.
employ"L dissatisfaction
gff-set some of rhe risk of being killed. The higher pay
personnel
miliury
to
paid
pay premiums

lead policy maximizes the abiliry

offserc the risk of being ftred when the market anks.

As ooted earlier, sometimes an entire industry crn pass high pay mtes on to consumers
fal
is a relatively low proponion oftotal operating expenses or ifthe industry is highly regulated.
But what about spicific ftrms within a high-pay indusry? Do any advantages acnrally eccrue to
rhese 6.rms? If all fums in the in&utry have similar operating experues' then the lead policy must
provide some competidve advantage rhat offsets the higher costs.
A number of researchers have linked high waga ro ease of attraction, reduced vacancy rats
and training time, and bener-qualiry employees.35 Research also suggests that high pay levels reduce
Severd studies found that the use ofvariable pay (bonuses and long-rcrm
t*oo"., *d
"bsenreeisrn.
incentives) is related rc an organizationt improved financid performance, bur dtat pay level is not.36
A lead policy can have negadve efFects, too. It may force the employer ro increase the wages

itr"r.a by brokerage fums

of current e*ploy.er to avoid internal misdignment and murmuring among the

employees.

Additionally a lead policy may rnask negative job attributes that contribute to high turnover later
on (e.g., lack of challenging assignmenrs or hostile colleagues). Remember the managers'view
that hilh rurnover w"s likely to be a managerial rather t'han a compensation problem.sT
Lag Policy

A policy

co pay below market rares rnay hinder a

ftrmt abfiry to attract potentid

employees'

go**.., if pay lwel is lagged in return for the promise of higher furure returns (e.g., scock
ownership in a irigh+ech starr-up firm), such a promise may increase employee commitmot and

'-

ChapterT

I D$ning

Competitivmcss

which may increase ptoductiviry. Additionally, it is possible to lag competition

l.vel bur co le4d on other returrs from work (e.g., hot assignmenn, desirable location,
ouJtanding colleagues, cool tools, work/life balance).
tosrer reamwork,

on pay

Different Policies for Different Employee Groups

ln praccice, many employers go beyond a single choice among che drree policy options. They may
urrv ,h. poliry for different occupational families, as did the,c,ornpany in Exhibit 7.1. Qr rhey
rhe policy for different forms of pay, as did rhe companies in Exhibir 7.2. They may also
^iruuy
adapr different policies for different business units that face very different cornpetidve condidons.
. Similaily to rhe lead, match, or lag options to pay level, there. are various options to pay mix
as well. Examples of some obvious alternatives are performance-driuett, marka match, worh/life
balance, and secaity. Exhibit 7.9 illusuates these four alternatives. Incentives and stock options
make up a greeler percentage of toral compensarion in performance driven than in che orher

EXHIEIT

re

7.9

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Pay Mix Policy Altennatives

E
Market Match

Options

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160/o

T
Security (Commitment)

Work/Life Balance

t
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Benefits
20o/o

Base
5Oo/o

options
1Oo/o

Bonus
10o/o

tl

154

P*tlI

I E*enul Conpaifitna Dcerniniflg *e

Pay

buel

rhree. The narhet tnatch simply mimics the pay mix competitors are pafing.
ally make tiese mir decisions is a ripe issue for more research.

liii

How managers acnr-

How managers position their organizationi pay against competitors is changing. Some alternadves thar are emerging focus on total returns frorn work (beyond ffnancid returns) and offering
people choices among rhese returns. Rather than flgxible, perhaps a better term would be "fuzy'

policies.

Eniployet'.of Ghoice/Shared Ghoice Some companies compete on the basis of dreir overall
reputarion"ds a place to work, beyond pay level and mix. For example, IBM competes wirhin
the informarion rcchnology marketplace and positioru its pay "among the best" in dris group.
Furtherniore, it claims to 'tuongly differentiate based on business and individual resulul It leads
the market wirh is srong emphasis on performance. IBM also offers octensive raining oppomrnities, chdlenging work assignments, and the like. In a sense, "employer of choice" corresponds

to the brand or irnage the company Prorects

as

an employer.

The shared choice apprciach begins wirh thetraditional alternatives of lead, meet, or hg. B*
it then adds a second part, which is to offer employees choices (within limits) in dre pay mi* This
"employee as cusromer" perspective is not all that revoludonary. Many employers offer choices
on health insurance (individual versus dependant coverage), retiremenr investmeots (growrh or
value), and so on.38 (See information on flexiblc benefis in Chaprcr 9.) More advanced software
is making the employee-as-customer approach more feasible. Mass customization-being able
ro select anong a variety of feacure*is roudne when purchasing a new laptop or car. It is now
possible wich total compensation too. Does offering people choices matter? One risk is that
employees might makc choices *rat jeopardize their financial well-being, for example inadequate
health insurance. Another is the "24 jars of jam" .dilemma. Supermarlret studies report rhat offerigg consumers a taste ofjust a few different jams increases sales. Bur offering a taste of 24 different
jams decreases sales. Consumers feel overwhclmed by too many choices and simply wdk away.
Perhaps offiring employees too many choices of differenr kinds of pay will lead to confrrsion,
mistakes, and dissatisfacdon.3g

Pitfalls of Pies
The pie charts in Exhibir 7.9 contrast various pay-mix policies. However, thinling about the
mix of pay forms as pieces in a pie chart has limitacions. These are particularly dear when the
valuc of options is volatile. The pie charts in Errhibit 7.10 show a well-known software company's
mix before and aftsr a rnajor scock market decline (srcck prices plummeted 50 percent within a
month). Note rhe effects on the composition of the pay forms. Base pay went from 47 percent
to 55 percenr of toml compensation, whereas the value of stock opdons fell from 28 percent to
16 percent. (The reverse has happened in this company, too.) But wait, it can get worse. One
technolory company w.rs forced to disclose that three-quarters of all its stock options were "under
warer,' that is, orercisable at prices higher chan their market price. Due to stock markct'voladliry, the options had becorne wortiless to employees. So what is the message to employees? To
competirors? Has the compensation strategT changed? Not the cornpany's intended strategy. But
in realiry, the mix has changed. So possible volatiliry in the value of different pay forms needs to

i
L_____-

be anticipated
Some companies prefer to report the mix of pay forms using a "dashboard," as depicted in
Exhibit 7. I I . The dashboard changes the focus from emphasizing the relative importance of each
form within a single company to comparing each form by itsclf rc the rnarket (many companies).
In {re example, the rralue of stock options is 79 percent of competitors' median, base pay is at
95 percent of comperitors' mefian, and overall totd compensation is 103 percent of (or 2 percent
above) the rnarket,median. Pies, dashboards-different focus, both recognizing the importance

of the mix of pay forrrs.

=r.

ChaprerT

-'i

I Ddning Coftpttitbena

Volatility of Stock Value Changes Total Pay Mix

Stock Value
Declines 50%

After

:...

.:..+

Benefits

Benefits

17o/o

19o/o

Base

47a/o

Bas

55%

Options
160/o

Bonus
Bonus

10o/o

8o/o

EXHIBIT

7.11

Dashboard: Total Fay Mix Breakdown versus Competitors*

il.'..''i:'.]..:li:'.'.].:'.;'.'E
Stock Options Base Salary

79o/o

95o/o

Benefits
103%

Bonus

Perquisites
122%

113o/o

eo

190

r30
140

1O2o/o

*100 = Chosen market position, e.9., market median

E
The mix employees receive can also differ at different levels of the internd job structure.
Exhibit 7.12 shows rhe different mix of base, cash incentives, and stock opdons Merrill Lynch
pap.at differenr organizational levels. Executive leadership posirions receive less than I0 percent io
base, about 20 percent in smds and rhe re$ in annual incentives. Compare this to 50 percert in
base, 40 percenr in annual incentives, and 10 percent in stock for mid-level manager/professional
positions, and 80 percent'base, 20 percent incentives, and no stoik for enry- and lowerJwd jobs.
Although rhe percentages vary across organizations, greater emphasis on performance (through

155

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Partll I E*rnal AnpdXma: Dcrnzaing

156

dtc Pay Lcvel

Pay Mtr Varies within lnternal Job Structure

re

rc

lnternal Job Structure

I
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Entry

Mid-level

Level

Manager

Executive

incentives and stock) at higher levels is corlmon practice. This is based on the belief that jobs at
higher levels in the organization have greater oppomrnicy to influence organizationd performance,

rT

CONSEGUENCES OF PAY LEVEL AND PAY MIX

DECISIONS

Earlier it was noted that enrernal cornpetitiveness has trnro major conseguences: It affects (1) operating expenses and (2) ernployee aairudis and work behaviours. Exhibit 7.13 summarizes these
conseguences, which have been discussed throughout t*ris chapter. The competitiveness policy
direcdy affects the compensation objectives of efficiency, fairness, and compliance. The .Net
'Wonh
box here summarizes several strategic compensation issues based on a survey of over 200
compensation professionals.

EXHIEIT

7.13

Some Consequences of Pay Levels

Contain operating expenses (labour costs)

lncrease pool of qualified applicants
lncrease quality and experience
Reduce voluntary turnover

lncrease probability of union-free status

Reduce pay-related work stoppages

Chapter

7|

137

Defning ComPctitims

Gompensation Strategy and Market Flates

An organization's compensation'strategy should reflect its business sffetegy. St.ate!)'

provides the guldeline for various compensation decisions, including how to beiance
market pricing data and internal equity. A survey of 227 compensation professicnak
raised four strategic concerns regarding market pricing. The most frequenily raisd issue
was how to decide whether internal or external equity should take precedence and
whether this might differ by job family. Many respondents would like guidelines helping
them determine what a market-pricing poliry should look like, and a means of reolving
conflicS between market rate and job evaluation (or other) indicators of job vaiue.

A second critical isue for many respondents was determining which market shou:d be
piiced against. There is widespread recognition of the existence of different defi:"idons
of markeG (e.g., geographic breakouts, Jrom local to global; product market ccmpetitor
or industry breakouts; size breakout), but much concern about when each migh: be used.
one respondent noted that while the "textbook" answer was available, it didn't srn to
match the reality reflected in discussions with colleagues and other professionals.

third compensation strategy issue raised by respondents was the deire for guid+
lines on how competitive to be in a variety of different situations, and what a compeiitiveness strategy that delineated these situations would look like. Different breakout

The

groups (e.g., hot jobs, critical jobs, typical jobs, executive jobs) were the focus of cifferent respondents, but the common thread running through comments in this area is how
one should best determine the competitive level of rewards
The

fourth

issue raised

for

a set of

jobr

with some {requency focused on whether competitiveness in

labour market should be based solely on wages, or whether a broader rewarCs measure
(e.g., total cash compensation, total compensation, compensation plus worMife baiance) should be used. There appears

to be an unsatisfied need for nrategy

guidelines

on individual- and joint-reward segment competitiveness'

There is a clear recognition that the proper use of market data is a critical issue for
organizations that are trying to stay competitive in attracting and retaining human capital while staying competitive in product and service markets. Most respondents noted
that no ,,one best strategy" exists, but at the same time there is a perceived need for
best practices in market pricing strategies taking into account industry organizational,
and business strategy characteristics'
Source: Adapted from C. H. Fay and M. Tare, "Market Pricing Concerns," WorldatWo*
Journal 16(2) (second quarter 2007), pp. 51-69.

'mamer
what *re competitive pay pohcy, it needs to be sanslated into practice. The starting
No
poinr is assesing rhe market through use of a salary survey. For this, we must rurn to the nert ctrapter.

Conclusion

Three importanr conclusions emetge from this chapter: (1) There is no "going rate," and so
factors.
-*"g.rri".r. ro make conscious pay level and pay mix decisions influenced by severallevel
arrd
fie
pay
im_Pact
competitors-that
market
labour
(2) Tf,ere are borh producr market-and
consequences.
different
have
mix
decisions
and
pay
level
pay
Alt.rrr.rir'.
pay mix decisions.
?3)

The pay model used tlrro,rgholrt *ris book emphasizes saategic policy issues: objecdves, internal
.lign*..r, ecernal competitive-ness, employee coruibutions, and management. Policies need to be
des-igned to achiwe specific pay objecti-ves.

This section

is concerned

with eicternal competitiveness, or

'

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158

?ann I hmnal

Campaitiuazas: Dcmmining

tk

Pe1

Lael

In Motion pay irs accountants rhe same wase i

that B.C. Hydro pap ia accountan$? Probably not. Different companies pay different rates; fiq ad;
age of the overall array of rates in an organizadon consdrutes the pay level. Different companies also
r.rse differenr forns of pay to achierre dre objectives sdpuJated for the pay sysrem, both $e pay [evel
and mix must be properly posidoned reladve to cor4pecitors. Each integrated job strucnue or career
path within the organizadon may harre its own comlLttive posicion in the market. The ne.ct chapter
considers the decisions involved and the rariery of technigues available to implemenc decisions.
It should be reernphasized here rtrat the major reison for creating an excernal compe,titiveee*:
poliqy-pay Ievel and mix of forms-is chat tiey have profound consequences on the organization!
objectives. Theories and practical ercperience support dris belief, but more research is needed to guide
us in making decisions. It has been dearly established rhat differences beween organizationi competitive policies and their pay levels and forns ercist, and the factors that determine rhese differences
Lave been examined. !7hat remains to be beaer understood is the potential effecn ofvarious policies.
pa)r comparisons betwecn organizations. Does Research

[I

Ghapter SummarY

l. Exernd

3.

competitiveness refers to the reladonship of one organizationt pay rc that of iu

comperitors, In practice, er<ternal competitiveness means (1) sening a pay level that is above,
below, or equd to one's competitors and (2) considering the mix of pay forms relative to
those of competitors.
The tluee major facrors that shape enterual competitivencss are (1) competition in the labour
market for people with various skjlls; (2) competition in the product and service marke6,
which affects the financial condition ofthe organization; and (3) charactcristics unique to
each organization and its employees, such as ie business stategy' technolory, and the productivity and orperience of its worldorce.
Three labour demand theories are compensating differentials rheory, efficiency wage theory,

and signalling theory. Compensating differcntials theory predicts *rat work with negative
characreristics will require higher pay to attract workers. Efficicncy wage theory predicts that
above-rnarlcet wages will improve cfficiency by atrracting workers who perform betteq say
Ionger and require less supervision. Signalling theory predicts that pay policies will signal the
kind of behaviour the employer wants (demand side) and what potendal hires bring to the

5.

table (supply side).

Two zupply side thcorics are reservalion wage theory and human capital theory. Reservation
wage theory predicts thar job seckers will not takc jobs when pay is below a certain levd,
no marrer how attractivc the other job atuibutes arc. Human capital theory predicts that
people arc paid at the value of apersont skills and abilities which is a firnction of the time
and expensc required to acquire them.
Three competitive pay level dternatives are: match the market, lag tlre market, and lead the
market, Examples of pay mix alternatives are: performance-driven, market match, work/life
bdance, and securiqy.

Key Terms
compensating differentials
theory
efficiency wage theory
human capital theory

marginal product of labour

marginal revenue of labour
PaY forms
PaY level

reservation wage theory

signalling theory