Prepared by
Cheryl Dowell,
Algonquin College,
and
Greg Cole,
Saint Mary’s University
Chapter 1
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1. Describe the purpose of a compensation system.
2. Explain why an effective compensation system is so
important to most organizations.
3. Distinguish between extrinsic and intrinsic rewards.
4. Distinguish between a reward system and a
compensation system.
5. Define “reward strategy.”
6. Describe the two key aspects of a compensation
strategy.
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7. Explain why a compensation system must be viewed in
the context of the total reward system.
8. Identify and explain the key criteria for evaluating the
success of a compensation system.
9. Describe the steps along the road to effective
compensation and explain how this book will facilitate
that journey.
10. Discuss the organizational context within which
compensation management takes place.
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• Financial returns
• Tangible services
• Benefits
• Employees receive as part of employment
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• “How do you get organization members to do what the
organization wants and needs them to do?”
• This is a central problem that has bedevilled those in
charge of organizations ever since their invention.
• Compensation is normally a key part of the solution,
although there are many other important parts, all of
which must fit together if the desired results are to be
fully achieved.
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• The purpose of a compensation system is to help create a
willingness among qualified persons to join the
organization and to perform the tasks the organization
needs.
• Employees must perceive that accepting a job with a
given employer will help them satisfy some of their own
important needs.
• Includes economic needs for the basic necessities of life
but may also include needs for security, social interaction,
status, achievement, recognition, and growth and
development
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• 40 to 70 percent of operating budgets
• Single largest operating expenditure
• Canada employers spend over $800 billion on wages
and salaries
• Another $100 billion on employee benefits
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Extrinsic
Intrinsic
Factors that satisfy basic human
needs for:
Factors that satisfy higher-order
human needs for:
•
•
•
•
•
•
•
•
survival
security
social needs
needs for recognition
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self-esteem
achievement
growth
development
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• Rewards are the positive consequences of performing
behaviours desired by the organization, and employees
normally receive these rewards:
o subsequent to performing the behaviour
(in the case of extrinsic rewards)
o during performance of the behaviour
(in the case of intrinsic rewards)
• An incentive is a promise that a specified reward will be
provided if the employee performs a specified behaviour.
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Intrinsic
Performance
pay
Base pay
Extrinsic
Indirect
pay
Reward
Compensation
system
system
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Direct
•
•
•
•
Base pay
Merit pay
Incentives
COLA: Cost of living
adjustment
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Indirect
• Pay for time not worked
• Protection programs
• Employee services
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• A plan for the mix of rewards with the means to
be provided
• Must be developed before the compensation
system
• The reward strategy is the blueprint for creating
the reward system.
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Three main components:
1. Base pay is the foundation pay component for most
employees and is generally based on some unit of time—
an hour, a week, a month, or a year.
2. Performance pay relates employee monetary rewards to
some measure of individual, group, or organizational
performance.
3. Indirect pay consists of noncash items or services that
satisfy a variety of specific employee needs, such as health
protection (e.g., medical and dental plans) or retirement
security (e.g., pension plans).
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Two key aspects of a compensation strategy:
1. The mix across the three compensation components, and
whether and how this mix will vary for different employee
groups
2. The total amount of compensation to be provided to
individuals and groups. In short, “How should
compensation be paid?” and “How much compensation
should be paid?” are the two key questions for
compensation strategy.
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• The reward system that adds the most value to the
organization after considering all its costs.
• This may not be the cheapest reward system; in some
cases a high-wage compensation strategy may suffice.
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• Step I: Understand the organizational context within which
it will operate. The reward system is part of the total
organizational system, and each part must fit with and
support the other parts.
• Step II: Determine the mix of compensation components
to include in your system and the total level of
compensation components to include in your system and
the total level of compensation to provide, relative to
other employers.
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• Step III: Establish the processes for determining actual dollar
values for jobs and for individual employees.
o The value of the employee’s assigned job relative
to other jobs in the firm, usually determined by a process
called job evaluation
o The value of the employees job relative to what
other firms are paying for this job, usually determined
through a process known as labour market surveys.
o The value of the employees job performance
relative to other employees performing the same
job, usually determined by a process called
performance appraisal
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• Step IV: Elaborated in Chapters 11 and 12
• Step V: Key issues here include procedures for implementing
the system, communication information about the system,
dealing with compensation problems, budgeting, and
controlling compensation costs.
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• A set of capabilities designated by the Canadian Council of
Human Resources Associations
• Essential for Human Resources practitioners
• Required for designation as a Certified Human Resources
Professional (CHRP)
• Jobs requiring this certification may include:
compensation analyst, manager of compensation,
or VP of human resources
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• Statistics Canada’s website
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1. Discuss why an effective compensation system is so
important to most organizations.
2. Discuss why a compensation system must be viewed in the
context of the total reward system.
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