COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
3-1
© 2010 McGraw Hill Ryerson
THE PAY MODEL
STRATEGIC
POLICIES
ALIGNMENT
COMPETITIVENESS
TECHNIQUES
INTERNAL
STRUCTURE
PAY
STRUCTURE
INCENTIVE
CONTRIBUTORS
STRATEGIC
OBJECTIVES
EFFICIENCY
 Performance
 Quality
 Customers &
Stockholders
 Costs
PROGRAMS
FAIRNESS
MANAGEMENT
EVALUATION
COMPLIANCE
3-2
© 2010 McGraw Hill Ryerson
Compensation Strategy:
Internal Alignment/Equity
Supports Organization
Strategy
Supports Workflow
Motivates Behaviour
3-3
© 2010 McGraw Hill Ryerson
Internal Alignment/Equity
the pay relationships between the jobs/skills/
competencies within a single organization
the relationships form a pay structure that:
supports organization strategy
 supports the workflow
motivates behaviour of employees
3-4
© 2010 McGraw Hill Ryerson
Job Structure at an
Engineering Company
 Consultant Engineer: Exhibits an exceptional degree
Recognized
of ingenuity, creativity, and resourcefulness. Acts
Authority
independently to uncover and resolve operational
problems.
 Advisor Engineer: Applies advanced principles,
theories, and concepts. Assignments often self-initiated.
 Lead Engineer: Applies extensive knowledge as a
generalist or specialist. Exercises wide latitude.
 Systems Engineer: Wide applications of principles and
concepts, plus working knowledge of other related
disciplines. Under very general direction.
 Senior Engineer: Full use of standard principles and
concepts. Under general supervision.
Entry Level  Engineer: Limited use of basic principles. Close
supervision.
3-5
© 2010 McGraw Hill Ryerson
Pay Structure
refers to the array of pay rates for different work
or skills within a single organization, created
through the use of:
the number of levels
 differentials in pay between the levels, and
the criteria used to determine those
differences.
 Pay structures change over time
3-6
© 2010 McGraw Hill Ryerson
Pay Structure at an
Engineering Company
Recognized
Authority
Entry Level
Consultant Engineer
Advisor Engineer
Lead Engineer
Systems Engineer
Senior Engineer
Engineer
$162,000
$120,000
$93,000
$73,000
$58,500
$48,000
3-7
© 2010 McGraw Hill Ryerson
What Shapes Internal
Structures?
EXTERNAL FACTORS:
Economic Pressures
Government Policies, Laws, Regulations
Stakeholders
Cultures and Customs
ORGANIZATION FACTORS:
Strategy
HR Policy
Technology
Employee Acceptance
Human Capital
Cost Implications
INTERNAL STRUCTURE:
Levels, Differentials, Criteria
3-8
© 2010 McGraw Hill Ryerson
Illustration of an
Internal Labour Market*
Hire
*Internal labour
markets combine
both external and
organizational
factors
Consultant
Engineer
Advisor
Engineer
Lead
Engineer
Systems
Engineer
Hire
Senior
Engineer
Hire
Engineer
3-9
© 2010 McGraw Hill Ryerson
Strategic Choices Among
Structure Options
1. Tailored (well-defined jobs; small differentials)
versus
Loosely Coupled (jobs flexible, adaptable, changing)
2. Egalitarian (few levels; small differentials)
versus
Hierarchical (many levels; large differentials)
3-10
© 2010 McGraw Hill Ryerson
Structures Vary in Number
of Levels
Structure A
Layered
Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer
Senior Engineer
Engineer
Engineer Trainee
Structure B
De-layered
Chief Engineer
Consulting Engineer
Associate Engineer
3-11
© 2010 McGraw Hill Ryerson
Strategic Choice:
Hierarchical vs. Egalitarian
Hierarchical
Egalitarian
Levels
Many
Fewer
Differentials
Large
Small
Criteria
Person or Job
Person or Job
Fit
Tailored
Loosely Coupled
Supports
Individual Performers
Teams
Fairness Criterion
Performance
Equal Treatment
Behaviour Rewarded
Opportunities for
Promotion
Cooperation
3-12
© 2010 McGraw Hill Ryerson
What The Research Tells Us
 Equity Theory: Fairness
my pay for my inputs
vs. others’ pay for their
inputs
MY PAY
My qualifications
My work performed
My product value
OTHERS’ PAY
Their qualifications
Their work performed
Their product value
3-13
© 2010 McGraw Hill Ryerson
What The Research Tells Us
Tournament Theory: Motivation and
Performance
Players perform better where prize
differentials are sizeable
works best in situations where individual
performance matters most
3-14
© 2010 McGraw Hill Ryerson
What The Research Tells Us
 Institutional Model: Copy others
Copy “best practices” of others
No analysis of whether the practice fits
the organizational strategy
3-15
© 2010 McGraw Hill Ryerson
Organizational Outcomes
of an Internally Aligned
Structure
Undertake training
Increase experience
Reduce turnover
Pay structure
Facilitate career progression
Facilitate performance
Reduce pay-related
grievances
Reduce pay-related work
stoppages
3-16
© 2010 McGraw Hill Ryerson
Consequences of Structures
Efficiency
Internal
Structure
Fairness
Legal Compliance
3-17
© 2010 McGraw Hill Ryerson
Conclusion
 Internal alignment refers to the pay relationships
among jobs / skill / competencies within a single
organization.
 Pay structures – the array of pay rates for
different jobs within an organization – are
defined by levels, differentials, and the criteria
for determining these.
 Acceptance by employees of the pay
differentials between jobs is a key test of an
equitable pay structure.
 The goals of the entire compensation system
must be kept in mind when designing internal
pay structures.
3-18
© 2010 McGraw Hill Ryerson