COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
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© 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
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© 2010 McGraw Hill Ryerson
External Competitiveness
 refers to the pay relationships among
organizations - the organization’s pay
relative to its competitors
 shaped by three factors:
1. labour market (supply and demand)
2. product/service market (competition)
3. organizational factors (e.g., size)
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Pay Level and Pay Forms
Pay level refers to the average of the array
of pay rates paid by an employer.
( Base + Bonuses + Benefits + Options)
# of Employees
Pay forms refer to the mix of the various types of
payments that make up total compensation.
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External Competitiveness
Policies
1. pay level that is above, below, or
equal to competitors, and
2. the mix of pay forms relative to
those of competitors.
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External Competitiveness
Objectives
Control Labour Costs
Attract and Retain
Employees
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Pay Level Decisions
Impact Labour Costs
Labour Costs
=
Number of
Employees
x
Pay Level
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Labour Demand
 The marginal product of labour is the
additional output associated with the
employment of one additional human
resource unit, with other production factors
held constant.
 The marginal revenue of labour is the
additional revenue generated when the firm
employs one additional unit of human
resources, with other production factors
held constant.
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© 2010 McGraw Hill Ryerson
Supply and Demand at the Market and
Individual Employer Level
Market level
Employer level
$100,000
Pay for business graduates
Pay for business graduates
$100,000
$50,000
$25,000
$50,000
Supply to
individual
employer
$25,000
100
1000
Number of business graduates available
0
5
10
15
20
25
Number of business graduates hired
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© 2010 McGraw Hill Ryerson
Labour Demand Theories
and Implications
Theory
Compensating
differentials
Prediction
Work with negative
characteristics requires higher
pay to attract workers.
Efficiency wage
Above-market wages will improve
efficiency by attracting workers
who will perform better and be
less willing to leave.
Signaling
Pay policies signal the kinds of
behaviour the employer seeks.
So What?
Job evaluation and compensable
factors most capture these
negative characteristics.
Staffing programs must have the
capability of selecting the best
employees. Work must be
structured to take advantage of
employees’ greater efforts.
Pay practices must recognize
these behaviours by better pay,
larger bonuses, and other forms
of compensation.
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© 2010 McGraw Hill Ryerson
Labour Supply Theories
and Implications
Theory
Prediction
So What?
Reservation wage
Job seekers won’t accept jobs
whose pay is below a certain
wage, no matter how
attractive other job aspects.
Pay level will affect ability
to recruit.
Human capital
The value of an individual’s
Higher pay is required to
skills and abilities is a function induce people to train for
of the time and expense
more difficult jobs.
required to acquire them.
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Product Market Factors and
Ability to Pay
Two key product market factors affect
ability of a firm to change price of its
products or services
 Level of product demand – Puts a lid on
maximum pay level an employer can set
 Degree of competition – In highly
competitive markets, employers are less
able to raise prices without loss of revenue
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Organization Factors
Industry and technology
Employer size
Employee preferences
Organization strategy
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Competitive Pay Policy
Alternatives
Pay with Competition
(Match)
Flexible Policies
Lead Policy
Lag Policy
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Pay Mix Policy Alternatives
Performance - Driven
Benefits
17%
Options
Base 50%
16%
Bonus
17%
Work - Life Balance
Benefits
30%
Market Match
Benefits
20%
Options 4%
Bonus 6%
Base 70%
Security (Commitment)
Benefits
20%
Base 50%
Options
10%
Bonus
10%
Base 80%
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Some Consequences
of Pay Levels
Contain operating
expenses (labour costs)
Increase pool of
qualified applicants
Increase quality and
experience
Competitiveness of total
compensation
Reduce pay-related
work stoppages
Reduce voluntary
turnover
Increase probability of
union-free status
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© 2010 McGraw Hill Ryerson
Conclusion
 there is no ‘going rate’, conscious pay decisions
are made by managers
 both product/service market and labour market
competitors impact the pay level and mix
decisions
 alternative pay level and mix decisions have
different consequences
 pay policies need to be designed to achieve
specific pay objectives
 the pay level and mix must be properly
positioned relative to competitors
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© 2010 McGraw Hill Ryerson