Strategic Compensation in Canada Canadian 6th Edition Long Solutions Manual

Type:

Solution Manual

Resource:

Strategic Compensation in Canada

Edition:

6th Edition

Author(s):

Richard Long Parbudyal Singh

NETA ENGAGEMENT Enriched Instructor’s Manual to accompany

Prepared by

Richard J. Long Edwards School of Business, University of Saskatchewan and

Edward Marinos Sheridan College

NETA ENGAGEMENT: Enriched Instructor’s Manual to accompany Strategic Compensation in Canada, Sixth Edition

By Richard J. Long and Parbudyal Singh Enriched Instructor's Manual prepared by Edward Marinos, Sheridan College Copy Editor: Jessie Coffey Available at http://www.nelson.com/instructor COPYRIGHT © 2018 by Nelson Education Ltd. Nelson is a registered trademark used herein under licence. All rights reserved.

For more information, contact Nelson, 1120 Birchmount Road, Toronto, ON M1K 5G4. Or you can visit our Internet site at nelson.com.

ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems—without the written permission of the publisher.

Contents Preface to the Enriched Instructor’s Manual .................................................................... iv About NETA ........................................................................................................... iv The Enriched Instructor’s Manual ........................................................................... vi Additional Teaching Resources ............................................................................. viii PART 1 STRATEGY, REWARDS, AND BEHAVIOUR Chapter 1 A Road Map to Effective Compensation…………………………… 1-1 Chapter 2 A Strategic Framework for Compensation.………………………… 2-1 Chapter 3 A Behavioural Framework for Compensation……………………… 3-1 PART 2 FORMULATING REWARD AND COMPENSATION STRATEGY Chapter 4 Components of Compensation Strategy……………………………. 4-1 Chapter 5 Performance Pay Choices…………………………………………... 5-1 Chapter 6 Formulating the Reward and Compensation Strategy…………….... 6-1 PART 3 DETERMINING COMPENSATION VALUES Chapter 7 Evaluating Jobs: The Job Evaluation Process……………………… 7-1 Chapter 8 Evaluating Jobs: The Point Method of Job Evaluation…………….. 8-1 Chapter 9 Evaluating the Market……………………………………………… 9-1 Chapter 10 Evaluating Individuals…………………………………………… 10-1 PART 4 DESIGNING PERFORMANCE PAY AND INDIRECT PAY PLANS Chapter 11 Designing Performance Pay Plans……………………………….. 11-1 Chapter 12 Designing Indirect Pay Plans…………………………………….. 12-1 PART 5 IMPLEMENTING, MANAGING, EVALUATING, AND ADAPTING THE COMPENSATION SYSTEM Chapter 13 Activating and Maintaining an Effective Compensation System... 13-1

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Preface to the Enriched Instructor’s Manual The Nelson Education Teaching Advantage (NETA) program delivers research-based instructor resources that promote student engagement and higher-order thinking to enable the success of Canadian students and educators. Visit Nelson Education’s Inspired Instruction website at http://www.nelson.com/inspired to find out more about NETA. NETA Instructor Guide This Enriched Instructor’s Manual is organized according to the textbook chapters and addresses eight key educational concerns. It also includes elements of a traditional Instructor’s Manual, including answers to problems, suggested answers to exercises and cases, etc.

The key educational concerns consist of the following: 1.

2.

3.

4.

5.

6.

7.

8.

Learning outcomes Key concepts Student motivation Barriers to learning Engagement strategies Assessment tools Reflections on teaching Additional resources

Each of these educational concerns is described in more detail below.

1. Chapter Learning Outcomes  The Learning Outcomes reflect back to the textbook’s Learning Outcomes 2. Key Concepts: How does this chapter connect to the world of training and development?  This section identifies the key or threshold concepts covered in this chapter. Are there concepts that are key to new directions in the discipline? Concepts that help the student understand how the discipline works?

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3. Student Motivation: Why should students care?  Here, the guide underlines relevance for the student’s studies. Are there topics that relate to earlier chapters or are the underpinnings for a future concept? Is there relevance to everyday life or to a global issue?  This section will highlight the ways that the topic is, in itself, engaging for students.

4. Barriers to Learning: What are some common student misconceptions and stumbling blocks?  This section identifies common misconceptions or difficult topics and helps instructors to address them explicitly, in lectures, through out-of-class work, and with in-class activities (see below).

5. Engagement Strategies: What can I do in class?  In each section, suggestions cover a broad range of in-class engagement activities: e.g., those that don’t require any extra work on the part of the instructor, and those that require more instructor intervention; those that work best in small classes, and those that work with larger groups.  Activities will vary by chapter, but may include: o making explicit real-world links o online activities o role playing o small or large group discussions o collaborative team projects 6. Assessment Tools  This section includes references to other Nelson resources (e.g., Test Banks, CNOW, TurningPoint questions, web quizzes, etc.) that help assess student learning.

7. Reflections on Teaching: How can I assess my own “performance”? o This section includes a checklist to encourage instructors to do self-assessment.

8. Additional Resources  Resources include chapter summaries, lecture outlines, web links, suggestions for end-of-chapter exercises, new case incidents (unrelated to those in the text), and answers to the flashback questions from the text.

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Additional Instructor Resources This manual is intended to complement Strategic Compensation in Canada, Sixth Edition. It is part of an extensive teaching package that includes the following resources: 

NETA Test Bank: This resource was written by the author, Parbudyal Singh. It includes over 390 multiple-choice questions written according to NETA guidelines for effective construction and development of higher-order questions. Also included are 130 true/false and over 80 short-answer questions.

The NETA Test Bank is available in a new, cloud-based platform. Nelson Testing Powered by Cognero® is a secure online testing system that allows instructors to author, edit, and manage test bank content from anywhere Internet access is available. No special installations or downloads are needed, and the desktop inspired interface, with its drop-down menus and familiar, intuitive tools, allows instructors to create and manage tests with ease. Multiple test versions can be created in an instant, and content can be imported or exported into other systems.

Tests can be delivered from a learning management system, the classroom, or wherever an instructor chooses. Nelson Testing Powered by Cognero for Strategic Compensation in Canada, Sixth Edition can be accessed through www.nelson.com/instructor.

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NETA PowerPoint: Microsoft® PowerPoint® lecture slides for every chapter have been created by Greg Cole, of St. Mary’s University. There is an average of 25 slides per chapter, many featuring key figures, tables, and photographs from Strategic Compensation in Canada, Sixth Edition. NETA principles of clear design and engaging content have been incorporated throughout, making it simple for instructors to customize the deck for their courses.

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Image Library: This resource consists of digital copies of figures, short tables, and photographs used in the book. Instructors may use these jpegs to customize the NETA PowerPoint or create their own PowerPoint presentations. An Image Library Key describes the images and lists the codes under which the jpegs are saved. Codes normally reflect the Chapter number (e.g., C01 for Chapter 1), the Figure or Photo number (e.g., F15 for Figure 15), and the page in the textbook. C01-F15-pg26 corresponds to Figure 1-15 on page 26.

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MINDTAP: Offering personalized paths of dynamic assignments and applications, MindTap is a digital learning solution that turns cookie-cutter into cutting-edge, apathy into engagement, and memorizers into higher-level thinkers. MindTap enables students to analyze and apply chapter concepts within relevant assignments, and allows instructors to measure skills and promote better outcomes with ease. A fully online learning solution, MindTap combines all student learning tools—readings, multimedia, activities, and assessments—into a single Learning Path that guides the student through the curriculum. Instructors personalize the experience by customizing the presentation of these learning tools to their students, even seamlessly introducing their own content into the Learning Path.

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Chapter 1: A Road Map to Effective Compensation

CHAPTER 1 A Road Map to Effective Compensation ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That developing an effective compensation system can be the difference between company success and failure.

2. That there is no “one best” compensation system, and that the same compensation system that is a success at one firm may be a complete failure at another.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Describe the purpose of a compensation system.

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Explain why an effective compensation system is so important to most organizations.

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Distinguish between extrinsic and intrinsic rewards.

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Distinguish between a reward system and a compensation system.

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Describe the key aspects of a compensation strategy.

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Explain why a compensation system must be viewed in the context of the total reward system, and the broader environment of the organization.

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Identify and explain the key criteria for evaluating the success of a compensation system.

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Describe the steps along the road to effective compensation, and explain how this book will facilitate that journey.

KEY CONCEPTS Key concepts introduced in Chapter 1 include the purpose of a compensation system, intrinsic vs. extrinsic rewards, rewards vs. incentives, reward vs. compensation strategy, the three main components of compensation strategy (base, performance, and indirect pay), and the criteria for assessing the success of a compensation system. Students are also introduced to the concept of Copyright © 2018 by Nelson Education Ltd.

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Chapter 1: A Road Map to Effective Compensation

“fit”—the fundamental notion that there is no one best compensation system, and that the key is to find the compensation system that best fits with a given organization’s characteristics and circumstances. The chapter concludes by providing some perspective on the role of the compensation professional within the human resources function of an organization.

A crucial distinction exists between a compensation strategy and a compensation system. In order to reinforce this distinction, the first six chapters of the text are devoted to compensation strategy, while the technical details required to convert the compensation strategy into a compensation system are deferred to the second half of the text.

This chapter connects to the world of practice of Human Resources (HR) professionals in several ways. First, compensation is an integral part of the HR function, and virtually every organization must deal with this aspect of Human Resources Management. Second, compensation has become much more complicated in recent years, and HR professionals must spend more and more of their time dealing with compensation issues. Third, as compensation increasingly becomes recognized as a strategic variable, integral to the success of the organization’s business strategy, the importance of compensation specialists and the HR function as a whole has been rising in many organizations in recent years.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Virtually all students will be subject to compensation systems during their working lives, and it is in their interest to understand how they work.



An understanding of compensation will help students unravel the mystery of why some employees (and co-workers) behave as they do.

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Young HR graduates will find it much easier to compete successfully in their hunt for an appropriate HR position if they can demonstrate that they have an understanding of, and ability to apply, compensation knowledge on the job.

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To be effective in developing and advancing their HR careers, HR specialists need to understand the role that compensation can play in company success.



To eventually become a part of top management, it is important for HR specialists to be able to convey and demonstrate to senior management how compensation strategy can support the business strategy of the organization.

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Chapter 1: A Road Map to Effective Compensation

BARRIERS TO LEARNING 

Some students may see compensation as irrelevant to them. Pedagogical devices that highlight the five points above may help overcome this.

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Students may think compensation is a very technical specialty and thus boring. Building on the real-life experiences of the class, and showing how the understanding of compensation may help to solve behavioural “mysteries” in organizations, may help to bring the subject matter to life.

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Students may think that compensation works in isolation and without recognizing the inter-connectedness to other HR processes. It is important for instructors to ensure students are reminded how processes like Performance Management and Succession planning to name a few can impact changes to compensation as an overall organizational strategy.

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Many terms (e.g., “rewards”) may seem familiar to students and they may assume they know what they mean. However, their colloquial “understanding” of these terms may prevent them from developing the precise compensation vocabulary that is an essential tool for understanding the concepts to come. It is important for instructors to be careful in their use of terminology, so as to demonstrate proper usage, and to highlight how important this is for future understanding.

ENGAGEMENT STRATEGIES To introduce the subject of compensation, first discover who within this class has a compensation system that works well, and who has encountered some of the compensation problems discussed in this opening chapter, by using end of chapter Exercise Question 1. After allowing time within groups, have each group share their best compensation system or their worst with the class, indicating why it was so good or so bad.

Ask “Is there a ‘one-size fits all’ compensation system that will work well for all organizations?”

“How is it that the same compensation system can be either an asset or a liability?” Discuss with reference to the examples from Compensation Today 1.1 (Introduction).

Use end-of-chapter Discussion Question 1. Review key points in regard to the impact of the compensation system on company performance. Follow up by asking “How can a compensation system be turned from a liability into an asset?” (Learning how to do so is what this course is all about!)

Pose the question “How do you get organization members to do what the organization wants and needs them to do?” Ask how this question relates to a course on compensation. Emphasize that there are many ways of motivating employee behaviour, and that compensation is normally one important way. Add that the behaviour you want is not always the behaviour you get, referencing

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Chapter 1: A Road Map to Effective Compensation

the examples of reward problems in the Introduction. Ask students why they work. What do they get out of working? Are the only rewards money? Be sure students are clear that “anything provided by the organization that satisfies one or more of an employee’s needs can be considered a reward.” Many students think that a “reward” is something special that is given only for some accomplishment. Make sure that they understand that rewards can be extrinsic and/or intrinsic, and arise from their connection with the organization. Many “rewards” may have little or nothing to do with what management specifically grants.

Ask if “rewards” and “incentives” are the same thing. Make sure students understand that they are very different concepts, although over time consistently granted rewards may come to be seen as incentives. Follow up with Discussion Question 2 to set the stage for a discussion of the “total rewards” concept, and then to differentiate between a “reward” and a “compensation” strategy. Make sure students are clear on the two main aspects of a compensation strategy (How should compensation be paid? How much compensation should be paid?).

Ask students, “If you were developing a compensation system for your organization, what would your goals be?” Record the responses. Then show a slide of Compensation Today 1.1 (Introduction) and compare. Segue into the Henderson Printing Case and relate to Compensation Notebook 1.1. (Criteria for Success: Goals for The Compensation System) At this point, you are ready to introduce the process for developing an effective compensation system. Show a slide of Figure 1.1 (A Road Map to Effective Compensation) and discuss each of the five steps along the road to effective compensation.

The purpose of the final section of the chapter (“The Context of Compensation Management’) is to place compensation management within the context of the Human Resources function in an organization and within HR as a profession. Ask students what kinds of opportunities they think knowledge of compensation can bring, and relate this discussion to material in Compensation Today 1.3 (The Context of Compensation Management). Using the Internet Question 2 can be used here to both reinforce the monetary value placed on compensation-related jobs and engage students more actively in compensation issues outside the class context. Announce this assignment in a previous class so it can be discussed in class.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

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Chapter 1: A Road Map to Effective Compensation

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 1 sets the stage for the study of compensation and the rest of the text by explaining the importance of effective compensation systems to firm success, by defining key reward and compensation concepts, and by providing students with a map to guide them along the road to development of an effective compensation system. This “road map” is used as the organizing framework for everything that is to come, and links specific text chapters to each step along the road to effective compensation. Although many students tend to gloss over the introductory chapters in most text books, an understanding of the key concepts underpinning compensation design, and an understanding of the process for design of effective compensation systems, will make it much easier for students to put the following chapters in context, and will facilitate their comprehension and understanding.

Answers to Discussion Questions 1. Effective compensation systems are important to most organizations because they have a direct and influential impact on behaviour. Organizations today are requiring higher levels of performance and a desire to have more achieved with less resources. Also, no organization is alike, and so it can become challenging for students to realize there is no perfect definitive answer. What should be focused on is the required level of performance, the make-up and structure of employees and the complexity of employee behaviours are critical to ensure organizations have the right mix of employees with the better chance or retaining and keeping their talent.

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Chapter 1: A Road Map to Effective Compensation

2. A compensation system alone does not what drive, motivate, and inspire all employees.

Compensation, critical rewards, and incentives need to be balanced and structured in a way whereby employees perceive them as satisfying and supporting their personal needs.

Not all employees are alike, but an organization must ensure it can also achieve its desired level of performance requirements and behaviour expectations in order to manage total rewards. Organizations are affected by the economy and look for creative and lesscostly options to reward employees. Using a total reward approach can give employers the motivation to engage in more creative ways to reward employees given the often complex make up and staffing today.

3. Refer to Figure 1.1 in the textbook. Ensure that students can identify at least one fact from each of these steps before moving on. Their answers should include an implication if a step is not performed correctly.

Notes for Exercises 1. This exercise provides the opportunity for students to relate the class content to their own personal experiences, as well as providing excellent material for class discussion. It also sets the tone that student input is both expected and valued, and that student interaction with the material will be a norm for this class.

Depending on the size of the class, organize the participants in groups of four to six. Provide each person with a pre-printed worksheet with the questions posed in the exercise and a space for the responses. Instruct each group to elect a facilitator/ spokesperson. Each person should answer each question for her or his own work situation, followed by group discussion.

Consensus should be reached in each group on the best system. Instructor collects input from each group highlighting reasons for their choice.

2. This exercise, based on internships, provides the opportunity for students to think about what makes a compensation system effective and what amount of pay is needed to discuss how organizations best attract and retain the appropriate workforce and how this varies with the other rewards that the organization can offer (See Compensation Today 1.2).

Divide the class into groups of four to six participants, and ask each group to address the questions posed in the exercise. Give them a specific period of time to do so, and tell them that their answers will be discussed in the class as a whole. This exercise always generates a lot of discussion, with some students outraged by the concept of working for free, believing that this exploits workers who are already disadvantaged, while others contend that workers are agreeing to this arrangement of their own free will, and therefore shouldn’t complain about it. The benefits to the organization should be included in the conversation that eventually leads to the benefits to the employee.

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Chapter 1: A Road Map to Effective Compensation

Some points that may inform this discussion are as follows: 

Any organization’s goals are to minimize or eliminate payroll costs in an effort to seek profitability from acquired distressed businesses.

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Apprenticeships appeal to those employees who are motivated to know about the longterm benefits of their future profession, knowing there may be some stability of their income.

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The key discussion point should focus on “educational purposes.” If the internship is for this specifically, pay is not required. Where it becomes an issue is where this is extended into situations where a person want to earn experience (working hours) towards a certification. For example, an auto mechanic requires work experience after achieving all educational requirements.



One discussion item that can service is the benefit to the employer to offer salary and provide strong learning support. This provides significant opportunity from a requirement standpoint. The organization knows what they are getting in an employee’s work habits and skills and hopefully has worked to engage a committed employee.

Notes for Case Question Henderson Printing. This case question provides the opportunity for students to understand what an inadequate compensation system looks like within a real-life context. (Note: This is a recurring case, and students can do further work with this case later in the book. See Chapter 3, Case Question 1, and Chapter 10, Case Questions 1 and 2.)

The “Henderson Printing” case is a great example of a small business that has enjoyed some success and growth, but is now being severely hampered by a failure to apply some basic managerial and organizational principles. The compensation system is a perfect example of this; it is haphazard and inequitable, and, far from supporting organizational effectiveness, is actually working against it. Students will find that virtually none of the criteria for an effective compensation system discussed in Compensation Notebook 1.1 (Criteria for Success: Goals for the Compensation System) are being met.

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Chapter 1: A Road Map to Effective Compensation

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

For examples of trends in labour incomes in Canada, go to Statistics Canada’s website at http://www.statcan.gc.ca.

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For examples of the concept of “total rewards,” go to the WorldatWork website at http://www.worldatwork.org/waw/pub/workspan_trarticle.pdf.

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For examples of employers with leading edge compensation practices, go to Maclean’s magazine’s Canada’s Top 100 Employers website at http://www.CanadasTop100.com.

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For examples of pay levels for various jobs in Canada, go to http://monsterca.salary.com.

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Chapter 2: A Strategic Framework for Compensation

CHAPTER 2 A Strategic Framework for Compensation ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That, in order to design an effective compensation strategy, it is essential to first understand the strategic context in which a firm operates, particularly the managerial strategy in place.

2. How to use the strategic framework for compensation as a tool to help identify the strategic context for compensation, and the implications for designing the compensation strategy that best fits a particular organization.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Understand the concept of “fit” and explain why a compensation system that is a success in on firm can be a failure in another.

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Explain how the strategic framework for compensation can be used as a tool for designing effective reward and compensation systems.

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Describe the main elements in the strategic compensation framework, and explain how they relate to one another.

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Describe the three main managerial strategies that organizations can adopt, and explain the implications for the most effective reward and compensation system.

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Describe the main determinants of managerial strategy, and explain how they can be used to select the most appropriate managerial strategy.

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Analyze any organization to determine the most appropriate managerial strategy for that organization to adopt.

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Discuss how conditions in North America changed during the twentieth century, and explain how this has affected today’s managerial and compensation strategies.

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Chapter 2: A Strategic Framework for Compensation

KEY CONCEPTS Key concepts covered in Chapter 2 include the concept of “fit” as it relates to an organizational reward system, organizations as systems, the strategic framework for compensation (structural and contextual variables), and the three main types of managerial strategy. Students need to understand the implications of each managerial strategy for organizational structure, including compensation structure. It is important for students to understand that none of the managerial strategies is inherently superior to the others, but that some managerial strategies will better fit a given organization than other managerial strategies, depending on the contextual variables related to environment, corporate strategy, technology, organizational size, and the nature of work.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

The previous chapter emphasized that the success of a compensation system depends on the fit between the compensation system and the organization. Nevertheless, how do we know if we will have a good fit? The strategic framework provides a tool for helping to predict this, and for identifying the compensation system that will be the best fit with the organization and its business strategy.

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As the business environment grows ever more competitive, being able to analyze an organization and come up with the compensation strategy and system that will be the best fit with the organization and its business strategy is a skill that will be highly valued by employers.

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Because it is such a fundamental building block in designing an effective compensation strategy and system, an inability to effectively use the strategic framework will make it virtually impossible for the student to achieve the learning objectives of this course or to become a successful compensation professional.

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A strong understanding of this chapter will help students strengthen their understanding of other compensation areas.

BARRIERS TO LEARNING 

Some students may be so intimidated by the seeming complexity of the strategic framework that they give up too easily or do not even attempt to master it. It is crucial for the instructor to explain the framework piece by piece—while extensively using the strategies for engagement described below—and to emphasize its importance as a crucial building block for achieving success in this course. Students need to come to see the strategic framework as an essential and helpful tool in solving compensation problems.

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Chapter 2: A Strategic Framework for Compensation

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Students often confuse the role of the structural variables (used for determining the managerial strategy actually in use) and the contextual variables (used for determining what is the most appropriate managerial strategy to adopt). The instructor will need to continually emphasize this distinction through both lecture and application activities.

Repeated use over time of a clicker question testing student grasp of this distinction will be very useful in gauging progress toward this understanding.

ENGAGEMENT STRATEGIES In the opening vignette for Chapter 2 (A Tale of Two Firms), the text provides two diverse examples to illustrate the concept of fit. Divide students into pairs, and ask them to decide which compensation system is likely the most effective, in terms of the criteria for success listed in Compensation Notebook 1.1. Use clickers to ask each pair to indicate their choice. Ask them to justify their selection of LS Electro-Galvanizing or Koch Foods Chicken Processors. Use the board to tally the advantages and disadvantages of the two different compensation systems. Use the concept of fit to note that both systems are effective, but tell them to think about what would happen if the two firms traded their compensation systems? (Of course, they would both be deader than the Koch chickens!)

Follow up on this example by asking students to work out the key differences in contextual variables between the two firms. They should hit on points relating to the firms’ environment, business strategy, technology, size, and work force. Carry on to ask the broader question, “If fit between the compensation system and key characteristics of the firm is essential, then what exactly are these key characteristics, and exactly how do they link to compensation?” Note that the purpose of this chapter is to provide a strategic framework as a tool for answering this question.

Next, reinforce the concepts of business strategy and organizational structure. Explain and emphasize that for the organizational system to be effective, these two concepts must fit with other key variables.

Because it can look intimidating, walk students through the strategic framework for compensation (Figure 2.1), emphasizing that it will be become an extremely useful tool once students understand it and are able to apply it. Explain the various parts of it first, and then explain how the parts fit together.

This sets the stage for introducing managerial strategies and eventually showing how they relate to reward systems. The key unifying role of managerial assumptions in establishing managerial strategies needs to be emphasized, pointing out that even though many managers may never have heard of the three managerial strategies, they will nonetheless evolve toward one, depending on their assumptions about people and human nature. Use the exercises “Design Your Own Company” (a supplementary exercise included under “additional resources”) to help students see the impact of managerial assumptions on the way that firms are structured, and to help them understand the structural alternatives for the various managerial strategies.

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Chapter 2: A Strategic Framework for Compensation

Once the strategies have been introduced, use the examples of Foxconn (Compensation Today 2.1), Eastman Kodak (Compensation Today 2.2) and WestJet (Compensation Today 2.3) to illustrate how the structural variables (shown in Compensation Notebook 2.1) differ across a classical, human relations, and high-involvement firm. Note how the structural variables need to be internally consistent for a successful organization, and how structural variables interrelate.

These examples also give students a feel for what organizations utilizing the three different managerial strategies feel like on the ground.

To reinforce understanding of the three managerial strategies, and to understand how they can be used to help find solutions to organizational problems, Case Question 1 (“Achtymichuk Machine Works”) provokes excellent insight and material for discussion. Organize the students into pairs to analyze this case and report their findings.

Next, use the exercise “Classify Your Firm” (a supplementary exercise included under “additional resources”) to provide students with practice in applying the structural variables to determine which managerial strategy is in place at a firm for which they have been employed. As stated in the exercise preamble, tabulating and feeding back the results can really add to the flavour of what these different managerial strategies feel like in practice.

This can also lead to a very fruitful discussion of why these different firms use different managerial strategies, and whether the managerial strategy fits with the contextual variables for each organization. Some will be a good fit—and should therefore be a successful firm—and some will not be, and the firm should therefore be less successful. It won’t always work out exactly this way (i.e., some firms can be successful despite a mismatch between the managerial strategy and the contextual variables if they are monopolies, for instance), but overall this will provide good fodder for discussion, especially since these are firms students have had personal experience with.

To build further on the personal experience of students, end of chapter Exercises 1 and 2 work together very well to reinforce application of the entire strategic framework.

For further reinforcement of the strategic framework, Case Question 2 (“The Fit Stop”) provides practice in applying the contextual variables to determine the most appropriate managerial strategy for a firm to use, and illustrates links to the assumptions of the founder. Case Question 3 (“Multi-Products Corporation”) gives additional practice in the application of the contextual variables, and provides students with the chance to carry through to determine what would be the most appropriate compensation strategy for this firm.

For the final section of the chapter, “Trends in Managerial and Compensation Strategies,” use Discussion Question 3 to develop the link between changes in the Canadian socio-economic and business environment to changes in managerial strategy and changes in compensation strategy.

Ask students if they have had any personal experiences with these trends.

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Chapter 2: A Strategic Framework for Compensation

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 2 presents the first of two conceptual tools that underpin the effective design of compensation strategy. The purpose of this chapter is to follow up on the concept of strategic fit briefly introduced in Chapter 1. If fit between the compensation system and key characteristics of the firm is essential, then what exactly are these key characteristics, and how exactly do they link to compensation?

The strategic framework presented in Chapter 2 is intended to answer these questions, by providing a conceptual tool for linking compensation strategy to the managerial strategy used by the firm, as well as to the corporate strategy and other key contextual variables. The key idea for students to take away from Chapter 2 is the interdependence between the compensation system,

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the other structural variables, the managerial strategy, and the contextual variables. A related insight is that if any of these characteristics change, changes to other characteristics, including the compensation system, may be needed.

Students also need to understand that just because the contextual variables seem to call for a particular managerial strategy, this is no guarantee that the firm will have actually adopted that managerial strategy. To know which managerial strategy is actually in place, if any, they need to examine the structural variables. It may well be that a firm has no definite managerial strategy— either explicit or implicit—in place, which then makes it impossible to systematically identify the most appropriate compensation system for that firm. Ideally, before the compensation system is redesigned, this organizational issue should be ironed out.

Suggested Answers to Discussion Questions 1. Students need to focus on the concept of “fit” and the importance of an organizations strategy. As with any process (e.g., leadership values, learning and development, performance management, etc.) the focus on the organizational goals or its strategy is what will often determine the needs both short and long term. Each organization will often have its own unique organizational structure (i.e., what is needed to generate the behaviours necessary to carry out the organization’s strategy). So how well a compensation or reward works in an organization will depend on how it “fits” the organization’s context and its system as a whole. With this in mind, it is less likely that a successful compensation system can be a “one size fits all.”

2. Refer to Compensation Notebook 2.1. Recommended reward systems are described in the table.

3. Since the late 20th century Canadian compensation systems are moving toward more complicated pay systems. Organizations moved toward indirect pay thus making extrinsic reward more complex. More benefits were added to increase employee security and well being (note: the Kodak example). There has been a major increase in the adoption of pay-forperformance, group or team-based incentive systems and some companies have looked at pay-for-knowledge systems in place of traditional job-based pay systems. Flexible benefit plans have become more popular. More companies are moving away from defined benefit pension plans (i.e., guaranteeing specific payout amounts) and toward defined contribution plans (i.e., where there are no such guarantees). There is also an increase in the use of parttime, temporary and contract workers. They are often seen as cheaper to employ but can also serve as a buffer against demand fluctuations in global economic climate that is constantly changing.

Notes for Exercises 1. The purpose of this exercise is to give students a better understanding of the contextual variables and their purpose by applying them to organizations with which students have had personal experience, and, in so doing, reinforce their understanding of how to assess the type

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of managerial strategy practised by a firm, and their understanding of the linkages between managerial strategy and reward structure.

Assign this exercise to the class to reflect on individually before breaking the class into small groups for further discussion. Have the groups identify the organizations they are using as their examples and list them on a flip chart or board, along with their responses to each of the questions in the exercise. Depending on the size of the class, it may be necessary for each group to select just one organizational example to share with the class. Using the slide of Compensation Notebook 2.2, engage the groups in discussion of the relationships between the contextual variables and the actual managerial strategies that seem to be in use. Tie in the question of whether the reward system fits the managerial strategy.

2. The purpose of this exercise is to take Exercise 1 another step farther, by asking the students to reflect on whether the actual performance results match what theory would predict, and if not, why not. Use the same groups as in Exercise 1. If some of the predicted linkages don’t match up, discuss some of the possible reasons why this may have occurred. Possible reasons may include misclassification on the part of the students, or a misunderstanding of the actual performance level of the firm. Point out that most firms do not fall neatly into boxes, and that many factors affect firm performance, so that the theory may not necessarily “work” in every case.

Notes for Case Questions 1. Achtymichuk Machine Works. The purpose of this case question is to help students see how the three managerial strategies can translate into specific managerial and organizational actions, to see how they can be used to generate ideas for solving problems, and to see how the implications for compensation are very different depending on the managerial strategy being pursued.

The classical consultant would see this as a problem of structure, job design, training, and compensation. First, she would study the jobs, to see how they could be broken down into smaller fragments that would make training and learning, as well as supervision, easier. She would create specialist jobs, such as cleaning all washrooms, cleaning all hallways, cleaning around all of a certain type of machine. Each job would be studied to find the most efficient equipment, cleansers, and procedures. Workers would then be trained in these methods, and monitored to be sure they were using them. To provide motivation, some type of piece rate system might be implemented, where cleaners get paid for each toilet cleaned, each machine area cleaned, and the like. In order to supervise and control all this, a specialized cleaning department would be created, with all cleaners reporting to a single supervisor expert in all aspects of the necessary cleaning tasks.

The human relations consultant would see this as a job satisfaction problem. If workers received higher satisfaction from their job and workplace, then they would be more likely to stay with the firm after they had learned their jobs. He would note that workers’ social needs are not being satisfied, and neither are related needs for esteem and recognition by peers. He would create a separate cleaning department to give the cleaners a sense of identity and Copyright © 2018 by Nelson Education Ltd

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create opportunities for the cleaners to socialize at breaks. Another purpose of having a separate cleaning department would be to remove the cleaners from the direct supervision of the department supervisors, who would look down on the cleaners, and not provide them with any social support. He would also change the compensation system so that pay would go up with seniority, and provide benefits, such as pension plans, to encourage retention.

Finally, the high-involvement consultant would see this mainly as a problem of insufficient intrinsic rewards, and attempt to redesign jobs to make them more interesting. Workers would be given some say over the cleaning products and methods to be used. Cleaners might be organized in self-managing work teams, in which they would make decisions about which cleaners would clean what. To give them some sense of being on a team, and to give them more independence, a cleaning department would be created, headed by a supervisor with a participative leadership style. Cleaners would be put on salary, and also some type of groupbased pay plan to tie their goals to those of the firm, and probably organizational performance pay as well, depending on whether this is offered to other employees in the firm.

Which solution is the best? It depends on the managerial strategy being practised by the firm.

If classical is being practised, the classical method may work best; if human relations is being practised, then the human relations suggestions will work best; and if high-involvement is being practised, then the high involvement ideas would be most suitable. One thing that I point out to the students is that any of the three would likely be an improvement over what is being done now. I also point out that there are some commonalities in the suggestions of the three consultants—the creation of a cleaning department with its own supervisor—although the reasons for this suggestion are very different in each case.

2. The Fit Stop. The purpose of this case question is to give students a better understanding of the contextual variables and their purpose by giving them an opportunity to apply the template for selecting the most appropriate managerial strategy (Compensation Notebook 2.2). (Note: This is a recurring case and students can do further work with this case later in the book. See Chapter 4, Case Question 1; Chapter 5, Case Question 3; Chapter 6, Case Question 1; Chapter 11, Case Question 2; Chapter 12, Case Question 1; and Chapter 13, Case Question.)

Some points that may inform this case discussion are as follows: 

To determine the most appropriate managerial strategy for The Fit Stop, we need to examine the contextual variables. The environment is quite unstable, given the competitors and the changing state of knowledge in physical fitness. The corporate strategy would be most similar to the prospector, as the firm wants to be the first to make new fitness products and solutions available to its customers. Under Porter, it would be a focused differentiator.



The technology is intended to be intensive, where every customer is given a custom-made solution to their fitness problems. The overall organization will be quite large, but the size of each store will be relatively small. Susan needs dedicated employees who will be

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willing to learn and develop, and to have a high concern for customers and the company.

She is going to need high membership behaviour, high task behaviour, and high citizenship behaviour from her employees. All of this suggests a high involvement managerial strategy. 

Susan would likely be favourably disposed towards high involvement, because she recognizes the importance of teamwork and employee commitment to the success of her business. She has already decided to hire only full-time employees, in recognition of the need to have a stable and highly trained work force, which fits in very well with a high involvement organization. Moreover, her background in sports will likely have taught her the value of teamwork in achieving success.

3. Multi-Products Corporation. The purpose of this case question is also to give students a better understanding of the contextual variables and their purpose by giving them an opportunity to apply the template for selecting the most appropriate managerial strategy (Compensation Notebook 2.2). In contrast to the Fit Stop above, this case calls for a classical managerial strategy, although an argument could be made for a human relations strategy.

(Note: This is a recurring case, and students can be given the opportunity to do further work with this case later in the book. See Chapter 4, Case Question 2, and Chapter 6, Case Question 2.)

Some of the points that may inform this case discussion are: 

The first step is to examine the contextual variables: o Relatively stable environment, because of the patents, guaranteed source of funding, stable technology, non-militant labour unions, etc. o Relatively simple environment, because firm will basically make one product o Golf club production technology unchanged and straightforward, long linked, routine, and mass o Defender strategy, whereby the division will focus on excelling and dominating in a limited domain, focused differentiator under Porter o The size of the division is small to medium o The skills needed by employees are only moderate, although consistency of performance is important



Overall, the organization probably does not need high membership, task, or citizenship behaviour.



Given all this, the strategic template clearly calls for a classical managerial strategy.



However, a human relations strategy has some appeal because the firm wants a high quality product, and the human relations strategy is more likely to produce committed workers. Moreover, because of the monopoly position the firm holds in regard to the product, and the fact that demand is price-inelastic, the company could afford the higher costs of a human relations strategy. Use of the classical strategy will make it more likely that the employees will become unionized. If the firm does become unionized, use of a

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classical strategy could end up producing disgruntled workers who are difficult to fire.

On the other hand, the union in this industry has not been very militant, so unionization may not be a huge problem for the firm, and if pay and benefits are kept at market levels, employees may not have a strong incentive to unionize in any case. 

If a classical strategy is adopted, a fairly simple system including hourly wages and a limited set of employee benefits would fit best. Piece rates would fit this philosophy, but may detract from the product quality needed.



If a human relations strategy is selected, a salary approach, with seniority increases and liberal benefits increasing with time, would be the best bet, along with opportunities for social interaction among organization members.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

For examples of the latest trends and issues in compensation, go to the Canadian HR Reporter: http://www.hrreporter.com or the WorldatWork website: http://www.worldatwork.org/waw/home/html/compensation_home.jsp.

Supplemental Exercises The following two exercises can be used to help students better understand managerial strategy, and how it relates to the structural variables of the firm.

1. Design Your Own Company. This exercise is intended to show how managerial assumptions about people (employees) affect the way in which an organization will be structured, and also to help students better understand the main structural options available to an organization. Following are three sheets, each asking students to adopt classical assumptions (Set 1), human relations assumptions (Set 2), or high-involvement assumptions (Set 3).

Form students into pairs for this exercise, and hand out one sheet to each pair.

Approximately one-third of the pairs should get Set 1, one-third should get Set 2, and the remaining third should get Set 3. (Don’t tell the students that there are three sets of assumptions—this would greatly diminish the impact of the exercise!) It works best if you hand out each set to a different portion of the classroom.

In this exercise, student pairs are asked to design a fictitious firm, using the six structural dimensions, based on the assumptions they are given. After they have done this, ask each pair to indicate the choice they have made for each structural variable, and record the letter for each structural choice on a chart on the blackboard. (Choice (a) for structural dimension represents the classical school; choice (b) represents the human relations school, and choice (c) reflects the high-involvement school.) Start with the same area of Copyright © 2018 by Nelson Education Ltd

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the room, say, with the classical assumptions. Students will notice how consistent the responses are. Students with the other sets will notice how different the choices are from their own, and will wonder why.

Next, move to the high-involvement pairs (Set 3). Again, the results will be very consistent, in pointing to structural dimensions that fit with high involvement (i.e., they will be all “c”). Finally, go to human relations, and they will be mainly “b,” although this one will be a bit inconsistent, because the human relations school falls in between the other two.

Students are always impressed to see how just a few assumptions can consistently dictate the way in which an organization is structured. (One thing that I note is my experience that from speaking just a few minutes with the founder of a company, and learning her or his assumptions, I can predict with a high degree of certainty how her or his organization will be structured, without knowing anything at all about the actual structure!) For each structural variable, discuss why a particular set of assumptions will lead to this outcome.

Overall, this exercise has a lot of impact on students, conveys very effectively the relationship between assumptions and managerial strategy, and also helps them understand the structural dimensions.

2. Classify Your Firm. This exercise gives students the chance to see if they can recognize the type of managerial strategy at a firm at which they have had personal experience, and helps them to learn how to do so by applying the structural variables. Hand out the “Classify Your Firm” worksheet to all students, and ask them to select which structural dimension best reflects their firm.

Collect these sheets, and then present a tabulation in the next class session. If a firm has at least four dimensions consistent with a particular managerial strategy, I classify it as having that managerial strategy. (If not, I say it has a mixed or no distinct managerial strategy.) Return the worksheets to the students so they can see where their firms fall on the managerial strategy continuum.

Using the tabulation, discuss why some firms tend to be classical, others highinvolvement, and so on. Reference the contextual variables, and see if they can help explain the results. For example, if the classical firms tend to be fast-food restaurants, and the high-involvement firms tend to professional services firms, discuss how their environments, technology, etc., may differ.

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Design Your Own Company!

(Set 1)

You are just starting a company that will have about 200 employees initially, but is expected to grow steadily. You need to design the organization structure. Unfortunately, you have had no management training. However, you believe that you have a pretty good understanding of human nature. The following are your beliefs about people (employees): (a)

Most employees are inherently lazy and will avoid work if they possibly can.

(b)

Most employees are primarily motivated by economic incentives and will do what will get them the greatest economic gain, while doing as little as they can in return.

(c)

Human feelings can cause unpredictable behaviour, so organizations must be designed in such a way as to neutralize and control human feelings and thereby control their unpredictable traits.

(d)

Although most people are not capable of self-control, some are. These manage the rest.

Organization Design: The following are some dimensions of organization structure, along with some of the options available for each dimension. In designing your organization structure, choose the ones that fit best with your beliefs about people (as described above).

Job Design: (a) Narrow, very specific jobs that prevent social interaction (b) Narrow, specific jobs that may allow some social interaction (c) Broad, challenging jobs that allow employees scope in deciding how to do their work Coordination: (a) Strict pyramidal hierarchy, with many rules; coordination by bosses (b) More flexible structure, with coordination by employees themselves; relatively few rules (c) Pyramidal hierarchy; many rules; most coordination by bosses, some by employees Control: (a) Exercised through employee peer pressure, through supervisor if this fails (b) Employees expected to exercise self-control (c) Exercised through close supervision, strict enforcement of rules, with penalties for breaching them Communication: (a) Open communication, high flow of communication up, down, and across the organization (b) Very little communication, very restricted access to information (c) Lots of social communication, but little task-oriented communication; restricted access to information Leadership and Decision Making: (a) Autocratic leadership, task-oriented, centralized decision making (b) Participative leadership, decentralized decision making (c) Autocratic leadership, employee-oriented, centralized decision making Reward Systems: (a) Fixed salary with seniority bonuses and liberal fringe benefits (b) Pay based on number of units produced or hours worked (c) Salary with gain sharing, profit sharing, or employee stock plans

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Design Your Own Company!

(Set 2)

You are just starting a company that will have about 200 employees initially, but is expected to grow steadily.

You need to design the organization structure. Unfortunately, you have had no management training. However, you believe that you have a pretty good understanding of human nature. The following are your beliefs about people (employees): (a)

Most employees are basically motivated by social needs and obtain their basic sense of identity through relationships with others.

(b)

As a result of the fragmentation of jobs, meaning has gone out of work itself and must therefore be sought in the social relationships on the job.

(c)

Most employees are more responsive to the social forces of the peer group than to the incentives and controls of management.

(d)

Employees are responsive to management to the extent that management can meet employees’ social needs and needs for acceptance and can get the work group to adopt favourable group norms.

Organization Design: The following are some dimensions of organization structure, along with some of the options available for each dimension. In designing your organization structure, choose the ones that fit best with your beliefs about people (as described above).

Job Design: (a) Narrow, very specific jobs that prevent social interaction (b) Narrow, specific jobs that may allow some social interaction (c) Broad, challenging jobs that allow employees scope in deciding how to do their work Coordination: (a) Strict pyramidal hierarchy, with many rules; coordination by bosses (b) More flexible structure, with coordination by employees themselves; relatively few rules (c) Pyramidal hierarchy; many rules; most coordination by bosses, some by employees Control: (a) Exercised through employee peer pressure, through supervisor if this fails (b) Employees expected to exercise self-control (c) Exercised through close supervision, strict enforcement of rules, with penalties for breaching them Communication: (a) Open communication, high flow of communication up, down, and across the organization (b) Very little communication, very restricted access to information (c) Lots of social communication, but little task-oriented communication; restricted access to information Leadership and Decision Making: (a) Autocratic leadership, task-oriented, centralized decision making (b) Participative leadership, decentralized decision making (c) Autocratic leadership, employee-oriented, centralized decision making Reward Systems: (a) Fixed salary with seniority bonuses and liberal fringe benefits (b) Pay based on number of units produced or hours worked (c) Salary with gain sharing, profit sharing, or employee stock plans

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Design Your Own Company!

(Set 3)

You are just starting a company that will have about 200 employees initially, but is expected to grow steadily. You need to design the organization structure. Unfortunately, you have had no management training. However, you believe that you have a pretty good understanding of human nature. The following are your beliefs about people (employees): (a)

People seek to be mature on the job and are capable of doing so. Employees tend to live up (or down) to expectations. If employees are given trust, they will usually be trustworthy.

(b)

Work can be as natural as play if it satisfies higher order needs for learning and growth.

(c)

Employees are primarily self-motivated and can exercise self-control if they are treated fairly and are given interesting jobs that allow autonomy, learning, and growth.

(d)

There is no inherent conflict between individual goals and organization goals. If employees are treated fairly, and if the reward system is structured properly, they will voluntarily integrate their goals with those of the organization.

Organization Design: The following are some dimensions of organization structure, along with some of the options available for each dimension. In designing your organization structure, choose the ones that fit best with your beliefs about people (as described above).

Job Design: (a) Narrow, very specific jobs that prevent social interaction (b) Narrow, specific jobs that may allow some social interaction (c) Broad, challenging jobs that allow employees scope in deciding how to do their work Coordination: (a) Strict pyramidal hierarchy, with many rules; coordination by bosses (b) More flexible structure, with coordination by employees themselves; relatively few rules (c) Pyramidal hierarchy; many rules; most coordination by bosses, some by employees Control: (a) Exercised through employee peer pressure, through supervisor if this fails (b) Employees expected to exercise self-control (c) Exercised through close supervision, strict enforcement of rules, with penalties for breaching them Communication: (a) Open communication, high flow of communication up, down, and across the organization (b) Very little communication, very restricted access to information (c) Lots of social communication, but little task-oriented communication; restricted access to information Leadership and Decision Making: (a) Autocratic leadership, task-oriented, centralized decision making (b) Participative leadership, decentralized decision making (c) Autocratic leadership, employee-oriented, centralized decision making Reward Systems: (a) Fixed salary with seniority bonuses and liberal fringe benefits (b) Pay based on number of units produced or hours worked (c) Salary with gain sharing, profit sharing, or employee stock plans

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Classify Your Firm Firm Name: ____________________________________ Your task here is to classify your current employer (or a previous employer) according to which of the following choices within each structural dimension best describes that employer, for the majority of its employees. Do not base your selection on what you would like the organization to be, or what the organization claims to be, but on what the organization actually displays, for the majority of its employees.

Job Design: (a) Narrow, very specific jobs that prevent social interaction (b) Narrow, specific jobs that may allow some social interaction (c) Broad, challenging jobs that allow employees scope in deciding how to do their work Coordination: (a) Strict pyramidal hierarchy, with many rules; coordination by bosses (b) More flexible structure, with coordination by employees themselves; relatively few rules (c) Pyramidal hierarchy; many rules; most coordination by bosses, some by employees Control: (a) Exercised through employee peer pressure, through supervisor if this fails (b) Employees expected to exercise self-control (c) Exercised through close supervision, strict enforcement of rules, with penalties for breaching them Communication: (a) Open communication, high flow of communication up, down, and across the organization (b) Very little communication, very restricted access to information (c) Lots of social communication, but little task-oriented communication; restricted access to information Leadership and Decision Making: (a) Autocratic leadership, task-oriented, centralized decision making (b) Participative leadership, decentralized decision making (c) Autocratic leadership, employee-oriented, centralized decision making Reward Systems: (a) Fixed salary with seniority bonuses and liberal fringe benefits (b) Pay based on number of units produced or hours worked (c) Salary with gain sharing, profit sharing, or employee stock plans

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Chapter 3: A Behavioural Framework for Compensation

CHAPTER 3 A Behavioural Framework for Compensation ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That rewards influence employee behaviour, but that the behaviour you get is not always the behaviour you want. It is crucial to be able to predict the consequences of a reward and compensation system before it is adopted.

2. How to use the behavioural framework as a tool to help understand and predict the possible consequences of a reward and compensation system.

LEARNING OUTCOMES After reading this chapter, students should be able to: 

Identify the main types of reward problems that can afflict organizations.



Define the three key employee behaviours desired by employers.



Identify three key job attitudes and explain their roles in determining employee behaviour.



Describe the causes and consequences of reward dissatisfaction.



Explain how to generate membership behaviour.



Outline the process through which task behaviour is motivated.



Explain how to generate organizational citizenship behaviour.



Discuss the role that managerial strategy plays in determining the type of employee attitudes and behaviour needed by an organization.



Describe the implications of the behavioural framework for designing effective reward systems.

KEY CONCEPTS Key concepts discussed in Chapter 3 include the three main types of employee behaviour that organizations may seek (membership, task, and citizenship) and the three key job attitudes (job satisfaction, motivation, and organizational identification) necessary to generate these behaviours. Key causes and consequences of reward dissatisfaction are then discussed, with an Copyright © 2018 by Nelson Education Ltd.

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underlying theme of just how damaging reward dissatisfaction can be. Process theories of motivation are discussed to explain individual choices to satisfy needs.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

If a reward and compensation system is to produce behaviours that the organization wants and needs, it is essential to understand how to generate these behaviours.



Many reward and compensation systems not only fail to produce the desired behaviour, but can actually cause counterproductive behaviour that could even threaten the success of the firm.



Being able to understand and predict the consequences of a reward and compensation system is a valuable skill for any manager, and is an essential skill for HR managers.

BARRIERS TO LEARNING 

This chapter contains many concepts, some of a complicated nature, and students may feel overwhelmed by the volume and complexity of material. It is crucial for the instructor to lead students through the chapter piece by piece.



Many of the concepts may seem very theoretical to students, and they may not understand their practical implications, or how to apply them in practice. It is important for the instructor to incorporate many engagement and application activities—as discussed below—in covering this material.

ENGAGEMENT STRATEGIES Start by referring to the examples of compensation problems in the opening vignette and first two pages of the chapter. At first glance, the approach seemed reasonable until the approach extended itself to those who were unable to afford a mortgage. Ask whether the problematic results could have been anticipated. Chapter 3 is intended to provide a tool (the behavioural framework for compensation) to help us predict—prior to implementation—the consequences that are likely to arise when changes are proposed for the compensation system. Being able to predict the consequences will not only help to avoid costly problems, but also help us select the compensation system most likely to produce the behaviour we want.

Introduce the three main types of reward problems and ask the class to identify which type of reward problem each of the above examples exemplifies. Ask students whether they have run into any of these problems in their work experience (or any similarities to these problems).

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Next, point out that there are three main behaviours (membership, task, citizenship) organizations might want from their employees. Also note that the importance of these behaviours (and, therefore, what firms are willing to do to get these behaviours) varies radically, depending on the nature of the firm, especially the managerial strategy. Ask what it takes to produce behaviour change in employees, and link to the three key job attitudes (job satisfaction, work motivation, organizational identification), showing Figures 3.1 and 3.2.

Segue into a discussion of how reward dissatisfaction has the potential to threaten these desired attitudes and behaviours. Ask students about instances where they experienced reward dissatisfaction—and what the causes may have been—before getting into a structured discussion, using Figure 3.3. Then, ask students what their reactions to reward dissatisfaction were. Present Figure 3.4 piece by piece so that it is less intimidating. (Using the Internet 1) could be used here to illustrate the financial costs of just one aspect of reward dissatisfaction—high employee turnover. This could be done in class, or assigned in advance so that students can report back their findings.)

All of this sets the stage for Supplemental Exercise 1, which is intended to use student work experience to help students apply and better understand key concepts introduced up to this point in the text (the three key employee job attitudes, intrinsic vs. extrinsic rewards, the three main compensation components, the three main reward problems) and to help them see connections between reward and compensation systems and possible consequences, in terms of reward problems and employee performance. This exercise can usefully extend over an entire class period or more. (Note that an alternative to the above exercise that requires less class time is endof-chapter Exercise 1.)

To bring these concepts into the context of the corporate world, and to show how compensation can fit with and support managerial strategy—or can undermine managerial strategy—end-ofchapter Exercise 2 works very well here. Besides involving a very well-known corporate brand (Toyota), it also shows what a reward and compensation strategy that supports a highinvolvement managerial strategy actually looks like in practice.

Case Question 1 (“Henderson Printing”) can also be used here to show the problems that can arise in a firm that practises virtually none of the principles of good compensation discussed so far. By starting with a specific problem (high turnover of new employees) this case can be used like a “whodunit” mystery to show how a poor compensation system can be a “culprit” guilty of causing many problems, without always being an obvious suspect. It also allows for a discussion of the criteria for effective compensation, and for students to practise using course concepts to identify solutions for this small, struggling enterprise.

The text next moves to the practical matter of how to create the three types of desired employee behaviours, starting with membership behaviour. Lead off with the general question “Why do people work?” Ask students who are employed why they work, and why they chose the job they did. Ask students who are not currently employed what they would like to get out of a job. Ask whether it is possible that these desires may change over time.

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Chapter 3: A Behavioural Framework for Compensation

Introduce the concept of affective vs. continuance commitment. Ask students which type of commitment their previous job seemed to engender for most employees. Pose the question of whether low employee turnover is always a good thing. Most students will have been conditioned to think so, so asking students to put conditions on this statement may stimulate some discussion and/or debate. In the discussion, it should come out that the cause of low turnover is very important—is it due to affective commitment or continuance commitment? Ask whether continuance commitment is always worth paying for. Reference the Zappos example (Compensation Today 3.5) to show how one firm actually tests for the strength of affective commitment in its new recruits by offering them a bonus to quit!

Turning to task behaviour, ask students if they have ever wondered why some employees seem to put a lot of effort into their work, while others do not. Lead this into a general discussion of what students think “motivation” is all about. Note that the study of “motivation” is intended to help solve the mystery of why people behave as they do. Two main types of theories have emerged—content theories and process theories. Point out that content theories help to explain what needs we are attempting to satisfy, and that process theories help to explain how we will go about satisfying those needs. Although we all (most of us, anyway) need money, some of us will try to satisfy that need by accepting employment, some will seek a rich spouse, some will buy lottery tickets, and some will rob banks. Process theories help us to understand which of those we will choose.

Note how content theories relate to the three managerial strategies (Figure 3.6). Conclude discussion of content theories by noting that the key compensation issue for firms is identifying the salience of various needs among its employees, referencing Compensation Today 3.6 to show how employee needs changed during the Klondike Gold Rush.

Moving on to process theories, note that motivation is not always as simple as mainstream economists (or as some critics of performance pay) might imagine, and that both intrinsic and extrinsic factors can play a strong role in motivation, as Compensation Today 3.7 (“Want to Help People Lose Weight?”) illustrates. Ask students to provide some personal examples to help reinforce this idea and better understand expectancy theory. Devote considerable time to expectancy theory, showing Figure 3.8, and explaining it with examples. For instance, reference “The $50,000 Hamburger” case (Compensation Today 3.8) to illustrate valence, instrumentality, and expectancy, but mention attribution theory as well, using the “The Elderly Man” story and Compensation Today 3.9 (“Fining Latecomers Increases Lateness!”). Finish this section by pairing students and asking them whether money ought to be considered a motivator, in the light of all the theories about motivation. Poll the pairs to find out how many say “yes” and how many “no.” Ask whether (and where) it would be better to abandon performance pay and stick to noncash employee recognition.

Turning to employee citizenship behaviour, ask students whether they have seen any examples of citizenship behaviour in their work experience. Is there any pattern to the types of organizations in which citizenship behaviour arises or does not arise? Ask students for ways that an organization could stimulate citizenship behaviour. In your discussion, note that citizenship behaviour is virtually impossible to generate in some organizations, but that in many of these firms (i.e., classical firms) citizenship behaviour is not needed anyway.

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Chapter 3: A Behavioural Framework for Compensation

To reinforce the concepts discussed to this point, and to illustrate how intrinsic rewards could be designed into jobs, Case Question 2 (“Plastco Packaging”) can be used here. This case also helps students see the big picture, by asking them to consider (and recommend) what other structural changes (including reward structure) would be necessary to support what is, in essence, a movement from a classical to a high-involvement managerial strategy.

This chapter covers a lot of ground. The purpose of the final section of Chapter 3 is to distil the contents of the chapter into a few key behavioural implications for designing effective compensation systems, as summarized in Compensation Notebook 3.1, Behavioural Implications for Designing Effective Reward Systems. Put this on a slide, and make sure students understand how the six key implications play into effective compensation design. It would also be useful at this point to briefly tie the content of this chapter to the previous chapter, to emphasize how the strategic and behavioural frameworks are essential complements to each other in designing effective compensation systems. Ask students if they could provide an example ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

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Chapter 3: A Behavioural Framework for Compensation

ADDITIONAL RESOURCES Chapter Summary Chapter 3 presents the second of two conceptual tools that underpin the effective design of compensation strategy. Once the employee behaviour that a firm needs has been identified, how do you know, in advance, whether a given compensation strategy is likely to actually produce that behaviour? The behavioural framework presented in Chapter 3 is intended to address this question.

The chapter starts off by using specific examples to illustrate three main reward problems, with the key theme being that “what you want is not always what you get” when it comes to reward systems. The chapter then asks the question of whether it would be possible to predict, in advance, whether a reward system is likely to produce the desired employee behaviour, and explains that the behavioural framework can help to do so.

Next, the chapter turns to the key issue of how to generate the desired employee behaviours, discussing theories of job satisfaction and work motivation, including content and process theories of motivation, in so doing. After discussion of the complex (and controversial) question of whether money can really be seen as a motivator, the issue of citizenship behaviour and how to create it is addressed. The chapter concludes with a discussion of six key implications (as summarized in Compensation Notebook 3.1) for effective reward system design that flow from the behavioural framework. The summary to Chapter 3 sums up the key linkages between the material in this chapter and the material in Chapter 2.

Suggested Answers to Discussion Questions 1. The three main categories of reward problems are: (1) failure to produce desired behaviours, (2) production of desired behaviour but with undesirable consequences, and (3) production of reward dissatisfaction.

2. The psychological contract assumes that an employee will make certain contribution to the organization, in return for certain rewards. Problems can arise with this psychological contract if a misunderstanding or lack of communication regarding rewards that will actually be provided or if the employer changes the contract in a way that the employee perceives as unfair. This can and will often influence employee behaviours and attitudes about the organization.

3. Reward systems can be used to generate task behaviour, membership behaviour, and citizenship behaviour. Students should identify the three key employee behaviours: (1) membership behaviour, (2) task behaviour, and (3) organizational citizenship behaviour. The three key employee attitudes: (1) job satisfaction, (2) work motivation, and (3) organizational identification. Job satisfaction will lead to membership behaviour, work motivation leads to task behaviour, and organizational identification leads to citizenship behaviour. Students should focus on Figure 3.1.

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Chapter 3: A Behavioural Framework for Compensation

4. Expectancy theory states that individuals are more likely to offer more effort to particular behaviour if they believe there is value at the end of the effort and that they can actually perform the behaviour. It is associated with three key terms: (1) Valence (the net value) – “Is the task worth doing?”; (2) Instrumentality (the perceived likelihood the behaviour will lead to the desired consequence) – “Will I actually receive the rewards if I accomplish the task?”; and (3) Expectancy (the perceived likelihood of actually being able to accomplish the behaviours) – “Will I be able to accomplish the task if I make the effort?”. This theory can help managers with their ability to lead and coach employees. By recognizing employee strengths and weaknesses, managers can make sure they delegate work and support employees so they can strive and achieve valued performance. This can ensure trust, gain confidence, and allow managers to continually “stretch” employees further in their work related activities as they develop their knowledge, skills and confidence.

Notes for Exercises 1. The purpose of this exercise is to give students the opportunity to better understand the consequences of reward dissatisfaction by linking it to their own personal experiences. Link this discussion to Figure 3.3 (Causes of Reward Dissatisfaction) and to Figure 3.4 (Consequences of Reward Dissatisfaction). For each group, have the participants’ select the most pronounced case of reward dissatisfaction and share it with the class. They should indicate what they consider to be the key causes and consequences of this reward dissatisfaction.

2. The purpose of this exercise is to give the students the opportunity to understand how reward concepts might relate to managerial strategy. Position the response to this exercise within the context of the concepts covered in the first three chapters, particularly intrinsic vs. extrinsic rewards, managerial strategy, and the behavioural issues covered in this chapter. Break the class into groups of four to six students, and have them (a) identify the concepts that help explain why high involvement was successful at Toyota but not at CAMI and (b) discuss what management at CAMI should have done differently.

Some points that might inform this discussion are as follows: 

One obvious difference between Toyota and CAMI is the presence of a union at CAMI. Another is the reward and compensation system, which is very complex and multifaceted at Toyota, but very traditional at CAMI. Although CAMI voluntarily accepted the CAW and the union agreed to lower wages in return for what they thought would be a more high-involvement style of management, most of the elements of the highinvolvement model never really materialized at CAMI, although the trappings and symbols of high-involvement management were there.



For example, the time clock was eliminated, parking and cafeterias became more egalitarian, employees were known as “associates,” and production “teams” were formed.

However, the “teams” that were formed did not seem to have any real powers, and the

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Chapter 3: A Behavioural Framework for Compensation

work was still organized as in a traditional plant, except that staffing was leaner than in a traditional plant. After a while, CAMI employees came to realize that nothing fundamental had changed in the employee–management relationship, despite all the symbols. Management did not really seem to trust employees or value their input, and employees lost interest in providing input, feeling they were simply being manipulated for greater reward to the company. 

A key problem at CAMI was that a traditional classical reward and compensation system remained in place at the plant. If workers are going to be motivated to work both harder and smarter, as they do at Toyota, they need to know that they will share in the fruits of their labour. However, the CAW has always been philosophically opposed to any kind of non-traditional pay system, such as profit sharing, so it would be very difficult for management at CAMI to implement the complex and multi-faceted reward system in place at Toyota.



Use of a traditional reward system at CAMI probably had one other effect. Because employee and management goals were not harmonized, through the use of group and organizational performance pay, management may have been less willing to trust and value input from employees. In line with this, they didn’t seem to create mechanisms through which employees could have more input into the operation of the firm. This may also have been a by-product of representation of employees by the CAW, a union that has always believed in the traditional adversarial relationship between management and employees and has never been enthusiastic about cooperative labour-management relations. Maybe this effort to move to high involvement was simply doomed to fail right from the outset.



Ed Lawler would not have been surprised by the results at CAMI. He argues that there are four key elements to high-involvement management—power, information, knowledge, and rewards—and that if all four are not provided, high-involvement management will not work. Rewards that tie employee goals to those of the organization are particularly crucial in his view, because delegating power to employees without this integration of goals would simply be foolish on the part of management. The union wanted power to be delegated to employees, but did not want to change the reward system. Other elements that may not have been put in place are information and knowledge. It is also not clear that management provided the necessary information—or the training and education necessary for employees to interpret this information.



However, an interesting sidelight to this discussion is that while high-involvement management did not really appear to take hold at CAMI, the attempt to achieve a new type of relationship between the company and its employees may have eventually borne some fruit, as the plant has become one of the most efficient plants in North America.

Although the fact that CAMI is a relatively new plant may have helped efficiency, the very low absenteeism rate suggests that workers are generally happy with the new psychological contract they eventually worked out with the employer.

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Chapter 3: A Behavioural Framework for Compensation

Notes for Case Questions 1. Henderson Printing. The purpose of this case question is to help students understand the consequences of a poor reward system within an actual organization. (Note: This is a recurring case. The notes for Case Question 1 in Chapter 1 may provide useful background here. Students can do further work with this case later in the book. See Chapter 10, Case Questions 1 and 2.)

Divide the class into groups of four to six to discuss the questions provided, giving them about 30 minutes to come up with responses to these questions, and then have a full class discussion of their responses. It would be helpful if students were assigned to read the case and consider the questions in advance of the class discussion.

Some points that may inform this discussion are as follows: 

George Henderson’s underlying managerial assumptions fit the human relations approach because George has a genuine concern for the welfare of his employees, but he also wants to stay in control—despite his protests to the contrary. He wants to make all major decisions in the firm, despite not having the training for many of them. He has unconsciously designed his organization so that all decisions must go through him.



Issues associated with motivation, organizational identification, and job satisfaction need to be better understood by top management in order to affect the foundations of a reward system. Additionally, issues of equity, fairness, and business structures and process need to be addressed, particularly in terms of developing people and rewarding them for their achievements. Currently there is reward dissatisfaction stemming from all the root causes, but particularly from perceived inequity and lack of organizational justice.



New employees see a chaotic organization where no one except George is able to make decisions, and are frustrated by the fact that rewards seem to flow mainly to those employees who George remembers and likes, without any real attempt to consider performance. Since George is much less likely to remember new employees than older employees, their rewards will tend to be much lower, regardless of how they perform. On the other hand, older employees know that if they are cheerful and do not offend anybody, then George will take care of them. There is no motivation to perform well.



Before a reward and compensation system can be designed, there are many fundamental organizational issues to address. The product line must be rationalized, and proper costing for the various customer orders must be done. The firm needs to implement proper financial information systems, and to hire specialized personnel in the key functional areas, such as marketing and human resources. Responsibilities, especially of supervisors, need to be better defined, and delegation needs to take place. However, none of this is likely to take place with George still at the helm, so it is time for new leadership, possibly in the form of his daughter, to take control.

Copyright © 2018 by Nelson Education Ltd.

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Chapter 3: A Behavioural Framework for Compensation



It sounds like a human relations structure may work for this organization, but a lot of changes need to be made if the firm is to survive. If the firm continues to focus on custom orders, possibly a high-involvement approach might make sense, but it will be very difficult to implement with a large core of long-term employees who are not used to exercising any initiative or making any decisions. Clearly, it is essential to implement a reward and compensation system that recognizes what each employee contributes to the organization more fairly than does the current system. Currently, the compensation system doesn’t seem to achieve any of the eight goals of an effective compensation outlined in Compensation Notebook 1.1, except that it may comply with the law.

2. Plastco Packaging. The purpose of this case question is to help students understand the causes of low job satisfaction and poor work motivation within an organizational context, and to learn how to build more intrinsic rewards into jobs. (Note: This is a recurring case, and students can do further work with this case later in the book. See Chapter 12, Case Question 2.)

Divide the class into groups of four to six, give them about 30 minutes to come up with responses to the questions provided, and then have a full class discussion of their responses.

It would be helpful if students were assigned to read the case and consider the questions in advance of the class discussion.

Some points that may inform this discussion are as follows: 

The way in which work is currently organized at Plastco Packaging is more or less guaranteed to produce low worker satisfaction, low motivation, and high conflict among employees and between employees and management. For starters, the packers/inspectors are put in a nearly impossible situation. They are at the bottom of the hierarchy in terms of wages and status, and appear to have no opportunities to rise to the machine operator jobs. They are not given standardized quality guidelines, and so it is difficult to justify the rejection of a batch. Doing so is also guaranteed to raise the ire of the machine operators, because they have no respect for the opinions of the packers/inspectors, and because it can make them look bad. However, given the reward structure of the organization, there is no real incentive for anyone to care about quality or productivity anyway.



There are several ways one could enrich the job of machine operator, which is the key to the success of the organization. Currently, all five job characteristics are low—there is little task identity because the operators do only a portion of the bag-making process, task significance is likely perceived to be low, skill variety is low, job autonomy is low, and job feedback is also low. The only feedback operators currently receive is from the packers/inspectors, which is always negative and which they probably discount anyway.



To improve all these characteristics, the machine operators could be given the entire task, including routine maintenance and adjustment of the equipment and the packing task, as well as following up with the customer to discuss product quality. Each operator would be assigned to a single machine, which would become “their machine” for the purposes of routine maintenance and the like. Packing their own products would enable them to get

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Chapter 3: A Behavioural Framework for Compensation

direct feedback from the job on the quality of their output. It could be set up so that a number of customers are assigned to each machine operator, and these operators are primarily responsible for ensuring quality of production and ensuring that productivity levels are met so that a profit can be realized on each batch. Of course, consistent and measurable quality standards would need to be created, so that all operators are using the same standards to judge the quality of their work. Also, there would need to be a change in the reward system that makes the workers care about the quality and quantity of production. 

The best way of doing this would probably be some type of gain sharing plan, where all the operators would benefit from increasing productivity and product quality. The reason for including all operators is that this creates an incentive for operators to work together if they have production problems. A profit-sharing plan would also be useful for all company employees, to encourage concern for profitability throughout the firm. This would also encourage the mechanics to spend time teaching operators how to do routine maintenance of the machines.



A downside to this plan is that the firm would be replacing six low-paid inspector/packers with six highly paid machine operators. However, some of this should be offset by being able to reduce the size of the maintenance department. In addition, the operators should be able to reduce machine downtime, since they will not be waiting for a maintenance person to come fix a malfunctioning machine, and probably will be able to cut downtime by doing some preventative maintenance. Both productivity and quality should go up.



One thing to bear in mind, however, is that these changes do represent a shift toward more high-involvement management at Plastco. To go with the gain-sharing plan, management will need to create a mechanism for employee participation and problem solving, and make sure that employee ideas are seriously considered. In the process, there will be a need to provide employees with more information about costs, profitability, and other financial information, as well as some training to interpret this information. Overall, it is always difficult for classical firms to move to high-involvement management.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

For an example of how to estimate the costs of employee turnover, go to the Small Business Advisor website at http://www.isquare.com/turnover.cfm.



For examples of how specific values and personality characteristics may affect employee motivation and of ways to test for them, go to the Queendom website at http://queendom.com.



To examine trends in the labour market, go to the Statistics Canada website at http://www.statcan.gc.ca/daily-quotidien/160708/dq160708a-eng.htm.

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Chapter 3: A Behavioural Framework for Compensation

Supplemental Exercise 1. Rating Your Job: The Good, the Bad, and the Ugly. This exercise is intended to utilize student work experience to help students apply and better understand key concepts introduced in this and earlier chapters (the three key employee job attitudes, intrinsic vs. extrinsic rewards, the three main compensation components, the three main reward problems) and to help them see connections between reward and compensation systems and possible consequences, in terms of reward problems and employee performance.

First, ask students to individually fill out the job rating sheet on the next page. Then, form them into groups of four to six to discuss their experiences. If students identified any of the reward problems, they should be asked to share those with the group. Students should be prompted to look for patterns in the experiences of their group members—for example, did poor job attitudes seem to be connected to poor job performance?

After that, there are two options for the instructor. The instructor could just move to a class-wide discussion, asking each group to talk about reward problems they saw, and what the consequences were. When it comes to reward dissatisfaction, you could put up Figure 3.4 as a slide, and trace through to which consequences arose in a particular case.

Be sure to include a discussion of the causes of the reward dissatisfaction and the other reward problems. There is enough here for this exercise to take a whole class period.

Either instead of or in addition to the above, collect the ratings sheets at the end of class, and do a tabulation of the results. For example, how many students reported a lot of job satisfaction, how many reported some job satisfaction, and how many reported very little? Do this with the other questions as well, and put the results on slides. Use these data to inform a discussion about the connections among compensation, attitudes, and consequences.

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Chapter 3: A Behavioural Framework for Compensation

Rating Your Job: The Good, the Bad, and the Ugly 1. What is the job title of your most recent job?___________________________________ 2. For most employees in this job, did this job produce: (Circle one response for each item.) (a) Job satisfaction

1. Very little

2. Some

3. A lot

(b) Motivation (job effort)

1. Very little

2. Some

3. A lot

(b) Organizational identification

1. Very little

2. Some

3. A lot

3. What type of reward system was in place? (Circle one response for each item.) (a) Intrinsic rewards

1. Very little

2. Some

3. A lot

(b) Extrinsic rewards

1. Very little

2. Some

3. A lot

4. What type of compensation system was in place? (Circle one response for each item.) (a) Base pay

1. None

2. Some

3. A lot

(b) Performance pay

1. None

2. Some

3. A lot

(c) Indirect pay (benefits)

1. None

2. Some

3. A lot

5. Did you notice any of the following reward problems? (Circle one response for each item.) (a) Failure to generate desired behaviour

1. Yes

2. No

(b) Desired behaviour, but with undesirable consequences 1. Yes

2. No

(c) Reward dissatisfaction

2. No

1. Yes

6. Overall, would you say the performance of most employees was: (Circle one response.)

1. Just good enough to get by 2. More than the absolute minimum 3. At a high level

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Chapter 4: Components of Compensation Strategy

CHAPTER 4 Components of Compensation Strategy ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. The wide range of compensation mix choices that are available to an employer.

2. How to select the compensation mix choices that best fit a given firm.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Define base pay and discuss its advantages, disadvantages, and applicability.



Define performance pay and discuss its advantages, disadvantages, and applicability.



Define indirect pay and discuss its advantages, disadvantages, and applicability.



Identify and differentiate between the three main methods for establishing base pay.



Define market pricing and discuss its advantages, disadvantages, and applicability.



Define job evaluation and discuss its advantages, disadvantages, and applicability.



Define the pay-for-knowledge system and discuss its advantages, disadvantages, and applicability

KEY CONCEPTS Key concepts in Chapter 4 are the pros and cons of base pay, performance pay, and indirect pay, as well as the pros and cons of the three main methods for establishing base pay (market pricing, job evaluation, pay-for-knowledge). Throughout the chapter, linkages between these pay practices and key concepts from the strategic and behavioural frameworks are identified.

STUDENT MOTIVATION Why should students care about the material in this chapter?

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Chapter 4: Components of Compensation Strategy



In order to identify the most appropriate compensation strategy, it is essential to understand the full range of compensation choices that are available to employers.



To select the most appropriate compensation mix, it is essential, besides taking the contextual variables and managerial strategy into account, to understand the advantages and disadvantages of each choice, and the specific circumstances that are relevant to choosing whether to include a particular pay component in the compensation mix for a particular employer or set of jobs.

BARRIERS TO LEARNING 

Students often have difficulty understanding that job evaluation does not involve evaluation of the performance of the jobholder, but only of the job itself. This distinction needs to be emphasized by the instructor at every turn.



This chapter tends to be rather list-based, which makes it more useful for reference, but easier for students to just skim over. Application exercises are important for this chapter because it is essential that students really understand the many compensation choices that are available.

ENGAGEMENT STRATEGIES Start off by asking students what are the two key questions when designing any compensation strategy, and then indicate that Chapters 4 and 5 cover the first one. Use a slide of Figure 4.1, Compensation Mix Choices to show the “menu” of compensation choices.

Turning first to base pay, give examples of jobs that are paid only on output (i.e., tree planters, dentists, trucker) and ask, “Why should we bother with base pay at all?” Base pay has been identified as a key change identified in the open vignette. Lead this into a discussion on the practicality and appropriateness of base pay vs. output-related pay. Ask students who have worked under both systems how they felt about the different systems. Then students should identify the advantages and disadvantages of base pay. As with all pay components, ask when base pay or output pay is more appropriate.

Show a slide of the main types of performance pay and ask students if they have ever worked under these, and what the consequences were. In some cases, performance pay will have worked well, but in others it will not. Try to tease out why some performance pay systems were successful, and why others were not. From this discussion, unearth the general advantages and disadvantages of performance pay, noting that the specific pros and cons will vary with the specific forms of performance pay (to be covered in the next chapter).

Students should then give examples of indirect pay from their own workplaces and relate these examples to the six major categories of performance pay outlined in Compensation Notebook 4.1. Note that indirect pay can be very expensive, and then ask why employers would want to

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Chapter 4: Components of Compensation Strategy

provide it as it does not motivate employee task behaviour (although it may foster membership behaviour). Put up a slide showing some prominent types of performance pay, and ask students to use their clickers to indicate which type would be most important in the choice of their next job. (Be sure to include “additional cash” as one of the choices, just to see how students value benefits versus cash.)

You may wish to use end-of-chapter Exercise 2 to illustrate how different people may value various benefits differently.

End-of-chapter Exercise 3 can be used here, to illustrate the factors that need to be taken into consideration when designing indirect pay plans, and possible linkages with managerial strategy.

Compensation Notebook 4.2 can be used to briefly summarize and compare the pros and cons of the three major pay components. To conclude discussion of the three pay components, end-ofchapter Exercise 1 can be used to reinforce student understanding and application of the components. It also helps students think about the three components in terms of fit with various types of employers and various managerial strategies.

Next, move to the three methods for establishing base pay: market pricing, job evaluation, and pay-for-knowledge. Note that although market pricing may seem to be the simplest method, achieving a valid result is more difficult than it looks, and that applying market pricing doesn’t allow the firm to fit the pay system to its own specific circumstances, since it is just doing what the average firm does.

Next, discuss job evaluation. Find out how many people in the class have had any experience with job evaluation. In so doing, emphasize the distinction between job evaluation and performance evaluation of jobholders. Many students have trouble with this distinction. At this point, students do not need to have detailed knowledge of how to conduct a job evaluation; what they need is an understanding of the pros and cons of job evaluation, and the circumstances to which it is suited or not suited. Ask students if they can think of circumstances where job evaluation may not fit. However, note that in jurisdictions that have pay equity legislation, job evaluation is pretty well obligatory.

The exception to the need for job evaluation in pay equity jurisdictions is an approved pay-forknowledge system, which has been found acceptable for pay equity purposes. Unlike was the case for the previous two methods for determining base pay, this section of the text covers both the conceptual and the design side of pay-for-knowledge, which are too closely intertwined to separate them. Note the difference between skill-based pay (a proven pay practice) and competency-based pay (a questionable pay practice).

First off, ask if any students have worked under a skill-based pay system (although it is very possible that none have) and what the outcomes were. If none have, use Compensation Today 4.2 to illustrate the potential advantages of such a system and Compensation Today 4.3 to illustrate how these plans can be set up. Go over the five main issues in setting up a skill-based pay system. Follow up with a discussion of the many difficulties in using skill-based pay, and the

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Chapter 4: Components of Compensation Strategy

limited range of circumstances in which skill-based pay will be beneficial (mainly in certain high-involvement firms).

To reinforce the concepts in this chapter, first get students to tackle Case Question 1 (“The Fit Stop”), in pairs, to illustrate the issues involved in deciding whether or not to use base pay, and to illustrate a situation where skill-based pay would be very good fit (for the sales staff). You might ask students to design a skill-based system for the sales staff, and then discuss the results in class.

You could also undertake Case Question 2 (“Multi-Products Corporation”), which can be employed very effectively to illustrate how managerial strategy can influence the choice of base pay methods. This case also gives students practice in working with managerial strategy and the relevant contextual variables if you did not use this case for this purpose in conjunction with previous chapters.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

Copyright © 2018 by Nelson Education Ltd.

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Chapter 4: Components of Compensation Strategy

ADDITIONAL RESOURCES Chapter Summary As the introduction to Chapter 4 notes, there are two key questions that must be addressed in designing a compensation strategy: (a) What role (if any) should each of the three compensation components (base pay, performance pay, indirect pay) play in the compensation mix? and (b) What total level of compensation should be provided? The purpose of Chapters 4 and 5 is to address this first question, by providing a menu of the components and practices that may be selected when designing a compensation system, as well as the factors to be considered in this selection process.

Chapter 4 compares base pay, performance pay, and indirect pay, and then examines the three main choices of methods for establishing base pay. Chapter 5 goes on to an in-depth examination of the different choices available for performance pay.

Note that Chapters 4 and 5 are not intended to cover the detailed design issues for all of these components and practices, but simply to provide enough insight to enable the reader to knowledgably choose which of these practices will fit well with the reward strategy for a particular firm. The detailed design issues will come later in the text, but they are not needed for the formulation of a compensation strategy.

Suggested Answers to Discussion Questions 1. Base pay is a specific guaranteed amount of pay; often referred to as a “wage” or “salary.” Whether an employee exceeds or meets performance that pay “base pay” is guaranteed. The idea of “output-related” pay means an employee is paid based on the quality of performance. This can be effective for an organization to ensure performance is achieved or exceeded, but it has challenges. It can be difficult to measure based on what employees do. It can lead to just “getting things done to meet a quota but not necessarily paying attention to other variables like the quality of the work or the safety in the work (e.g., miners potentially impacting their safety to mine more in order to get paid more).

2. Indirect pay has been commonly referred to in the past as “fringe benefits” and are costincurring items that is not included as part of base or performance pay. It can range from health and dental plans to vacation entitlement. Compensation Notebook 4.1 outlines the six direct categories of indirect pay. There are eight primary reasons why firms offer indirect pay: (1) competitive pressure; (2) secure needs of their members; (3) it can provide more favourable income tax treatment; (4) some benefits can be purchased more cheaply by the employer rather than the employee; (5) it can protect the financial security and peace of mind of employees, thus helping maintain good employee performance; (6) some employers feel a genuine sense of responsibility for their employees; (7) benefits can reinforce a particular managerial strategy (e.g., human relations strategy) and (8) specific benefits can promote consequences that benefit the organization (e.g., subsidized fitness classes)

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Chapter 4: Components of Compensation Strategy

3. Use Compensation Notebook 4.3 as direct reference. Advantages and disadvantages of both are clearly explained. It is important to note the more robust detail achieved in using Job Evaluation, although it is more extensive and time consuming.

4. Focus on the Table 4.1 as a matrix table example and consider using the Shell Sarnia chemical plant described in Compensation Today 4.3. The five key steps include (1) deciding which employee groups to include; (2) designing skill blocks (often using relevant dimensions); (3) linking skill blocks to pay; (4) providing learning (ensuring that requisite skills are available) and (5) certifying skill achievement (ensuring valid and acceptable competence by both employer and employee).

Notes for Exercises 1. The purpose of this exercise is to use students’ experience to help them understand the concepts of base pay, performance pay, and indirect pay in practical terms, and to get them to apply the strategic framework described in Chapter 2 in order to get them thinking about the concept of fit. It would be useful to hand out to each group a pre-printed sheet that contains five columns. The first column is headed “Name of Employer,” the second column “Base Pay,” the third column “Performance Pay,” the fourth column “Indirect Pay,” and the fifth column “Managerial Strategy.” Ask groups to use this sheet to summarize their findings, and then collect the sheets. You could use this as a basis for an immediate discussion and/or as a basis for a discussion in the next class, once you have had an opportunity to see what they have recorded.

2. The purpose of this exercise is to demonstrate that the value of various benefits will differ for different individuals, which makes designing an effective indirect pay plan even more complex. Document the responses on the board, and see whether there is consensus on the three most important benefits, and whether there are any patterns. For example, do older students have different preferences than younger students? The more diversity there is in your class, the more diversity you should get in the responses. Make the parallel to organizations, where those with a more diverse work force will be less likely to find that a “standard” benefits package for everyone will be satisfactory.

3. The purpose of this exercise is to help students understand, within the context of actual firms, that the most appropriate type of indirect pay plan will vary for different employers, and to see possible relationships between organizational characteristics and the nature of the indirect pay plan that is developed. 

The first thing that needs to be done in any compensation analysis is to identify the managerial strategy being practised by the firm. It is apparent that the lawn maintenance company is (or should be) practising classical management; the retailer is (or should be) practising human relations management; and the computer firm is (or should be) practising high-involvement management. The behavioural framework should also be used to understand the likely characteristics of the employees and what benefits might

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Chapter 4: Components of Compensation Strategy

appeal to them. From there, it is quite easy to outline an appropriate indirect pay policy for each firm. 

For the lawn maintenance firm, its primary work force would be fit young men. There is no particular value in having extensive benefits to encourage commitment to the firm.

Indeed, the firm may not particularly want to retain most of its employees over a longer time frame, since their productivity may decline with age. Certainly, a pension plan is not likely to be of much value to the firm or of much importance to most of their work force.

Because the chance of workplace injury may be quite high, the firm may want to have some type of disability insurance program, although most of their liabilities in this area could be discharged through their participation in mandatory worker compensation programs.



For the clothing retailer, high membership behaviour would be very important, because customers in a high-end retailer such as this like to deal with the same knowledgeable staff. A human relations approach will create committed employees in what is usually a high-turnover environment. Indirect pay will be used heavily to encourage this commitment. It would include a pension plan, life insurance, supplementary medical and dental coverage, and, of course, discounts on company products, to encourage employees to wear what they sell. In the rather volatile retail environment, a deferred profit sharing plan would be a good choice for the pension plan, which would create employee interest in firm performance, and not commit the store to fixed pension payments at times when it might not be able to afford them.



For the computer firm, a high-involvement strategy will be essential. In this dynamic environment, the competition for good employees will be fierce, and while competitive compensation levels will be necessary, the work needs to be structured so as to maximize intrinsic rewards. In order to help retain employees, a solid and competitive benefits package will be essential, with a variety of features available. This might be an excellent organization for a flexible benefits plan, so that employees can maximize the value of their benefits by selecting benefits that suit their needs. Needless to say, a key benefit will be subsidized training and education programs. Other programs to help redress the work– family life conflict would be highly desirable, since the work is very intensive at times when a deadline must be met, and there needs to be some way of keeping work and family life in balance. Flexible and generous personal and vacation leaves can play a major role in this. Child and elder care programs might also help in this regard.

Recreational and fitness/health plans may also help to reduce stress in this very intensive environment. Optical care programs may also be highly desirable in this setting.

Notes for Case Questions 1. The Fit Stop. The purpose of this case question is to help students understand, within the context of an actual organization, the issues surrounding the choice between base pay and output-related pay, and the issues in selecting a method for determining base pay. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 2 may provide useful background here. Students can do further work with this case later in the book. See Case Copyright © 2018 by Nelson Education Ltd.

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Chapter 4: Components of Compensation Strategy

Question 3 in Chapter 5; Chapter 6, Case Question 1; Chapter 11, Case Question 2; Chapter 12, Case Question 1; and Chapter 13, Case Question).

It would appear that base pay (specifically skill-based pay) is important at the Fit Stop because it supports flexibility and it allows for recognition of those specialized job skill areas that are deemed important in this venture. Base pay also demonstrates an employer commitment to the employee, which in turn should elicit the same from the employees, which will be key to The Fit Stop’s success.

Skill-based pay (SBP) provides a major incentive for the employees to learn a variety of skills, which supports the owner’s desire to be able to offer expert and competent advice to each customer. It also permits greater flexibility in maintaining a consistency of expertise despite the extended hours of operation. SBP fits with the need for high-involvement management, which will be a prerequisite in order to foster the necessary behaviour to support the business model.

2. Multi-Products Corporation. The purpose of this case question is to help students understand, within the context of an actual organization, the issues in selecting a method for determining base pay. (Note: This is a recurring case. The notes for Case Question 3 in Chapter 2 may provide useful background here. Students can do further work with this case later in the book. See Case Question 2 in Chapter 6.)

If a classical managerial strategy is adopted, the most appropriate method of base pay for the new recreational products division of Multi-Products Corporation would be market pricing, in line with the classical managerial strategy, which will probably be best in this firm (see notes for Case Question 3 in Chapter 2 for more background on this case). By definition, market pricing establishes the rate of base pay by determining the minimum amount of pay necessary to attract qualified individuals from the labour market.

Since Multi-Products Corporation’s new division requires semi-skilled workers, who are readily available, and since unemployment is high, there is an opportunity to attract the necessary employees and contain costs. Also, since the union is relatively benign, there is no apparent need to be concerned about other issues beyond matching the market.

If a human relations managerial strategy is adopted, the most appropriate method of base pay would be job evaluation, with its emphasis on fairness and due process, with above-market pay offered, along with seniority raises to reduce turnover.

Possible Sources of Lecture Enrichment The following can be used as a source of materials for lecture enrichment: 

For examples of the current issues in benefits management, check the websites of three publications: Benefits Canada at http://www.benefitscanada.com; Benefits and Pensions Monitor at http://www.bpmmagazine.com; and the Canadian HR Reporter at http://www.hrreporter.com/compensation-benefits.

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

The “Using the Internet” questions could be used as in in-class exercise to illustrate how the compensation mix may vary across jobs, and even within the same job. This feature can be made interactive by asking students to identify the jobs, for which you will then use Salary Wizard to look up. Students often seem to enjoy using a website like Salary Wizard right in the class.

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Chapter 5: Performance Pay Choices

CHAPTER 5 Performance Pay Choices ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That there are many specific types of performance pay plans, and that they are very different, have different goals, and may produce very different outcomes.

2. To identify and differentiate the specific types of performance pay plans, and to understand the circumstances under which each best fits an organization.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Define and discuss the applicability of the four main types of individual performance pay.



Define and discuss the applicability of the three main types of group performance pay.



Define and discuss the applicability of the three main types of organizational performance pay.

KEY CONCEPTS Key concepts covered in this chapter include the performance pay choices available within each of the three main categories of performance pay (individual, group, and organizational). Four main types of pay geared to individual performance are covered—piece rates, commissions, merit pay, and special-purpose incentives. Three main types of pay geared to group performance are covered—gain-sharing plans, goal-sharing plans, and other group bonus plans. Also, three main types of pay geared to organizational performance are covered—profit sharing, employee stock plans, and other organization performance plans.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Performance pay plans are increasing in use by employers, and it is important for students to understand the wide array of choices available.

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Chapter 5: Performance Pay Choices



Many firms implement performance pay plans that fail to produce the intended results or that are even counterproductive. It is important to be able to select the performance pay plan that is most likely to produce the desired results, without undesirable consequences.

BARRIERS TO LEARNING 

There are many types of performance pay plans that may look superficially similar but in fact are very different and produce different outcomes. Students may be tempted to lump the various types together, without developing sufficient understanding of the differences among them.



Many people mistakenly call any type of employee stock plan a “stock option” plan. An employee stock option plan is in fact just one type of employee stock plan, and is very different from the other types. It is important that students understand the differences between these plans, and use the appropriate terminology to describe each.

ENGAGEMENT STRATEGIES First, use Figure 5.1 to introduce students to the entire “menu” of performance pay plans, indicating that we will be looking at the pros and cons of each type of performance pay in turn, to allow students to be able to select the performance pay plans that best fit the employer.

Then, use end-of-chapter Exercise 1 to kick-start the discussion of performance pay. This exercise can get students thinking about a whole range of issues, and the extent to which they can be solved by performance pay or other means should generate a fruitful discussion.

Starting with individual performance pay, ask students whether they have ever worked under piece rates. Common examples of piece rates for students include pizza delivery, haircuts, or tree planting. Discuss issues that may arise with their use. Use the Lincoln Electric example (Compensation Today 5.1) to illustrate some of the paradoxes of piece rates. Ask students where and under what conditions piece rates may be appropriate. Refer them to Compensation Today 5.2 for information on the potential benefits of using other forms of reward as opposed to merit pay increases.

Many students have had experience with sales commissions. Ask them whether they felt the sales commissions were effective in motivating performance. Were there any unintended effects of sales commissions? Discuss the pros and cons, and the circumstances under which they would be appropriate. Discuss applicability in terms of the four types of selling.

End-of-chapter Exercise 2 fits very well here. Because it asks students to collect outside information, it needs to be assigned in advance. However, note that to encourage students to actually invest the time to do this, you would probably have to turn it into a graded assignment.

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Chapter 5: Performance Pay Choices

Moving on to merit pay, ask students whether any of them have ever worked under merit pay, and how it worked out. In the ensuing discussion, be sure to emphasize the difference between merit raises and merit bonuses.

You can introduce this section by using a clicker question in which you ask students to indicate, if given a choice, whether they would prefer a $1200 merit raise or a $2400 merit bonus. For those who choose the $2400 merit bonus, ask them why, since a merit raise will pay off indefinitely, and will compound with future raises (as well as benefits geared to pay level, such as a pension plan), while a merit bonus does not contribute to future pay. However, there is at least one rational reason for choosing the merit bonus—if the employee is planning to quit his or her job in the near future! Also, if the employee fears that layoffs may be coming, and he or she may not be around long enough for the raise to net out to the $2400, which would take two years.

Before concluding the discussion on merit pay, be sure to note that there are many circumstances where it does not fit and may be ineffective or even counterproductive. Refer to Compensation Notebook 5.1 to outline the conditions necessary for success. Note that the key issue is to be able to differentiate and accurately measure individual performance, and that in many instances that may be neither practical nor desirable. (Mention in passing that the issue of appraising employee performance, on which merit pay depends, is a very problematic matter, and will be covered in Chapter 10.) Note that many merit pay plans fail because they are introduced in circumstances where they do not fit. In those situations, no amount of tinkering with the merit plan itself will make it work.

Before moving on, note that promotions can be seen as a type of merit pay. Ask whether there are any downsides to using promotions as the main means of recognizing exceptional employee performance. Discuss the dilemma inherent in doing so, as illustrated by the Peter Principle.

Have students seen any examples of the Peter Principle in action?

Moving on, note that in order to foster certain behaviours that are of special importance to the organization, or to counteract some behaviours that are causing problems for the organization, it may be worthwhile to consider the use of targeted incentives. However, these plans can backfire, as in the Green Giant case discussed at the beginning of Chapter 1. Ask students whether they have seen any examples of special-purpose incentives, and how they worked out.

Case Question 1 (“Alliston Instruments”) fits well here, to highlight the problems in using individual performance pay in the wrong circumstances, and to allow students to think about which types of individual performance pay might be the most or least likely to cause problems in this instance.

The problems that can be caused by individual performance pay are a good segue to group performance pay. Note that group pay plans may have very different consequences from individual performance pay, particularly in fostering group cohesion, teamwork, and cooperative behaviour. Mention that, in many firms, the use of employee teams has become more and more common in recent years, and that group pay plans fit with this trend and can reinforce the effectiveness of teams.

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Chapter 5: Performance Pay Choices

After noting that group or team pay plans fall into one of three main categories—gain sharing, goal sharing, and other group/team plans—ask the class if they can identify the key differences between gain-sharing and goals-sharing plans. A short clicker quiz would be a good tool to see whether students can differentiate these plans, and as a springboard to discussing their pros and cons.

Ask the class to discuss the applicability of gain- or goal-sharing plans to their workplaces.

Select several examples from student workplaces, and discuss the advantages and disadvantages each plan might produce. Bring in the idea of fit by asking students how they would know if such a plan might be a good fit for the example organizations. Hopefully, they will use both the strategic and behavioural frameworks in so doing—prompt them if they don’t! What factors would be necessary for the success of these plans?

Move on to other types of group plans. A good way to start this would be to ask if any of the students work/have worked under individual sales commissions. Ask them if replacing them with group commissions would be a good or a bad idea. Why so? What about a combination of individual and group commissions?

Note that there are many other possible group plans, such as group piece rates, competitive bonus plans, and team-based merit pay. Ask the class whether they know of any such plans currently in use, and how they are working. Ask them whether any of these plans might be beneficial for their current employer.

Noting that some group plans may have a number of potential drawbacks and unintended consequences—such as conflicts between groups—introduce the idea of organization performance pay, which is intended to bring the whole organization together by creating a common goal.

After introducing the three main types of organization performance pay—profit sharing, employee stock plans, and other organization performance pay plans—ask them whether they can identify the differences between profit sharing and employee stock plans. A brief clicker quiz might help to assess their understanding of the differences between these two main types of plans.

After discussing the differences, as well as the possible goals and consequences of these plans, delve into the differences within each category. For example, be sure students know the difference between current distribution (cash), deferred, and combination profit-sharing plans.

For employee stock plans, they should know the differences between stock bonus, share purchase, stock option, and phantom stock plans. (When discussing phantom stock plans, I show a slide of the old “phantom” comic book character and ask students to visualize him leaping around distributing “phantom shares” to employees.)

The Using the Internet feature for this chapter, which uses the ESOP Association of Canada’s website to identify motives for employee stock ownership plans in Canada, can be used to connect students to the practitioner community.

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Chapter 5: Performance Pay Choices

Ask the class whether either profit sharing or employee stock plans would benefit their current or previous employers. Then, add other organizational performance plans to the discussion, such as long-term incentives.

Use Case Question 2 (“Alliston Instruments”) to allow students to assess the appropriateness of either group or organization performance pay plans in addressing the problems facing the firm.

This could be done in class, or would be an excellent graded assignment, which could then be discussed in class.

Case Question 3 (“The Fit Stop”) is an excellent vehicle to help students develop the skill of assessing an organization for the most appropriate type of organization performance pay plan.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

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Chapter 5: Performance Pay Choices

ADDITIONAL RESOURCES Chapter Summary Chapter 5 completes our discussion of the compensation “menu” by discussing the performance pay choices available within each of the three main categories of performance pay (individual, group, and organizational). First, four main types of pay geared to individual performance are discussed—piece rates, commissions, merit pay, and special-purpose incentives. Next, three main types of pay geared to group performance are discussed—gain-sharing plans, goal-sharing plans, and other group bonus plans. Finally, three main types of pay geared to organizational performance are discussed—profit sharing, employee stock plans, and other organization performance plans. Importantly, throughout the chapter, linkages between these pay practices and key concepts from the strategic and behavioural frameworks are identified.

Suggested Answers to Discussion Questions 1. There are several key advantages and disadvantages of individual level pay for performance pay systems. Individual level is based on employees being paid on the amount of output they produce. Piece rate and sales commissions can be used in conjunction with base pay, whereas merit pay and special-purpose incentives always used in conjunction with base pay. These are fairly common across Canadian workplaces. The advantages can be creating a highly motivational task behaviour whereby employees are rewarded for extending their performance and it can reduce the need to monitor and manage external control over employees. Some of the disadvantages are jobs that have an interdependence to other jobs or to variables related to the external environment in which the employee has no control over. The other challenge is determining what is a reasonable standard to set in order to meet the required level of performance or output?

Compensation Notebook 5.2 provides a comparative advantages and disadvantages table to compare these plans.

2. Gain sharing is a group performance play plan that shares costs savings or productivity gains whereas goal-sharing is where a work group receives a bonus when it meets specified performance goals. In gain sharing, cost savings are quantified and then shared between the company and the employee group; unlike in goal sharing, there are no set goals other than to improve to the base line. Goal sharing becomes more of an “all or nothing,” where employees receive nothing if the group goal is not met. In gain sharing, employees will receive a portion of any productivity made. Compensation Notebook 5.3 provides a comparative advantages and disadvantages table to compare these plans.

3. Profit sharing and employee share ownership are organization performance pay plans. In an era where there tends to be less employee loyalty at remaining with an employer for a significant period of time, these plans attempt to leverage higher employee productivity, attempts to align the interests of the company with the employees (a “common cause”) and strives to obtain a long-term focus or vision for the organization or the business in general. Employees can own company shares, receive bonus from company profits or a

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combination of both. The organization needs to have a strong commitment leadership and management and to ensure there is consistent clarity about the benefits to employees.

Compensation Notebook 5.4 provides a comparative advantages and disadvantages table to compare these plans.

Notes for Exercises 1. There are several alternatives that students could consider: 

One approach would be to try to address the problem by using more intrinsic rewards, but this would be difficult in this context.



One obvious way to increase membership behaviour would be to raise the hourly pay for workers, which might attract more responsible employees. It would certainly increase the likelihood of workers at least lasting the summer.



As for performance pay, if workers as a group were given a bonus for the number of cups of drink sold, this might encourage more conscientious work and less “off the books” sales. A problem right now is that it is not really in any employee’s interest to report dishonest employees, so this might create more of an incentive to do so.



However, the most direct route to dealing with the reported problems is to employ more conscientious shift supervisors, by raising their pay (so as to attract more responsible individuals), and possibly providing them with individual incentives based on sales to increase their concerns about maximizing sales.

Of course, these are not the only possibilities, and it will be interesting to see what other alternatives the class come up with.

2. The purpose of this exercise is to help students deepen their understanding of pay systems for sales workers. Set up student groups of four to six, and assign this exercise. You may wish to coordinate the retailers that each team approaches so that the same retailer is not approached repeatedly. Ask each group to submit a written response to the assigned questions, and to present this response to the class on the due date.

Notes for Case Questions 1. Alliston Instruments. The purpose of this case question is to give students the opportunity to diagnose why a pay system is not working, and to examine possible solutions to deal with this problem. (Note: This is a recurring case, and students can be given the opportunity to do further work with this case. See Case Question 2 in this chapter; Chapter 9, Case Question; and Chapter 11, Case Question 1.)

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Chapter 5: Performance Pay Choices



Clearly, Alliston Instruments is being managed by the classical management approach, and some of the predictable outcomes of that approach have emerged, including a militant union, and poor employee–management relations. The only rewards provided by Alliston to its production workers seem to be extrinsic—mainly hourly pay. Despite this, however, employee turnover is low, but this is no doubt due to continuance commitment rather than affective commitment. Workers do not stay because of any particular loyalty or affection toward the firm, but because they can’t find a better alternative.



Given this background, the company is probably correct that individual incentives would be the only thing that would really change worker motivation. But as the text discusses, there can be many problems with piece rates, and we see many of these in this case.

However, we should note that what is in place is not a full-fledged piece rate system, because base pay continues to be a large component of the pay system.



We can see problems with setting production standards fairly, due to the lack of accurate production data from earlier years. We see problems with measuring acceptable quality in items produced. We see some jobs where piece rates are too “tight” and others where rates are too “loose.” We see workers producing to minimum standards, and a lack of interest in doing jobs that have “tight” rates. Indeed, for jobs with tight rates, we can assume that productivity has actually fallen with the new system because workers have no incentive to work hard if they do not expect to reach the production goal (as expectancy theory predicts).



Another problem is not only that is there pay inequity among workers, depending on who gets the tight or loose jobs, but also that supervisors now perceive pay inequity, as some employees earn more than they do under the new system. As we would expect, many supervisors are quitting, while the remaining supervisors no doubt feel very bitter about the new system. The system also implicitly pits them against their workers, but supervisors really have very little power in this system, despite being held responsible for productivity and quality.



One problem for the company is that in return for union permission to implement the new incentive plan, the company agreed not to impose layoffs. However, as their sales volumes drop, layoffs would be one of the few ways that this classical firm has to cut costs. In general, this job security should reassure employees that they will not be “working themselves out of a job” if they improve productivity, but all it really does in this case is take away one of the key tools that classical firms use in trying to control employee behaviour. The new incentive system was intended as a way of increasing this control, but it hasn’t really worked out that way. Aside from all the problems discussed earlier, at Alliston the piece rates were a relatively small part of total compensation, so there is not really enough incentive to change employee behaviour.



If management really wants to stay with individual incentives, they would be better off with a full-fledged piece rate plan, where employees get paid a certain amount per piece produced, rather than the current system, which provides incentives only if standards are surpassed. However, it is unlikely the union would agree to the elimination of base pay

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Chapter 5: Performance Pay Choices

and its replacement by a piece rate. Overall, this firm may be better off to try gain sharing, which can encourage employees to work together to improve quantity and quality of production.

2. Alliston Instruments. The purpose of this case question is to give students the opportunity to better understand the circumstances that fit various group and organizational performance pay plans, and select the plan that best fits a given organization. (Note: This is a recurring case. The notes for Case Question 1 in this chapter may be useful background here. Students can also be given the opportunity to do further work with this case. See Chapter 9, Case Question 1, and Chapter 11, Case Question 1.)

What has happened at Alliston is a clear illustration of some of the dysfunctions that can be caused by the introduction of individual performance pay into a situation in which it is not really suited. Employees have no loyalty to the company and its goals, and turnover is low only because of continuance commitment. Employees are taking advantage of the new bonuses to enhance their own self-interests only, with the result of added cost in the form of the bonuses and materials wastage as well as additional administration, with marginal quality and no off-setting productivity advantages. Individual bonuses such as those used here do not work well where a long-linked production technology is being used. Alliston is a prime example of what can happen when the environment changes for a classical firm that has the typical classical adversarial relationship with its union.

Options to consider for Alliston Instruments: A. Gain Sharing (Scanlon Plan) 

Advantages: o focuses employee participation toward company goal of improved productivity o can develop a cooperative relationship between workers, the union, and management o considers cost savings beyond just labour savings o self-funding from the cost savings o may increase affective employee commitment o has been used in other unionized settings o can be used more easily in distrustful situation than goal sharing



Disadvantages: o commitment and costs required to set up and administer o training to enable it to work o short-term results unlikely o doesn’t fit classical organizations; firm will have to become more participative

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Chapter 5: Performance Pay Choices

B. Goal Sharing 

Advantages: o simpler to develop and flexible in application o can be tied to specific objectives in supporting company objectives o favourable group norms lead the group to police itself and become more productive o more collaborative attitudes, enabling creative idea generation



Disadvantages: o tendency to be more arbitrary in terms of goals set and rewards given o may not be as motivational or trusted as gain sharing o all or nothing approach can prove to counter attainment of objectives o best application is in high-involvement firms

C. Profit Sharing 

Advantages o may help develop favourable group norms and improved internal cooperation o may lead to more organizational citizenship behaviour o reduces the need for supervision, thereby reducing costs o rewards are related to ability to pay



Disadvantages o currently no profits, so no payouts o weak line of sight in terms of motivating desired behaviour o lack of acceptance by unions o does not fit well with classical firms

Of the three major group/organization plans, it would appear that the Scanlon-type gainsharing plan would best suit Alliston Instruments at this point in time. The primary rationale in recommending this method of reward system is the need for Alliston to focus employee attention on productivity and quality problems, and, given the adversarial situation at the firm, gain sharing fits better than goal sharing, which could be disregarded by employees as simply a management attempt at manipulation.

Profit sharing in this case has too weak a line of sight to provide immediate solutions to the problems at hand. However, combined with gain sharing and other structural changes in line with high involvement, such as information sharing, profit sharing could serve a very useful role in focusing employee attention on the overall financial performance of the company, and the seriousness of the problems facing the firm.

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Chapter 5: Performance Pay Choices

The issues to address in designing the gain-sharing plan include: 1. Creating a joint union–management committee to design the system—key is for employees to understand why gain sharing is needed and how it could benefit both the employees and the company 2. Identify the cost measures to be used in the gain-sharing formula 3. Determine how the baselines are to be calculated 4. Establish the gain-sharing bonus formula (e.g., 50% of savings to employees) 5. Establish an ongoing joint committee to solicit suggestions from workers and to identify potential cost-saving innovations 6. Develop a communications program o clearly articulate to all employees the workings and benefits of the plan o provide feedback on the plan in terms of results produced 3. The Fit Stop. The purpose of this case question is to help students understand the circumstances under which organizational performance pay is appropriate, and to select the most appropriate organizational pay plan in the light of these circumstances. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 2 and Case Question 1 Chapter 4 may provide useful background here. Students can also do further work with this case later in the book. See Chapter 6, Case Question 1; Chapter 11, Case Question 2; Chapter 12, Case Question 1; and Chapter 13, Case Question 1).

Because the Fit Stop will be using the high-involvement managerial strategy and a pay-forknowledge system for base pay, and because it will want high levels of membership, task, and citizenship behaviour, either employee profit sharing or stock plans would be appropriate. The problem with a profit-sharing plan at this point is that the firm is likely to make no profits for at least one year, possibly two, so this type of reward is not likely to have much effect on employees at the present time. Another disadvantage of a profit-sharing plan is that the firm loses critical working capital once the profit-sharing plan does start to pay out, unless the firm has a plan that pays out in stock, which wouldn’t be a bad idea.

However, at the moment, to give the employees a stake in the firm’s success and integrate their goals with those of the firm, some type of stock plan would be appropriate. Perhaps initially, there would be a stock bonus plan, to get shares into the hands of employees quickly, and then a share purchase plan, with perhaps the company matching employeecontributed funds up to a certain maximum, such as 5 or 10 percent of pay. To keep shares in the hands of company employees, the firm may well decide to impose a buy-back policy for the shares held by any employees leaving the firm.

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Chapter 5: Performance Pay Choices

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment:  

To provide examples of employee ownership, go to the website of the National Center for Employee Ownership: http://www.nceo.org.

To find Canadian information on employee stock plans, go to the website of the ESOP Association of Canada: http://www.esop-canada.com.

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Chapter 6: Formulating the Reward and Compensation System

CHAPTER 6 Formulating the Reward and Compensation Strategy ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. How to apply the compensation strategy formulation process.

2. The key issues in compensating special employee groups—contingent workers, executives, and expatriate/foreign employees.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Describe the constraints that limit the design of a compensation strategy.



Explain the compensation strategy formulation process and describe each step.



Discuss the considerations in deciding whether to adopt a lead, lag, or match compensation-level policy.



Describe utility analysis and explain how it can be used.



Apply the compensation strategy formulation process to specific organizations.



Explain how to evaluate a compensation strategy prior to implementation.



Discuss the special issues involved in compensating contingent workers, executives, and international employees.

KEY CONCEPTS Key concepts covered in this chapter begin with the four main constraints that establish boundaries for the compensation system being designed – (1) legislated, (2) labour market, (3) product/service market, and (4) financial. The four key understandings that form the foundation for formulating compensation strategy are then covered—(1) understanding your organization and its context, (2) understanding your work force, (3) understanding your compensation options, and (4) understanding your compensation constraints. However, the bulk of the chapter is devoted to the compensation strategy formulation process—(1) defining the required behaviour, (2) defining the role of compensation, (3) determining the compensation mix, (4) determining the compensation level, and (5) evaluating the proposed strategy. The chapter Copyright © 2018 by Nelson Education Ltd.

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Chapter 6: Formulating the Reward and Compensation System

concludes with describing various compensation strategies for special employee groups (e.g., contingent workers, executives) and some of the decisions and challenges associated with them.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

The ability to formulate compensation strategy—in the light of other strategic concerns— will serve students very well as they seek to advance their careers within organizations and as they achieve higher and higher levels of managerial responsibility.



The compensation strategy formulation process is the culmination of everything that has gone before in the previous five chapters. The value of the preceding material is greatly diminished if students have not learned how to pull it all together to formulate a successful compensation strategy.

BARRIERS TO LEARNING 

Because this chapter relies so heavily on the preceding chapters, if students haven’t mastered the preceding chapters sufficiently, it will be difficult or impossible for them to be able to learn and effectively use the compensation strategy formulation process.



It will not be possible for students to fully understand and master the compensation strategy formulation process without extensive practice in application.



There is a large amount of complicated material in this chapter, and students may get discouraged and fail to give the chapter the attention it requires. They may skim over the Canada Chemicals Corporation case, because of its apparent complexity. It is hard work to understand and apply this material, and the instructor will need to use virtually all of the suggested engagement strategies to overcome this.

ENGAGEMENT STRATEGIES Note that effective strategy formulation depends on four understandings (your organizational context, your workforce, your compensation options, and your compensation constraints) and remind students that the first three are covered in Chapters 2 through 5. Emphasize the importance of grasping this earlier material for successful formulation of compensation strategy.

Use the opening vignette to introduce the idea of how an effective compensation strategy has developed a strong culture at WestJet and how employees participate in some of those compensation decisions. The fourth (compensation constraints) will be covered here.

Note that compensation constraints fall into four broad categories: legislated constraints, financial constraints, labour market constraints, and product/service market constraints. To kick

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Chapter 6: Formulating the Reward and Compensation System

off discussion on legislated constraints, ask students to offer their opinion to “Is this Legal?”

(Compensation Today 6.1). Then ask who they side with in teller Dara Fresco’s long-running dispute with the Canadian Imperial Bank of Commerce (Compensation Today 6.2) over whether the bank owes her (and her colleagues) more than $600 million in unpaid overtime. This is not a clear-cut case—the case has been before the courts since 2007—with no resolution in sight, and it illustrates that there can be a great deal of ambiguity even under legislated constraints. Ask students whether they have ever been in a situation where they felt compelled to perform unpaid overtime.

Another legislated issue with potential ambiguity is whether a person is classified as an employee or a contractor, as Compensation Today 6.3 (“Don’t Cross These Workers!”) illustrates. However, after discussing these cases, don’t leave the impression that all legislated constraints are ambiguous—many are very straightforward and simply must be observed by employers.

Using the Internet 1 could be applied here to encourage more student involvement. This project is best assigned to small groups or pairs of students, and may need to be treated as a graded assignment in order to encourage them to tackle it.

Briefly touch on the other constraints, and then move on to the strategy formulation process.

Lead off by asking whether the compensation strategy used by WestJet (in the opening vignette) could be used elsewhere, and why it works at WestJet. What are the key elements of strategy formulation that can be distilled from the vignette?

Present a slide with the five steps in the compensation strategy formulation process (Figure 6.1) and describe each step. Use Compensation Notebook 6.1 to help explain how task behaviour relates to compensation strategy. (Of course, don’t ignore the other two desired behaviours.) The role of compensation is best discussed by using Tables 6.1 and 6.2 as templates for the discussion, leading to the compensation mix. As for compensation level, help students understand the concept of utility analysis by walking the class through the example on pp. 198200.

Remind students of the original eight goals for the effectiveness of a compensation system noted in Compensation Notebook 1.1. From there, emphasize the three basic screens through which all successful compensation strategies must pass, and then mention the other important criteria. As a final issue, touch on the question of who should develop the compensation strategy, noting that this will differ according to managerial strategy.

Students will not be able to understand the compensation strategy formulation process without attempting to apply it. The best way of doing this is with Strategic Compensation in Canada Simulation: Workbook that is available for use to accompany the text. However, if you have opted not to use the simulation work, use end-of-chapter Exercise 1 to provide students with a key application opportunity. This could be assigned in advance as a major (perhaps the major) graded term assignment, and then taken up in class after submission, or it could be conducted in pairs giving students another “voice” to discuss ideas and pros and cons of their proposed strategy. It is very important to provide ample feedback to students and to review problem areas.

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Chapter 6: Formulating the Reward and Compensation System

Once you are satisfied that students understand and are able to apply the compensation strategy formulation process, you can discuss compensation strategy for three special employee groups— contingent workers, executives, and expatriate/foreign employees.

Students may be able to identify with the first group, and opening with a question about the fairness of treating contingent workers differently from regular employees should generate some good debate. From their experience, are contingent workers different in their motivation and productivity from regular workers? What about loyalty? Do contingent workers feel that they are being exploited, or is this a fair situation, one that meets the needs of some employees who don’t want a full-time permanent position? Answers will likely vary depending on the nature of the contingent employment (note that there are many different types of contingent employment relationships) and the motives for students in taking these jobs. The text takes the line that if contingent employees are being asked to perform the same behaviours as regular employees, then they should be paid on the same basis as regular employees.

Executive pay has become the subject of major controversy in recent years, not just in terms of the (very high) amounts, but also in terms of how executive pay systems may actually encourage and reward poor executive decision making and even executive malfeasance. Compensation Today 6.4 (“The 47-Million-Dollar Man”) can be used as one particularly egregious example of an executive getting richer while making everyone else poorer. Problematic executive pay is not just a problem for the corporations involved, but actually affects everyone, including the students in this class!

A good way to start this section is with a slide of Table 6.3, Compensation of Canada’s 10 Highest-Paid Executives. Students are invariably shocked by the amounts involved, but you must emphasize that the problems with executive pay go way beyond the amounts being paid. The enormous amounts simply provide a greater incentive for executives to game the system to maximize their own pay. Finish this section with the “Decision Issues for CEO Pay.” End-of-chapter Exercise 2 will help students grapple with the issues of setting executive pay, but students will need to be familiar with the Canada Chemicals Corporation case before proceeding.

It would be ideal if students have already been assigned end-of-chapter Exercise 1, but an alternative is to review the case in class. This preparation could take a whole class period to do thoroughly.

Finally, note that as globalization progresses, issues of pay for expatriate and foreign employees will become more and more relevant for companies. Spell out the dilemmas of pay for these employees. Ask students how they would expect to be treated if sent to a foreign country.

The end-of-chapter Exercise 3 could be used to extract more learning value from the Canada Chemicals case (but only if end-of-chapter Exercise 1 has already been done) by tying this case more closely to the strategic framework for compensation. This exercise allows students to consider what changes to the organization, besides those to the compensation system, would be required to make the new compensation strategy succeed. It also illustrates what kinds of structural and other changes are needed to implement a high-involvement strategy. Clearly, the

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Chapter 6: Formulating the Reward and Compensation System

contextual variables at Canada Chemicals have evolved to require a high-involvement managerial strategy. This exercise helps students understand what is required to adapt to that, and reinforces key concepts from earlier chapters.

Alternatively, or in addition to the end-of-chapter Exercises, Case Questions 1 (“The Fit Stop”) and/or 2 (“Multi-Products Corporation”) could also be used to reinforce understanding and the ability to apply the compensation strategy formulation process. These would best be used as graded hand-in assignments, to focus student attention, to be subsequently discussed in class.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

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Chapter 6: Formulating the Reward and Compensation System

ADDITIONAL RESOURCES Chapter Summary Building on the previous five chapters, Chapter 6 tackles the problem of how to design the compensation strategy that will best fit a given firm. It starts by identifying four key understandings that form the foundation for formulating compensation strategy—(1) understanding your organization and its context, (2) understanding your work force, (3) understanding your compensation options, and (4) understanding your compensation constraints.

It notes that the strategic framework presented in Chapter 2 provides the basis for the first understanding, the behavioural framework in Chapter 3 provides the basis for the second understanding, and Chapters 4 and 5 provide the basis for the third understanding.

Chapter 6 covers the fourth understanding, constraints on compensation, by discussing legislated constraints, labour market constraints, product/service market constraints, and financial constraints. A detailed description of the five steps in the compensation strategy formulation process then ensues—(1) defining the required behaviour, (2) defining the role of compensation, (3) determining the compensation mix, (4) determining the compensation level, and (5) evaluating the proposed strategy.

The question of who should be involved in compensation strategy formulation is briefly addressed, followed by a discussion of the special compensation issues involved with compensating contingent workers, executives, and expatriate/foreign employees.

The chapter concludes with a comprehensive example of compensation strategy formulation. The example is complex, mirroring the actual complexity of compensation strategy formulation, and it takes considerable effort for students to work their way through it. As discussed under “Engagement Strategies,” you may wish to use the end of chapter exercises to help students learn from this example. Otherwise, it is easy for them to give up on it!

Suggested Answers to Discussion Questions 1. Managers must (1) have an understanding of the organization and its context. This is what the organization does (i.e., what it produces, makes, services, etc.) and who and how it supports those who use what they make or serve. This can help understand the larger context in terms of who else provides similar goods and services and the need for what it does and the types of employees needed. Managers must (2) understand their workforce. What are the knowledge, skills & abilities and attitudes & behaviours (KSAs) required for the workforce?

What education and additional skills are needed in order for employees to performance to required standards? Managers need to (3) understand the compensation options available.

What does the organization have in place that can be used to compensate employees? Finally, managers (4) must understand compensation constraints. This can come in the way of legislative constraints, employment standard legislation, human rights legislation, trade union legislation, labour market constraints and financial constraints of the organization.

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Chapter 6: Formulating the Reward and Compensation System

2. Legislative constraints come in the way of employment standards set out by every province in Canada. It sets minimum wage, hours of work, termination benefits, statutory holidays, etc. Second are human rights acts which prohibit employment discrimination. Third, legislation is related to unions and collective bargaining. This affects compensation in unionized organizations by requiring all compensation arrangements are made by the union.

Finally, all organization must adhere to federal and provincial income and corporate task laws which significantly influence the type of compensation offered.

3. Ensure that students see these steps as “independent” but “interdependent” steps. The first step is to “define the required behaviour” related to a combination of membership, membership, task and citizenship behaviours. An organization may want an equal combination of all three, more of one to another. Second is “define the role of compensation” which requires the decision of what intrinsic versus extrinsic rewards can be used to motivate behaviour. Is the organization looking for specific knowledge and skills when hiring or is the organization willing to develop and train for these skills and behaviours? The third step, “determine the compensation mix” asks the questions related to what role will be played by base pay, performance pay and indirect pay and how will they be structured? Will the foundation of base pay be job evaluation, market pricing or pay for knowledge? These answers will depend on the required organizational behaviours desired, the strategy, employee needs and organizational constraints. The fourth step, “determine the compensation level” is deciding on the total amount of compensation employees will receive? A close examination of external labour market is required here. Finally, “Evaluate the Proposed Strategy” is challenging because there is projections and estimations involved. Three criteria of (1) affordability, (2) legality and (3) employee attraction are screens to ensure the compensation strategy is of value. What makes this step challenging is the leadership need to project the cost of the compensation system and compare to what the organization can afford.

This is usually not a clear-cut process as these are often difficult to predict in advance. The success of the compensation strategy plays a major role in determining if the funds are available to meet payroll.

4. An organization can use a utility analysis to determine whether a lead, lag or match compensation-level strategy is most efficient for its needs. A lag compensation-level strategy is based on paying below the average compensation level in a given labour market. In some instances, the organization may have a cash flow and there is no choice. Organizations may try and find noncash rewards to make up for the lag. A lead compensation-strategy is based on paying above the average compensation level in a given market. This is used when an organization values employee stability or there are high demand positions or positions with highly-sought after skills where they believe it is necessary to keep these positions. This could come in base pay or even use a pay-for-knowledge system that consistently pays above market value. Finally, a match compensation-level strategy is based on paying at average compensation levels in a given labour market. Organizations will do this to remain competitive with the market and be in a position to attract the necessary talent needed. This strategy requires consistent monitoring of the current market.

5. The issue with executive pay has been its continued escalation as compared to the stagnating everyday individual contributor employees. As the text states, a CEO’s salary can be 500

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Chapter 6: Formulating the Reward and Compensation System

times that of an average worker. This issue is what is the message to employees? Are you really working for the “organization” or helping to fill the pockets of CEO’s? This is not to say that executives do not have significant responsibility, but after stock options became more common and favourable as a result of favourable taxes issues in 2000, executives had lucrative compensation packages far beyond their publically-known base pay salaries. Table 6.3 provides the evidence. International employees compensation issues will differ depending on the specific category one fall into. Foreign employees and expatriates are given a variety of option depending on the organizations policy. Expatriates are often given three compensation options: (1) balance sheet approach—allowing them to maintain a standard of living comparable with what they would have in their home country; (2) Negotiation approach—where a mutually agreed upon package is determined between employee and employer; and (3) Localization approach—which is the practice of paying the same compensation as local nationals in equivalent positions. Finally, contingent workers can be hired to handle highly skilled work for which skills do not exist or in which the work they do is not needed for an ongoing basis. They are also hired as part-time workers or to help other employees during busy periods. Organizations are moving more toward contingent workers because it frees them from many legal constraints, often exempt from severance pay provisions, employee benefits, employment standards provisions and mandatory benefits.

6. Stock options were once seen as a costless way of compensating executives, but in rising stock market times, executives can reap significant gains that are unrelated to personal performance. The big issue with these options is hidden incentives for mismanagement.

Historically, companies have “altered” the reported financial results to greatly inflate bonuses. The ability to hide or alter financial records to inflate these options without any relationship to executive performance has led to the backlash against executive stock options.

Notes for Exercises 1. This exercise provides excellent reinforcement of the compensation strategy formulation process, building on the comprehensive example in the text, as well on concepts from previous chapters. It requires out-of-class preparation. To make this a group exercise, divide the class into six groups and ask two groups to prepare compensation strategy templates for the production workers, two groups for the administrative staff, and two groups for the technical staff. Then, as a class, discuss the templates suggested by each group. 

In terms of the substance, the groups should all make sure that their compensation systems are in line with high-involvement management, in the same way that the sales engineer template (Figure 6.2, Compensation Strategy Template) is in line with high involvement. For the production workers, pay-for-knowledge seems a logical choice, along with goal sharing for meeting production targets, as well as profit-sharing and employee stock plans. In fact, all three employee groups should have profit-sharing and employee stock plans, and these plans could be fairly consistent for all employee groups.

Technical staff may also be suited to a separate pay-for-knowledge plan, along with goal sharing, and the profit-sharing and stock plans.

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Chapter 6: Formulating the Reward and Compensation System



Administrative staff should perhaps be on job evaluation in order to ensure fairness, although market pricing could be considered. They should be cut in on the profit-sharing and stock plans, with perhaps a heavier concentration on profit sharing than other employee groups, since it is more difficult to apply group pay to these employees. For all three groups, indirect pay should focus on things of most value to the firm, such as subsidized educational courses. A flexible benefits plan would fit well here. Programs that facilitate work–family life balance should also be put in place, and benefits to provide for the security needs of employees.

2. This exercise provides the opportunity to reinforce concepts surrounding executive pay. Top executive compensation should be in keeping with a high-involvement organization. This means that there must not be huge discrepancies between pay between executives and the rest of the employees. A very strong focus on profit sharing would be appropriate, as well as some company stock. Some long-term incentives may also be useful to avoid short-term thinking.

Indirect pay should not be radically different from that of other employees.

3. This exercise provides an opportunity for students to more fully understand what high involvement looks like in practice. There need to be lot of changes to various aspects of organizational structure. For example, job design should be broader and incorporate more of the core dimensions for motivating work discussed on pages 79–80 of Chapter 3. More use should be made of teams, especially for the development of new products. There need to be teams that include the sales engineer, chemists, and production staff for developing proposals to customers and developing products that both meet customer needs and can be produced at a profit. Customer representatives (including chemists from the customer) could even be encouraged to be involved in some aspects of this. Teams in the production area could also be introduced.

There needs to be more training and education of employees, not only technical training, but also training about management issues and group/team dynamics. There needs to be much more communication and information flow through the organization. With all these things in place, including the reward changes discussed earlier, the stage is set for more horizontal coordination and more decision making by multifunctional teams and production teams.

Notes for Case Questions 1. The Fit Stop. This case question provides an opportunity to reinforce use of the five-step strategy formulation process, within the context of a high-involvement firm. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 2, Case Question 1 in Chapter 4, and Case Question 3 in Chapter 5 may provide useful background here. Students can also do further work with this case later in the book. See Chapter 11, Case Question 2; Chapter 12, Case Question 1; and Chapter 13, Case Question).

Using the five-step model for formulating compensation strategy summarized in Figure 6.1, the following factors could be considered:

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Chapter 6: Formulating the Reward and Compensation System



Required behaviour: This high involvement organization needs high membership behaviour, high task behaviour, and high citizenship behaviour. A key need is to develop interpersonal cooperation among knowledgeable employees who have a high concern for the needs of the customer.



Role of compensation: Compensation will help to create membership behaviour and citizenship behaviour. Task behaviour will be motivated primarily through intrinsic rewards, although pay-for-knowledge may contribute indirectly by providing an incentive for learning many aspects of fitness knowledge. Compensation will play a major role in promoting citizenship behaviour through plans that encourage the alignment of employee and company goals.



Compensation mix: The mix will include base, performance, and indirect pay, as discussed in previous case notes. o Base pay will be based on pay for knowledge; performance pay will be split between group and organization pay; and indirect pay will focus on things of most value to the firm. o In order to foster a team atmosphere, no individual performance pay will be provided. Instead, group commissions will be offered based on the total sales of each store. There will also be a goal-sharing plan that focuses on customer satisfaction, to ensure that sales personnel are focusing on that as well. There could also be a profit-sharing plan based at the store level, although profits may not be expected immediately. At the organization level, a combination stock bonus/stock purchase plan will give employees the long-term perspective on the firm and their relationship with it, and will not cost the firm its valuable cash. o The firm will need to keep costs under control in the first few years, so the indirect pay plan cannot be too lavish. However, in the retail sector, indirect pay is generally quite low anyway, so it will not be too difficult to meet industry standards in this area. Given that most employees will be quite young and fit, there is probably no need for extensive pension and medical plans at this point anyway.

Flexible benefits would work well, with employees choosing items of value to themselves. The firm should offer some benefits that are of direct value to the firm, such as memberships in fitness or sports clubs, and subsidization of educational courses in areas related to the business. A reasonable mix at this time might be 70 percent base pay, 18 percent performance pay, and 12 percent indirect pay.



Compensation level: The firm will be offering many intrinsic rewards as well as some extrinsic rewards, such as full-time work, salary, and a reasonable benefits package, and employees will likely be attracted by the pay-for-knowledge system and the potential to eventually reap big returns through stock appreciation. Given all this, the firm should be able to attract and retain good employees by offering a base wage comparable to no more than the market average, with the performance pay bringing the package over the market.

This would probably amount to a lead of about 10 to 15 percent, but only if the

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Chapter 6: Formulating the Reward and Compensation System

performance outcomes are achieved. Over time, as the pay-for-knowledge plan kicks in, this will bring employee compensation to considerably over the market averages. 

Evaluating the strategy. Key indicators for evaluating the strategy will include the ability to hire the persons who are desired (indicated by proportion of employment offers that are accepted), the turnover levels of employees, employee satisfaction levels as measured by employee surveys, and customer satisfaction levels.

2. Multi-Products Corporation. This case question provides an opportunity to reinforce use of the five-step strategy formulation process, within the context of either a classical firm or a human relations firm. (Note: This is a recurring case. The notes for Case Question 3 in Chapter 2 and Case Question 2 in Chapter 4 may provide useful background here.) 

Using the five-step model for strategy formulation summarized in Figure 6.1, the following factors could be considered (assuming use of a classical strategy): o Required behaviour: For this classically managed company, there is a requirement for minimal membership behaviour, adequate task behaviour, and little to no citizenship behaviour. o Role of compensation: Compensation will be used primarily to induce enough membership behaviour to attract the number of workers that are needed and to induce attendance behaviour through hourly pay. One extrinsic factor that will be attractive to many employees is the job security that the firm will be able to offer to competent employees because of the guaranteed markets for its product. o Compensation mix: A blend of base and indirect pay is called for in this workplace. Base pay will be predicated on market pricing, and indirect pay will be set at industry levels. This might work out to about 83 percent base pay and 17 percent indirect pay, which is the norm for companies in the Canadian manufacturing sector. o Compensation level: Due to ready availability of labour, this will be based on matching the market. o Evaluation of the strategy: Employee turnover and absenteeism will be tracked, along with various production quantity and quality indicators.



Using the five-step model for strategy formulation summarized in Figure 6.1, the following factors could be considered (assuming use of a human relations strategy): o Required behaviour: With a human relations managed company there is a requirement for high membership behaviour, adequate task behaviour, and little to no citizenship behaviour.

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Chapter 6: Formulating the Reward and Compensation System

o Role of compensation: Compensation will be used primarily to induce high membership behaviour through the use of salaries, seniority increases, and generous indirect pay. One extrinsic factor that will be attractive to many employees is the job security that the firm will be able to offer to competent employees because of the guaranteed markets for its product, as well as congenial social and employee–management relationships within the firm. o Compensation mix: A blend of base and indirect pay is called for in this workplace. Base pay will be predicated on job evaluation, and indirect pay will be set at above industry levels. This might work out to about 78 percent base pay and 22 percent indirect pay, above the norm for companies in the Canadian manufacturing sector. o Compensation level: Due to ready availability of labour, this will be based on matching the market, but it will rise above the market with seniority increases. o Evaluation of the strategy: Employee turnover and absenteeism will be tracked, along with various production quantity and quality indicators.

Possible Sources of Lecture Enrichment The following websites can be used as a source of materials for lecture enrichment:    

To check on current minimum wage rates in your jurisdiction and other employment standards and labour legislation, go to the Government of Canada website, http://srv116.services.gc.ca/dimt-wid/sm-mw/rpt1.aspx.

For a definition of the distinction between an employee and an independent contractor, go to the Canada Revenue Agency website, Employee or Self-Employed? http://www.craarc.gc.ca/E/pub/tg/rc4110/rc4110-16e.pdf For information on the Canadian Human Rights Act, administered by the Canadian Human Rights Commission, go to http://www.chrc-ccdp.gc.ca/eng For detail on legislation related to collective bargaining, go to the ESDC website, Labour Laws, https://www.canada.ca/en/employment-social-development/programs/lawsregulations/labour.html

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Chapter 7: Evaluating Jobs: The Job Evaluation Process

CHAPTER 7 Evaluating Jobs: The Job Evaluation Process ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. How to develop useful job descriptions.

2. What is required for a job evaluation system to be seen as equitable.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Explain the purpose of job evaluation and the main steps in the job evaluation process.



Understand job analysis and the key steps in that process.



Prepare useful job descriptions.



Identify and briefly describe the five main methods of job evaluation.



Describe the key issues in managing the job evaluation process.



Understand the key reasons for pay equity and the general process for conforming to pay equity legislation.

KEY CONCEPTS Key concepts covered in Chapter 7 are job analysis and its four principle methods, the basic elements and importance of job descriptions, the five main methods of job evaluation, issues in conducting and managing the job evaluation process, and procedures for conforming to Ontario pay equity legislation.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Job evaluation is widely used in medium to large organizations, and it is important to understand what it is based on and how to conduct it properly.

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Chapter 7: Evaluating Jobs: The Job Evaluation Process



Poorly done job evaluation can cause many problems for organizations, including reduced employee motivation, satisfaction, and commitment.

BARRIERS TO LEARNING 

Students may see job evaluation as a very technical process in which they don’t want to invest a lot of time. It is important for them to understand that failure to observe the principles and concepts in this chapter can bring many problems to organizations.



Without practice in application, students will not really be able to grasp the concepts in this chapter.

ENGAGEMENT STRATEGIES Start by reminding students that job evaluation is intended to measure the value of the job itself, not the performance of the jobholder. Find out whether any students have been involved with job evaluation where they work. What was their experience with it?

Note that a job evaluation system is only as good as the information on which it is based, which is generally a job description. Briefly refer to the basic elements of a useful job description (Compensation Notebook 7.1) and then launch into end-of-chapter Exercise 3 First, ask pairs of students to assess the sample job description against the seven basic elements.

Then, ask them to use Compensation Notebook 7.2 to see if any of these “Important Points to Remember about Job Descriptions” could be of use in improving this job description. To reinforce the learning, you could follow up with the Case Question at the end of the chapter.

Briefly review the process of job analysis, and ask students whether they can see any possible pitfalls. Record these on the board, and add any they miss. Use the first suggestion under “Possible Sources of Lecture Enrichment” to illustrate the process of job analysis.

Briefly review the five major methods for job evaluation, but then note that job evaluation is at heart a subjective process, albeit one whose purpose is to ensure internal equity across jobs in an organization. Acceptance of the results is as important as having reliable and valid results. How a decision is made is as important as the outcome—the concept of procedural justice must be taken into account. The concept of distributive justice, on the other hand, relates to the equity of the amount of pay. Job evaluation must satisfy certain criteria of procedural justice if it is to be perceived as properly managed.

Moving on to legislated pay equity requirements, this class could be started with a discussion of whether or not students believe that it is right for employers to be constrained in setting their pay rates, and that market forces should be the criterion for pay. Following this discussion, use Using the Internet 1 (see “Possible Sources of Lecture Enrichment”) to work through the steps in the process. (Note that Case Question 2 in Chapter 8 provides another opportunity for students to

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Chapter 7: Evaluating Jobs: The Job Evaluation Process

work with the Ontario pay equity procedures.) The concept of equal value could also be discussed using Compensation Today 7.1 as a starting point for this discussion. It can be further discussed using Compensation Today 7.3 related to a pay equity complaint at the Ottawa Public Library ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary The four chapters in Part Three (“Determining Compensation Values”) provide the basis for converting a compensation strategy into a compensation system. Part Three is based on the premise that the actual compensation values for employees are normally a function of three main variables: the value of the jobs they are doing, the labour market they are in, and their

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Chapter 7: Evaluating Jobs: The Job Evaluation Process

performance levels. Chapters 7 and 8 cover the first of these variables, by showing how to evaluate jobs. Chapter 7 deals with the general processes for evaluating jobs, while Chapter 8 takes the most commonly used job evaluation method—the point method—and shows how it is developed and how a base pay structure can be built.

Chapter 7 starts by briefly recapping the purpose of job evaluation (which was discussed in depth in Chapter 4). It then moves on to job analysis and describes how to develop useful job descriptions, noting some of the possible pitfalls in the process. After that, the five main methods of job evaluation are introduced and discussed, followed by the issues in conducting and managing the job evaluation process. The chapter wraps up with a discussion of the procedures for conforming to Ontario pay equity legislation. Although other Canadian jurisdictions have pay equity legislation, Ontario is chosen as the example because its legislation sets the pattern for other jurisdictions.

Suggested Answers to Discussion Questions 1. The purpose of a job evaluation is to ensure that all jobs in the organization are compensated equitably and perceived by leaders and employees as being equitable. It is to ensure jobs are not underpaid or overpaid. The output of the job evaluation process is a hierarchy of jobs, where all jobs of similar value are located in the same level on the jobs hierarchy—thus providing the foundation for the development of pay grades and pay ranges.

2. Job analysis is intended to gain accurate information about the jobs to be evaluated. It is usually summarized in the form of a job description—a summary of duties, responsibilities and reporting responsibilities pertaining to a job. Job specifications come out of the job analysis and job description which are the employee qualifications identified as necessary to perform the duties involved in a job.

3. There are several key issues in managing a job evaluation process. A job analysis will use methods such as observation, interviews, and questionnaires as sources to help collect detailed information about jobs. These methods can give first hand visual and verbal understanding of jobs from various sources. This includes subject-matter-experts, managers and employees themselves who work in these jobs on a day-to-day basis. Using multiple sources can gain deeper insight into what people do in their jobs and also the subtle nuances that exist and that one may not think of. With this accuracy come a number of challenges.

One is focusing too much on the jobholder rather than the job itself. Another problem is gender bias in job descriptions, especially when it comes to language. Technical jargon can also be an impediment to the understanding of jobs because it needs to be accurately translated into everyday language for the job description. Another problem is oversimplifying job duties. It is important jobs are described accurately, using simple straightforward, precise language that has bias-free language. Finally, jobs that are dynamic or multi-dimensional or related to changing laws, regulations or circumstances. When the job changes, often does the job description and job specification. So information can become obsolete or inaccurate, requiring once again to go back conduct another time consuming job analysis

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Chapter 7: Evaluating Jobs: The Job Evaluation Process

4. Red-circled employees are ones who are paid above the maximum of a new pay range for their jobs. Legal and motivational issues come into play for an organization that simply goes to reducing an employees pay. An employer would “freeze” an employee’s pay at the current level until the salary scales “catch up”. It can work well in times of higher inflation, but may not work in times of lover inflation as the time it takes to “catch up” will be lengthy. This can be more problematic if you have many red circled employees because no matter how well you communicate this with employees, morale, and dissatisfaction often will become an issue.

5. Pay equity legislation ensures gender equity in the workplace. Ontario has OPEA (Ontario Pay Equity Act) and the process in the textbook follows this process given it is the largest jurisdiction. If a company has fewer than 10 people, pay equity does not apply or if the organization is federally legislated. The general process for pay equity is the same for all employers covered by the act. First, the number of pay equity plans needs to be determined.

If unionized, there will be multiple plans, one for each bargaining unit. The second step is to determine whether the organization has any female job classes within each pay equity plan (i.e., a job class being a group of jobs that have similar duties, require similar qualification, etc.). If pay equity laws do apply, step three is carry out the pay equity process using a recommended employee-management committee. Next, the committee needs to develop a gender-neutral job evaluation system that allows comparison of job classes as it relates to skill, effort, responsibility and working conditions. Step five is to gather information for evaluating the jobs. Next, the committee applies the job evaluation system to each job class and develops a job hierarchy. Compensation then needs to be adjusted. Finally, the pay equity plan and results should be communicated to employees. Students should see this process as a very time consuming but important process. An egalitarian and respectful workplace is critical in that is not only the right thing to do, but it also ensures an organization can be competitive by attracting and selecting the best talent for their respective organizations.

Notes for Exercise 1. This exercise provides students with more opportunity to understand the key issues involved in developing useful job descriptions. This exercise can take the form of a class discussion.

Divide the class into pairs of students, and ask them to use Compensation Notebooks 7.1 and 7.2 as checklists to compare the “Drafter 1” job description against. Come together and discuss which requirements the students think the job description does not meet.

Although the job description complies with most of the requirements, some additional aspects might include:     

An indication of prioritization of job duties An indicator of proportion of total time required for each duty Tools or equipment required for each duty Mental and physical effort demanded by the job Expected outcomes as a measure of successful performance

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Chapter 7: Evaluating Jobs: The Job Evaluation Process

Notes for Case Question 1. Eastern Provincial University. This case question provides more opportunity for students to understand the characteristics of useful job descriptions. Strengths of this job description include the very detailed listing of duties and responsibilities, and clearly spelled out job specifications (qualifications). However, there is no indication of the relative importance of these job duties. Also, many of the key details noted in Compensation Notebooks 7.1 and 7.2 are missing, such as identification of the department the position is located in, reporting relationships, and date of compilation. The job description for the Grounds Worker III position is unwieldy, and possibilities for restructuring this description could be discussed.

(Note: This is a recurring case, and students can do further work with this case later in the book. See Chapter 8, Case Questions 1 and 2.)

Possible Sources of Lecture Enrichment The following weblinks can be used as a source of material for lecture enrichment: 

To illustrate how information for job analysis is collected, ask students to volunteer their most recent jobs, and then show how to apply a position analysis questionnaire by using http://www.asu.edu/hr/documents/PAQuestionnaire.pdf.



To trace the steps required to create a gender-neutral job evaluation system that complies with Ontario pay equity legislation, go to http://www.payequity.gov.on.ca and follow it through in class.



To check out the Canadian National Occupational Classification, go to http://noc.esdc.gc.ca/. Information on the U.S. occupational classification system can be found on the O*Net site: http://online.onetcenter.org.



To review the findings of the Pay Equity Task Force, go to http://publications.gc.ca/site/eng/9.687563/publication.html.

Copyright © 2018 by Nelson Education Ltd.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

CHAPTER 8 Evaluating Jobs: The Point Method of Job Evaluation ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. How to develop a point system of job evaluation for a given organization.

2. How to develop a base pay structure.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Describe the steps in designing a point system of job evaluation.



Identify the possible pitfalls in designing a point system of job evaluation.



Design a base pay structure, including pay grades and pay ranges.

KEY CONCEPTS Key concepts in this chapter include the four main steps in developing a point system of job evaluation—identifying compensable factors, scaling these factors, weighting these factors, and then applying and testing the system. Other key concepts are base pay structures, including pay grades, pay ranges, overlap policy, and movement policy, and the potential challenges of the point method of job evaluation.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Because it can be the fundamental building block that underpins the base pay structure, failure to get job evaluation right not only wastes all the effort involved in developing a job evaluation system, but also will produce a flawed base pay structure. A base pay structure is only as good as the job evaluation system underpinning it.



Failure to develop an effective base pay structure will reduce employee motivation and performance and may even threaten survival of the firm.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

BARRIERS TO LEARNING 

While it should be conveyed to students that this is a “learning by doing” chapter, students can sometimes misinterpret this to mean that there are no principles or concepts that apply, and may therefore neglect the principles and concepts that should inform the development of an effective job evaluation system and base pay structure.



Conversely, students can often fail to appreciate that unless they work hard to attempt to apply the material in this chapter, they will actually get very little out of this chapter, and that simply studying the chapter—without a serious attempt to apply the material—will produce very little real learning.

ENGAGEMENT STRATEGIES Note that the purpose of this chapter is to follow up on Chapter 7 by describing how to design a job evaluation system using the point method. Although this chapter is a hands-on type of chapter, where learning by application is a key aspect, it is important for students to use the principles in this chapter. The key outcome of this chapter is the ability to develop a full-blown base pay structure for an organization.

Before walking the students through the four main steps in developing a point method job evaluation system, ask them to share their opinion in the opening vignette (“Nurses or Painters Who is More Valuable to a Hospital?”). This will give students a perspective of what goes into assessing the value of a job. Then work through the hospital example in Figure 8.1, Tables 8.2 and 8.3, and Figure 8.2. Then, use the end-of-chapter Exercise 1 to give students a chance to discuss what the rankings from job evaluation mean and how the systematic use of job evaluation can produce results that may seem a bit surprising.

At this point, a discussion of some of the possible pitfalls of job evaluation will be very timely.

Alerting students to the many possible pitfalls may help them to avoid them in the future. Case Question 1 can be assigned to give them practice in actually developing a job evaluation system.

This is best done as a graded, hand-in project so that students will put in the necessary effort to really understand how the point method of job evaluation works. A good approach to discussing this case is to compare the different jobs hierarchies that students hand in and to try to explain discrepancies. Note that an effective point method of job evaluation should produce the same hierarchy when compared with other effective applications of the point method for the same organization and set of jobs.

For those classes that are not doing the Strategic Compensation in Canada Simulation: Workbook, end-of-chapter Exercise 2 can be an acceptable substitute for practice in developing a full-blown base pay structure. It is a substantial project, and it needs to be treated as such. It needs to be assigned in advance, with grading weight attached to it, so students will put in the necessary effort. Prior to submission, it is crucial that the instructor walk students through the steps in developing a base pay structure.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

One area that students doing the simulation workbook always find challenging is determining pay grade widths, and Compensation Notebook 8.3 gives instructors a tool to help students understand how to do so. However, it is complex, and it is absolutely necessary that instructors work through this example in class if they expect students to be able to use a systematic approach to determining pay grade widths. (However, for instructors not using the simulation workbook, this may simply be too fine a level of detail, and it is important that students not get lost in a forest of detail, but instead understand the underlying principles and logic for determining pay grade widths.)

After submission and grading, substantial class time needs to be devoted to discussing the exercise. Given sufficient attention by students and the instructor, this exercise can really help students understand what goes into a base pay structure. The instructor should reinforce relevant terms and ask students for clarification as to where figures come from and why.

Finally, to give students practice in applying the point system of job evaluation to the determination of whether pay equity (as defined by pay equity legislation) exists in a given organization, Case Question 2 can be used here. It can be assigned as a graded project, or the instructor can have groups of students tackle it in class. It is short enough to be completed and discussed within a single class period.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

 Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary This chapter is intended to be a hands-on, how-to type of chapter. If the chapter is supplemented by either Strategic Compensation in Canada Simulation: Workbook or the end-of-chapter exercises/case questions, students will have the opportunity to get involved in the mechanics of compensation system development. Although it is unrealistic to expect one chapter to turn students into job evaluation experts, this chapter can be used to provide a realistic preview of the specific steps and issues involved in establishing a viable compensation structure.

The chapter starts off by describing the four main steps in developing a point system of job evaluation—identifying compensable factors, scaling these factors, weighting these factors, and then applying and testing the system. It then identifies possible pitfalls to avoid—inconsistent construct formation, factor overlaps, hierarchical grounding, and gender bias. It moves on to determining the base pay structure, which involves establishing pay grades, establishing pay ranges, dealing with possible overlaps, and establishing a policy for movement through the pay range.

Suggested Answers to Discussion Questions 1. The Bell example in Compensation Today 8.1 is a very good example that students should consider making reference to in answer to this question. Gender bias in compensation and in the job evaluation system can be very costly. Even if jobs are evaluated fairly with job families that may not be evaluated fairly between classes if job families are used for male and female jobs. The term “visibility of dirt” can be an excellent term for students to differentiate between the evaluation factors of whether a job is valued more because of its “perceived” working conditions. The other issue is bias and the assumption that women have been historically associated with “low skill” jobs.

The example of a childcare worker in the textbook is a good one.

2. Students might identify a Janitor/Cleaner in a rank higher than they might identify a Pharmacist’s Assistant or Head ward nurse above a Chief Pharmacist. Students should be focused on the factor scores. Although a relatively lower education level is required for a Janitor/Cleaner, it does score high in factors of physical effort, job hazards (e.g., being exposed to infection via blood, body fluids, etc.) makes this job of significant value in a hospital setting.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

3. Similar to job analysis, with job evaluation there is a tendency to evaluate the jobholder rather than the job itself. For example, assessing a job based on how an existing employee has conducted or approached the job (good or bad). It can also be an adversarial process and a sense of conflict between employees and management. Finally, job evaluations may fall out of date quickly, so continually having to update them requires a never-ending commitment and focus. If not updated, they can become a source of inequality rather than a beneficial tool that ensures employee satisfaction.

Notes for Exercises 1. This exercise is intended to provide the opportunity for students to achieve a better understanding of what a hierarchy of jobs produced by a job evaluation system really means, and to explore the pitfalls of the “ranking” approach to job evaluation. It can be done individually at first. Students can then can compare their rankings in small groups (this should be considered). There likely will be considerable discrepancy across students in their rankings. Briefly discuss why they believe this happens. Note that because simple ranking is a “whole job” method, it is difficult to identify why rankings vary across raters (as they inevitably will).

In comparing their results with those in Table 8.2, are there jobs for which students consistently differ from the rankings? Discuss why this may be occurring, while keeping in mind that the rankings in Table 8.2 are not actually based on careful job evaluation in an actual hospital, but are simply hypothetical.

2. This exercise provides practice in designing base pay structures. It is best done in small groups of four to six students. Students should work their way through all the steps on pp.

295 - 305.

Notes on Case Questions 1. Eastern Provincial University. This case question provides the opportunity for students to enrich their understanding of job evaluation by developing a job evaluation system for an actual (albeit disguised) organization. (Note: This is a recurring case. The notes for Case Question 1 in Chapter 7 may provide useful background here. Students can also be given the opportunity to do further work with this case—see Case Question 2 in this chapter.)

This case question can be done as an individual assignment, or it can be assigned to small groups of students and then discussed in class after submission. Students need to go through the following four steps: 

Identify the compensable factors for the system, including some from each of the four categories of skill, effort, responsibility, and working conditions.



Scale these factors, using the example in Table 8.1 as the template.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation



Weight the factors, and then develop a rating chart as shown in Figure 8.1.



Apply the system to arrive at a total point value for each position, and then arrange the positions in order of the point totals, with the lowest at the bottom and highest at the top, using Table 8.2 as a template.

As a general guide, the order should be similar to the following. Note that the point totals provided are for illustration only.           

Medical Lab Technologist II (520 points) Draftsperson III (500 points) Draftsperson II (450 points) Medical Laboratory Technologist I (430 points) Draftsperson I (420 points) Grounds Worker III (405 points) Clerk Steno III (400 points) Clerk Steno II (350 points) Clerk Steno I (300 points) Grounds Worker II (250 points) Ground Worker I (200 points)

A couple of comments. While the Grounds Worker III job does not require as much formal training is the Clerk Steno III job, there appears to be more responsibility for supervising a variety of tasks and workers than for the Clerk Steno III job, and some Grounds Worker III positions do require some formal qualifications as well as considerable experience and specialized knowledge, such as the horticulture area. Other Ground Worker III positions do not require this, and would probably be ranked below the Clerk Steno III. These Grounds Worker III positions should probably have been separated, each with its individual job title and job description, since they should probably carry different point totals and therefore different pay rates.

The Medical Lab Technologist I has been placed slightly above the Draftsperson I despite the fact that the two positions appear to require an equivalent amount of training and education.

However, it could be argued that responsibility is higher for the lab techs, since their mistakes could be quite serious and even endanger human life. The same logic applies to placing the Medical Lab Tech II above the Draftsperson III, even though these two jobs seem to require roughly the same qualifications.

2. Eastern Provincial University. The purpose of this case question is to give students the opportunity to apply pay equity procedures to a set of real jobs in an actual (albeit disguised) organization. (Note: This is a recurring case. The notes for Case Question 1 in Chapter 7 and Case Question 1 in this chapter may provide useful background here.)

This case question can be done as an individual assignment, or it can be assigned to small groups of students and then discussed in class after submission. Using their job evaluation results from Case Question 1 above, the students should compare female and male job Copyright © 2018 by Nelson Education Ltd.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

classes by first attempting to apply the job-to-job method. The current hourly pay rates are shown below (assuming about 1700 work hours per year), and the job evaluation points are provided as an example only. (The students would, of course, use their job evaluation points from Case Question 1. If you do not wish to assign Case Question 1, simply provide the students with the JE points below, and they can work from those.)           

Medical Lab Technologist II (520 points) $34.42 Draftsperson III (500 points) $34.42 Draftsperson II (450 points) $27.87 Medical Laboratory Technologist I (430 points) $27.87 Draftsperson I (420 points) $24.22 Grounds Worker III (405 points) $24.22 Clerk Steno III (400 points) $40.62 Clerk Steno II (350 points) $27.87 Clerk Steno I (300 points) $21.38 Grounds Worker II (250 points) $21.38 Grounds Worker I (200 points) $17.48

The first step is to identify male job classes that are equivalent to female job classes in terms of point totals, thus using the job-to-job method. As can be seen, the Draftsperson III is quite a good match for the Medical Lab Tech II, the Draftsperson I is a reasonable match for the Medical Lab Tech I, and the Grounds Worker III is a good match for the Clerk Steno III. Use of these comparisons shows no evidence that the female job classes are underpaid. If anything, the Medical Lab Tech I and Clerk Steno III jobs are paid higher than their male comparator job classes.

There are two female job classes for which there are no close male job class matches – Clerk Steno I and II – and therefore the proportional value method must be used. This method entails selecting a male job class above and a male job class below the relevant female job classes. The appropriate choices here are the Grounds Worker III and Grounds Worker II jobs. We then need to locate where 350 points (for the Clerk Steno II) and 300 points (for the Clerk Steno I) would fall on a continuum from 250 points to 405 points. Dividing 100 points (the difference between 350 and 250 points) by 155 points (the difference between 405 points and 250 points) yields 0.645. This is then multiplied by $2.84 (the difference between $21.38 and $24.22), which yields (.645 x $2.84) $1.83. This is then added to $21.38 in order to determine where a male job with 350 points would have fallen on the continuum between $21.38 and $24.22, which is $23.20. Again, the female job class (Clerk Steno II) does not appear to be underpaid—if anything, it is overpaid relative to the male job classes.

Repeating the process for the Clerk Steno I job, dividing 50 points (350 points minus 300 points) by 155 points yields .323. Multiplying .323 by $1.83 yields $0.59, which is added to $21.38 to determine where a male job would have fallen on the continuum between $21.38 and $24.22, which is $21.97. Since the Clerk Steno I job is actually paid $21.38, this suggests that some pay inequity may exist for this job.

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Chapter 8: Evaluating Jobs: The Point Method of Job Evaluation

However, we must first check for permissible differences. In this example, none of these seem to apply so we must make plans to adjust the pay of the Clerk Steno I upwards. The employer is required to devote at least 1 percent of the amount of the previous year’s payroll to this purpose. The employer may devote more than this if they wish. This procedure continues until the inequity is redressed (that is, until the Clerk Steno I’s pay is $21.97 an hour). If the pay scales change upward, this change must also be reflected in the Clerk Steno I’s pay.

It can be noted that another problem with this pay system is that the Clerk Steno III job is currently compensated far higher than what the job evaluation system would suggest is its value to the organization. Either the job evaluation system has radically undervalued this job, or pay has not been applied to this job consistently with the way it has been applied to other jobs in this system. Both possibilities need to be examined.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

Using the Internet 1 can be used in class to supplement discussion of the hospital example cited in Engagement Strategies. Students always seem to enjoy use of compensation websites, such as Salary Wizard, when these are incorporated into a class session.



Using the Internet 2 can be used to illustrate what is behind a market line and what it means. Working through this example in class can really help students understand the issues surrounding a market line and how to tell if you have a good one or not.

Instructor may want to discuss with students how to set up in Excel.

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Chapter 9: Evaluating the Market

CHAPTER 9 Evaluating the Market ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. How to acquire appropriate compensation survey data on which effective compensation decision making can be based.

2. How to analyze and interpret compensation data in a way that supports effective compensation decision making.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Discuss the key considerations in understanding labour markets.



Identify possible sources of compensation data.



Describe the steps for conducting compensation surveys.



Analyze, interpret, and apply compensation survey data.

KEY CONCEPTS Key concepts in this chapter centre on understanding the labour market and how it affects pay rates. They include defining relevant labour markets, compensating differentials, compensation surveys, and analytical techniques for compensation data.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Being able to understand how labour market conditions affect pay is an essential precursor to effective compensation decision making.



Being able to acquire and effectively interpret/analyze compensation survey data is a skill that all human resource specialists need to possess, as do those charged with formulating compensation policy and making compensation decisions.

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Chapter 9: Evaluating the Market

BARRIERS TO LEARNING 

Students may take compensation survey data at face value, but it is important that they understand the complexities of the labour market underlying these data (i.e., especially the influence of supply and demand and the nature and/or type of industry), the limitations and/or deficiencies of compensation survey data, and that compensation data sets can vary in their quality and appropriateness for use.



Effectively learning how to use compensation survey data requires students to put considerable effort into practicing its application. They may not see the importance of so doing and may assume a simple reading of the chapter will be sufficient for understanding.

ENGAGEMENT STRATEGIES Start with some examples of pay “discrepancies,” such as the pay of hockey players relative to that of health and social services workers, or to that of the Prime Minister of Canada, and ask whether pay always reflects the importance of a person’s role in Canadian society—and if not, why not? Compensation Today 9.1 offers an excellent opportunity to generate discussion of pay discrepancies, and to understand why celebrities can command such high amounts. Use all of this as a springboard to pose the question “Why do people get paid what they do?” and then identify the key factors involved.

A good vehicle for helping students understand how labour markets work is to show them a slide of the industries (arrange alphabetically) and ask them to guess the order of industries by earnings (“Where would you choose to work?”) After showing the actual rankings, discuss the factors that affect the earnings in various industries.

Specific patterns of compensation are that unionized workers are paid more than comparable non-union workers (although this advantage may these days hold only in large manufacturing firms and in the public sector); males earn more than females (although this difference is declining); employees in large firms earn more than those in small firms; employees in Alberta, Ontario, Saskatchewan, and Newfoundland and Labrador earn more than employees in other provinces; and employees in the resource sector earn more than those in the service sector.

The tobacco vignette (Compensation Today 9.2) can be used to introduce the concept of “compensating differentials” and then ask students for examples of their own. End-of-chapter Exercise 3 can be used to generate a further set of data, based on student experiences, for a discussion of why pay levels vary across jobs and across firms. Using the Internet 2 could also be applied here (or at any point in the chapter) if you wanted to carry the hockey analogy further.

Next, note that what firms need to be concerned about is what their competitors are paying for labour—both competitors in the labour market and competitors in the product/service market.

Other key factors are occupational grouping, geographic scope, whether the firm is unionized,

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Chapter 9: Evaluating the Market

and the firm’s size. Emphasize that developing an appropriate set of market comparator firms is a balancing act, dependent on the judgment of knowledgeable individuals.

Note that compensation data can be obtained from a variety of sources (see Compensation Today 9.3). Point out the advantages and disadvantages of each type. Assign Using the Internet 1 as an in-class exercise adds considerable interest to this class. Put the websites on the screen and ask students to suggest jobs. The zanier the better! But the results for the same jobs will no doubt differ between the two websites, and this can be used to emphasize that caution is always needed when looking at compensation survey data.

Moving on to conducting compensation surveys, present the four main steps on a slide, and briefly discuss each. Case Question 1 fits well here. It can be assigned as either an individual or group assignment and then discussed in class. Or, it can be done as an in-class exercise.

The final step is interpreting the survey data. Without appropriate analysis and interpretation, the previous work will have been wasted. Make sure students understand the key statistics (including the mean, weighted mean, median, quartiles, deciles, comp-ratio) and then work through the example given in the book.

End-of-chapter Exercise 1 can be used here to allow students practice in analyzing and interpreting survey data, and then to develop a compensation structure for a specific job (industrial engineer) in a firm with a specific managerial strategy (high involvement). End-ofchapter Exercise 2 reinforces how different managerial strategies should result in different compensation strategies. These exercises can be assigned in advance as graded assignments— perhaps in small teams of two or three students—and then discussed in class. These exercises are very useful in illustrating the flow from compensation data to compensation decision making.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:

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Chapter 9: Evaluating the Market

 Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 9 deals with the second of the three variables that determine compensation values—the labour market. The chapter starts by showing that different industries vary widely in how much they pay their employees, thus raising the question “Why do people get paid what they do?”

After a brief discussion of the factors affecting pay rates, the chapter turns to the question of how to define the relevant labour market. From there, it moves on to sources of compensation data, and then to the steps for conducting a compensation survey. The chapter concludes with a discussion of how to analyze and interpret survey data.

Suggested Answers to Discussion Questions 1. Students should be able to recognize the influence of supply and demand and also the relationship of supply and demand to a particular type of industry or sector. Supply and demand of certain knowledge or skill level plays a factor in determining the value of a wages. Industries like mining and oil and gas can be considered very lucrative and may give these industries the flexibility to offer higher wages and total compensation. Accommodation and food services are very abundant in our economy and entrance into these areas given the wide variety of skill sets needed can be fairly easy to do. Finding a short-order cook or someone to wait on tables might easier to find and be much quicker to develop the skills to perform these positions as opposed to finding someone willing to enter in to a mine and be able to effectively use a specialized tool that requires extensive skill and expertise. What is important is that students do not degrade a job or industry (as they are all very important), but recognize the level of skill required and the supply available to fill these positions.

2. Students may want to consider variables that influence a job. You could consider close proximity to work (less travel time means less cost), coffee and tea provided by the employer, free employee parking. For example, Toronto Transit employees are given a pass to ride the TTC for free, thus impacting their travel costs to come to work. The opposite might be increase time, cost, dangers, and/or risks that a person has to encounter on a day-to-

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Chapter 9: Evaluating the Market

day basis. A pharmacist working in a high crime urban area where break-in’s for narcotics are consistently prevalent. A miner who must travel kilometres each day knowing there is risk of cave-ins or long-term physical ailments. Student should recognize that many other variables associated with what it takes to be in a job. That people place significant “value” to variables such as time, ability to be home with family, less anxiety, stress, or aggravation of just getting to work. All play a significant role in deciding the compensation value of a job.

3. There are many limitation of market surveys. First, they can omit important information (e.g., quantifying performance or indirect pay is not easy, some survey omit these). Second, the can vary in quality of job matches and methodology. Third, unless survey data is available unilaterally, you cannot surmise anything about compensation strategies practiced by other companies. Fourth, compensation data may not accurately align to the jobs in the organization. There may be bias in the sample of firms responding to compensation surveys.

Compensations systems are much more complex today because of indirect pay and performance pay. Lastly, the surveys assume that the market values jobs fairly.

Notes for Exercises 1. The purpose of this exercise is to provide the opportunity for students to enrich their knowledge of how to use compensation survey data to develop an actual pay structure, as well as to provide reinforcement for many aspects of the compensation process, such as how managerial strategy relates to compensation decision making. 

The first step in approaching this exercise is to consider what a high-involvement compensation system for engineers might look like. Thinking back to previous chapters, a high-involvement compensation system would generally include salary, group and organization performance pay, and a reasonable level of indirect pay, but not necessarily market leading. This organization would provide intrinsic as well as extrinsic rewards. Total compensation may be above market, but this would be a result of performance pay, not necessarily of higher base pay.



With these general considerations in mind, the next step is to understand the market for industrial engineers by examining the compensation survey data, using the procedure discussed on pages 323-327. Overall, for the average employer (based on simple average figures), base pay comprises about 71 percent of total compensation, performance pay comprises about 8 percent, and indirect pay comprises about 21 percent. For the average employee (based on weighted average figures), base pay comprises about 71 percent of total compensation, performance pay about 6 percent, and indirect pay about 23 percent. This suggests that firms that employ a larger number of engineers are providing more indirect pay, but less performance pay, than firms employing a smaller number of engineers are.



Overall, firms that employed fewer engineers actually paid more total compensation to each engineer than firms employing fewer engineers. The range midpoints are higher for firms employing fewer engineers. (Again, by comparing simple average midpoints with the weighted average midpoints.) The quartiles show us that firms employing fewer than 10 engineers have a higher proportion of their engineers in the top half of the pay range (13/19,

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or 68 percent) than firms with 10 or more employees, which have 58 percent (52/90) of their engineers in the top two quartiles. 

There is considerable variation across employers in their compensation strategies, with the base pay range minimums ranging from $42,000 to $50,000 and the range maximums ranging from $53,000 to $66,000. Two firms offered no performance pay at all, while for the others performance pay ranged from $5,010 to $13,200. Indirect pay ranged from $11,200 to $21,866. Mean total compensation ranged from $65,524 to $99,000, with a simple average of $78,187 and a weighted average of $73,298. Students should use other methods of data examination covered, such as calculating the compa-ratios.



Let us suppose we decide that our strategy will be to lead the market in total compensation by 10 percent, but match with base pay. Which average do we use to determine our target for total compensation? Compared with the other firms, the firm in the exercise is a relatively small one, but it does employ quite a few industrial engineers for its size, so let us go in between the $78,187 and the $73,298 and use $76,000 as our relevant market total compensation. Therefore, our target total compensation will be 1.10 times $76,000, which equals $83,600.



If we want to match with base pay, we can select between $55,323 and $51,738, say, $54,000. To match with indirect pay, let us use $16,500. Therefore, our desired compensation mix is about 65 percent base pay (calculated by dividing $54,000 by $83,600) and 20 percent indirect pay (calculated by dividing $16,500 by $83,600), which leaves us 15 percent for performance pay. Let us say that this 15 percent will be composed of 5 percent goal sharing if the engineering department meets various performance targets, 5 percent profit sharing if the company achieves its expected results, and 5 percent employee stock plan.



Now that we have the compensation mix and level, we need to establish the pay range.

Taking $52,000 as the midpoint of the range (by going in between the simple average of $53,000 and the weighted average of $50,541), and by taking the typical range size of about $10,000, this gives us a base pay range of $47,000 to $57,000. If base pay is 65 percent of our total compensation, working from that we can calculate that actual pay at the bottom of the range will be $47,000 base pay, $10,846 performance pay (if all performance goals are met), and $14,462 indirect pay, which adds up to $72,308 for total compensation at the bottom of the range.



At the top of the range, an engineer would receive $57,000 in base pay, $13,154 in performance pay (if all performance goals are met), and $17,538 in indirect pay, which adds up to a total compensation of $87,692. Of course, if none of the necessary performance results occur, then engineers will receive only their base pay and indirect pay. On the other hand, if performance results exceed targeted levels, total compensation could be considerably higher.

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

These figures should be adjusted for inflation, depending on what the inflation rate has been running at for the past year. If inflation has been 2 percent, multiply everything times 1.02 to account for this, thereby “aging the data.”

2. The purpose of this exercise is to follow up on Exercise 1 by looking at how compensation might change if a managerial strategy other than high involvement were to be used. If the firm uses a human relations managerial strategy, then there will be very little performance pay, with both mean base pay and mean indirect pay considerably above industry averages. If the firm uses a classical strategy, it will also use very little performance pay, with a mean base pay and mean indirect pay below industry averages.

3. The purpose of this exercise is to get students thinking about why employers may pay their employees different amounts even though they may have similar job titles. Students should be encouraged to apply the concepts discussed in Chapter 9, such as compensating differentials, to help explain these differences.

Notes for Case Question Alliston Instruments. The purpose of this case question is to provide an opportunity for students to enrich their understanding, at a practical level, of the steps involved in conducting a compensation survey. (Note: This is a recurring case. The notes for Case Questions 1 and 2 in Chapter 5 may be useful background here. Students can do further work with this case. See Chapter 11, Case Question 1.)

This question can be assigned to students as individuals, but is probably best done in a smallgroup format. Students should address all four steps covered on pages 318-322 in designing the process for the compensation survey.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

To show students how they can get updates on industry pay rates and other labour market news, updated on a daily basis, bring up the Statistics Canada website (http://www5.statcan.gc.ca/subject-sujet/resultresultat.action?pid=2621&id=238&lang=eng&type=DAILYART&sortType=2&pageNum=1 &more=0).



To provide specific examples of how individual jobs are classified for labour market purposes, bring up the Human Resources and Skills Development Canada website (http://www5.hrsdc.gc.ca/noc/english/noc/2011/Welcome.aspx).

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Chapter 10: Evaluating Individuals

CHAPTER 10 Evaluating Individuals ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That evaluating individual performance of employees for the purpose of merit pay can be counterproductive if attempted in circumstances that are not suited to merit pay and/or evaluation of individual employees.

2. That, if the conditions are right, it is possible to develop a performance appraisal system that will add value to the organization, but it is a difficult and time-consuming process with many possible pitfalls.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Identify and explain the main reasons for conducting performance appraisals.



Explain why many performance appraisal systems fail to accurately measure employee performance.



Identify and describe the different methods for appraising performance, along with their strengths and weaknesses.



Identify the possible sources of performance appraisals, and discuss the circumstances under which each would be appropriate.



Explain the concept of “performance management.”



Discuss how to link merit pay to performance appraisals.



Identify the key design issues in developing an effective merit pay system.

KEY CONCEPTS Key concepts in Chapter 10 include the possible motives for doing performance appraisal, the pitfalls associated with performance appraisal, the different methods and instruments for performance appraisal, sources of appraisals, the concept of “performance management,” linking

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pay to performance appraisals, and the key design issues in developing a successful merit pay system.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Effective appraisal of employee performance, when used in the right circumstances and with the right methods, can be beneficial to both the employee and the organization.



As a practical matter, it is quite common that more problems and employee (and manager) discontent are caused by inappropriate performance appraisal and merit pay than by any other HR issue.

BARRIERS TO LEARNING 

Given the many difficulties in conducting effective performance appraisal (and establishing merit pay), it is possible that many students will simply throw up their hands and say “Why bother?” It is important for students to understand that, used in the right circumstances and the right manner, performance appraisal (and merit pay) can add value to the organization.



Some students may be so intimidated by the seeming complexity of the subject area and the appraisal process that they make little real attempt to master the material in this chapter. As always, student involvement and application is essential to counteract this potential problem.

ENGAGEMENT STRATEGIES Start by noting that this chapter covers the third of the three variables that can affect compensation values—employee performance. Introduce the chapter by referencing the Microsoft example in the opening vignette. Ask students whether any of them have worked under this system of performance pay or a similar one. Ask what they think of such a system.

The idea and focus for Microsoft was to focus more on the concept of team and eliminated traditional performance ratings. Rather than individual performance, it was based on impact and for reward decisions to be based not on a high senior leader but rather being made much lower in the organization. The system has shown to be successful by positively influencing employee engagement and satisfaction.

Follow up with the paradox that although most firms, managers, and employees support the concept of performance appraisal (although it may not be in the commonly known traditional format), very few firms, managers, and employees are satisfied with performance appraisal at their firms.

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The End-of-Chapter Exercise is a great way to kick off this section, and it provides many student experiences/data for the instructor to work with. Invariably, many students will believe that the performance appraisal system that they worked under was unfair, although other students may believe that the system they worked under was fair. Try to tease out the differences between those performance appraisal systems that seemed to work well and those that did not. Be sure to take into consideration the purpose of the performance appraisal system—was it strictly for developmental purposes, or did it affect pay? How did this difference play out in terms of perceived effectiveness of, and satisfaction with, the performance appraisal system?

Pose the question “Why is it that appraisal systems may not produce accurate evaluations of employee performance?” Reference any relevant examples from the exercise above. Note that not only are there unintentional inaccuracies, there may often be intentional inaccuracies.

Although some of these intentional inaccuracies are obviously unacceptable—for example, when used to unfairly reward the boss’s favourites—other cases may not be so clear cut.

For example, what about a situation where an employee has put in years of outstanding service, but recently her daughter was killed in a car accident and her husband diagnosed with terminal cancer? Her performance has slipped so much that it is bordering on unacceptable. Would you give this employee the poor performance rating that her current performance warrants, or would you inflate the rating, so as not to load further stress on the employee at this terrible juncture in her life, and in recognition of her excellent past service to the firm? Pose this as a clicker question, and poll the class.

Usually there is an even split, with some students arguing that nothing but current performance should affect performance ratings, and others arguing that her years of outstanding service and extremely unfortunate personal circumstances should be taken into account. Many of these students will argue that the performance decline is likely only temporary and that her performance will return to its previous high level once she has had time to deal with her personal tragedies. Finally, others will say that the nature of the job needs to be taken into account—what are the consequences of poor performance. Is the employee a clerical worker or an airline pilot?

The best course of action is to have the performance appraisal reflect performance. It should be accompanied by employee assistance program support to help the employee through her crisis, along with reassurance that she is a valued employee and will not be abandoned. A temporary shift in duties until the employee can perform her full range of job duties might also help.

However, without the availability of such supports to the employee, most managers would likely see inflating the performance ratings as a necessary way to help the employee through the crisis.

Next, bring up the many possible pitfalls of and challenges to the validity of performance appraisals, even when appraisers are trying to measure performance accurately. A good way to evoke student interest is to start with the “beauty effect,” as described in Compensation Today 10.1, to show how various human biases can threaten the validity of performance appraisals.

Then, segue into the different methods and instruments that have been developed in hopes of avoiding these pitfalls. Note that all these methods have pros and cons, but that some instruments

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are better for avoiding these pitfalls and for accurately measuring performance. Note that it is also important to fit the method to the purposes and circumstances in which the appraisal takes place. Using the Internet 1 can be used to generate class discussion about what makes a good performance appraisal form.

Moving on to sources of appraisals, the key is that the sources should be the individual(s) with the best knowledge of how an employee is doing his or her job. In many instances, the supervisor alone may not be in the best position to do so. In these cases his or her observations should be supplemented by those of relevant others, through “multisource” appraisals. One way of supplementing the observations of the supervisor is to use “mystery shoppers.” Usually a number of students will have had their performance evaluated by mystery shoppers. Ask students for their experiences. They usually have some amusing anecdotes—often about how employees can outfox the system by alerting others of the imminent arrival of mystery shoppers. In many cases, mystery shoppers follow a fixed script and can be identified early on; in one case the firm always hired the same mystery shoppers, and employees simply spread word of their faces!

On a more serious note, talk about the pros and cons of 360-degree appraisals. Ask students, “If you were a boss, how would you feel about your subordinates evaluating your performance?”

“Would you be blamed for tough decisions that were beyond your control?” “Would some employees take advantage of the system to play out some grudge they may have against you?”

Ask students if they would feel comfortable having someone outside of their department or even a supplier or vendor participate in their evaluation. These types of questions can stimulate good discussion.

Use Compensation Today 10.2 to illustrate how a forced distribution method has been effectively used at GE. Session C is appraisal process that categorizes manages and executives to differentiate top and lower performers. The intention was to make performance appraisal more important Now GE is trying to break away from tradition and use technology to help with the development of manager performance.

In order to deal with all these issues, a process known as “performance management” has evolved. It is intended to overcome these problems by using a more holistic approach, in which performance appraisal is just part of a total process for managing employee performance. Present Compensation Notebook 10.1 and ask students whether they think it might address the problems of performance appraisal—and whether it might work better in some types of organizations than others. Note to students how it actually fits very well with a high-involvement approach to management, but may not fit well with classical or human relations firms. Indeed, for human relations firms, any kind of honest performance appraisal is likely to be very uncomfortable for both employees and managers!

Note that the issue of whether and how to link pay to performance appraisals is a thorny one. As soon as this link is made, the appraiser tends to transform (in the eyes of the appraisee) from a trusted coach to a feared judge, from whom one must try to hide any deficiencies or shortcomings. Note that, as discussed in Chapter 5 (see Compensation Notebook 5.1), conditions must be right for merit pay before there should be any consideration of linking pay to performance appraisals.

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Briefly discuss the main methods for linking appraisals to pay, and then use Case Question 1 (“Henderson Printing”). It can be assigned as a graded assignment, or it can be done right in class by small teams of two or three students and then discussed.

Briefly run over the eight issues in designing an effective merit system. Then, give special attention to the tricky issue of whether and how to evaluate individuals in teams. This issue will resonate with students who have done team projects through their academic careers and have been victimized by free riders. (Most students have very strong feelings about this, and it often turns them off from wanting to do group work, particularly where all group members will get the same grade, regardless of how much, or how little, they contribute to the project.)

While many high-involvement firms—such as Toyota—eschew the use of individual evaluation of team members, it should be noted that there is a whole culture at Toyota designed around motivating members to contribute to their teams. They have strong intrinsic motivation, strong positive work-group norms, and commitment to organizational goals, and members may spend their whole career in the same team or work unit.

These conditions are precisely the opposite for student work teams. On page 361, students will see that the five conditions militating for individual evaluation in work teams characterize student project teams and that members of these teams should have at least a portion of their reward based on their individual contribution to the team.

For this reason, for all significant team projects, I always base some of each team member’s grade on their individual contribution to the team. It is very important to “walk the talk” if the instructor is to be seen as credible. In addition, students should get practice in doing these types of evaluations. The Individual/Team Merit Grid depicted in Table 10.2 should one way of doing this. Also, new for this edition is Figure 10.3, which provides a specific tool—based on BARS— for evaluating individual performance in teams, including student teams. (Under “Supplemental Material,” I have included the method I use when grading the major team projects produced when using the compensation simulation.)

To reinforce and apply the concepts in this chapter, Case Question 2 (“Henderson Printing”) could be assigned. It would need to be assigned in advance, as a graded assignment, preferably in small groups of two or three, and then discussed in class after student submission.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

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REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 10 deals with the third of the three variables that normally determine compensation values—characteristics of individual employees, notably their performance on the job. The chapter starts by noting the paradox that although most organizations believe that the concept of performance appraisal is a good thing, few organizations, managers, or employees seem happy with their actual performance appraisal systems.

After discussing possible motives for doing performance appraisal, the chapter discusses why it seems so difficult to establish a performance appraisal system with which all concerned are satisfied. Following that, the different methods for performance appraisal are discussed, along with the concept of “performance management.” The issue of who should conduct the appraisals is covered next, as are the circumstances where performance appraisal is appropriate. The chapter then discusses ways of linking pay to appraisals and the issues in designing an effective merit system.

Finally, the issue of when and how individuals who work in teams or groups should be evaluated is discussed.

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Suggested Answers to Discussion Questions 1. Students should clarify the type of performance management structure (pure manager to employee performance management process, a 360-degree process, etc). They should be able to recognize why the company they have chosen has decided to do performance appraisals (i.e., based on the four main categories described in the textbook). Students should also be able to describe some of the characteristics of performance management or at least include these in their answers when aligning to merit (for example, employee-manager relationship, feedback process and guidance on ways to improve performance, etc.) When linking to merit, students should be making reference to (1) will merit be fixed or discretionary based on the relationship to performance; (2) how much merit each employee receives – will this be fixed or discretionary; and (3) how should the total amount of money available for merit pay be determined. Students should use specific examples that are directly related to the job(s) they are referring to as examples.

2. Students may want to reference a personal experience when answering this question.

Although many employees may think they are above their actual performance level, research also shows that many employees under-evaluate their performance as well. In today’s workplace, the concern for keeping one’s job is very apparent. Students should recognize that the success of an appraisal system is not universal across all organizations. There is not a “one size fits all” system. It is important to recognize that a system that allows both manager and employee to participate in the process and to offer a system whereby managers can be in a position to assess and offer informal feedback while their employees are working provides the ideal conditions. Again, is this a realistic environment of all workplaces? One consideration to this question would be to have both manager and employee complete an appraisal that has concrete rankings (e.g., a graphic rating scale) that uses specific employee objectives as a focus; so both can have a conversation and discussion of each other’s review.

Collectively, they can consolidate a final review based on a collaborated meeting that ensures both are clear and truly understand how performance has been achieved throughout the year.

This process would include manager and self-appraisal together. Students could also suggest 360-degree feedback reviews that incorporate peer, subordinate and customer appraisers if this would be a relevant structure based on the job. Students need to recognize the structure of the job, but also attempt to include the importance of feedback and discussion in any performance review that takes place.

3. The focus in this question is identifying the different ways merit can be viewed for individuals in a team situation. The first issue is whether you recognize individual contributions. This can single out individuals, even if the facts show their contributions may have excelled the team’s performance. There is no definitive answer. If done right, individual performance may ensure that high performers remain with the organization and continue to perform and support the team performance. One method is to use an individual/team merit grid that recognizes individual contributions while continuing to provide incentives for teamoriented behaviour and performance. For example, if a team does not reach it performance goal, no individual incentives are rewarded. However, if the team does reach a performance goal, then the individual ratings of each person on that team are assessed and different levels of performance rating can be given to employees, thus providing them with higher or lower

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merit depending on that rating. The approach reinforces the need for the team to reach performance goals; while at the same time can add further merit reward for those in the group who have extended themselves further throughout the year.

Notes for Exercise The purpose of this exercise is to bring student experiences with performance appraisal into the classroom. Once the groups have finished their questions, bring the whole group together to discuss their experiences.

Notes for Case Questions 1. Henderson Printing. The purpose of this case question is to help students better understand the pros and cons of performance appraisal at a practical level. It can be done as an out-ofclass assignment, or in class in small groups, with the class being brought together to discuss their conclusions. (Note: This is a recurring case. The notes for Case Question 1 in Chapter 1 and Case Question 1 in Chapter 3 may provide useful background here. Students can do further work with this case. See Case Question 2 in this chapter.)

Essentially, without some of the structural and managerial changes discussed in Case Question 1 of Chapter 1, no merit pay system will work. Students should note that the current circumstances do not really fit a performance appraisal system, certainly not one linked to pay. If the necessary structural changes are made, then a performance appraisal system might be useful, especially for performance feedback.

Some points that may inform this discussion are as follows: 

There is a need to identify purpose of implementing an appraisal system; the most likely rationale would be supervisory in terms of enhancing communication.



Nevertheless, there are threats to accuracy.



Obviously much more infrastructure and assigned responsibility needs to be established below the owner level (i.e., for managers, employees)



An objective/results based system would be the most likely choice to engender total involvement in the process.



The absence of a stated objective and formal structured compensation strategy severely limit the possibility of a successful merit pay system.



There would need to be an accurate measurement system and more variability in the individual performances.

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Chapter 10: Evaluating Individuals

2. Henderson Printing. The purpose of this case question is to follow up on the previous case question by giving the students the opportunity to design a performance appraisal system.

(Note: This is a recurring case. The notes for Case Question 1 in Chapter 1, Case Question 1 in Chapter 3, and Case Question 1 in this chapter may provide useful background here.)

In recommending an appraisal system that will be linked to merit pay, the following points should be considered: 

The system must be formalized and must be as objective as possible.



It must have specific goals, and its use must be mandatory.



The system must be based on formal job analysis techniques.



The performance criteria (traits, behaviour, or results) must be based on the various dimensions of employees’ jobs.



The immediate supervisor’s subjective evaluation must be only part of the overall performance appraisal.



The appraiser must have a real opportunity to observe the employee’s performance directly. (i.e., It must be part of the overall process)



The overall performance rating of employees must be determined by several appraisers.



Performance appraiser training programs must exist, and appraisers must attend them.



The administration and recording of appraisal results must be standardized and subject to controls.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

You can walk students through a free set of tools and resources for conducting performance appraisals by bringing up the following website in class: http://www.businessballs.com/performanceappraisals.htm.



Go to the website http://www.businessballs.com/performanceappraisalform.pdf, where there is a template for a performance appraisal form. Bring it up in class and ask students what are the pros and cons of this form. Also, see if students can infer what kind of appraisal method(s) it represents.

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Supplemental Material Procedure for Determination of Individual Grades for Team Projects 1. Team projects will be graded by the instructor. Grades will be numerical.

2. Each phase handed in must be accompanied by instructions from the team leader for the distribution of the grade in terms of the contribution of each individual member. (See below.)

3. Included with these instructions must be a statement describing the performance appraisal system and process used for determining the contribution of each team member. (Chapter 10 will be helpful here.)

4. Contribution must be indicated by percentage and must average out to 100 percent for the team.

5. The percentage given to any participating individual member can vary between 80 percent and 120 percent. No more than two team members may receive the same percentage.

6. A percentage of “0” must be given to team members who do not participate, for any reason whatsoever, in production of a particular project phase. This is the only reason that can be used to assign a “0” percentage for individual contribution.

7. If a “0” percentage is assigned to a group member, the average of 100 percent for the team will be determined by excluding the absent member. (100 percent will be averaged only for active participants.)

8. Team grades will be returned together with the grades of individuals, determined by multiplying the team grade times the contribution percentage assigned to the individual.

Example: Team C does a very good job and receives an 80% for its product.

Team C Members

1

2

3

Individual Contribution

Team Grade

Individual Grade

Alanis Morissette Wayne Gretzky Mick Jagger Shania Twain Don Cherry

95% 110% 95% 120% 80% 100%

80% 80% 80% 80% 80% 80%

76% 88% 76% 96% 64% 80%

AVERAGE

Column 1 will be filled in by the team leader and will accompany each project phase, along with the description of the performance appraisal system and process. (Note that column 1 must average out to 100%.) The instructor will grade the project phase and fill in Columns 2 and 3.

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Chapter 11: Designing Performance Pay Plans

CHAPTER 11 Designing Performance Pay Plans ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. The importance of designing a group or organization performance pay plan that fits the circumstances and goals of the organization.

2. That there are many possible design options and choices to be made when setting up a group or organization performance pay plan, and that the proper choice of design options can make the difference between success and failure.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Identify the main types of gain-sharing plans and key issues in their design.



Identify the main types of goal-sharing plans and key issues in their design.



Identify the main types of profit-sharing plans and key issues in their design.



Identify the main types of employee stock plans and key issues in their design.



Discuss the considerations in designing a nonmonetary rewards program.

KEY CONCEPTS Chapter Summary Key concepts covered in Chapter 11 include the key issues in the design of group performance pay plans (notably gain-sharing and goal-sharing plans) and organization performance pay plans (notably profit-sharing plans and employee stock plans), as well as nonmonetary employee recognition programs.

STUDENT MOTIVATION Why should students care about the material in this chapter?

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Chapter 11: Designing Performance Pay Plans



Group and organization performance pay plans have become increasingly popular as organizations search for any edge they can get in a competitive world, but their complexities are not necessarily well understood by top management.



Understanding the fundamentals of how to design such plans to suit a specific firm is an increasingly important skill set needed by HR professionals.

BARRIERS TO LEARNING 

Like many managers, students may have a simplistic view of group and organization pay plans, and they may not realize all the key design issues that can derail such a pay plan, even if it is otherwise a good fit with the organization. Therefore, they may be tempted to gloss over these design issues as being simply technicalities.



Especially in regard to stock plans, students (and many others) may think they know what they are talking about, but they often confuse the types of plans. For example, many students seem to think that any type of stock plan is a “stock option plan,” when this is in fact a very specific type of stock plan that is very different from other stock plans and that may bring very different results. It is important for the instructor to be precise about the terminology for the different types of stock plans and to emphasize the differences.

ENGAGEMENT STRATEGIES Use the Microsoft example in the opening vignette to catch the students’ interest. If you can find it, attach the theme music to Who Wants to be a Millionaire? to your opening slide. Note that although performance pay plans can be very beneficial to both employers and employees, this is not always the case, and it really depends on whether the specific performance pay plan matches the circumstances and goals of the employers and whether it is properly designed. Remind students that even if a particular group or organization performance pay plan is a good fit for an organization (as was discussed earlier in the book), the specific design of the plan can make the difference between success and failure, and that is what this chapter is all about.

Ask students if they can distinguish between gain-sharing and goal-sharing plans, and make sure they understand the key differences. You can use the examples of gain sharing in Compensation Today 11.1 and 11.2 to help do this. Then briefly describe the main types of each plan and the design issues for each. Follow that up with Case Question 1 (“Alliston Instruments”), which can be done as a graded case. Or an abbreviated version could be done by pairs of students in class.

Poll the class to find out which type of plan they came up with, and then ask the pairs why they made the selection they did. Also, find out from several pairs (for each type of chosen plan) how they dealt with the key design issues.

Moving on to organization performance pay plans, briefly go over the main types of profit sharing plans and then the design issues. Use Compensation Today 11.3 to illustrate some of the specific choices in designing a profit-sharing plan. Use End-of-Chapter Exercise 1 to discuss

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Chapter 11: Designing Performance Pay Plans

factors that may influence the effectiveness of a profit-sharing plan. Follow up with End-ofChapter Exercise 2 to get students thinking in more specific terms about the design choices for profit sharing, and which choices may be more attractive to employees.

When students reveal their choices (you could use clickers to collect information on how each would handle each of the design choices), then discuss choices where students are basically in agreement and those where they disagree. Try to tease out the reasons for the different choices (e.g., some students may be more concerned about possible free riders than are other students, and therefore want to gear the allocation across employees to employee performance rather than to other criteria.)

Moving on the employee stock plans, briefly introduce the different types of employee stock plans, noting that they are very different from one another in a number of very important ways, and that some types of stock plans are much riskier than others. Compensation Today 11.5 can be used as hair-raising example of how, under the Canadian tax regime, even stock options—one of the least risky forms of stock plan—can result in perverse consequences for employees.

However, be sure to note that most stock plans do not have such dire results for employees and are usually beneficial—depending of course on the specific design of the stock plan.

Use Case Question 2 (“The Fit Stop”) to give students the opportunity to decide what type of organization performance pay should best suit The Fit Stop. Hopefully, it won’t take students too long to realize that a profit-sharing plan won’t be much use in the initial years, since no profits are expected, and that they would then design a stock plan, as suggested in the notes to this case.

This could easily be done in class, by pairs of students, especially if The Fit Stop case has been previously used earlier in the course, so they are already familiar with it.

Finally, segue to nonmonetary reward plans by asking whether what people really want is recognition—and if they have a reasonable salary, why worry about performance pay? During the ensuing discussion, note that although nonmonetary plans may be a useful supplement to financial rewards—if designed properly and used in the right circumstances—they are no substitute for a fair and equitable compensation system.

Use the RBC Financial program as an example of a very well developed nonmonetary program.

Ask the class whether anyone has been involved with an organization that provided such rewards, and what their experience was. (Maybe you will be lucky, as I was, and actually have a student who worked for RBC to provide his or her take on the program!)

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

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Chapter 11: Designing Performance Pay Plans

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 11 identifies the key issues in the design of group and organization performance pay plans, which can be quite complex to design and manage. (Individual performance pay plans were discussed in Chapter 5 and Chapter 10, in the context of evaluating individual employee performance, so additional coverage of individual performance pay plans is not needed here.)

The chapter first covers the key issues in the design of gain-sharing plans, and those of goalsharing plans, identifying the major types of each plan in so doing. It then does the same for profit-sharing plans and employee stock plans and concludes with a discussion of the role that nonmonetary recognition programs can play in a total rewards system.

Suggested Answers to Discussion Questions 1. Given that gain-sharing is related to a work group reducing costs or improving productivity and goal-sharing is when a work group obtains a bonus if they achieve a specific performance goal; these situations will vary depending on the area of improvement or the required goal. In one circumstance a productivity rates are of interest. At another point in time, saving costs related to injury for example could be another or different focus. Similar to goal-sharing, improving service levels one year may give way to producing more products or Copyright © 2018 by Nelson Education Ltd.

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Chapter 11: Designing Performance Pay Plans

selling more in another given year. The focus changes and so do the parameters for what the bonus or will be for the workers.

2. The design issues that would be difficult to decide are the form of bonus payout and it relates to the structure and goals of the organization. Establishing the right formulae for determining the bonus can also be challenging. Discretionary plans create uncertainty for employees because of not knowing if their performance will be rewarded. This challenges motivation among employees. Fixed formula plans are most often used because of its relative simplicity.

3. There are pros and cons for stock option plans for privately held companies. On the one hand there is little or almost no immediate cash cost, it can be an incentive, it offers tax flexibility for the employee and employee can potentially see themselves as potential owners of the company. On the other side, it can be a tax issue for the company and it can cause unhappy employees as the company may not be doing as well or does an owner pull out retained earnings before stock options can be exercised?

4. There are five types of nonmonetary rewards: (1) social reinforcers, (2) merchandise awards, (3) travel rewards, (4) symbolic rewards, and (5) earned time off. They are effective because more employees have greater opportunity to achieve these and there can be greater involvement with employees making suggested nominations of other employees. It can stimulate very positive corporate culture. On the other hand, these types of reward programs can also dwindle in interest or may not provide enough incentives for employees to extend their performance to a significant level.

5. Profit sharing plan pay systems can often provide incentives for employees to improve performance. On the other hand, employees may not know if they will receive rewards or not depending on the type of profit sharing plan (e.g., discretionary approach) which could minimize motivation. Profit sharing plans can be fixed amounts, based on base pay amounts and can provide multiple offerings. The notion that as long as the organization is profitable and one can extend their performance to some level, the chances for payout increase. Thus, this further supports expectancy theory in that achievements are attainable and can be rewarded.

Notes for Exercises 1. The purpose of this exercise is to help students understand how profit-sharing plans may vary, and to think about how their structures might affect the ensuing results.

In discussing these two profit-sharing plans, it is important to note that the settings are very different, and that each firm may each have different objectives for its profit-sharing plan.

One the key objectives for the plan at Dofasco, which has certainly stood the test of time, is to demonstrate to employees that they don’t need a union in order to participate in the good fortunes of the company. The profit sharing likely does help to promote a feeling of reward equity on the part of employees, and can be a key pillar of the firm’s human relations

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Chapter 11: Designing Performance Pay Plans

strategy. The fact that all participants in the plan receive equal shares of the profit-sharing bonus helps to convey the idea that everyone is important at the company.

At the Barrie Canadian Tire Store, a key objective is probably to promote employee loyalty and commitment to the firm. We don’t know the bonus percentage, but the bonus distribution formula (40 percent based on employee earnings, 40 percent on employee merit, and 20 percent on employee seniority) suggests that the firm wants to particularly reward meritorious employees and more senior employees. The formula appears focused on using profit sharing to especially help retain the most valued employees in the store, something important in an industry with high turnover. The fact that the payout is in company shares deposited in a deferred profit-sharing plan emphasizes the long-term perspective and also provides a continuing reason for employees to be interested in company performance. A key requirement with this type of plan, however, is a fair system for appraising employee merit.

If such a system is not in place, the profit-sharing plan will be compounding unfairness, and much of its value may be lost.

2. The purpose of this exercise is to give students the opportunity to deepen their understanding about the characteristics of different profit-sharing plans and to see how different employees might value different aspects of these plans.

Notes for Case Questions 1. Alliston Instruments. This exercise gives students the opportunity to actually design a groupbased performance pay plan. (Note: This is a recurring case. The notes for Case Questions 1 and 2 in Chapter 5 and Case Question 1 in Chapter 9 may provide useful background here.)

What has happened at Alliston is a clear illustration of some of the dysfunctions that can be caused by the introduction of individual performance pay into a situation to which it is not really suited. Employees have no loyalty to the company and its goals, and turnover is low only because of continuance commitment. Employees are taking advantage of the new bonuses to enhance their own self-interests only, with the result of added cost in the form of the bonuses and materials wastage as well as additional administration, with marginal quality and no off-setting productivity advantages. Individual bonuses such as those used here do not work well where a long-linked production technology is being used. Alliston is a prime example of what can happen when the environment changes for a classical firm that has the typical classical adversarial relationship with its union.

Some points that may inform the discussion are as follows: Gain-Sharing (Scanlon) Plan Advantages: 

Focuses employee participation on towards company goal of improved productivity



Can develop a cooperative relationship between workers, the union, and management

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Chapter 11: Designing Performance Pay Plans



Considers cost savings beyond just labour savings



Self-funded from the cost savings



May increase affective employee commitment



Has been used in other unionized settings



Can be used more easily in low-trust situations than can goal sharing

Disadvantages: 

Involves costs to set up and administer



Requires training to enable it to work



Short-term results unlikely



Doesn’t fit classical organizations; firm will have to become more participative Goal-Sharing Plan

Advantages: 

Is simpler to develop and flexible in application



Can be tied to specific objectives in supporting company objectives



Favourable group norms lead the group to police itself and become more productive



More collaborative attitudes enable creative idea generation



Intrinsic motivator by establishing a sense of belonging by group members

Disadvantages: 

There may be a tendency to be more arbitrary in terms of goals set and rewards given



May not be as motivational or trusted as gain sharing – if reward does not reach expectations



All or nothing approach can prove to counter attainment of objectives



Best application is in high-involvement firms

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Chapter 11: Designing Performance Pay Plans

Of the two major group plans, it would appear that the Scanlon gain-sharing plan would best suit the Alliston case. The primary rationale in recommending this method of reward system is the need for Alliston to focus employee attention on productivity and quality problems.

And given the adversarial situation at the firm, gain sharing fits better than goal sharing, which could be disregarded by employees as simply a management attempt at manipulation.

Profit sharing in this case has too weak a line of sight to provide immediate solutions to the problems at hand. However, combined with gain sharing and other structural changes in line with high involvement, such as information sharing, profit sharing could serve a very useful role in focusing employee attention on the overall financial performance of the company and on the seriousness of the problems facing the firm.

2. The Fit Stop. The purpose of this case question is to give students the opportunity to deepen their knowledge of organizational pay plans by designing one for a specific organization.

(Note: This is a recurring case. The notes for Case Question 2 in Chapter 2, Case Question 1 in Chapter 4, Case Question 3 in Chapter 5 and Case Question 1 in Chapter 6 may provide useful background here. Students can also be given the opportunity to do further work with this case later in the book. See Chapter 12, Case Question 1, and Chapter 13, Case Question 1). 

Because the Fit Stop will be using the high-involvement managerial strategy and a payfor-knowledge system for base pay, and since it will want high levels of membership, task, and citizenship behaviour, either employee profit-sharing or stock plans would be appropriate. The problem with a profit-sharing plan at this point is that the firm is likely to make no profits for at least one year, possibly two, so this type of reward is not likely to have much effect on employees at the present time. Another disadvantage of a profitsharing plan is that the firm loses critical working capital once the profit sharing-plan does start to pay out, unless the firm has a plan that pays out in stock, which wouldn’t be a bad idea.



However, at the moment, to give the employees a stake in the firm’s success and integrate their goals with those of the firm, some type of stock plan would be appropriate.

Perhaps initially there would be a stock bonus plan, to get shares into the hands of employees quickly, and then a share-purchase plan, with perhaps the company matching employee-contributed funds up to a certain maximum, such as 5 or 10 percent of pay. To keep shares in the hands of company employees, the firm may well decide to impose a buy-back policy for the shares held by any employees leaving the firm.

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Chapter 11: Designing Performance Pay Plans

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

Additional material on employee stock plans in Canada can be obtained from the Employee Share Ownership Plan (ESOP) Association of Canada, at http://www.esopcanada.com.



For the most comprehensive source of information on employee ownership, including many specific examples, go to the website of the National Center for Employee Ownership, based in Oakland, California: http://www.nceo.org.

Copyright © 2018 by Nelson Education Ltd.

11-9

Chapter 12: Designing Indirect Pay Plans

CHAPTER 12 Designing Indirect Pay Plans ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That use of an extensive benefit system by an employer is a major investment, but one that must be designed carefully to fit the organization if the return from that investment is to be fully realized.

2. The key considerations and issues in designing a benefit system.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Identify the six major categories of employee benefits, and the specific types of benefits included in each category.



Discuss the advantages and disadvantages of fixed versus flexible benefits plans and the circumstances in which each would be most appropriate.



Describe the issues that must be addressed in designing a benefits system.

KEY CONCEPTS Key concepts included in Chapter 12 are types of employee benefits and services; fixed, semiflexible, or flexible benefits systems; and the steps and issues in designing and implementing an indirect pay system.

STUDENT MOTIVATION Why should students care about the material in this chapter? 

In many organizations, benefits have become a very important (and expensive) part of the compensation system; it is therefore important that HR specialists have a good understanding of this part of compensation.



In many organizations, an entry-level position is benefits officer, and knowledge from this chapter can give a candidate an advantage in securing his or her first HR position.

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Chapter 12: Designing Indirect Pay Plans

BARRIERS TO LEARNING 

Indirect pay (benefits) is a highly technical area—perhaps the most technical in the entire area of compensation—and students may therefore find it too technical to interest them.

An issues-oriented approach to introduce different sections of this chapter will go a long way toward fostering student interest.



Given that many undergraduate students are relatively young, it may be hard for some of them to see the personal relevance of benefits. Any exercise that can make benefits more personal to students (as with life expectancy and pensions; perhaps by referencing the importance of benefits to parents or older friends, and even the potential need to support aged parents if company plans are inadequate) may make the issues more personally relevant to students.

ENGAGEMENT STRATEGIES Start by noting that once the role of indirect pay within a compensation strategy has been decided (as discussed when formulating compensation strategy), the next step is to design the actual benefit system, which can be the most complex part of the firm’s entire compensation system.

After students have been asked to read this chapter, ask them to share their opinion to the opening vignette and why they believe Digital Extremes achieved the distinction of being on Canada’s top 100 employers list. Then ask students to do Using the Internet 1 and use what they learn to kick off this section.

It is finally time to flesh out the six main categories of benefits that students first encountered in Chapter 4. Tell students that this section could be very boring without their participation, and that you are planning to use lots of class participation to cover this section. As you cover the categories of benefits, ask students for examples that they have experienced. If students are vague in their knowledge of their benefits, use this opportunity to make the point that most firms do a poor job of communicating benefits, which is, admittedly, a challenging task. Use Compensation Today 12.1 to reinforce the potential impact of the many poor pension and benefit plans of Canadian workers. Then use Compensation 12.2 to show an example of how benefits are used to engage workers to a long-time career.

When covering pensions, use Discussion Question 1 to stimulate debate on the merits of defined benefit vs. defined contribution pension plans. When covering work–life balance programs, use Compensation Today 12.3 and/or Discussion Question 2 to stimulate discussion on why should it be up to the employer to look after an employee’s health and wellness. Using the Internet 2 can also be used in conjunction with discussion of work–life balance programs.

You could finish off this section with End-of-Chapter Exercise 1, to get students thinking about how different employees value different benefits. (You could do this as a clicker exercise as well.) This would be a good segue into the next section, on fixed vs. flexible benefit systems.

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Chapter 12: Designing Indirect Pay Plans

After defining fixed, semi-flexible, and flexible benefit systems, and ask students what they see as the pros and cons of each. Ask them which they would prefer, as an employee, or as an employer. Note the dissenting opinion on page 422, and use this as a lead-in to Discussion Question 3.

Moving on to designing the benefit system, briefly go over the five main issues. Then, divide the class into small teams and use End-of-Chapter Exercise 2 as an in-class exercise to give students practice in dealing with the first design issue, “Can benefits contribute to compensation objectives?”

One or both of Case Questions 1 (“The Fit Stop”) and 2 (“Plastco Packaging”) could be assigned in advance as graded assignments (or as in-class group exercises) to give students practice in designing a benefit system. (In-class use is of course more feasible if students have worked with either or both of these cases previously in the class.) Incidentally, since these two firms are quite different, using both together would add value to this exercise. If this places too high a demand on the students, one possible approach would be to assign The Fit Stop to half the class and Plastco Packing to the other half.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:  Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?

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Chapter 12: Designing Indirect Pay Plans

 What should I do differently next time?  How can I best gather student feedback?

ADDITIONAL RESOURCES Chapter Summary Chapter 12 identifies the key issues in the design of indirect pay plans. It starts by describing the menu of benefits that firms can include in their indirect pay plans. It then discusses whether a fixed, semi-flexible, or flexible benefits system may best fit a given organization, and the pros and cons of each system. Finally, a detailed description of the steps in designing an indirect pay system, and the key issues at each step, is provided.

Suggested Answers to Discussion Questions 1. There are pros and cons for defined contribution pension plans. In order to avoid fluctuations with inflation, the move to these plans can pay off for employees in the long term. That said, these plans give flexibility to employees who will most likely not remain in a long-term relationship with one employer. The opportunity to do well in these plans is off-set with a company not being a position to manage these portfolios, thus giving the responsibility to the employee. It becomes somewhat of a risk-reward relationship, but also employees will need the flexibility of a plan; especially if they are moving in their jobs throughout their careers. A company cannot continue to support a portfolio of an employee that has moved on. A company does reduce it accountability by not being the primary investor for the employee, but can claim that giving the autonomy to the employee provides long term rewards.

2. There is a certain degree of truth that employees have the personal accountability of his/her own wellness, but organizations must examine this issue from a few important factors. First, a safe working environment, depending on the workplace itself is a legislated requirement (i.e., the notion of fundamental federal and provincial legislated health and safety requirements). Second, it is the right thing to do and helps with a company’s brand image and can benefit in the recruitment and selection of talent. Three, ensuring that employees are healthy and avoid health risks (whether at work or related to life style) means employees are in a better position to remain at work and will perform to the required levels needed to ensure the company reaches it goals. Sick days, short and long term disability costs, and rising overall benefits insurance costs to employers is something they look to manage. So the focus of this question should address joint accountability from both the employee and employer.

But certainly, the employer can manage and leverage costs and ensure the retention of highpotential talent, while at the same time maximizing performance.

3. In most instances flexible benefits tend to provide many benefits to both employees and employers; although there are some downsides. It certainly is a cost-cutting measure for employers. It is a way for employees to customize health care and benefits packages to meet specific needs and lifestyles. Students should be able to list the many benefits presented in Copyright © 2018 by Nelson Education Ltd.

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Chapter 12: Designing Indirect Pay Plans

the text as a result of a change in the structure of the household and then the rising costs of healthcare in general for the employer. This is especially relevant when you look at the make-up and structure of today’s modern family where you have spouses often both working and receiving healthcare and benefit coverage. Flex programs can allow spouses to change and modify packages to avoid duplication and then enable them to “co-ordinate” benefits whereby one insurance company would cover the remaining balance of coverage that may not be fully covered.

4. The key steps the CEO to should take are (1) determine the role of indirect pay in the compensation strategy; (2) develop a process for the actual designing of the benefits; (3) identify the specific system and benefits to be included; (4) determine the structure of each benefit (i.e., coverage, benefit funding, eligibility and flexibility); and (5) develop the procedures for administering (i.e., enrolling, communicating and evaluating). Students should provide specific examples or rationales for each step.

Notes for Exercises 1. The purpose of this exercise to deepen student understanding of indirect pay plans by sharing their preferences with other class members.

You can document responses on a flip chart or board for class discussion, or simply go around the room asking students about their preferences. See whether there is consensus on the three most important benefits, and see whether there are any patterns. For example, do older students have different preferences than younger students? The more diverse the class you have, the more diversity in responses you should get. Make the parallel to organizations, where those with a more diverse work force will be less likely to find that a “standard” benefits package for everyone will be satisfactory.

2. The purpose of this exercise is to help students understand how the nature of the firm may affect the type of indirect pay plan that is offered. 

The first thing that needs to be done in any compensation analysis is to identify the managerial strategy being practised by the firm. It is apparent that the lawn maintenance company is (or should be) practising classical management, the retailer is (or should be) practising human relations management, and the computer firm is (or should be) practising high involvement management. From there, it is quite easy to outline an appropriate indirect pay policy for each firm.



For the lawn maintenance firm, its primary work force would be fit young men or women. There is no particular value in having extensive benefits to encourage commitment to the firm. Indeed, the firm may not particularly want to retain most of its employees over a longer time frame, since their productivity may decline with age.

Certainly, a pension plan is not likely to be of much value to the firm or of much importance to most of their work force. Because the chance of workplace injury may be quite high, they may want to have some type of disability program, although most of their

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Chapter 12: Designing Indirect Pay Plans

liabilities in this area could be discharged through their participation in mandatory worker compensation programs. 

For the clothing retailer, high membership behaviour would be very important, because customers in a high-end retailer such as this like to deal with the same knowledgeable staff. A human relations approach will create committed employees in what is usually a high turnover environment. Indirect pay will be used heavily to encourage this commitment. It would include a defined contribution pension plan, life insurance, supplementary medical and dental coverage, and, of course, discounts on company products to encourage employees to wear what they sell. In the rather volatile retail environment, a deferred profit sharing plan would be a good choice for the pension plan, which would create employee interest in firm performance and at the same time not commit the store to fixed pension payments at times when it might not be able to afford them.



For the computer software firm, a high-involvement strategy will be essential. In this dynamic environment, the competition for good employees will be fierce. While competitive compensation levels will be necessary, the work needs to be structured so as to maximize intrinsic rewards. In order to help retain employees, a solid and competitive benefits package will be essential, with a variety of features available. This might be an excellent organization for a flexible benefits plan, so that employees can maximize the value of their benefits by selecting benefits that suit their needs.

Needless to say, a key benefit will be subsidized training and education programs. Other programs to help redress the work–family life conflict would be highly desirable, since the work is very intensive at times when a deadline must be met, and there needs to be some way of keeping work and family life in balance. Flexible and generous personal and vacation leaves can play a major role in this. Child and elder care programs might also help in this regard. Recreational and fitness/health plans may also help to reduce stress in this very intensive environment. Optical care programs may also be highly desirable in this setting.

Notes for Case Questions 1. The Fit Stop. The purpose of this case question is to provide students with the opportunity to enrich their understanding of indirect pay, at a practical level, by designing an indirect pay plan for a firm. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 2, Case Question 1 in Chapter 4, Case Question 3 in Chapter 5, Case Question 1 in Chapter 6, and Case Question 2 in Chapter 11 may provide useful background here. Students can also be given the opportunity to do further work with this case later in the book. See Chapter 13, Case Question 1).

In designing the benefit system, two key factors are the nature of the employees, who will be young and interested in fitness, and the needs of the firm, which is to conserve cash. The most suitable plan would be benefits that young employees interested in fitness would value, such as recreational programs and educational programs geared to health and fitness. At the

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Chapter 12: Designing Indirect Pay Plans

moment, the firm cannot afford to spend a lot on indirect pay, and these employees are not likely to be too interested in such programs as life insurance and pensions right now in any case. In the future, a flexible benefits plan might make sense, to fit in with the highinvolvement approach of the firm. It might include a defined contribution pension plan geared to company profits.

2. Plastco Packaging. The purpose of this case question is to provide students with the opportunity to enrich their understanding of indirect pay, at a practical level, by designing an indirect pay plan for a firm. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 3 may provide useful background here.)

Because of the competitive environment facing Plastco, it is important to contain benefits costs. If the firm does move toward high involvement, then a flexible benefits program might help employees maximize the value of their benefits while containing costs for the company.

If the company stays with a classical managerial strategy, the best plan would be to minimize benefits as much as possible, although it may be necessary to increase benefits with length of service to retain experienced employees. However, investing a large amount of money in continuance commitment is unlikely to pay off without other changes to create a more motivational workplace atmosphere.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

For an interesting video of workplace benefits at Google, play the following in class: http://news.bbc.co.uk/1/hi/technology/7292600.stm.



Students are always interested in life expectancies, and this can be made very germane to benefits, especially pensions. Three websites with life expectancy information are: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/health72a-eng.htm http://www.sunware.ca/illustrations/longevity.aspx http://www.sonnyradio.com/realage3.swf The first website simply shows some basic statistics about average life expectancies. The second factors in a just a few characteristics, so a person can make an estimate of his/her life expectancy. The third is not necessarily a completely accurate estimate, but can be a lot of fun because of the many social and other factors it incorporates. Use it to plot the life expectancies of some “fictitious” employees, and students will have fun with that.



For examples of what various firms are doing with wellness programs, go to the Canadian Labour and Business Centre website, at: http://www.clbc.ca/files/Reports/summary_of_key_conclusions-final-e.pdf

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Chapter 13: Activating and Maintaining an Effective Compensation System

CHAPTER 13 Activating and Maintaining an Effective Compensation System ESSENTIAL OUTCOMES If nothing else, my students should learn: 1. That insufficient preparation for, and attention to, implementation can cause even welldesigned compensation systems to fail.

2. That ongoing evaluation and monitoring of the compensation system is crucial in order to ensure it remains effective.

3. There are many aspects to consider as it pertains to preparing, planning, communicating, organizing and maintaining a compensation system.

LEARNING OUTCOMES After completing this chapter, students should be able to: 

Identify the key issues in preparing to implement a compensation system.



Develop an implementation plan for a new compensation system.



Describe the steps necessary for implementing a compensation system.



Develop a process for communicating the compensation system.

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Explain how to evaluate the effectiveness of a compensation system.



Identify circumstances that may necessitate changes to the compensation system.



Discuss the issues to be considered in adapting the compensation system.

KEY CONCEPTS Key concepts covered in Chapter 13 include the key issues in preparing to implement a compensation system, developing the implementation plan, implementing the compensation system, communicating the compensation system information, evaluating the compensation system, monitoring changing circumstances, adapting the compensation system, and should exceptions be made for individual employees.

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Chapter 13: Activating and Maintaining an Effective Compensation System

STUDENT MOTIVATION Why should students care about the material in this chapter? 

Without effective implementation, all the effort that goes into developing a well-designed compensation system will be wasted. Moreover, such a debacle will seriously damage the credibility of all those involved with the compensation process.



The ability to effectively implement a new system—particularly a compensation system—is a skill that will serve HR professionals (and other managers) very well. The underlying principles for successfully implementing any type of change are very similar, and are useful far beyond compensation.

BARRIERS TO LEARNING 

Many students assume that if you come up with a new policy or system that is well suited to a given organization, employees will eagerly embrace the changes (or can simply be ordered to adopt the changes), and that therefore the implementation part of the process will be trivial. Therefore, they are not concerned about the issues in this chapter.



Implementation of a new policy is not a very exciting process, so students may find the contents of this chapter rather uninteresting and tend to gloss over them. The more examples of ineffective implementation in organizations the instructor can find, and the more opportunity provided to students to apply the concepts in this chapter, the better.

ASSESSMENT TOOLS To assess student learning against the chapter learning outcomes, before the end of the lecture, students may be asked to write short answers to questions such as the following:  What was the most important thing you learned during this class?  What important unanswered questions do you have?

Students can compare their questions and answers with a classmate or you can invite questions/responses from the large group.

REFLECTIONS ON TEACHING The key to providing the best possible learning experience for students is continually assessing the extent to which students are mastering the course material, and reflecting on ways to promote the learning experience. This can be aided by instructors asking themselves the following questions after each chapter:

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Chapter 13: Activating and Maintaining an Effective Compensation System

 Which learning exercises/pedagogical activities really worked?  Which didn’t work as well as I had hoped?  Were students engaged with the material?  Were students focused on key concepts, or were they distracted by tangents?  Did my assessments suggest that students understood the concepts?  Were my students able to relate and apply the concepts effectively?  What should I do differently next time?  How can I best gather student feedback?

ENGAGEMENT STRATEGIES This chapter represents the final milestone alone the road to an effective compensation system.

Note that any system, no matter how well designed, will fail if unless implementation is carefully planned and executed. Refer to the opening vignette to reinforce the potential impact of this. This chapter provides a process for implementation that will maximize the likely success of the new compensation system.

Run over the key issues in preparing for implementation, including preparing the compensation budget, planning for compensation administration and information technology, and organizing for compensation administration. Note that there are various privacy and legal issues involved with this. Using the Internet 1 can be used in class at this point (see “Possible Sources of Lecture Enrichment”).

Note that firms may choose to outsource some or all of their compensation administration. Go over the advantages and disadvantages of outsourcing, as well as the four main factors in deciding whether to outsource. You can use the opening vignette and Compensation Today 13.1 to animate the discussion. The End-of-Chapter Exercise can be assigned in advance to help generate more local data on this issue.

Next, briefly go over the points for developing the implementation plan, for implementing the compensation system, and for communicating compensation system information. To highlight the legal aspect, reference the legal case in the chapter.

If evaluating the compensation system is so important, ask students why so few employers have an evaluation system in place.

Reinforce the issues by assigning Case Question 1 to small teams of students. This is a large enough project to warrant being a graded assignment.

Note that a key problem with compensation systems is that they can lose effectiveness if the circumstances facing the organization change. Therefore, it is essential to monitor the organization for changes, both external (e.g., legislative and tax changes, labour market changes,

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Chapter 13: Activating and Maintaining an Effective Compensation System

competitive environment changes, socio-economic changes) and internal (e.g., changes in managerial strategy, the work force, financial circumstances, scope of the organization), and then to adapt the compensations strategy and system accordingly.

When it comes to adapting the compensation system, the key thing to identify is exactly what is going wrong with the system. Why are the desired results not occurring? Only after this question is answered can you move on to identifying the appropriate adaptations. When such adaptations are being made, however, remember that it is very important to communicate the need for the changes, or you may end up with your employees in a real lather, as Compensation Today 13.2 illustrates.

A final issue is whether to accommodate demands of employees for exceptional treatment. While it is tempting to make an exception to the existing compensation structure to keep a valued employee, such accommodations will eventually compromise the integrity of your carefully designed compensation system. If you have a sound compensation system, it is better to stick with it. If there is some way of accommodating the employee within the existing compensation system, fine.

Otherwise, rather than violating your compensation system, with all the inequity that will create (why wouldn’t other employees then feel inequitably treated and threaten to leave if they don’t get the same deal as the first employee?) you are better to stand pat, even if you may lose the employee. Making exceptions based on accommodating specific employees is a fast track to an inconsistent, inequitable, and ineffective compensation system. (Of course, if the compensation structure really is out of kilter, then changes need to be made, but not only for employees who threaten to leave.)

To stimulate lively discussion on this issue, and to serve as a vehicle for making this point, use the Supplemental Exercise in the “Additional Resources” section.

ADDITIONAL RESOURCES Chapter Summary Chapter 13 covers the final steps along the road to effective compensation, as mapped out way back in Chapter 1. While implementing, managing, evaluating, and adapting the compensation system may not be the most glamorous aspect of the compensation process, insufficient attention here can cause an otherwise sound system to founder.

The chapter starts by identifying the key issues in preparing for implementation, making the point that effective preparation before implementation can avoid many problems during implementation. It then describes the key components of an implementation plan, including the plans for managing implementation, for training, for communications, and for evaluation. Next, the six steps in actually implementing the compensation system are outlined, followed by the steps in communicating and in evaluating the compensation system. It then describes the ways a compensation system should be communicated and the importance of evaluating the

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Chapter 13: Activating and Maintaining an Effective Compensation System

compensation system – with strict attention to costs. The chapter concludes with a discussion on the need to monitor changing circumstances and to adapt the compensation system accordingly.

Suggested Answers to Discussion Questions 1. Compensation communication is an important aspect of an effective compensation system because it supports those initiating or operating the system and those using or subject to the system. Those who support the system must understand their roles. Supervisors and managers need to know about reporting overtime hours, termination and hiring requirements, etc. Managers should be able to articulate and explain a new compensation system to their employees and the relationship to organizational performance. If an organization wants to ensure positive employee attitudes and behaviours, it is important they understand how compensation applies to them. This includes the type of compensation, the amount and how it is calculated. Employees need to understand benefit options, what and how to choose to ensure they make the right decisions for their specific needs. Communication plays a key role in awareness but also ensuring employees can and should ask questions to ensure they are fully aware of their compensation and benefits and that management is in a position to ensure they can support this process.

2. Issues to consider when deciding to outsource compensation functions relate to direct and indirect pay. Depending on the benefits offered, the administration can become fairly complex. Today there many companies that perform this function so as a result of economies of scale, it is much more affordable today. There has been a slowdown in using outsourcing given company’s now have access to purchase their own high-powered HRMS (human resource management system), but outsourcing continues. Cost, expertise and the opportunity to use the HR team in a more strategic capacity are some of the advantages. Not being aware of some of the issues, efficiencies or best practices by being away from the process can be a disadvantage. Organizations are always looking for ways to improve and save so, unless you have your hands and eyes “on the controls,” sometimes these not seen.

3. It is important to have a process for evaluating a compensation system as it enables an organization to see out what is working well and where there are opportunities to improve.

Like any other HR process or function, measurement of your processes is critical to ensure organizational efficiency, accuracy and cost savings. This includes the importance of being able to identify the precise impact of compensation on organizational performance.

Evaluation is not easy and often most neglected for two reasons. First, being able to separate the precise impact of compensation to organizational performance with a strong degree of certainty is almost impossible (i.e., given there are so many other processes involved in addressing organizational performance) and second, many organizations don’t know how. If done correctly, it can offer significant information but it takes time and resources. Evaluation criteria and the procedures for collecting data should be set out during the compensation strategy formulation process (ideally).

4. A compensation system will need to change usually as a result of multiple factors. It usually does not simply “break” overnight. It can however, over time, become obsolete. This can be the result of external factors related to legislation, tax laws or labour market changes. It could

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Chapter 13: Activating and Maintaining an Effective Compensation System

be the result of internal changes within the organization itself such as a managerial or leadership change, a significant change in a strategy or a company’s financial condition. In terms of importance, one is not in the control of the organization, where the other one is.

Sometimes an external change can happen quickly but often, like a legislative change, organizations can prepare and adapt to these changes. What continues to make them challenging is the fact there are little options in such as case. The legislation is going to pass.

Whereas with an internal change, and organization can then modify or adjust decisions that can allow it to transition in a way that might be more conducive to its ability to deal with the changes.

5. Three ways in which an organization can evaluate the effectiveness of its compensation systems are: (1) examining the impact on compensation objectives, (2) the impact on compensation costs and (3) the impact on employee behaviours and attitudes. Evaluation should be strategic and scheduled and aligned to key performance indicators. Usually when a new compensation is in place, the first 90 days are critical to ensure the system is functioning, but usually within one year a complete cycle has occurred, which would be the right time to examine the entire process from front to back. The organization will need to determine if one year is suitable for making significant conclusions on the system or whether more time is needed. This will depend on the size and scope of the compensation system and/or the changes that were made.

Examining cost will be based on actual versus budgeted costs and by looking at compensation cost indicators (e.g., Compensation Cost Ratios and Average Employee Earnings are two main indicators). Compensation cost ratio takes the total of all compensation paid to all employees and it can change if average employee earnings change, the total number of employees changes, or total costs or revenues change. Average employee earnings focus on the individual employee.

An employee will make more or less money if average employee earnings to up or down. It makes sense to examine expenditures especially if there are situations where certain departments in an organization are making more than others. It may justify further investigation.

Finally, examining behaviours and attitudes comes down to the common areas of attraction, retention and attendance. This seems to align too many other HR processes and functions. If compensation and benefits are seen as fair and equitable, this will have a direct impact on membership behaviours. This includes the quantity and quality of work, citizenship behaviour as it pertains to taking “an extra step” or “reaching out” to make suggestions to better improve the organization and overall job attitudes. A well-defined compensation system has a significant on a company’s overall culture, and thus the overall performance of the organization.

Notes for Exercise The purpose of this exercise is to help students understand some of the practical issues of compensation administration, particularly as they relate to outsourcing.

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Chapter 13: Activating and Maintaining an Effective Compensation System

Notes on Case Question The Fit Stop. The purpose of this case question is to give students the opportunity to enrich their knowledge of the practical issues in developing a plan for the implementing a new compensation strategy. (Note: This is a recurring case. The notes for Case Question 2 in Chapter 2, Case Questions 1 in Chapter 4, Case Question 3 in Chapter 5, Case Question 1 in Chapter 6, Case Question 2 in Chapter 11, and Case Question 1 in Chapter 12 may provide useful background here.)

Students should develop an implementation plan that covers all of the key components discussed in the section, Developing The Implementation Plan. They will have to use most of the content from Chapter 13 in so doing, so this is an excellent opportunity for students to pull together everything in this chapter.

Possible Sources of Lecture Enrichment The following web links can be used as a source of materials for lecture enrichment: 

Refer to the Ten Privacy Tip page of the Office of the Privacy Commissioner of Canada website at https://www.priv.gc.ca/media/2355/tips-bus_info_201501_e.pdf Ask the students whether they can think of any ways in which adhering to these responsibilities might affect the practice of compensation management.

Supplemental Exercise Group students into pairs and ask them to address the multiple choice scenario below, selecting what they think is the most appropriate response. (You could use clickers to record and display their responses.)

Ask each pair why they selected their particular response and not one of the others. This will usually generate lively discussion, as some students argue that organizations should stop at nothing to retain valued employees, while others can see the problems in so doing. If you have a sound compensation system, response (e) is always the preferred course of action.

A good employee threatens to leave your firm because she has received a higher pay offer from a competitor. The offer is well outside your company’s pay range for the job the employee is performing. You should tell the employee that: a. You will match the other offer. b. You will beat the other offer to be sure you won’t lose her. c. You will try to get her job put into a higher pay grade. d. It would be disloyal for her to leave the firm, so she must not expect a good

reference. e. You wish her all the best in her new job at the competitor.

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