BUS 434 WEEK 1 DQ 1 & 2

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Learning Objectives

After reading this chapter, you will be able to:

1. Describe the historical development of compensation.

2. Explain the broad context within which a total rewards program operates.

3. Discuss the primary goals of a compensation system.

4. Describe the key components of a total rewards system.

5. De�ine core compensation and list its components.

1 An Overview of Compensation andBene�its

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Introduction Consider the following situations:

A �inancial services �irm has grown to the point where it needs to add account managers to handle the client accounts. What is the best way for the company to pay the account managers so that they are rewarded for getting new client accounts as well as servicing existing client accounts? Should the account managers be paid a salary, a commission, a bonus, or some combination of all of these options?

••••

Two retail companies are in direct competition. One company pays an average of $15.00 an hour but provides no company-paid holidays or vacation. Another company pays an average of $10.00 an hour but also provides company-paid holidays and vacation. Is one method better than the other? For the company? For the employees? Could either approach lead to a competitive advantage over the competition?

••••

An automobile company has run into dif�icult times and must cut expenses. Recognizing that payroll is often the single largest expense in organizations, what is the impact on the company if it cuts wages? What impact will that have on the morale, motivation, and retention of current employees? Will this impact the ability to attract new employees?

Managers, executives, business owners, and human resources (HR) professionals ask questions such as these every day. Why? Because it helps them stay in business!

It must be remembered that employees are individuals with their own desires, motivations, and needs. Properly designed, a compensation and bene�its strategy that addresses the needs of not only the business but also its employees will support the company’s overall business strategy, helping the company be successful in an ever-changing, competitive environment. The key is to align the goals and efforts of employees with those of the organization for which they work. Questions such as those above must be answered in a way that enhances, rather than detracts from, the operation of the company. Since employee talent is a critical resource for a company, the compensation, which includes bene�its, of that talent is a vital component of how a company operates.

In this book, we will explore the need for aligning compensation and bene�it strategy with business strategy. Speci�ically, we will address the contributions an effective compensation and bene�its system makes to ensure successful achievement of the �irm’s strategy. We will examine all aspects of what it takes for an employer to attract, motivate, recognize, reward, and retain the most talented and skilled work force possible. While not every company will have a dedicated compensation professional, much less a compensation department, these decisions must still be made in all types and sizes of businesses, and it is our goal in this book to provide you with the knowledge and background to make these kinds of informed strategic decisions.

We begin this chapter by providing a brief overview of the history of compensation and how compensation systems evolved into what they are today. We then shift our attention to the primary factors that go into creating a compensation system, namely, an organization’s culture, business strategy, and administration, and how the three interact. We then end with the primary goals that any compensation

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system hopes to accomplish and the types of compensation that can be utilized to design a cohesive compensation and bene�its plan.

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Christie’s Images Ltd./Superstock

Bartering arose as the �irst monetary system.

1.1 A Brief History of Compensation It is important to understand where we came from in order to understand where we are and where we are going. Understanding how modern compensation practices evolved can assist in identifying best approaches to aligning corporate strategy with both short- and long-term goals.

Bartering: The First Compensation System

One way to examine human culture is by considering the three waves (or ages) of revolutionary change that have, arguably, had the greatest impact on society (see Tof�ler, 1970). The �irst of these was the agricultural revolution (beginning about 9000 BCE), when humans began transitioning from primarily living as hunter-gatherers to growing crops and beginning to live a more settled existence. The next is the Industrial Revolution (from the late 18th century through the beginning of the 20th century), which was characterized by a dramatic growth in technology and the movement from an agricultural-based to a manufacturing-based economy. The last, which began in the mid-20th century and is still going on, is the information revolution, exempli�ied by the creation and growth of computer-related technology.

Our standards with regard to what is considered both valuable and useful in our lives have shifted accordingly. For example, how people live has changed, from the extended families necessary to sustain an agrarian society to nuclear families during the industrial period to the working-parent families of today. Similarly, business during the agrarian age was conducted by the family, by bureaucracies during the Industrial Revolution, and by teams in the current information age. Underlying all of these economic shifts and the subsequent ways in which we organize society has been the method by which we compensate each other for labor.

Without a developed monetary system, compensation for one’s labor entailed using what one had grown or made by hand, such as making clothes from cotton grown in the �ields. People quickly �igured out that this system was limiting and would not work well. As such, bartering, or the direct exchange of goods or services for other goods or services, arose as a system of exchange for one’s labors. In bartering, a fur trapper, for example, might trade pelts to a dairy farmer in exchange for milk, eggs, or cheese. The quantities exchanged between the two would be determined by their mutually agreed-upon valuation. They might agree, for example, that two dozen eggs was worth one small pelt, or that the trapper would provide trapping services for the farmer over the time frame of a winter in exchange for the farmer’s supplying milk for the same duration. Much of the impetus for the creation of written language came directly from the need for keeping track of bartered goods over time (Robinson, 1995).

The direct-exchange compensation system was helpful in addressing immediate needs, but this method was limiting in its utility in that the resources available were restricted to those in the immediate exchange. A dairy farmer’s milk was worthless to a locksmith, for example, if that locksmith also owned a cow, as there would be nothing the farmer could give to acquire the locksmith’s services.

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This is why a medium of exchange, such as the various currencies we use today, is so vital to an exchange system—it allows for people to acquire goods, services, and resources beyond a direct one-to-one trade. Instead of a dairy farmer having to trade milk for another direct good or service, such as pelts or a locksmith’s services, the farmer could receive a tangible item (the medium of exchange) with an agreed- upon value that could be saved and used for an altogether different need or purpose at a future time. The medium of exchange, in effect, then becomes a means of storing value. This exchange allows goods and services to obtain a certain universally accepted value, often resulting in the medium used for the exchange becoming valuable in itself. Perception of value is the key component of this system. All parties involved must accept the value for an item in order for it to maintain its value.

The actual items used in exchange and as a store of value have also evolved with time. Lumps of base metal, such as copper or tin, were used as a medium of exchange since at least the beginnings of the Bronze Age, or about 1000 BCE, while modern coinage is much more recent and began as simply a method for identifying the weight and quality of the metal being exchanged. People could exchange their particular goods or services for one of these metals and then trade elsewhere the metal they acquired for whatever they wanted or needed.

Today, our mediums of exchange are even more diverse. We still use coinage for smaller exchanges, but we also use paper, plastic, and even electronic means of compensating individuals and groups. All of these different means of exchange have liberated individuals and organizations alike to form ever more complex, mutually acceptable relationships that address wants and needs. While the mechanism of exchange has changed over time, this core concept of storing value for later use and exchanging what we have today for what we want or need in the future has not changed. HR professionals use this concept of exchanging one item (an employee’s labor) for another (compensation and bene�its) every day. Designed properly, this exchange relationship serves to align the employee’s labors with the company’s goals and strategies.

The Industrial Revolution: The Basis for Modern Compensation Practices

Our complex system of compensation used today has its roots in the late 18th century with the beginning of the Industrial Revolution. The advent of tools such as the cotton gin, patented by American inventor Eli Whitney in 1794, signaled the decline of individual hand labor and the beginning of the proliferation of mechanical devices capable of much greater productivity. The increasing complexity of heavy industrial machinery, however, necessitated the systematic training of workers, and training, in turn, represented an increased cost in terms of both time and money. Therefore, companies needed to �ind a way to both utilize that increased training and retain those trained workers. The method of rewarding workers for labor needed to evolve.

Such technological changes in the economy also required workers to move from the family farm to more population-dense urban areas where manufacturing was booming. Individuals and families required—at a minimum—food, safety, and shelter in this new urban environment. Compensating workers for their time, skills, and efforts became a requirement. This dramatic shift in how and where people worked and lived added yet another dimension to compensation—hence the need for a comprehensive compensation system that would attract, retain, and motivate employees while enabling the company to make a pro�it.

Taylor’s Scienti�ic Management Theory

In addition to proper training, guidelines and rules related to how the new industrial worker was to be managed were required. Compensation methods that mirrored the realities of the Industrial Revolution

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were also needed.

This void was �illed by Frederick Winslow Taylor, who has been called the father of “scienti�ic management” due to his work aimed at improving industrial ef�iciency. Taylor, a trained mechanical engineer in the United States, believed that through a detailed analysis of a given task, using techniques such as the detailed study of both the time taken to accomplish actions and the actual physical motions performed (“time and motion” studies), it would be possible to discover one best way to perform a task (Kanigel, 2005).

Based on his research and observations, Taylor developed four rules for scienti�ic management:

1. Create work methods based on a scienti�ic study of speci�ic tasks. 2. Scienti�ically select, train, and develop each employee. 3. Provide detailed instructions for speci�ic tasks. 4. Divide work nearly equally between managers and workers.

While conducting research using time and motion studies, Taylor found that workers and managers typically did not interact with one another. At the time, there was little to no standardization in factory work, and little motivation on the part of managers or their subordinates to work except to maintain an employed status. In the late 1800s, standardizing tasks and focusing on employee motivation were radical ideas, which is precisely what Taylor proposed.

One of the most in�luential ideas Taylor introduced at the time was the notion of providing a fair wage for a fair day’s work. Additionally, he highlighted the need for selecting, training, and developing each employee. Although Taylor was focused on the scienti�ic side of work—and as a result would often forget that the workers were people and not machines themselves—many of the ideas he put forth related to the need to fairly compensate workers for their labor. Taylor’s ideas laid the groundwork for the modern workplace and the need for a comprehensive compensation system.

Fayol’s Principles of Management

Building on Taylor’s scienti�ic management theory, Henri Fayol, a mining engineer in France, developed 14 principles of management (Fayol, 1949), three of which have direct implications for the compensation and bene�its programs of today. They are remuneration, initiative, and equity.

Remuneration—Employee satisfaction depends, in part, on a fair day’s pay for a fair day’s work, a re�lection of Taylor’s in�luence on Fayol’s thinking. Initiative—Productive employees take responsibility for their work and put forth effort and ideas to better the organization. Equity—Employees should be compensated commensurate to their output. The compensation employees receive must be aligned with not only what they believe they and the job they perform are worth but also with what others who perform similar work receive.

Taken together, Taylor’s and Fayol’s ideas have in�luenced business practices since their inception and continuing into the modern day.

Today, organizations have evolved beyond just providing pay for work to providing other forms of care and support for employees. Changes in society have necessitated the creation and growth of laws and government regulation. Additionally, the �ield of psychology has taught us that people are not easy to understand and are driven by individual goals and motivation. Both of these factors will be addressed

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extensively in future chapters. Remember, however, as we will repeat numerous times throughout this book, the hallmark of an effective compensation and bene�its program is consistency. In order to attain consistency, we need to understand what compensation actually is.

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Critical Thinking

Select an organization with which you are familiar and describe the type of compensation strategy it uses.

1.2 Components of a Compensation System A compensation system is a systematic approach to providing rewards to employees in exchange for work provided, with the goal of helping organizations attract, motivate, and retain the best talent. Of course, many different components factor into not only a proposed compensation plan but also the execution of that plan. An organization needs to take into account how much it can afford as well as what the market demands, what potential talent might expect, and also how current employees might react. Let’s consider the following scenario:

A German software company became aware of an extremely talented senior marketing executive from a U.S. company who had become dissatis�ied in her current position. The woman, Anne Prevost, had risen through the ranks at her current company and had been promoted as far as possible. The German �irm saw that Prevost had engineered an advertising campaign that helped her company make signi�icant inroads into the German �irm’s marketplace. The current head of marketing for the German �irm, Jürgen Mehr, recognized that Anne might be open to changing employers and would be a valuable addition to the company. However, Jürgen was dismayed that Anne’s salary was already almost identical to his, and wooing her away from her current employer might require offering a potential subordinate a higher salary than he made himself. In discussing the situation with the head of human resources, Mehr discovered Prevost had a �irm offer with another of their competitors, a highly leveraged start-up that offered a lower base salary but substantial stock options. Prevost spoke excellent German and was quite interested in moving to Germany and rearing her sons there, even though the cost of living in Germany was substantially more than what she was used to. Additionally, the CEO of the German company was sold on the idea of having Prevost join the team, especially since their current strategy was to increase international revenues by 10%, and he �irmly believed Prevost could help achieve that goal. (Fryer, 2003; used by permission)

As is evident in the above scenario, there are several elements Anne Prevost �inds important in a rewards program: compensation, bene�its, work-life, recognition, and developmental and career opportunities. If this German �irm wants to recruit Prevost, it needs to take her needs into consideration. However, an effective compensation strategy also will take into account issues related to what is best for the company in terms of the productivity gains it accrues by making the hire, how much it is able to afford, how it will affect the standing of current talent in the �irm, and so on.

A compensation strategy, therefore, must align with the company’s overall strategic vision and goals. The company’s management must answer these questions: What will it cost not to have this employee on board (due to not bene�iting from her talents as well as the potential of a competitor bene�iting instead)? What problems do we expect her to solve? How can she help us achieve our long-term market objectives?

Part of this equation is taking into consideration the personal costs and changes for the potential hire. In the particular case of Anne Prevost, the �irm must consider cost-of-living differentials between the United States and Germany, effective cultural integration support, and other elements key to her success. After all, little will be gained by a company in hiring an employee for perhaps less up-front money, only to have that employee be unable to ef�iciently and effectively make the personal and occupational transition. Fundamentally, the goal of

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an effective compensation strategy must address what it will take to keep the new potential hire focused on performance and not distracted by personal matters that may in part arise due to being hired by the organization in the �irst place. In the case of Anne Prevost, the German hiring �irm would not want to hire her to have her distracted with issues such as differences in exchange rates or tuition for her sons’ schooling or excessive cultural or language barriers. Such issues would decrease her performance at work, which would diminish the company’s investment in her talent. Worse, persistent problems on the personal front might also result in her leaving the �irm, which would mean that the hunt for talent would need to begin all over again, costing the �irm yet more time and more money. We will further examine issues like this in future chapters.

For now, however, let’s look brie�ly at three factors that are integral to the creation of any compensation system.

WorldatWork (www.worldatwork.org (http://www.worldatwork.org) ), formerly known as the American Compensation Association, has provided compensation professionals with resources and education since 1955. The organization created a compensation model called the total rewards model that highlights the impact of organizational culture, business strategy, and HR strategy on attracting, motivating, and retaining employees. The model is presented in Figure 1.1.

Figure 1.1: WorldatWork’s total rewards model

A company’s reward strategy is not just for the employee’s bene�it. It impacts the overall business performance while also boosting employee engagement.

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Critical Thinking

Discuss the WorldatWork model and how it can be used to understand the relationship between rewards and performance.

Copyright © 2015 WorldatWork. All rights reserved.

The WorldatWork Total Rewards Model provides a way to conceptualize the way employee rewards impact business performance. In the center of the model is the employee. An employee’s performance is dependent, in part, upon satisfaction with (and other attitudes such commitment to) an organization and engagement with the organization’s purpose and mission. These interact to in�luence overall business performance. Centered around the employee in the model are the key goals of a reward system, namely, to attract, motivate, engage, and retain quality employees. These goals are of course in�luenced by the total rewards strategy, including compensation, bene�its, work-life effectiveness, recognition, performance management and talent development. However, this strategy is directly impacted by the macro level strategic facets of the organization: organizational culture, business strategy, and human resource strategy. We will now discuss these strategic elements in depth.

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Organizational Culture

Organizational culture represents the shared norms and values of an organization, such as a company or charity, that dictate not only how goals are accomplished but also the ways in which those goals are achieved. The culture of any organization can be operationalized in numerous ways, but generally, and more informally, it can be viewed as “the way we get things done around here.” As opposed to formal academic de�initions, this description is, perhaps, more straightforward and may be more easily understood by all employees and managers and communicated more effectively.

A healthy organizational culture helps get all employees on the same page as management in terms of goals and behavior, which leads to a positive environment that motivates employees to be successful and promotes loyalty to the organization as well as unity within the organization. An unhealthy organizational culture has the opposite effect and leads to a negative environment that runs counter to what management wants to accomplish. To achieve a healthy organizational culture, the management team is critical in setting the culture and maintaining it through policies, procedures, reward systems, and everyday ways of conducting business.

To understand organizational culture, we must also understand the nature of the society in which the company is embedded. Hofstede (http://geert-hofstede.com/) (1983b) developed a model for international management and cross-cultural communication utilizing six dimensions that capture the essential elements of a country’s culture. The dimensions are power distance, individualism, masculinity, uncertainty avoidance, pragmatism, and indulgence. In keeping with our scenario at the beginning of this section, we’ll look at the comparison of Germany in relation to the United States with regard to these six dimensions in Figure 1.2.

1. Power distance considers the degree to which a society recognizes and accepts authority. In our German example, Anne would need to know that in Germany the power distance is less than in the United States, so participative meetings and communication in general will be more common. Additionally, leader actions and decisions are more likely to be challenged.

2. Individualism accounts for how strongly a culture emphasizes individual achievement over group and community achievement. Since Anne comes from the United States, a country that emphasizes individualism more strongly than Germany does, she must be aware of this difference and make adjustments to how she interacts and works with others in her department and the company as a whole. While the German culture values individualism at a relatively high level, it is not nearly as high as in the United States.

3. Any society with a high score in masculinity will be driven by competition, success, and achievement—all characteristics of U.S. and German culture. In terms of this dimension, Anne will be able to transition easily to the German culture.

4. In the United States, taking reasonable risks in business is encouraged. In Germany, on the other hand, not taking as many risks is more the norm due to the tendency toward uncertainty avoidance.

5. Pragmatism refers to societies that do not have a need to explain everything but to lead a virtuous life and accept that positive results will occur. Pragmatism is using a practical approach to problems, focusing on the situation, and not being pulled into ideas and theories. Germany and the United States are at extreme ends of the spectrum on this characteristic. As such, Anne would need to be prepared to operate in a generally more pragmatic manner than would be required in her current company.

6. Indulgence de�ines the degree to which people in a society control their desires and impulses and behave in a more cynical and pessimistic way. We see in Figure 1.2 that German people are more

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restrained, control self-grati�ication, and tend not to emphasize leisure activities. These are cultural qualities Anne will need to be mindful of.

Figure 1.2: Cross-cultural comparison: Germany and the United States

Using Hofstede’s six dimensions, it becomes clear which cultural qualities Anne will need to be mindful of when she begins working in Germany.

Source: The hofstede centre. www.geert-hofstede.com (http://geert-hofstede.com/)

In addition to broader national issues related to culture, organizations also take on characteristics that de�ine the way they conduct business and what it is like to work for or interact with the organization. The norms and values of an organization in�luence factors from employee selection and retention to compensation as well as corporate strategy (Giorgi, Lockwood, & Glynn, 2015). When designing a compensation and bene�its system, the company needs to put a plan in place that reinforces and helps build its culture. Consider the example of Southwest Airlines that is presented in the following feature.

Compensation and Bene�its in the Real World: Business Strategy at Southwest Airlines

Southwest Airlines was an idea created by Herb Kelleher and Rollin King in the late 1960s, though, due to court challenges from other airlines, the company did not get off the ground (literally) until June 1971. The airline began by �lying among just three cities in Texas (Houston, Dallas, and San Antonio) as a way to minimize barriers to entry such as the then-restrictive federal transportation laws. Beginning with a �leet of only three used Boeing 737s, Southwest Airlines parlayed its approach of a low-cost differentiation strategy into one of the most pro�itable and fastest-growing airlines in the world. By its second year of operations, the company charged only $20.00 for one- way fares between its three destination cities, whereas other airlines charged $28.00. It truly had a competitive position.

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Critical Thinking

Why is an understanding of organizational culture important to developing and implementing a successful total rewards system? Select an organization with which you are familiar and describe its culture. In other words, how do things get done in the organization?

Since its beginnings, Southwest has maintained its low-cost differentiation strategy using only the Boeing 737, thus requiring its mechanics, �light, and ground crews to be familiar with only one type of aircraft. Its “People Department” (i.e., Human Resources) hires employees who are extroverted and verbally skilled and then supports them with training programs emphasizing Positively Outrageous Service for customers. (Southwest employees and customers, for example, tell stories of the company’s employees offering to pet-sit dogs while a customer was on vacation or an employee offering her home to a customer while undergoing cancer treatment in a distant city.) Southwest has a reputation for having employees who love their jobs and who share that enthusiasm with their customers. Humor is widely used on Southwest �lights not only to entertain passengers but also to inform them of key safety requirements, as can be seen in this video on YouTube: http://www.youtube .com/watch?v=K9Fcndt2aOc (http://www.youtube.com/watch? v=K9Fcndt2aOc) .

To deploy its low-cost differentiation strategy, Southwest needs to operate ef�iciently and effectively. This requires achieving signi�icant operating ef�iciencies, such as

a 15-minute gate turnaround time instead of the industry norm of 45 minutes, pilots who pitch in to handle baggage, �light crews who help clean the plane while on the ground, and a point-to-point �light travel pattern instead of the traditional hub-and-spoke approach.

To achieve these operating ef�iciencies, employees need to want to help the company achieve its goals. This requires a compensation and bene�its program that rewards employees for taking action that enables the company to be successful with its low-cost differentiation strategy. It also requires consistently reinventing total employee reward systems, such as being the �irst airline to offer employee stock ownership plans (ESOPs) and paying employees more than the industry average.

In other words, a �irm with the proper strategy, good execution, and an effective employee reward system, such as Southwest has, is more likely to be successful, even in an extremely tough and competitive market like the airline industry.

Business Strategy

Business strategies differ based on a number of factors, such as the time period covered, the market the company operates in, the supply and demand trends within a market, and the company’s particular short- term objectives and long-term goals. That said, there are three broad strategies that companies can follow in trying to realize their goals: (1) a low-cost strategy, (2) a differentiation strategy, and (3) a focus strategy.

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A low-cost business strategy is one in which the company competes on the basis of the lowest possible cost, while a differentiation business strategy is one in which the �irm sets itself apart in the marketplace by offering unique and unusual products or services (Porter, 1980). A focus business strategy means a company concentrates its resources in order to enter a speci�ic niche within an industry segment. For example, Toyota Motor Corporation wanted to appeal to younger drivers in the 16- to 28- year-old age group, so it designed the Toyota Scion, which sells for an affordable base price that appeals to its niche target group of young potential buyers.

Though Porter originally described the low-cost and differentiation strategies as mutually exclusive, organizations such as Southwest Airlines, discussed previously, continue to combine both strategies quite successfully.

Human Resource Strategy

Human resource strategy involves the planning, organizing, leading, and controlling of people who are needed to support the organization. The strategic function of the HR department is to develop policies and practices that support the overall strategy of the company. The HR department puts into place programs that will reinforce the company’s business philosophy and will support the company in attaining its goals. The following story illustrates how this works:

Shortly after World War II, R. G. Barry Corporation invented a unique product for that time: a soft, washable, easy-to-wear woman’s house slipper. R. G. Barry was in fact widely acclaimed for its innovation in developing and implementing human resource management systems (Likert & Likert, 1976). Since the company was based on using and encouraging innovation and creativity, the human resources department needed to set up its programs and procedures in a manner that supported this overall strategy of the company. As an example, the company used its compensation practices to reinforce its management philosophy of team-based management. The company wanted to create an environment where employees worked together to resolve issues, so it paid employees for time away from the manufacturing �loor to present and solve production problems in a team environment. The HR department also provided training on effective management, leadership, communication, and problem-solving skills. One result of the company’s management and rewards practices included an annualized employee retention rate of 98% (or only 2% employee turnover each year). This retention rate resulted in reduced labor costs and made it easier to plan labor needs. Such company-wide practices also created a long list of job applicants waiting for an opportunity to work for R. G. Barry, which allowed the company to select from the most quali�ied applicants. R. G. Barry was successful in mirroring its human resources strategy with its business strategy so that its HR programs added to the accomplishments of the company.

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Critical Thinking

Why is it important that compensation systems are consistent?

1.3 Goals of Compensation Systems The goals of an organization’s compensation system are, of course, complex and highly contingent on multiple factors, both internally and externally. However, there are some common primary goals of the compensation function that tend to be consistent across organizations. They are as follows:

Ensure internal and external consistency. Attract high-quality talent. Motivate and retain talent. Meet legal requirements.

We will spend the next sections discussing each of these elements.

Internal and External Consistency

The �irst goal of a compensation system is to create a system that is consistent on an internal and an external basis. Internal consistency refers to the nature of compensation as perceived by employees. Employees will ask questions such as, How fair is my pay relative to that of others performing the same job? Is what I am paid equitable or fair in terms of the actual work I have to perform? External consistency, however, looks at compensation from the employer’s viewpoint. Employers want to know if they are paying a fair wage relative to their direct and indirect competition and relative to the geographic area in which they operate.

While the goal is to maximize both internal and external consistency, in the real world, external consistency is often the easiest to quantify and therefore is most often used. This results in the compensation and bene�its plan being predominantly focused on the money or bottom line (i.e., the employer’s perspective). This creates a lopsided plan that doesn’t meet all the needs of its constituents, since one perspective is not included. To counter or minimize this impact, careful planning must be done to strive for a plan that is both internally and externally consistent. How this is achieved varies by organization but takes into account factors such as fairness, cost, and culture in order to make sure both perspectives are considered and are incorporated into the design of the organization’s compensation and bene�its plan.

Compensation and bene�its professionals will utilize salary and bene�its surveys to ensure both external consistency and perceived equity. As noted earlier, R. G. Barry chose an equitable but average wage for the areas in which its manufacturing plants were located. Part of R. G. Barry’s compensation competitive analysis included companies whose employees performed similar activities but did not produce the same or even similar products. This was done to ensure that the �irm’s compensation strategy aligned with the business goals and to address employees’ concerns about how their pay compared to employees’ in nearby companies. HR departments use wage and salary data collected by professional survey consulting �irms, along with local information gathering, to benchmark their own compensation policies and practices against those of other companies, thus ensuring external consistency.

Internal consistency is built from a variety of tools, such as attitude and bene�its surveys, job descriptions, job analyses, and job evaluations. An attitude survey is a set of written questions completed by employees expressing their reactions to the employer’s policies, practices, management style, compensation, training,

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Knowledgeable, hard-working employees are essential in making a strategic plan a success.

bene�its, and other measures important to a given �irm. If used effectively—meaning employees receive useful feedback on their aggregated results in a timely manner—such surveys are instrumental in creating and revising effective compensation and bene�its programs.

Attract High-Quality Talent

The second goal of a compensation system is to attract high-quality talent. Having knowledgeable, hard- working employees is a key component of a company’s success. A well-designed compensation system can help obtain that talent. Attracting talented employees consists of a variety of elements, beginning with a strategic analysis of the company and ending with the types of reward systems needed to accomplish organizational goals.

The company starts by performing a SWOT analysis. SWOT is an acronym standing for the internal strengths and weaknesses an organization possesses and the opportunities and threats it must address in its competitive marketplace. The SWOT analysis is used to prepare (or revise) a strategic plan that is used to help guide the company in achieving its goals. A strategic plan consists of the company’s mission and vision statements and outlines the strategy the company will use to achieve its goals. The strategic plan will detail where the company wants to go, how it will look when it gets there, and how it will deliver its products and services—all of which require hiring high-quality talent.

The �irm’s mission is the expression of the company’s purpose in light of the larger market environment. The mission will answer two questions:

1. Why do we exist? 2. What need in society do we intend to ful�ill?

When an organization can answer these two questions clearly, it can begin to seek out talented employees who will help realize the mission of the organization, using the compensation systems that it has put in place to help in this critical process.

The organization’s vision is the picture of the future it seeks to create moving forward; therefore, it will answer one additional question: What will we look like? To be meaningful and effective, the answer must be owned and supported by the entire organization, right down to the talent that best aligns with the organization’s vision of itself.

A strategy de�ines what products and services will be delivered, to which customers, and how they will be delivered. A successful strategy

1. makes the �irm different, 2. has value in customers’ eyes, and 3. is deliverable.

Once in place, the �irm’s strategy becomes the benchmark upon which the compensation strategies are

created.

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Critical Thinking

What motivates you to do your best work in a job?

Motivation and Retention

Once identi�ied, recruited, and on board, talented employees who can contribute positively to the bottom line must be retained and motivated. A well-designed compensation and bene�its plan can help with these goals.

Motivation can be de�ined as that which energizes, directs, and sustains behavior. While motivating employees is a dif�icult task since motivation can be viewed as a door that we open from the inside only, there are techniques companies can utilize to better motivate their employees. When looking at motivating employees, companies need to take into account the two basic types of motivation: intrinsic motivation and extrinsic motivation.

Intrinsic motivation is that which drives people from within. Intrinsically, then, people are drawn to jobs they enjoy doing and are good at performing, so HR departments need to make sure they are putting people in jobs that are right for both the employee and the company. How employees feel about their jobs is related to the culture of the organization, the amount of value they believe they contribute to their organization, and whether the effort they apply to their work is worth the rewards.

Companies can also put policies and methods in place to enhance and create positive feelings toward the company, which brings us to extrinsic motivation, or factors derived from outside a person that might incentivize behavior. For example, employees might be attracted to, and therefore motivated by, extrinsic factors such as a higher salary, longer vacations, a better insurance plan, and enhanced retirement bene�its. A comprehensive, strategically planned compensation and bene�its package can go a long way in motivating employees to be productive and ef�icient. In Chapter 3, we will discuss this further and examine several theories of motivation.

Employee retention is the ability to keep employees working for a company. Companies accomplish this through factors such as the compensation and bene�its they offer, the work involved, the promotion opportunities available, and the culture of the company. In order to manage retention effectively, the concept of attracting and retaining employees needs to be considered in a strategic manner. One practice that is common in some industries, such as banking and

information technology, is to “poach” the best employees from other �irms whenever possible. While this helps gain talented employees in the short term, it is not always a valid long-term solution. In essence, the time, money, and effort spent in developing employees at best is wasted and at worst serves to bene�it competitors. Having a comprehensive plan for addressing employee retention will help companies avoid this pitfall and help them focus on identifying and recruiting quality, experienced employees, both internally and externally.

Firms must adapt to the reality that it is the total marketplace for talent, not each organization’s individual perspective, that in�luences what salary level and rewards are valued most by prospective employees. For example, Prudential Insurance integrates recruiting, training, rewarding, and retention efforts to attract and satisfy a highly mobile Generation Y group of employees. Generation Y, also known as Millennials, are much less likely than older generations were to stay with one company for life, so companies must be honest with themselves and evaluate how long they truly believe they will be able to retain talented employees. Moreover, they must actively plan for who they want to keep onboard and how they will do so,

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A Policy Perspective

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and utilize carefully crafted and �lexible methods for recruiting potential new employees. Compensation and bene�its are key elements in such an equation.

To better motivate and retain employees, companies need to examine themselves in terms of their compensation philosophy and practices. An important and insightful question companies can ask themselves is, Will we be willing to consider employees in the same manner as we treat our customers? This question draws on applying a marketing perspective to handling employees and can be answered in many ways, all with different connotations that will impact and guide a company’s compensation practice.

On one end of the spectrum is borrowing the marketing practice of segmentation. With segmentation, a company segments, or divides, its customers into tiers, such as high, medium, and low. The “high” customers are those who generally purchase high-margin products, spend more dollars, are loyal, and require few inducements to remain loyal, while the “low” customers are the opposite and could actually cost the company money due to time spent on catering to them or the negligible amount of money those customers spend. The extent to which companies are willing and able to rank current and potential employees as high, medium, and low may dictate how successful the company is in acquiring and retaining talented pools of employees.

Jack Welch, former CEO of General Electric, viewed his employees in this manner. He used a performance differentiation strategy to separate his best performers from his worst. His goal was to not only become competitive in sourcing his employees but also ensure his company remained competitive. Using solid job analyses, descriptions, and evaluations, he had everyone throughout the organization evaluated following strict guidelines. Employees, managers, and executives who were in the bottom 10% of people doing that particular job were replaced with new hires, transfers, and promotions. While sometimes accused of being cruel, Welch believed that a transparent set of expectations, meticulously followed in a fair manner, was best not only for the company but also for the employee. Welch was successful during his tenure at General Electric, giving credence to this approach. However, General Electric became known as a breeding ground that groomed executives who then left to lead their own companies, which reduced the retention part of the equation. Additionally, times are different from the 1980s and 1990s, when Welch led General Electric, so this approach might not be as applicable or appropriate in today’s environment.

On the other end of the “employees = customers” spectrum is the notation that employees should be highly valued like customers are. While the adage “the customer is always right” can’t be blindly applied to employees, the sentiment behind the adage can be. Treating employees in a manner that gives them the

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tools they need to do their jobs, fairly compensates them for their work, and values them as people who are vital to a company’s success can go a long way in retaining and motivating high-quality employees, a win-win for both parties.

Finally, compensation packages in this evolving environment must continually innovate and be creative in what they offer. Base pay alone is often not enough. SAS Institute, a privately held software company based in Cary, North Carolina, for example, is often cited as an employer that effectively uses nonwage bene�its to attract and retain employees. Health, dental, and vision insurance programs are available even to part- time employees. Among many other types of bene�its, the company provides dependent-care �lexible spending accounts, domestic partner bene�its, group-rate tickets to events, numerous vendor discounts for SAS employees, on-site health care centers, and many more programs to entice talented employees to stay onboard. SAS has been successful in motivating and retaining its employees by offering a comprehensive compensation and bene�its package and not just relying on monetary compensation for employee attraction and retention.

Meet Legal Requirements

Compensation practices exist within a broader and constantly evolving legal context that regulates both what types of rewards can be provided to employees and how those rewards can be given. One of the major goals of compensation systems is to not violate these laws. As will be discussed more extensively in Chapter 2, there are both historical and societal reasons for why regulations and laws exist. For moral and legal reasons, those responsible for administering monetary compensation and nonwage bene�its in organizations need to remain aware of current regulations and evaluate their plans based on this shifting legal landscape.

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In addition to core compensation, indirect bene�its such as insurance, retirement options, and equity-based or ownership options can be offered in a total rewards model.

Elements of the Compensation Package

1.4 Types of Rewards In the past, it was adequate to pay employees money for work done and that was the end of the relationship. As the workforce and business environment became more complex and global in nature, the methods for rewarding employees became more sophisticated. As such, the total rewards model is currently the most commonly used method for rewarding employees. The total rewards model includes everything and anything valued by both employers and employees that also impacts the business. Under this model, compensation (both direct and indirect), work-life balance, performance and recognition, and individual and career development are included as ways to reward employees. Direct compensation refers to hourly wages or salaries, sales commissions, and bonuses. Indirect compensation refers to bene�its such as insurance programs, retirement options, and equity-based or ownership options.

The total rewards model developed by WorldatWork considers the framework within which the compensation system operates as essential, in part due to the ongoing and growing impact of a global economy. In a global survey of HR professionals conducted by the Society for Human Resource Management (SHRM), Mauer (2014) found that “the top challenge of the next three years for HR leadership across the globe centers on talent—�inding it, motivating it, and keeping it.” The top �ive global priorities are

aligning total rewards with business strategy by attracting, motivating, and retaining employees, reducing the costs of providing health care and other noncash bene�its to employees, motivating staff when pay increases are �lat or nonexistent, demonstrating appropriate return on investment for reward expenditures, and creating a rewards program that re�lects the culture and goals of the organization.

The �indings from the above survey highlight the critical need for a company to create and implement an effective compensation and bene�its program. As indicated by the total rewards model, there are a lot of components that make up a compensation and bene�its program. Let’s go into detail about each of the components.

Core Compensation

The �irst component is core compensation, which consists of the base wages and salaries, cost-of-living adjustments (COLAs), seniority pay, merit pay, incentive pay, and pay for knowledge and skills provided by employers to employees in exchange for work. A company can choose to provide any combination of these components as well as vary what makes up core compensation based on positions within the company.

When evaluating its core compensation policies, companies calculate labor costs, which are the costs associated

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with the pay provided employees. They also look at labor rates, which take into account how productive the employees are while working. It is crucial for companies to look at both of these because an analysis of labor costs compared to labor rates can show if paying more would be bene�icial to a company by correspondingly increasing productivity. Sometimes, paying more leads to less productivity per dollar spent, an undesirable situation.

As an example of this, consider two different manufacturers. One manufacturer pays an average hourly wage of $18.07, while the second pays an average of $21.52 an hour. At �irst glance, the �irst manufacturer is doing

better because its labor costs are lower ($18.07 an hour versus $21.52 an hour, on average). However, we don’t actually have enough information to make this determination. When productivity is taken into account, the second manufacturer may actually be in a better situation. Determining which manufacturer is doing better would depend on production numbers, waste produced, quality of the �inal product, and many other factors, of which only one is pay. Paying more doesn’t necessarily mean getting more value, and paying less doesn’t automatically result in cost savings. This is why it is so critical to evaluate the total compensation picture when devising plans for recruiting and retaining talent.

Base Pay Hourly wages and salary are commonly known as base pay, the foundation of total compensation. The key difference between salary versus hourly wages is that salary is paid regardless of hours worked, while hourly wages are paid based on the number of hours worked. A salary employee receives his or her annual salary divided by the number of pay periods in a year, such as 24 if paid semimonthly or 12 if paid monthly, regardless of how many hours the employee worked. An hourly employee, on the other hand, will receive pay based on the number of hours worked in a pay period times the hourly rate.

Employees are concerned about the amounts they receive since it represents an easily quanti�iable measure of the worth of their work to the �irm, has an impact on their own feelings of self-worth, and directly impacts what type of lifestyle they can live and the things they can buy. Base pay must be perceived as being both internally equitable and externally competitive in order to be effective in attracting, retaining, and motivating employees.

Pay is determined by the strategy the company chooses to pursue, the nature of the industry, the marketplace, equity or fairness considerations, and the location of the organization. For example, because there is no state income tax in Florida to reduce workers’ pay by the tax amount, companies may choose to pay employees less, thus reducing the cost of labor to the company while maintaining comparable take- home pay for workers (Oi, 1983). In the 1990s, the federal government formally recognized these regional cost differences and began to offer locality adjustments to base pay as part of the Federal Employees Pay

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Comparability Act of 1990 (FEPCA (http://www.opm.gov/policy-data-oversight/pay-leave/pay-systems/general- schedule/pay-agent-reports/2001report.pdf) ; Report on locality-based comparability payments, 2001).

Companies also need to take into account any government regulations related to pay when creating and administering their compensation plans. For example, the Fair Labor Standards Act (FLSA) sets the minimum wage that workers must receive as well as the amount of overtime pay required when employees work more than the standard 40 hours a week. As another example, the Equal Pay Act requires evaluation of skill, effort, responsibility, and working conditions. The worth or value of a job relative to another job in a given company can be determined by factors common to the two jobs in question. Compensation specialists refer to these as compensable factors. While some companies develop their own lists, most use approaches provided by �irms specializing in the area or who have extensive experience in the �ield. For example, Walmart uses knowledge, problem-solving skills, and accountability as its compensable factors.

The FLSA along with the Equal Pay Act and other legal issues related to compensation and bene�its will be covered in more detail in Chapter 2.

Cost-of-Living Adjustments Cost-of-living adjustments, or COLAs, are periodic increases in base pay to offset in�lation and the corresponding negative effect on employees’ purchasing power. Usually, COLAs are tied to an economic indicator such as the Consumer Price Index (CPI), which, in recent years, has averaged between 2% and 3%. While any organization may use a COLA, union-based organizations, typically negotiated within a collective bargaining agreement, routinely include such annual adjustments.

Seniority Pay Seniority pay rewards tenure within a given organization and is used to make decisions on salary increases, promotions, and the like. Incremental wage increases are provided primarily on the basis of length of employment, although sometimes consideration may be given to performance. The aim of seniority pay is to enhance employee retention and increase employee engagement. Some companies may use seniority as a component of the decision-making process, while others, such as union shops, are required to use seniority for pay increases, promotions, and preferential treatment during layoffs and downsizings.

On the plus side of the equation, organizations that exclusively use seniority pay may predict their labor costs with a solid degree of accuracy, and employees cannot claim favoritism in pay-raise decisions. Such pay systems offer stability and reward loyalty and longevity.

On the negative side, seniority pay, without any additional types of remuneration such as bonuses or other incentives, generally do not motivate newer employees to work more productively and may cause them to leave the company since they have little or no chance of being rewarded. Additionally, long-term employees may become less motivated and productive since they will be rewarded just for sticking around rather than for their performance.

Merit Pay Merit pay primarily considers performance as the basis for wage increases. For merit pay to work properly, there need to be mutually agreed-upon goals, a clearly communicated and understood set of expectations, and demonstrated results. Merit pay is applied using the notion that pay increases should be

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Critical Thinking

In your opinion, what type of core compensation system will work best for you: seniority, merit, or incentive? Why?

tied to improvements in productivity by the employee, usually connected with performance measurement systems.

Merit pay requires detailed administrative work to monitor the program. Merit pay also permanently increases base pay for subsequent years, causing companies to spend more and more on paying employees. Merit pay, however, is effective in motivating employees to do their jobs well, and it helps retain valuable employees who have demonstrated that they can achieve positive results for the company (Scott, Somersan, & Repsold, 2015). This is illustrated by more than 90% of Malcolm Baldrige National Quality Award–winning companies using some form of merit or performance-based compensation system (Greene, 2010).

Incentive Pay Incentive pay is based chie�ly on meeting organizational and individual performance targets. Incentive pay is similar to merit pay in that it is based on meeting performance goals. It is different from merit pay because it is typically a one-time payment that has no impact on base pay, whereas merit pay is added to base pay and is paid from that point on.

For incentive pay to work, rewards should be tied to goals that are dif�icult yet obtainable and that are easy to communicate, understand, and measure. Some �irms also include team performance in their incentive plans. Incentive plans may include partial payments if, say, 80% of the goals are met, while others pay only if the full goal is reached. Virtually all plans include a maximum payout amount, even if goals are exceeded. Incentive pay can include both short-term (e.g., pro�it sharing) and long-term (e.g., stock options) elements or may simply be in the form of a bonus check.

Companies have developed a large array of plans based on providing incentives for completing work. For example, a piecework plan involves paying a �ixed amount for each unit produced. A Taylor differential piecework plan, based on Frederick Taylor’s principles, applies two different pay rates: one for equaling or exceeding a predetermined standard and a lower one for not achieving the established standard. Other plans might include a point incentive system that involves establishing a standard, which is then translated into a set of point values. Pay is based on an employee’s ability to exceed the standard. The chief value in such a system is that it is possible to compare dissimilar jobs by using the points established.

Pay-for-Knowledge Pay-for-knowledge is a pay system that rewards employees who set learning goals and acquire new knowledge. Employees are rewarded after they learn and are able to demonstrate new knowledge, skills, and competencies related to their current or other jobs in the organization. Often, companies will pay for such a program and then require a commitment from the employee to stay with the organization for a set period of time after the employee completes the training program. Otherwise, the employee must reimburse the company for the cost of the program.

Pay-for-knowledge plans have the potential to lower absenteeism and turnover, increase workforce �lexibility, create opportunities for leaner staf�ing, and promote employee growth and development (Gupta, Schweizer, & Jenkins, 1987). Such plans can be used to reward any level of employee as long as

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Critical Thinking

Why is market-driven competition for employee talent important to understand?

consideration is given to the �irm’s managerial philosophy, commitment to the pay-for-knowledge plan, and attitudes toward employees.

Whereas pay-for-knowledge is based on the fundamentals of a competency-based job analysis, pay-for- skills is used primarily for jobs requiring speci�ic kinds of physical work. Research shows that this method can be quite effective. In one study (Murray, B., & Gerhart, 1998), using a skill-based pay system resulted in improving productivity by 58%, lowering how much it cost to produce each part by 16%, and reducing scrap (waste) by 82%.

Employee Bene�its

The next component that makes up a compensation and bene�its program is employee bene�its. Employee bene�its deal with the indirect �inancial and non�inancial payments that employees receive for performing their jobs and that are added to compensation programs as an additional method for attracting, retaining, and motivating the best talent possible. It includes both legally required bene�its (e.g., Social Security, unemployment insurance, workers’ compensation) and market-driven, discretionary bene�its (e.g., various types of employee retirement planning, on-site services such as child-care assistance, pay for time not worked). Traditionally, health care was voluntary but is now mandated by the federal Affordable Care Act that was signed into law in March 2010 (more on this in Chapter 2).

Other examples of discretionary bene�its, among many possibilities, are employee assistance programs, elder care, �lexible work schedules, and executive perks such as supplemental life insurance or a car allowance. Key factors that employers need to consider when designing bene�its programs include whether retirees or “probationary” employees should be included, cost- containment procedures, how to �inance the plans, employer tax incentives as well as effective methods of communicating what the plans involve, eligibility

requirements, and why such bene�its are valuable to employees. Usually, discretionary bene�its are in�luenced by market-driven competitive pressures for talent.

Work-Life Programs

Another component is work-life programs, or the desire to create balance between an employee’s work life and personal life. The cultural expectations about what that balance should be change over time. For example, company loyalty, in which an employee would feel inclined to stay with a single organization throughout the span of his or her career, was the hallmark of the Silent Generation and the Baby Boom generation (i.e., those born between 1925 and 1964). Younger generations such Gen Xers and the Millennials, however, don’t hold that same allegiance to a single organization, and many younger people want more of a balance between their work life and their personal life, illustrating why assessment of work-life programs has become such an integral part of the total rewards compensation system in today’s

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The desire to balance work and life guides many decisions.

work environment. See, for example, the video “Teetering on the Edge of Work-Life Balance,” https://www.youtube.com/watch? v=YN1vtXeNCos&index=20&list=PL5F629B44FC6F04BB (https://www.youtube.com/watch? v=YN1vtXeNCos&index=20&list=PL5F629B44FC6F04BB) .

Essentials of an effective work-life program consider �lexible working arrangements, paid and unpaid time off, community involvement and �inancial support, voluntary bene�its such as long-term care, and organizational cultural initiatives such as team-building and women’s advancement programs.

Performance and Recognition

Another aspect of a compensation and bene�its program is performance and recognition initiatives. Performance represents a set of mutually shared expectations and goals that align with those of the organization and are clearly communicated and understood by the employee and the organization. Recognition includes both formal and informal acknowledgment of results achieved by employees.

To be able to reward based on performance, there needs to be a mechanism in place to accurately and fairly measure performance. Chapter 4 covers this topic in detail, but in general, measurement of performance includes comparison of goals and expectations to the behaviors of the employees as well as the employees’ knowledge, skills, abilities, and other characteristics (KSAOs) that are used to produce results in the workplace. Ongoing feedback and improvement complete the circle of performance measurement.

An effective performance appraisal system needs to be prepared with consideration for employee perceptions and be tied to corporate, business unit, and departmental strategy. Such a system contributes to a sense of accomplishment and equitable treatment on the part of employees, important aspects that demonstrate consistency in a total rewards system. An effective performance measurement system should be derived from measurable goals, and the results should be agreed upon in advance of the actual appraisal. The process includes establishing expectations and providing ongoing, continuous feedback as a routine part of the job.

In conjunction with performance is the recognition of that performance. Recognition for good work may be formal, such as completing the appraisal process or providing an award for salesperson of the year, or informal, such as giving a written note or verbal praise. The keys are effective recognition is that employees receive the recognition in a timely fashion, it is tied to discernable performance, and it represents something valued by the employee.

For example, customer service representatives for a national credit card–processing company may receive bonuses for the most effective service provided during a given week or month. Another example would be implementing an “Employee of the Month” designation that allows the employee to park in a specially designated spot next to the front entrance. In group situations where an entire team exceeded expectations for a month, casual Friday could be extended for an entire week. The type and amount of the

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recognition will vary based on the company’s culture and the impact and importance of the performance being recognized.

Development and Career Opportunities

The �inal component in a compensation and bene�its program is offering development and career opportunities to employees. Development represents a set of learning experiences designed to produce more effective, ef�icient, and thus productive employees. Tuition reimbursements and discounts for additional education and licensing in particular �ields are examples of developmental practices. Coaching and mentoring activities also may be used to both develop employees and provide them with guidance needed for employee advancement.

Career opportunities are plans and activities used to advance employees for future positions of more responsibility and bigger challenges within the organization. Together with the other elements in the WorldatWork model, development and career opportunities contribute to the primary goal of attracting, motivating, and retaining the best available talent.

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Critical Thinking

Will compensation and a bene�its package be your primary consideration for taking a job now? How about 10 years from now? How about 20 years from now?

1.5 Designing a Compensation Plan A company will use a combination of the factors mentioned in the previous sections to design a compensation and bene�its program that will work within the context of the company’s business strategy, culture, industry, and market conditions. The ultimate goal in a compensation and bene�its program is to support and enhance the company’s strategy by attracting, motivating, and retaining the best employees for that company. Typically, a company will create a standard system for the “rank-and-�ile” employees, with relatively stringent parameters, but will provide more customized plans, with enhanced and more numerous features, for the executive-level employees.

To bring it all together and better understand how a compensation and bene�its program might be designed, let’s look at our example of Anne Prevost, the talented marketing executive from the United States who is being recruited by a German software company as well as a competing �irm. In our example, salary is an issue—both for Anne, who would be moving to a higher-cost-of-living country and thus would need more money to account for these higher costs, and for Jürgen Mahr, who would have a direct report (Anne) making almost as much as or even more than he does. Plus, the company would have dif�iculties increasing Anne’s salary in the future since it couldn’t raise her salary without raising Jürgen’s. Management at the company, however, really wants Anne to be a part of the team because it feels strongly that she will be able to meaningfully contribute to the company’s success and add value to the company. Therefore, management needs to design a total compensation and bene�its package that will meet both Anne’s needs and the company’s needs.

The company needs to look beyond just offering a salary if it hopes to successfully recruit and retain Anne while keeping with the company’s strategy and culture and not upsetting currently valued employees, most notably Jürgen. In addition to a competitive salary, the company could offer to pay for her sons’ educational expenses at the German-American school as well as college tuition in the United States. Relocation expenses could be paid along with twice-yearly trips back to the United States. Stock options could be awarded, matching the offer from the competing �irm that is also trying to recruit Anne. Offering a combination of such

elements would not add to her overall base salary, thus giving the company a “buffer zone” so she would not be at the top of her salary range, allowing room for later salary increases while maintaining consistency in the company’s salary ranges.

There are other ways that the company could create a total rewards plan for Anne to satisfy all parties’ needs. The key in designing a compensation and bene�its plan is to take into account all the elements we’ve discussed and have a cohesive approach to offering compensation and bene�its.

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Summary & Resources

Summary We began this chapter by developing an understanding of the history, goals and uses of, and types of reward systems. We discussed how people have moved from an agrarian through an industrial to an information age and the related changes to compensation and bene�its that are found in the workplace. We presented the WorldatWork model to provide a global perspective of a total rewards system and then discussed why an understanding of rewards systems is important from the perspective of compensation and bene�its.

In examining organizational strategies and strategic planning, we reviewed the basic elements of strategy in any organization and brie�ly reviewed motivation. Next, we turned our attention to retention and growth through reputation in a marketplace dominated by organizations competing head-to-head for talented employees.

Finally, we brie�ly discussed the elements of pay related to increments of time and performance. While each of the topics we touched upon will be examined in more depth throughout the text, an overview of the key elements is a good jumping-off point to help the reader understand the challenges and future of compensation and bene�its.

Key Terms

bartering The direct exchange of goods or services for other goods or services.

compensable factors Aspects, or attributes, of jobs that are used to determine the value of those jobs to the organization.

compensation system A systematic approach to providing rewards to employees in exchange for work provided, with the goal of helping organizations attract, motivate, and retain the best talent.

core compensation The base wages and salaries, cost-of-living adjustments (COLAs), seniority pay, merit pay, incentive pay, and pay for knowledge and skills paid by companies to employees in exchange for work.

differentiation business strategy Business strategy in which the �irm sets itself apart in the marketplace by offering unique and unusual products or services.

direct compensation Refers to hourly wages or salaries, sales commissions, and bonuses.

employee bene�its The nonwage, indirect �inancial and non�inancial payments that employees receive for performing their jobs.

employee retention

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The ability to keep employees working for a company.

external consistency Compensation from the employer’s viewpoint; employers want to know if they are paying a fair wage relative to their direct and indirect competition and relative to the geographic area in which they operate.

extrinsic motivation Factors derived from outside a person that might incentivize behavior.

focus business strategy A business strategy in which a company concentrates its resources in order to enter a speci�ic niche within an industry segment.

indirect compensation Refers to bene�its such as insurance programs, retirement options, and equity-based or ownership options.

internal consistency Compensation as perceived by employees; mainly concerned with perceptions of equity and fairness.

intrinsic motivation That which drives people from within.

low-cost business strategy Business strategy in which the company competes on the basis of the lowest possible cost.

motivation That which energizes, directs, and sustains behavior.

organizational culture The shared norms and values of an organization that dictate not only how goals are accomplished but also the ways in which those goals are achieved.

SWOT analysis Looks at a company’s internal strengths and weaknesses as well as the opportunities and threats (SWOT) a company must address in its competitive marketplace; used to prepare (or revise) a strategic plan that is used to help guide the company in achieving its goals.