BHR 3352, Human Resource Management 1
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
9. Formulate a compensation strategy that aligns with an organization’s business strategy.
Reading Assignment
Chapter 11: Motivating Employees Through Compensation
Chapter 12: Designing Compensation and Benefit Packages
Unit Lesson
At a basic level, every employee has some sort of transactional relationship with their employer. People come
to work for a paycheck; in many ways, it is that simple. Of course, we hope through good management
practices that people come to work for more than just a paycheck, but at a basic-needs level, the paycheck
looms in most conversations. This is for both physical and psychological reasons. To a certain point, money is
about needs. Someone making $10 per hour will likely take a different job for $12 per hour as this represents
more ability to provide for their basic needs of food, shelter, and some limited entertainment. Once their salary
grows significantly, compensation in their personal life will be about lifestyle. The question on money shifts
from “will this job provide for my needs/my family’s needs” to “will this job provide the lifestyle I want for
me/my family?” The next phase of this evolution is from lifestyle preferences to ego. A CEO making $4 million
per year wants a raise to $4.5 million per year. Why? It is because CEOs cannot feed their families or drive
the car they want? Of course not. Most of the time, this is because the CEO learned of another CEO making
more money, or the CEO simply believes he or she is worth it: ego. This evolution makes strategic
compensation management challenging. Further still, the cultural assumptions about compensation as merit
pay confounds an already complex situation. Some of these include the following assumptions:
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Some jobs contribute more to achieving company goals than others. Some people are more efficient at their jobs than others. Those employees who do perform better than others should receive more pay. Some portion of employee pay should be tied directly to their performance (Mathis & Jackson, 2011). |
Given the complexity of managing compensation, the remainder of this lesson will be devoted to questions a
manager and human resource manager must answer to effectively administer a compensation program.
What will Happen if I Change My Existing Compensation System?
It is informative of human nature that money is never listed as the most important aspect to most jobs. People
usually say the most important aspect of work to them is the people they work with followed by the work itself.
Somewhere down the list at number four or five will be money. However, if you fired all that employee’s best
friends or reassigned them to a different job, they would still come to work (at least for a while). However, if
you stop paying them, they will stop working immediately. Which is really the most important? As stated
earlier, most people come to work for a paycheck. If you are making changes to a compensation system and
want to avoid disgruntled employees, high turnover, and productivity loss, these changes need to be
communicated well in advance with careful action taken to clearly articulate “what this change means to me”
for each employee.
UNIT VIII STUDY GUIDE
Compensation and Benefits Strategy
and Implementation
BHR 3352, Human Resource Management 2
UNIT x STUDY GUIDE
Title
Is Compensation the Right Career for Me?
Jobs in compensation are oddly enough the highest paid in the HR profession. It is a very technical aspect of
HR with substantial legal implications regarding salary, merit pay, promotions, and benefits. It can be a
rewarding field, however, a difficult place to start. Most compensation experts have many years (greater than
10) in the human resource function and training in finance and accounting. These are the requirements to
manage the organization’s greatest expense.
What are the Different Ways to Pay People?
There are dozens of compensation tactics, but they all generally fall into two categories: base pay and merit
pay. Base pay is what an employee receives (hourly or salary) for his or her job, and while it might raise with
each year of service (creating entitlement), there is very little incentive for extraordinary performance. A
classic example of this is a union represented plumber who earns $X per hour with an increase in that rate for
overtime, weekends, and holiday work. This amount per hour will increase three-to-six percent every year as
a slight increase in pay and a cost of living adjustment. Merit pay is pay based on merit (performance). This
means the pay is variable in that it varies based on performance on the job. High performers earn
substantially more than lower performers in the same job. The purpose of this merit pay is to incentivize
behavior that directly and positively affects performance, resulting in a “win-win” for the employee and the
firm. An example of this is a mobile phone salesperson who is paid based on the number of phones he or
she sells.
Am I Rewarding the Right Behaviors?
Behaviors that are rewarded will increase in scope, repetition, and persistency. With most base pay systems,
the firm is rewarding retention. In other words, they are incentivizing people to show up for work and not quit.
In merit pay systems, certain behaviors are rewarded and thus, repeated. A firm must take care in rewarding
the behaviors that are consistent with the firm strategy. Walmart should reward speed over service.
Nordstrom should reward service over speed. Boeing should reward quality over low cost. Old Navy should
reward low material and labor costs over quality. There is no single behavior to reward, but rather, a set of
behaviors that advances the firm in line with its strategy.
What Should I as a Manager do if I Have Limited Financial Resources Available to Motivate?
Managers often think about money when they think about compensation. Many plans and ideas are
considered to determine the best way to pay people, but they rarely fully consider how to compensate people.
In a manager’s tool kit, there are three forms of compensation: money, performance feedback, and
recognition. All three of these rewards should be used to reinforce the right performance behaviors.
Considering Overall Compensation, Should I Lead, Lag, or Meet the Market?
Meeting the market is simply averaging out pay amongst a selected group of employees. This strategy is
useful in both attracting and retaining employees. If a company is looking to reduce costs, it may incorporate
a lagging market strategy. This strategy institutes a pay level that is less than average in most cases. Finally,
if you institute a leading market strategy, your company’s average pay will be higher than the market average.
Many times, with higher wages, comes higher expectation and responsibility for the employees. Which
strategy you choose depends on the following factors:
1. Your financial position: Some firms are only able to lag the market.
2. Your local competitors: If they are lagging the market, you can meet the market and do well. If they
are all leading the market, you have to decide if it is worth it to compete with them.
3. The labor market itself (tight or loose labor market): In times of high unemployment and underemployment, firms can pay less and acquire strong talent. Keep in mind that when the market
returns, the firm will have to significantly increase salary (playing catch-up) in order to prevent
turnover of highly skilled employees.
BHR 3352, Human Resource Management 3
UNIT x STUDY GUIDE
Title
4. Most important is the intersection of the job and the firm’s core competencies: Rather than a single
commitment to meet, lag, or lead, organizations would be well off to consider what jobs are core
competencies to the firm and critical to compete in the marketplace and subsequently lead the market
in those jobs only. For example, Google must lead the market when compensating software
engineers. This is their core competency. If they do not pay well, not only will they miss out on top
talent, but that talent will go to their competitors. They do not need to lead the market in landscapers
and janitorial staff as these are not their core competency. However, a prestigious golf course must
lead the market in landscapers, and The Ritz-Carlton Hotel must lead the market in janitorial staff as
these are critical to their brand and market competitiveness.
What is the Purpose of a Benefit Plan in Total Compensation?
Benefits are a very unique component of compensation because they do not incentivize good performance.
Very few employees show up for work and think, “my medical benefit plan is so good that I am going to work
very hard today.” Rather, benefits are focused on attraction and retention. Benefits motivate people to take a
job and keep a job, whereas well designed merit pay motivates people to perform well on that job.
Reference
Mathis, R. L., & Jackson, J. H. (2011). Human resource management (13th ed.). Mason, OH: SouthWestern.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to
submit them. If you have questions, contact your instructor for further guidance and information.
For additional information regarding the topics discussed in this unit, please see the following video. This
video visually demonstrates the concepts discussed in the unit lesson and readings.
Chapter 11: Motivating Employees Through Compensation
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