COMPENSATION

Third Canadian Edition

Milkovich, Newman, Cole

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2010 McGraw Hill Ryerson

THE PAY MODEL

STRATEGIC
POLICIES
ALIGNMENT

COMPETITIVENESS

TECHNIQUES
INTERNAL
STRUCTURE

PAY
STRUCTURE

INCENTIVE

CONTRIBUTORS

PROGRAMS

MANAGEMENT

EVALUATION

STRATEGIC
OBJECTIVES

EFFICIENCY
Performance
Quality
Customers &
Stockholders
Costs
FAIRNESS
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COMPLIANCE

2010 McGraw Hill Ryerson

Compensation Strategy:
Internal Alignment/Equity
Supports Organization
Strategy
Supports Workflow
Motivates Behaviour
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Internal Alignment/Equity
the pay relationships between the jobs/skills/
competencies within a single organization
the relationships form a pay structure that:
supports organization strategy
supports the workflow
motivates behaviour of employees
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2010 McGraw Hill Ryerson

Job Structure at an
Engineering Company
Consultant Engineer: Exhibits an exceptional degree of
ingenuity, creativity, and resourcefulness. Acts
independently to uncover and resolve operational
problems.
Advisor Engineer: Applies advanced principles, theories,
and concepts. Assignments often self-initiated.
Lead Engineer: Applies extensive knowledge as a
generalist or specialist. Exercises wide latitude.
Systems Engineer: Wide applications of principles and
concepts, plus working knowledge of other related
disciplines. Under very general direction.
Senior Engineer: Full use of standard principles and
concepts. Under general supervision.
Entry Level Engineer: Limited use of basic principles. Close
supervision.

Recognized
Authority

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Pay Structure
refers to the array of pay rates for different work
or skills within a single organization, created
through the use of:
the number of levels
differentials in pay between the levels, and
the criteria used to determine those
differences.
Pay structures change over time
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2010 McGraw Hill Ryerson

Pay Structure at an
Engineering Company
Recognized
Authority

Entry Level

Consultant Engineer
Advisor Engineer
Lead Engineer
Systems Engineer
Senior Engineer
Engineer

$162,000
$120,000
$93,000
$73,000
$58,500
$48,000
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2010 McGraw Hill Ryerson

What Shapes Internal

Structures?
EXTERNAL FACTORS:
Economic Pressures
Government Policies, Laws, Regulations
Stakeholders
Cultures and Customs
ORGANIZATION FACTORS:
Strategy
HR Policy
Technology
Employee Acceptance
Human Capital
Cost Implications

INTERNAL STRUCTURE:
Levels, Differentials, Criteria
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2010 McGraw Hill Ryerson

Illustration of an
Internal Labour Market*
Hire

*Internal labour
markets combine
both external and
organizational
factors

Consultant
Engineer
Advisor
Engineer
Lead
Engineer
Systems
Engineer

Hire

Senior
Engineer

Hire

Engineer
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2010 McGraw Hill Ryerson

Strategic Choices Among

Structure Options
1. Tailored (well-defined jobs; small differentials)
versus
Loosely Coupled (jobs flexible, adaptable, changing)
2. Egalitarian (few levels; small differentials)
versus
Hierarchical (many levels; large differentials)
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2010 McGraw Hill Ryerson

Structures Vary in Number

of Levels
Structure A
Layered
Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer
Senior Engineer
Engineer
Engineer Trainee

Structure B
De-layered
Chief Engineer

Consulting Engineer

Associate Engineer
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2010 McGraw Hill Ryerson

Strategic Choice:
Hierarchical vs. Egalitarian
Hierarchical

Egalitarian

Levels

Many

Fewer

Differentials

Large

Small

Criteria

Person or Job

Person or Job

Fit

Tailored

Loosely Coupled

Supports

Individual Performers

Teams

Fairness Criterion

Performance

Equal Treatment

Behaviour Rewarded

Opportunities for
Promotion

Cooperation
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2010 McGraw Hill Ryerson

What The Research Tells Us

Equity Theory: Fairness
my pay for my inputs
vs. others pay for their
inputs

MY PAY
My qualifications
My work performed
My product value

OTHERS PAY
Their qualifications
Their work performed
Their product value
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2010 McGraw Hill Ryerson

What The Research Tells Us

Tournament Theory: Motivation and
Performance
Players perform better where prize
differentials are sizeable
works best in situations where individual
performance matters most

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2010 McGraw Hill Ryerson

What The Research Tells Us

Institutional Model: Copy others
Copy best practices of others

No analysis of whether the practice fits

the organizational strategy

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2010 McGraw Hill Ryerson

Organizational Outcomes
of an Internally Aligned
Structure
Undertake training
Increase experience
Reduce turnover

Pay structure

Facilitate career progression

Facilitate performance
Reduce pay-related
grievances
Reduce pay-related work
stoppages
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Consequences of Structures
Efficiency
Internal
Structure

Fairness
Legal Compliance
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Conclusion
Internal alignment refers to the pay relationships
among jobs / skill / competencies within a single
organization.
Pay structures the array of pay rates for different
jobs within an organization are defined by levels,
differentials, and the criteria for determining these.
Acceptance by employees of the pay differentials
between jobs is a key test of an equitable pay
structure.
The goals of the entire compensation system must
be kept in mind when designing internal pay
structures.
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2010 McGraw Hill Ryerson