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Pay Model

Pay Model

• Compensation Objectives

• Policies (that form foundation of compensation system)

• Techniques that make up the system

• Efficiency
– Performance
– Quality
– Delighting Customers
– Stockholder
– Controlling labour cost

• Fairness (fair wage, fair procedures)

• Compliance (with existing laws)

• Ethics (values, codes of conduct, key behaviours)

What are the Policy Choices?
• Internal Alignment
– Comparisons among jobs, skills internally
– Pay rates for people doing similar work and dissimilar work
– Eg. Software engineer vs software architect OR HR vs Finance vs Technical
– Cap on executive cash compensation

• Internal alignment choices impacts objective through:

– Employee decision to stay, Seek greater responsibility, to invest in further
learning / training
– Fairness: through comparison with others in organization
– Compliance: Differences of pay based on gender, nationality
What are the Policy Choices?
• External Competitiveness
– Comparison with other employers for similar skill set
– Pay mix: base, incentives, stocks, benefits
– Typically has geographical references
– Companies may set their pay levels higher to attract the best talent

• Impacts objectives through:

– Sufficient to attract and retain employees
– Control labour costs to keep products competitive
– Thus impacts efficiency and fairness
What are the Policy Choices?

• Employee Contributions
– Pay for performance or flat rate for similar skill sets
– Should profits be shared with employees?
– Important decision as it affects employee attitude and behaviour

• Impacts objectives through:

– Basis of judging performance and distribution of rewards
What are the Policy Choices?

• Management
– Right people get Right pay for achieving Right objectives in the Right
– The best system design is of no use without competent management
– Management needs to answer “So what” difference does it make to
achieving objectives
Pay Model
Strategic Choices

• Innovator

• Cost Cutter

• Customer Focussed
Strategy: Innovator
• Strategy: • HR Alignment:
– Increase product complexity – Committed to agile
– Shorten product life cycle – Risk taking
– Innovative / creative

• Business Response: Compensation System:

– Product Leadership • Reward innovation in product /
– Customization processes
– Reduced cycle time • Market based pay
• Flexible – generic job descriptions
Strategy: Cost Cutter

• Strategy: • HR Alignment:
– Focus on efficiency – HR / Labour cost focus
– Head count management
– Do more with less

• Business Response: Compensation System:

– Operational Excellence • Benchmark with competitors
– Pursue cost effective • Productivity based variable pay
solutions • Clear work specifications
Strategy: Customer Focused
• Strategy: • HR Program Alignment:
– Increase customer – Delight customer

• Business Response: Compensation System:

– Deliver solutions to • Customer satisfaction incentives
customers • Customer contact / customer
– Speed to market acquisition / customer retention
Developing a total compensation strategy
• Step 1: Assess total compensation implications

– Understand competitive dynamics

– Culture / Values (Avoid grandiose sounding but empty phrases; it

doesn’t fool anyone)

– Social & political context

– Employee needs (older vs younger, gender differences)

Developing a total compensation strategy… 2

• Step 2: Map a total compensation strategy

– Objectives
– Alignment
– Competitiveness
– Contributions
– Management

• Step 3: Translate strategy into actions

• Step 4: Reassess and realign

Best Practice Model
• The elements of best practices identified by Pfeffer (1998) are now widely recognised, if
not universally accepted:

– Employment security
– Selective hiring
– Self-managed teams or team working
– High pay contingent on company performance
– Extensive training
– Reduction of status differences
– Sharing information
Best Fit Model / Contextual Model
• Argument: HR strategy becomes more efficient when it is linked/tailored to its surrounding
context or environment of the business

• There are 2 elements:

– ‘External fit’:
• HR activities must fit the organization's competitive strategy

– ‘Internal fit‘:
• Specific HR policies designed to `fit with and support each other‘.
• Policies which work in opposite direction should be avoided. For
example, encouraging teamwork but rewarding individual performance.
Best Practice or Best Fit

• Ideal approach is to have a compensation system that is a good strategic

• But views differ. Some suggest “best practices” rather than “best fit”
• A set of best practice exists
• Can be applied universally across situations
• Allows employers to gain preferential access to superior talent
• Which in turn will turn into a competitive advantage

• Challenge is – what to select from the basket of best practices?

Virtuous and Vicious Circles