Find the Full Original Textbook (PDF) in the link
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Contents
PART I
Introducing the Pay Model and Pay Strategy
Chapter 1
The Pay Model 2
Compensation: Does It Matter? (Or, “So
What?”) 3
Compensation: Definition, Please
(Stakeholders) 4
How Pay Influences Beahviors: Incentive and Sort-
ing Effects 11
Forms of Pay 14
A Pay Model 19
Book Plan 25
Caveat Emptor—Be an Informed Consumer 26
Your Turn: Compensation at the World’s Largest
Company 28
(Still) Your Turn: Who are Amazon’s Peer Com-
panies for Comparing Compensation? 28
Chapter 2
Strategy: The Totality of Decisions 40
Similarities and Differences in Strategies 41
Strategic Choices 45
Support Business Strategy 46
Support HR Strategy 47
The Pay Model Guides Strategic Pay
Decisions 48
Society 6
Stockholders 9
Customers 10
Managers 10
Employees 11
Global Views—Vive la Différence 14
Cash Compensation: Base 15
Cash Compensation: Merit Increases/
Short-Term Incentives (Merit Bonuses)/
COLAs 16
Cash Compensation: Incentives 16
Long-Term Incentives 17
Benefits: Income Protection 17
Benefits: Work/Life Balance 18
Benefits: Allowances 18
Total Earnings Opportunities: Present Value of
a Stream of Earnings 18
Relational Returns from Work 19
Compensation Objectives 19
Four Policy Choices 22
Pay Techniques 24
1. Is the Research Useful? 26
2. Does the Study Separate Correlation from
Causation? 26
3. Are There Alternative Explanations? 27
Different Strategies within the Same
Industry 43
Different Strategies within the Same Company
(between business units/markets) 44
Different Strategies within the Same Company
(Evolution over Time) 44
Stated versus Unstated Strategies 49
Developing a Total Compensation Strategy: Four
Steps 50
Source of Competitive Advantage: Three Tests 56
“Best Practices” versus “Best Fit”? 58
Guidance from the Evidence 58
Virtuous and Vicious Circles 59
Your Turn: Using Compensation to Improve Envi-
ronmental, Social and Governance (Including
Diversity & Inclusion) Performance: Apple and
Starbucks 60
Still Your Turn: Mapping Compensation
Strategies 61
PART II
Internal Alignment: Determining the Structure
Chapter 3
Defining Internal Alignment 72
Jobs and Compensation 73
Compensation Strategy: Internal Alignment 73
Structures Vary among Organizations 76
What Shapes Internal Structures? 79
Strategic Choices in Designing Internal
Structures 85
Guidance from the Evidence 87
Consequences of Structures 91
Your Turn: So You Want to Lead an Orchestra! 93
Still Your Turn: (If You Don’t Want to Lead the
Orchestra...) 94
Still (yes, still) Your Turn: NCAA 97
Chapter 4
Job Analysis 106
Structures Based on Jobs, People, or Both 107
Job-Based Approach: Most Common 109
Job Analysis Procedures 110
Step 1: Assess Total Compensation
Implications 50
HR Strategy: Pay as a Supporting Player or a
Catalyst for Change? 51
Step 2: Map a Total Compensation Strategy 54
Steps 3 and 4: Implement and Reassess 56
Align 56
Differentiate 56
Add Value 58
Supports Organization Strategy 75
Supports Work Flow 75
Motivates Behavior 76
Number of Levels 76
Differentials 77
Criteria: Content and Value 77
Economic Pressures 79
Government Policies, Laws, and Regulations 80
External Stakeholders 80
Cultures and Customs 81
Organization Strategy 81
Organization Human Capital 81
Organization Work Design 82
Overall HR Policies 82
Internal Labor Markets: Combining External
and Organization Factors 83
Employee Acceptance and Perceived
Fairness 84
Pay Structures Change 84
Tailored versus Loosely Coupled 85
Hierarchical versus Egalitarian and Layered
versus Delayered Structures 85
Equity Theory: Fairness 87
Tournament Theory (and Pay Dispersion):
Motivation and Performance 88
Institutional Theory: Copy Others and
Conform 90
(More) Guidance from the Evidence 90
Efficiency (including Retention) 92
Fairness 92
Compliance 92
Why Perform Job Analysis? 109
What Information Should Be Collected? 112
How Can the Information Be Collected? 118
Job Descriptions Summarize the Data 121
Job Analysis: Bedrock or Bureaucracy? 125
Job Analysis and Change in Work: Globalization,
and Automation (Including AI) 126
Judging Job Analysis 134
Your Turn: The Customer-Service Agent 137
Chapter 5
Job-Based Structures and Job Evaluation 143
Job-Based Structures: Job Evaluation 144
Defining Job Evaluation: Content, Value, and
External Market Links 145
“How-To”: Major Decisions 146
Job Evaluation Methods 149
Who Should Be Involved? 162
The Final Result: Structure 164
Balancing Chaos and Control 164
Your Turn: Job Evaluation at Whole Foods 165
Chapter 6
Person-Based Structures 175
Person-Based Structures: Skill Plans 176
“How-To”: Skill Analysis 180
Person-Based Structures: Competencies 183
“How-To”: Competency Analysis 189
Job Data: Identification 112
Job Data: Content 113
Employee Data 114
“Essential Elements” and the Americans With
Disabilities Act 116
Level of Analysis 117
Conventional Methods 118
Quantitative Methods 118
Who Collects the Information? 120
Who Provides the Information? 120
What about Discrepancies? 120
Using Generic Job Descriptions 121
Describing Managerial/Professional Jobs 124
Verify the Description 124
Change in Work 126
Susceptibility to Offshoring 127
Susceptibility to Automation and AI 130
Job Analysis Information and Comparability
across Borders 134
Reliability 134
Validity 135
Acceptability 135
Currency 135
Usefulness 136
A Judgment Call 136
Content and Value 145
Linking Content with the External Market 145
Technical and Process Dimensions 145
Establish the Purpose 146
Single versus Multiple Plans 147
Choose among Job Evaluation Methods 149
Ranking 150
Classification 151
Point Method 153
The Design Process Matters 162
Types of Skill Plans 176
Purpose of the Skill-Based Structure 179
What Information to Collect? 180
Whom to Involve? 182
Establish Certification Methods 182
Outcomes of Skill-Based Pay Plans: Guidance
from Research and Experience 182
Defining Competencies 185
Purpose of the Competency-Based
Structure 186
Objective 189
What Information to Collect? 189
Whom to Involve? 190
Establish Certification Methods 191
PART III
External Competitiveness: Determining the Pay
Level
Chapter 7
Defining Competitiveness 210
Compensation Strategy: External
Competitiveness 211
What Shapes External Competitiveness? 218
Labor Market Factors 220
Modifications to the Demand Side 223
Modifications to the Supply Side (Only Two More
Theories to Go) 227
Product Market Factors and Ability to Pay 228
Organization Factors 231
Relevant Markets 232
Competitive Pay Policy Alternatives 235
Consequences of Pay-Level and Pay-Mix
Decisions: Guidance from the Research 246
Your Turn: Two-Tier Wages 249
Your Turn: Combining Pay Survey and Job Evalu-
ation Data 250
Appendix 7-A: Utility Analysis 252
Resulting Structure 191
Competencies and Employee Selection and
Training/Development 191
Guidance (and Caution) from the Research on
Competencies 193
Reliability of Job Evaluation Techniques 195
Validity 197
Acceptability 198
Wages Criteria Bias 198
Control Costs and Increase Revenues 212
Attract and Retain the Right Employees 217
How Labor Markets Work 220
Labor Demand 221
Marginal Product 222
Marginal Revenue 222
Labor Supply 223
Compensating Differentials 224
Efficiency Wage 225
Sorting and Signaling 226
Reservation Wage 227
Human Capital 227
Product Demand 228
Degree of Competition 228
A Different View: What Managers Say 229
Segmented Supplies of Labor and (Different)
Going Rates 229
Industry and Technology 231
Employer Size 231
People’s Preferences 231
Organization Strategy 232
Defining the Relevant Market 233
Globalization of Relevant Labor Markets:
Offshoring and Outsourcing 234
What Difference Does the Pay-Level Policy
Make? 238
Pay with Competition (Match) 238
Lead Pay-Level Policy 240
Lag Pay-Level Policy 243
Different Policies for Different Employee
Groups 243
Not by Pay Level Alone: Pay-Mix Strategies 244
Efficiency 246
Fairness 248
Chapter 8
Designing Pay Levels, Mix, and Pay
Structures 261
Major Decisions 262
Specify Competitive Pay Policy 262
The Purpose of a Survey 262
Select Relevant Market Competitors 264
Design the Survey 268
Interpret Survey Results and Construct a Market
Line 277
From Policy to Practice: The Pay-Policy Line 286
From Policy to Practice: Grades and Ranges 288
From Policy to Practice: Broad Banding 291
Balancing Internal and External Pressures:
Adjusting the Pay Structure 294
Market Pricing 295
Review 296
Your Turn: Google’s (now Alphabet’s) Evolving
Pay Strategy 297
Still Your Turn: Word-of-Mouse: Dot-Com
Comparisons 298
PART IV
Employee Contributions: Determining Individual
Pay
Chapter 9
Pay-for-Performance: Theory and Evidence 306
What Behaviors Do Employers Care About? Link-
ing Organization Strategy to Compensation and
Performance Management 308
What Does It Take to Get These Behaviors? What
Theory Says 312
What Does It Take to Get These Behaviors? What
Practitioners Say 317
Does Compensation Motivate Behavior? 322
Adjust Pay Level—How Much to Pay? 263
Adjust Pay Mix—What Forms? 263
Adjust Pay Structure? 263
Study Special Situations 263
Estimate Competitors’ Labor Costs 264
Fuzzy Markets 268
Who Should Be Involved? 268
How Many Employers? 269
Which Jobs to Include? 272
What Information to Collect? 274
Verify Data 277
Statistical Analysis 280
Update the Survey Data 282
Construct a Market Pay Line 283
Setting Pay for Benchmark and
Non-Benchmark Jobs 285
Combine Internal Structure and External
Market Rates 286
Choice of Measure 287
Updating 287
Policy Line as Percent of Market Line 287
Why Bother with Grades and Ranges? 288
Develop Grades 289
Establish Range Midpoints, Minimums, and
Maximums 289
Overlap (and Midpoint Progression) 290
Flexibility Control 293
Reconciling Differences 294
Business Strategy (More than “Follow the
Leader”) 295
Do People Join a Firm Because of Pay? 322
Do People Stay in a Firm (or Leave) Because
of Pay? 323
Reminder: Not All Turnover is Bad (and at
least some is necessary) 324
Do Employees More Readily Agree to Develop
Job Skills Because of Pay? 324
Do Employees Perform Better on Their Jobs
Because of Pay for Performance? The Short
Answer is "Yes" (Especially Compared to the
Alternative) 325
Pay for Performance: Harmful Effects on
Intrinsic Motivation (Claims and
Evidence) 326
Table of Contents vii
Designing a Pay-for-Performance Plan 330
Your Turn: Burger Boy 333
Chapter 10
Pay-for-Performance: Types of Plans 346
What Is a Pay-for-Performance Plan? 346
Pay-for-Performance: Merit Pay Plans 351
Pay-for-Performance: Short-Term Incentive Plans
(Individual-Based) 354
Pay-for-Performance: Short-Term Incentive Plans
("Group"-Based) 361
Pay-for-Performance: Long-Term Incentive
Plans 374
Does Variable Pay (Short-Term and Long-Term
Incentives) Improve Performance Results? The
General Evidence 378
Your Turn: Pay at Delta and American
Airlines 378
Chapter 11
Performance Appraisals 387
The Role of Performance Appraisals in Compen-
sation Decisions 389
Strategies for Better Understanding and Measur-
ing Job Performance 390
Putting It All Together: The Performance Evalua-
tion Process 409
Equal Employment Opportunity and Performance
Evaluation 412
Tying Pay to Subjectively Appraised Performance
(Merit Pay) 413
Sorting and Incentive Effects 327
Risk (Unintended Consequence) 330
Efficiency 330
Equity/Fairness 332
Compliance 333
How Widely Used Is Pay for Performance
(PFP)? 347
The Important Role of Promotion (internal or
external) in Pay for Performance 350
Merit Bonuses aka Lump-Sum Bonuses 354
Individual Spot Awards 354
Individual Incentive Plans 355
Individual Incentive Plans: Returns (But Also
Risks) 358
Individual Incentive Plans: Examples 359
Comparing Group and Individual Incentive
Plans 364
Large Group Incentive Plans 367
Gain-Sharing Plans 367
Profit-Sharing Plans 372
Earnings-at-Risk Plans 373
Group Incentive Plans: Advantages and
Disadvantages 373
Group Incentive Plans: Examples 373
Employee Stock Ownership Plans (ESOPs) 376
Performance Plans (Performance Share and
Performance Unit) 377
Broad-Based Stock Plans (BBSPs) 377
Combination Plans: Mixing Individual and
Group 377
Performance Metrics 389
The Balanced Scorecard Approach 391
Strategy 1: Improve Appraisal Formats 392
Strategy 2: Select the Right Raters 401
Strategy 3: Understand How Raters Process
Information 404
Strategy 4: Training Raters to Rate More
Accurately 408
Strategy 5: Improving Rater Motivation and
Opportunity to Rate More Accurately 409
“New” Performance Appraisal 410
A Checklist of Recommended Behaviors for
Managers and Employees 411
Your Turn: Performance Appraisal at American
Energy Development 419
Appendix 11-A: Balanced Scorecard Example:
Department of Energy (Federal Personal Property
Management Program) 422
Appendix 11-B: Sample Appraisal Form for Lead-
ership Dimension: Pfizer Pharmaceutical 425
PART V
Employee Benefits
Chapter 12
The Benefit Determination Process 443
Overview 444
Why the Growth in Employee Benefits? 445
The Value of Employee Benefits 449
Key Issues in Benefit Planning, Design, and
Administration 450
Components of a Benefit Plan 454
Administering the Benefit Program 459
Your Turn: World Measurement 464
Chapter 13
Benefit Options 474
Legally Required Benefits 479
Retirement and Savings Plan Payments 486
Life Insurance 493
Medical and Medically Related Payments 493
More Benefits 498
Benefits (or Lack Thereof): Contingent and Alter-
native Work Arrangement Workers 501
Competency: Customer Care 414
Performance- and Position-Based
Guidelines 415
Designing Merit Guidelines 415
Wage and Price Controls 447
Unions 447
Employer Impetus 448
Cost (Including Tax) Effectiveness of
Benefits 448
Government Impetus 449
Benefits Planning and Design Issues 450
Benefit Administration Issues 451
Employer Factors 454
Employee Factors 457
Employee Benefit Communication 459
Cost Containment 463
Claims Processing 463
Workers’ Compensation 479
Social Security: Old Age, Survivors, Disability
& Health (OASDI) + Medicare 480
Unemployment Insurance 483
Family and Medical Leave Act (FMLA) 485
Consolidated Omnibus Budget Reconciliation
Act (COBRA) 485
Health Insurance Portability and
Accountability Act (HIPAA) 485
Defined Benefit Plans 486
Defined Contribution Plans 487
Individual Retirement Accounts (IRAs) 490
Employee Retirement Income Security Act
(ERISA) 490
How Much Retirement Income to Provide? 491
General Health Care 493
Health Care: Cost Control Strategies 496
Short- and Long-Term Disability 497
Dental Insurance 497
Vision Care 497
Paid Time Off during Working Hours 498
Payment for Time Not Worked 498
Family-Friendly Policies (including Child Care,
Family Leave, and Flexible Work) 499
Elder Care 500
Domestic Partner Benefits 500
Legal Insurance 501
Addressing Financial Precarity (and Financial
Wellness) 501
Part I Introducing The Pay Model And Pay
Strategy
Why do we work? If we are fortunate, our work
brings meaning to our lives, challenges us in new
and exciting ways, brings us recognition, and gives
us the opportunity to interact with interesting people
and create friendships. Oh yes—we also get a
paycheck. Here in Part 1 of the book, we begin by
talking about what we mean by “pay” and how
paying people in different ways can influence them
and, in turn, influence organizational success.
Wages and salaries, of course, are part of
compensation, but so too, for some employees, are
bonuses, health care benefits, stock options, and/or
work/life balance programs.
Compensation is one of the most powerful tools
organizations have to influence their employees.
Managed well, it can play a major role in
organizations successfully executing their strategies
through their employees.
We will see how companies like Costco, Whole
Foods, Nucor, the SAS Institute, Microsoft,
Alphabet/Google, and others use compensation to
attract, motivate, and retain the right employees to
execute their strategies.
We will also see how companies like Apple sell
premium products at attractive price points, to an
important degree by using suppliers that have low
labor costs. When they are managed less well—as
bankruptcies at General Motors, Chrysler (now part
of Stellantis), Lehman Brothers, and American
Airlines (which stated at the time that it needed to
reduce labor costs by $1.25 billion per year to be
competitive), for example, it might indicate—
compensation decisions can also come back to
haunt you. In Part 1, we describe the compensation
policies and techniques that organizations use and
the multiple objectives they hope to achieve by
effectively managing these compensation decisions.
Although compensation has its guiding principles,
we will see that “the devil is in the details”—how a
compensation program is specifically designed and
implemented will help determine its success. We
want you to bring a healthy skepticism when you
encounter simplistic or sweeping claims about
whether a particular way of managing compensation
does or does not work. For example, organizations,
in general, benefit from pay for performance, but
there are many types of pay-for-performance
programs, and it is not always easy to design and
implement a program that has the intended
consequences and avoids unintended
consequences. . (As examples of what can go
wrong, search the Web for Wells Fargo or Novartis
and the term, scandal.) So, general principles are
helpful, but only to a point.
Thus, in Part 1, our aim is to also help you
understand how compensation strategy decisions
interact with the specific context of an organization
(e.g., its business and human resource strategies) to
influence organizational success. We emphasize
that good theory and research are fundamental, not
only to understanding compensation's likely effects,
but also to developing that healthy skepticism we
want you to have toward simplistic claims about
what works and what does not.
Chapter One The Pay Model
Chapter Outline
Compensation: Does It Matter? (or, “So
What?”)
Compensation: Definition, Please
(Stakeholders)
Society
Stockholders
Customers
Managers
Employees
How Pay Influences Behaviors: Incentives
and Sorting Effects
Global Views—Vive la Différence
Forms of Pay
Cash Compensation: Base
Cash Compensation: Merit Increases/
Short-Term Incentives (Merit
Bonuses)/COLAs
Cash Compensation: Incentives
Long-Term Incentives
Benefits: Income Protection
Benefits: Work/Life Balance
Benefits: Allowances
Total Earnings Opportunities: Present Value
of a Stream of Earnings
Relational Returns from Work
A Pay Model
Compensation Objectives
Four Policy Choices
Pay Techniques
Book Plan
Caveat Emptor—Be an Informed Consumer
1. Is the Research Useful?
2. Does the Study Separate Correlation from
Causation?
3. Are There Alternative Explanations?
Your Turn: Compensation at the World’s
Largest Company
Still Your Turn: Who Are Amazon’s Peer
Companies for Comparing Compensation?
COMPENSATION: DOES IT MATTER? (OR, “SO
WHAT?”)
Why should you care about compensation? Do you
find that life goes more smoothly when there is at
least as much money coming in as going out?
(Refer, e.g., to the lyrics for the Beatles' song
“Money.” 1 To exaggerate a bit, they say something
like: Money doesn't buy everything, but if money
can't buy it, I can't use it.) In the movie, It's a
Wonderful Life, George Bailey is in a difficult spot.
An (inexperienced) guardian angel by the name of
Clarence has been sent to help George. When
Clarence implores George to let him help, George
asks if he has $8,000 on him. Clarence replies “No,
we don't use money in Heaven” to which George
replies: “Well, it comes in real handy down here,
bud!”
Of course, it is the same for companies. It really
does help to have as much money coming in
(actually, more is better) as going out. Until recently,
production workers at Chrysler received total
compensation (i.e., wages plus benefits) of about
$76 per hour. US workers doing the same jobs at
Toyota received $48 per hour, and the average total
compensation per hour in U.S. manufacturing was
$25 (and $3 in Mexico--not surprisingly, many new
automobile supply and assembly plants have gone
to Mexico in recent years). It is one thing to pay
more than your competitors if you get something
more (e.g., higher productivity and/or quality) in
return.
But Chrysler was not. So its “strategy” was not
sustainable. Chrysler ended up going through
bankruptcy, being bought out by Fiat, and then
reducing worker compensation costs as part of its
strategy for a return to competitiveness. Specifically,
Chrysler took steps (as part of its bankruptcy plan) to
bring its hourly labor costs down to about $49.2 (Fiat
Chrysler is now part of Stellantis.) General Motors
(GM), like Chrysler, has for decades paid its workers
well— too well, perhaps, for what it received in
return. So what? Well, in 1970, GM had 150 U.S.
plants and 395,000 hourly workers. In sharp
contrast, GM now has 32 U.S. manufacturing plants
(including 11 vehicle assembly plants) and 87,000
U.S.
workers (up from 57,000 U.S. hourly workers a few
years ago).3 In June 2009, GM, like Chrysler, had to
file for bankruptcy (avoiding it for a while thanks to
loans from the U.S. government—i.e., you, the
taxpayer) . Not all of GM's problems were
compensation related. Building too many vehicles
that consumers did not want was also a problem.
But having labor costs higher than the competition's,
without corresponding advantages in efficiency,
quality, and customer service, does not seem to
have served GM or its stakeholders well. Its stock
price peaked at $93.62/share in April 2000. Its
market value was about $60 billion in 2000. That
share-holder wealth was wiped out in bankruptcy.
Think also of the billions of dollars the U.S. taxpayer
had to put into GM. Think of all the jobs that have
been lost over the years and the effects on
communities that have lost those jobs. (The good
news is that as of 2021, GM's market value was over
$80 billion. However, that is a ways behind what is
now the most valuable U.S. carmaker, Tesla, at
$635 billion, depending on the day, or about 8x
greater than GM.) On the other hand, Nucor Steel
pays its workers very well, relative to what other
companies inside and outside of the steel industry
pay. But Nucor also has much higher productivity
than is typical in the steel industry.
The result: Both the company and its workers do
well. Apple Computer is able to charge lower prices
for its iPads and iPhones by outsourcing
manufacturing to China in facilities owned by the
Hon Hai Precision Industry Co., Ltd. (Foxconn), a
Taiwanese company. (See Chapter 7.) As we will
see later, doing so generates billions (yes, billions
with a “b”) of dollars in cost savings per year. Google
and Facebook are companies that are known for
paying very well. So far that seems to have worked,
in that their high pay allows them to be very
selective in who they hire and who they keep, and
they would say that their talent-rich strategy has
helped them to foster growth and innovation.
Find the Full Original Textbook (PDF) in the link
below:
CLICK HERE
