Module 5 - Driving Plan Sponsor Strategy With Reward and Compensation Systems

Question 1

Explain the potential impact of the compensation system on employers, employees, shareholders and society.

Answer 1

For an employer, the compensation system it chooses can help the organization achieve its business strategy and objectives; it can help attract, retain and motivate employees. The compensation system can also have moral and philosophical implications. Pay influences employees’ standard of living. Shareholders place importance on the financial value of the compensation system to the organization’s bottom line. Wider society tends to view compensation from an equity perspective, focusing on questions of justice. Compensation design can have a powerful effect on behaviour, but the employee behaviour desired is not always the behaviour obtained. A well-designed compensation system can have positive implications for organizations, employees and society, while a poorly designed compensation system can have undesirable consequences.

Question 2

Identify potential problems an organization can face if it fails to choose an appropriate compensation system.

Answer 2

A compensation system is one of the most powerful tools available to an employer for shaping employee behaviour and influencing financial performance. An inappropriate compensation system can actually promote unproductive or counterproductive behaviour, leading to low employee motivation, poor job performance and high turnover. It can also create organizational rigidity, inability to adapt to change, lack of innovation, conflict between organizational units and poor customer service.

Question 3

Contrast extrinsic and intrinsic rewards. Provide examples for each.

Answer 3

“Rewards” are anything provided by an organization that satisfies one or more of an employee’s needs. “Extrinsic rewards” satisfy basic needs for survival and security, social needs and needs for recognition. They are derived from the context of the job. Examples are financial returns (i.e., pay), supervisory and coworkers’ behaviours and general working conditions. “Intrinsic rewards” satisfy higher level needs for selfesteem, achievement, growth and development. They are derived from the content of the job—factors inherent in the job itself. Examples of intrinsic rewards are the amount of challenge a job provides, the degree of variety in a job and the extent to which it provides feedback and allows autonomy.

Question 4

Differentiate between “rewards” and “incentives.”

Answer 4

Although the terms “reward” and “incentive” are often used interchangeably, they are not synonymous. Rewards are the positive consequences of performing behaviours an organization desires. Employees normally receive rewards either subsequent to performing the behaviour (in the case of extrinsic rewards) or during performance of the behaviour (in the case of intrinsic rewards).

An incentive is promise that a specified reward will be provided if the employee provides a specified behaviour. Incentives are offered to induce employees to perform behaviours they might not otherwise perform or to perform these behaviours at a higher level than they otherwise would.

Incentives are intended to induce valued behaviour, while rewards serve to recognize valued behaviour. These two concepts can merge over time, because if rewards are used consistently to recognize a desired behaviour, they can come to be seen as an implied promise for performing that behaviour in the future—in other words, as an incentive.

Question 5

Differentiate between a “reward system” and a “compensation system,” and briefly outline the components of each.

Answer 5

A “reward system” is the mix of intrinsic and extrinsic rewards an organization provides to employees and includes components like career advancement opportunities, the intrinsic characteristics of the job, work/life balance, an employee recognition program, a positive workplace culture and compensation.

A “compensation system” is a subset of the reward system; it addresses the economic or monetary component of the reward system and has three components:

(1) Base pay

(2) Performance pay

​​​​​​​(3) Indirect pay (Includes noncash items or services that satisfy specific employee needs, such as health protection (e.g., extended health care or dental care) or retirement security (e.g., pension plans).)

Question 6

Identify the main goals of optimal reward and compensation systems, and indicate the significance of these goals.

Answer 6

Optimal reward and compensation systems are those that add the most value to an organization, after considering all their costs. An organization’s main goals for its reward and compensation systems are:

(a) Promoting achievement of organizational goals
(b) Fitting within the strategy for achieving its goals and supporting its structure for implementing that strategy
(c) Attracting and retaining qualified individuals who can perform the required task behaviours
(d) Promoting desired employee behaviour
(e) Being seen as equitable by all employees
(f) Complying with all relevant laws within the jurisdictions in which it operates
(g) Achieving organizational goals at a cost that is within its financial means
(h) Achieving organizational goals in the most cost-effective manner possible.

Question 7

Identify factors considered in each step of developing an effective compensation system.

Answer 7

Step 1. Understanding the organization and the context in which it operates.

Step 2. Formulating the compensation strategy.

Step 3. Determining compensation values.

Step 4. Designing performance pay and indirect pay plans.

Step 5. Implementing, managing, evaluating and adapting the compensation system.

Question 8

Explain the importance of ongoing evaluation and adaptation of a compensation system.

Answer 8

Ongoing evaluation determines whether the system is accomplishing its objectives and whether it is doing so in the most cost-effective manner possible. The evaluation process provides feedback that can be used to surface the nature of the issues and inform the nature of the changes needed (e.g., addressing a technical aspect of the system or a total redesign). A need for changing/redesigning the compensation system can be triggered by many things, including changes in the environment, within the organization or changes with technology.

Question 9

Explain the concepts of vertical and horizontal “fit” and their significance in reward and compensation management.

Answer 9

“Fit” is an important concept in strategic management. It refers to the alignment of strategies at various levels in an organization. “Vertical fit” refers to the alignment between an organization’s mission (i.e., its reason for existence), vision (i.e., its desired future state) and values (i.e., principles, beliefs and attitudes that drive behaviour) and the various supportive strategies in the organization (e.g., human resource strategies support business strategies). “Horizontal fit” refers to the alignment between and among strategies at the same level (e.g., human resource strategies such as performance management and compensation are aligned with or support each other).

Question 10

Describe the dynamics that underpin a “contingency approach to organizational design.”

Answer 10

For the organizational system to be effective, the business strategy and organizational structure must also fit with other key variables, including the type of environment in which the organization operates, the type of technology it uses, the size of the organization and the characteristics of the people employed. This is known as the “contingency approach to organizational design” and is the foundation for the strategic compensation framework presented in the text. Ultimately, the success or failure of any compensation system depends on how well it fits the organization’s context and its system as a whole. Therefore, to successfully design, manage and modify any compensation system, you must understand this context and how it links to the compensation system.

Rewards and compensation sit inside a larger set of structural variables, which are interrelated and must fit with one another. These are all in turn influenced by a set of contextual variables that are interrelated and must fit with one another as well. The link is managerial strategy. To be effective, the reward and compensation systems must fit with the other structural variables, as well as with the managerial strategy, which in turn must fit with the contextual variables.

Question 11

Identify structural variables in an organization that interface with and impact reward and compensation systems.

Answer 11

Job design: Manner in which the total amount of work to be done in an organization is divided into subtasks that are assigned to individual employees

Coordination and departmentation: Methods used to coordinate the work of individual employees and subunits to ensure the work of individuals supports accomplishment of the overall task

Decision making and leadership: Mechanisms through which decisions are made and type of leadership role played by those in managerial positions

Communication and information: Methods used to communicate information and the amount and types of information communicated throughout the organization

Control structure: Means used to control employee behaviour and to ensure they are doing what they are supposed to do.

Question 12

Explain the role of managerial strategy in a strategic compensation framework.

Answer 12

The structural variables can be arranged in a virtually limitless number of ways. However, over time, three main patterns of structural variables, known as “managerial strategies,” have emerged—classical, human relations and high-involvement. Each of these managerial strategies represents a particular combination of structural variables that has proven to be successful in the right circumstances. The particular managerial strategy used by a given organization is the single most important determinant of what will or will not be a successful compensation system for that organization.

Question 13

Explain the factors that influence determination of the most appropriate managerial strategy for that organization.

Answer 13

Interaction between the goals and the general environment in which the organization operates determines the organization’s “domain.” The domain defines the specific products or services that the organization will offer and the task environment. The “task environment” is the specific slice of the general environment that is of particular relevance to the organization. Key elements of the task environment include customers or clients, competitors, suppliers and regulatory agencies.

Organizational goals “drive” the determination of the other contextual variables— business strategy, technology, organization size and nature of the workforce.

Question 14

Explain how contextual variables affect reward and compensation decisions.

Answer 14

The key point about contextual variables is that a change in any of them may trigger a need for change in the reward and compensation systems. An organization that changes its business strategy, implements a new technology, grows in size, or experiences a change in its workforce may need a new reward and compensation strategy. An organization attempting to change its managerial strategy usually needs to change its compensation system. Failure to make the right changes in the reward and compensation systems, in light of other changes, may have dire consequences. Because organizations are systems, change in one aspect of the organization almost inevitably has implications for other parts of the organization.

Question 15

Contrast the basic premises of the classical, human relations and high-involvement managerial strategies.

Answer 15

The classical managerial strategy assumes most employees inherently dislike work but can be induced to work in order to satisfy their economic needs. This approach assumes that the only way to get employees to work is to create circumstances where satisfaction of their economic needs becomes threatened if they don’t behave as the organization wants them to.

The human relations strategy assumes most employees inherently dislike work but can be induced to work in order to satisfy their social needs. This strategy is similar to the classical managerial strategy in the assumption that people inherently dislike work, but it differs in the belief that employees can be motivated by appealing to their social (vs. economic) needs. The human relations view tends toward paternalism—The organization is like a family.

The high-involvement managerial strategy assumes that work can be intrinsically motivating if an organization is structured properly. Employees are motivated by their needs for interesting work, challenge, autonomy, personal growth and professional development (vs. economic or social needs).

Question 16

Compare organizations that a follow classical vs. a human relations vs. a highinvolvement managerial strategy using the structural variables of job design, coordination and departmentation, control systems, communication and information, decision making and leadership.

Answer 16

Under classical managerial strategy, thinking is separated from doing. Jobs are designed with only a few basic elements so that they can be closely supervised and so that employees can be easily replaced if they quit or are dismissed. Specific duties and work methods for each job are planned and defined in detail by management, based on the assumption that employees cannot be trusted to perform effectively without doing so. Jobs are arranged in strict, hierarchical, pyramidal fashion because of the overriding need for accountability. Employees are organized by function (e.g., all production staff are in one department, all marketers in one department). Coordination decisions are made at a relatively high level in the organization. The major role of the supervisor is to control and evaluate subordinates. Classical management strategy also assumes supervisors will shirk their duties if given the opportunity. Control is exercised through close supervision and the threat of punitive action for deviations from formal rules and policies. Communication is low.

The human relations approach is similar to the classical approach in terms of job design, but management attempts to arrange jobs to allow social interaction among employees. It is also similar to the classical approach in the way it coordinates employees. Overall, the leader plays a controlling but employee-oriented role. Leadership is still autocratic. Senior managers make all the important decisions, but there is a greater attempt to “sell” these decisions to provide employees with the feeling that they have some decision-making influence by asking opinions or permitting involvement in minor, inconsequential decisions. Control is still external but preferably exercised through the work group. The human relations approach invests in developing loyal employees and uses work group pressure to influence conformity. If this fails, the supervisor steps in. Punishments are not used extensively for fear of upsetting the social harmony. Communication within informal work groups is encouraged, and management helps to facilitate social communication. The flow of work-related communication tends to be low, whether up or down the hierarchy. As with the classical strategy, management still tries to restrict the flow of what it considers to be important information.

With high-involvement managerial strategy, job design is very different from the other two strategies. It attempts to create jobs that are interesting and challenging and provide employees with considerable autonomy with planning and executing work activities. Job-based feedback is provided to employees about their performance. Jobs are broader and include more elements. Joint employee-management planning and goal setting are often used. Efforts are made to combine the thinking and doing. Coordination of task completion is horizontal as well as vertical, with horizontal being the preferred mode. The role of supervisor as facilitator is very different from classical and human relations approaches. Employees are assumed to be able to exercise self-control and self-motivation; therefore, the supervisor does not need to execute the control function. Because employees are assumed to be self-motivated and competent, decisions can be made at the lowest possible level in the organization. The leadership style is participative or democratic in nature. Control is internal (within the individual). Little supervision is necessary, and formalized rules and regulations can be kept to a minimum. Full disclosure of information is recognized as being essential to good decision making.

Question 17

Discuss how an organization’s compensation system may vary depending on whether it follows a classical, human relations or high-involvement managerial strategy.

Answer 17

In an organization with a classical managerial strategy, the compensation system is quite simple—Extrinsic economic rewards are related to individual output (e.g., piece rates, commissions) or to time worked (e.g., hourly pay). Pay is no higher than absolutely necessary to attract a sufficient flow of job applicants. Little indirect pay is used, because it is not tied to individual performance. Management does not see much value in incurring large benefit costs in order to promote loyalty and reduce turnover. Those issues are managed by the approach itself, which uses narrow job classifications and employees that are easy to replace, train and supervise.

An organization with a human relations strategy mainly bases its compensation system on extrinsic economic rewards that focus on loyalty to the organization (i.e., are unrelated to performance). Salaries (rather than hourly pay) are often used to foster a feeling of permanence. To encourage workforce stability, seniority increases may be provided. There are liberal employee benefits (i.e., indirect pay), loyalty rewards and social rewards, again to develop employee loyalty.

An organization with a high-involvement managerial strategy uses a variety of intrinsic and extrinsic rewards. Employees are expected to receive substantial intrinsic rewards directly from performing their jobs and participating in decision making. Extrinsic rewards are geared toward fostering good performance rather than controlling substandard output and tend to focus on the work unit rather than the individual. Base pay tends to be salary, augmented by profit-sharing and gainsharing plans of various types as well as by employee share ownership. Pay is often person-based (i.e., pay for knowledge) rather than job-based, in order to promote skills acquisition and flexibility within the organization. The implicit assumption in the high-involvement strategy is that employees are intrinsically motivated by both the job itself and the opportunity to participate in profit-sharing, gain-sharing and employee share ownership plans. Because of the complex behaviour and high performance levels required in high-involvement organizations, compensation systems are usually more complex than those in firms using the other two managerial strategies.

Question 18

Explain the nature of the complementary and substitute interrelationships that can exist among the five structural variables. Provide examples.

Answer 18

If structural variables are complementary, they must occur together for any of them to be effective. For example, decision making, leadership, communication and information are complementary in many situations. A classic benefits-related example relates to any retirement income arrangement that qualifies as a capital accumulation plan (i.e., a plan that allows members to make investment decisions among two or more investment options in a plan, such as how much to contribute and how much to contribute to any particular investment option). Members must also make decisions during the decumulation stage when they are nearing retirement. Members must have enough knowledge to select payout products that best meet their needs.

If structural variables are substitutes, the presence of one negates or minimizes the need for another. For example, profit-sharing or gain-sharing systems (or preferably both) can serve as substitutes for managerial control.

Question 19

Explain the role of organizational culture in guiding employee behaviour under the classical, human relations and high-involvement management strategies.

Answer 19

“Organizational culture” is the set of values, guiding beliefs, understandings and ways of thinking that are shared by members of an organization. A strong culture can play a major role in shaping behaviour within an organization; it can supplement an organization’s structure or it can substitute for it. For example, in an organization with a high-involvement management style, the need to stay flexible can result in very little formal structure, because strong organizational culture is a substitute for structure. Classically managed organizations depend more on the formal structure to get the employee behaviour they want, so they focus very little on organizational culture. Human relations organizations use both formal structure and culture to shape employee behaviour.

Question 20

Explain how the environment in which an organization operates influences the type of managerial strategy it should adopt.

Answer 20

Of the five contextual variables—environment, business strategy, technology, organization size and workforce—the environment in which an organization operates is the most important. The two key issues are:

(1) Whether it is stable or unstable. An unstable (dynamic) environment exists where product or service lifecycles are short, product or service demand is volatile, customer needs change quickly and unpredictably, technologies change rapidly, new competitors enter the field often and the regulatory environment is unpredictable. Organizations generally have little control over the level of stability in the task environment.
(2) Whether it is simple or complex. If the environment is complex, the organization has many distinct product or service domains, technology is complex and there are many factors that can influence success. While organizations don’t have much control over the degree of stability in their environments, they do have some control over the complexity of their task environments.

Because of their rigidity, classical and human relations organizations have great difficulty operating successfully in dynamic, unstable environments. If a task environment is complex but stable, a classical or human relations approach can be effective. By contrast, when task environments are dynamic, complexity compounds the uncertainty facing an organization. Neither classical nor human relations organizations are able to adapt quickly to environmental change. Generally a highinvolvement approach is needed where environments are highly unstable, dynamic or complex.

Question 21

Explain the Miles and Snow defender typology of business strategy and its implications for the managerial strategy.

Answer 21

The “defender business strategy” focuses on dominating a narrow product or service market segment and excelling in it, based on a combination of product quality and price. A defender organization may not always be the low-cost leader, but it will always try to provide the best possible quality/price trade-off so that its products offer the best value to customers. The key word for the defender strategy is “consistency.” Defenders need to identify the most efficient process by providing a product or service and then locking it in. For defenders, the classical or human relations approaches are most appropriate. The classical managerial strategy generally works well for manufacturing and human relations for service enterprises, where there is extensive contact with customers.

Question 22

Explain the Miles and Snow prospector typology of business strategy and its implications for the managerial strategy.

Answer 22

The “prospector business strategy” focuses on identifying and exploiting new opportunities quickly. Prospectors tend to move on to other new products or services as competitors move into the market. Competitors can copy the product and mass produce it at a lower cost than the prospector can, because competitors don’t have to include development costs or costs of failed products in their pricing structures. The key word for the prospector strategy is “speed.” Prospectors need to identify opportunities quickly, and the organization needs to be flexible and dynamic enough to get them to market quickly. The high-involvement managerial approach is the most appropriate for the prospector business strategy.

Question 23

Explain the Miles and Snow analyzer typology of business strategy and its implications for the managerial strategy.

Answer 23

The “analyzer business strategy” focuses on exploiting new opportunities at a relatively early stage while maintaining a base of traditional products or services. The key word for the analyzer business strategy is “balance.” There is a need to balance stability and flexibility. This often requires a hybrid or dual organization structure— one that promotes speed and flexibility for new product development and one that promotes stability and consistency for established products. Analyzer organizations are typically not the first to offer new products or services, but they do enter these markets early, after prospectors have identified them. They are generally less efficient in production than defenders, but are able to get their products on the market before defenders. Analyzers likely operate best with a high-involvement managerial approach for new product development and a classical approach for established products. Because it is difficult to practice two such divergent management strategies in the same organization, analyzers often end up practising a compromised human relations strategy across the board. This can be successful provided the environment is not too dynamic.

Question 24

Explain Porter’s low-cost and focused low-cost typologies of business strategy and their implications for the managerial strategy.

Answer 24

A “low-cost business strategy” depends on providing low-cost products or services to a broad range of customers. A “focused low-cost business strategy” depends on providing low-cost products or services to a narrow range of customers. The classical managerial strategy is best suited to these two approaches.

Question 25

Explain Porter’s differentiator and focused differentiator typologies of business strategy and their implications for the managerial strategy.

Answer 25

A “differentiator business strategy” depends on providing unique products or services to a broad range of customers. A “focused differentiator business strategy” depends on providing unique products or services to a narrow range of customers. Because these strategies depend on innovation and creativity, they seem best suited to the high-involvement managerial strategy.

Question 26

Explain how the size of an organization influences the type of managerial strategy an organization chooses.

Answer 26

Because of the need to coordinate and control large numbers of people, large organizations generally use classical or human relations strategies. In general, it is easier to implement high-involvement in small- to medium-sized organizations, because the larger the organization, the greater the need for some formal structure. Some large organizations have resolved this problem by segmenting the organization into a series of relatively small units and then practising high involvement in these units.

Question 27

Explain how the nature of an organization’s workforce influences the type of managerial strategy it chooses.

Answer 27

Employees’ skills, educational characteristics and expectations have an impact on the choice of managerial strategy. Highly skilled, well-educated or professional employees are generally more suited to a high-involvement organization. A high-involvement organization requires these characteristics because of the broad job and decision-making responsibilities that employees are expected to assume. The classical managerial strategy is appropriate for organizations in which employees have relatively low skill levels. Because of the classical approach to motivation and control, this strategy is most appropriate where there are poor economic conditions and in areas with high unemployment and a low standard of living. In contrast, the human relations strategy is appropriate for organizations with a relatively low-skilled workforce, because the organizations don’t need to depend on poor economic conditions for their motivational policies since they offer both economic and social rewards.