ADMS 3490: Lecture 2

The Concept of fit and strategic compensation

A TALE OF TWO FIRMS:

• Koch Foods

o Use to be British was then bought out by an American company

o Processes chicken

o Compensation systems in facturies such as this is to provide minimum wage to

most employees and to only provide benefits required by law

o Turnover was 100% meaning everyone that came to work left

o Despite the very high turnover rate Koch foods would is not worried because the
skills needed and training provided is very minimum. And their main concern is
profit because they need to stay competitive.

• L-S Electro-Galvanizing (LSE)

o Steele company

o This company pays more than other companies in the industries, more benefits,
skill based pay, ect.

Which compensation system is the most effective?

• There is no compensation system that is most effective, each system works in its
context, both pay systems are good because they fit the context of the
organization.

LSE

 Complex jobs

 High pay

 Skill-based pay

 Excellent benefits

Koch Foods

 Chicken processing

 Minimum wage

 No fringe benefits

Market Basket Foods

 • Profote sharing plans for employees was what the company did before the CEO was
fired.

• The new leadership chose to give more to the shareholders and take money away from
the employees.

• Employees here had great benefits, personal connection to the company, more than
above average pay comparing to other grocery stores.

• As a result this firm has very loyal employees

• at the end Arthur T ( the good guy) got most of the company back from Arthur S and the
pay system continued as it was

• good example for profit sharing

An organization can be conceptualized in many ways. One is that it’s a cyber nectic system; it
has inputs which are transformed into useful outputs (ones which society finds useful), which
makes the organization self-sustained.

Four main types of inputs: human, information, physical and financial. Taking the input
resources and applying procedures to them creates the outputs.

A Strategic Model

Mission, Vision, Values ( we use these to drive core principles, every decision the
company makes must reflect the values of the company. Good mission and vision
statements are simple, short, easily remembered, it motivates)

SWOT

Strategy ( strategy is putting legs on an abstract idea, a company’s strategy should

optimize the strength and opportunities while neutralizing the weakness and threats.

Unit/Functional Strategy/Mngr Strategy ( marketing, operations, finances)

Compensation Strategy

Attitudes ( job satisfaction, organizational identification)

Employee Behaviours

Strategic plan includes:

• Vertical integration (fit) is the alignment of everything vertically that support the vision of
the company

• Horizontal integration (fit): there should be coordination between all the departments of
the organization to know they are working together for the same mission

3M example: 3M is very well known for innovation. They make computers, machinery, electrical
products, they are a global company with headquarters in the US. They emphasis creativity and
innovation of their employees. They designed the company around being the most innovative
company in the world. 20% of their new products should be put on the market within 5 years
( that’s one of their operating principles) it means every year they drop a product and add a new
one. Everyone in the company is driven to create new products to satisfy the vision of the
company. Focus on 3M compensation, when employees display creativity and help the profits of
the company they are rewarded very well. ( the sticky note story) if employees are rewarded
well for their creativity, their attitudes and behaviors are driven to productivity which results in
good profits for the company.

Questions

 Which of the following is not part of the strategic framework for compensation?

a. Resource providers
 b. Structural variables

c. Contextual variables

d. Managerial strategy

Managerial Strategy and Reward Systems

Structural variables can be together in numerous ways to determine managerial strategy
Three main types: ( These are the categories that all organizations fit into)
- classical ( direct supervision, task oriented, we don’t trust employees to do their job and think
they will slack off, pay system is base rate, a little to no benefits, piece per work.
- Human relations ( okay pay, a lot more benefits, paternalistic, the bosses think employees are
their children)
- high involvement ( trust the employees, work environments are conducive, more freedom in
the work time, team and project oriented, lot of stocks and profit sharing, less individual pay)

Comparison of the Three Managerial Strategies and Their Structural Implications

Structural Variable Classical Managerial Strategy Human Relations

Job Design Thinking separate from doing; narrow, fragmented Similar to classica
jobs more social
contact

Coordination and Strict, formalized pyramidal hierarchy emphasizing Similar to classica

Departmentation accountability; vertical coordination (by superiors); teams
departmentation by function

Structural Variable Classical Managerial Strategy Human Rela

Control External—through supervision, rules, External—th

punishments, rules,
and some extrinsic rewards some extrins

Communication Formal and vertical; Use of forma

restricted communicat
some restric

Structural Classical Managerial Human Relations High-Involvement

Variable Strategy Managerial Strategy
Managerial Strategy
Decision Autocratic decision Autocratic decision making Participative or democratic
Making making; task-oriented; with minor consultation;
controlling decision style; both task- and
and employee-oriented;
Leadership supervisory role controlling employee-oriented; facilitator

supervisory role supervisory role

Reward Extrinsic economic Extrinsic economic Intrinsic rewards from job

Systems rewards related to rewards, unrelated to itself; pay for knowledge;
individual output performance;
extrinsic rewards focusing on
(e.g., piece rates, liberal fringe benefits
commissions) (indirect pay) and loyalty group/organization
rewards; performance
or to time worked
social rewards (e.g., gain sharing, profit
(e.g., hourly pay) sharing, stock ownership)

Determinants of the Most Appropriate Managerial Strategy

Miles and Snow Typology of Corporate Strategy

Porters typology of corporate strategy graph: Low cost (Walmart), Focused low cost (southwest
airlines), differentiator and focused differentiator.

Question

Which of the following leadership styles is appropriate for companies pursuing a classical
managerial strategy?
a. The leader is controlling and employee-oriented
b. The leader is controlling and task-oriented
c. The leader gives free rein to employees
d. The leader is facilitating and both employee- and task-oriented

Trends in Managerial and Compensation Strategies

  The Evolution of Managerial Strategies

• Evolution of management theory: scientific management/classical, human relations, high

involvement

• The Hawthorne experiments ( the one with the lights, this drove the human relations
movement)

• Scientific era evolved the factory system

The Evolution of Managerial Strategy

• Changes in society, the economy (e.g., manufacturing vs service), demographics, etc.

have induced change
• Pressures from globalization
• Rapid evolution in some instances; not much in other cases

Trends in Compensation Systems

“Traditional” Systems
- High base pay, low variable
“New” Pay Systems
- Competitive base pay
- Some merit, individual incentives
- More emphasis on group and organizational level pay-for-performance systems
Pay systems vary by employee category: executive versus lower level employee

Compensation is comprised of four core elements:

Fixed pay Variable pay

Also known as "base pay," fixed pay is nondiscretionary
compensation that does not vary according to
performance or results achieved. It usually is
determined by the organization's pay philosophy and
structure.
Also known as "pay at risk," variable pay changes directly
with the level of performance or results achieved. It is a
one-time payment that must be re-established and re-
earned each performance period.

Short-term incentive pay Long-term incentive pay

A form of variable pay, short-term incentive pay is
designed to focus and reward performance over a
period of one-year or less.
A form of variable pay, long-term incentive pay is
designed to focus and reward performance over a period
longer than one year. Typical forms include stock options,
restricted stock, performance shares, performance units
and cash.

Types of Compensation
Base Wages
Variable Pay
Salary Pay
Hourly Pay
Commissions
Piece Rate Pay
Team-Based Pay
Bonus Programs
PremiumPay
Incentive Pay
- Short-term
Shift-Differential
Profit Sharing
Pay
- Individual Performance
Weekend/Holiday Pay Based
Incentives
On-call Pay
- Performance-Sharing
Call-In Pay Incentives
- Long-term
Hazard Pay
- Restricted
Bi-Lingual Pay Stock
- Performance
Skill-Based Pay Shares