Compensation Strategy

Compensation Strategy

What type of jobs have you had? Did you work in construction and get paid by the hour? Or did you work in retail and get paid on commission? What about your friends or family members? Did they get a regular salary for working in an office, or did they get paid for a service that they provided? Whether you are an HR professional, a salesperson, a doctor, a labourer or a caregiver, the way in which you are paid may differ from the way another person is paid.
A compensation strategy helps organizations to determine how to pay individuals for the work that they do. This module will help you to understand the components of a compensation strategy and will give you the tools to build one.
Learning Outcomes
By the end of this module, you should be able to:
• Identify components of a compensation strategy
• Evaluate advantages and disadvantages of a compensation strategy
• Analyze methods for establishing base pay (market pricing, job evaluation, pay for knowledge/skills)
• Understand the difference in compensation for different classes of workers, including executive, permanent, temporary, full-time and part-time employees
• Understand the laws that affect the design of a compensation strategy
• Create a compensation strategy
Components of a Compensation Strategy
A compensation strategy describes an organization’s plan for how it will remunerate its employees. This strategy is a key driver of the organization’s compensation and reward programs.
In order to formulate a compensation strategy, an organization needs to consider which components and levels of compensation and rewards should be included in its strategy. In Module 1, we explored the different types rewards which include direct compensation (such as salary or hourly rate of pay); indirect compensation (such as benefit and retirement plans); and, non-financial compensation (such as recognition and wellness programs).
Organizations may have different views in terms of which types of rewards they will offer. In Module 2, we learned about different types of managerial strategies. These strategies, which help to define the values and behaviours they want employees to exhibit, strongly contribute to the creation of the compensation strategy. An organization that demonstrates a classical managerial strategy may have a very different compensation strategy to an organization that demonstrates a high involvement managerial strategy.
After reading these articles, think about places where you have worked and what compensation strategies may have been in place.
• 5 Steps to a Compensation Strategy (10 pages)
• Key Components of Compensation (6 pages)
Compensation Strategies
Compensation strategies help organizations to determine how they will pay their employees. These strategies are typically aligned to an organization’s business objectives and serve as tools to communicate to employees the organization’s position regarding pay and level of competitiveness. Compensation strategies also serve to help recruit, retain and motivate employees.
Base Pay
Base pay is generally the starting point of discussion in any compensation strategy and often makes up the largest component of an employee’s compensation package. Base pay is provided for time worked and is given as either a wage (when calculated on an hourly basis) or a salary (when calculated on a weekly, monthly and annual basis).
There are both advantages and disadvantages to base pay. Advantages of base pay may include:
• It is measurable and can define the importance of roles
• It may be influenced by employee performance when certain behaviours are demonstrated
• It is a guaranteed form of payment (unlike a commission which is based on the necessity to sell a product before a payment is awarded)
• It is easy to administer
However, there are disadvantages to base pay. These disadvantages may include:
• It is a fixed cost to an employer even when an employee is not demonstrating the required level of performance
• It may not motivate the required behaviours that employees are expected to demonstrate
After you read this article, think about what other advantages or disadvantages there are to base pay.
• The Advantages and Disadvantages of Salary (7 pages)
Performance Pay
Performance pay (also known as incentive pay, variable pay or at-risk pay) is another type of financial reward that may be included in a compensation strategy. Performance pay is typically awarded when specific performance results are achieved. For example, an organization may provide remuneration to employees for achieving individual, group/team or organizational objectives.
There are advantages to properly designed performance pay plan which may include:
• They define the key behaviours necessary to achieve the award
• They support the managerial strategies of the organization
• They reduce organizational compensation expenses when performance results are not achieved
However, like base pay, there are also disadvantages to performance pay which may include:
• They may not achieve the desired performance results
• They require more expertise to establish the funding and administration of the plans
• They may place an organization in a more financially disadvantaged position if a significant portion of an employee’s compensation package is based on performance pay and all performance objectives are overachieved
• They may cause employees to focus only on the behaviours that are being measured but not other necessary behaviours
Ask yourself, what can an organization do to ensure its performance pay plans are as effective as possible?
• Do Variable Compensation Plans for Employees Really Work? (4 pages)
Indirect Compensation Components
Organizations may also use other types of indirect or non-financial compensation components in their compensation strategy. These types of rewards are in addition to base and/or performance pay and are something that costs the employer money. The major components of indirect pay that are typically included in the compensation strategy are:
• Federally/provincially legislated benefits – such as Canada Pension Plan (CPP), Employment Insurance and Workers’ Compensation Benefits
• Deferred income plans – such as retirement or pension plans
• Health and Dental benefits – including life insurance, disability insurance
• Pay for time not worked – such as paid holidays and other leaves
• Other programs – such as wellness or recognition programs
Advantages of indirect and non-financial compensation programs may include:
• They help an organization achieve a competitive position by offering programs that may be attractive to potential employees by satisfying both extrinsic and intrinsic drivers
• They reinforce the organization’s managerial strategy
• They can reduce other organizational expenses (such as lost productivity if an employee is away from work due to illness) by providing resources to employees (such as fitness programs, health insurance or employee assistance programs) which help to keep employees healthy and supported if they need to be away from the workplace
Disadvantages of indirect and non-financial compensation programs may include:
• The financial cost(s) of program(s) may be substantial and are fixed expenses
• It may be difficult to remove a program once it is offered to employees – employment law may prevent this from happening and/or it may create negative reactions by employees if removed
• Not all programs meet the needs of all employees (there is not a one-size fits all solution) especially if few choices are offered to employees
• Administration of programs may be burdensome
After reading this article, think about a place where you have worked where you may have received indirect/non-financial compensation. Did it satisfy your needs and motivate you to perform?
• Pros and Cons of Employee Benefits
Comparing Compensation Strategies
Once an organization considers all the direct and indirect forms of compensation to use in its compensation strategy, it then needs to consider the level (or amount) of each that they wish to include. In order to do this, an organization will determine how they wish to compare themselves to external competitors. There are different ways in which they may approach this:
• match the market – meaning they will provide comparable direct/indirect rewards
• lead the market – meaning they will provide greater rewards
• lag the market – meaning they will provide lesser rewards
• use a combination of the above
The following articles help to explain these different concepts and looks at the advantages and disadvantages of each.
• Resources, Tools and Samples
• How a Pay for Performance Compensation Strategy Pays Off (6 pages)
Methods for Establishing Base Pay
As you just learned, base pay often makes up the majority of an employee’s compensation package. But how an organization determines the amount of base pay that an individual is to receive is based on:
• The evaluation of the job – how it compares to other jobs in the organization
• The market value of the job – the “going rate” for the position in the market
• The knowledge to do the job – the skills or competencies required to do the job
Job Evaluation
Job evaluation is the process of determining the relative worth of a job compared to other jobs within an organization. The approaches to job evaluation can be quantitative (fact based) or qualitative (observation based) in their approach.
We will learn more about job evaluation in Module 6 but for now, take a look at these articles to explore the advantages and disadvantages of job evaluation in establishing base pay.
• The 5 Key Benefits of Job Evaluation (8 pages)
• Advantages and Disadvantages of Job Analysis (6 pages)
Market Value of Jobs
Determining the market value of a job is another way of establishing base pay. The market value can simply be defined as the “going rate” for the job. Organizations may use different methods for determining the value of a job – anecdotal/instinctual or data derived.
In an anecdotal or instinctual approach, organizations may look at what a previous incumbent was paid or may look at the rates of pay for other similar roles within the organization. Additionally, recruiters may provide insight into the “going rate” or information will be sourced directly from other HR professionals at other organizations. Or, an organization may just pick a number based on their own determination of the value of the role.
What do you think are the advantages and disadvantages to each? This article may give you some insight into your response.
• Hot to Determine a Job’s Market Value
Pay for Knowledge
Unlike job evaluation, which bases pay on a ranking system, pay for knowledge involves paying an individual based on their capabilities. Pay for knowledge may include paying an individual for certain competencies, education level, or skills.
Competencies are demonstratable knowledge, skills and attributes an employee requires to do a job well. Generally speaking, a competency-based approach is often found at the professional or managerial level. In organizations with a competency-based approach to base pay, pay raises are provided when employees achieve a specific level of competency.
The advantages of competencies are that they are driven by an organization’s values and contribute to the workplace culture. Organizations who align core and job-specific competencies with their values, can communicate their desired behaviour expectations to all employees.
The following article highlights how competencies reinforce organizational culture. Before reading this article, think back to what you learned about the importance of workplace culture in Module 2.
• How to Align Competencies with Core Company Values (11 pages)
Compensation for Different Classes of Workers
You have now learned that there are many components that go into the formulation of a compensation strategy. But, does one approach to compensation work for a given organization?
Within an organization, there may be many different types of classes of workers. These may include:
• Operational/Support employees – such as maintenance workers, labourers, administrative staff
• Professional employees – such as HR, Finance or Technology staff
• Managerial employees – such as Managers or Directors
• Executive employees – such as Senior Vice Presidents or CEOs
In each of these classes, employees may be compensated on an hourly or salaried basis. They may be employed on a full-time or part-time contract. Their position may be a permanent or temporary in nature. Some employees may also be working on a seasonal basis (such as a farm labourer), as an intern (such as a student completing a program of study) or even as a volunteer. So, what does all of this mean? The following article will help you to better understand these differences.
• Types of Employment (6 pages)
The Impact of Canadian Law on Compensation Strategies
Organizations in Canada are governed by either federal or provincial labour laws which ensure that employees are treated fairly when it comes to:
• Minimum wage
• Annual vacations or other types of leave
• Public (statutory) holidays – such as pregnancy/parental leaves
• Hours of work, including standard hours, overtime and emergency requirements
These types of labour laws are known as Employment Standards legislation. Each province has its own governing Employment Standards legislation. Organizations that are covered under the federal labour laws are covered by the Canada Labour Code (which is equivalent to Employment Standards).
In addition, provincial or federal law also establishes rights for employees that prohibit discrimination on issues such as gender, ethnicity and race. Provinces may also have laws surrounding pay equity, which has been based on past pay practices whereby female employees were remunerated less than male employees.
Additionally, if an organization’s workforce is unionized, there may be additional standards identified in their Collective Bargaining Agreement which may be greater than that which is required by law.
As an HR professional, it is important to be aware of the federal and provincial laws that may govern your organization.
Employment Standards Legislation
As you have just read above, Employment Standards legislation sets forward the minimum requirements that an employer must provide to its employees. Employers do have the ability to provide more than the minimum.
When it comes to establishing pay in an organization, this legislation dictates the minimum rate of pay along with rules around overtime pay and maximum hours of work for different classes of workers.
If you are interested in learning more about Ontario’s Employment Standards legislation, you can read more about it here:
• Employment Standards
Human Rights Legislation
In Canada, Human Rights legislation prohibits discrimination in hiring or employment on the basis of race, ethnicity, religion, gender, marital status and age. These rights are protected by federal, provincial and territorial laws.
In Canada, The Canadian Human Rights Act was established in 1977, later followed by the Canadian Charter of Rights and Freedoms of 1982.
• Human Rights in Canada (3 pages)
In Ontario, the Human Rights Code was first enacted in 1962 and the Code prohibits discrimination based on a protected “ground” or “social area.” For more information on Ontario’s Human Rights Code, check out this link:
• The Ontario Human Rights Code (2 pages)
When it comes to developing compensation programs and to comply with Human Rights laws, organizations must be able to demonstrate that differences in the way they pay employees is related to the requirements of the job and the competencies or skills required to do the job. Organizations cannot pay employees based on things such as ethnicity or gender. Ontario, along with other provinces and territories, also set out laws around pay equity which state that an employer cannot pay one employee at a rate of pay less than another employee, on the basis of sex. For more information on pay equity in Ontario, read this article:
• What is Pay Equity? (2 pages)
Collective Bargaining
The Canadian labour market has an extensive history spanning over 100 years to protect the rights of workers. Many of these labour movements occurred before the development of Human Rights legislation and set forward demands around wages, pensions and social programs.
• History of Labour in Canada (6 pages)
Since then, trade unions continue to play a large role in determining the working conditions between employers and employers through the act of collective bargaining. Unions can help employees to negotiate things such as wages and hours of work that are of greater benefit that the Employment Standards minimum legislative requirements. The following article will provide you with more information on the role of unions in the Canadian workplace.
• The Role of Unions in Canada
Learning Activities
1. Discussion
These activities are not graded, but essential to prepare you for evaluations in the course.
Do not skip the practice activities, they help you prepare for your upcoming assignments.
To complete this learning activity, access the discussion:
Discussion 1: Compensation Strategies
To learn how to access and use the discussion forums, read Discussions under the Evaluations module.
2. Assignment 1 (See Detailed Course Schedule)

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