Compensation Analysis- Case Study

Compensation Analysis- Case Study

Compensation Analysis Document

When approaching a case study on compensation, follow this outline to help you with your analysis and to ensure you have not missed something important.

Executive Summary

An executive summary is a short section of a document, produced for business purposes, that summarizes a longer report in such a way that readers can rapidly become acquainted with a large body of material without having to read it all.

Company Analysis

Always start your case study with a summary of the Company you are analyzing. This summary should include the following points:

  • What the Company does; i.e. products produced or services provided.
  • Location of the Company; include address if you have this information. The corporate head office address is appropriate or you can add the city and country if an exact address is not available.
  • Hours of operation.
  • Demographics of the employees; i.e. if you know the following information, include average age, average years of service/tenure, skills and education required, if they are happy.
  • Union or non-unionized environment.
  • The challenges facing the Company.
  • The unique advantages the Company offers its clients or the competitive advantage they have in the industry.
  • How is the financial well-being of the Company?
  • What is the background in creating the Company? Why did the owner want to create the Company?
  • Who are the customers? If you have the customer information, include what you know about their demographics; i.e. age group, socio-economic status, why would the customers be interested in the product or services?

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Compensation Analysis

Your analysis of the compensation strategy requires you to think of two questions:

  1. What proportion of the total compensation mix should base pay be?
  2. What method should be used for establishing base pay (job evaluation, market pricing, or pay for knowledge)?

These questions will help you understand where the Company is currently positioned and will provide an understanding if something needs to change. Something needs to change if more than one of the following occurs:

  • High turnover.
  • Financial problems.
  • Employees are thinking about unionization.
  • Satisfaction or engagement levels are decreasing.
  • Management and employee relations are strained.
  • The Company is losing business; for example competitors are stealing market share.

Note: All of the above changes are measures or Key Performance Indicators (KPIs) used in companies to help gauge success and impact the ability to achieve corporate goals. Compensation Analysis- Case Study

Think about the rewards the Company is offering its employees:

  • Extrinsic rewards: these are the rewards for survival. These rewards are tangible and allow for shelter, food, clothes, etc.
  • Intrinsic rewards: these are the rewards that provide a sense of achievement. These rewards can be a sense of fulfillment, added responsibility, these are parts of the job that provide pride and a sense of accomplishment.

Ask yourself the following questions:

  • Are the rewards competitive?
  • Are the rewards legal? For example, do they meet legislative requirements?
  • Is procedural justice evident? That means, procedures are in place to ensure the strategy is fair. Think about how the strategy was communicated, was the strategy created by a person who has the right skills and qualifications?
  • Is distributive justice evident? That means, the distribution of the compensation strategy is fair. For example, are salaries created based on job analysis, job evaluation, market share, pay for knowledge, you need to prove there is equity in the distribution of salaries and rewards.

Every Company uses four resources in their business and these resources are transformed to create outputs that contribute to the success of the Company.

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Example:

The Resource The Transformation The Outputs
Human Resources Training, minimum

qualifications, skill sets required

Knowledgeable staff, qualified staff, efficiency and effectiveness in problemsolving
Information This depends on what information you are using or collecting. From whom are you collecting information? Why is the information you are using important? The output is how you will use the information. What decision(s) will you make, how will the information help you achieve your business goals or give you a competitive advantage? Do you need to consider warranties or any other information that will impact success?
Capital Consider what capital is in the Company; for example, raw materials, equipment, the other assets owned by the Company. This is the final product or service. It can also be inventory.
Financial Consider why the money is important; consider what the financial resources help the business accomplish. This can be cashflow, payroll, bonuses, taxable benefits, or special programs for staff.

Contextual Variables

Contextual variables impact your organization and the compensation strategy you put in place in your organization.

There are five contextual variables. These variables are important because once you analyze each of the contextual variables you can determine the most appropriate managerial strategy for your organization. Look at each of the contextual variables and discuss how they relate to the organization you are analyzing; indicate the most appropriate managerial strategy for the organization.  The five contextual variables are:

  1. Task environment and domain: you can use your Company analysis to help you create the task environment and domain of the Company. These are the specific products or services offered by the organization.
  2. Business Strategy: The organization’s plan for how it will achieve its goals. You should also look at Miles & Snow typology and Porter’s typology to understand how the organization will accomplish its goals, which are measured by Key Performance Indicators (KPIs).
  3. Organization Size: How large is the organization and is it the most appropriate size to achieve the goals?
  4. The Workforce: Consider the nature of the workforce that is needed to accomplish the goals of the organization. Does the workforce need a minimum level of education, any special skill sets required, will shift work be required, and will employees be part of a union?
  5. Technology: Technology should be used to increase efficiency and effectiveness in the organization. How will technology be used and if technology changes in the organization, how will this impact the workforce and the business strategy? For example, will there be a loss of jobs, will new skills be required, and will productivity suffer if a learning curve exists?

Structural Variables

Once you understand the necessary management strategy, you can start organizing tasks and how they should be accomplished to elicit the behaviours you want in your organization. There are six structural variables that can help you create stability in your organization and you need to discuss how they relate to the organization you are analyzing. Compensation Analysis- Case Study

The six structural variables are:

  1. Job design: Describes the manner in which the total task of an organization is divided into separate jobs. You can measure how many processes are used to produce the final product and the amount of time it takes.
  2. Coordination and departmentation: The methods used to coordinate the work of individuals and sub-units.
  3. Decision-making and leadership: The nature of the decision-making and the leadership processes used in the organization. You can discuss the management systems in place and the measures the organization uses to determine its level of success. For example a quality system might measure the number of defective parts.
  4. Communication and information: The nature of the information shared and the methods used in sharing information in an organization.
  5. Control system: The nature of the processes used to control behaviour in the organization; for example, an employee handbook or performance evaluation. Measures of control can include the number of people who attended a formal orientation and the number of performance appraisals completed each year.
  6. Reward system: The type of extrinsic and intrinsic rewards that motivate individuals and reinforce the desired behaviours required to achieve goals.

Management System

Based on your analysis of the contextual and structural variables, determine the different systems that may be impacted to achieve your goals. These systems are measured for their success and impact in the organization. Key Performance Indicators are used to measure the success of each system. Key Performance Indicators can be set by using industry averages, evidence based data, which results from research, or internal targets for improvement. Compensation Analysis- Case Study

The management systems may include, but not be limited to the following:

  1. Quality systems: Standards and process improvement.
  2. Performance management systems: Performance evaluations.
  3. Policies and procedures: Employee handbooks and corporate orientation.
  4. Information systems: Proprietary information, privacy, intellectual property.
  5. Talent management systems: Recruitment, selection, retention.
  6. Change management systems: Transforming the business.
  7. Project management systems: Executing plans for achieving your key performance indicators (goals).
  8. Risk management systems: Items that could jeopardize the effectiveness of the organization.
  9. Health and safety systems: Items that contribute to the employees’ safety while working and maybe beyond the workplace.

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Compensation Mix and Related Measures of Success Base Pay

Base pay is the foundation pay component for most employees, usually based on some unit of time worked. Base pay can be segmented into pay grades and pay ranges. Base pay is the main component used to attract individuals into an organization. An organization’s compensation strategy will be considered as one of three categories in the industry in which it operates, these categories include leading, lagging, or matching the market. There are three ways in which base pay can be calculated; these include:

  1. Pay for knowledge
  2. Market pricing
  3. Job evaluation

The effectiveness of your base pay can be measured through retention, the number of complaints re: compensation, and time it takes to hire for hard to fill vacancies.

Merit Pay

Consider the different levels of merit pay in the organization and why you want to include merit pay/performance pay in your organization.  

There are three levels of merit/performance pay and each have a measure that is used to define success or an upper limit to ensure distributive justice:

  1. Individual; examples might include piece rates, commission, special incentives, nonmonetary rewards.
  2. Group; examples include goal-sharing, gain-sharing, non-monetary rewards.
  3. Organization; profit sharing, stock options.

Indirect Pay

Often referred to as “employee benefits”, these are nonmonetary items or services that satisfy a variety of specific employee needs. Nonmonetary rewards are used to increase employee motivation to achieve goals. Services are intended to assist employees and their families with unexpected emergencies and create a sense of wellness, which contributes to the ability to come to work and contribute to the organizational goals. There are six categories of indirect pay and each have their own advantages and disadvantages. Compensation Analysis- Case Study

The measures of indirect pay include retention rates, benefit costs and utilization, achievement of goals, legislative compliance, and the use of sick time.

Goals for the Reward and Compensation System

Your compensation system should achieve as many of these goals as possible:

  1. Promote achievement of the organization’s goals.
  2. Fit the structure and the business strategy of the organization.
  3. Attract and retain qualified staff.
  4. Promote desired employee behavior.
  5. Be equitable.
  6. Comply with the law.
  7. Be financially feasible.
  8. Achieve the above noted goals in the most-cost effective manner.

Your Recommendation

Once you have the preceding information analyzed and sorted, you can recommend what your compensation strategy would include. Your compensation strategy has a mix of basic pay, indirect pay, merit/performance pay and should motivate all different levels of your organization.

To ensure procedural justice you need to determine if you will use market information, pay for knowledge, or job evaluation to create your direct pay.

To ensure distributive justice, you need to make sure when you provide rewards, you do it in a manner that is fair, and that people understand and that the standards set can be achieved by all individuals.

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