These examples show that reward systems can have powerful effects on behaviour, but that the behaviour we get is not always the behaviour we want. How can we design reward and compensation systems that produce the behaviour we want, while avoiding the behaviour we don't want? How can we predict, before the fact, whether a proposed reward and compensation system is likely to lead to the behaviour we want? Answering these questions is what this book is all about.

However, there are no simple answers. First of all, in many fields, the employee behaviour that companies need has become more complex, and a higher level of performance is required than in the past. In general, the more complex the behaviour and the higher the level of performance required, the more complex the compensation system needs to be. Second, there are now more choices of compensation practices available than ever before, and choosing among these is no simple task.

There is no "one best" compensation system that fits all firms. For every successful compensation practice described in Compensation Today 1.1, examples can be found where the same practice was a complete flop. Understanding why the same compensation system that is successful in one firm fails at another firm is an essential precondition to successful compensation design.

Why should you study compensation? For many students, this is a required course in a degree, diploma, and certificate program. It is a key component of the national and provincial certification examinations. Compensation may also be a key aspect of the jobs that some do; thus, they study it. And a career in compensation is very rewarding. There are several jobs and career paths within the compensation field, including job evaluation specialists, payroll administrators, benefits specialists, and executive compensation consultants. The pay varies for these jobs in Canada (and you will learn why this is the case as you progress through this text); on average, however, compensation professionals tend to be among the highest paid among human resource practitioners.

Many organizations regard their compensation system as a cost to be minimized; others, however, believe that compensation can do much to help the company carry out its strategies and achieve its goals. Here are some examples that span the alphabet (well, not every letterthat would make the chapter too long!):

At Adobe Systems Canada, a market-leading software firm, all employees participate in profit-sharing and employee share purchase plans; they also receive family-friendly benefits such as flexible working hours, telecommuting, and maternity leave top-up payments. The point is to recognize the high degree of commitment that Adobe employees display.

At Boeing Canada's Winnipeg Division, which produces components for Boeing's new 787 Dreamliner aircraft, unionized employees participate in a gain-sharing program, under which they share in any cost savings they help generate. The company believes that this program cuts waste and boosts productivity.

At Canadian Tire, management attributes a great deal of the firm's success to its employee profit-sharing plan, which it believes has led to a more committed and motivated workforce than is usual in the retail business.

At Herman Miller, a large manufacturer of office furniture, the centrepiece of the compensation strategy is a gain-sharing plan under which employees share in company productivity gains. This plan supports the company strategy of delegating a high amount of responsibility to employees.

At RBC Financial, management is integrating performance pay elements into compensation packages for all employees in order to support the firm's increased focus on customers and performance. In the past, virtually all employees in the banking industry were paid fixed salaries.

At the giant retailer Sears, measures of customer satisfaction are being factored into all employees' pay in an attempt to make the organization more flexible and customer-oriented. Executives are compensated based on customer and employee satisfaction, as well as on their financial achievements.

At Shell Canada's chemical plant in Sarnia, Ontario, pay is based not on the specific job an employee does, but on the number of jobs the worker is qualified to perform. The company believes that this radical departure from tradition has resulted in a more flexible and efficient workforce.

At Starbucks, all employees, including part-time baristas, are given stock options. This supports the company strategy of committed service from employees. In most organizations, stock options are limited to a few top executives.

At Vanderpol's Eggs in Surrey, British Columbia, management regards employee share ownership as vital to its managerial strategy, which is to create a partnership between owners and employees. Management believes that employee-owners are more committed and productive.

At WestJet Airlines, the profit-sharing and stock plans have made employees "owners." This pay strategy is aligned with the firm's strategy to develop employees' commitment and increase their participation and engagement. It has also spawned a culture that fosters teamwork.

At Zappos, the huge online retailer of shoes and other consumer products, the company works hard to create a culture of involvement and commitment among its 1,500 employees. The extrinsic rewards are not high (except for health care benefits); instead, the company relies on intrinsic rewards such as job autonomy and wide latitude for employees to make job decisions. For example, the amount of time that employees spend dealing with each customer call is not monitored, so employees can spend as much time as they see fit with each customer.

Henderson Printing is a small- to medium-sized manufacturer of account books, ledgers, and various types of record books used in business. Located in Halifax, the company has annual sales of about $12 million, mostly in the Atlantic provinces.

The owner, George Henderson, is a firm believer in making a high-quality product that will stand up to many years of use. He uses only high-grade paper, cover stock, and binding materials. Of course, this has led to high production costs and high prices. He also believes in a high level of customer service and is willing to make the products to customers' specifications whenever they so request. However, resetting the equipment for relatively short production runs of customized products takes considerable extra time and, of course, also drives up costs.

The firm employs about 80 people, most of whom work in production. The firm has a few supervisors to oversee production, but their responsibilities are not clearly spelled out, so the supervisors often contradict one another. There is no system for scheduling production; in fact, there are few systems of any kind. Whenever there is a problem, everyone knows that you have to go to George if you expect a definite answer.

The company also has several salespeople who travel throughout the Atlantic region; most of them are relatives of George or his wife. The company has one bookkeeper to keep records and issue the paycheques, and several office employees to handle routine administrative chores. The firm has no specialists in accounting, marketing, human resources, or production; George handles these areas himself, although he has no real training and little interest in any of them except production. He focuses most of his attention on ensuring product quality and on dealing with the countless problems that everyone brings to him every day. He has often been heard to exclaim, in his usual good-natured way, 'Why am I the only one who can make decisions around this place?" as he deals with each of these problems.

When George was growing up, both his parents (his father was a printer and his mother was a seamstress in a garment factory) had to work hard in order to scratch out a living for their family. In those days, employers who showed little consideration for their employees were the norm, and George resolved that things would be different if he ever became an employer. Today, George tries hard to be a benevolent employer. Although he feels the organization cannot afford any formal employee benefits, he often keeps sick workers on payroll for a considerable time, especially if he knows the worker has a family to support. George is well liked by most employees, who have shown little interest in unionization during the few approaches made by union organizers.

George has no formal system for pay and tends to make all pay decisions on the spur of the moment, so almost everybody has a different pay rate. He has never gotten around to giving annual raises, so any employee who wants a raise has to approach him. He gives raises to most people who approach him, but the amount depends on his mood at the time and on how well he knows the employee. For example, if the firm has just lost a major customer, raises are lower, and if the firm has just booked a large order, they are higher. They are also higher if he knows the employee has a family to support, or if the employee's spouse has been laid off, or if the employee has added a new member to the family.

George believes that a good employer should recognize the contributions made by employees during the year. So every Christmas, if profits allow, he gives merit bonuses to employees, which he says are based on their contributions to the firm. One day in early December, he sits down with his employee list, in alphabetical order, and pencils in an amount next to each name.

Everybody gets something, but the amounts vary greatly. If he can associate a face with the name (which is difficult sometimes, because new employees seem to turn over a lot), he tends to give larger bonuses. And if he can remember something such as a cheerful attitude, the bonuses are higher still. But if he remembers anyone complaining about that employee for some reason or another (he usually can't recall the exact reasons), the employee gets a smaller bonus. Not surprisingly, longer-term employees tend to receive much higher bonuses than new employees. He has noticed this tendency, but assumes that if an employee has been with the firm longer, that person must be more productive, so this is fair. He personally distributes the bonus cheques on the last working day before Christmas.

Since he has just turned 60, George is planning to retire in the next year or two and turn the business over to his daughter, Georgette Henderson, who is just finishing her commerce degree at Dalhousie University. Ironically, it was on the day of his 60th birthday that his bookkeeper informed him that there wasn't enough money in the bank account to meet payroll.

1.What is your assessment of the compensation system in place?

2.Do you think it meets the criteria for an effective compensation system as set out in Compensation Notebook 1.1?

3.Which criteria does it meet, and which does it violate?

4.Which managerial strategy would be most effective for this firm?

5.What reward and compensation strategy would fit this managerial strategy?

6.What problems would you encounter in using this managerial strategy?

7.Why do you think there is a high turnover of new employees?

8.What concepts may help to explain the employee reactions to the compensation system?

9.Do you think the compensation system is fair? Is it effective?

10.What principles for effective reward systems does it violate? What changes should be made?