What are the four policy issues in the pay model? What purposes do the objectives in the pay model serve?

Management A policy regarding management of the pay system is the last building block in our model. Management means ensuring that the right people get the right pay for achieving the right objectives in the right way. The greatest system design in the world is useless without competent management. Managing compensation means answering the "So What?" question. So what is the impact of this policy, this technique, this decision? Although it is possible to design a system that is based on internal alignment, external competitiveness, and employee contributions, what difference does it make? Does the decision help the organization achieve its objectives?81 The ground under compensation management has shifted. The traditional focus on how to administer various techniques is long gone, replaced by more strategic thinking-managing pay as part of the business. It goes beyond simply managing pay as an expense to better understanding and analyzing the impact of pay decisions on people's behaviors and organizations' success. The impact of pay decisions on expenses is one result that is easily measured and well understood. But other measures-such as pay's impact on attracting and retaining the right people, and engaging these people productively-are not yet widely used in the management of compensation. Efforts to do so are increasing, and the perspective is shifting from "How to" toward trying to answer the "So What?" question. $2 Ease of measurement is not the same as importance; costs are easy to measure (and, of course, important), so there is a tendency to focus there. Yet the consequences of pay, although often less amenable to measurement, are nonetheless just as important.Reader Prefer Four Policy Choices Every employer must address the policy decisions shown on the left side of the pay model: (1) internal alignment, (2) external competitiveness, (3) employee contributions, and (4) management of the pay system. These policies are the foundation on which pay systems are built. They also serve as guidelines for managing pay in ways that accomplish the system's objectives. page 23 Internal Alignment Internal alignment refers to comparisons among jobs or skill levels inside a single organization. Jobs and people's skills are compared in terms of their relative contributions to the organization's business objectives. How, for example, does the work of the programmer compare with the work of the systems analyst, the software engineer, and the software architect? Does one contribute to solutions for customers and satisfied stockholders more than another? What about two marketing managers working in different business units of the same organization? Internal alignment pertains to the pay rates both for employees doing equal work and for those doing dissimilar work. In fact, determining what is an appropriate difference in pay for people performing different work is one of the key challenges facing managers. Whole Foods tries to manage differences with a salary cap that limits the total cash compensation (wages plus bonuses) of any executive to 19 times the average cash compensation of all full-time employees. The cap originally started at eight times the average. However, attraction and retention problems were cited as a need for raising the cap several times since. (Note that the cap does not include stock options.) Pay relationships within the organization affect all three compensation objectives. They affect employee decisions to stay with the organization, to become more flexible by investing in additional training, or to seek greater responsibility. By motivating employees to choose increased training and greater responsibility in dealing with customers, internal pay relationships indirectly affect the capabilities of the workforce and hence the efficiency of the entire organization. Fairness is affected through employees' comparisons of their pay to the pay of others in the organization. Compliance is affected by the basis. used to make internal comparisons. Paying on the basis of race, gender, age, or national origin is illegal in the United States.Q AA External Competitiveness Reader Prefer External competitiveness refers to pay comparisons with competitors. How much do we wish to pay in comparison to what other employers pay? Many organizations claim their pay systems are market-driven-that is, based almost exclusively on what competitors pay. "Market-driven" gets translated into practice in different ways." Some employers may set their pay levels higher than their competition, hoping to attract the best applicants. Of course, this assumes that someone is able to identify and hire the "best" from the pool of applicants. And what is the appropriate market? When, for example, should international pay rates be considered? Should the pay of software engineers in New Delhi or Minsk influence pay for engineers in Silicon Valley or Boston? External competitiveness decisions-both how much and what forms-have a twofold effect on objectives: (1) to ensure that the pay is sufficient to attract and retain employees-if employees do not perceive their pay as competitive in comparison to what other organizations are offering for similar work, they may be more likely to leave-and (2) to control labor costs so that the organization's prices of products or services can remain competitive in a global economy. Employee Contributions How much emphasis should there be on paying for performance? Should one programmer be paid differently from another if one has better performance and/or greater seniority? Or should there be a flat rate for programmers? Should the company share any profits with employees? Should it share with all employees, parttime as well as full-time? The emphasis to place on employee contributions (or nature of pay mix) is an important policy decision because it directly affects employees' attitudes and work behaviors. Eaton and Motorola use pay to support other "high-performance" practices in their workplaces."9 Both use team-based pay and corporate profit-sharing plans. Starbucks emphasizes stock options and sharing the success of corporate performance with the employees. page 24 General Electric uses different performance-based pay programs at the individual, division, and company-wide levels. Performance-based pay affects fairness, in that employees need to understand the basis for judging performance in order to believe that their pay is fair. What mix of pay forms-base, incentives, stock, benefits-do our competitors use in comparison to the pay mix we use? Whole Foods combines base pay and team incentives to offer higher pay if warranted by team performance. Nucor targets base pay below market, but targets total cash compensation (including profit sharing and gain-sharing/plant production bonuses) at well above the market median. Medtronic sets its base pay to match its competitors but ties bonuses to performance. It offers stock to all its employees, based on overall company performance.30 Further, Medtronic believes that its benefits, particularly its emphasis on programs that balance work and life, make it a highly attractive place to work. It believes that how its pay is positioned and what forms it uses create an advantage over competitors. The external competitiveness and employee contribution decisions should be made jointly. Clearly, an above-market compensation level is most effective and sustainable when it exists together with above-market employee contributions to productivity, quality, customer service, or other important strategic objectives