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Compensation structures: egalitarian v. hierarchicalTRANSCRIPT
Choosing a Strategic Compensation Structure: Egalitarian vs. Hierarchical
May 4, 2010
APH ManufacturingExecutive Board Meeting for 2011
What is a compensation structure?
• An internal pay structure can be defined by – Number of levels of work– Pay differentials between the levels– Criteria or basis used to determine those levels and
differentials in pay
What a strategic compensation structure needs?
• Needs to supports organization strategy• Needs to supports work flow
– Work flow – process by which goods and services are delivered to the customer
• Needs to reinforce desired behaviors– Ex: Intuit Indians
5 Considerations in Developing Strategy
• Objectives• Internal alignment• External alignment• Employee contributions• Management
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• Support the business objectives
• Support recruiting, motivation, and retention of MS-caliber talent
• Preserve MS core values
• Support business mission and goals
• Develop global leaders at every level
• Reinforce team-based culture
• Reduce costs, increase productivity
• Integral part of MS culture• Support MS performance driven culture• Business/technology-based organization design structure
• Flexibility for development and growth• Reflect responsibilities, required competencies, and business impact
• Lead in total comp
• Lag in base pay
• Lead in bonuses, stock
• Bonuses and options based on individual performance
• Open, transparent communications• Centralized administration• Software supported
• Compare favorably to high-performing competitor
• Cash between the 50th and 75th percentile
• Support high performance, leadership culture
• Team-based increases
• Options align employee and shareholder interest
• Tailor to business and team results
• Performance and leadership feedback –everyone is a leader• Administrative ease
Importance of Compensation Strategy
Mission, Vision, Core Beliefs, &
Business StrategyCompensation Performance
Hierarchical vs. Egalitarian
Hierarchical Egalitarian
Level Many Fewer
Pay Differential Large Small
Criteria Person or Job Person or Job
Supports: Work Organization Fairness Behaviors
Close Fit (Banding)Individual PerformersPerformanceOpportunities for PromotionIndividual ContributorsRecognition of Differences
Loose Fit (Banding)TeamsEqual TreatmentCooperationShare Knowledge FreelyCross Training in Jobs
Best Compensation StructureFor APH Manufacturing the Egalitarian
compensation structure would be best!
1) Gomez-Mejia, L.R., & Balkin, D.B. (1992b). The determinants of faculty pay: An agency theory perspective. Academy of Management Journal, 35 (5), 921-955.
2) Gomez-Mejia, L.R., Welbourne, T.M., & Wiseman, R.M. (2000). The role of risk sharing and risk taking under Gainsharing. The Academy of Management Review, 25 (3), 492-507.
3) Lawler, E.E. (2000). Rewarding excellence: Pay strategies for the new-economy. San Francisco: Jossey-Bass.
4) Milkovich, G.T., & Newman, J.M. (2008). Compensation. Boston: Irwin McGraw Hill.
5) Olson, C.A., Schwab, D.P., and Rau, B.L. (2000). The effects of local market conditions on two pay-setting systems in the federal sector. Industrial and Labor Relations Review, 53 (2), 272-294.
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