Select an organization with which you are familiar and describe the type of compensation
strategy it uses.
Your initial post should be at least 250 words in length. Support your claims with examples from
required material and properly cite any references.
Reference to chapter reading:
Weathington, B. L. & Weathington, J. G. (2016). Compensation and benefits: Aligning rewards
with strategy [Electronic version]. Retrieved from https://ashford.content.edu
An Overview of Compensation
After reading this chapter, you will be able to:
1. Describe the historical development of compensation.
2. Explain the broad context within which a total rewards program operates.
3. Discuss the primary goals of a compensation system.
4. Describe the key components of a total rewards system.
5. Define core compensation and list its components.
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Consider the following situations:
A financial services firm has grown to the point where it needs to add account
managers to handle the client accounts. What is the best way for the company
to pay the account managers so that they are rewarded for getting new client accounts as well as servicing existing client accounts? Should the account
managers be paid a salary, a commission, a bonus, or some combination of all
of these options?
Two retail companies are in direct competition. One company pays an average
of $15.00 an hour but provides no company-paid holidays or vacation. Another
company pays an average of $10.00 an hour but also provides company-paid
holidays and vacation. Is one method better than the other? For the company?
For the employees? Could either approach lead to a competitive advantage
over the competition?
An automobile company has run into difficult times and must cut expenses.
Recognizing that payroll is often the single largest expense in organizations,
what is the impact on the company if it cuts wages? What impact will that
have on the morale, motivation, and retention of current employees? Will this
impact the ability to attract new employees?
Managers, executives, business owners, and human resources (HR) professionals ask questions such as these every day. Why? Because it helps them stay in business!
It must be remembered that employees are individuals with their own desires, motivations,
and needs. Properly designed, a compensation and benefits strategy that addresses the needs
of not only the business but also its employees will support the company’s overall business
strategy, helping the company be successful in an ever-changing, competitive environment.
The key is to align the goals and efforts of employees with those of the organization for which
they work. Questions such as those above must be answered in a way that enhances, rather
than detracts from, the operation of the company. Since employee talent is a critical resource
for a company, the compensation, which includes benefits, of that talent is a vital component
of how a company operates.
In this book, we will explore the need for aligning compensation and benefit strategy with
business strategy. Specifically, we will address the contributions an effective compensation
and benefits system makes to ensure successful achievement of the firm’s strategy. We will
examine all aspects of what it takes for an employer to attract, motivate, recognize, reward,
and retain the most talented and skilled work force possible. While not every company will
have a dedicated compensation professional, much less a compensation department, these
decisions must still be made in all types and sizes of businesses, and it is our goal in this book
to provide you with the knowledge and background to make these kinds of informed strategic
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A Brief History of Compensation
We begin this chapter by providing a brief overview of the history of compensation and how
compensation systems evolved into what they are today. We then shift our attention to the
primary factors that go into creating a compensation system, namely, an organization’s culture, business strategy, and administration, and how the three interact. We then end with the
primary goals that any compensation system hopes to accomplish and the types of compensation that can be utilized to design a cohesive compensation and benefits plan.
1.1 A Brief History of Compensation
It is important to understand where we came from in order to understand where we are and
where we are going. Understanding how modern compensation practices evolved can assist in
identifying best approaches to aligning corporate strategy with both short- and long-term goals.
Bartering: The First Compensation System
One way to examine human culture is by considering the three waves (or ages) of revolutionary change that have, arguably, had the greatest impact on society (see Toffler, 1970). The first
of these was the agricultural revolution (beginning about 9000 BCE), when humans began
transitioning from primarily living as hunter-gatherers to growing crops and beginning to live
a more settled existence. The next is the Industrial Revolution (from the late 18th century
through the beginning of the 20th century), which was characterized by a dramatic growth in
technology and the movement from an agricultural-based to a manufacturing-based economy. The last, which began in the mid-20th century and is still going on, is the information
revolution, exemplified by the creation and growth of computer-related technology.
Our standards with regard to what is
considered both valuable and useful in
our lives have shifted accordingly. For
example, how people live has changed,
from the extended families necessary to sustain an agrarian society to
nuclear families during the industrial
period to the working-parent families
of today. Similarly, business during
the agrarian age was conducted by the
family, by bureaucracies during the
Industrial Revolution, and by teams in
the current information age. Underlying all of these economic shifts and the
subsequent ways in which we organize
society has been the method by which
we compensate each other for labor.
Christie’s Images Ltd./Superstock
Bartering arose as the first monetary system.
Without a developed monetary system, compensation for one’s labor entailed using what one
had grown or made by hand, such as making clothes from cotton grown in the fields. People
quickly figured out that this system was limiting and would not work well. As such, bartering,
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A Brief History of Compensation
or the direct exchange of goods or services for other goods or services, arose as a system of
exchange for one’s labors. In bartering, a fur trapper, for example, might trade pelts to a dairy
farmer in exchange for milk, eggs, or cheese. The quantities exchanged between the two would
be determined by their mutually agreed-upon valuation. They might agree, for example, that
two dozen eggs was worth one small pelt, or that the trapper would provide trapping services
for the farmer over the time frame of a winter in exchange for the farmer’s supplying milk for
the same duration. Much of the impetus for the creation of written language came directly
from the need for keeping track of bartered goods over time (Robinson, 1995).
The direct-exchange compensation system was helpful in addressing immediate needs, but
this method was limiting in its utility in that the resources available were restricted to those
in the immediate exchange. A dairy farmer’s milk was worthless to a locksmith, for example,
if that locksmith also owned a cow, as there would be nothing the farmer could give to acquire
the locksmith’s services.
This is why a medium of exchange, such as the various currencies we use today, is so vital to
an exchange system—it allows for people to acquire goods, services, and resources beyond
a direct one-to-one trade. Instead of a dairy farmer having to trade milk for another direct
good or service, such as pelts or a locksmith’s services, the farmer could receive a tangible
item (the medium of exchange) with an agreed-upon value that could be saved and used for
an altogether different need or purpose at a future time. The medium of exchange, in effect,
then becomes a means of storing value. This exchange allows goods and services to obtain
a certain universally accepted value, often resulting in the medium used for the exchange
becoming valuable in itself. Perception of value is the key component of this system. All parties involved must accept the value for an item in order for it to maintain its value.
The actual items used in exchange and as a store of value have also evolved with time. Lumps
of base metal, such as copper or tin, were used as a medium of exchange since at least the
beginnings of the Bronze Age, or about 1000 BCE, while modern coinage is much more recent
and began as simply a method for identifying the weight and quality of the metal being
exchanged. People could exchange their particular goods or services for one of these metals
and then trade elsewhere the metal they acquired for whatever they wanted or needed.
Today, our mediums of exchange are even more diverse. We still use coinage for smaller
exchanges, but we also use paper, plastic, and even electronic means of compensating individuals and groups. All of these different means of exchange have liberated individuals and organizations alike to form ever more complex, mutually acceptable relationships that address wants
and needs. While the mechanism of exchange has changed over time, this core concept of storing value for later use and exchanging what we have today for what we want or need in the
future has not changed. HR professionals use this concept of exchanging one item (an employee’s labor) for another (compensation and benefits) every day. Designed properly, this exchange
relationship serves to align the employee’s labors with the company’s goals and strategies.
The Industrial Revolution: The Basis for Modern
Our complex system of compensation used today has its roots in the late 18th century
with the beginning of the Industrial Revolution. The advent of tools such as the cotton gin,
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A Brief History of Compensation
patented by American inventor Eli Whitney in 1794, signaled the decline of individual hand
labor and the beginning of the proliferation of mechanical devices capable of much greater
productivity. The increasing complexity of heavy industrial machinery, however, necessitated
the systematic training of workers, and training, in turn, represented an increased cost in
terms of both time and money. Therefore, companies needed to find a way to both utilize that
increased training and retain those trained workers. The method of rewarding workers for
labor needed to evolve.
Such technological changes in the economy also required workers to move from the family
farm to more population-dense urban areas where manufacturing was booming. Individuals
and families required—at a minimum—food, safety, and shelter in this new urban environment. Compensating workers for their time, skills, and efforts became a requirement. This
dramatic shift in how and where people worked and lived added yet another dimension to
compensation—hence the need for a comprehensive compensation system that would attract,
retain, and motivate employees while enabling the company to make a profit.
Taylor’s Scientific Management Theory
In addition to proper training, guidelines and rules related to how the new industrial worker
was to be managed were required. Compensation methods that mirrored the realities of the
Industrial Revolution were also needed.
This void was filled by Frederick Winslow Taylor, who has been called the father of “scientific management” due to his work aimed at improving industrial efficiency. Taylor, a trained
mechanical engineer in the United States, believed that through a detailed analysis of a given
task, using techniques such as the detailed study of both the time taken to accomplish actions
and the actual physical motions performed (“time and motion” studies), it would be possible
to discover one best way to perform a task (Kanigel, 2005).
Based on his research and observations, Taylor developed four rules for scientific management:
Create work methods based on a scientific study of specific tasks.
Scientifically select, train, and develop each employee.
Provide detailed instructions for specific tasks.
Divide work nearly equally between managers and workers.
While conducting research using time and motion studies, Taylor found that workers and managers typically did not interact with one another. At the time, there was little to no standardization in factory work, and little motivation on the part of managers or their subordinates
to work except to maintain an employed status. In the late 1800s, standardizing tasks and
focusing on employee motivation were radical ideas, which is precisely what Taylor proposed.
One of the most influential ideas Taylor introduced at the time was the notion of providing a
fair wage for a fair day’s work. Additionally, he highlighted the need for selecting, training, and
developing each employee. Although Taylor was focused on the scientific side of work—and
as a result would often forget that the workers were people and not machines themselves—
many of the ideas he put forth related to the need to fairly compensate workers for their labor.
Taylor’s ideas laid the groundwork for the modern workplace and the need for a comprehensive compensation system.
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Components of a Compensation System
Fayol’s Principles of Management
Building on Taylor’s scientific management theory, Henri Fayol, a mining engineer in France,
developed 14 principles of management (Fayol, 1949) (see Table 1.1), three of which have
direct implications for the compensation and benefits programs of today. They are remuneration, initiative, and equity.
• Remuneration—Employee satisfaction depends, in part, on a fair day’s pay for a fair
day’s work, a reflection of Taylor’s influence on Fayol’s thinking.
• Initiative—Productive employees take responsibility for their work and put forth
effort and ideas to better the organization.
• Equity—Employees should be compensated commensurate to their output. The
compensation employees receive must be aligned with not only what they believe
they and the job they perform are worth but also with what others who perform
similar work receive.
Taken together, Taylor’s and Fayol’s ideas have influenced business practices since their
inception and continuing into the modern day.
Today, organizations have evolved beyond just providing pay for work to providing other
forms of care and support for employees. Changes in society have necessitated the creation and growth of laws and government regulation. Additionally, the field of psychology
has taught us that people are not easy to understand and are driven by individual goals and
motivation. Both of these factors will be addressed extensively in future chapters. Remember,
however, as we will repeat numerous times throughout this book, the hallmark of an effective
compensation and benefits program is consistency. In order to attain consistency, we need to
understand what compensation actually is.
1.2 Components of a Compensation System
A compensation system is a systematic approach to providing rewards to employees in
exchange for work provided, with the goal of helping organizations attract, motivate, and retain
the best talent. Of course, many different components factor into not only a proposed compensation plan but also the execution of that plan. An organization needs to take into account how
much it can afford as well as what the market demands, what potential talent might expect,
and also how current employees might react. Let’s consider the following scenario:
A German software company became aware of an extremely talented senior
marketing executive from a U.S. company who had become dissatisfied in her
current position. The woman, Anne Prevost, had risen through the ranks at
her current company and had been promoted as far as possible. The German
firm saw that Prevost had engineered an advertising campaign that helped
her company make significant inroads into the German firm’s marketplace.
The current head of marketing for the German firm, Jürgen Mehr, recognized
that Anne might be open to changing employers and would be a valuable
addition to the company. However, Jürgen was dismayed that Anne’s salary
was already almost identical to his, and wooing her away from her current
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Components of a Compensation System
employer might require offering a potential subordinate a higher salary than
he made himself. In discussing the situation with the head of human resources,
Mehr discovered Prevost had a firm offer with another of their competitors,
a highly leveraged start-up that offered a lower base salary but substantial
stock options. Prevost spoke excellent German and was quite interested in
moving to Germany and rearing her sons there, even though the cost of living
in Germany was substantially more than what she was used to. Additionally,
the CEO of the German company was sold on the idea of having Prevost join
the team, especially since their current strategy was to increase international
revenues by 10%, and he firmly believed Prevost could help achieve that goal.
(Fryer, 2003; used by permission)
As is evident in the above scenario, there are several elements Anne Prevost finds important
in a rewards program: compensation, benefits, work-life, recognition, and developmental and
career opportunities. If this German firm wants to recruit Prevost, it needs to take her needs
into consideration. However, an effective compensation strategy also will take into account
issues related to what is best for the company in terms of the productivity gains it accrues by
making the hire, how much it is able to afford, how it will affect the standing of current talent
in the firm, and so on.
A compensation strategy, therefore, must align with the company’s overall strategic vision
and goals. The company’s management must answer these questions: What will it cost not to
have this employee on board (due to not benefiting from her talents as well as the potential of
a competitor benefiting instead)? What problems do we expect her to solve? How can she
help us achieve our long-term market objectives?
Part of this equation is taking into consideration the personal costs and changes for the
potential hire. In the particular case of Anne
Prevost, the firm must consider cost-of-livSelect an organization with which you
ing differentials between the United States
are familiar and describe the type of
and Germany, effective cultural integration
compensation strategy it uses.
support, and other elements key to her success. After all, little will be gained by a company in hiring an employee for perhaps less
up-front money, only to have that employee
be unable to efficiently and effectively make the personal and occupational transition. Fundamentally, the goal of an effective compensation strategy must address what it will take to keep
the new potential hire focused on performance and not distracted by personal matters that
may in part arise due to being hired by the organization in the first place. In the case of Anne
Prevost, the German hiring firm would not want to hire her ...
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