A Pay Model and Defining Internal Alignment

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OBJECTIVE

EFFICIENCY
* Performance
* Quality
* Customers
* and Stockholder
* Costs

FAIRNESS

COMPLIANCE

COMPLANCE

TECHNIQUE
EXHIBIT 1.5 The pay Model

ALIGNMENT Work Descriptions Evaluation Analysis Certificate Internal Structure

COMPETITIVENESS Market Surveys Policy Line PAY Definitions STRUCTURE PPSTRUCTURE

CONTRIBUTIONS Seniority Performance Merit Based Based Guideline INCENTIVE PROGRAMS

MANAGEMENT Costs Communication Change EVALUATION

A PAY MODEL
The pay model shown in Exhibit 1.5 serves as both a framework for examining current pay systems and a guide for most of this book. It contains three basic building blocks (1) the compensation objectives, (2) the policies that form the foundation of the compensation system and (3) the techniques that make up the compensation system. Compensation Objective

Pay system translate the strategy into practice in order to achieve certain objectives. The basic objectives, shown at the right side of the model, include efficiency, fairness, and compliance with laws and regulations. Efficiency can be stated more specifically: (1) improving performance, increasing quality, delighting customers and stockholders, and (2) controlling labor costs. Compensation objectives at Medtronic and AES are contrasted in Exhibit 1.6. Medtronic is a medical technology company that pioneered cardiac pacemakers. Its compensation objectives emphasize performance, business success, and salaries that are competitive with other companies whose financial performance matches Medtronic’s. AES generates and markets electricity around the world. Its goal is to "provide electricity worldwide in a socially responsible way." The notion of social responsibility pervades the company. Fairness is a fundamental objective of pay systems. In Medtronic's objectives, fair-.ness means “ensure fair treatment" and "be open and understandable.".AES's mission statement acknowledges, "Defining what is fair is often difficult, but we believe it is helpful to routinely question the relative fairness of alternative courses of action. It does not mean that everyone gets treated equally, but instead treated fairly or with justice given the appropriate situation."

Thus, the fairness objective calls for Fail treatment for all employees by recognizing both employee contributions (e.g. higher pay for greater performance, experience, or training) and, employee needs (e.g. a fair wage as Weil as fair procedures). Procedural Fairness refers to the process used to make pay decisions. It suggests that the way a pay decision is made may be as important to employees as the results of the decision. Compliance as a pay objective means conforming to federal and state compensation laws and regulations. If they change, pay systems may need to be adjusted to ensure continued compliance.

There are probably as many statements of pay objectives as there are employers. In fact, highly diversified firms such as general Electric and Eaton, which operate in multiple lines of businesses, may have different pay objectives for different business units. Objectives at Medtronic and AES emphasize the increased complexity of the business and the importance of integrity, competitiveness, ability to attract and retain quality people and having fun.

Objectives serve several purposes. First, they guide the design the pay system. If an objective is to increase customer satisfaction, then incentive programs and merit pay (techniques) might be used to...
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