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Written by: Robert J. Long

Employee compensation typically consumes 40 to 70 percent of operating costs for Canadian employers. For most firms, compensation is their single largest operating expenditure. Last year, according to Statistics Canada1, employers in Canada spent nearly a trillion dollars on wages, salaries, and benefits – imagine a stack of $100 bills more than 1,100 kilometers high! Are they getting their money’s worth? Is this money well-spent         

In many cases it is not. Some organizations are spending too much. But others are spending too little. While the amount being spent is important, it is not the key issue. The real question is “what is the organization receiving for its investment in wages, salaries, and benefits?” Is your compensation system contributing to the achievement of organizational objectives in the fullest possible way? Does the firm have in place the compensation system that adds the greatest possible value to the firm, after its costs are taken into account?

A compensation system is one of the most powerful tools available to an employer for shaping employee behaviour and influencing company performance, yet many organizations waste this potential, viewing compensation as simply a cost to be minimized. Even worse, some firms not only waste this potential, but their compensation systems actually serve to promote unproductive or even counterproductive behaviour. Problems of low employee motivation, poor job performance, high turnover, irresponsible behaviour, and even employee dishonesty often have their roots in the compensation system. Problems as varied as organizational rigidity, inability to adapt to change, lack of innovation, conflict between organizational units, and poor customer service may also stem, at least in part, from the reward system.

What complicates matters further is that, without any obvious warning signs, a compensation system that has worked well in the past can become a serious liability when circumstances change. Failure to adapt reward systems to changing circumstances can cause business strategies to falter, organizational structures to collapse, new technologies to malfunction, and entire companies to founder. Ironically, because the reward system often affects behaviour in very subtle ways, many firms never identify their reward system as a major contributor to these problems.

So, how can an organization avoid all this grief, and be sure that their compensation system is an asset, and not a liability? Although it is not a simple matter, asking yourself these questions can help to put you on track.

  1. Is our current compensation system strategic? A compensation system is strategic if it promotes the kind of employee behaviour our organization needs to meet its overall mission, and it does so in the most efficient possible way. This does not necessarily mean it is the compensation system that costs the least, but the compensation system that makes the greatest contribution to organizational objectives, after considering all its costs. The key is not so much the amount of compensation, but the structure through which compensation is provided—the mix of base pay, performance pay, and indirect pay—and the specific means through which each component is provided. How do we know whether we have this right?
  2. We need to ask ourselves, for the majority of our employees, what types of employee behaviour do we really need from them? We can think in terms of three main categories of employee behaviour—task behaviour, membership behaviour, and citizenship behaviour. Do we need employees to perform complicated tasks to a high level of proficiency, utilizing initiative and creativity, or do we need them simply to do what they are told in a reliable and consistent manner? Do we have a highly-skilled and hard-to-replace workforce for which we want a high feeling of membership—and therefore low turnover—or is it really not that big a problem for us to replace employees who quit? Do we need our employees to think of themselves as citizens of the organization as a whole, looking for ways to go above and beyond the call of duty, or is it enough for our employees to simply do their jobs competently and efficiently?
  3. It is important to be honest with ourselves about which types of employee behaviour our organization actually needs; developing a compensation system that produces all three types of behaviour is a complex and costly endeavour, which will incur a higher ongoing bill for total compensation and administration. It is tempting to say “of course, we need all three” even when our organization simply doesn’t, and investing what it will take to achieve unnecessary employee behaviours will be a very poor investment.
  4. In the light of the employee behaviours we need, which human resources strategy will produce the necessary employee behaviours? In general, we can think of two main HR strategies that are more or less polar opposites—high involvement and classical. A high-involvement HR strategy is the best choice to produce all three types of employee behaviour, while a classical HR strategy is a more traditional top-down, hierarchical approach that will be the most efficient choice when these behaviours are not strongly needed. In general, a classical HR strategy will be effective in business environments that are relatively stable, with relatively straightforward assembly-based or transaction-based technologies, with cost-oriented business strategies, and that require low to moderately-skilled workers. A high-involvement HR strategy is generally necessary in rapidly-changing business environments, with complex technologies or services, with business strategies based on innovation and/or differentiating products or services from those of competitors, and that employ highly-skilled workers.
  5. Next, we need to make sure our compensation strategy dovetails with our choice of HR strategy. If a classical HR strategy fits us the best, a fairly conventional compensation system using base pay geared to time worked or output produced, with some individual performance pay in circumstances where it fits, and an adequate package of benefits will suffice. However, a high-involvement HR strategy will require a complicated mix of intrinsic and extrinsic rewards (where a “reward” is defined as anything offered by an employer that satisfies an employee need). Jobs will need to be designed as to allow for intrinsic motivation, by incorporating skill variety, employee autonomy, employee teams, and the like. Decisions will need to be decentralized, giving employees extensive opportunities to participate in decision making. Supporting this will require a compensation system that provides for common goals, through such practices as team-based pay, gain sharing, profit sharing, and employee stock plans. Where feasible, base pay will be geared to the capabilities of employees (i.e. skill-based pay), rather than the specific tasks they perform, and the benefits package should emphasize elements that are of particular value in supporting a high-involvement strategy, such as support for learning and development. A flexible benefits plan that allows employees choice about the particular benefits that are of most value to them would fit the high involvement concept. 
  6. A final question is how can we be sure that our reward and compensation system is actually producing the employee behaviours we need? At this stage, we need to make sure that we are collecting information that helps us assess the extent to which the desired employee behaviours are taking place, whether key compensation objectives are being achieved, and, of course, whether the cost of our compensation system is commensurate with the results it is producing. Ongoing assessment and adjustment of the reward and compensation system is essential to ensure that it continues to support our human resources and business strategies in the most effective and efficient ways.

About the Author

Richard J. Long is Professor of Human Resources and Hanlon Fellow in International Business at the Edwards School of Business at the University of Saskatchewan. This article is based on his recently-published book, Strategic Compensation in Canada, published in Toronto in 2014 by Nelson Education.

References

Long, R.J. (2014). Strategic compensation in Canada (5th ed.). Toronto, ON: Nelson Education.

Statistics Canada. (2015) Table  281-0049 -  Survey of Employment, Payrolls and Hours (SEPH), employment, average hourly and weekly earnings (including overtime), and average weekly hours for the industrial aggregate excluding unclassified businesses, seasonally adjusted, monthly,  CANSIM (database). Retrieved April 8, 2015, from http://www5.statcan.gc.ca/cansim/pick-choisir?lang=eng&p2=33&id=2810049