--- date: '2024-01-10' description: compensation fundamentals from the Milkovich pay model, covering total rewards, the efficiency, fairness and compliance objectives, and the four strategic pay policies. id: Pay model modified: 2026-10-21 15:45:00 GMT-04:00 seealso: - '[[thoughts/university/twenty-three-twenty-four/commerce-4be3/The Pay Model.pdf|Slides]]' tags: - commerce4be3 title: Pay model created: '2024-01-10' published: '2024-01-10' pageLayout: default slug: thoughts/university/twenty-three-twenty-four/commerce-4be3/Pay-model permalink: https://aarnphm.xyz/thoughts/university/twenty-three-twenty-four/commerce-4be3/Pay-model.md generator: quartz: v4.6.0 hostedProvider: Cloudflare baseUrl: aarnphm.xyz full: https://aarnphm.xyz/llms-full.txt --- ## compensation. > all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship The same pay system looks different depending on who is judging it. 1. society - pay and benefits as a measure of justice, e.g. the pay gap between men and women - job losses or gains in a country depend partly on labour costs, relative to productivity 2. stockholders - paying employees in stock (options, share purchase plans) is meant to create a sense of ownership; the counterargument is that new shares dilute existing holders - executive pay gets the most attention: tying it to company performance is supposed to raise stockholder returns 3. managers - a major expense that must be managed - a major determinant of employee attitudes and behaviours 4. employees - usually the main source of financial security - read in different ways: a return in an exchange, an entitlement for being employed, an incentive to take or stay in a job and perform, or a reward for having done so The perspectives conflict. A stock grant that a manager sees as cheap retention, a stockholder may see as dilution. ## total rewards. Total rewards = total compensation + relational returns. ### total compensation Cash compensation, paid directly: - base pay: cash for the work performed, set by the job (job evaluation) or by the skills and education the employee holds - merit increases: increments to base pay based on performance. They compound, because next year’s raise applies to a base that already includes this one. - COLA (cost of living adjustment): a change to base pay that tracks the cost of living, independent of performance - incentives (bonuses): paid as a lump sum based on performance, and do not become part of base pay. They can be short or long term. Benefits, paid indirectly: - health insurance: medical, dental, vision, life and disability - pensions: retirement and savings programs. In Canada an employer often offers a group RRSP, the closest analogue to a US 401(k); a health spending account reimburses medical costs the insurance plan does not cover. - allowances: often grow out of a shortage, e.g. housing and transport allowances in China ### relational returns > Non-financial returns that substantially impact employee behaviour, such as employment security and learning and developmental opportunities - psychological returns: recognition and status, challenging work, learning opportunities - employment security, which in unionized workplaces is partly negotiated through seniority rules in the collective agreement - psychological safety: employees can speak up or make mistakes without retaliation Relational returns work as a network. A bonus, a development opportunity and a promotion are worth more when they point the same way. The employee value proposition is the package a firm advertises to recruits: the total rewards it offers in exchange for the work it asks for. ## pay model. The pay model has three building blocks: objectives, the policies that form the foundation of the system, and the techniques that make up the system. ```mermaid graph LR SP{{Strategic policies}} --> T{{Techniques}} --> SO{{Strategic objectives}} ``` ### objectives Objectives guide the design of the pay system and are the standards for judging whether it works. - efficiency: improve performance, increase quality, control labour costs - fairness: both the process and the outcomes of pay decisions should be fair - compliance: conform to federal, provincial and territorial law Firms phrase these differently. The textbook compares Medtronic, whose list leads with its mission and with limiting fixed-cost growth, and Whole Foods, whose list leads with long-term shareholder value and team outcomes. ### internal alignment - comparisons among jobs or skill levels inside one organization - covers pay rates both for employees doing equal work and for those doing different work - these pay relationships affect all three objectives: an unexplained gap between two similar jobs is a fairness problem, and possibly a pay-equity compliance problem ### external competitiveness - pay comparisons with competitors outside the organization - **market driven** - objectives: - pay enough to attract and retain employees - control labour costs so products and services can be priced competitively These two pull in opposite directions, and the pay level a firm picks relative to the market is the trade-off between them. ### employee contributions - how employees are rewarded for performance, as individuals or as teams - employees who understand the basis for judging performance are more likely to see pay as fair ### management - making sure the right people get the right pay for achieving the right objectives in the right way. In practice this means budgeting, communicating the system to employees, and checking whether it meets the objectives above. ## pay techniques - techniques tie the four policies to the objectives - they are the tools and mechanisms used to reach the objectives: job evaluation for internal alignment, market surveys for external competitiveness, merit guides and incentive plans for contributions, budgets and audits for management - many variations exist, and firms with the same policies can choose different techniques Gender inequality [article](https://web.archive.org/web/20230602214140/https://www.theglobeandmail.com/business/careers/article-not-a-single-large-public-canadian-firm-has-closed-the-gender-pay-gap/)