Chapter 1: A Road Map to Effective Compensation
Canadian firms typically spend 40-70% of their operating budgets to compensate their
Compensation is the single largest operating expenditure.
A compensation system is one of the most powerful tools available to an employer for
shaping employee behavior and influencing company performance.
Many organizations waste this potential, b/c they see it as a cost needed to be
Some firms not only waste this potential, but promote unproductive or even
Role and Purpose of the Compensation System
Purpose of a compensation system- to help create willingness among qualified persons
to join the organization and to perform the tasks needed by the organization.
Employees must perceive that accepting a job with an employer will help satisfy own
needs as well as needs for security, social interaction, status, achievement etc.
Extrinsic vs. Intrinsic Rewards
Reward- Anything provided by the organization that satisfies one or more of an
A reward can be divided into two main categories: Extrinsic rewards and intrinsic
Extrinsic Rewards- satisfy basic needs for survival and security, as well as social needs
and needs for recognition.
- They derive from factors that surround the job such as pay, supervisory
behavior, co-workers, and general working conditions.
Intrinsic Rewards- satisfy higher-level needs for self-esteem, achievement, growth and
- They derive from natural factors in the work itself such as the amount of
challenge/interest the job provides, the degree of variety in the job and the
extent to which it provides feedback and allows autonomy.
Rewards vs. Incentives
Rewards are the positive consequences of performing behaviors desired by the
Employees receive these rewards either subsequent to performing the behavior or
during performance of the behavior.
Incentive- is a promise that a specified reward will be provided if the employee
performs a specified behavior.
- Offered to induce employees to perform behaviors that thy might otherwise
perform, or to perform these behaviors at a higher level. Incentives are intended to induce valued behavior, while rewards serve to recognize
Reward vs. Compensation Strategy
Reward System- The mix of intrinsic and extrinsic rewards provided to its members by
- If utilized effectively, each can produce important benefits for the
Total Rewards- The compensation philosophy that considers the entire spectrum of
rewards that an organization may offer to employees.
Reward Strategy- The plan for the mix of rewards, both extrinsic and intrinsic that the
organization intends to provide to its members along with the means