Choosing a Strategic Compensation Structure: Egalitarian vs. Hierarchical

May 4, 2010

APH ManufacturingExecutive Board Meeting for 2011

What is a compensation structure?

• An internal pay structure can be defined by – Number of levels of work– Pay differentials between the levels– Criteria or basis used to determine those levels and

differentials in pay

What a strategic compensation structure needs?

• Needs to supports organization strategy• Needs to supports work flow

– Work flow – process by which goods and services are delivered to the customer

• Needs to reinforce desired behaviors– Ex: Intuit Indians

5 Considerations in Developing Strategy

• Objectives• Internal alignment• External alignment• Employee contributions• Management

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• Support the business objectives

• Support recruiting, motivation, and retention of MS-caliber talent

• Preserve MS core values

• Support business mission and goals

• Develop global leaders at every level

• Reinforce team-based culture

• Reduce costs, increase productivity

• Integral part of MS culture• Support MS performance driven culture• Business/technology-based organization design structure

• Flexibility for development and growth• Reflect responsibilities, required competencies, and business impact

• Lead in total comp

• Lag in base pay

• Lead in bonuses, stock

• Bonuses and options based on individual performance

• Open, transparent communications• Centralized administration• Software supported

• Compare favorably to high-performing competitor

• Cash between the 50th and 75th percentile

• Support high performance, leadership culture

• Team-based increases

• Options align employee and shareholder interest

• Tailor to business and team results

• Performance and leadership feedback –everyone is a leader• Administrative ease

Importance of Compensation Strategy

Mission, Vision, Core Beliefs, &

Business StrategyCompensation Performance

Hierarchical vs. Egalitarian

Hierarchical Egalitarian

Level Many Fewer

Pay Differential Large Small

Criteria Person or Job Person or Job

Supports: Work Organization Fairness Behaviors

Close Fit (Banding)Individual PerformersPerformanceOpportunities for PromotionIndividual ContributorsRecognition of Differences

Loose Fit (Banding)TeamsEqual TreatmentCooperationShare Knowledge FreelyCross Training in Jobs

Best Compensation StructureFor APH Manufacturing the Egalitarian

compensation structure would be best!

1) Gomez-Mejia, L.R., & Balkin, D.B. (1992b). The determinants of faculty pay: An agency theory perspective. Academy of Management Journal, 35 (5), 921-955.

2) Gomez-Mejia, L.R., Welbourne, T.M., & Wiseman, R.M. (2000). The role of risk sharing and risk taking under Gainsharing. The Academy of Management Review, 25 (3), 492-507.

3) Lawler, E.E. (2000). Rewarding excellence: Pay strategies for the new-economy. San Francisco: Jossey-Bass.

4) Milkovich, G.T., & Newman, J.M. (2008). Compensation. Boston: Irwin McGraw Hill.

5) Olson, C.A., Schwab, D.P., and Rau, B.L. (2000). The effects of local market conditions on two pay-setting systems in the federal sector. Industrial and Labor Relations Review, 53 (2), 272-294.

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