Table Of ContentCompensation
Fourteenth Edition
Barry Gerhart
University of Wisconsin–Madison
COMPENSATION
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Preface xiv
PART I A Pay Model 19
Introducing the Pay Model and Pay Strategy
Compensation Objectives 19
Chapter 1 Four Policy Choices 22
The Pay Model 2
Pay Techniques 24
Compensation: Does It Matter? (Or, “So
What?”) 3 Book Plan 25
Compensation: Definition, Please Caveat Emptor—Be an Informed Consumer 26
(Stakeholders) 4 1. Is the Research Useful? 26
Society 6 2. Does the Study Separate Correlation from
Stockholders 9 Causation? 26
Customers 10 3. Are There Alternative Explanations? 27
Managers 10
Your Turn:Compensation at the World’s Largest
Employees 11 Company 28
HowPayInfluencesBeahviors:IncentiveandSort- (Still) Your Turn: Who are Amazon’s Peer Com-
ingEffects11 panies for Comparing Compensation? 28
Global Views—Vive la Différence 14 Chapter 2
Strategy: The Totality of Decisions 40
Forms of Pay 14
Similarities and Differences in Strategies 41
Cash Compensation: Base 15
Different Strategies within the Same
Cash Compensation: Merit Increases/
Industry 43
Short-Term Incentives (Merit Bonuses)/
COLAs 16 Different Strategies within the Same Company
(between business units/markets) 44
Cash Compensation: Incentives 16
Different Strategies within the Same Company
Long-Term Incentives 17
(Evolution over Time) 44
Benefits: Income Protection 17
Benefits: Work/Life Balance 18 Strategic Choices 45
Benefits: Allowances 18 Support Business Strategy 46
Total Earnings Opportunities: Present Value of
Support HR Strategy 47
a Stream of Earnings 18
The Pay Model Guides Strategic Pay
Relational Returns from Work 19
Decisions 48
Stated versus Unstated Strategies 49
iv Table of Contents
DevelopingaTotalCompensationStrategy:Four
External Stakeholders 80
Steps 50
Cultures and Customs 81
Step 1: Assess Total Compensation
Organization Strategy 81
Implications 50
Organization Human Capital 81
HR Strategy: Pay as a Supporting Player or a
Organization Work Design 82
Catalyst for Change? 51
Overall HR Policies 82
Step 2: Map a Total Compensation Strategy 54
Internal Labor Markets: Combining External
Steps 3 and 4: Implement and Reassess 56
and Organization Factors 83
SourceofCompetitiveAdvantage:ThreeTests56 Employee Acceptance and Perceived
Align 56 Fairness 84
Differentiate 56 Pay Structures Change 84
Add Value 58
Strategic Choices in Designing Internal
Structures 85
“Best Practices” versus “Best Fit”? 58
Tailored versus Loosely Coupled 85
Guidance from the Evidence 58
Hierarchical versus Egalitarian and Layered
Virtuous and Vicious Circles 59 versus Delayered Structures 85
YourTurn:UsingCompensationtoImproveEnvi-
Guidance from the Evidence 87
ronmental, Social and Governance (Including
Equity Theory: Fairness 87
Diversity & Inclusion) Performance: Apple and
Starbucks 60 Tournament Theory (and Pay Dispersion):
Motivation and Performance 88
Still Your Turn:Mapping Compensation
Institutional Theory: Copy Others and
Strategies 61
Conform 90
PART II (More) Guidance from the Evidence 90
Internal Alignment: Determining the Structure
Consequences of Structures 91
Chapter 3
Defining Internal Alignment 72 Efficiency (including Retention) 92
Jobs and Compensation 73 Fairness 92
Compliance 92
Compensation Strategy: Internal Alignment 73
Supports Organization Strategy 75 YourTurn:SoYouWanttoLeadanOrchestra!93
Supports Work Flow 75 Still Your Turn: (If You Don’t Want to Lead the
Motivates Behavior 76 Orchestra...) 94
Structures Vary among Organizations 76 Still (yes, still) YourTurn:NCAA 97
Number of Levels 76 Chapter 4
Job Analysis 106
Differentials 77
Criteria: Content and Value 77 Structures Based on Jobs, People, or Both 107
Job-Based Approach: Most Common 109
What Shapes Internal Structures? 79
Why Perform Job Analysis? 109
Economic Pressures 79
Government Policies, Laws, and Regulations 80 Job Analysis Procedures 110
Table of Contents v
What Information Should Be Collected? 112
Content and Value 145
Job Data: Identification 112 Linking Content with the External Market 145
Job Data: Content 113 Technical and Process Dimensions 145
Employee Data 114
“How-To”: Major Decisions 146
“Essential Elements” and the Americans With
Disabilities Act 116 Establish the Purpose 146
Level of Analysis 117 Single versus Multiple Plans 147
Choose among Job Evaluation Methods 149
How Can the Information Be Collected? 118
Job Evaluation Methods 149
Conventional Methods 118
Quantitative Methods 118 Ranking 150
Who Collects the Information? 120 Classification 151
Who Provides the Information? 120 Point Method 153
What about Discrepancies? 120
Who Should Be Involved? 162
Job Descriptions Summarize the Data 121 The Design Process Matters 162
Using Generic Job Descriptions 121
The Final Result: Structure 164
Describing Managerial/Professional Jobs 124
Balancing Chaos and Control 164
Verify the Description 124
Your Turn:Job Evaluation at Whole Foods 165
Job Analysis: Bedrock or Bureaucracy? 125
Chapter 6
JobAnalysisandChangeinWork:Globalization, Person-Based Structures 175
and Automation (Including AI) 126
Person-Based Structures: Skill Plans 176
Change in Work 126
Types of Skill Plans 176
Susceptibility to Offshoring 127
Purpose of the Skill-Based Structure 179
Susceptibility to Automation and AI 130
Job Analysis Information and Comparability “How-To”: Skill Analysis 180
across Borders 134 What Information to Collect? 180
Whom to Involve? 182
Judging Job Analysis 134
Establish Certification Methods 182
Reliability 134
Outcomes of Skill-Based Pay Plans: Guidance
Validity 135
from Research and Experience 182
Acceptability 135
Currency 135 Person-Based Structures: Competencies 183
Usefulness 136 Defining Competencies 185
A Judgment Call 136 Purpose of the Competency-Based
Structure 186
Your Turn:The Customer-Service Agent 137
“How-To”: Competency Analysis 189
Chapter 5
Job-Based Structures and Job Evaluation 143 Objective 189
What Information to Collect? 189
Job-Based Structures: Job Evaluation 144
Whom to Involve? 190
Defining Job Evaluation: Content, Value, and
Establish Certification Methods 191
External Market Links 145
vi Table of Contents
ModificationstotheSupplySide(OnlyTwoMore
Resulting Structure 191
Theories to Go) 227
Competencies and Employee Selection and
Training/Development 191 Reservation Wage 227
Guidance (and Caution) from the Research on Human Capital 227
Competencies 193
Product Market Factors and Ability to Pay 228
OneMoreTime:InternalAlignmentReflectedin Product Demand 228
Structures (Person-Based or Job-Based) 193
Degree of Competition 228
Administering and Evaluating the Plan 195 A Different View: What Managers Say 229
Reliability of Job Evaluation Techniques 195 Segmented Supplies of Labor and (Different)
Going Rates 229
Validity 197
Acceptability 198 Organization Factors 231
Bias in Internal Structures 198 Industry and Technology 231
Employer Size 231
Wages Criteria Bias 198
People’s Preferences 231
The Perfect Structure 199
Organization Strategy 232
Your Turn:Climb the Legal Ladder 201
Relevant Markets 232
PART III
Defining the Relevant Market 233
External Competitiveness: Determining the Pay
Level Globalization of Relevant Labor Markets:
Offshoring and Outsourcing 234
Chapter 7
Defining Competitiveness 210 Competitive Pay Policy Alternatives 235
CompensationStrategy:External What Difference Does the Pay-Level Policy
Competitiveness211 Make? 238
Control Costs and Increase Revenues 212 Pay with Competition (Match) 238
Attract and Retain the Right Employees 217 Lead Pay-Level Policy 240
Lag Pay-Level Policy 243
What Shapes External Competitiveness? 218
Different Policies for Different Employee
Labor Market Factors 220 Groups 243
How Labor Markets Work 220 Not by Pay Level Alone: Pay-Mix Strategies 244
Labor Demand 221
Consequences of Pay-Level and Pay-Mix
Marginal Product 222 Decisions: Guidance from the Research 246
Marginal Revenue 222
Efficiency 246
Labor Supply 223
Fairness 248
Modifications to the Demand Side 223 Compliance 248
Compensating Differentials 224 Your Turn:Two-Tier Wages 249
Efficiency Wage 225
YourTurn:CombiningPaySurveyandJobEvalu-
Sorting and Signaling 226
ation Data 250
Appendix 7-A: Utility Analysis 252
Table of Contents vii
Chapter 8 From Policy to Practice: Broad Banding 291
Designing Pay Levels, Mix, and Pay
Flexibility Control 293
Structures 261
Balancing Internal and External Pressures:
Major Decisions 262
Adjusting the Pay Structure 294
Specify Competitive Pay Policy 262
Reconciling Differences 294
The Purpose of a Survey 262
Market Pricing 295
Adjust Pay Level—How Much to Pay? 263
Business Strategy (More than “Follow the
Adjust Pay Mix—What Forms? 263
Leader”) 295
Adjust Pay Structure? 263
Study Special Situations 263 Review 296
Estimate Competitors’ Labor Costs 264 Your Turn: Google’s (now Alphabet’s) Evolving
Pay Strategy 297
Select Relevant Market Competitors 264
Still Your Turn:Word-of-Mouse: Dot-Com
Fuzzy Markets 268
Comparisons 298
Design the Survey 268
PART IV
Who Should Be Involved? 268 Employee Contributions: Determining Individual
Pay
How Many Employers? 269
Which Jobs to Include? 272 Chapter 9
Pay-for-Performance: Theory and Evidence 306
What Information to Collect? 274
WhatBehaviorsDoEmployersCareAbout?Link-
InterpretSurveyResultsandConstructaMarket
ing Organization Strategy to Compensation and
Line 277
PerformanceManagement308
Verify Data 277
WhatDoesItTaketoGetTheseBehaviors?What
Statistical Analysis 280
Theory Says 312
Update the Survey Data 282
WhatDoesItTaketoGetTheseBehaviors?What
Construct a Market Pay Line 283
Practitioners Say 317
Setting Pay for Benchmark and
Does Compensation Motivate Behavior? 322
Non-Benchmark Jobs 285
Combine Internal Structure and External Do People Join a Firm Because of Pay? 322
Market Rates 286 Do People Stay in a Firm (or Leave) Because
of Pay? 323
From Policy to Practice: The Pay-Policy Line 286
Reminder: Not All Turnover is Bad (and at
Choice of Measure 287 least some is necessary) 324
Updating 287 Do Employees More Readily Agree to Develop
Policy Line as Percent of Market Line 287 Job Skills Because of Pay? 324
Do Employees Perform Better on Their Jobs
From Policy to Practice: Grades and Ranges 288
Because of Pay for Performance? The Short
Why Bother with Grades and Ranges? 288 Answer is "Yes" (Especially Compared to the
Develop Grades 289 Alternative) 325
Establish Range Midpoints, Minimums, and Pay for Performance: Harmful Effects on
Maximums 289 Intrinsic Motivation (Claims and
Overlap (and Midpoint Progression) 290 Evidence) 326
viii Table of Contents
Sorting and Incentive Effects 327 Employee Stock Ownership Plans (ESOPs) 376
Risk (Unintended Consequence) 330 Performance Plans (Performance Share and
Performance Unit) 377
Designing a Pay-for-Performance Plan 330
Broad-Based Stock Plans (BBSPs) 377
Efficiency 330
Combination Plans: Mixing Individual and
Equity/Fairness 332 Group 377
Compliance 333
Does Variable Pay (Short-Term and Long-Term
Your Turn:Burger Boy 333 Incentives) Improve Performance Results? The
General Evidence 378
Chapter 10
Pay-for-Performance: Types of Plans 346 Your Turn:Pay at Delta and American
Airlines 378
What Is a Pay-for-Performance Plan? 346
How Widely Used Is Pay for Performance Chapter 11
Performance Appraisals 387
(PFP)? 347
The Important Role of Promotion (internal or TheRoleofPerformanceAppraisalsinCompen-
external) in Pay for Performance 350 sation Decisions 389
Performance Metrics 389
Pay-for-Performance: Merit Pay Plans 351
Strategies for Better Understanding and Measur-
Pay-for-Performance: Short-Term Incentive Plans
ing Job Performance 390
(Individual-Based) 354
The Balanced Scorecard Approach 391
Merit Bonuses aka Lump-Sum Bonuses 354
Strategy 1: Improve Appraisal Formats 392
Individual Spot Awards 354
Strategy 2: Select the Right Raters 401
Individual Incentive Plans 355
Strategy 3: Understand How Raters Process
Individual Incentive Plans: Returns (But Also
Information 404
Risks) 358
Strategy 4: Training Raters to Rate More
Individual Incentive Plans: Examples 359
Accurately 408
Pay-for-Performance: Short-Term Incentive Plans Strategy 5: Improving Rater Motivation and
("Group"-Based) 361
Opportunity to Rate More Accurately 409
Comparing Group and Individual Incentive
PuttingItAllTogether:ThePerformanceEvalua-
Plans 364
tion Process 409
Large Group Incentive Plans 367
“New” Performance Appraisal 410
Gain-Sharing Plans 367
A Checklist of Recommended Behaviors for
Profit-Sharing Plans 372
Managers and Employees 411
Earnings-at-Risk Plans 373
Group Incentive Plans: Advantages and EqualEmploymentOpportunityandPerformance
Disadvantages 373 Evaluation412
Group Incentive Plans: Examples 373 TyingPaytoSubjectivelyAppraisedPerformance
(Merit Pay) 413
Pay-for-Performance: Long-Term Incentive
Plans 374
Table of Contents ix
Competency: Customer Care 414 Chapter 13
Benefit Options 474
Performance- and Position-Based
Guidelines 415 Legally Required Benefits 479
Designing Merit Guidelines 415 Workers’ Compensation 479
Social Security: Old Age, Survivors, Disability
Your Turn: Performance Appraisal at American
& Health (OASDI) + Medicare 480
Energy Development 419
Unemployment Insurance 483
Appendix 11-A: Balanced Scorecard Example:
Family and Medical Leave Act (FMLA) 485
DepartmentofEnergy(FederalPersonalProperty
Consolidated Omnibus Budget Reconciliation
ManagementProgram)422
Act (COBRA) 485
Appendix 11-B: Sample Appraisal Form for Lead-
Health Insurance Portability and
ership Dimension: Pfizer Pharmaceutical 425
Accountability Act (HIPAA) 485
PART V
Retirement and Savings Plan Payments 486
Employee Benefits
Defined Benefit Plans 486
Chapter 12
The Benefit Determination Process 443 Defined Contribution Plans 487
Individual Retirement Accounts (IRAs) 490
Overview 444
Employee Retirement Income Security Act
Why the Growth in Employee Benefits? 445 (ERISA) 490
Wage and Price Controls 447 How Much Retirement Income to Provide? 491
Unions 447
Life Insurance 493
Employer Impetus 448
Medical and Medically Related Payments 493
Cost (Including Tax) Effectiveness of
Benefits 448 General Health Care 493
Government Impetus 449 Health Care: Cost Control Strategies 496
Short- and Long-Term Disability 497
The Value of Employee Benefits 449
Dental Insurance 497
Key Issues in Benefit Planning, Design, and
Vision Care 497
Administration 450
Benefits Planning and Design Issues 450 More Benefits 498
Benefit Administration Issues 451 Paid Time Off during Working Hours 498
Payment for Time Not Worked 498
Components of a Benefit Plan 454
Family-Friendly Policies (including Child Care,
Employer Factors 454
Family Leave, and Flexible Work) 499
Employee Factors 457
Elder Care 500
Administering the Benefit Program 459 Domestic Partner Benefits 500
Legal Insurance 501
Employee Benefit Communication 459
Addressing Financial Precarity (and Financial
Cost Containment 463
Wellness) 501
Claims Processing 463
Benefits(orLackThereof):ContingentandAlter-
Your Turn:World Measurement 464
native Work Arrangement Workers 501
