Human Resources Chapter 1 Source The Wall Street Journal February Discussion Case Questions Thinking Back Our

Unlock access to all the studying documents.

View Full Document

Chapter One: The Pay Model 1 – 12

pay of others in the organization.

▪ Compliance is affected by the basis used to make internal comparisons.

External Competitiveness

o External competitiveness decisions—both how much and what forms—have a

twofold effect on objectives:

1. To ensure that the pay is sufficient to attract and retain employees—if

2. To control labor costs so that the organization’s prices of products or

services can remain competitive in a global economy.

Employee Contributions

o How much emphasis should there be on paying for performance?

▪ Should one programmer be paid differently from another if one has better

performance and/or greater seniority?

o Emphasis placed on employee contributions (or nature of pay mix) is a key

policy decision since it directly affects employees’ attitudes and work

behaviors.

o Performance-based pay affects fairness in that employees need to understand

o The external competiveness and employee contribution decisions should be

made jointly.

▪ Clearly, an above-market compensation level is most effective and

Management

o Management means ensuring that the right people get the right pay for

achieving the right objectives in the right way.

1 – 13 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

o The ground under compensation management has shifted.

C. Pay Techniques

• The remaining portion of the pay model in Exhibit 1.5 shows the techniques that

make up the pay system.

V. Book Plan

• The focus of this book is on the design and management of compensation systems.

• Part One, Chapters 1 – 2, introduces the pay model which provides the structure for

much of this book.

o Chapter 2 discusses how to formulate and execute a compensation strategy.

• Part Two, Chapters 3 – 6, focuses on internal alignment and examines pay

relationships within a single organization.

• Part Three, Chapters 7 – 8, examines external competitiveness – the pay relationships

among competing organizations – and analyzes the influence of market-driven forces.

• Part Four, Chapters 9 – 11, focuses on employee contributions, the third building

block in the model, examining issues related to how much to pay each employee, how

much and how often should an employee’s pay be increased and on what basis, etc.

• Part Seven, Chapters 17 – 18, discusses critical issues related to managing the

compensation system, including the government’s role in compensation as well as

Chapter One: The Pay Model 1 – 14

Education.

o There is rarely a single correct approach, alternative approaches exist or can be

designed.

VI. Caveat Emptor – Be an Informed Consumer

• Students and future managers need to be informed consumers of compensation

research.

o They must be able to understand the state of knowledge—what is and isn’t known.

• A consumer’s guide, that includes three questions, is provided to evaluate research

studies.

o Is the Research Useful?

▪ How useful are the variables in the study?

▪ How well are they measured?

▪ Does the research measure anything useful?

o Does the Study Separate Correlation From Causation?

▪ Once we are confident that the variables are useful and accurately measured, we

must be sure that they are actually related.

▪ Most often this is addressed through the use of statistical analysis.

▪ Many research studies use a statistical analysis known as regression analysis.

▪ One output from a regression analysis is the R2. The R2 is a squared correlation

▪ For example, just because a manufacturing plant initiates a new incentive plan

and the facility’s performance improves, we cannot conclude that the incentive

o Are There Alternative Explanations?

▪ The best way to establish causation is to account for competing explanations,

either statistically or through control groups.

▪ The point is alternative explanations often exist. And if they do, they need to be

1 – 15 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

VII. Your Turn: The Role of Labor Costs in Retail Electronics

Summary of Case

The case discusses Circuit City’s decision in 1997, to replace some of its highest-paid

employees with lower-paid workers. Some commentators attributed the loss it suffered in the

following quarter to this decision. The company was forced to liquidate later. The case also

talks about Best Buy, who started aggressively cutting down costs by demoting employees,

Learning Objective

Understand the impact of the change in Circuit City and Best Buy’s compensation strategy on

the companies’ performance.

Discussion of Case Issues

Evaluate whether the replacement of highly paid workers with lower-paid workers did or did

not cause Circuit City to perform so poorly. Will Best Buy face the same fate as Circuit City

because of its cost cutting measures and low sales of expensive items? How confident are you

in your evaluation? Why? What other data or information would be helpful in assessing

Circuit City change in compensation strategy.

Teaching Guidelines

Use this case to stimulate a discussion on restructuring and analyze the impact of replacement

of highly paid workers with lower-paid workers on the performance of Circuit City and the

effect the cost cutting measures taken by Best Buy on its sales and competitive edge.

Exhibit 1.8: Data on stock prices and customer satisfaction for Circuit City, Best Buy, and

two other competitors, Amazon and Walmart.

• In the case of Circuit City, the customer service index had dropped in 2007, when the layoff

announcement was made. On the other hand, Best Buy’s customer satisfaction index hit a

Chapter One: The Pay Model 1 – 16

high in the same year.

Discussion of Case Questions

1. Thinking back to our discussion in the chapter section, Caveat Emptor—Be An

Informed Consumer, evaluate whether the replacement of highly paid workers with

lower-paid workers did or did not cause Circuit City to perform so poorly. How

confident are you in your evaluation? Why?

Student answers will vary. There are several reasons why Circuit City went bankrupt. Though

the replacement of highly paid workers with lower paid workers was one of the reasons, it

might not have been the main cause of the consumer-electronics retailer’s downfall. It all

Sources:

2. How is Best Buy doing? Did its cuts to labor costs work?

Answer: Best Buy’s stock price has rebounded dramatically. Its cuts to labor costs has

probably contributed to this improvement. However, there are likely many other factors at

3. Why are Walmart and Amazon doing better than Best Buy (and Circuit City)? Do

they have high pay?

Each of the three has their own Unique Selling Propositions (USP).

Walmart is one of the most well renowned global retail giant brands. Walmart has a large

customer base and the scale gives it the ability to negotiate sharp prices from its vendors,

4. Are there larger problems in the competitive landscape for Best Buy that cannot be

solved by compensation strategy changes alone? When customers look to buy

electronics, what options do they have other than Best Buy and why would they

choose these options over Best Buy? Where do customers “test drive” the product and

where do they buy it? Can compensation changes address these challenges? Explain.

Best Buy faces very strong competition from Walmart, as the latter has a large customer base

and it sells everything from groceries, to apparels and electronics. Also Walmart offers a wide

range of products at lower prices. This is possible for Walmart to achieve because of its scale

Education.

5. Is Best Buy focusing too much or too little on cost reduction? Explain.

6. If you had answered these questions about Best Buy in 2013 (when its stock price was at

13), what would you have expected to happen to Best Buy? Are you surprised by their

performance since 2013? What lesson, if any, do you take away from their reversal of

fortune?

Answer: One presumes that as of 2013, many did not expect Best Buy survive and that it

would follow the same path as Circuit City. Might ask students to search for newspaper

Answers to Review Questions

1. How do differing perspectives affect our views of compensation?

From a societal perspective, compensation may be viewed as:

• a measure of the inherent equity and justice in a society (examine the wages of similarly

situated men versus women, blacks versus whites, etc.).

1 – 19 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

From a stockholder perspective, compensation may be viewed as:

• a mechanism to increase stockholders’ wealth.

• a key method to link executive pays to company performance.

From a managerial perspective, compensation may be viewed as:

• a major expense to be managed.

• a means to influence employee work attitudes and behavior, which affect productivity.

From an employee perspective, compensation may be viewed as:

• a return for services rendered.

• a reward for meritorious performance.

• an indicator of the worth of an individual’s skills or training.

• a major determinant of economic and social well-being.

From a global perspective, compensation may be used to convey more contemporary

meanings:

• Countries like China and Japan have replaced traditional words associated with pay to

2. What is your definition of compensation? Which meaning of compensation seems most

appropriate from an employee’s view: return, reward, or entitlement? Compare your

ideas with someone with more experience, someone from another country, someone from

another field of study.

“Traditional” college students will most likely focus on direct compensation only, since most

students in this category will have expenses beyond their present earning capacity. “Non–

3. What is the “network of returns” that your college offers your instructor? What returns

do you believe make a difference in teaching effectiveness? What “returns” would you

change or add to increase the teaching effectiveness?

The “network of returns” an instructor receives will depend on the type of college or

university (example—research versus teaching orientation) he/she attends. Potential examples

are provided below. Relational returns, moving beyond compensation and benefits are

Education.

4. What are the four policy issues in the pay model? What purposes do the objectives in the

pay model serve?

The four policy issues in the pay model are: (1) internal alignment; (2) external

competitiveness; (3) employee contribution; and (4) management of the pay system.

5. List all the forms of pay you receive from work. Compare your list to someone else’s list.

Explain any differences.

The different forms of pay will definitely depend on the types of jobs a student has held and

the nature of his/her work experience. The various types of pay include: (1) pay received

Education.

6. Answer the three questions in the Caveat Emptor—Be An Informed Consumer section for

any study or business article that tells you how to pay people.

(1) Is the research useful?

Many studies use managers’ opinions as measures of success. For example, Rynes, Colbert,

and Brown (2002; see footnote #54) conducted a study that surveyed 5000 HR managers and

compared their beliefs to the research evidence in several areas and identifies seven common

(2) Does the study separate correlation from causation?

Empirical research studies typically employ statistical analysis techniques to analyze the

variables of interest. The correlation coefficient is a common measure of association and

indicates how changes in one variable are related to changes in another. A study conducted to

Education.

(3) Are there alternative explanations?

Research studies focused on compensation often examine the impact of a certain type of pay

program (i.e. merit or performance-based pay, team-based pay, gain-sharing) on a measure of

organizational performance (i.e. customer satisfaction, company performance, productivity,

quality) over a period of time. Researchers typically want to demonstrate that the introduction