Chapter 2
A Strategic Framework for
Compensation
Copyright ©2021 by Top Hat 2-1
Learning Outcomes
(Slide 1 of 3)
• Understand the concept of “fit” and explain why a
compensation system that is a success in one firm
can be a failure in another.
• Explain how the strategic framework for
compensation can be used as a tool for designing
effective reward and compensation systems.
• Describe the main sets of elements in the strategic
compensation framework, and explain how they
relate to one another.
2-2
Learning Outcomes
(Slide 2 of 3)
• Describe the three main managerial strategies that
organizations can adopt, and explain their
implications for compensation system.
• Describe the main determinants of managerial
strategy and explain how they can be used to select
the most appropriate managerial strategy.
2-3
Learning Outcome
(Slide 3 of 3)
• Analyze any organization to determine the most
appropriate managerial strategy for that organization
to adopt.
• Discuss how conditions in North America changed
during the 20th century, and explain how this has
affected today’s managerial and compensation
strategies.
2-4
Effective Compensation Systems
• A Tale of Two Firms: ArcelorMittal Dofasco
and Koch Foods
Which compensation system
is the most effective?
Copyright © 2021 by Top Hat 2-5
A Strategic Framework for
Compensation
• Vision – desired future state
• Mission – reason for existence
• Values – principles, beliefs, and attitudes
• Vertical fit – alignment of strategies at
different levels
• Horizontal fit – alignment of strategies at the
same level
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Strategy and the Concept of Fit
• Business strategy
– plan for achieving goals
• Organizational structure
– means through which an organization generates the
behaviours necessary to execute its business strategy
• Contingency approach to organizational design
– an approach based on premise what the best type of
structure depends on the key contingencies (contextual
variables)
Copyright © 2021 by Top Hat. 2-7
Figure 2.1
A Strategic Framework for
Compensation
Copyright © 2021 by Top Hat 2-8
Assessment Question 2.1
An company’s human resource management
functions, such as recruitment, training, and
performance management, are all focused on
helping its organizational objectives. What is this
alignment of strategies called?
a. best fit
b. vertical fit
c. operations alignment
d. horizontal fit
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A Strategic Framework:
Structural Variables
• Structural variables
– Reward system
– Job design
– Coordination and departmentation
– Decision-making and leadership structure
– Communication and information structure
– Control structure
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A Strategic Framework:
Managerial Strategy
• Managerial Strategy
– One of the three main patterns or combinations of
structural variables that can be adopted by an
organization:
1. Classical
2. Human relations
3. High-involvement
Copyright © 2021 by Top Hat. 2-11
A Strategic Framework:
Contextual Variables
• Contextual variables
– Factors in the firm’s context that indicate the most
appropriate managerial strategy and
organizational structure
• Organization’s environment
• Business strategy
• Technology
• Size
• Workforce
Copyright © 2021 by Top Hat 2-12
Assessment Question 2.2
Which of the following is not considered a
structural variable under the strategic
framework of compensation?
a. job design
b. business strategy
c. control system
d. reward system
Copyright © 2021 by Top Hat 2-13
Comparison of the Three Managerial
Strategies
(Slide 1 of 4)
Classical Human Relations High-Involvement
Structural Variable Managerial Managerial Managerial
Strategy Strategy Strategy
Similar to classical, Joint planning and
Thinking separate
but job design may goal setting;
Job Design from doing; narrow,
allow more social broader, more
fragmented jobs
contact meaningful jobs
Strict, formalized Horizontal
pyramidal hierarchy coordination (by
emphasizing employees) in
accountability; Similar to classical; addition to vertical
Coordination and
vertical possibly use of coordination; use of
Departmentation
coordination (by some work teams work teams;
superiors); departmentation by
departmentation by product, customer,
function project, or matrix
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Comparison of the Three Managerial
Strategies
(Slide 2 of 4)
Classical Human Relations High-Involvement
Structural Variable Managerial Managerial Managerial
Strategy Strategy Strategy
Internal—through
External—through External—through
intrinsic rewards
supervision, rules, use of social or peer
from the work itself,
Control punishments, and pressure, rules,
self-control through
some extrinsic some extrinsic
internalized
rewards rewards
commitment
High amount of
vertical and
Use of formal and
horizontal
Formal and vertical; informal (grapevine)
Communication communication;
restricted communication;
less formal; climate
some restriction
of open
communication
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Comparison of the Three Managerial
Strategies
(Slide 3 of 4)
Classical Human Relations High-Involvement
Structural Variable Managerial Managerial Managerial
Strategy Strategy Strategy
Autocratic decision Participative or
Autocratic decision making with minor democratic decision
Decision Making making; task- consultation; style; both task- and
and Leadership oriented; controlling employee-oriented; employee-oriented;
supervisory role controlling facilitator
supervisory role supervisory role
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Comparison of the Three Managerial
Strategies
(Slide 4 of 4)
Classical Human Relations High-Involvement
Structural Variable Managerial Managerial Managerial
Strategy Strategy Strategy
Intrinsic rewards
Extrinsic economic from job itself; pay
Extrinsic economic
rewards, unrelated for knowledge;
rewards related to
to performance; extrinsic rewards
individual output
liberal fringe focusing on
Reward systems (e.g., piece rates,
benefits (indirect group/organization
commissions) or to
pay) and loyalty performance (e.g.,
time worked (e.g.,
rewards; social gain sharing, profit
hourly pay)
rewards sharing, stock
ownership)
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Which Management Strategy Would You Use
for Narrow Job Design?
Monty Rakusen/Getty Images
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Interrelationships Among
Structural Variables
• Some elements are
complimentary, others
serve as substitutes for
others
– A single managerial
strategy is usually more
effective than an
inconsistent mix of
structural elements © [Link]/PeopleImages
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Organizational Culture
Guiding
beliefs
Core values
Understandings
CULTURE
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Determinants of the Most
Appropriate Managerial Strategy
Environment
Nature of
Corporate
the
strategy
workforce
Contextual
variables
Organization
Technology
Size
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Environment
• Most important of the contextual variables
– Stable or unstable?
– Simple or complex?
• These combinations determine the most
effective approach
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Corporate Strategy
Miles and Snow
• Defender
– dominating a narrow product or service market segment
• Prospector
– identifying and exploiting new opportunities quickly
• Analyzer
– exploiting new opportunities at a relatively early stage
while maintaining a base of traditional products or
services
• Reactor
– firms that do not practise any distinct overall strategy
Copyright © 2021 by Top Hat 2-23
Technology
• Set of procedures and resources an organization
uses to transform resources to usable products and
services
– Type of production processes
– Routine or non-routine
– Small or large batch
– Implication for workforce capabilities
• Technology can serve as a source of competitive
advantage and influence the managerial and
compensation strategies to be used.
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Organization Size
• Large organizations generally use classical or
human relations strategies
• Easier to implement high involvement in a
small- to medium-sized organization
– The larger the organization, the greater the need
for some formal structure
• Hewlett-Packard has traditionally used this
approach
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The Nature of the Workforce
• Highly skilled, well-educated, or professional
employees are more suited to the high-
involvement organization
• High-involvement strategy requires these
characteristics because of the broad job and
decision-making responsibility expected of
employees
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Nature of the Workforce:
Classical
• Classical organizations are specifically
designed to use employees with relatively low
skill levels, and because of their approach to
motivation and control, these organizations
are most suited to workers who badly need
the money the job provides
Copyright © 2021 by Top Hat. 2-27
Nature of the Workforce:
Unions
• Role of unions
– Unions can have an effect on employee skills, their
tasks and responsibilities, and their expectations
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Selecting the Most Appropriate Strategy
HIGH-
CONTEXTUAL VARIABLE CLASSICAL HUMAN RELATIONS
INVOLVEMENT
Environment
• Stable • Stable • Unstable
• Stability
• Simple • Simple or complex complex
• Complexity
Business Strategy
• Defender • Analyzer • Prospector
• Miles and Snow typology
• Low cost • Focused differentiator • Differentiator
• Porter’s typology
Technology
• Things • People • Ideas
• Product transformed
Size
• Any size • Any size • Small/medium
• Number of employees
Workforce
• Low • Moderate • High
• Skills/education
• Poor • Moderate • Good
• Economic circumstances
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Assessment Question 2.3
Which of the following managerial strategies
would be suitable for a defender strategy, simple
and stable environment, and low-skilled workers
with poor economic circumstances ?
a. Human relations
b. Classical
c. High involvement
d. Mechanical
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Assessment Question 2.4
Which of the following is likely to be offered to
employees by a company practicing a high-
involvement managerial strategy?
a. Overtime
b. Opportunity to grow professionally in the job
c. Output-based incentives
d. Strong control by managers
Copyright © 2021 by Top Hat 2-31
Trends in Managerial and
Compensation Strategies
• All three managerial strategies can be effective
if used in the right context
• How are circumstances changing in North
America, and how will these changes affect
the optimal choice of managerial strategy?
Copyright © 2021 by Top Hat 2-32
The Evolution of Managerial
Strategies
• Socioeconomic changes in Canada created
conditions that are more suitable for high-
involvement organizations and less suitable for
classical and human relations organizations
• Educational levels have increased
• Economic security and social security have
improved
• Social values have become more democratic
and egalitarian
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Evolving Strategies
• All of these conditions work against classical
and human relations organizations
• Many classical firms have found developing
countries are a much better fit for their
preferred managerial strategy and have
moved operations there
• Human relations organizations tend to be as
rigid and inflexible as classical organizations
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Trends in Compensation Systems
(Slide 1 of 2)
• More complicated pay systems
• Increase in pay-for-performance (profit-
sharing, employee share plans) during latter
part of 20th century
• Flexible benefit plans
• Gradual movement away from hourly pay to
salary
Copyright © 2021 by Top Hat 2-35
Trends in Compensation Systems
(Slide 2 of 2)
• Wage freezes/rollbacks, cuts to benefit plans,
increased use of two-tier wage systems
– Fell out of practice in late 1990s when economic
conditions improved, resurged in 2008-2009
during global financial crisis and recession
• Increased use of part-time, temporary, and
contract workers (“contingent workers”)
• Implementing noncash employee recognition
programs
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Assessment Question 2.5
Which of the following is not a recent trend in
compensation system?
a. Trend towards noncash employee recognition
programs
b. More complicated pay systems
c. Increase in performance-based pay
d. Non-flexible benefit plans
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Discussion Question
• Read “The Fit Stop Ltd. Case on page 478 in
the Appendix. Which managerial strategy
would be the most effective for this firm?
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