Compensation, 14e Barry Gerhart, Jerry Newman (Instructor's
Manual All Chapters, 100% Original Verified, A+ Grade)
CHAPTER ONE
THE PAY MODEL
Overview
Part One, Introducing the Pay Model and Pay Strategy, contains chapters one and two and begins
by talking about what “pay” means and how paying people in different ways can influence them
and, in turn, organization success. The two chapters describe the compensation policies and
techniques that organizations use and the multiple objectives they hope to achieve by effectively
managing these compensation decisions. The aim of Part One is to understand how
compensation strategy decisions interact with the specific context of an organization (its business
and human resource strategies) to influence organization success. The authors emphasize that
good theory and research are fundamental to not only understanding compensation’s likely
effects, but also to developing that healthy skepticism needed toward simplistic claims about
what works and what does not.
Chapter one starts with a discussion on the role of poorly designed compensation plans in the
current economic situation. It provides an overview of the key components of a compensation
system. The definition of compensation is initially explored from the perspectives of the society,
stockholders, the organization, and the external environment. Next, the various forms of pay are
identified and defined. The major focus is presenting a pay model that provides a structure for
understanding compensation systems. The three main components of the model are (1)
compensation objectives, including the importance given to ethics; (2) policy decisions that
guide the way objectives will be achieved; and (3) techniques that make up the pay system. The
book plan is outlined at the end of chapter one. The remaining chapters examine each of the four
policy decisions—internal alignment, external competitiveness, employee performance, and
management—as well as the techniques, new directions, and related research.
Learning Objectives
• Compare the benefits of well-designed compensation systems to the detriments of poorly
designed compensation systems.
• Define compensation from the perspectives of society, stockholders, the organization,
and the external environment.
• Examine the various forms of pay including cash compensation, benefits, total earnings
opportunities, and relational returns from work.
• Understand the three components of the pay model: compensation objectives, policy
choices, and pay techniques.
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, Chapter One: The Pay Model 1-2
Lecture Outline: Overview of Major Topics
I. Compensation: Does it Matter (or, “So What?”)
II. Compensation: Definition, Please (Stakeholders)
A. Society
B. Stockholders
C. Customers
D. Managers
E. Employees
III. How Pay Influences Behaviors: Incentives and Sorting Effects
A. Global Views – Vive la Différence
IV. Forms of Pay
A. Cash Compensation: Base
B. Cash Compensation: Merit Increases/Short-Term Incentives (Merit
Bonuses)/COLAs
C. Cash Compensation: Incentives
D. Long-Term Incentives
E. Benefits: Income Protection
F. Benefits: Work/Life Balance
G. Benefits: Allowances
H. Total Earnings Opportunities: Present Value of a Stream of Earnings
I. Relational Returns from Work
V. A Pay Model
A. Compensation Objectives
B. Four Policy Choices
C. Pay Techniques
VI. Book Plan
VII. Caveat Emptor—Be an Informed Consumer
A. Is the Research Useful?
B. Does the Study Separate Correlation from Causation?
C. Are There Alternative Explanations?
VIII. Your Turn: Compensation at the World’s Largest Company
IX. Still Your Turn: Who are Amazon’s Peer Companies for Comparing Compensation?
X. Summary
XI. Review Questions
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,1-3 Compensation – Fourteenth Edition Barry Gerhart
Lecture Outline: Summary of Key Chapter Points
I. Compensation: Does It Matter? (Or, “So What?”)
1. The role of poorly designed compensation plans is analyzed from different
perspectives.
• Companies that failed in recent times had labor costs higher than competition
without the corresponding advantages in efficiency, quality, and customer
service.
o Examples in the text include Chrysler and General Motors (GM).
▪ Chrysler was paying $76/hour in pay and benefits
▪ Vs. Toyota paying $48/hour in pay and benefits (in the U.S.)
▪ Vs. average total compensation for all U.S. manufacturing was
$25/hour – and $3/hour in Mexico
▪ Chrysler was not sustainable and filed for bankruptcy
i. they were bought out by Fiat
ii. brought pay costs down to $49/hour
iii. and are now part of Stellantis
▪ GM also filed bankruptcy in 2009
▪ Their problems included more than overcompensating their
employees
▪ As of 2021, GM’s market value was over $80 billion
▪ Far behind Tesla, at $635 billion
• Successful companies had relatively high pay as well as higher productivity
compared to competitors.
o One example in the text is Nucor Steel who had higher productivity
than is typical in the steel industry
▪ Both the company and its workers do well
o Apple reduced prices for iPads and iPhones by outsourcing
manufacturing to China
▪ In facilities owned by a Taiwanese company
▪ This generated billions in cost savings per year
o Google and Facebook are known for paying very well
▪ High pay allows them to be selective in hiring and retention
▪ This helps them foster growth and innovation
• Wall Street financial services firms and banks used incentive plans that
rewarded people for developing “innovative” new financial investment
vehicles and for taking risks to earn themselves and their firms a lot of money.
o When the markets discovered that many such risks had gone bad, the
firms either had to file for bankruptcy or wait for other companies to
take them over.
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, Chapter One: The Pay Model 1-4
o An important driver of risk taking is the incentive system that
encourages them to be “confident and aggressive.”
• The U.S. Justice Department announced a $678 million settlement with
Novartis over improper inducements to persuade doctors to prescribe Novartis
drugs
o This was the largest whistleblower settlement under federal law
o The whistleblower wore a wire for the feds to change the way the
pharmaceutical industry operated
o Novartis then changed its sales compensation so pay no longer
depends only on sales
o Pay also now depends on if sales were achieved in a way consistent
with their code of ethics
2. How people are paid affects their behavior at work, which affects an organization’s
success.
• For most employers, compensation is a major part of total cost, and often it is
the single largest part of operating costs.
• Well-designed compensation systems can help an organization achieve and
sustain competitive advantage.
• Poorly designed compensation systems can play a major role in undermining
organization success.
II. Compensation: Definition, Please (Stakeholders)
1. People’s view of compensation differs depending on whether they look at
compensation from the perspective of a member of society, a stockholder, a manager,
or an employee.
2. Thus, the text analyzes the definition and importance of compensation from several
different perspectives.
A. Society
1. Exhibit 1.1 summarizes information on indicators of economic standard of living
• At the top, Panel A, economic output (GDP) per Employed Person, is a
measure of national productivity
o Productivity increased by 52% since 1990
▪ In general, increases in productivity are necessary to generate
increases in income and wealth for the population
▪ Note that the productivity in the U.S. in 2020 ($127,378I) is the
highest among the 30 largest world economies
• Panel B shows the average annual earnings increased 23% since 1990
• Panel C moves from individual earnings to household income – with two sets
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