1-1 Define strategic compensation.

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“What is strategic compensation? Answering this question requires that we first answer the question, “What is compensation?”

What Is Compensation? Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs and for their membership as employees. Together, both intrinsic and extrinsic compensation describe a company’s total compensation system, which we will look at more closely in this chapter, and, in even greater detail throughout the remainder of this textbook.

Intrinsic compensation ( reflects employees’ psychological mind-sets that result from performing their jobs, for example, experiencing a great feeling from the belief that one’s work matters in the lives of others. Perhaps it is easy to imagine that many health care providers feel this way. Extrinsic compensation ( includes both monetary and nonmonetary rewards. Organizational development professionals promote intrinsic compensation through effective job design. Compensation professionals are responsible for extrinsic compensation, which is the focus of this textbook.

Compensation professionals establish monetary compensation programs to reward employees according to their job seniority, performance levels, or for learning job-related knowledge or skills. Some describe this exchange as a pay-effort bargain. As we will discuss shortly, monetary compensation represents core compensation ( . Nonmonetary rewards include protection programs (e.g., medical insurance), paid time off (e.g., vacations), and services (e.g., day care assistance). Most compensation professionals refer to nonmonetary rewards as employee benefits ( . Employees receive some or all of these offerings as part of an employment arrangement. Rarely do employers base employee benefits on job performance. Employee benefits are becoming an increasingly important element of compensation packages. Since the so-called Great Recession (2007–2009) ended, fewer companies have offered pay increases and, those that do, are offering lower amounts (from roughly an average 3.8 percent increase to less than 2 percent).

Both monetary and nonmonetary compensation represents costs to companies. In the case of core compensation, employers pay an hourly wage or salary. In the case of employee benefits, employers pay some or all of the cost for employees to have health insurance coverage rather than providing dedicated monetary payments, apart from wage or salary, to

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1.1 Defining Strategic Compensation

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pay for health care.

What Is Strategic Compensation? Defining strategic compensation requires that we place the relevance and importance of compensation practices in a broader context where compensation practices are linked to competitive business strategy, as shown in Figure 1-1 ( . Competitive business strategy ( refers to the planned use of company resources—financial capital, equipment capital, and human capital—to promote and sustain competitive advantage. The time horizon for strategic decisions may span multiple years. For example, Exxon Mobil Corporation, a company in the oil and gas exploration industry, strives to be the world’s premier petroleum and petrochemical company by achieving superior financial and operating results while simultaneously adhering to high ethical standards.

Eli Lilly and Company, a manufacturer of pharmaceutical products, pursues a competitive strategy, which focuses on creating innovative medicines that improve patient health outcomes.

FIGURE 1-1 Relationship between Strategic Decisions and Compensation Practices

Human resource executives collaborate with company executives to develop human resource strategies. Human resource strategies





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