This part of the book is intended to give the reader a feel for how many organizations design their compensation systems. Even if your organization doesn't do it this way, it is helpful to understand how this is done because many organizations follow suit, either directly or by comparing compensation with others through consultants and other intermediaries. The basic structure is important to understand if you want to make your own compensation system more effective and if you want to understand how to make more yourself. This part of the book starts with a discussion of business strategy and compensation strategy. It then goes on to present the “guts” of how most compensation systems are organized. It also includes a discussion of internal and external comparisons and how to collect the right data. We start with strategy.

Starting With a Basic Framework

My PhD is in economics, so when I started making the transition from purely academic work in economics to interdisciplinary academic work on compensation to the more practical world, I must admit that I was more than a little skeptical when I first started hearing about and reading about compensation “strategy.” Therefore, I don't blame you if you are a bit suspicious too. Don't markets work and aren't people just paid what they are worth? And if this is so, why should we waste time and resources thinking about how to pay people and why we would ever even think about “strategy?” If the “market” acts appropriately, won't things just sort themselves out? Finally, isn't thinking about compensation “strategy” just a total waste of time? No: compensation “strategy” isn't a waste of time and this chapter is intended to highlight a few reasons why it is important to consider strategy when paying workers.