Northern Software Compensation

Case #2: Northern Software

Question 1

There are a number of different policies regarding external competitiveness and each have their own pros and cons. The first is Lead; this policy has the ability to maximize the attraction of quality talent and it can retain valuable employees, while minimizing employee dissatisfaction with respect to pay. Research has also suggested higher pay levels can reduce turnover, absenteeism, vacancy rates, and training time. This policy is also useful when attempting to offset less attractive features of the work (i.e. higher pay in brokerage firms offsets the risk of losing your job when the market is unfavorable). The policy does have some cons: research has concluded that high pay levels do not have a direct impact on productivity. However, variable pay does improve productivity (i.e. bonuses, long-term incentives). Therefore, offering higher salaries will not improve a company’s financial performance. Secondly, labor costs can be negatively impacted. The employer might be forced to increase the wages of current employees in order to avoid internal misalignment and employee dissatisfaction.

The second policy is Match. This policy aims to match the market price and is also the most common. Pros of this policy include that there are no real negatives; it does not place the employer at a disadvantage in pay levels. This means a company with this policy has an equal ability to attract talent, retain talent, reduce pay dissatisfaction, and labor costs are similar to that of the market. The con of this policy is that the employer will lack a competitive advantage in the labor market.

The third policy is Lag. This policy pays below the market price. As a result, the company may be at a disadvantage of attracting potential employees and it can have a negative impact on pay satisfaction. However, if the employer lags pay in return for the promise of higher future returns, that can have a positive impact on employee commitment and may increase productivity. For example, Shopify (an e-commerce platform) offered its employees stock ownership and lower pay levels initially. The company was highly successful due to committed employees and when the company went public a few years ago, the hard work and dedication paid off for the employees.

Lagging pay is also acceptable if the company can lead on other returns from work (i.e. desirable assignments or location, work/life balance, amazing colleagues, etc).

Our recommendation for the Marketing Manager’s pay policy would be to lag. Despite lagging pay, the company can promise higher future returns. Referring back to Shopify’s example, when the company was a start-up in 2006 it was not in the financial position to lead in base pay for all employees, much like it is now. However, the incentives and stock options worked as a motivator to increase productivity and it has had a significant impact on the company’s financial performance. The same theory can be applied to Northern Software. Our full recommendation would be to use a hybrid policy. It is possible to lag in one occupational family, and lead in another (i.e. software developers)

Question 2

Fort McMurray is located in Alberta, and the province’s current unemployment rate is hovering around 8.6%, a steady increase since last September (6.6%). This increase can also be attributed to the damaging forest fire that took place this past summer. In fact, the number of people filing for Employment Insurance in Fort McMurray in May rose by 69.8% (Appendix 1.1). In addition, the professional, scientific, and technical services industry in Alberta employs 7.9% of the total workforce (StatsCan, 2016). This isn’t a large proportion; therefore, Northern Software would not have to lead in pay for all positions, as the competition for these jobs would be high. In comparison, a start-up in Silicone Valley, California would have more competition; therefore a lead policy would be more favorable in that location.