Independent University, Bangladesh

Case study
COURSE CODE: MBA 509
COURSE: Human Resources Management
Section-2
SUBMITTED BY:
Name Id
Afzal Hossain Tanvir 2531205
Shoprova Nahrin 2531047
Rizwan Ahamed 2531061

SUBMITTED TO:
Prof. Dr. Muhammad Shariat Ullah
SUBMISSION DATE:
20TH August 2025
Show Me The
Money:
Compensation
At Cel
Contents
Summary......................................................................................4
Relations with Performance management...................................5
Core Principles of Performance Management Theory
Relevant to CEL......................................................................5
How the CEL Case Relates to Performance Management
Theory.......................................................................................6
Managing Compensation Theory:...............................................9
Core Principles of Compensation Management Theory
Demonstrated:.........................................................................9
Applying Theory to Arvidson's Options:..............................11
Recommended...........................................................................12
Conclusion:................................................................................12
Key Conclusions...................................................................13
 Show Me the Money:
Compensation At Cel
Summary
Core Problem: CEL President Jeff Arvidson wants to hire Ron Grubb, a skilled pipe stress
analyst, to bring a new revenue-generating service in-house. However, Grubb's salary
expectation (CA$90,000-$110,000) is significantly higher than:

1. CEL's Internal Pay: Average for engineers with 5-10 years experience is $85,000.

2. Arvidson's Initial Offer Plan: He initially thought $85,000 based on experience.

3. Some Existing Engineers' Pay: Paying Grubb more risks creating internal inequity and
resentment.

CEL Background:

 Small (16 employees), employee-owned engineering consulting firm in Waterloo, ON.

 Specializes in certifying pressure equipment for safety regulations.

 Recently transitioned to employee ownership (majority of employees own ~5% each via
affordable purchase plans).

 Seeking to expand into pipe stress analysis (currently outsourced).

Compensation Context:

 Base Salaries: Lower than large firms. Structure based on experience (e.g., <5 yrs: $78k, 5-10
yrs: $85k, 10-15 yrs: $96k).

 Dividends: Potential future benefit (30-40% of earnings in good years after share purchase
period) but uncertain and dependent on company performance. Some employees prefer higher
base salary over this risk/reward.
 Total Rewards: Extensive package includes:
o Significant vacation (23 days) + holidays + shutdown.

o Comprehensive Health & Dental, LTD, Life/AD&D insurance.

o Generous RRSP matching (up to 6%).

o Health Spending Account ($500/yr rollable).

o Tuition/books reimbursement, paid study days, training.

o Strong work-life balance/flexibility, positive culture.

o Numerous social events, perks, and discounts.

Communication: An annual "Total Rewards Statement" details all benefits, but employees often
forget its specifics; the non-monetary perks are valued but the monetary impact seems muted.

Key Concerns:

1. Attracting Talent: As a small firm, CEL struggles to compete on base salary alone against
larger companies. Grubb has critical skills needed for growth.

2. Internal Equity: Paying Grubb substantially more than peers could demotivate existing
engineers and damage morale/culture.

3. Compensation Philosophy: Tension between lower base salary + potential high

dividends/benefits vs. employee preference for guaranteed higher cash compensation. Not all
employees value the total rewards package equally.

4. Urgency: Bringing pipe stress analysis in-house is seen as immediately profitable and
strategically important.

Arvidson's Options:
1. Offer Lower Salary (~$85k): Risk Grubb rejecting the offer, losing the candidate and the
strategic opportunity.

2. Meet Grubb's Demand ($90k-$110k): Risk creating internal pay inequity and upsetting
existing employees if they discover the disparity.

3. Revamp Compensation System: Increase salary levels for all engineers to be more competitive
and avoid internal inequity. This would significantly increase fixed costs.

Relations with Performance management

Core Principles of Performance Management Theory Relevant to CEL

1. Alignment with Organizational Strategy: PM aims to ensure individual efforts contribute to

organizational objectives.
2. Goal Setting & Feedback: Establishing clear expectations and providing ongoing feedback.
3. Performance Measurement & Evaluation: Assessing how well employees meet goals.
4. Rewards & Recognition (Compensation): Linking performance outcomes to tangible and
intangible rewards to motivate and reinforce desired behaviors.
5. Development: Identifying skill gaps and providing opportunities for growth.
6. Fairness & Equity: Ensuring systems are perceived as just and equitable.
7. Communication: Clearly conveying expectations, feedback, and the value of rewards.

How the CEL Case Relates to Performance

Management Theory
1. Compensation as a Performance Driver & Reward (Expectancy & Reinforcement
Theories):
o Grubb's Expectation: Ron Grubb links his salary expectation directly to his inputs (7 years
experience, unique skills). This reflects the core idea of Expectancy Theory - employees are
motivated when they believe effort (inputs) leads to performance, which leads to desired rewards
(outcomes like salary).
o CEL's Strategic Need: Hiring Grubb aligns with the strategic goal of branching into pipe stress
analysis to capture lost revenue and grow. His skills directly contribute to achieving this
organizational objective. PM theory emphasizes rewarding contributions that advance strategy.
o Davies' Argument: Davies explicitly states Grubb will "pay for himself" by bringing outsourced
work in-house. This is a direct performance-reward linkage argument. It suggests
Grubb's expected performance (cost savings, revenue generation) justifies the higher reward
(salary), aligning with Reinforcement Theory .
2. Internal Equity & Fairness (Equity Theory):
o Arvidson's Primary Concern: His immediate worry is that paying Grubb significantly more
($90k-$110k) than existing engineers with similar experience (avg. $85k) will create perceptions
of inequity.
o Comparison: Employees compare their own input/output ratios (effort, experience/salary,
benefits) to others (Grubb's experience/higher salary). A significant imbalance can lead to
demotivation, resentment, and reduced performance among existing staff.
o Data-Driven Approach: Arvidson uses internal salary data (Exhibit 1) to establish a baseline
for internal equity. PM theory stresses the importance of fair and consistent compensation
structures based on objective factors like experience, role, and performance.
3. External Competitiveness & Market Positioning:
o Attraction Challenge: Arvidson acknowledges CEL struggles to compete on salary with larger
firms. PM theory recognizes that compensation must be externally competitive to attract critical
talent (like Grubb).
o Market Data: Arvidson references salary survey data (Exhibit 2) to benchmark against
the external market. PM systems rely on such data to ensure rewards are competitive and
attract/retain talent necessary to achieve goals.
o Grubb's Leverage: His specific, in-demand skill set (pipe stress analysis) gives him greater
market power, justifying his higher demand. PM systems need flexibility to account for critical
skills and market scarcity.
4. Beyond Base Salary: Total Rewards & Intrinsic Motivation:
o Total Rewards Philosophy: CEL explicitly uses a Total Rewards Statement to communicate the
full value of compensation. PM theory recognizes that motivation stems from more than just
base pay.
o Components: CEL's package includes:
 Financial: Base pay, potential dividends (significant long-term reward), RRSP matching, Health
Spending Account.
 Benefits: Extensive health/dental, LTD, Life/AD&D.
 Work-Life: Generous vacation (23 days + holidays + shutdown), flexibility, work-life balance
initiatives.
 Development: Tuition reimbursement, paid study days, training, career development plans.
 Culture/Environment: Collegial atmosphere, social events (BBQs, lunches), team-building,
ownership stake.
o Intrinsic Motivation: Arvidson and Davies emphasize the positive culture, interesting projects,
and ownership as key motivators, acknowledging that "money isn't everything." PM theory
incorporates intrinsic motivators (achievement, recognition, work itself, responsibility, growth)
alongside extrinsic rewards.
o Communication Challenge: The case highlights the difficulty of making the total value of
rewards salient. Employees forget the statement details, and some undervalue non-cash elements
or the potential of dividends, impacting their perception of the reward package's fairness and
competitiveness.
5. Ownership as a Unique Performance Link (Goal Congruence):
o Alignment: Employee ownership creates a powerful link between individual/team performance,
company success, and personal reward (dividends). This fosters goal congruence – employees'
financial interests are directly tied to the company's long-term performance. This aligns perfectly
with PM's aim to link individual effort to organizational outcomes.
o Risk/Reward Trade-off: The grumbling about preferring higher base salary over uncertain
dividends highlights the performance-reward risk inherent in ownership. PM theory
acknowledges that reward structures influence risk tolerance and time horizons. Arvidson argues
this structure protects the company during downturns, promoting long-term sustainability – a key
organizational performance goal.
o Vesting: The 2-year vesting period for RRSP employer contributions incentivizes retention,
another key PM objective.
6. Performance Management Gaps Implied:
o Lack of Explicit Individual Performance Metrics: While experience is a proxy, the discussion
lacks clear links between individual performance evaluations and compensation decisions
(beyond experience level). PM theory stresses the importance of evaluating actual performance
against goals.
o Potential for Skill-Based Pay: Grubb's unique skill set suggests a potential need for skill-based
pay or competency-based pay structures within the PM system, formally recognizing and
rewarding critical in-demand skills differently.
o Calibration: Arvidson's dilemma underscores the need for a robust process
to calibrate compensation decisions – balancing internal equity, external market value, individual
contribution/performance, and strategic needs.

The CEL case vividly demonstrates the complexities of applying Performance Management
theory, particularly regarding compensation:

 It highlights the tension between attracting critical talent (external competitiveness/strategic

need) and maintaining internal equity.
 It showcases the importance of a Total Rewards perspective beyond base salary and the
challenge of effectively communicating its value.
 It illustrates how unique reward structures (like employee ownership) can create
powerful alignment between individual and organizational performance goals but also introduce
perceptions of risk and uncertainty.
 It underscores the need for data-driven decisions (internal/external benchmarks) and clear
communication within any performance and reward management system.
 It implicitly points to potential gaps in linking compensation directly to measured individual
performance outcomes and the need for flexibility to reward critical skills.

Managing Compensation Theory:

Core Principles of Compensation Management Theory Demonstrated:

1. Internal Equity vs. External Competitiveness (Equity Theory - Adams):

o Internal Equity: Arvidson's primary concern is fairness within CEL. Paying Grubb ($90k–
$110k) significantly more than peers with similar experience ($85k avg. for 5-10 yrs) risks
violating perceptions of fairness. Employees compare their input (experience, skills,
effort)/output (pay, benefits) ratio to Grubb's. A large imbalance could lead to demotivation,
resentment, and turnover (Adams' Equity Theory).

o External Competitiveness: CEL struggles to compete with larger firms on base salary. Grubb's
demand reflects the market rate for his specialized skills (pipe stress analysis). Compensation
theory stresses the need for market pricing to attract critical talent. Davies argues this explicitly
("we really need this guy," "he'll pay for himself").
2. Strategic Alignment & Skill-Based Pay:
o Grubb's role is not just a hire; it's a strategic investment to capture lost revenue and enter a new
service line. Compensation must align with business strategy. Paying a premium for scarce, high-
impact skills (like pipe stress analysis) is justified by the expected ROI (revenue
retention/generation, client service enhancement).

o This highlights the potential need for skill-based pay or competency-based pay structures within
CEL's system, formally recognizing and rewarding unique, strategically valuable skills
differently than general experience.

3. Total Rewards Philosophy:

o CEL explicitly uses a Total Rewards Statement. This aligns with the theory that compensation
encompasses far more than base salary: Direct Compensation (Base Pay, Potential Dividends,
RRSP match), Indirect Compensation/Benefits (Health/Dental, LTD, Life/AD&D, HCSA),
and Non-Monetary Rewards (Work-Life Balance - 23 days vacation + flexibility,
Culture/Environment, Development - Tuition, Training, Ownership, Social Events).

o The Communication Challenge: The case exposes a core tenet - the value of total rewards
must be effectively communicated and understood. Employees forget the statement details,
and some undervalue non-cash elements/dividends, undermining their perceived value and CEL's
competitiveness. Arvidson hopes the statement mitigates salary concerns but realizes its impact
is limited.

4. Variable Pay & Risk/Reward (Agency Theory):

o Dividends as Variable Pay: The employee ownership model introduces a significant variable
compensation component tied to company performance (dividends potentially 30-40% of
earnings). This aligns employee/owner interests (Agency Theory), aiming for goal congruence.

o Risk Tolerance: The "grumbling" employees prefer higher guaranteed base salary
over variable, performance-dependent dividends. Compensation theory recognizes employees
have different risk tolerances. CEL's structure favors those comfortable with risk/long-term
gains, potentially creating tension with those needing immediate, predictable income.

o Vesting: The 2-year vesting period for RRSP employer contributions is a classic retention tool
within compensation management.
5. Pay Structure & Administration:
o Structure: CEL has a relatively simple, experience-based salary structure (<5 yrs: $78k, 5-10
yrs: $85k, 10-15 yrs: $96k). Grubb (7 yrs) fits the 5-10 yr band ($85k). His demand exposes a
rigidity in this structure – it doesn't easily accommodate market premiums for specialized skills
critical to strategy.

o Benchmarking: Arvidson uses both internal data (Exhibit 1) and external salary surveys
(Exhibit 2), demonstrating sound practice in establishing internal equity and external
competitiveness benchmarks. Theory emphasizes data-driven decisions.

o Compression Risk: Hiring Grubb at $90k+ could create salary compression with more senior
engineers (10-15 yrs, $96k avg), further damaging internal equity.

6. Compensation Objectives in Tension:

The case perfectly illustrates the fundamental tension between key compensation objectives:
o Attract (Grubb's market rate demand)

o Retain (Existing employees' morale if equity is violated)

o Motivate (Linking rewards to ownership/performance vs. desire for guaranteed pay)

o Control Costs (Higher fixed salaries vs. variable dividends; revamping all salaries is expensive)

o Ensure Equity & Fairness (The core of Arvidson's dilemma)

o Comply (Implicitly, through benchmarking and structured plans like RRSP)

Applying Theory to Arvidson's Options:

1. Offer $85k (Internal Equity Focus):

o Theory Alignment: Prioritizes internal equity and existing pay structure consistency.

o Risk: Ignores external competitiveness and strategic value of the role. High risk of rejection
(failure to attract critical talent) per market pricing principles.

2. Meet Grubb's Demand ($90k-$110k) (External Competitiveness/Strategic Focus):

o Theory Alignment: Acknowledges market value and strategic need (skill-based pay
justification).

o Risk: Violates internal equity severely. High risk of demotivation, resentment, and turnover
among existing engineers if discovered (Equity Theory). Potential salary compression. Requires
secrecy, damaging trust.

3. Revamp Compensation System (Systemic Solution):

o Theory Alignment: Addresses the root cause – aligning the entire structure better with market
realities and strategic skill valuation. Improves external competitiveness broadly.

o Risk: Very high cost (increased fixed expenses). May not be financially sustainable, especially
for a small, employee-owned firm focused on long-term stability via dividends. Complex and
time-consuming to implement. Doesn't solve the immediate Grubb dilemma quickly.

 Ownership as Compensation: Shares purchased at a deep discount (10% FMV) represent

significant deferred compensation and potential future wealth.

 Compensation Philosophy Shift: Ownership fundamentally changes the compensation

philosophy. It shifts emphasis towards long-term wealth creation (dividends, capital growth)
rather than just short-term cash. This requires a different mindset from employees (accepting
risk/reward trade-off).

Communication Imperative: The value proportion of ownership needs even clearer communication
than standard benefits. Employees need help understanding the long-term potential versus the short-
term salary sacrifice. The current communication (Total Rewards Statement) isn't effectively conveying
this value.

 Multiple Theories: Equity, Agency, Total Rewards, Market Pricing.

 Conflicting Objectives: Attraction vs. Retention, Equity vs. Competitiveness, Cost Control vs.
Investment.

 Data-Driven Decisions: Internal equity analysis and external benchmarking are crucial inputs.

 Effective Communication: The perceived value of compensation (especially complex packages

like CEL's) depends heavily on how well it is communicated and understood.
 Alignment with Strategy & Structure: Pay decisions must support business goals (e.g.,
entering pipe stress) and fit the organizational context (e.g., small, employee-owned).

 Ethical Considerations: Secrecy around pay (Option 2) is risky and often unethical; systemic
fairness (Options 1 or 3) is generally preferred.

Recommended
Arvidson should:

1. Offer a Compromise Salary (e.g., $92k–$95k), positioning Grubb’s premium as a "skill

surcharge" for specialized expertise.
2. Leverage Ownership & Benefits:
o Structure offer to highlight total compensation: Base salary + accelerated share purchase + RRSP
match.
o Quantify benefits (e.g., "Your total package = $115k+ with ownership potential").
3. Reform Communication:
o Redesign Total Rewards Statements into interactive sessions.
o Educate staff on dividend math (e.g., "At 40% dividends, $85k base → $119k total").
4. Initiate Pay Structure Review:
o Create bands for specialized roles to prevent future inequities.

Conclusion:
 Option Pros Cons

Preserves internal equity; High chance Grubb rejects offer; strategic

Offer $85k
controls costs opportunity lost

Meet Grubb’s Secures critical talent; Risks morale collapse if pay gap leaks;
Demand captures revenue violates ownership fairness

Revamp All Solves systemic equity issues; Financially unsustainable; erodes dividend
Salaries boosts retention potential

Jeff Arvidson faces a challenge:

1. Strategic Imperative: Hiring Ron Grubb (pipe stress analyst) is critical for growth. His
expertise would stop revenue leakage from outsourced work and expand service offerings.
2. Compensation Equity: Grubb's expected salary ($90k–$110k) exceeds CEL’s experience-based
pay bands (avg. $85k for 5–10 yrs engineers), risking internal resentment.
3. Cultural Integrity: As an employee-owned firm, perceived pay unfairness could undermine
ownership morale and the "shared destiny" ethos.

Key Conclusions

1. Total Rewards Value is Undercommunicated:

o Despite a robust package (23 days vacation, 6% RRSP match, ownership stakes, flexible work),
employees undervalue non-salary benefits.
o The annual Total Rewards Statement fails to make lasting impact, reducing perceived
competitiveness.
2. Ownership Model Creates Tension:
o Dividends (potential 30–40% of earnings) offer long-term wealth but require risk tolerance.
o Some employees prefer predictable cash over variable pay, conflicting with Arvidson’s vision of
sustainable, performance-linked rewards.
3. Market Realities Demand Flexibility:
o Pipe stress analysis is a specialized skill with higher market value. Rigid adherence to internal
bands may sacrifice strategic growth for short-term equity.
o Salary surveys (Exhibit 2) likely confirm Grubb’s ask aligns with industry rates.
4. Employees Prioritize Differently:
o While some value salary most, others cite culture, flexibility, and work-life balance as "non-
negotiable" retention factors.