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Compensation Case Study Report Format-. Typed, 12pt font, Arial, double spaced. You should include headings to make it easier for the reader (


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Report Format-. Typed, 12pt font, Arial, double spaced. You should include
headings to make it easier for the reader (
A. Identify the Current Organizational problems. Consider the structural
variables. Identify the current managerial strategy. (3 pages)
What is the current managerial strategy based on your analysis of the
existing 6 structural variables? Remember, the analysis of the structural
variables determines what managerial strategy the company is currently
using. What are the causes of reward dissatisfaction at Zenith? How
may this be impacting current employee behaviours?
B. Develop Structural and Strategic recommendations – based on the
problems facing the organization what should the managerial strategy
be (analysis of contextual variables) and how should the structural
variables then be aligned? (3-4 pages)
You must analyze the contextual variables (Refer to Compensation
Notebook 2.2 p.39) to determine the most appropriate managerial
strategy. If you decide the managerial strategy should change, what
should it change to and how will that require a change in the alignment
of the 6 structural variables?
C. Develop your Reward and Compensation strategy and then create
template(s) to indicate the compensation mix for each job family. You will
have 1 template for the pay for knowledge group and 3-5 for the JE groups.
A brief rationale should be included.
Zenith Medical Systems Incorporated
Your Client
Your client firm is Zenith Medical Systems Incorporated. Zenith was formed as a joint venture of
a major computer firm and a leading supplier of hospital products and opened its doors for
business on January 1, 2012. Both firms invested an equal amount of capital in the venture. Top
management for Zenith was provided from the ranks of the parent companies, but the majority of
top management, including the CEO of Zenith, came from the hospital products firm. The logic
for this was that managers from the hospital products firm would have a greater grounding in the
health care industry than would managers from the computer firm.
Zenith’s product is information management systems for health care institutions. As
health care organizations have become more complex, there has been an increasing demand for
computer systems that will help manage the massive flows of information necessary for their
effective operation. The idea is to develop an integrated system for patient records, staff and
facilities scheduling, materials management, medication tracking, and financial management, in
place of the separate systems that now exist in most cases. Ineffective transmission of
information between different parties who need that information makes for an inefficient
operation and could even cost lives. Zenith would be a comprehensive provider of these systems,
handling everything from systems design to installation, training, and maintenance.
Zenith has about 600 employees, with about half located at head office in Ottawa and half
located at five regional offices dispersed across Canada. Chart 1 shows the organizational
structure at head office. The executive committee consists of the CEO and the two vice
presidents. There are six main departments. Marketing, Finance/Accounting, and Human
Resources report to Jeff Wieler, Vice President Marketing and Administration, while Systems
Development, Systems Installation, and Systems Maintenance report to Rob McIvor, Vice
President Systems. Most of the marketing and systems maintenance employees are dispersed
across the five regional offices, while the other departments are located at head office in Ottawa.
Although some employees were seconded from the parent companies, most were hired on
the open market or from the companies that Zenith took over. Early in the firm’s life, Zenith took
over a number of small software companies that specialized in specific systems. For example,
they took over a firm that specialized in medication tracking systems, another that specialized in
systems for hospital scheduling, and another that produced systems for patient records.
Darlene Adams, President and CEO of Zenith Medical Systems, has requested your
consulting services, and she is delighted that your team was assigned to her firm. Zenith is
experiencing serious performance problems: employee turnover is up and morale is down;
customer satisfaction is down and complaints are up; and, most importantly, revenue and profits
are both down. President Adams knows that the compensation system used by a firm can
contribute to all these problems, and since compensation is a major cost item for her firm
(currently accounting for about 79 percent of the firm’s costs), she suspects that the firm’s
compensation system may be implicated in these problems. But she can’t be sure without your
Chart 1
Because President Adams recognizes that compensation is just one of several important
structural variables that must all fit together if effective organizational performance is to occur,
you are authorized to suggest any changes to the managerial strategy and structure of the
organization that are needed to make the new compensation system work. Your only limitation is
that she wants no changes to be made to the company’s six-department structure, which she
believes is the best way to organize. Beyond that, you have free rein to make recommendations
about reward structure, job design, and the other structural elements.
Zenith Operations and Structure
Virtually all of the 600 employees at Zenith have university degrees, mostly in software design
and computer programming, but also in the other functional areas, such as in finance, marketing,
and human resources management. Employees are paid well in order to attract outstanding
individuals. Pay for most employees is based on a fixed monthly salary with annual reviews, at
which time it is normal to receive a pay raise. It is extremely unusual not to receive a pay raise at
this time.
Because management knew that the firm was relatively new and had no common culture,
and because people are the key component of a software firm (approximately 70 percent to 75
percent of all expenses are compensation expenses for most software firms), the company
adopted a number of policies to encourage employee loyalty, such as increased vacation after
two and then five years and liberal employee benefits. Employee benefits amount to about 30
percent of total compensation costs (compared with an industry average of about 20 percent).
Total compensation for the most recent fiscal year (2013) was $43,665,820.
The job of Marketing is to bring in the contracts for Systems. The department is
organized geographically, as Chart 2 shows, with regional offices in Vancouver, Edmonton,
Toronto, Montreal, and Halifax. Each Systems Marketing Specialist is assigned a specific
geographical area. Within that area, he or she is expected to contact all health care institutions
and attempt to sell them systems. Sales personnel are paid a base salary plus commission based
on a percentage of the total value of systems contracts that are signed in their territory. To
motivate marketing specialists, base pay is set low; the expectation is that at least half of a
marketing rep’s income should come from commissions.
Chart 2
Once an institution agrees to purchase a system, the marketing specialist and a systems
design specialist in the Marketing Department work to establish the exact characteristics and
parameters for the system, based on the stated needs of the client and the hardware they will be
using. The cost of the system is then estimated according to strict guidelines set by top
management, a purchase price is established, and the delivery schedule is determined. Finally, a
contract is signed, detailing all of this.
The procedures for doing all this are very strictly laid out, and Marketing has very little
discretion on the sales price. (Prices are fairly competitive but not usually the lowest in the
industry.) Since marketing reps have little flexibility on price, in order to close a deal, they often
promise extra features and quick delivery. Managers in the Marketing Department are evaluated
on the number of contracts signed and their dollar value. The Marketing Department Manager is
paid a modest base salary plus a substantial bonus that is dependent on the extent to which sales
targets are met or exceeded, as are the Regional Marketing Managers.
Once signed, the contract goes to the Systems Development Department (see Chart 3),
which first attempts to see whether a previously designed system can be used as a basis for the
new system. Each contract is broken down into segments, and one or more applications
programmers are assigned to work on each segment. Procedures for so doing are carefully laid
out. Systems integration specialists are given the task of ensuring that all parts of the system fit
Top management evaluates managers in the Systems Development Department in terms
of whether systems are completed by the development date set when the contract was signed and
whether each system is within the budgeted development hours for the project. Managers in the
Systems Development Department are paid a base salary, plus a large bonus if they meet or
exceed these targets. Non-managerial employees in the Systems Development Department
receive base pay plus indirect pay only, as do all non-managerial employees except systems
marketing reps.
Once the Systems Development Department has a system that their management believes
meets contract specifications, it is passed on to the Systems Installations Department (see Chart
4). Its job is to take the system to the client, install it on client hardware, help with any necessary
data conversion, test the system, and conduct training for client personnel. For each installation,
a team of systems installation employees is sent out from head office, where they are based.
Managers in the Systems Installations Department are evaluated on whether installations are
completed by the date specified in the contract and within total budgeted hours for each
installation. Managers are paid a base salary, plus a large bonus that is dependent on meeting or
exceeding these targets.
If problems arise after installation, or if changes to the system become necessary due to
changing information requirements or changing hardware (which are both frequent occurrences),
it is the role of the Systems Maintenance Department (see Chart 5) to deal with these problems.
If the problem is the fault of Zenith, the work is done free of charge. If the work is additional
work requested by the customer, the department charges a standard per-hour fee. To be close to
customers, the systems maintenance staff are located at the five regional offices, with a Regional
Maintenance Manager at each. Maintenance Department Managers are paid a base salary, plus a
bonus based on a percentage of the extra revenue the department generates.
In order to build market share as quickly as possible, the Marketing Department seeks to
sell to any health care institution that will purchase a system, even if there is not much profit in it
for Zenith. Its clients vary enormously. Some clients are large university teaching hospitals with
literally dozens of medical specialties. Some clients are very specialized, such as a cancer clinic
or a special-care nursing home. No two clients are alike in terms of their information needs, their
current systems, or their current hardware. Every system sold requires at least some modification
from the standard product, and most require very substantial modification.
The competitive environment is intense. The biggest firm in the industry (based in the
United States but also selling in Canada) does about half a billion dollars in sales annually, while
Zenith was expected to do about 10 percent of that during its first two years. (Projected sales
were targeted at $55,000,000 for the first year and $60,000,000 for the second year. Top
management expected the firm to break even the first year and to show a $3,000,000 profit the
second year.) Zenith is the largest medical systems firm based in Canada and the eighth-largest
medical systems company in North America. It would be considered a middle-sized firm in the
Chart 3
Chart 4
Chart 5
The competitive strategy for the biggest firms in the industry is to compete on price and
speed of delivery. Because of their size, the biggest firms have an extensive “inventory” of
standardized systems, from which the client was essentially expected to select one. Some
modifications could be made, but clients are expected to basically accept the system provided
and adapt to it. Because of their resulting low development costs, the big firms can pass these
savings on to their clients. They are also able to provide fast delivery dates. To make sure their
systems stay up to date as technology and the information needs of clients changes, the large
firms each had an applied research department constantly updating their basic systems. In this
field, both the available hardware and the information needs of clients change quite rapidly, as
new medical and technological innovations are discovered.
The small firms in the industry compete in one of three ways. Some firms specialize in
one type of health care institution, such as nursing homes or geriatric hospitals, and tend to have
one basic specialized product. Others focus on one particular systems module and often do
subcontracting work for larger medical systems firms. Still others essentially work from scratch,
designing customized systems for institutions that are not happy with the standardized systems
that are available on the market.
Performance Results
Zenith’s first year (2012) was quite promising, with a net loss of about $1,000,000 on sales of
$58,000,000. Marketing had exceeded objectives, and Systems Development had met
expectations, but Systems Installations was consistently late with final installation and over
budget, and Systems Maintenance was way under revenue projections.
Top management was not overly concerned, since they expected these problems would
get ironed out over time. They expected that increased revenues would bring economies of scale,
which would increase profitability. But they did feel that something needed to be done about
what they saw as the poor performance of the Systems Installations and Maintenance
departments, so they replaced the managers of these departments, who had both come from the
parent computer firm, with executives from the parent hospital products firm.
To management’s dismay, sales actually dropped the following year (2013), to
$50,000,000, which produced a net loss of $5,000,000. Moreover, customers are unhappy
because systems are late in being brought up and running, don’t perform as promised by the sales
force, and are subject to frequent crashes—and because Systems Maintenance seems to show
little enthusiasm for fixing these problems.
The morale of the sales force, which had been quite high at the outset, sank as sales (and
their sales commissions) declined. Because of the poor reputation the company’s products are
beginning to get, marketing reps are finding that they have to promise more and more special
features to get any contracts at all, and they are desperate to try to close any deal they can get.
Morale is generally low throughout the company, with employees focusing only on their
own jobs, feeling little need or desire to cooperate with workers in other departments. Indeed,
most employees view other departments as populated mainly by obnoxious incompetents. For
example, the Systems Installations Department frequently find that the systems provided by the
Systems Development Department need extensive rework to get them operating at all, and this
makes it very difficult or impossible for them to meet their installation guidelines. But when
Installations complains to Systems Development, they themselves are accused of being
Systems Development believes that any installation problems are due to either the
incompetence of the personnel in the Installations Department or the inability of the Marketing
Department to accurately understand and convey customer requirements—and most probably
both! By the end of the second year, Systems Development found it more and more difficult to
meet its targets because while the systems that were promised to customers grew fancier, there
was no increase in the price to customers and no increase in the time and hours budgeted for each
system. By the end of the second year, it found that the department was not meeting client
timelines for most systems and were consistently over the budgeted hours.
Because Installations often do not even receive the system until after the targeted date for
completion of installation, installation timelines are almost never met, and clients usually unload
their displeasure on Installations staff when they do arrive. In response, the new Installations
Department Manager ordered staff to “just get the basic system up and running as fast as possible;
we’ll worry about the fancy details later.” Since targeted customer delivery dates were almost
never met, he was determined to at least bring in as many projects as possible within budgeted
hours. He believed that extensive systems testing was an unnecessary expense. So he cut back on
time devoted to this, as well as on time spent on training client staff. With these measures, he
was able to bring in some projects under budgeted hours.
Systems Maintenance staff are finding that they are spending virtually all their time
dealing with frequent “crashes” of systems and with complaints that the special features that the
marketing rep had promised either don’t work right or don’t work at all. Sometimes features are
missing entirely. As a result, the Maintenance Department is forced to spend most of its time
repairing crashes or adding the promised features themselves. It spends virtually no time on
activities that will generate revenue. In response, the department is trying to charge clients for
systems failures that are caused by client staff, which are growing more frequent. But clients
object strenuously to this policy, claiming that the crashes are actually Zenith’s fault, due to
poorly designed systems or inadequate training of client staff.
Systems Maintenance blames Systems Development for creating poor systems, Systems
Installations for faulty installation, and Marketing for providing the client with unrealistic
expectations of what the system would be able to do. Systems Maintenance is especially bitter
because although its staff hasn’t caused the problems, they are always the ones berated by
panicky, frustrated, angry customers when they show up to repair a crashed system. Employee
turnover in this department is the highest in the company, although turnover is becoming a
serious problem everywhere.
Marketing views all three Systems departments as incompetent and believes that the poor
quality of their work is making it almost impossible to sell company products. Overall, relations
among all departments are very bitter, and personnel in each department try to avoid talking to
anyone in the other departments unless absolutely necessary.
Top management is concerned about these problems. However, they believe that
problems like these are to be expected in any new company and that they will turn around, given
sufficient time. Indeed, it is very normal for a new company to lose money in its first year or two
as it attempts to enter a market and gain market share. Revenues often lag expenses, since it is
necessary to establish some basic products in order to have something to sell. It often takes a
while to get the bugs out of new products and to get work structures operating effectively. Also,
it takes …
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