Compensation Changes at JC Penney

Having been in business for over 100 years, JC Penney has experienced highs and lows in organizational performance. In the past decade, the firm has faced a dramatically changing retail environment from competitors such as Target, Wal-Mart, the Gap, and others. As a result, JC Penney was increasingly viewed by customers and analysts of the retail industry as lagging in its merchandising strategies.

Even the compensation system at JC Penney was viewed as traditional and paternalistic in nature because it emphasized rewarding employees primarily for their length of service. Also, most promotions were made internally, which created a more static organizational culture. The traditional pay structure at the firm contained many pay grades and was based on job evaluations to establish those grades. Its performance review system emphasized employee tenure and effort to a greater degree than performance results.

To respond to the competitive environment, the firm’s executives decided that JC Penney had to become more dynamic and able to change more quickly. One of the changes identified was that a new compensation system was needed. The restructured compensation system that was developed and implemented focused heavily on market value, using pay survey data that specifically matched job responsibilities. The greatest change was the development of “career bands.” These career bands grouped jobs together based on survey data and job responsibilities and resulted in fewer grades with wider ranges. The career bands represented a broadbanding approach that was based on benchmark jobs for which market pricing data were available. Jobs for which market data could not be found were analyzed using a job evaluation system.

Use of the career bands was designed to identify career paths for employees throughout the company and to better link compensation to all of the jobs. By having career bands, greater flexibility was provided for employees to be rewarded for both current performance and continuing career growth. To support this new compensation system, a revised performance management system was developed. This system used performance goals and measures more closely tied to business strategies and objectives. Important to implementing the new performance management system was managerial training. This training was needed so that the managers could use the new system effectively and to describe to employees the importance of performance and its link to compensation. Implementation of the new compensation system required extensive communication.

Newsletters were prepared for all managers explaining the new compensation system. Then departmental and store meetings were held with managers and employees to describe the new system. A number of printed materials and videos discussing the importance of the new compensation plan were prepared and utilized. A final part of communications was to prepare letters for individual employees that informed them about their job band and market pay range.

Questions

1. How do the JC Penney changes reflect a total rewards approach?

2. Discuss why JC Penney’s shift to a more performance-oriented compensation system had to be linked to market pricing.