Transcript
Milkovich/Newman: Compensation, Ninth Edition
Chapter 2
Strategy: The Totality of Decisions
Chapter Topics
Similarities and Differences in Strategies
Strategic Choices
Support Business Strategy
The Pay Model Guides Strategic Pay Decisions
Developing a Total Compensation Strategy: Four Steps
Chapter Topics
Similarities and Differences in Strategies
Strategic Choices
Support Business Strategy
The Pay Model Guides Strategic Pay Decisions
Developing a Total Compensation Strategy: Four Steps
Chapter Topics (cont.)
Source of Competitive Advantage: Three Tests
“Best Practices” versus “Best Fit”
Guidance from the Evidence
Virtuous and Vicious Circles
Your Turn: Mapping Compensation Strategies
Still Your Turn: Pay Matters (Productivity Does, Too)
Exhibit 2.1: Three Compensation Strategies
Similarities and Differences in Strategies
Different strategies within the same industry
Different strategies within the same company
“Let the market decide our compensation” philosophy is untenable in the real world, especially in global environments
Strategic Choices
Strategy refers to the fundamental directions that an organization chooses – Corporate level: “What business should we be in?” – Business unit level: “How to gain and sustain competitive advantage?” – Functional level: “How should total compensation help gain and sustain competitive advantage?”
A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage
Exhibit 2.2: Strategic Choices
Support Business Strategy Pay systems should align with the organization's business strategy
– Based on contingency notions
Compensation systems can be tailored to: – Innovator business strategy – Cost cutter business strategy – Customer-focused business strategy
When business strategies change, pay systems should also change
Exhibit 2.3: Tailor the Compensation System to the Strategy
Exhibit 2.4: IBM’s Strategic Principles and Priorities
Five Strategic Guidelines for Compensation Choices
Objectives
Internal Alignment
External Competitiveness
Employee Contributions
Management
The Pay Model Guides Strategic Pay Decisions
Decisions based on the five strategic compensation choices of the pay model, taken together, form a pattern that becomes an organization's compensation strategy – Stated versus Unstated Strategies
Example: The Strategic Compensation Decisions Facing Whole Foods Objectives: How should compensation support business strategy and be adaptive to the cultural and regulatory global environment?
Whole Foods’ Objectives – Increase shareholder value through profits and growth – Go to extraordinary lengths to satisfy and delight customers – Seek and engage employees who are going to help the company make money
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.) Internal Alignment: How differently should the various types and levels of skills and work be paid within the organization?
Whole Foods’ Approach – Store operations are organized around eight to ten self-managed teams – Egalitarian, shared-fate philosophy – executive salaries do not exceed 14 times the average pay of full-time employees – All full-time employees qualify for stock options, and 94 percent of the company's options go to nonexecutive employees
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.) External competitiveness: How should total compensation be positioned against our competitors? What forms of compensation should we use?
Whole Foods’ Approach – Offer a unique deal compared to competitors – Provide health insurance for all full-time employees – 20 hours of paid time a year to do volunteer work
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.) Employee contributions: Should pay increases be based on individual and/or team performance, on experience and/or continuous learning, on improved skills, on changes in cost of living, on personal needs, and/or on each business unit’s performance?
Whole Foods’ Approach – A shared fate – every four weeks, assess the performance of each team – Top teams get an extra $1.50 to $2.00 an hour in the next pay period
Example: The Strategic Compensation Decisions Facing Whole Foods (cont.) Management : How open and transparent should pay decisions be to all employees? Who should be involved in designing and managing the system?
Whole Foods’ Approach – “No-secrets” management; every store has a book listing the previous year's pay for every employee including executives – “You Decide” – employees recently voted to pick their health insurance rather than having one imposed by leadership
Exhibit 2.5: Key Steps In Formulating a Total Compensation Strategy
Developing A Total Compensation Strategy: Four Steps
Step 1: Assess total compensation implications
Step 2: Map a total compensation strategy
Steps 3: Implement strategy
Step 4: Reassess
Step 1: Assess Total Compensation Implications
Competitive Dynamics – Understand the Business – Changing customer needs – Competitors’ actions – Changing labor market conditions – Changing Laws – Globalization
Competitive dynamics can be assessed globally
Exhibit 2.6: Toshiba’s Managerial Compensation Plan, Annual Amount (in Yen)
Step 1: Assess Total Compensation Implications (cont.)
Culture/values – A pay system reflects the values that guide an employer's behavior and underlie its treatment of employees
Social and political context – Context refers to legal and regulatory requirements, cultural differences, changing workforce, demographics, expectations etc. – Affects compensation choices – Lobbying is also part of compensation strategies
Exhibit 2.7: Medtronic Values
Step 1: Assess Total Compensation Implications (cont.)
Employee preferences – How to better satisfy individual needs and preferences
Choice – Examples: Flexible benefits and choices
Union preferences – Pay strategies need to be adapted to the nature of the union-management relationship – Unions' interests can differ – Compensation deals with unions can be costly to change
Step 1: Assess Total Compensation Implications (cont.)
Prominence of pay in overall HR strategy: Supporting player or catalyst for change – Pay strategy is influenced by how it fits with other HR systems – High-performance systems
High skill/knowledge requirements
Work designed so that employee teams enjoy discretion in making decisions and continue to learn
Pay systems based on performance
– Pay can be a supporting player or a catalyst for change
Step 2: Map a Total Compensation Strategy
Mapping is used in marketing to clarify and communicate a product's identity
Offers picture of a company’s compensation strategy based on the five choices in the pay model
Clarifies the message the company is trying to establish with its compensation system
Maps do not tell which strategy is the “best”, providing rather framework and guidance
Exhibit 2.8: Contrasting Maps Of Microsoft And SAS
Steps 3 and 4: Implement and Reassess
Step 3 – Involves implementing strategy through the design and execution of compensation system
Step 4 – Reassess and realign, closes the loop and recognizes that the strategy must be changing to fit changing conditions – Involves periodic reassessment
Sources of Competitive Advantage: Three Tests
Three tests determine if a pay strategy is a source of advantage
Is it aligned?
Does it differentiate?
Does it add value?
Which hat is
unique?
– Calculate the return on investment (ROI)
Best Practices” Versus “Best Fit”? B est F i t
B est Pr acti ces
Assumptions
If design of pay system
– A set of best-pay practices exists
– Reflects company’s strategy and values
– Practices can be applied universally across all situations
– Is responsive to employees’ and unions’ needs
– Results in better performance with almost any business strategy
– Is globally competitive
Company is more likely to achieve competitive advantage
Guidance from the Evidence Consistent research evidence that the following practices do matter to the organization's objectives
– Internal alignment
Pay differences among internal jobs can affect results
– External competitiveness
Paying higher than average paid by competitors can affect results
– Employee contributions
Performance-based pay can affect results
Guidance from the Evidence (cont.) – Managing compensation
Need to consider all dimensions of pay strategy
– Compensation strategy
Embedding compensation strategy within the broader HR strategy affects results
“What practices pay off best under what conditions” is an important question to be answered
Virtuous and Vicious Circles
One study concluded that how you pay also matters as much as how much you pay
Studies conclude that performance-based pay that shares success with employees improves employee attitudes, behaviors, performance – especially when combined with high performance practices
Performance-based pay can be the best practice under right circumstances