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Strategic Compensation

Learning Objectives
1. Understand the concept of a compensation strategy,
where it comes from, how it relates to the
organization’s situation, and why the concept has
value.
2. Illustrate the relationship between the pay system and
each of the strategic issues discussed.
3. Realize there is not yet consensus on the concept of
strategy.
4. Understand the difference between transactional and
relational returns.
Corporate
objectives Business unit
HR strategies
strategic plans, strategies
vision, and values

What business How do we win (gain How should HR


should we be in? competitive advantage) in help us win?
those businesses?

How should total Social,


Strategic
compensation help competitive,
compensation
us win? and regulatory
decisions
environment

Compensation
systems
Strategic Choices
Employee
attitudes and
behaviors

Competitive
advantage
Strategic Perspectives Toward Total
Compensation
Microsoft

•Support the business


objectives
•Support recruiting,
Objectives
motivation, and retention of
MS-caliber talent
•Preserve MS core values

•Integral part of MS culture


•Support MS performance driven
culture
Internal •Business/technology-based
Alignment organization design structure
Strategic Perspectives Toward Total Compensation
(continued)
Microsoft
•Lead in total
compensation
Externally •Lag in base pay
Competitive •Lead with bonuses, stock
options

•Bonuses and options


based on individual
performance
Employee
Contribution

•Open, transparent
communications
Administration •Centralized administration
•Software supported
Pay System Objectives
• Attract and retain employees
• Motivate performance
• Promote skills and knowledge development
• Shape corporate culture
• Reinforce and define structure
• Determine pay costs
Pay-Design Process
• Before any new compensation program is
designed, there must be a clear
understanding by the organization of:
– its current values
– its structure
– its people
– its goals and vision for the future
Strategic Alignment

VISION/MISSION
CORE BELIEFS
DESIRED CULTURE
BUSINESS
OBJECTIVES
REWARD
PLANS
PERFORMANC
E
Generic Business-level
Strategies


§Innovator

§Cost Cutter

§Customer Focused
Compensation System to the Strategy
Business HR Program Compensation
Strategy Response Alignment System
Innovator: •Product •Committed to •Reward Innovation
Leadership Agile, Risk Taking, in Products and
Increase Product Processes
Innovative People
Complexity and •Shift to Mass
Shorten Product Customization and •Market-Based Pay
Life Cycle Innovation •Flexible – Generic
•Cycle Time Job Descriptions

Cost Cutter: •Operational •Focus on


Excellence Competitors’ Labor
Focus on Costs
Efficiency •Pursue Cost- •Do More With Less •Increase Variable
effective Solutions Pay
•Emphasize
Productivity
•Focus on System
Control and Work
Specifications

Customer •Customer Intimacy •Delight Customer, •Customer


Satisfaction
Focused: •Deliver Solutions to Exceed Incentives
Customers Expectations
Increase •Value of Job and
Customer •Speed to Market Skills Based on
Expectations Customer Contact
Which Pay Decisions Are
Strategic?

A strategic perspective focuses on those


competitive choices that help the organization
gain and sustain competitive advantage.
Strategic Compensation
Decisions

§Objectives
§Alignment
§Competitiveness
§Contributions
§Administration
Example: The Strategic
Compensation Decisions
Facing Starbucks
1. Objectives: How should compensation support business
strategy and be adaptive to the cultural and
regulatory environment?
 Starbucks objectives:

– Grow by making employees feel valued.


– Recognize that every dollar earned passes through
employees’ hands.
– Use pay, benefits, and opportunities for personal
development to help gain employee loyalty and
become difficult to imitate.
Example: The Strategic
Compensation Decisions
Facing Starbucks (continued)
2. Alignment: How differently should the various types
and levels of skills be paid within the organization?
 Starbucks:

– De-emphasize differences.
– Use egalitarian pay structures, cross-train
employees to handle many jobs, and call
employees partners.
Example: The Strategic
Compensation Decisions
Facing Starbucks (continued)
3. Competitiveness: How should total compensation be
positioned against our competitors? What forms of
compensation should we use?
 Starbucks:
– Pay just slightly above other fast-food employers.
– Provide health insurance and stock options for all
employees (including part-timers).
– Give everyone a free pound of coffee every week.
Example: The Strategic
Compensation Decisions
Facing Starbucks (continued)
4. 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?
 Starbucks:
– Emphasize team performance and shareholder
returns.
– For new managers in Beijing and Prague, provide
training opportunities in the U.S.
Example: The Strategic
Compensation Decisions
Facing Starbucks (continued)
5. Administration: How open and transparent should pay
decisions be to all employees? Who should be
involved in designing and managing the system?
 Starbucks:
– As members of the Starbuck’s “family,” our
employees realize what is best for them.
– Partners can and do get involved.
Key Steps to Formulate a Compensation Strategy
1.
1. Assess
Assess Total
Total Compensation
Compensation
Implications
Implications
•Competitive
•Competitive Dynamics
Dynamics
•Core
•Core Culture
Culture // Values
Values
•Social
•Social and
and Political
Political Context
Context
•Employee
•Employee // Union
Union Needs
Needs
•Other
•Other HR
HR Systems
Systems

4.
4. Reassess
Reassess the
the Fit
Fit 2.
2. Fit
Fit Policy
Policy Decisions
Decisions to
to Strategy
Strategy
•Realign
•Realign as
as Conditions
Conditions Change
Change •• Objectives
Objectives •• Contributions
Contributions
•Realign
•Realign as
as Strategy
Strategy Changes
Changes •• Alignment
Alignment •• Administration
Administration
•• Competitiveness
Competitiveness

3.
3. Implement
Implement
Strategy
Strategy
•Design
•Design System
System to
to Translate
Translate Strategy
Strategy
into
into Action
Action
•Choose
•Choose Techniques
Techniques to
to Fit
Fit Strategy
Strategy
Basic Issue: Does “Best Fit”
Pay Off?
Socioeconomic / Organization
Organization Strategy
Strategy HR
HR // Compensation
Compensation Competitive
Competitive
Political Environment Policies
Policies Advantage
Advantage

Socioeconomic
Socioeconomic // HR
HR // Compensation
Compensation Organization
Organization Strategy
Strategy Competitive
Competitive
Political
Political Environment
Environment Policies
Policies Advantage
Advantage
Best Practices Options
 THE NEW PAY  HIGH COMMITMENT
• External market-sensitive-based pay, not • High wages: You get what you pay for
internal alignment • Guarantee employment security
• Variable performance-based pay, not • Apply incentives; share gains, not risks
annual increases • Employee ownership
• Risk-sharing partnership, not entitlement • Participation and empowerment
• Flexible opportunities to contribute, not • Teams, not individuals are base units
jobs • Smaller pay differences
• Lateral promotions, not career path • Promotion from within
• Employability, not job security • Selective recruiting
• Teams, not individual contributors • Enterprise-wide information sharing
• Training, cross-training, and skill
• •
development are crucial
Symbolic egalitarianism adds value
• Long-term perspective matters
• Measurement matters
Virtuous and Vicious
Circles
Organizati
on Increased
Performanc Performance - Based
e Pay
INCREASES
Virtuous
Circle
Risk / Retur Increased
n BALANCE Employee
Performance

Organizati
on Decreased
Performanc Performance - Based
Vicious e Pay
DECREASES
Circle
Risk / Retur Decreased
n Employee
IMBALANCE Performance
Framework for Analyzing
Different Deals

HIGH PAY – LOW COMMITMENT HIGH PAY – HIGH COMMITMENT

Hired Guns Cult - like


High

(Stockbrokers) (Microsoft)
TRANSACTIONAL

LOW PAY – LOW COMMITMENT LOW PAY – HIGH COMMITMENT

Workers as Commodity Family


Low

(Employers of Migrant (Starbucks)


Farm Workers)

Low High
RELATIONAL
Thank You

FOR YOUR
SUPPORT….