2-1

Chapter

2
Strategic
Perspectives

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-2

Exhibit 2.1: Strategic Perspectives Toward Total Compensation

Microsoft Bristol - Myers Squibb Firepond

• Support the business • Support business mission • Demonstrate respect for

objectives and goals individual talent and the
• Support recruiting, • Develop global leaders at limitless potential of a
motivation, and retention every level highly motivated team
Objectives

of MS-caliber talent • Encourage high

• Reinforce team-based
• Preserve MS core values culture standards of excellence,
original thinking, a
• Reduce costs, increase passion for the process
productivity of discovery and a
willingness to take risks
• Reward fresh ideas, hard
work and a commitment to
excellence
• Value diverse
perspectives as a key to
discovery
Alignment

• Integral part of MS culture • Flexibility for development • Pay differences that

Internal

• Support MS performance and growth foster a collegial

driven culture atmosphere
• Reflect responsibilities,
• Business/technology-based required competencies, and • Reinforce high
organization design structure business impact expectations

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.


Exhibit 2.1: Strategic Perspectives Toward Total Compensation
Microsoft
Competitive
• Lead in total
Externally
compensation
• Meet base pay and
bonuses
• Lead with stock awards
(moving away from
options)
Administration Contribution
• Bonuses and stock
Employee
awards based on individual
performance
• Open, transparent
communications
• Centralized administration
• Software supported
McGraw-Hill/Irwin
Bristol - Myers Squibb
• Compare favorably to
higher-performing
competitors
• Cash between the 50th
and 75th percentile
• Support high performance,
leadership culture
• Team-based increases
• Options align employee
and shareholder interest
• Tailor to business and
team results
• Performance and
leadership feedback –
everyone is a leader
• Administrative ease
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
2-3
Firepond
• “Pay what others are
paying”
• Bonus pool based on
Firepond financial
performance. Individual
share of pool based on
individual performance.
• Push stock ownership
deep into company
• Goal-focused, team-
oriented, and self-managed
 2-4

Strategic Alignment

VISION/MISSION
CORE BELIEFS
OBJECTIVES
BUSINESS STRATEGY

COMPENSATION
SYSTEM

PERFORMANCE

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-5

Exhibit 2.2: Strategic Choices

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-6
Exhibit 2.4: Tailor the 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 Innovative People Processes
Complexity and • Shift to Mass
Shorten Product Customization and • Market-Based Pay
Life Cycle Innovation
• Flexible – Generic
• Cycle Time Job Descriptions

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

• Customer
Customer • Customer Intimacy • Delight Customer,
Satisfaction
Focused: Exceed Incentives
• Deliver Solutions to
Expectations
Increase Customers • Value of Job and
Customer Skills Based on
• Speed to Market
Expectations Customer Contact
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-7

Example: The Strategic Compensation

Decisions Facing Starbucks
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.
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-8

Example: The Strategic Compensation

Decisions Facing Starbucks (cont.)
Alignment: How differently should the
various types and levels of skills be paid
within the organization?
Starbucks’ Approach

 De-emphasize differences.

 Use egalitarian pay structures, cross-train

employees to handle many jobs, and call
employees partners.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-9

Example: The Strategic Compensation

Decisions Facing Starbucks (cont.)
Competitiveness: How should total
compensation be positioned against our
competitors? What forms of
compensation should we use?
Starbucks’ Approach
 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.
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-10

Example: The Strategic Compensation

Decisions Facing Starbucks (cont.)
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’ Approach
 Emphasize team performance and
shareholder returns.
 For new managers in Beijing and Prague,
provide training opportunities in the U.S.
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Exhibit 2.5: Key Steps to Formulate
2-11

a Compensation Strategy
1. Assess Total Compensation Implications
• Competitive Dynamics
• Core Culture / Values
• Social and Political Context
• Employee / Union Needs
• Other HR Systems

2. Fit Policy Decisions to Strategy

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

3. Implement Strategy
• Design System to Translate Strategy
into Action
• Choose Techniques to Fit Strategy

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-12

Step 1: Assess Total Compensation

Implications
Before any new compensation program is
designed, there must be a clear
understanding by the organization of
 Competitive dynamics
 Customer needs
 Competitors’ actions
 Labor market conditions
 Regulations
 Global environment

 Culture/values
A pay system reflects values guiding an
employer’s behaviors and treatment of employees
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-13

Step 1: Assess Total Compensation

Implications (cont.)
 Social and political context
 Legal and regulatory requirements
 Cultural differences
 Changing work force demographics
 Employee values and expectations

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-14

Step 1: Assess Total Compensation

Implications (cont.)
 Employee needs

Contemporary pay systems

Flexible compensation systems

 Nature of union-management relationship

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-15

Step 1: Assess Total Compensation

Implications (cont.)
 Role of pay in overall HR strategy

Supporting player

Agent of change

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-16

Exhibit 2.10: Strategic Mapping

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-17

Steps 3 and 4: Implement and Reassess

Step 3
 Involves implementing strategy through the
design and execution of compensation system
Step 4
 Focuses on reassessing and realigning as
conditions and strategy changes
Managing links between
 Compensation strategy
 Pay system and
 Employee perceptions and behaviors
Vital to implementing a pay strategy
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-18

Sources of Competitive Advantage

 Three tests determine if a pay strategy is
a source of advantage

 Is it aligned?

 Does it differentiate?

 Does it add value?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 2-19

Best Fit vs. Best Practices

Best Fit Best Practices

 If design of pay system Assumptions

 Reflects company’s A set of best-pay

strategy and values practices exists

 Is responsive to  Practices can be applied

employees’ needs and universally across all
situations
 Is globally competitive

 Company is more likely

to achieve competitive
advantage
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 2-20

Exhibit 2.11: Best-Practices Options

The New Pay High Commitment
 High wages: You get what you pay
 Externalmarket-sensitive-based
for
pay, not internal alignment
 Guarantee employment security
 Variable
performance-based pay,  Apply incentives; share gains, not
not annual increases risks
 Risk-sharing  Employee ownership
partnership, not
entitlement  Participation and empowerment
 Teams, not individuals are base
 Flexible
opportunities to units
contribute, not jobs  Smaller pay differences
 Lateral promotions, not career  Promotion from within
path  Selective recruiting

 Employability, not job security  Enterprise-wide information sharing

 Training, cross-training, and skill
 Teams,not individual
development are crucial
contributors
 Symbolic egalitarianism adds value
 Long-term perspective matters
 Measurement matters

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.