Formulating a Total Compensation Strategy

STRATEGIC PERSPECTIVES:
Steps to Formulate a Total

Compensation Strategy
OVERVIEW
• The objective of every business organization is to maximize its profit.
An organization is nothing without its employees. The employees
work hard, generate ideas, sometimes give personal sacrifice etc. to
take the organization toward its objective. The reward in return that
the organization gives is compensation. It can be in the form of cash,
stock options, good relation etc. Good/appropriate compensation
can take the organization in a very competitive position resulting
from its employees’ high morale, added effort and a sense of
responsibility/ love towards the organization.

2
Need for Compensation Strategy?
Socio-Economic/  Organization  HR/Compensation  Competitive

Political Environment Strategy Policies Advantage
VS.
Socio-Economic/  HR/Compensation  Organization  Competitive

Political Environment Policies Strategy Advantage

3
Strategic Choices
Corporate objectives,
strategic plans,
What business vision and values
should we be in?
Business unit
How do we win (gain strategies
competitive
advantage) in those
business?
HR Strategies
How should HR help us

win?
Social, competitive Strategic
and regulatory Compensation
How should total environment decisions
compensation help
us win? Compensation
systems
Employee attitudes
and behaviors
Competitive
Advantage
4
STEPS TO FORMULATE A TOTAL COMPENSATION
STRATEGY
1. Assess Total Compensation Implications
Culture and Values
Social, Economic and Political Context
Global Competitive Pressure
Employee/Union Needs
Other HR Systems
2. Fit Policy Decisions

Objectives
4. Reassess the Fit
Consistency
Realign as Conditions Change Competitiveness
Realign as Strategy Change Contribution
Administration
3. Implementation Strategy
Design System to Translate Strategy into
Action
Choose Techniques to Fit Strategy

5
Step 1: Assess Total Compensation Implications
a. Cultural Values
The values underlying an employer’s treatment of its employees are reflected in
the pay system. Some employer’s articulate their philosophies. These philosophies
guide their pay systems.
b. Social, Economic and Political Context

The environmental context also affects the compensation choices.
Context refers to a wide range of pressures, including competitive
pressures from product and labor markets, legal and regulatory
requirements, cultural differences, changing workforce demographics,
values and expectations etc. different regions of the world may require
different approaches to pay. Also, living standards define the pay
structure; where there is a high living standard, compensation package is
relatively high rather than in a region with low living standards and less
demand.

6
Step 1: Assess Total Compensation Implications (cont…)
c. Global Competitive Pressure
50
45
40
35
30
25
20
15
10
5
0
Hours w orked per Week
UK
USA
Paid Vacations
G ermany
Bangladesh
Hourly Pay ($)

China
India
Hourly Pay ($) Paid Vacations Hours worked per Week

7
Step 1: Assess Total Compensation Implications (cont…)
d. Employee Needs – Flexible Compensation Systems

– Pay systems should be according to the need of individual
employees
– An employee should be entitled to draw his salary the way he
wants
e. Unions
– Pay strategies also need to be adapted to the nature of the
union-management relationship.
– Internationally, the role of unions in determining pay varies
greatly. In Europe, unions are major players and must be
considered in any strategic pay decisions.

8
d. Role of Pay in Overall HR Strategy: On the Point,
Support, Change Agent
– The pay system in just one of many HR systems
that make up the HR strategy and the pay
strategy in the organization .
– In a highly decentralized and open organization
where pay system is centralized and
confidential, a successful operation of that
company is highly doubtful.

9
Step 2: Fit The Policy Decision to Strategy
In step 1 we have discussed the factors that we should take into

consideration to design a total compensation strategy. Next we come
into a policy decision to formulate a compensation strategy.
Issues that are examined to fit this policy decision to company strategy
includes -
– setting objectives: How should compensation support the business
strategy and the adaptive to the cultural and regulatory pressures in
the environment ?
– Consistency: how differently should different types and levels of skills
and work be paid within the organization?

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– Contribution: should pay increases be based on individual
and tem performance, on experience and or continuous
learning or improved skills, on change in cost of living, on
personal needs or on each business unit’s performance?
– Administration: How open and transparent should the
bases for pay decisions be to all employees? Who should
be involve din designing and managing the system?
– Competitiveness: How should our total compensation be
positioned against our competitors?

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• It is important to realize that the decisions
made on these five issues ( objective,
consistency, competitiveness, contribution,
and administration) together form the
compensation strategy.

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Step 3: Implement the Strategy
• Step 3 in the strategy is to implement it trough

the design of the compensation system .
• The compensation system translate the strategy
into practice.
• Translate Strategy into Action
• Choose Technique to fit Strategy.

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• Step 4: Reassess the Fit
• Review the changed conditions and modify the
Compensation strategy
• Modify the Compensation strategy with the change
of company strategy.
• Compensation strategy must change to fit changing
conditions.
• Periodic reassessing of the fit is needed.

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COMPENSATION STRATEGY: SOURCES OF
COMPETITIVE ADVANTAGE
A Company’s strategic compensation should be competitive. It provides
the sources of competitive advantages.
There are two ways to test whether the compensation is competitive or
not.
Does it add value?
Is it difficult to imitate?
1. Adding Value. Pay decision adds value:
– By controlling cost
– By attacking and retaining critical talent
– By motivating people to learn and improve performance.

15
2. Difficult to Imitate
– Competitors can not copy it.
– Organization’s business strategy and
Compensation system fit together
– The fit among the compensation and other HR
Activities
– Implementation of the compensation system.

16
COMPENSATION STRATEGY: INTERNAL vs.
EXTERNAL FACTORS
• An organization exists to accomplish specific
goals and objectives.
• The individuals hired for the Organization
have their own needs. Hence there is a basis
for an exchange – the employee offers
specific behavior desired by the Organization
to meet its goals and objectives in return for
money, goods, and services.

17
• If we go through the first four steps of
compensation policy formulation, we can see
that there are some external factors, such as
social, economic and political context, global
competitive pressure, etc are common for all
organization that they have to consider in the
same way before formulating compensation
policy.
• But if we focus on internal factors, such as
culture, value, objective, business policy, HR
systems, we can observe that each
organization differ from others.

18
Strategic Approaches
Recent studies have begun to research what really does

matter, but
the answer is still unclear.
Two alternative approaches have highlighted:
1. Contingent business strategy approach – Which
presumes that one size, does not fit all. The art of
managing compensation strategically involves fitting
the compensation system to the different business and
environment condition.

19
2. Best Practice Approach – It assumes that there
exist one best way and focus on best
implementation system.
The best practice can be applied independent of
the situation. It challenges the match-the-
business –strategy view.
Today’s business world is so dynamic, which is ever
changing so in practice we can say contingent
business strategy approach is best suitable.

20
Best practices options
• The new pay. • High commitment view.
• Employee pay is based on • High base pay.
market rates, pay increases • Sharing performance
depend on performance, success only, not risks.
not cost of living or • Guarenteeining job security.
seniority. • Promotion from within.
• No job security. Smaller pay differences.
• Risk-sharing partnership. • Team, not individuals, are
base units.

21
CONCLUSION
As each organization’s sustainability depends on
the best effort of their employees, so to achieve
competitive advantage over others each
organization must focus on some basic individual
factors of the employee to motivate and make
enthusiastic them to work. These factors are -
1. Monetary return
2. More socio-psychological return

22
So from the overall discussion we can conclude that before
formulation of a
compensation policy an organization should –
– Asses the environmental condition that exists
– Decide the best strategic choice that based on the organizations
objectives, consistency , competitiveness, contributions and
administration.
– Implement the strategy, and
– Reassess the fit
To do that one standard policy is not appropriate, so it is

from our view is the best
way to follow the Contingent business strategy or
Environmental context
approach considering the individual employee needs of the
organization.

23
What Do You Want It To Do?
1. The basis of compensation.
– Performance
– Tenure
– Cost of living
– Owner’s discretion
2. Which positions are being addressed.
3. Which compensation components will be included in the

compensation program.
– Base pay
– Employee benefits
– Perquisites
– Short-term incentives
– Long-term incentives

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4. The assumptions and priorities of the firm
related to compensation. For example:
– The current group of professionals are key
assets to be retained.
– We expect incentive compensation to play a
key role in the overall compensation strategy
because it helps focus on performance and
business objectives.

25
5. The goals of the program. For example:
– The compensation program should be as
competitive as possible when viewed in its entirety.
– To the extent possible, the compensation program
should allow for individual options and choices.
– The compensation program should be as simple as
possible.
– The compensation plan should be perceived as fair
by the employees.
– The compensation program should be affordable.
– The compensation plan should be clearly
communicated to all participants.

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STRATEGIC PERSPECTIVES:

Steps to Formulate a Total

Steps to Formulate a Total

Socio-Economic/  Organization  HR/Compensation  Competitive

Socio-Economic/  HR/Compensation  Organization  Competitive

Steps to Formulate a Total

How should HR help us

2. Fit Policy Decisions

Steps to Formulate a Total

b. Social, Economic and Political Context

Steps to Formulate a Total

c. Global Competitive Pressure

Hourly Pay ($)

Hourly Pay ($) Paid Vacations Hours worked per Week

Steps to Formulate a Total

d. Employee Needs – Flexible Compensation Systems

Steps to Formulate a Total

Steps to Formulate a Total

In step 1 we have discussed the factors that we should take into

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

• Step 3 in the strategy is to implement it trough

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

Recent studies have begun to research what really does

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

To do that one standard policy is not appropriate, so it is

Steps to Formulate a Total

3. Which compensation components will be included in the

Steps to Formulate a Total

Steps to Formulate a Total

Steps to Formulate a Total

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