KMS2073 Compensation & Benefits Management Unit 2: Strategic Compensation

Objectives
At the end of this unit, you will be able to:
Describe forms of pay Explain compensation objectives Describe relations between compensation systems with
Society Strategies and objectives of human resource management and development Strategies and objectives of organizations

Forms of Pay
Relational returns
Psychological in nature

Total compensation
Cash compensation/transactional
Base wages
Difference between wage and salary

Merit pay/cost of living adjustments

Merit increases given in recognition of past work behavior cost of living adjustments same increases to everyone, regardless of performance

Forms of Pay (cont.)

Cash compensation/transactional (cont.)
Incentives/variable pay the pay increases directly to performance
Does not increase base wage, must be re-earned each pay period Potential size generally known beforehand Long term (stock options) and short term

Benefits
Income protection Work/life balance Allowances

Forms of Pay (cont.)

Total earnings opportunities: Present value of a stream of earnings
Shifts comparison of todays initial offers to consideration of future bonuses, merit increases, and promotions

Relational returns from work

Non-financial returns

Organization as a network of returns

Created by different forms of pay, including total compensation and relational returns

A Pay Model
Three basic building blocks
Compensation objectives Policies that form the foundation of the compensation system Techniques that make up the compensation system

The Pay Model

Compensation objectives
Guide the design of the pay system Serve as the standards for judging success of the pay system Policies and techniques are means to reach objectives

Compensation objectives (cont.)

Efficiency Improving performance, increasing quality, delighting customers and stockholders Controlling labor costs Fairness Fundamental objective of pay systems Fair treatment by recognizing both employee contributions and employee needs Procedural fairness
Refers to process used to make pay decisions

Compensation objectives (cont.)

Compliance
Conformance to federal and state compensation laws and regulations

Ethics
Organizations care about how its results are achieved

4 Policy choices
Internal alignment Focus comparisons among jobs or skill levels inside a single organization Pay relationships within an organization affect an employees decision to: Stay with the organization Become more flexible by investing in additional training Seek greater responsibility External competitiveness Focus compensation relationships external to the organization: comparison with competitors Pay is market driven

4 Policy choices (cont.)

External competitiveness (cont.) Effects of decisions regarding how much and what forms: To ensure that pay is sufficient to attract and retain employees To control labour costs in ensuring competitive pricing of products/services Employee contributions Focus relation emphasis placed on employee performance Performance based affect fairness Management Focus policies ensuring the right people get the right pay for achieving the right objectives in the right way

Pay system techniques

Techniques tie the 4 basic policies to the pay objectives Many variations exist

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

Three Compensation Strategies

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

Strategic Choices

Support Business Strategy

Pay systems should align with the organization's business strategy
Compensation systems can be tailored to:
Innovator business strategy Cost cutter business strategy Customer-focused business strategy Based on contingency notions

When business strategies change, pay systems should also change

Tailor the Compensation System to the Strategy

IBMs Strategic Principles and Priorities

The Pay Model Guides Strategic Pay Decisions

Decisions based on the four strategic compensation choices of the pay model taken together form a pattern that becomes an organization's compensation strategy
Stated versus Unstated Strategies

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

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 Context refers to legal and regulatory requirements, cultural differences, changing workforce, demographics, expectations etc. Affects compensation choices Lobbying is also part of compensation strategies

Social and political context

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 companys 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

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?

Best Practices
Assumptions
A set of best-pay practices exists Practices can be applied universally across all situations Results in better performance with almost any business strategy

Best Fit
If design of pay system
Reflects companys strategy and values Is responsive to employees and unions needs 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 External competitiveness
Pay differences among internal jobs can affect results Paying higher than average paid by competitors can affect results Performance-based pay can affect results

Employee contributions

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

Thank you