Chapter 2 Strategy: Compensation Decisions PDF

Chapter 2 Strategy: The Totality of Decisions McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.  Chapter Topics  Similarities and Differences in Strategies ...

Chapter 2 Strategy: The Totality of Decisions McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.  Chapter Topics  Similarities and Differences in Strategies  Strategic Choices  Support Business Strategy  Support HR Strategy  The Pay Model Guides Strategic Pay Decisions 2-2  Chapter Topics (cont.)  Developing a Total Compensation Strategy: Four Steps  Source of Competitive Advantage: Three Tests  “Best Practices” versus “Best Fit”?  Guidance from the Evidence  Virtuous and Vicious Circles 2-3 Exhibit 2.1: Three Compensation Strategies 2-4  Similarities and Differences in Strategies  Different strategies within the same industry  Different strategies within the same company 2-5  Strategic Choices  Strategy refers to the fundamental directions that an organization chooses  A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage 2-6 Exhibit 2.2: Strategic Choices 2-7  Support Business Strategy  Pay systems should align with the organization's business strategy  Based on contingency notions  When business strategies change, pay systems should also change 2-8 Exhibit 2.3: Tailor the Compensation System to the Strategy 2-9  Support HR Strategy  The “AMO theory” by Boxall and Purcell  P = f(A,M,O)  HR systems will be most effective when:  Employee ability is developed through selective hiring and training and development 2-10  Support HR Strategy (cont.)  The compensation system motivates employees  Roles allow employees to be involved in decisions 2-11 Exhibit 2.5: Fit Between HR Strategy and Compensation Strategy and Effectiveness 2-12 The Pay Model Guides Strategic Pay Decisions  Five strategic compensation choices:  Objectives  Internal alignment  External competitiveness  Employee contributions  Management 2-13 The Pay Model Guides Strategic Pay Decisions (cont.)  These decisions, taken together, form a pattern that becomes an organization’s compensation strategy  Stated versus unstated strategies 2-14  Developing A Total Compensation Strategy: Four Steps  Step 1: Assess total compensation implications  Step 2: Map a total compensation strategy  Step 3: Implement strategy  Step 4: Reassess 2-15 Exhibit 2.6: Key Steps in Formulating a Total Compensation Strategy 2-16 Step 1: Assess Total Compensation Implications  Business strategy and competitive dynamics – understand the business  Changing customer needs  Competitors’ actions  Changing labor market conditions  Changing laws  Globalization  Competitive dynamics can be assessed globally 2-17 Step 1: Assess Total Compensation Implications (cont.)  HR strategy: Pay as a supporting player or catalyst for change?  Pay strategy is influenced by how it fits with other HR systems  Pay can be a supporting player, as in the high-performance approach  Pay can take the lead and be a catalyst for change 2-18 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 2-19 Step 1: Assess Total Compensation Implications (cont.)  Affects compensation choices  Lobbying is also part of compensation strategies 2-20 Step 1: Assess Total Compensation Implications (cont.)  Employee preferences  How to better satisfy individual needs and preferences  Choice  People do not understand the alternatives; too many choices confuse them  Challenging to design and manage 2-21 Step 1: Assess Total Compensation Implications (cont.)  Disapproval from the U.S. Internal Revenue Service  Requires meeting codes and regulations 2-22 Step 1: Assess Total Compensation Implications (cont.)  Union preferences  Union preferences for different forms of pay and their concern with job security affect pay strategy  Unions' interests can differ  Compensation deals with unions can be costly to change 2-23  Step 2: Map a Total Compensation Strategy  A strategic map offers a 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”; provides a framework and guidance 2-24 Exhibit 2.8: Contrasting Maps of Microsoft and SAS 2-25  Steps 3 and 4: Implement and Reassess  Step 3  Involves implementing the strategy through the design and execution of the compensation system  Step 4  Recognizes that the strategy must change to fit changing conditions  Involves periodic reassessment 2-26 Sources of Competitive Advantage: Three Tests  Is it aligned?  Does it differentiate?  Does it add value?  Calculate the return on investment (ROI) 2-27  “Best Practices” versus “Best Fit”? Best Practices Best Fit  Assumptions:  A company is more  A set of best-pay practices exists likely to achieve competitive  Practices can be applied universally across all advantage if the situations pay system:  Results in better performance with almost  Reflects company’s any business strategy strategy and values  Is responsive to employees’ and unions’ needs  Is globally competitive 2-28  Guidance from the Evidence  Internal alignment  Pay differences among internal jobs can affect results  External competitiveness  Paying higher than the average paid by competitors can affect results  Employee contributions  Performance-based pay can affect results 2-29 Guidance from the Evidence (cont.)  Managing compensation  All dimensions of the pay strategy need to be considered  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 2-30  Virtuous and Vicious Circles  A study concluded that how you pay 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 2-31 Virtuous and Vicious Circles (cont.)  Performance-based pay can be the best practice under right circumstances 2-32 Exhibit 2.9: Virtuous and Vicious Circles 2-33