Strategy and Compensation Decisions PDF

**CHAPTER 2: Strategy (The Totality of Decisions)** **Strategy** (Def'n): the **fundamental business directions** that an organization has made in order to achieve its strategic objectives. - Strategy helps focus on **compensation decisions that help the organization gain and sustain** compe...

**CHAPTER 2: Strategy (The Totality of Decisions)** **Strategy** (Def'n): the **fundamental business directions** that an organization has made in order to achieve its strategic objectives. - Strategy helps focus on **compensation decisions that help the organization gain and sustain** competitive advantage - The better **the alignment, or fit, between organizational strategy and the compensation system**, the more effective the organization - Different industries may have **different pay strategies** - There can be different strategies **within the same industry**, - [Example]: Google, Microsoft and SAS - There can be different strategies **within the same company** - [Example]: SK Holdings **The Pay Model Guides Strategic Pay Decisions (5 Strategic Compensation/" decisions"): IMPORTANT** 1. Objectives 2. Internal Alignment 3. External Competitiveness 4. Employee Contributions 5. Management **Compensation Strategies: Three Examples Using the "5-Dimensions"** A screenshot of a computer AI-generated content may be incorrect. **Tailor the Compensation System to the Strategy** +-----------------+-----------------+-----------------+-----------------+ | **Strategy** | **Business | **HR Program | **Compensation | | | Response** | Alignment** | Systems** | +=================+=================+=================+=================+ | **Innovator:** | - Product | - Committed | - Reward | | Increases | Leadership | to Agile, | Innovation | | Product | | Risk-Taking | in Products | | Complexity and | - Shift to | , | and | | Shorten Product | Mass | Innovative | Processes | | Life Cycle | Customizati | People | | | | on | | - Market-Base | | | | | d | | | - Cycle Time | | Pay | | | | | | | | | | - Flexible -- | | | | | Generic Job | | | | | Description | | | | | s | +-----------------+-----------------+-----------------+-----------------+ | **Cost | - Operational | - Do More | - Focus on | | Cutter**: Focus | Excellence | with Less | Competitors | | on Efficiency | | | ' | | | - Pursue | | Labour | | | Cost-Effect | | Costs | | | ive | | | | | Solutions | | - Increase | | | | | Variable | | | | | Pay | | | | | | | | | | - Emphasize | | | | | Productivit | | | | | y | | | | | | | | | | - Focus on | | | | | System | | | | | Control and | | | | | Work | | | | | Specificati | | | | | ons | +-----------------+-----------------+-----------------+-----------------+ | **Customer-Focu | - Deliver | - Delight | - Customer | | sed**: | Solutions | Customer, | Satisfactio | | Increase | to | Exceed | n | | Customer | Customers | Expectation | Incentives | | Expectations | | s | | | | - Speed to | | - Value of | | | Market | | Job and | | | | | Skills | | | | | Based on | | | | | Customer | | | | | Contact | +-----------------+-----------------+-----------------+-----------------+ **Pay Systems Support *[Business]* Strategy** Pay systems should **align with the organization\'s business strategy** - Example: Exhibit 2.3 -- Innovator, Cost Cutter, Customer Focused In most instances: - Competing as an **[innovator]** requires MORE high‐powered incentives or Pay‐for‐Performance programs - Competing on **[cost‐cutter]** requires LOWER compensation - Competing through **[customer service]** requires MORE incentives related to job and customer success **Pay Systems Support *[HR]* Strategy** Compensation is the **[key]** to **attracting, retaining and motivating employees** who can execute the business strategy HR Systems are **[MOST effective]** when: 1\. Roles are designed where **employees are involved in decisions and have an opportunity to make an impact** 2\. Employee ability it developed through selective hiring and T&D 3\. The compensation system motivates employees to **execute their KSA's and take full advantage of opportunities given** **Key Steps in Formulating a Total Comp Strategy** 1. **Assess Total Compensation Implications** - Business Strategy and Competitive Dynamics - HR Strategy - Culture/Values - Social and Political Context - Employee/Union Preferences - Other HR Systems 2. **Map a Total Compensation Strategy** - Objectives - Internal Alignment - External Competitiveness - Employee Contributions - Management 3. **Implement Strategy** - Design System to Translate Strategy into Action - Choose Techniques to Fit Strategy 4. **Reassess the Fit** - Realign as Conditions Change - Realign as Strategy Changes **Competitive Advantage: Three Tests** You need to determine whether a pay strategy is a source of competitive advantage by doing the following: 1. **Is it aligned?** - Is the compensation strategy aligned with the business strategy, economic and sociopolitical conditions, and the overall HR system? 2. **Does it differentiate?** - Is the compensation strategy different and difficult to imitate? 3. **Does it add value?** - Does the compensation strategy add value by providing a return on investment? **"Best Fit" versus "Best Practices"** - The underlying premise... Managers **align pay decisions with the organizations strategy and values** - The **challenge is to design the "fit"** with the environment, business strategy and pay plan - The **better the fit, the greater the competitive advantage** 1. "**Best fit**" approach suggests that a company is more likely to achieve **competitive advantage if pay practices are aligned with business and overall HR strategies**. Reflects the company's strategies and values. 2. "**Best practices**" approach suggests that there exists a set of **best‐pay practices, which can be applied universally across all situations**, results in better performance with almost any business strategy. (Note: This is also connected to the "External Market") **Virtuous and Vicious Circles** - Performance-based pay **improves performance** when combined with high-performance practices and **[can be]** a **best practice under the right circumstances.**  **External Competitiveness (Video Worksheet)** 1. According to the narrator in the video, what are the objectives of any compensation system? What is this concept called? - **ARM** Concept: To attract, retain, and motivate talent. - This is the ARM concept; every organization wants to control costs and increase revenue. 2. How does an organization acquire talent and what does it need to be sure of? - Offer competitive pay package? What are the competitors paying for these skills? You can match or differentiate - An employer's pay level is dependent on his ability to compete in the market. 3. What are the three things an organization must look at to ensure it acquires talent in the market? Considerations when setting Pay Levels: - Availability of qualified people. - Profit Margin (Milk vs Lambo) - Characteristics of your organization. Size, and employee benefit preferences 4. What are the characteristics of Lead, Lag and Match pay rates? Why would a company Lag in its pay rates? - Companies may pay above industry rate to attract the best talent. - Startup firms who do not have the cash flow to match the going rate. Instead, they offer long-term incentives like grants, stock options. If the company becomes successful, early hires can become wealthy overnight (Google, Facebook)