Chapter 2 - Strategy: The Totality of Decisions

Vicious Circles

Organization performance decreases, culture of ownership weakens, risk-return becomes unbalanced = pay for performance decreases (less successful companies pay less)

Virtuous Cycle

Organization performance increases, culture of ownership develops, risk-return balances = pay for performance increases (more successful companies can pay more)

Strategic Choice

the tradeoffs and compromises a company makes to support its vision

Support Business Strategy

*Aligns pay systems with organizations business strategy, better alignment more effective the organization, changes in business strategies should result in pay system changes *Compensation strategies can be based on generic frameworks

Start with the pay mode and

*Assess implications for the total compensation of your organization's situation *Mp out the compensation objectives and four policy choices to achieve them *Translate policies into the workplace via the compensation system and implement it *Reassess by comparing results against the pay objectives *Continue to learn, adapts, and improve

Key Steps in Formulating a Total Compensation Strategy

1. Assess Total Compensation Implication 2. Map a Total Compensation Strategy 3. Implement Strategy 4. Reassess

Pay Model Guides Strategic Pay Decisions

5 Strategic Compensations: objectives, internal ailment, external competitiveness, employee contributions, and management

Strategic Perspective

A strategic prospective focuses on those compensation choices that help the organization gain and sustain competitive advantage

Align

Align with business strategy, externally w/environment, internally

Exhibit 2.1 3 Compensation Strategies: Google, Nucor, Merrill Lynch

All companies emphasized outstanding employee performance, different industries may have different pay strategies, but there can be different strategies within the same industry or even the same company.

Ability

An individual's capability to engage in a specific behavior

Motivation

An individual's willingness to engage in some behavior. Primarily concerned with (1) what energizes human behavior, (2) what directs or channels such behavior, and (3) how this behavior is maintained or sustained

Add value

As the largest controllable expense every dime must add value to the company's processes

Best Practices vs. Best Fit

Best Practices - Assumptions Set of best-pay practices exist Practices can be applied universally Results in better performance Best fit - an organization is likely to achieve competitive advantage if the pay system reflections the companies strategies and values, union needs, globally competitive.

Cost Cutter: Focus of Efficiency

Business Response: - Operational Excellence - Pursue Cost-Effective Solutions HR Program Alignment: - Do More with Less Compensation Systems: - Focus on Competitors' Labor Costs - Increase Variable Pay - Emphasize Productivity -Focus on System Control and Work Specifications

Customer Focused: Increase Customer Expectations

Business Response: - Deliver Solutions to Customers - Speed to Market HR Program Alignment: - Delight Customer, Exceed Expectations Compensation Systems: - Customer Satisfaction Incentives - Value of Job and Skills Based on Customer Contact

Innovator: Increase Product Complexity and Shorten Product Life Cycle

Business Response: - Product Leadership - Shift to Mass Customization - Cycle Time HR Program Alignment: - Committed to Agile, Risk-Taking, Innovative People Compensation Systems: - Reward Innovation in Products and Processes - Market-Based Pay - Flexible - Generic Job Descriptions

Step 1 Assess Total Compensation Implications

Business strategy & competitive dynamics, understanding the business HR strategy pay as a supporting player or catalyst for change Employee preferences are also wide ranging Union preferences differ by location

Guidance from the Evidence

Consistent research evidence show the following practices matter to objectives: internal alignment, external competitiveness, employee contributions, managing compensation, and compensation strategy Identify what practices pay off best under what conditions

Strategic Choices

Corporate level - What business should we be in? Business level - How do we gain and sustain competitive advantage in this business? Functional level - How should total compensation help this business gain and sustain competitive advantage?

Miles & Snow's Frameworks includes

Defenders in stable markets competing on cost, and prospectors who compete in innovative/new markets.

Nonexempt

Employees who are subject to the provisions of the Fair Labor Standards Act

Virtuous & Vicious Circles

How you pay matters as much as how much you pay Performance based pay: -improves performance when combined with high performance practices -can be best practice under right circumstances

3 General strategies

Innovator, Cost Cutter, Customer Focused

Step 3 & 4 Implement & Reassess

Involves implementing the strategy through the design and execution of the compensation system Recognizes that the strategy must change to fit changing conditions, and involves periodic reassessment.

Competitive Advantage - Three tests

Is it aligned? Does it Differentiate? Does it add value?

Boxall & Purcell use the AMO Theory (Support HR Strategy)

P=f(A,M.O) P - performance f - function A - ability M - motivation O - opportunity The AMO logic is that HR systems will be most effective when roles are designed to allow employees to be involved in decisions and have an opportunity to make an impact, when employee ability is developed through selective hiring and training and development, and when the compensation system motivates employees to act on their abilities and take advantage of the opportunity to make a difference.

Differentiate

Slavish copying of another's pay strategy yields no advantage. Pay strategy must be tailored

Step 2 Map a Total Compensation Strategy

Strategic maps offer a picture of a compensation strategy, visual reference, easy understanding, provides framework and guidance, decisions in pay model work in concert.

Similarities & Differences in Strategies

Strategy refers to the way a company compensates its employees to maintain its competitiveness. The elements of a strategy are the company's objectives, internal alignment in how the company organizes its employees, external competitiveness with others within the industry, manner in which employee contributions are recognized, management actions towards employees.

Competitive Position

The comparison of the compensation offered by one employer relative to that paid by its competitors

Cost Cutter

The cost cutter's efficiency-focused strategy stresses doing more with less by minimizing costs, encouraging productivity increases, and specifying in greater detail exactly how jobs should be performed, do more with less

Customer-Focused

The customer-focused business strategy stresses delighting customers and bases employee pay on how well they achieve this

Strategy

The fundamental directions that an organization chooses

Innovator

The innovator stresses new products and short response time to market trends, increase product complexity and shorten product life cycle

Michael Porter's Frameworks includes

cost leadership strategy focuses reducing cost, while the differentiator strategy focuses on providing a unique and/or innovative product/service at premium prices.