Chapter 2 - Strategy of Compensation Plans

Describe a total compensation strategy in four steps.

1. Asses Total Compensation Implications 2. Map a Total Compensation Strategy 3. Implement 4. Reassess and Realign

What is the first step in a total compensation strategy?

1. Asses Total Compensation Implications Understand the specific industry in which your organization wants to compete in - What business should be in? How do we win in that business? - To cope with turbulent competitive dynamics, focus on what factors in the business environment are important today. What will be important in the future? - How will you compete to win? Competitive Dynamics Culture/values Social and political context Employee/Union needs Other HR systems

What is the alignment test for competitive advantage?

Alignment of the pay strategy includes 3 aspects - Align with business strategy - Align externally with the economic and sociopolitical conditions - Align internally within the overall HR system Easiest test to past

What happens when a pay system is in a VIRTUOUS CIRCLE?

An organization whose profits or market share is increasing is able to pay larger bonuses and stock awards Paying these bonuses fairly improves employee attitudes and work behaviors, which in turn improves their performance Employees receive returns that compensate for the risks they take, and get to share in the organization's success

How do you implement HR strategy with compensation?

Compensation is the key to attracting, retaining, and motivating employees with the abilities necessary to execute the business strategy and handle greater decision-making responsibilities. Compensation is also the key to motivating them to fully utilize those abilities.

What are best-pay practices?

Compensation practices that allow employers to gain preferential access to superior human resource talent and competencies (i.e., valued assets), which in turn influence the strategies the organization adopts

At a business unit level, the choice shifts to:

How do we gain and sustain competitive advantage in this business?

At the function level strategic choice is:

How should total compensation help this business gain and sustain competitive advantage?

Describe the differentiation test for competitive advantage?

If the pay system is relatively simple for any competitor to copy, then how can it possible be a source of competitive advantage? The answer is HOW YOU MANAGE IT

Apply the three tests for sources of competitive advantage.

Is it aligned? Does it differentiate? Does it add value

what is strategic compensation?

It is the design and implementation of a compensation system that reinforces the objectives of both a company HR strategy AND business strategy.

Describe the value test for competitive advantage?

Look for the return you are getting from offering your incentives, benefits, and even base pay Measure ROI

What is the 2nd step in a total compensation strategy?

Map a Total Compensation Strategy Mapping is often a picture of a company's compensation plan. - It can also clarify the message that the company is trying to deliver Provides a visual reference They don't tell which strategy is best, they just provide framework and guidance

How do employee/union needs shape pay systems?

Offer choices to benefits Be flexible with compensation options for all types of employees Doing this adds value and makes it difficult for other companies to imitate Make sure to make choices limited though as to avoid confusion and conflict

Explain what performance theory is:

P = f(A,M,O) P = performance A = ability M = motivation O = opportunity AMO logic is that HR systems will be most effective when employee ability is developed through selective hiring and training and development.

How does culture and values shape pay systems?

Pay systems reflect the values that guide an employee's behavior and underlie its treatment of employees Pay systems also mirror the company's image and reputation

Compensation value should influence what 3 aspects of business?

Productivity Availability Satisfaction

What are stated compensation strategies?

Stated strategies are compensation strategies that are written for all to see and understand Rational and deliberate

What is strategy?

Strategy refers to the fundamental directions that an organization chooses.

virtuous circle describes...

Suggests performance-based pay works best when there is success to share! :)

what is the supporting compensation approach when it comes to strategic choice?

Supporting compensation approach places less emphasis on evaluating skills and jobs and more emphasis on incentives designed to encourage innovations.

T or F: Cookie cutter strategies don't work for most firms

True; Tailor compensation system to your business strategy

What are unstated compensation strategies?

Unstated strategies are inferred from pay decisions Done more chaotically Responds to pressures from economic, sociopolitical, and regulatory context

When organization performance declines, performance-based pay plans do not pay off There are not bonuses The value of stock declines, with potentially negative effects on organization performance This increases the risk of facing employees with smaller bonuses, demotions, wage cuts, and layoffs Unless the increased risks are offset by larger returns, the risk-return imbalance will reinforce declining employee attitudes and speed the downward spiral.

Vicious circle

At a fundamental level, strategic choice is

What business should we be in?

vicious circle describes..

When organization performance declines, performance-based pay plans do not pay off

What happens when a pay system is in a VICIOUS CIRCLE?

When organization performance declines, performance-based pay plans do not pay off There are no bonuses. The value of stock declines, with potentially negative effects on organization performance This increases the risk of facing employees with smaller bonuses, demotions, wage cuts, and layoffs Unless the increased risks are offset by larger returns, the risk-return imbalance will reinforce declining employee attitudes and speed the downward spiral.

stresses doing more or less by minimizing costs, encouraging productivity increases, and specifying in greater detail exactly how jobs should be performed. Example: Ryanair is a low cost commercial airline in Ireland. Emphasizes keeping training and maintenance costs lower than competitors by only using one particular type of aircraft (Boeing 737); seats don't recline, customers are required to carry luggage to the plane McDonald's training plan - short and sweet

cost cutter's efficiency-focused strategy

stresses delighting customers and bases employee pay on how well they do this Nordstrom - places heavy emphasis on competitive based pay and commission

customer focused strategy

Compensation strategy, HR strategy, and business strategy seek to ...

decrease costs or increase revenues relative to competitors.

What is efficiency-focused strategy when it comes to strategic choice?

efficiency-focused strategy stresses doing more or less by minimizing costs, encouraging productivity increases, and specifying in greater detail exactly how jobs should be performed.

T or F: Most firms have generic business strategies.

false: Most firms do not have generic strategies. They tend to have aspects of cost and innovation.

A strategic perspective focuses on those compensation choices that ...

help the organization gain and sustain competitive advantage.

stresses new products and short response time to market trends places less emphasis on evaluating skills and jobs and more emphasis on incentives designed to encourage innovations New and unique products Short response time to market trends

innovator approach

What is a customer-focused business strategy?

stresses delighting customers and bases employee pay on how well they do this

What is the innovative approach when it comes to strategic choice?

stresses new products and short response time to market trends

places less emphasis on evaluating skills and jobs and more emphasis on incentives designed to encourage innovations. Google wants employees to spend 20% of their working time innovating products to make Google better Gmail was made Heavily invested in research development

supporting compensation approach

Suggests performance-based pay works best when there is success to share! :) An organization whose profits or market share is increasing is able to pay larger bonuses and stock awards Paying these bonuses fairly improves employee attitudes and work behaviors, which in turn improves their performance Employees receive returns that compensate for the risks they take, and get to share in the organization's success

virtuous circle