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.