Compensation Ch. 2- Strategy the Totality of Decisions

Virtuous circle

Organization performacne increasing.

Vicious circle

Organization performance decreasing.

Matching Business Strategy and Pay Strategy

-A firm must fashion its own unique way of adding value by matching its business strategy and pay strategy. Companies may have a blend of strategies: innovator, customer focus and cost cutter. -If an organization changes its business strategy, the pay systems should change. -To support the new business strategy, the compensation strategy: 1. Cut layers of mgmt 2. Redesigned jobs to build in flexibility 3. Increased incentive pay to differentiate on performance 4. Kept a constant eye on costs.

Stated v Unstated Strategies

-All organizations have a compensation strategy, some are shared with all employees. -Some compensation strategies emerge from pay decisions. -Managers in all organizations make the 5 strategic decisions: objectives, internal alinment, external competitiveness, employee contribution and management. -Some do so in a rational, deliberate way, while others do it more chaotically.

Different Strategies within the same industry

-Google, Microsoft and SAS focus on different components of employees' compensation. -Like Google, Microsoft offered generous stock options, except employees accepted less base pay. -SAS Institute emphasizes work/life programs over cash compensation, provides limited bonuses and no stock options.

Similarities & Differences in Strategies

-Google, nucor & Merrill Lynch are all industry innovators. These have pay strategies that support their business strategies. -Google positions itself as a feisty startup. -Nucor emphasizes high productivity, high quality & low cost. -Merrill Lynch pay objectives are to attract, motivate & retain the best talent.

Fit between HR Strategy and Compensation Strategy & Effectiveness

-Horizontal Fit- Fit of compensation strategy with overall HR strategy. -Vertical Fit- Fit of compensation strategy and HR strategy and the Business straegy. -AMO- Ability, Motivation, Opportunity.

Virtuous and Vicious Circles

-One study reported that while pay levels differed among companies, they were not related to financial performance. Conclusion: It is not only how much you pay but how you pay. -Performance based pay workds best when there is shared success. 1. Shared success improves employee attitudes, behaviors, and performance when coupled with other "high performacne" practices. 2. When organizational performacne declines, performance-based pay plans do not pay off with potentially negative effects. 3. Unless increased risks are offset by larger returns, the risk return imbalance will reinforce declining employee attitudes and speed the downward spiral.

Different Strategies within the Same Company

-Sometimes units within the same corporation face different competitive conditions, adopt diferent strategies, and fit different compensation strategies. -A "let the market decide" strategy does not work internationally. -Strategic perspective on compensation is more complex than it first appears.

Strategic Choices

-Strategy- The fundamental directions an organization chooses. -As the corporate level, the fundamental strategic choise is: What business should we be in? -At the business unit level, the choise shifts to: How do we gain and sustain competitive advantage in this business? -At the functional level the strategic choise is: How should total compensation help this business gain and sustain competitive advantage? Strategic perspective- Focuses on compensation choises that help the organization gain and sustain competitive advantage.

Support Business Strategy

-The greater the alignment between a business strategy and the compensation system, the more effective the organization. -A supporting compensation strategy for an innovator, places more emphasis on incentives encouraging innovations. -Compensation in a cost cutter strategy encourages productivity increases. -The customer focused strategy uses customer satisfaction incentives in the compensation strategy. Compensation strategies can be based on generic strategy frameworks, such as Michael Porter's strategy framework, or Miles & Snow's framework.

Key steps in formulating a total compensation strategy

1. Assess total compensation implications. (Business strategy and competitive dynamics, HR strategy, culture/values, social and political context, employee/union neds). 2. Map a total compensation strategy. (Objectives, alignment, competitiveness, contributions & management) 3. Implement strategy. (Design systems to translate strategy into action, choose techniques to fit strategy.) 4. Reassess. (Realign as conditions change, realign as strategy changes.)

Source of competitive advantage: 3 tests

1. Is it aligned? Is it aligned with the business strategy? With external conditions? Internally with the overall HR system? 2. Does it differentiate? How is the pay system managed? Each strategy is woven into the company's overall HR strategy. 3. Does it add value? Calculate the return on (pay) investments (ROI).

The Pay Model Guides Strategic Pay Decisions: 5 Strategic compensation choices facing Whole Foods

1. Objectives- Increase shareholder value, satisfy and delight customers, and seek employees who will help the company make money. 2. Internal alignment-Store is aorganized into self managed teams, executive salaries capped at 19x average full-time employee pay and all full time employees qualify for stock operations. 3. External Competitiveness- Offers a unique total compensation package compared to competitors. 4. Employee contributions- Uses a shared fate technique and monthly performance affects team pay. 5. Management- Uses a "no secrets" management technique making salaries known to all and a "you decide" technique allowing employees to chose their health insurance.

Total compensation strategy: step 1

Assess total compensation implications. -Business strategy and competitive dynamics-understand the business. -HR strategy- pay as a supporting player or a catalyst for change? -Culture/Values-pay systems mirror image and reputation. -Socail & political context affects compensation choices. -Employee preferences are easily overlooked. -Choices can be good. -Union preferences- Adapt pay strategies to the union mgmt relationship.

"Best practices" v "Best fit"

In contrast to the notion of strategic fit, some belive that: A set of best-pay practices exists and these practices can be universally applied across situations. Guidance from the evidence: -Both smaller and larger internal pay differences can be a "best practice". -Paying higher than competitor's average can affect results. -Performance-based pay can affect results. -Consider all dimensions of the pay strategy together. -Embedding compensation strategy into HR strategy affects results. EQ: What practices pay off best under what conditions?

Support HR Strategy

Researchs Boxall and Purcell found a commonly used performacne theory they refer to as "AMO Theory" P=f(A,M,O). -Performance (P) is a function (f) of three factors: ability (A), motivation (M), and opportunity (0). -Compensation is key to attracting, retaining & motivating employees with the abilities necessary to execute the business strategy. -Compensation strategy and HR strategy are central to successful business strategy execution.

Step 3 & 4: Implement & Reassess

Step 3: To implement the strategy through the design and execution of the compensation system. The compensation system translates to strategy into practice. Step 4: Reassess and realign, closes the loop. This step recognizes that compensation strategy must change to fit changing conditions. Periodic reassessment is needed to continuously learn, adapt and improve.

Total compensation strategy: step 2

To map a total compensation strategy using 5 elements of the pay model. -Assign descriptors to each element and rate from high to low the level of importance of each descriptor. -The profile on the strategy map reflects a company's "pay brand". -Strategic maps are a visual reference but do not tell which strategy is "best". -Decisions in the pay model work in concert and the totality of decisions form the compensation strategy.