COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
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© 2010 McGraw Hill Ryerson
Strategy
A fundamental business decision that an
organization has made in order to
achieve its strategic objectives e.g., what
business to be in, how to gain
competitive advantage
The greater the alignment, or fit,
between the organizational strategy and
the compensation system, the more
effective the organization
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© 2010 McGraw Hill Ryerson
Strategic Perspectives Toward Total
Compensation (1 of 2)
Google
Medtronic
Objectives
•Emphasis on innovation
•Commitment to cost
containment
•Recognize contributions
•Attract and reward the
best
•Focus on customers
•Fully present at work and in
personal lives
•Recognize personal
accomplishment and share
success
•Attract and engage top talent
•Control costs
Internal
Alignment
•Minimize hierarchy
•Everyone wears several
hats
•Emphasize collaboration
•Reflect job responsibilities
•Support promotional growth
opportunities
•Foster team culture
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© 2010 McGraw Hill Ryerson
Strategic Perspectives Toward Total
Compensation (2 of 2)
Externally
Competitive
Google
Medtronic
•Explore novel ideas in
benefits and compensation
•Generous, unique benefits
•Market value of jobs
establishes overall pay
parameters
•Choices in benefits
Employee
•Recognize individual
Contributions contributions
•Unrivaled stock programs
Management
•Love employees, ant to
know it
•Technology support
•Incentives directly tied to
business goals
•Opportunity to earn abovemarket pay
•Recognition of individual and
team performance
•Clearly understood; open
•Technology support
•Employee choice
© 2010 McGraw Hill Ryerson
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Strategic Choices
Corporate objectives,
strategic plans, vision,
and values
Business unit
strategies
Social,
competitive,
and regulatory
environment
HR strategies
Strategic
compensation
decisions
Compensation
systems
Employee
attitudes and
behaviours
Competitive
advantage
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© 2010 McGraw Hill Ryerson
Strategic Compensation
Decisions
 Objectives
 Internal Alignment
 External Competitiveness
 Employee Contributions
 Management
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© 2010 McGraw Hill Ryerson
Key Steps to Formulate a
Compensation Strategy
1. Assess Total Compensation Implications
• Competitive Dynamics
• Core Culture / Values
• Social and Political Context
• Employee / Union Needs
• Other HR Systems
4. Reassess the Fit
• Realign as Conditions Change
• Realign as Strategy Changes
2. Map a Total Compensation Strategy
• Objectives
• Alignment
• Competitiveness
• Contributions
• Management
3. Implement Strategy
• Design System to Translate Strategy
into Action
• Choose Techniques to Fit Strategy
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© 2010 McGraw Hill Ryerson
Competitive Advantage
Three tests to assess competitive advantage
of a strategy:
1. Does the pay strategy align with the business
strategy, economic and sociopolitical
conditions, and the overall HR system?
2. Is the pay strategy different and difficult to
imitate?
3. Does the pay strategy add value by providing
a return on investment in compensation?
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© 2010 McGraw Hill Ryerson
“Best Fit” versus “Best Practices”
“Best fit” approach suggests that aligning
compensation decisions with strategy will
be most effective
“Best practices” approach suggests that a
set of practices exist that work with almost
any strategy
 Emerging evidence suggests that a focus on
“What practices pay off best under what
conditions?” will be most effective
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© 2010 McGraw Hill Ryerson
Conclusion
 Managing total compensation strategically means
aligning compensation and business strategies
 The three tests for whether pay strategy provides
competitive advantage are: (1) does it align?; (2)
does it differentiate?; and (3) does it add value?
 The four-step process to develop a compensation
strategy is:
1.
2.
3.
4.
assess environmental conditions
decide on the best strategic choices
implement the strategy, and
reassess the fit
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© 2010 McGraw Hill Ryerson