Chapter Two
Strategic Compensation: Attaining
a Competitive Advantage
Background

Historical perspective
» Scientific management, time and motion studies
» Welfare practices, federal and local laws
» Competitive advantage (firm’s ability to maintain
market share and profitability over a sustained
period of several years.)
– Compensation—promoting more-productive and highly
skilled work forces. Merit pay to reinforce performance.
Incentives to connect pay and work. Pay for knowledge.
Discretionary benefits.
» Technology, job design, global competition
Strategic vs Tactical Compensation

Competitive strategy choices
» Cost leadership
» Differentiation

Tactical decisions that support the firm’s
strategy
» Human resource tactics
» Tactics in other functional areas
Exhibit 2-1
Relationship Between Strategic and Tactical Decisions
• Competitive strategy
• Human resource strategy
• Compensation strategy
Strategic
Decisions
General
Tactical
HR
Decisions
• Recruitment
• Compensation
• Selection
• Training
• Performance appraisal
Specific
Tactical
HR
Decisions
(Comp.
Examples)
•
•
•
•
•
Seniority pay
• Skill-based pay
Merit pay
• Broadbanding
Incentive pay
• Two-tier pay
Pay-for-knowledge
structures
Discretionary benefits options
General
Specific
Exhibit 2-3
Influences on Competitive Strategy

National Culture
»
»
»
»

Power distance
Individualism-collectivism
Uncertainty avoidance
Masculinity-femininity

Organizational &
Product Life Cycle
Organizational Culture
» Traditional organizational hierarchy
» Flatter organizational structures
» Team orientation
» Growth
» Maturity
» Decline
Exhibit 2-4
Traditional Organizational Structure
Chief
Exec. Officer
President
Executive
VP
VP
Accounting
VP
Finance
VP
HR
VP
Mfg.
VP
Marketing
Director
Accounting
Director
Finance
Director
HR
Director
Mfg.
Director
Marketing
Manager
Accounting
Manager
Finance
Manager
HR
Manager
Mfg.
Manager
Marketing
Exhibit 2-7
Factors That Lead to Dysfunctional Turnover
Dysfunctional Turnover
General
Economic
Conditions
Turnover
increases
when general
economic
conditions are
favorable.
Labor Market
Conditions
Turnover
increases
when demand
for employees
increases.
Personal
Mobility
Turnover
increases with
fewer family
responsibilities.
Job Security
Turnover
increases
when
employees
believe job
security is
better in other
companies.
Exhibit 2-5
Designing Pay-for-Knowledge Programs

Establishing Skill Blocks
» Skill type
» Number of skills
» Grouping of skills

Transition Matters
» Skills assessment
» Aligning pay with the knowledge structure
» Access to training

Training and Certification
» In-house or outsourcing training
» Certification and recertification
Exhibit 2-6
Annual Salary
Broadbanding Structure and Its Relationship to
Traditional Pay Grades and Ranges
Grade E
Grade D
Grade C
Grade B
Grade A
Band A
Low
Band B
Job Worth
High