2-1
Chapter
2
Strategic Perspectives
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2-2
Learning Objectives
After studying Chapter 2, students should be able to:
1.
2.
3.
4.
Understand the concept of a compensation strategy,
where it comes from, how it relates to the
organization’s situation, and why the concept has
value.
Illustrate the relationship between the pay system and
each of the strategic issues discussed.
Realize there is not yet consensus on the concept of
strategy.
Understand the difference between transactional and
relational returns.
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2-3
Corporate objectives
strategic plans,
vision, and values
What business
should we be in?
How should total
compensation help
us win?
Business unit
strategies
HR strategies
How do we win (gain
competitive advantage) in
those businesses?
How should HR
help us win?
Social, competitive,
and regulatory
environment
Strategic
compensation
decisions
Strategic Choices
Compensation
systems
Employee
attitudes and
behaviors
Competitive
advantage
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2-4
Strategic Perspectives Toward Total Compensation
Objectives
Microsoft
Bristol - Myers Squibb
Firepond
• Support the business
objectives
• Support business mission
and goals
• Support recruiting,
motivation, and retention of
MSMS-caliber talent
• Develop global leaders at
every level
• Demonstrate respect for
individual talent and the
limitless potential of a
highly motivated team
• Preserve MS core values
• Reinforce teamteam-based
culture
• Reduce costs, increase
productivity
• Encourage high
standards of excellence,
original thinking, a passion
for the process of discovery
and a willingness to take
risks
• Reward fresh ideas, hard
work and a commitment to
excellence
Internal
Alignment
• Value diverse
perspectives as a key to
discovery
• Integral part of MS culture
• Support MS performance
driven culture
• Business/technologyBusiness/technology-based
organization design structure
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• Flexibility for development
and growth
• Pay differences that foster a
collegial atmosphere
• Reflect responsibilities,
required competencies, and
business impact
• Reinforce high expectations
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2-5
Strategic Perspectives Toward Total Compensation (continued)
Administration
Employee
Contribution
Externally
Competitive
Microsoft
• Lead in total
compensation
• Lag in base pay
• Lead with bonuses, stock
options
• Bonuses and options
based on individual
performance
Bristol - Myers Squibb
• Compare favorably to
higherhigher-performing
competitors
• Cash between the 50th
and 75th percentile
• Support high performance,
leadership culture
• TeamTeam-based increases
• Options align employee
and shareholder interest
• Tailor to business and
team results
• Open, transparent
communications
• Centralized administration
• Performance and
leadership feedback –
everyone is a leader
Firepond
• Demonstrate respect for
individual talent and the
limitless potential of a
highly motivated team
• Bonus pool based on
Firepond financial
performance. Individual
share of pool based on
individual performance.
• Push stock ownership
deep into company
• Goal-focused, teamoriented, and self-managed
• Administrative ease
• Software supported
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2-6
Pay System Objectives
!Attract and retain employees
!Motivate performance
!Promote skills and knowledge development
!Shape corporate culture
!Reinforce and define structure
!Determine pay costs
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Pay-Design Process
!Before any new compensation program is
designed, there must be a clear understanding by
the organization of:
!its current values
!its structure
!its people
!its goals and vision for the future
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Strategic Alignment
VISION/MISSION
CORE BELIEFS
DESIRED CULTURE
BUSINESS OBJECTIVES
REWARD
PLANS
PERFORMANCE
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Generic Business-level Strategies
!Innovator
!Cost Cutter
!Customer Focused
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Tailor the Compensation System to the Strategy
Strategy
Innovator:
Increase Product
Complexity and
Shorten Product
Life Cycle
Cost Cutter:
Focus on
Efficiency
Customer
Focused:
Increase
Customer
Expectations
McGraw-Hill/Irwin
Business
Response
• Product
Leadership
• Shift to Mass
HR Program
Alignment
• Committed to
Agile, Risk Taking,
Innovative People
2-10
Compensation
System
• Reward Innovation
in Products and
Processes
Customization and
Innovation
• MarketMarket-Based Pay
• Cycle Time
Job Descriptions
• Operational
Excellence
• Focus on
Competitors’ Labor
Costs
• Increase Variable
Pay
• Emphasize
Productivity
• Focus on System
Control and Work
Specifications
• Pursue CostCost-
• Flexible – Generic
• Do More With Less
effective Solutions
• Customer Intimacy
• Deliver Solutions to
Customers
• Speed to Market
• Delight Customer,
Exceed
Expectations
• Customer
Satisfaction
Incentives
• Value of Job and
Skills Based on
Customer Contact
© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
2-11
Which Pay Decisions Are Strategic?
A strategic perspective
focuses on those
competitive choices that
help the organization gain
and sustain competitive
advantage.
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Strategic Compensation Decisions
!Objectives
!Alignment
!Competitiveness
!Contributions
!Administration
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2-13
Example: The Strategic Compensation
Decisions Facing Starbucks
1.
Objectives: How should compensation support
business strategy and be adaptive to the cultural and
regulatory environment?
Starbucks objectives:
!
Grow by making employees feel valued.
! Recognize that every dollar earned passes through
employees’ hands.
! Use pay, benefits, and opportunities for personal
development to help gain employee loyalty and become
difficult to imitate.
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2-14
Example: The Strategic Compensation
Decisions Facing Starbucks (continued)
2.
Alignment: How differently should the various types
and levels of skills be paid within the organization?
Starbucks:
! De-emphasize differences.
! Use egalitarian pay structures, cross-train employees
to handle many jobs, and call employees partners.
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2-15
Example: The Strategic Compensation
Decisions Facing Starbucks (continued)
3.
Competitiveness: How should total compensation be
positioned against our competitors? What forms of
compensation should we use?
Starbucks:
! Pay just slightly above other fast-food employers.
! Provide health insurance and stock options for all
employees (including part-timers).
! Give everyone a free pound of coffee every week.
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Example: The Strategic Compensation
Decisions Facing Starbucks (continued)
4.
Contributions: Should pay increases be based on
individual and/or team performance, on experience
and/or continuous learning, on improved skills, on
changes in cost of living, on personal needs, and/or on
each business unit’s performance?
Starbucks:
! Emphasize team performance and shareholder
returns.
! For new managers in Beijing and Prague, provide
training opportunities in the U.S.
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2-17
Example: The Strategic Compensation
Decisions Facing Starbucks (continued)
5.
Administration: How open and transparent should
pay decisions be to all employees? Who should be
involved in designing and managing the system?
Starbucks:
! As members of the Starbuck’s “family,” our
employees realize what is best for them.
! Partners can and do get involved.
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2-18
Key Steps to Formulate a Compensation Strategy
1.
1. Assess
Assess Total
Total Compensation
Compensation Implications
Implications
•• Competitive
Competitive Dynamics
Dynamics
•• Core
Core Culture
Culture // Values
Values
•• Social
Social and
and Political
Political Context
Context
•• Employee
Employee // Union
Union Needs
Needs
•• Other
Other HR
HR Systems
Systems
4.
4. Reassess
Reassess the
the Fit
Fit
•• Realign
Realign as
as Conditions
Conditions Change
Change
•• Realign
Realign as
as Strategy
Strategy Changes
Changes
2.
2. Fit
Fit Policy
Policy Decisions
Decisions to
to Strategy
Strategy
•• Objectives
Objectives
•• Alignment
Alignment
•• Competitiveness
Competitiveness
•• Contributions
Contributions
•• Administration
Administration
3.
3. Implement
Implement Strategy
Strategy
•• Design
Design System
System to
to Translate
Translate Strategy
Strategy
into
into Action
Action
•• Choose
Choose Techniques
Techniques to
to Fit
Fit Strategy
Strategy
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2-19
Basic Issue: Does “Best Fit” Pay Off?
Socioeconomic /
Political Environment
Organization
Organization
Strategy
Strategy
HR
HR // Compensation
Compensation
Policies
Policies
Competitive
Competitive
Advantage
Advantage
Socioeconomic
Socioeconomic //
Political
Political Environment
Environment
HR
HR // Compensation
Compensation
Policies
Policies
Organization
Organization
Strategy
Strategy
Competitive
Competitive
Advantage
Advantage
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2-20
Best Practices Options
HIGH COMMITMENT
THE NEW PAY
!
!
!
!
!
!
!
External market-sensitive-based pay,
not internal alignment
Variable performance-based pay, not
annual increases
Risk-sharing partnership, not
entitlement
Flexible opportunities to contribute, not
jobs
Lateral promotions, not career path
Employability, not job security
Teams, not individual contributors
!
!
!
!
!
!
!
!
!
!
!
!
!
!
McGraw-Hill/Irwin
High wages: You get what you pay for
Guarantee employment security
Apply incentives; share gains, not
risks
Employee ownership
Participation and empowerment
Teams, not individuals are base units
Smaller pay differences
Promotion from within
Selective recruiting
Enterprise-wide information sharing
Training, cross-training, and skill
development are crucial
Symbolic egalitarianism adds value
Long-term perspective matters
Measurement matters
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2-21
Virtuous and Vicious Circles
Organization
Performance
INCREASES
Increased PerformanceBased Pay
Virtuous Circle
Risk/Return
BALANCE
Vicious Circle
Organization
Performance
DECREASES
Risk/Return
IMBALANCE
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Increased Employee
Performance
Decreased PerformanceBased Pay
Decreased Employee
Performance
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2-22
An implicit contract is an unwritten
understanding between employers and
employees over their reciprocal
obligations and returns; employees
contribute toward achieving the goals of
the employer in exchange for returns
given by the employer and valued by the
employee.
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2-23
High
Low
TRANSACTIONAL
Framework for Analyzing
Different Deals
HIGH PAY – LOW COMMITMENT
HIGH PAY – HIGH COMMITMENT
Hired Guns
(Stockbrokers)
Cult - like
(Microsoft)
LOW PAY – LOW COMMITMENT
LOW PAY – HIGH COMMITMENT
Workers as Commodity
(Employers of Migrant
Farm Workers)
Family
(Starbucks)
Low
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High
RELATIONAL
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2-24
Summary
! A strategic perspective on compensation takes the
position that how employees are compensated can be a
source of sustainable competitive advantage.
! Two alternative approaches are highlighted:
! A “best fit” / contingent business strategy / environmental
context approach; and
! A “best practices” approach.
! The “best fit” approach presumes that one size does not
fit all. The art of managing compensation strategically
involves fitting the compensation system to the different
business and environmental conditions.
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Summary (continued)
! The best practices approach assumes that there exists a
universal, best way.
! The focus is not on the question of what the best strategy is,
but how best to implement the system.
! Agreement on what are the best practices does not exist.
! The four-step process for forming and implementing a
compensation strategy includes:
! Assessing conditions
! Deciding on the best strategic choices following the pay model
! Implementing the strategy through design of the pay system
! Reassessing the fit
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2-26
Summary (continued)
! Recent studies have begun to research what aspect of the
compensation system really does matter, but the answer
is still fuzzy.
! An essential point is that the deal (the employment
relationship) includes both transactional and relational
forms of compensation.
! It is the total deal, the relationship with people, that
makes an organization successful.
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2-27
Review Questions
1.
2.
3.
Contrast the essential differences between the “best fit”
(strategic business-based) and “best practice”
perspectives.
Reread the culture / values statements in Exhibit 2.7.
Discuss how, if at all, those values might be reflected
in a compensation system. Are these values consistent
with “let the market decide”?
Two tests for any source of competitive advantage are
“adds value” and “difficult to imitate”. Discuss
whether these two tests are difficult to pass. Can
compensation really be a source of competitive
advantage?
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