The Construction and Evaluation of Consistency between Compensation
Management and Strategy
Gang Du1, You-min Gao1, Xiao-diao Wu1, Jing Sun1
1
College of Management and Economics, Tianjin University
(tddg@tju.edu.cn)
Abstract - As an important function of human resources
management, strategic compensation management plays a
significant role in motivation and constraint. How
compensation management be consistent with operation
strategy of enterprises, and whether compensation
management can support execution of enterprise
management strategy effectively have become research
hotspots to many enterprises and scholars. To impel further
development of theory in this field, research and evaluation
of consistency between compensation management and
enterprise strategy should be strengthen. Therefore, this
paper constructs a consistency model of compensation
management and enterprise strategy. Based on this model,
an evaluation model about consistency between
compensation management and enterprise strategy is also
built. At last, a practical example is shown to explain the
evaluation methods.
Keywords - Consistency, evaluation, measurement,
strategic compensation management
I. INTRODUCTION
With the growing of economic globalization and the
increasing competition of world market, the environments
enterprises facing with are changing all the time. The
working nature and working environments become more
and more complicated. As an important role of motivation
and constraint, compensation management and system
stays no longer at operation, technology and rules, but
becomes an important HRM method to assist the
execution of enterprises’ strategy effectively. It has been
brought into the enterprises strategy frame and becomes a
significant tool ensuring the implement of enterprises
strategy. More and more scholars and consulting
companies started to pay attention to the researches of
consistency between enterprise strategy and compensation
strategy. They also start at contingency research of how to
adjust compensation management and design with the
changing of compensation strategy. Meanwhile, many
enterprises had also started to applicant the strategyoriented integrative compensation project, which
combined compensation system and operation strategy of
expending business unit. It made the compensation
strategy and management design can assist HRM strategy
effectively, so that enterprise strategy and business
operation strategy can be put into effect.
Strategic compensation management comes into
being because of these opportunities. The focus of this
theory is the consistency between enterprises’ operation
strategy and compensation strategy. To solve this problem,
scholars at home and abroad have two different research
ideas and systems. First one is the “contingency” or
“consistency” which emphasizes that enterprise strategy
decides compensation strategy and compensation strategy
must adapt to enterprise strategy. Second one is the
“universal perspectives” or the “best practice” which
emphasizes compensation strategy decides enterprise
strategy. Compensation strategy influenced by
environment will decide enterprise strategy through
mediating variables. The theory is based on the resourcebased theory.
1) About strategic compensation management based
on “contingency” or “compatibility”, Gomez Mejia [1] [2]
brought “consistency” into strategic compensation
management early. He thought that the theory of
compensation strategy is a contingency theory which
means compensation strategy should change with
environment, especially the enterprise strategy. While
Edilberto [3] [4] thought that enterprises should design
compensation system according to enterprise strategy.
Andrew [5] thought that with the fiercer competition
between enterprises and the endless emergence of
enterprise restructuring, merging and acquisition,
compensation strategy should adapt to the changing of
environments. Lewn and Mitchell pointed out that the
match of compensation strategy and enterprise strategy
can help organizations make use of market opportunities,
expand organization advantages in enterprises and realize
strategic targets [6]. Yueran Wen, Lingyun Wang, Hong
Liu and many other scholars in China had started to study
the consistency between compensation strategy and
enterprise strategy. Among the scholars holding
“matching” view, they made agreement that enterprise
compensation reformation should consider design factors
of compensation system based on enterprise development
strategy and guide enterprise compensation decisions.
Only by putting compensation reformation and
management into strategic level, can HRM be really
effective [7-9].
2) “Universal perspectives” have been supported by
some researchers. They thought that compensation
strategy determines enterprise strategy [10] [11]. The best
practice exists with nothing to do with the environment.
The perspective presupposes that adopting the best
practice will be beneficial to introducing talents, who will
in turn contribute to the strategic decisions in
organizations as well as strengthen its competitive
advantage. The concept of “best practice” is a worthwhile
effort for compensation strategy determining enterprise
strategy is a new research approach different from
contingency [12][13]. However, their perspectives also
caused much controversy. Human resources management
(HRM) practices focused on compensation are superior to
other HRM practices. The best practice is suitable for all
organizations and has nothing to do with the environment.
Much work remains to be done if we want to examine
these views.
In previous work, study of consistency between
compensation management and enterprise strategy
management only focused on exposition or description.
Some researches only analyze the individual cases so the
results can’t be extended to a large scale, which will result
in the lack of external validity. Empirical researches on
consistency between compensation management and
enterprise strategy are not enough.
With all these considerations, this essay proposes the
construction for consistency between strategy and
compensation management. It further proposes factors to
evaluate the consistency between strategy and
compensation management. We aim to help provide a
direction for the control of strategic compensation
management system to make up for the blank in this area.
II. CONSTRUCTION OF CONSISTENCY MODEL OF
STRATEGIC COMPENSATION MANAGEMENT
The concept of consistency has been an important
issue in organization and strategy study [14][15]. Nadler
defines consistency as a degree that the needs, goals and
structures of one component consistent with other
components. Michael Porter points out that the essence of
strategy is creating consistency of various enterprise
activities. In organization management, consistency is the
degree of the needs, goals, missions and structures of one
part of the organization agree with those of other parts.
The premise is better consistency produces more effective
management.
Based on previous study and dynamics of strategic
compensation management, this essay defines the
consistency between strategy and compensation
management as properties of strategic compensation
management system that can adjust system goals and
structure according to the needs of organization strategy
and environmental change so that compensation
management can be an important component of enterprise
competing advantages.
A. Interaction mechanism between enterprise strategy
and compensation management
Compensation is an important method to motivate
employees as well as one of the most direct and effective
ways. By establishing effective compensation system,
enterprises can not only use labor efficiently to keep cost
advantage but also promote the combination of labor and
the means of production. It can also create economic
benefits and produce competition advantages. Enterprise
develops compensation strategy under competitive
strategy and constructs efficient compensation system to
guide employees’ behaviors so that expectations of
enterprise can be achieved. Appropriate behaviors of
employees make employees’ individual goals consistent
with enterprise’s goal, so that the enterprise competition
strategy can be achieved ultimately. Fig.1 illustrates the
relationship between employee behaviors, compensation
management and competitive strategy.
Support
Compensation
Management
Incentive
Decision
Employee
Behaviors
Direction
Expectation
Competitive
Strategy
Motivate
Fig.1 A relationship map of employees’ behaviors, compensation management and competition strategy
B. Consistency between strategy and compensation
management
For the purpose of the best result of strategic
compensation management, enterprise need to find out
consistent points of strategy management and
compensation management, that is, divide and search for
consistency units. Consistency units are located in several
levels (such as strategy level, tactic level and operation
level) and several objects (such as consistency with
environment, consistency with management objects and
subjects) of enterprise. From the vertical aspect, strategic
compensation management can influence on and produce
consistency with different levels of the enterprise. From
the horizontal aspect, strategic compensation management
system contributes to the achievement of enterprise
strategic goal as a strategy supporting subsystem. At the
same time, it cooperates with other strategy supporting
system in order to realize enterprise strategy. The
consistency between strategy and compensation
management follows the order from down to up, from
inside to outside. Fig.2 illustrates the consistency model
horizontal
consistency
Environment
constraint
vertical
consistency
strategy supporting system
Strategy
process
strategic
compensation
management system
supply management
system
Production and
manufacture
system
......
marketing system
strategy level
......
tactic level
......
operation level
Fig.2 Consistency model of strategic human resources management
This essay considers consistency of strategic
compensation management system and enterprise strategy
system as vertical consistency, that of strategic
compensation management system and other strategy
supporting subsystems as horizontal consistency.
Horizontal and vertical consistency two constitute the key
dimensions of consistency between strategy and
compensation management. In this essay, vertical and
horizontal consistency will be divided further on basis of
functions of strategic compensation management and the
principles of enterprise strategy, as is shown in Fig.3.
Researches on vertical consistency follow a time sequence.
More details remain to be determined in aspect of strategy
making, the transformation from goals of enterprise
Consistency
between
Compensation
Management and
Strategy
Vertical
consistency
Horizontal
consistency
strategy to the goals of strategic compensation
management, the compensation management mode
consistent with enterprise strategy, and the approach of
compensation
management
appropriate
to
the
organization needs. Horizontal consistency needs to settle
such matters from low level to high level as, the
consistency of the practices of compensation management,
the accommodation between compensation management
system and the employees of strategy supporting
subsystem, the support that the strategy supporting team
and the cross-functioning team get from compensation
management system, and the coordinated management of
compensation management and strategy supporting.
consistency with strategy formulation process
consistency of
consistency with different levels of strategic goal
organizational strategy
consistency with different types of strategy
consistency with
consistency with organization culture
organization changing
consistency with organizational structure
collaborative management with strategy support systems
consistency with
consistency with team management
organization changing
consistency degree with core staffs
consistency with internal compensation management
Fig.3 Consistency of strategic compensation management
The realization of consistency between compensation
management and strategy follows the order of top to
bottom, within to outside. Vertical consistency is the
guiding one with greater impact on overall strategic
compensation management achievements and value
creation. Horizontal consistency refers to collaboration in
strategy support systems. As is shown in Fig. 2, horizontal
consistency and vertical consistency are inextricably
linked and horizontal consistency of strategic
compensation management throughout the entire process
of its vertical consistency, while the coordination process
of vertical consistency must take horizontal consistency
into account. In short, vertical consistency is the main line
of strategic compensation management, and horizontal
consistency
contents
are
also
considered
comprehensively. The perfect combination between
horizontal consistency and vertical consistency promotes
the production of corresponding effect and the maximum
effectiveness of strategic compensation management.
III. ESTABLISHMENT OF EVALUATION MODEL
ON CONSISTENCY BETWEEN COMPENSATION
MANAGEMENT AND STRATEGY
A. Determine indicator system
According to above analysis, strategic compensation
management can be divided into two dimensions:
horizontal consistency and vertical consistency. Through
further excavation, vertical consistency includes
consistency with strategy, consistency with culture and
consistency with organizational structure; horizontal
consistency includes consistency with internal system and
consistency with strategy support system. Taking science
system, effectiveness, qualitative and quantitative
analyzed comparability and operability into consideration,
this essay further analyzes consistency indicators of
strategic compensation management to measurable level.
Ultimately, evaluation indicator system on strategic
compensation management correspond degree can be
built as Fig.4.
Consistency between strategy management and compensation management
Horizontal consistency
consistency
with internal
system
(1) number of compensation
management activities sharing
collaborative tasks
(2) number of compensation
management activities with
collaborative process
(3) consistency of organization
information transmitted among
compensation management
activities
(4) indiscriminate degree
between staffs having same
work nature
(5) number of compensation
management policy changes in
half a year
Vertical consistency
consistency
with strategy
support system
(1) reasonable
degree of core staff
ratio in each
department
(2) support degree
of team members
with complementary
skills
(3) reasonable
degree of
motivation
coefficient in team
compensation
motivating policy
consistency
with strategy
(1) participation of
compensation manager
in strategy formulation
(2) consistency between
compensation
management goals and
strategy goals
(3) support degree of
human resources on key
compensation
(4) coordination level
between human
resources management
mode and strategic
orientation
consistency
with culture
(1) support degree
of compensation
management in
culture transmission
(2) coordination
degree between
compensation
management mode
and culture type
consistency with
organizational structure
(1) coordination
degree between
organizational
structure and
strategy targets
(2) coordination
degree between
compensation
management mode
and organization
structure
Fig.4 Indicator evaluation system on consistency between strategy and compensation management
B. Determine indicator weight
Both qualitative indicators and quantitative
indicators are involved in the indicator system, and
qualitative indicators are more than quantitative indicators,
so the indicator value can be mainly determined by the
way of experts scoring, which can be also called as the
Delphi method. Through processing, indicators can be
designed as questionnaire. According to the requirements
of specific targets, designs can be flexible. For example,
enterprises can score to themselves compared with the
enterprise's own situation, average or highest level of the
industry.
The determination of indicator weight is as (1).
(1)
Z  B  F，rij  i  1, 2,..., m, j  1, 2,..., n 
Significance degree is different among various
indicators of indicator system at all levels, and the
indicator hierarchies and the indicator number of the
indicator system are more, so Analytic Hierarchy Process
(AHP) can be used to determine their weights. Specific
steps are as follows:
1) determine the comparative judgment matrix: ask
experts to compare the importance between two
subordinate indicators which relative to the same upper
layer indicators, the ratio get from experts can construct
the judgment matrix;
2) hierarchical sorting: use the square root method
to calculate the largest matrix eigenvalue and the
corresponding eigenvector of each matrix, normalize the
eigenvector , and then to conduct matrix consistency test;
3) general hierarchy ordering: follows the order of
top layer to bottom layer, using normalized characteristic
component of each indicator of each layer as weights
respectively, multiplying characteristic component of
each indicator belonging to this layer, to get down layer
indicator combination weights, and the last layer
combination weights are required. And also consistency
test should be carried out in the general hierarchy ordering
process.
C. Model construction
This essay adopts the multistage fuzzy evaluation
method to construct the comprehensive evaluation model
of
strategic
compensation
management
key
dimensionalities. First is to integrate each branch of the
model, and then to evaluate each factor comprehensively
to get the evaluation of main factors. Specifically, at first,
the combination weighting method can be used to
calculate the indicator weights of the critical
dimensionality, and then comprehensive evaluation
method can be used to calculate the quality level of the
enterprise key dimensionalities. The fuzzy comprehensive
evaluation method is a comprehensive decision making
method for some purpose that takes a variety of factors
into account in a fuzzy environment, and the specific
steps are as follow:
1) Constructing elements:
Factors set: X   x1 , x2 ,..., xn  is an indicators set
consisting of measuring indicators；
Remark set: V   v1 , v2 ,..., vm  is a comment set
and comments are divided into 4 grades including
excellent, good, medium and poor level；
Weight set:   1 , 2 ,..., 3  is a weight set, it
is determined by AHP.
2) The fuzzy relation from X to V can be described by
the following fuzzy evaluation matrix R:
r1n 
 r11 r12
r

r
r
2n 
R   21 22




rmn 
 rm1 rm 2
Where: indicates the membership degree of the ith
indicator corresponding to the jth v j , the value of rij
derives through integrating expert estimation.
rij 
vij
n
v
j 1
ij
3) Using synthetic operation of fuzzy matrix gets
comprehensive evaluation model:
B    R  (b1 , b2 , , bn )
If
n
b
j 1
j
 1 , then normalization processing is applied to B.
3) Calculation of consistency and key dimensions
level of strategic human resource management:
Let F   f1 , f 2 ,..., f n  is score set, f i indicates the
T
the final evaluation result. That is the key dimensions
indicator of enterprise capability is Z=B×F.
D. Application Example: Calculation of consistency
between Compensation Management and Strategy
L Company was founded in 1993 and is located in a
southern coastal city in China. The company has more
than 2000 technical personnel, managers and production
staffs. It is a scientific and group-type agricultural
industry enterprise which is mainly based on animal
husbandry with many other industries simultaneously,
makes production, transportation and marketing a
coordinated process and integrates agriculture, industry
and trade. L Company is committed to cultivating
excellent team enterprise character, encourage employees
to concentrate on scientific research, hard work,
innovation and management. In recent years, it
maintained the advantage of product leadership, while the
company gradually expanded the scale and the product
category became more various. To ensure the tacit
cooperation between every sub-unit, the company
introduced
consistency
between
compensation
management and strategy. Strategic compensation
management was brought into company. In order to
implement strategy management and compensation
management, it has also taken a number of innovative
measures. As part of the core competitiveness of the
company, the executives paid attention to cultivating
compensation advantages.
This essay will apply the proposed calculation
method
of
consistency
between
compensation
management and strategy to the company and make
diagnosis and evaluation on the integrated degree between
strategy management and compensation management.
First, the indicator weights are determined by AHP
method. That is determining the comment set (excellent,
good, medium, poor), evaluating the indicators in table 1
based on fuzzy comprehensive evaluation method. By
calculations, it gets that consistency between
compensation management and strategy of L Company is
(0.5547, 0.2621, 0.1473, 0.0360), this shows that current
compensation management work of L Company is
running well and the consistency is in good condition.
score of j-th remark, using the vector product calculates
TABLE I
L COMPANY’S EVALUATION RESULTS OF CONSISTENCY BETWEEN HUMAN RESOURCES MANAGEMENT AND STRATEGY
Weight
Dimension
Weight
Consistency Sub-item
Weight
0.12
Consistency
between
compensation
management
and strategy
0.46
Lateral
consistency
0.44
Consistency inside
system
0.17
0.18
0.22
Indicator
① Number of salary management
subsystem interfaces
②Number of compensation management
activities existing task cooperation
③ Number of compensation management
activities existing process collaboration
④ Consistency of compensation
management activities to deliver the
Remark Set
(0.4,0.3,0.1,0.2)
(0.5,0.3,0.1,0.1)
(0.4,0.4,0.2,0)
(0.3,0.4,0.2,0.1)
organization information
0.16
0.15
0.32
0.56
Consistency with
strategic supporting
system
0.40
0.28
0.20
0.26
0.44
Consistency with
strategy
0.28
0.26
0.54
Vertical
consistency
0.3
Consistency with
culture
0.32
0.68
0.42
0.26
Consistency with
organization structure
0.58
IV. CONCLUSION
Compensation management is a tough problem for
any enterprise, and it is about the survival and
development of employees. Important works which help
enterprises motivate employees to understand enterprise
business strategy. Strategic compensation management is
considering from the perspective of enterprise business
strategy to combine business strategy and compensation
management. The process is oriented by enterprise
strategy and takes balance between internal fairness and
external competitiveness, performance correlation and
human incentive, enterprise affordability and strategic
planning into account. That is to promote compensation
management to the level of enterprise strategy. This paper
carries out a study to consistency between compensation
management and strategy management. It establishes an
evaluation model of strategic compensation management.
Finally, it demonstrates the calculation method of
consistency by using a practical example, which provides
research ideas to calculation of consistency between
compensation management and strategy.
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