Compensation as A Source
of Competitive Advantage
Christina L. Greathouse, Ph.D.
Strategic Performance Group
October 15, 2013
Strategic Performance Group
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Founded 1995
Three partners, 32 contract employees
Work across all industries
Human Capital Solutions, OD, Coaching
Christina Greathouse Bio
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25+ years consulting experience with Arthur Andersen and
KPMG Peat Marwick prior to co-founding SPG
Ph.D. Industrial/Organizational Psychology
Taught graduate level courses at GMU and Marymount
University
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Strategic Performance Group
• The Great Recession has radically
changed the way many companies do
business
• Dramatic shifts in corporate strategy
requiring re-alignment of compensation
practices to support those changes
• Newly conservative approach to
compensation spending
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Today’s Topics
• What science has taught us about work
motivation
• The relationship between pay satisfaction and
job satisfaction
• Why “pay for performance” systems often fail
• How compensation can be used effectively as
a management tool to gain and keep a
competitive advantage
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Compensation Redesigned
• The Great Recession has radically
changed the way many companies do
business
• Dramatic shifts in corporate strategy
requiring re-alignment of compensation
practices to support those changes
• Newly conservative approach to
compensation spending
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Compensation as a % of GDP
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Compensation and Productivity
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Global Salary-Budget Trends
2012-2014
India
China
Brazil
Singapore
Australia
UK
Netherlands
Canada
France
Germany
United States
Spain
Japan
Actual 2012
Actual 2013
11.2%
9.1%
7.7%
4.3%
4.0%
3.1%
3.1%
3.0%
3.0%
3.0%
2.8%
2.8%
2.6%
10.5%
8.2%
6.8%
4.2%
3.7%
2.9%
2.8%
2.9%
2.7%
2.9%
2.9%
2.4%
2.4%
Projected
2014
10.9%
8.5%
7.2%
4.3%
3.8%
3.0%
2.8%
3.1%
2.8%
3.0%
3.1%
2.5%
2.5%
Source: WorldatWork 2013-2014 Salary Budget Report
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Pay Dissatisfaction
• Washington Post (9/29/13) reported: “Four years into an
economic recovery in which most of the benefits have flowed to
the top earners, a majority believe that the American Dream is
becoming markedly more elusive (source: Washington PostMiller Center Poll)
• 58% of those polled believe they earn less than they deserve
• 6 in 10 workers worry these will lose their jobs because of the
economy
• SPG employee survey research indicates that many employees
are dissatisfied with their compensation
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Employee Surveys: Low Scoring Items
• I receive reasonable compensation compared to my peers at my
company.
• The pay at my company is competitive with other similar
organizations.
• I am paid fairly for someone with my qualifications.
• I am paid fairly for my accomplishments at my company.
• I receive reasonable compensation compared to my peers at my
company.
• People are compensated at my company for what they
accomplish.
• My hard work is rewarded appropriately.
• I have been adequately recognized for my work contributions.
• I understand how the current compensation system works.
• I understand how performance increases are awarded.
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Relationship of Pay Satisfaction to
Job Satisfaction
Items Correlating with, “Overall, I like my job”
Correlation
I have the opportunity to gain skills and knowledge necessary to perform my
job.
There is adequate opportunity for growth and career development for me at my
company.
I feel my company values my work.
0.70
At my company, our culture builds a feeling of teamwork and collaboration.
0.64
The amount of stress in my job is not a problem.
0.61
I receive adequate training on an ongoing basis.
0.60
I usually have a clear idea of what my supervisor expects of me.
0.59
My hard work is rewarded appropriately.
0.59
I have been adequately recognized for my work contributions.
0.50
The pay at my company is competitive with other similar organizations.
0.32
I am paid fairly for what I accomplish at my company.
0.37
0.69
0.66
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Work Motivation Theories
• Expectancy Theory (Vroom)
• Equity Theory (Adams)
• Motivator-Hygiene Theory (Herzberg)
• Self-Determination Theory (Deci)
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Expectancy Theory (Vroom)
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Motivator-Hygiene Theory (Herzberg)
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Equity Theory
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Equity Theory (Adams)
• There is an expectation to be paid according to one’s
contribution
• Research has shown that most people
– Perceive themselves as top performers when
compared with others
– Believe they work as hard or harder than others
– Attribute their success to hard work and/or skills
– Attribute others’ success to luck or favorable conditions
• This leads to feelings of inequity and unfairness when
comparing one’s compensation with others’ compensation
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Goal-Setting Theory
• Clarity: Specific, measurable, time-bound
• Challenge and Complexity: Enhances
feelings of achievement
• Commitment: Input and ownership
• Feedback: Assessing progress
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Self-Determination Theory (Deci)
• People have three innate, psychological
needs:
• Competence: succeeding at challenging tasks
• Autonomy: having choice over one’s actions
• Relatedness: enjoying mutual respect and
reliance with others
• Meeting these needs leads to job satisfaction,
work motivation, and high performance
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Putting It All Together
• Employees can be de-motivated by receiving less pay
than they think they deserve (equity theory)
• There are very few jobs where “paying for performance” is
motivating because the rewards are too small (expectancy
theory)
• Compensation can lead to job dissatisfaction, but has a
limited effect on job satisfaction (motivator-hygiene theory)
• Employers need to get employees to stop obsessing over
compensation, so they are open to other powerful
motivators such as a desire to do meaningful work,
intellectual challenge, recognition, and self-determination
(self-determination theory)
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Achieving a Competitive Advantage
Adopt pay practices that avoid de-motivation:
• Implement a transparent compensation philosophy and process
in line with organization’s values
• Pay people fairly in relation to the market and to each other
(internal and external equity)
• Stop using salary increases and bonuses as an incentive,
unless they are large enough to make a difference
• Reward results, not effort
• Use pay as a recognition tool
• Use goal setting to motivate performance, not as a method to
determine compensation
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Establishing Equity
• Internal equity: job classification
• External equity: market analysis
• Integrate equity analyses into pay
decisions
• Establish fair pay administration
processes
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Differentiation Among Talent Segments
• Must be willing to pay a premium to attract and retain
highly skilled talent critical to the successful
execution of the business strategy
• Identify talent segments critical to success
• Identify key drivers for each talent segment
• Identify talents segments at risk
• Design strategies employing a full range of rewards
for critical talent segments
• Integrate these strategies into corporate
compensation program
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Mapping an
Organization’s
Human Capital
Architecture
Unique skills
Alliance/ Partners
Core knowledge workers
Lower
High strategic
value
strategic
value
Contract labor
Traditional job-based
employees
Generic skills
Employee
Functions
Production
R&D
Quality
IT
Marketing
Accounting
HR
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Pay Increases as a Function of Performance
Mercer U.S.
Percent of Workforce*
Highest-rated
7%
Average Pay
Increase*
4.6%
Next highest-rated
30%
3.5%
Middle-rated
54%
2.6%
Low-rated
7%
0.9%
Lowest-rated
2%
0.2
Source: Mercer 2013/2014 U.S. Compensation Planning Survey Report
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Holistic Compensation Strategies
• Use compensation programs
strategically, to support the business
strategy
• Integrate the compensation system with
other components of the HR life-cycle
• Employ a full-range of strategies to
recognize and reward employees
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Holistic Compensation Strategies
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Base salary
Short-term rewards
Long-term rewards
Equity-based rewards
Employee benefits
Non-financial recognition and rewards
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Recognition and Rewards
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Spot bonuses
Project completion bonuses
Retention bonuses
Investment in training and development
Paid time off
Flexible work schedules
Cross-training
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Transparency and Communication
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Employee input/buy-in
Providing market pricing data
Publishing internal salary ranges
Publishing total compensation
statements
• Publishing compensation and benefits
information on website
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Total Compensation Statements
Benefit
Employer Cost
Employee Cost
Medical Insurance
or Stipend
$4,565
$910
Disability/Life
$1,245
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401(k) Match or
Pension
$8,194
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Salary/Bonus
$65,654
TOTAL COMP
$79,658
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