2-1

Chapter

Strategic Perspectives

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After discussing Chapter 2, students should be able to:

Learning Objectives

2-2

1.
2. 3. 4. 5.

Explain the idea of a strategic perspective to compensation.

Identify the five dimensions of a compensation strategy and how a compensation strategy can support an organizations strategy. Understand the four steps involved in developing a total compensation strategy. Discuss how three tests can be used to determine if a pay strategy can be a source of competitive advantage. Describe the key arguments related to the two approaches best-fit vs. best-practices in developing a compensation strategy and system.
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2-3

Chapter Topics

Strategic Perspective Support Business Strategy Which Pay Decisions are Strategic? Developing a Total Compensation Strategy

Source of Competitive Advantage: Three Tests

Best Fit versus Best Practices So What Matters Most - Best Practices or Best Fit?
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2-4

What Is the Strategic Perspective?

The strategic perspective involves thinking about how pay can assist in achieving organization success, while not being fixated on pay techniques.

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2-5

Exhibit 2.1: Strategic Perspectives Toward Total Compensation

Microsoft
Support the business objectives Support recruiting, motivation, and retention of MS-caliber talent Preserve MS core values

Bristol - Myers Squibb

Support business mission and goals Develop global leaders at every level Reinforce team-based culture Reduce costs, increase productivity

Firepond
Demonstrate respect for individual talent and the limitless potential of a highly motivated team 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

Value diverse perspectives as a key to discovery Integral part of MS culture Support MS performance driven culture Business/technology-based organization design structure
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Flexibility for development and growth

Reflect responsibilities, required competencies, and business impact

Pay differences that foster a collegial atmosphere Reinforce high expectations

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2-6

Exhibit 2.1: Strategic Perspectives Toward Total Compensation

Microsoft Bristol - Myers Squibb Firepond

Lead in total compensation Lag in base pay Lead with bonuses, stock options

Compare favorably to higher-performing competitors Cash between the 50th and 75th percentile

Demonstrate respect for individual talent and the limitless potential of a highly motivated team

Bonuses and options based on individual performance

Support high performance, leadership culture Team-based increases Options align employee and shareholder interest Tailor to business and team results

Bonus pool based on Firepond financial performance. Individual share of pool based on individual performance. Push stock ownership deep into company

Open, transparent communications Centralized administration Software supported

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Performance and leadership feedback everyone is a leader Administrative ease

Goal-focused, teamoriented, and self-managed

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2-7

Strategic Alignment
VISION/MISSION CORE BELIEFS OBJECTIVES BUSINESS STRATEGY
COMPENSATION SYSTEM PERFORMANCE

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2-8

Exhibit 2.2: Strategic Choices

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Exhibit 2.3: IBMs Strategic Principles and Priorities

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2-10

Generic Business-level Strategies

Innovator

Cost

Cutter Focused

Customer

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Exhibit 2.4: Tailor the Compensation System to the Strategy

Strategy
Innovator: Increase Product Complexity and Shorten Product Life Cycle

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Business Response
Product Leadership
Shift to Mass

HR Program Alignment
Committed to Agile, Risk Taking, Innovative People

Compensation System
Reward Innovation in Products and Processes
Market-Based Pay Flexible Generic

Customization and Innovation

Cycle Time

Job Descriptions Focus on Competitors Labor Costs Increase Variable Pay Emphasize Productivity Focus on System Control and Work Specifications

Cost Cutter: Focus on Efficiency

Operational Excellence
Pursue Cost-

Do More With Less

effective Solutions

Customer Focused: Increase Customer Expectations

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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

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2-12

Which Pay Decisions Are Strategic?

Objectives Alignment Competitiveness Contributions Management

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Example: The Strategic Compensation Decisions Facing Starbucks

Objectives:

2-13

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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Example: The Strategic Compensation Decisions Facing Starbucks (cont.)

Alignment:

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How differently should the various types and levels of skills be paid within the organization?
Starbucks Approach
De-emphasize Use

differences.

egalitarian pay structures, cross-train employees to handle many jobs, and call employees partners.

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Example: The Strategic Compensation Decisions Facing Starbucks (cont.)

Competitiveness:

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How should total compensation be positioned against our competitors? What forms of compensation should we use?
Starbucks Approach
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 (cont.)

Contributions:

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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 units performance?
Starbucks Approach Emphasize team performance and shareholder returns. For new managers in Beijing and Prague, provide training opportunities in the U.S.

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Example: The Strategic Compensation Decisions Facing Starbucks (cont.)

Management:

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How open and transparent should pay decisions be to all employees? Who should be involved in designing and managing the system?
Starbucks Approach
As

members of the Starbucks family, our employees realize what is best for them.

Partners

can and do get involved.

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Exhibit 2.5: 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

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4. Reassess the Fit

Realign as Conditions Change Realign as Strategy Changes

2. Fit Policy Decisions to Strategy

Objectives Alignment Competitiveness Contributions Administration

3. Implement Strategy
Design System to Translate Strategy into Action Choose Techniques to Fit Strategy
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Step 1: Assess Total Compensation Implications

Before

2-19

any new compensation program is designed, there must be a clear understanding by the organization of
Competitive

dynamics

Culture/values Social

and political context needs

Employee/union Customization
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and flexibility
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Step 1: Assess Total Compensation Implications (cont.)

Before

2-20

any new compensation program is designed, there must be a clear understanding by the organization of
Competitive
Customer

dynamics

needs Competitors actions Labor market conditions Regulations Global environment

Culture/values
A

pay system reflects values guiding an employers behaviors and treatment of employees
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Exhibit 2.6: Toshibas Managerial Compensation Plan

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Exhibit 2.7: Strategic Differences in Pay Forms at Daimler and Chrysler

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Step 1: Assess Total Compensation Implications (cont.)

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Before any new compensation program is designed, there must be a clear understanding by the organization of

Social and political context

Legal and regulatory requirements

Cultural differences
Changing work force demographics Employee values and expectations

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Step 1: Assess Total Compensation Implications (cont.)

Before

2-24

any new compensation program is designed, there must be a clear understanding by the organization of
Employee

needs
pay systems

Contemporary Flexible

compensation systems

Nature

of union-management relationship
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Step 1: Assess Total Compensation Implications (cont.)

Before

2-25

any new compensation program is designed, there must be a clear understanding by the organization of
Role

of pay in overall HR strategy

player

Supporting Agent

of change

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2-26

Step 2: Map a Total Compensation Strategy

Strategic
Offer

maps

picture of a companys compensation strategy based on the five choices in the pay model

Clarify

message of company in delivering its compensation program

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2-27

Exhibit 2.10: Strategic Mapping

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2-28

Steps 3 and 4: Implement and Reassess

Step

Involves

implementing strategy through the design and execution of compensation system

Step

Focuses

on reassessing realigning as conditions and strategy changes

Managing

links between

Compensation

strategy Pay system and Employee perceptions

Vital
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to implementing a pay strategy

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2-29

Sources of Competitive Advantage

Three tests determine if a pay strategy is a source of advantage

Is it aligned?

Does it differentiate?
Does it add value?

Which hat is unique?

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2-30

Best Fit vs. Best Practices

Best Fit

Best Practices
Assumptions

If design of pay system

Reflects

companys strategy and values responsive to employees needs and globally competitive
is more likely to achieve competitive advantage

set of best-pay practices exists can be applied universally across all situations

Is

Practices

Is

Company

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2-31

Exhibit 2.11: Best-Practices Options

The New Pay
External Variable

High Commitment
High

market-sensitive-based pay, not internal alignment performance-based pay, not annual increases partnership, not entitlement

Risk-sharing Flexible Lateral

opportunities to contribute, not jobs promotions, not career not job security path

Employability, Teams,

not individual contributors

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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wages: You get what you pay

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So What Matters Most Best Practices or Best Fit?

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Some

research supports the best practices approach

research supports the best fit approach

Some

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Exhibit 2.12: Virtuous and Vicious Circles

2-33

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