COMPENSATION
MANAGEMENT
Brief Notes for Students
HUMB 354/HRSB 353
Chapter 2: Strategic
Perspectives
LEARNING OBJECTIVES
Similarities and differences in strategies
Strategic choices
Support business strategy
Support HR strategy
The pay model guides strategic pay decision
Developing a total compensation strategy: four steps
Source of competitive advantage: three tests
“Best Practices” versus “Best Fit”?
Guidance from the evidence
Virtuous and vicious circles
THREE COMPENSATION STRATEGIES
SIMILARITIES AND DIFFERENCES IN
PERSPECTIVES OF COMPENSATION
STRATEGIES
Different strategies within the same industry
Different strategies within the same company
Corporate objectives
Business unit
strategic plans, HR strategies
strategies
vision, and values
What business How do we win (gain How should HR
should we be in? competitive advantage) in help us win?
those businesses?
How should total Social, competitive, Strategic
compensation help and regulatory compensation
us win? environment decisions
Compensation
systems
Strategic Choices
Employee
attitudes and
behaviors
Competitive
advantage
PAY SYSTEM OBJECTIVES
Attract and retain employees
Motivate performance
Promote skills and knowledge development
Shape corporate culture
Reinforce and define structure
Determine pay costs
PAYDESIGN 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
Generic Business-level Strategies
Innovator
CostCutter
Customer Focused
Tailor the Compensation System to the Strategy
Which Pay Decisions Are Strategic?
A strategic perspective
focuses on those
competitive choices that
help the organization gain
and sustain competitive
advantage.
STRATEGIC COMPENSATION
DECISIONS
Objectives
Alignment
Competitiveness
Contributions
Administration
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.
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.
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.
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.
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.
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 2.
2. Fit
Fit Policy
Policy Decisions
Decisions to
to Strategy
Strategy
•• Realign
Realign as
as Conditions
Conditions Change
Change •• Objectives
Objectives •• Contributions
Contributions
•• Realign
Realign as
as Strategy
Strategy Changes
Changes •• Alignment
Alignment •• Administration
Administration
•• Competitiveness
Competitiveness
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
SOURCES OF COMPETITIVE
ADVANTAGE: THREE TESTS
• Is it aligned?
• With the business strategy
• Externally with the economic and sociopolitical
conditions
• Internally with HR system
• Does it differentiate?
• Does it add value?
• Calculate the return on investment (ROI)
“BEST PRACTICES” VERSUS “BEST
FIT”?
BEST PRACTICE BEST FIT
Assumptions: An organization is likely to
A set of bestpay practices achieve competitive advantage
exists if the pay system:
Practices can be applied Reflects company’s strategy
universally across all
situations and values
Results in better performance Is responsive to employees’
with almost any business and unions’ needs
strategy Is globally competitive
Virtuous and Vicious Circles
Organization
Performance
INCREASES
Increased Performance-
Virtuous
Based Pay
Circle
Risk/Return
Increased Employee
BALANCE
Performance
Organization
Performance
DECREASES Decreased Performance-
Vicious Circle Based Pay
Risk/Return Decreased Employee
IMBALANCE Performance
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.
Summary
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
Review Questions
1. Contrast the essential differences between the best-fit
and best-practices perspectives.
2. Three tests for any source of competitive advantage are
align, differentiate, and add value. Discuss whether
these tests are difficult to pass. Can compensation
really be a source of competitive advantage?
3. Set up a debate over the following proposition:
Nonfinancial returns (great place to work,
opportunities to learn, job security, and flexible work
schedules) are more important (i.e., best practice) than
