CHAPTER 2 Strategy: The Totality of
Decisions
CHAPTER TOPICS
Similarities and Differences in Strategies
Strategic Choices
Support Business Strategy
The Pay Model Guides Strategic Pay Decisions
Developing a Total Compensation Strategy: Four Steps
CHAPTER TOPICS (CONT.)
Source of Competitive Advantage: Three Tests
“Best Practices” versus “Best Fit”
Guidance from the Evidence
Virtuous and Vicious Circles
Your Turn: Mapping Compensation Strategies
Still Your Turn: Pay Matters (Productivity Does, Too)
EXHIBIT 2.1: THREE COMPENSATION STRATEGIES
SIMILARITIES AND DIFFERENCES
IN STRATEGIES
Lead policy
Lag policy
Match policy
Different strategies within the same industry
Different strategies within the same company
“Let the market decide our compensation” philosophy is untenable in the real world,
especially in global environments
STRATEGIC CHOICES
Strategy refers to the fundamental directions that an organization chooses
Corporate level: “What business should we be in?”
Business unit level: “How to gain and sustain competitive advantage?”
Functional level: “How should total compensation help gain and sustain competitive advantage?”
A strategic perspective focuses on those compensation choices that help the
organization gain and sustain competitive advantage
EXHIBIT 2.2: STRATEGIC CHOICES
SUPPORT BUSINESS STRATEGY
Pay systems should align with the organization's business strategy
Based on contingency notions
Compensation systems can be tailored to:
Innovator business strategy
Cost cutter business strategy
Customer-focused business strategy
When business strategies change, pay systems should also change
EXHIBIT 2.3: TAILOR THE COMPENSATION SYSTEM
TO THE STRATEGY
EXHIBIT 2.4: IBM’S STRATEGIC
PRINCIPLES AND PRIORITIES
FIVE STRATEGIC GUIDELINES FOR COMPENSATION CHOICES
Objectives
Internal Alignment
External Competitiveness
Employee Contributions
Management
THE PAY MODEL GUIDES STRATEGIC PAY
DECISIONS
Decisions based on the five strategic compensation choices of the pay model, taken
together, form a pattern that becomes an organization's compensation strategy
Stated versus Unstated Strategies
EXHIBIT 2.5: KEY STEPS IN FORMULATING A TOTAL COMPENSATION
STRATEGY
Porters industry competitiveness
model:
1. Bargaining power of buyers
2. Bargaining power of sellers
3. Substitute products
4. Threat of entry barriers
5. Competition among industry/rivalry
among among companies within the
Monopoly Duopoly Oligopoly Monopolistic Perfect competition industry
N o Buyers M M M M M
Sellers 1 2 few M M
Price Setter Taker
Profit Highest Lowest
Product Unique Slightly differentiation Similar
DEVELOPING A TOTAL COMPENSATION STRATEGY:
FOUR STEPS
Step 1: Assess total compensation implications
Step 2: Map a total compensation strategy
Steps 3: Implement strategy
Step 4: Reassess
STEP 1: ASSESS TOTAL COMPENSATION
IMPLICATIONS
Competitive Dynamics – Understand the Business
Changing customer needs
Competitors’ actions
Changing labor market conditions
Changing Laws
Globalization
Competitive dynamics can be assessed globally
EXHIBIT 2.6: TOSHIBA’S MANAGERIAL COMPENSATION PLAN,
ANNUAL AMOUNT (IN YEN)
STEP 1: ASSESS TOTAL COMPENSATION
IMPLICATIONS (CONT.)
Culture/values
A pay system reflects the values that guide an employer's behavior and underlie its treatment of
employees
Social and political context
Context refers to legal and regulatory requirements, cultural differences, changing workforce,
demographics, expectations etc.
Affects compensation choices
Lobbying is also part of compensation strategies
STEP 1: ASSESS TOTAL COMPENSATION
IMPLICATIONS (CONT.)
Employee preferences
How to better satisfy individual needs and preferences
Choice – Examples: Flexible benefits and choices
Union preferences
Pay strategies need to be adapted to the nature of the union-management relationship
Unions' interests can differ
Compensation deals with unions can be costly to change
STEP 1: ASSESS TOTAL COMPENSATION
IMPLICATIONS (CONT.)
Prominence of pay in overall HR strategy: Supporting player or
catalyst for change
Pay strategy is influenced by how it fits with other HR systems
High-performance systems
High skill/knowledge requirements
Work designed so that employee teams enjoy discretion in making decisions and continue to learn
Pay systems based on performance
Pay can be a supporting player or a catalyst for change
STEP 2: MAP A TOTAL COMPENSATION STRATEGY
Mapping is used in marketing to clarify and communicate a product's identity
Offers picture of a company’s compensation strategy based on the five choices in the
pay model
Clarifies the message the company is trying to establish with its compensation system
Maps do not tell which strategy is the “best”, providing rather framework and
guidance
EXHIBIT 2.8: CONTRASTING MAPS OF MICROSOFT
AND SAS
STEPS 3 AND 4: IMPLEMENT AND REASSESS
Step 3
Involves implementing strategy through the design and execution of compensation system
Step 4
Reassess and realign, closes the loop and recognizes that the strategy must be changing to fit changing
conditions
Involves periodic reassessment
SOURCES OF COMPETITIVE ADVANTAGE: THREE
TESTS
Three tests determine if a pay strategy is a source of advantage
Is it aligned?
Does it differentiate?
Does it add value? Which
– Calculate the return on investment (ROI) hat is
unique?
BEST PRACTICES” VERSUS “BEST FIT”?
Best Practices Best Fit
Assumptions If design of pay system
A set of best-pay practices Reflects company’s strategy
exists and values
Practices can be applied Is responsive to employees’
universally across all and unions’ needs
situations
Is globally competitive
Results in better Company is more likely to achieve
performance with almost competitive advantage
any business strategy
GUIDANCE FROM THE EVIDENCE
Consistent research evidence that the following practices do matter to the organization's objectives
Internal alignment
Pay differences among internal jobs can affect results
External competitiveness
Paying higher than average paid by competitors can affect results
Employee contributions
Performance-based pay can affect results
GUIDANCE FROM THE EVIDENCE (CONT.)
Managing compensation
Need to consider all dimensions of pay strategy
Compensation strategy
Embedding compensation strategy within the broader HR strategy affects results
“What practices pay off best under what conditions” is an important question to be
answered
VIRTUOUS AND VICIOUS CIRCLES
One study concluded that how you pay also matters as much as how much you pay
Studies conclude that performance-based pay that shares success with employees
improves employee attitudes, behaviors, performance – especially when combined
with high-performance practices
Performance-based pay can be the best practice under right circumstances
EXHIBIT 2.9: VIRTUOUS AND VICIOUS CIRCLES
(CONT.)