Compensation Strategy

Formation and Principles

Compensation strategies Organizations should consider

Relating job worth to differences in job requirements. Recognizing the worth and value of employee knowledge

and skills. Rewarding employee contributions and the results achieved. Promoting continued employee acquisition and upgrading of knowledge and skills. Supporting team and work unit cooperative efforts Designing compensation plans that successfully compete within established labor markets Aligning compensation of all the employees with the objectives and goals of the organization. Providing a compensation package that enhances current lifestyles and provides long term protection for employees and their dependents.

Types of Employment Relationships

HIGH PAY LOW COMMITMENT HIGH PAY HIGH COMMITMENT Cult - like (Microsoft)

TRANSACTIONAL

Hired Guns (Stockbrokers)

LOW PAY LOW COMMITMENT

LOW PAY HIGH COMMITMENT Family (Starbucks)

Low

Workers as Commodity (Employers of Migrant Farm Workers)

Low

High

RELATIONAL

Exhibit 2.2: Strategic Choices

Tailor the Compensation System to the Strategy

Strategy
Innovator: Increase Product Complexity and Shorten Product Life Cycle

Business Response
Product Leader
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 Do More With Less Focus on Labor Costs Increase incentives Productivity focus System focus on control and work specifications Customer Satisfaction Incentives
Value of Job and

Cost Cutter: Focus on Efficiency

Operational Excellence
Pursue Cost-

effective Solutions

Customer Focused: Increase Customer Expectations

Customer Intimacy
Deliver Solutions to

Customers Speed to Market

Delight Customer, Exceed Expectations

Skills Based on Customer Contact

Competitive Strategy, Corporate Policies, and Compensation

Aligning reward strategy to firms strategic aims.
Eg: IBM policies Pay to Market The company switched from its previous single pay plan (for non sales employees) to different pay plans and merit budgets for different job families (accountants, engineers, and so on). This enabled IBM to pay different job families in a more market oriented way. Fewer, broadband jobs IBMs old system slotted IBMs jobs in to 24 narrow wage grades Employees only did their job New policy slotted all jobs based on three factors skills, leadership requirement and scope / impact). In US the job grades dropped from 5,000 to 1200 and employees had wider job duties.

 Let Managers manage

The previous compensation plan based raises on a

complex formula that linked performance appraisal scores to salary increases measured in tenths of a percent. The new system gives managers a budget and some coaching to differentiate between their stars and acceptable performers and provide pay differences
Incentivize Employees
The old policy used to give incentives to only Sales

employees, but the new policy makes a part of the salary as incentives irrespective of the type of the job of the employees.

Example: The Strategic Compensation Decisions Facing Starbucks

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 (cont.)

Alignment: How differently should the various

types and levels of skills be paid within the organization?

Starbucks Approach
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 (cont.)

Competitiveness: 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.

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

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 units performance?
Starbucks Approach 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 (cont.)

Management: 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.

Key Steps to Formulating Compensation Strategy

1. Assess Total Compensation Implications
Competitive Dynamics Core Culture / Values Social and Political Context Employee / Union Needs Other HR Systems

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

2 Approaches Contrasted
Best fit
Do what works in a specific situation

Best practice
Do what works best in other places

Best Fit vs. Best Practices

Best Fit Best Practices

Reflects companys

Assumes a set of

strategy and values

Responsive to

best-pay practices exists

Practices can be

employees needs

Globally competitive Provides company

applied universally across all situations

some competitive advantage