2-1

Chapter

2
Strategic Perspectives

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2-2

Learning Objectives
After studying Chapter 2, students should be able to:
1.

2.
3.
4.

Understand the concept of a compensation strategy,

where it comes from, how it relates to the
organizations situation, and why the concept has
value.
Illustrate the relationship between the pay system and
each of the strategic issues discussed.
Realize there is not yet consensus on the concept of
strategy.
Understand the difference between transactional and
relational returns.
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2-3

Corporate objectives
strategic plans,
vision, and values
What business
should we be in?
How should total
compensation help
us win?

Business unit
strategies

HR strategies

How do we win (gain

competitive advantage) in
those businesses?

How should HR
help us win?

Social, competitive,
and regulatory
environment

Strategic
compensation
decisions

Strategic Choices

Compensation
systems

Employee
attitudes and
behaviors

Competitive
advantage
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2-4

Strategic Perspectives Toward Total Compensation

Objectives

Microsoft

Bristol - Myers Squibb

Firepond

Support the business

objectives

Support business mission

and goals

Support recruiting,
motivation, and retention of
MSMS-caliber talent

Develop global leaders at

every level

Demonstrate respect for

individual talent and the
limitless potential of a
highly motivated team

Preserve MS core values

Reinforce teamteam-based
culture
Reduce costs, increase
productivity

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

Internal
Alignment

Value diverse
perspectives as a key to
discovery

Integral part of MS culture

Support MS performance
driven culture
Business/technologyBusiness/technology-based
organization design structure
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Flexibility for development

and growth

Pay differences that foster a

collegial atmosphere

Reflect responsibilities,
required competencies, and
business impact

Reinforce high expectations

2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-5

Strategic Perspectives Toward Total Compensation (continued)

Administration

Employee
Contribution

Externally
Competitive

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

Bonuses and options

based on individual
performance

Bristol - Myers Squibb

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

Support high performance,

leadership culture
TeamTeam-based increases
Options align employee
and shareholder interest
Tailor to business and
team results

Open, transparent
communications
Centralized administration

Performance and
leadership feedback
everyone is a leader

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

Bonus pool based on

Firepond financial
performance. Individual
share of pool based on
individual performance.
Push stock ownership
deep into company
Goal-focused, teamoriented, and self-managed

Administrative ease

Software supported
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2-6

Pay System Objectives

!Attract and retain employees
!Motivate performance
!Promote skills and knowledge development
!Shape corporate culture
!Reinforce and define structure
!Determine pay costs

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2-7

Pay-Design 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

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2-8

Strategic Alignment
VISION/MISSION
CORE BELIEFS
DESIRED CULTURE
BUSINESS OBJECTIVES

REWARD
PLANS
PERFORMANCE

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2-9

Generic Business-level Strategies

!Innovator
!Cost Cutter
!Customer Focused

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Tailor the Compensation System to the Strategy

Strategy
Innovator:
Increase Product
Complexity and
Shorten Product
Life Cycle

Cost Cutter:
Focus on
Efficiency

Customer
Focused:
Increase
Customer
Expectations
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Business
Response
Product
Leadership
Shift to Mass

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

2-10

Compensation
System
Reward Innovation
in Products and
Processes

Customization and
Innovation

MarketMarket-Based Pay

Cycle Time

Job Descriptions

Operational
Excellence

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

Pursue CostCost-

Flexible Generic

Do More With Less

effective Solutions

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
2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-11

Which Pay Decisions Are Strategic?

A strategic perspective
focuses on those
competitive choices that
help the organization gain
and sustain competitive
advantage.

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2-12

Strategic Compensation Decisions

!Objectives
!Alignment
!Competitiveness
!Contributions
!Administration

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2-13

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.
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2-14

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.

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2-15

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.

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2-16

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 units performance?
Starbucks:
! Emphasize team performance and shareholder
returns.
! For new managers in Beijing and Prague, provide
training opportunities in the U.S.
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2-17

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 Starbucks family, our
employees realize what is best for them.
! Partners can and do get involved.

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2-18

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
Realign
Realign as
as Conditions
Conditions Change
Change
Realign
Realign as
as Strategy
Strategy Changes
Changes

2.
2. Fit
Fit Policy
Policy Decisions
Decisions to
to Strategy
Strategy
Objectives
Objectives
Alignment
Alignment
Competitiveness
Competitiveness

Contributions
Contributions
Administration
Administration

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
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2-19

Basic Issue: Does Best Fit Pay Off?

Socioeconomic /
Political Environment

Organization
Organization
Strategy
Strategy

HR
HR // Compensation
Compensation
Policies
Policies

Competitive
Competitive
Advantage
Advantage

Socioeconomic
Socioeconomic //
Political
Political Environment
Environment

HR
HR // Compensation
Compensation
Policies
Policies

Organization
Organization
Strategy
Strategy

Competitive
Competitive
Advantage
Advantage

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2-20

Best Practices Options

HIGH COMMITMENT

THE NEW PAY

!
!
!
!
!
!
!

External market-sensitive-based pay,

not internal alignment
Variable performance-based pay, not
annual increases
Risk-sharing partnership, not
entitlement
Flexible opportunities to contribute, not
jobs
Lateral promotions, not career path
Employability, not job security
Teams, not individual contributors

!
!
!
!
!
!
!
!
!
!
!
!
!
!

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High wages: You get what you pay 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

2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-21

Virtuous and Vicious Circles

Organization
Performance
INCREASES

Increased PerformanceBased Pay

Virtuous Circle
Risk/Return
BALANCE

Vicious Circle

Organization
Performance
DECREASES
Risk/Return
IMBALANCE

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Increased Employee
Performance

Decreased PerformanceBased Pay

Decreased Employee
Performance

2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-22

An implicit contract is an unwritten

understanding between employers and
employees over their reciprocal
obligations and returns; employees
contribute toward achieving the goals of
the employer in exchange for returns
given by the employer and valued by the
employee.

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2-23

High
Low

TRANSACTIONAL

Framework for Analyzing

Different Deals
HIGH PAY LOW COMMITMENT

HIGH PAY HIGH COMMITMENT

Hired Guns
(Stockbrokers)

Cult - like
(Microsoft)

LOW PAY LOW COMMITMENT

LOW PAY HIGH COMMITMENT

Workers as Commodity
(Employers of Migrant
Farm Workers)

Family
(Starbucks)

Low
McGraw-Hill/Irwin

High

RELATIONAL
2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-24

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.
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2-25

Summary (continued)
! 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
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2-26

Summary (continued)
! Recent studies have begun to research what aspect of the

compensation system really does matter, but the answer

is still fuzzy.
! An essential point is that the deal (the employment
relationship) includes both transactional and relational
forms of compensation.
! It is the total deal, the relationship with people, that
makes an organization successful.

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2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2-27

Review Questions
1.

2.

3.

Contrast the essential differences between the best fit

(strategic business-based) and best practice
perspectives.
Reread the culture / values statements in Exhibit 2.7.
Discuss how, if at all, those values might be reflected
in a compensation system. Are these values consistent
with let the market decide?
Two tests for any source of competitive advantage are
adds value and difficult to imitate. Discuss
whether these two tests are difficult to pass. Can
compensation really be a source of competitive
advantage?
McGraw-Hill/Irwin

2002 by The McGraw-Hill Companies, Inc. All rights reserved.