COMPENSATION

Third Canadian Edition Milkovich, Newman, Cole

2-1 2010 McGraw Hill Ryerson

Strategy
A fundamental business decision that an organization has made in order to achieve its strategic objectives e.g., what business to be in, how to gain competitive advantage The greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization
2-2 2010 McGraw Hill Ryerson

Strategic Perspectives Toward Total Compensation (1 of 2)

Google Medtronic

Objectives

Emphasis on innovation Commitment to cost containment Recognize contributions Attract and reward the best

Focus on customers Fully present at work and in personal lives Recognize personal accomplishment and share success Attract and engage top talent Control costs
Reflect job responsibilities Support promotional growth opportunities Foster team culture
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Internal Alignment

Minimize hierarchy Everyone wears several hats Emphasize collaboration

2010 McGraw Hill Ryerson

Strategic Perspectives Toward Total Compensation (2 of 2)

Google Externally Competitive Explore novel ideas in benefits and compensation Generous, unique benefits Medtronic Market value of jobs establishes overall pay parameters Choices in benefits Incentives directly tied to business goals Opportunity to earn abovemarket pay Recognition of individual and team performance Clearly understood; open Technology support Employee choice
2-4

Employee Recognize individual Contributions contributions Unrivaled stock programs

Management

Love employees, ant to know it Technology support

2010 McGraw Hill Ryerson

Strategic Choices
Corporate objectives, strategic plans, vision, and values
Business unit strategies HR strategies Strategic compensation decisions Compensation systems Employee attitudes and behaviours Competitive advantage
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Social, competitive, and regulatory environment

Strategic Compensation Decisions

Objectives Internal Alignment External Competitiveness Employee Contributions Management

2-6 2010 McGraw Hill Ryerson

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

4. Reassess the Fit

Realign as Conditions Change Realign as Strategy Changes

2. Map a Total Compensation Strategy

Objectives Alignment Competitiveness Contributions Management

3. Implement Strategy
Design System to Translate Strategy into Action Choose Techniques to Fit Strategy
2-7 2010 McGraw Hill Ryerson

Competitive Advantage
Three tests to assess competitive advantage of a strategy:
1. Does the pay strategy align with the business strategy, economic and sociopolitical conditions, and the overall HR system? 2. Is the pay strategy different and difficult to imitate? 3. Does the pay strategy add value by providing a return on investment in compensation?
2-8 2010 McGraw Hill Ryerson

Best Fit versus Best Practices

Best fit approach suggests that aligning compensation decisions with strategy will be most effective Best practices approach suggests that a set of practices exist that work with almost any strategy
Emerging evidence suggests that a focus on What practices pay off best under what conditions? will be most effective
2-9 2010 McGraw Hill Ryerson

Conclusion
Managing total compensation strategically means aligning compensation and business strategies The three tests for whether pay strategy provides competitive advantage are: (1) does it align?; (2) does it differentiate?; and (3) does it add value? The four-step process to develop a compensation strategy is:
1. 2. 3. 4. assess environmental conditions decide on the best strategic choices implement the strategy, and reassess the fit
2-10 2010 McGraw Hill Ryerson