STRATEGIC PERSPECTIVES:

Steps to Formulate a Total

Compensation Strategy
 Group Members

Asif Anwar 03-05-08-054

Ashrafur Rashid Khan 03-04-06-041
Md. Rasula Kibria 03-05-08-022
Md. Anwar Hossain 03-05-08-027
Sadia Khan Mazlish 03-05-08-039

Steps to Formulate a Total Compensation Strategy 2

OVERVIEW
• The objective of every business organization is to maximize its
profit. An organization is nothing without its employees. The
employees work hard, generate ideas, sometimes give
personal sacrifice etc. to take the organization toward its
objective. The reward in return that the organization gives is
compensation. It can be in the form of cash, stock options,
good relation etc. Good/appropriate compensation can take the
organization in a very competitive position resulting from its
employees’ high morale, added effort and a sense of
responsibility/ love towards the organization.

Steps to Formulate a Total Compensation Strategy 3

 Need for Compensation Strategy?

Socio-Economic/  Organization  HR/Compensation  Competitive

Political Environment Strategy Policies Advantage

VS.

Socio-Economic/  HR/Compensation  Organization  Competitive

Political Environment Policies Strategy Advantage

Steps to Formulate a Total Compensation Strategy 4

Strategic Choices
Corporate objectives,
strategic plans,
What business vision and values
should we be in?
Business unit
How do we win (gain strategies
competitive
advantage) in those
business?
HR Strategies

How should HR help us

win?
Social, competitive Strategic
and regulatory Compensation
How should total environment decisions
compensation help
us win? Compensation
systems

Employee attitudes
and behaviors

Competitive
Advantage
Steps to Formulate a Total Compensation Strategy 5
STEPS TO FORMULATE A TOTAL
COMPENSATION STRATEGY
1. Assess Total Compensation Implications
Culture and Values
Social, Economic and Political Context
Global Competitive Pressure
Employee/Union Needs
Other HR Systems

2. Fit Policy Decisions

Objectives
4. Reassess the Fit
Consistency
Realign as Conditions Change Competitiveness
Realign as Strategy Change Contribution
Administration

3. Implementation Strategy
Design System to Translate Strategy into
Action
Choose Techniques to Fit Strategy

Steps to Formulate a Total Compensation Strategy 6

Step 1: Assess Total Compensation Implications

a. Cultural Values
The values underlying an employer’s treatment of its employees are
reflected in the pay system. Some employer’s articulate their philosophies.
These philosophies guide their pay systems.

b. Social, Economic and Political Context

The environmental context also affects the compensation choices. Context
refers to a wide range of pressures, including competitive pressures from
product and labor markets, legal and regulatory requirements, cultural
differences, changing workforce demographics, values and expectations etc.
different regions of the world may require different approaches to pay. Also,
living standards define the pay structure; where there is a high living
standard, compensation package is relatively high rather than in a region
with low living standards and less demand.

Steps to Formulate a Total Compensation Strategy 7

Step 1: Assess Total Compensation Implications
(cont…)
c. Global Competitive Pressure

50
45
40
35
30
25
20
15
10
5
0
Hours w orked per Week
UK

USA

Paid Vacations
G ermany

Bangladesh

Hourly Pay ($)

China

India

Hourly Pay ($) Paid Vacations Hours worked per Week

Steps to Formulate a Total Compensation Strategy 8

Step 1: Assess Total Compensation Implications
(cont…)

d. Employee Needs – Flexible Compensation Systems

– Pay systems should be according to the need of individual employees
– An employee should be entitled to draw his salary the way he wants

e. Unions
– Pay strategies also need to be adapted to the nature of the union-management
relationship.
– Internationally, the role of unions in determining pay varies greatly. In Europe,
unions are major players and must be considered in any strategic pay decisions.

f. Role of Pay in Overall HR Strategy: On the Point, Support, Change Agent

– The pay system in just one of many HR systems that make up the HR strategy
and the pay strategy in the organization
– In a highly decentralized and open organization where pay system is centralized
and confidential, a successful operation of that company is highly doubtful.

Steps to Formulate a Total Compensation Strategy 9

Step 2: Fit The Policy Decision to Strategy

In step 1 we have discussed the factors that we should take into consideration to
design a total compensation strategy. Next we come into a policy decision to
formulate a compensation strategy.
Issues that are examined to fit this policy decision to company strategy includes -
– Objectives
– Consistency
– Competitiveness
– Contribution
– Administration

Steps to Formulate a Total Compensation Strategy 10

Step 3: Implement the Strategy

• Translate Strategy into Action

• Choose Technique to fit Strategy.

Step 4: Reassess the Fit

• Review the changed conditions and modify the Compensation

strategy
• Modify the Compensation strategy with the change of company
strategy.

Steps to Formulate a Total Compensation Strategy 11

COMPENSATION STRATEGY: SOURCES
OF COMPETITIVE ADVANTAGE
A Company’s strategic compensation should be competitive. It provides the
sources of competitive advantages.
There are two ways to test whether the compensation is competitive or not.
1. Adding Value
– By controlling cost
– By attacking and retaining critical talent
– By motivating people to learn and improve.
2. Difficult to Imitate
– Competitors can not copy it.
– Organization’s business strategy and Compensation system fit together
– The fit among the compensation and other HR Activities
– Implementation of the compensation system.

Steps to Formulate a Total Compensation Strategy 12

COMPENSATION STRATEGY:
INTERNAL vs. EXTERNAL FACTORS
• An organization Exists to accomplish specific Goals and objectives.
• The individuals hired for the Organization have their own needs.
Hence there is a basis for an exchange – The Employee offers
specific behavior desired by the Organization to meet its goals and
objectives in return for money, goods, and services.
• If we go through the first four steps of compensation policy
formulation, we can see that there are some external factors, such
as social, economic and political context, global competitive
pressure, etc are common for all organization that they have to
consider in the same way before formulating compensation policy.
• But if we focus on internal factors, such as culture, value, objective,
business policy, HR systems, we can observe that each
organization differ from others.

Steps to Formulate a Total Compensation Strategy 13

Strategic Approaches
Recent studies have begun to research what really does matter, but
the answer is still fuzzy. Two alternative approaches have highlighted
that are-
1. Contingent business strategy approach – Which presumes that
one size, does not fit all. The art of managing compensation
strategically involves fitting the compensation system to the
different business and environment condition.
2. Best Practice Approach – It assumes that there exist one best
Way and focus on best implementation system.
Today’s business world is so dynamic, which is ever changing so in
practice we can say contingent business strategy approach is best
suitable.

Steps to Formulate a Total Compensation Strategy 14

CONCLUSION
As each organization’s sustainability depends on the best effort of their employees,
so to achieve competitive advantage over others each organization must focus on
some basic individual factors of the employee to motivate and make enthusiastic
them to work. These factors are -

1. Monetary return
2. More socio-psychological return

So from the overall discussion we can conclude that before formulation of a

compensation policy an organization should –
– Asses the environmental condition that exists
– Decide the best strategic choice that based on the organizations objectives,
contingency, competitiveness, contributions and administration.
– Implement the strategy, and
– Reassess the fit

To do that one standard policy is not appropriate, so it is from our view is the best
way to follow the Contingent business strategy or Environmental context
approach considering the individual employee needs of the organization.

Steps to Formulate a Total Compensation Strategy 15

What Do You Want It To Do?
1. The basis of compensation.
– Performance
– Tenure
– Cost of living
– Owner’s discretion
2. Which positions are being addressed.
3. Which compensation components will be included in the compensation program.
– Base pay
– Employee benefits
– Perquisites
– Short-term incentives
– Long-term incentives
4. The assumptions and priorities of the firm related to compensation. For example:
– The current group of professionals are key assets to be retained.
– We expect incentive compensation to play a key role in the overall compensation strategy
because it helps focus on performance and business objectives.
5. The goals of the program. For example:
– The compensation program should be as competitive as possible when viewed in its entirety.
– To the extent possible, the compensation program should allow for individual options and
choices.
– The compensation program should be as simple as possible.
– The compensation plan should be perceived as fair by the employees.
– The compensation program should be affordable.
– The compensation plan should be clearly communicated to all participants.

Steps to Formulate a Total Compensation Strategy 16

Steps to Formulate a Total Compensation Strategy 17