Strategic Perspective

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

Chapter

2

Strategic Perspectives

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Learning ObjectivesAfter studying Chapter 2, students should be able to:

1. Understand the concept of a compensation strategy, where it comes from, how it relates to the organization’s situation, and why the concept has value.

2. Illustrate the relationship between the pay system and each of the strategic issues discussed.

3. Realize there is not yet consensus on the concept of strategy.

4. Understand the difference between transactional and relational returns.

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Corporate objectivesstrategic plans,vision, and values

Strategiccompensation

decisions

Compensationsystems

Employeeattitudes and

behaviors

Competitiveadvantage

Business unitstrategies

HR strategies

Social, competitive,and regulatoryenvironment

What business should we be in?

How do we win (gain competitive advantage) in those businesses?

How should HR help us win?

How should total compensation help us win?

Strategic Choices

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Strategic Perspectives Toward Total Compensation

• Support the business objectives

• Support recruiting, motivation, and retention of MS-caliber talent

• Preserve MS core values

• Support business mission and goals

• Develop global leaders at every level

• Reinforce team-based culture

• Reduce costs, increase productivity

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

• 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

• Value diverse perspectives as a key to discovery

Microsoft Bristol - Myers Squibb Firepond

Ob

ject

ives

Inte

rnal

A

lign

men

t • Integral part of MS culture• Support MS performance

driven culture• Business/technology-

based organization design structure

• Flexibility for development and growth

• Reflect responsibilities, required competencies, and business impact

• Pay differences that foster a collegial atmosphere

• Reinforce high expectations

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Strategic Perspectives Toward Total Compensation (continued)

• Lead in total compensation

• Lag in base pay

• Lead with bonuses, stock options

• Compare favorably to higher-performing competitors

• Cash between the 50th and 75th percentile

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

Microsoft Bristol - Myers Squibb Firepond

Ext

ern

ally

C

om

pet

itiv

eA

dm

inis

trat

ion

• Open, transparent communications

• Centralized administration• Software supported

• Performance and leadership feedback – everyone is a leader

• Administrative ease

• Goal-focused, team-oriented, and self-managed

Em

plo

yee

Co

ntr

ibu

tio

n

• Bonuses and options based on individual performance

• Support high performance, leadership culture

• Team-based increases

• Options align employee and shareholder interest

• Tailor to business and team results

• Bonus pool based on Firepond financial performance. Individual share of pool based on individual performance.

• Push stock ownership deep into company

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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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Pay-Design ProcessBefore any new compensation program is

designed, there must be a clear understanding by the organization of:its current valuesits structureits peopleits goals and vision for the future

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Generic Business-level Strategies

InnovatorCost CutterCustomer Focused

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Tailor the Compensation System to the Strategy

StrategyBusiness Response

HR Program Alignment

Compensation System

Innovator:

Increase Product Complexity and Shorten Product

Life Cycle

Cost Cutter:

Focus on Efficiency

Customer Focused:

Increase Customer

Expectations

• Product Leadership

• Shift to Mass Customization and Innovation

• Cycle Time

• Committed to Agile, Risk Taking, Innovative People

• Reward Innovation in Products and Processes

• Market-Based Pay

• Flexible – Generic Job Descriptions

• Operational Excellence

• Pursue Cost-effective Solutions

• Do More With Less

• Focus on Competitors’ Labor Costs

• Increase Variable Pay

• Emphasize Productivity

• Focus on System Control and Work Specifications

• 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

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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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Strategic Compensation Decisions

ObjectivesAlignmentCompetitivenessContributionsAdministration

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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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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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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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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 unit’s 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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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 Starbuck’s “family,” our

employees realize what is best for them. Partners can and do get involved.

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

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

2. Fit Policy Decisions to Strategy• Objectives • Contributions• Alignment • Administration• Competitiveness

2. Fit Policy Decisions to Strategy• Objectives • Contributions• Alignment • Administration• Competitiveness

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

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

4. Reassess the Fit• Realign as Conditions Change• Realign as Strategy Changes

4. Reassess the Fit• Realign as Conditions Change• Realign as Strategy Changes

Key Steps to Formulate a Compensation Strategy

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Basic Issue: Does “Best Fit” Pay Off?

Socioeconomic / Political Environment


HR / Compensation Policies


Organization Strategy


Competitive Advantage









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Best Practices Options

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

HIGH COMMITMENT 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

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Virtuous and Vicious Circles

Organization Performance INCREASES

Decreased Performance- Based Pay

Decreased Employee Performance

Risk/Return IMBALANCE

Organization Performance DECREASES

Increased Performance- Based Pay

Increased Employee Performance

Risk/Return BALANCE

Virtuous Circle

Vicious Circle

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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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Framework for AnalyzingDifferent Deals

HIGH PAY – LOW COMMITMENT

Hired Guns (Stockbrokers)

HIGH PAY – HIGH COMMITMENT

Cult - like (Microsoft)

LOW PAY – LOW COMMITMENT

Workers as Commodity (Employers of Migrant

Farm Workers)

LOW PAY – HIGH COMMITMENT

Family (Starbucks)

Low High

RELATIONAL

Lo

wH

igh

TR

AN

SA

CT

ION

AL

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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; andA “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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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 conditionsDeciding on the best strategic choices following the pay modelImplementing the strategy through design of the pay systemReassessing the fit

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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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Strategic Perspective