external competitiveness

7/30/2019 external competitiveness

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McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

2-1

Strategic

Perspectives

Chapter

2


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1. Explain the idea of a strategic perspective tocompensation.

2. Identify the five dimensions of a compensationstrategy and how a compensation strategy can

support an organizations strategy.

3. Understand the four steps involved in developing atotal compensation strategy.

4. Discuss how three tests can be used to determine if

a pay strategy can be a source of competitiveadvantage.

5. Describe the key arguments related to the twoapproachesbest-fit vs. best-practicesin

developing a compensation strategy and system.

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


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2-3

Chapter Topics

Strategic Perspective

Support Business Strategy

Which Pay Decisions are Strategic?

Developing a Total Compensation Strategy

Source of Competitive Advantage: Three

Tests

Best Fit versus Best Practices

So What Matters Most - Best Practices or

Best Fit?


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2-4

What Is the Strategic Perspective?

The strategic perspective

involves thinking about

how pay can assist in

achieving organization

success, while not being

fixated on pay techniques.


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Exhibit 2.1: 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 thelimitless potential of a

highly motivated team

Encourage high

standards of excellence,

original thinking, a passion

for the process of discovery

and a willingness to takerisks

Reward fresh ideas, hard

work and a commitment to

excellence

Value diverse

perspectives as a key to

discovery

Microsoft Bristol - Myers Squibb Firepond

Integral part of MS culture

Support MS performancedriven culture

Business/technology-based

organization design structure

Flexibility for developmentand growth

Reflect responsibilities,required competencies, andbusiness impact

Pay differences that foster acollegial atmosphere

Reinforce high expectations


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Lead in totalcompensation

Lag in base pay

Lead with bonuses, stock

options

Compare favorably tohigher-performing

competitors

Cash between the 50th

and 75th percentile

Demonstrate respect forindividual talent and the

limitless potential of a

highly motivated team

Open, transparentcommunications

Centralized administration

Software supported

Performance andleadership feedbackeveryone is a leader

Administrative ease

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

Bonuses and options

based on individual

performance

Support high performance,leadership culture

Team-based increases

Options align employeeand shareholder interest

Tailor to business andteam results

Bonus pool based on

Firepond financial

performance. Individual

share of pool based on

individual performance.

Push stock ownershipdeep into company

Exhibit 2.1: Strategic Perspectives Toward Total Compensation

Microsoft Bristol - Myers Squibb Firepond


7/33McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc. All rights reserved.

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VISION/MISSION

CORE BELIEFS

OBJECTIVES

BUSINESS STRATEGY

PERFORMANCE

COMPENSATION

SYSTEM

Strategic Alignment



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Exhibit 2.2: Strategic Choices



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Exhibit 2.3: IBMs StrategicPrinciples and Priorities



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Innovator

Cost Cutter

Customer Focused

Generic Business-level Strategies



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Exhibit 2.4: Tailor the Compensation System to the Strategy

StrategyBusiness

Response

HR Program

Alignment

Compensation

System

Innovator:

Increase ProductComplexity 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 onCompetitors LaborCosts

Increase VariablePay

EmphasizeProductivity

Focus on SystemControl and WorkSpecifications

Customer Intimacy

Deliver Solutions to

Customers

Speed to Market

Delight Customer,

Exceed

Expectations

CustomerSatisfactionIncentives

Value of Job andSkills Based on

Customer Contact



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Objectives

Alignment

Competitiveness

Contributions

Management

Which Pay Decisions Are Strategic?



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Example: The Strategic CompensationDecisions Facing Starbucks

Objectives: How should compensationsupport 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 CompensationDecisions Facing Starbucks (cont.)

Alignment: How differently should thevarious types and levels of skills be paid

within the organization?

Starbucks Approach

De-emphasize differences.

Use egalitarian pay structures, cross-trainemployees to handle many jobs, and call

employees partners.

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Competitiveness: How should totalcompensation 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 optionsfor all employees (including part-timers).

Give everyone a free pound of coffee every

week.


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Contributions: Should pay increases bebased 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.

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Management: How open and transparentshould 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.


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E hibi 2 5 K S F l



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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

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

Exhibit 2.5: Key Steps to Formulatea Compensation Strategy

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Step 1: Assess Total CompensationImplications

Before any new compensation program isdesigned, there must be a clear

understanding by the organization of

Competitive dynamics

Culture/values

Social and political context

Employee/union needs

Customization and flexibility

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Competitive dynamics

Customer needs

Competitors actions

Labor market conditions

Regulations

Global environment

Culture/values

A pay system reflects values guiding an

employers behaviors and treatment of employees

Step 1: Assess Total CompensationImplications (cont.)

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Exhibit 2.6: Toshibas ManagerialCompensation Plan

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Exhibit 2.7: Strategic Differences inPay Forms at Daimler and Chrysler

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Social and political context Legal and regulatory requirements

Cultural differences

Changing work force demographics

Employee values and expectations


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Employee needs

Contemporary pay systems

Flexible compensation systems

Nature of union-management relationship


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Role of pay in overall HR strategy

Supporting player

Agent of change


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Step 2: Map a Total Compensation Strategy

Strategic maps

Offer picture of a companys

compensation strategy based

on the five choices in thepay model

Clarify message of

company in deliveringits compensation program

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Exhibit 2.10: Strategic Mapping

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Steps 3 and 4: Implement and Reassess

Step 3Involves implementing strategy through the

design and execution of compensation system

Step 4

Focuses on reassessing realigning as

conditions and strategy changes

Managing links between

Compensation strategyPay system and

Employee perceptions

Vital to implementing a pay strategy

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Sources of Competitive Advantage

Three tests determine if a pay strategy isa source of advantage

Is it aligned?

Does it differentiate?

Does it add value?

Which

hat is

unique?

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Best Fit vs. Best Practices

Best Fit

If design of pay system

Reflects companys

strategy and values

Is responsive to

employees needs and

Is globally competitive

Company is more likelyto achieve competitive

advantage

Best Practices

Assumptions

A set of best-pay

practices exists

Practices can be applied

universally across all

situations

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Exhibit 2.11: 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 individualcontributors

High CommitmentHigh wages: You get what you pay

for

Guarantee employment security

Apply incentives; share gains, notrisks

Employee ownership

Participation and empowerment

Teams, not individuals are baseunits

Smaller pay differences

Promotion from within

Selective recruiting

Enterprise-wide information sharing

Training, cross-training, and skilldevelopment are crucial

Symbolic egalitarianism adds value

Long-term perspective matters

Measurement matters

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S Wh M M


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So What Matters Most -Best Practices or Best Fit?

Some research

supports the best

practices approach

Some research

supports the best

fit approach

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E hibit 2 12 Vi t d Vi i


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Exhibit 2.12: Virtuous and ViciousCircles

external competitiveness

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