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COMPENSATIONThird Canadian Edition

Milkovich, Newman, Cole

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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

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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

Internal Alignment

•Minimize hierarchy•Everyone wears several hats•Emphasize collaboration

•Reflect job responsibilities•Support promotional growth opportunities•Foster team culture

© 2010 McGraw Hill Ryerson

Strategic Perspectives Toward Total Compensation (2 of 2)

Google Medtronic

Externally Competitive

•Explore novel ideas in benefits and compensation•Generous, unique benefits

•Market value of jobs establishes overall pay parameters•Choices in benefits

Employee Contributions

•Recognize individual contributions•Unrivaled stock programs

•Incentives directly tied to business goals•Opportunity to earn above-market pay•Recognition of individual and team performance

Management •Love employees, ant to know it•Technology support

•Clearly understood; open•Technology support•Employee choice

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Corporate objectives, Corporate objectives, strategic plans, vision, strategic plans, vision, and valuesand values StrategicStrategic

compensationcompensationdecisionsdecisions

CompensationCompensationsystemssystems

EmployeeEmployeeattitudes andattitudes andbehavioursbehaviours

CompetitiveCompetitiveadvantageadvantage

Business unitBusiness unitstrategiesstrategies HR strategiesHR strategies

Social, Social, competitive, competitive,

and regulatoryand regulatoryenvironmentenvironment

Strategic ChoicesStrategic Choices

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Strategic Compensation Decisions

Objectives Internal Alignment External Competitiveness Employee Contributions Management

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1. Assess Total Compensation Implications1. Assess Total Compensation Implications• Competitive Dynamics• Core Culture / Values• Social and Political Context• Employee / Union Needs• Other HR Systems

2. Map a Total Compensation Strategy2. Map a Total Compensation Strategy• Objectives • Contributions• Alignment • Management• Competitiveness

3. Implement Strategy3. Implement Strategy• Design System to Translate Strategy into Action• Choose Techniques to Fit Strategy

4. Reassess the Fit4. Reassess the Fit• Realign as Conditions Change• Realign as Strategy Changes

Key Steps to Formulate a Key Steps to Formulate a Compensation StrategyCompensation Strategy

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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?

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“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 strategyEmerging evidence suggests that a focus on

“What practices pay off best under what conditions?” will be most effective

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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. assess environmental conditions

2. decide on the best strategic choices

3. implement the strategy, and

4. reassess the fit