STRATEGIC COMPENSATION & REWARDS
PREPARED BY:ANNU (030)
POOJA RANA (075)
Scope of the Presentation
Strategic compensation: Introduction Compensation design and its drivers Challenges & Issues to Strategic compensation Principles to Strategic Compensation Strategically oriented compensation systems
Strategic Compensation: Introduction
Strategic compensation is a fast-emerging phenomenon. Involves compensation practices being aligned with the achievement of
the organisation s strategic business objectives. Strategic compensation is the type of compensation scheme implemented
to improve the motivation of your people to perform better. It must also have the potential of strengthening your image as a good
employer. Paying competitive salaries is in accordance with sound employee
recruitment, employee engagement and employee retention practices. You are making it a truly strategic compensation.
The strategic perspective involves thinking about how pay can assist in achieving organization success.
Compensation Goals and Strategy
Basic Goals of a Compensation System Attract Employees Retain Employees Motivate Employees Compliance with Pay Laws Administrative Simplicity Cost Effective Drive focus & effort to exceed performance objectives Internal and external equity
There are four (4) key questions which must be addressed:
How much should we pay? (What is the SIZE of the economic pie?) In what form should we pay it? (How should the pie be SLICED?) When should it be provided? (When and how do we serve the pie?) How do we make adjustments? (When should we change the pie recipe?)
Following steps need to be followed in compensation system design:
I. Work DesignII. Job EvaluationIII. Job BenchmarksIV. Labor Market DefinitionV. Market ResearchVI. Compensation DeterminationVII. Job/Pay Structure DesignVIII. Compensation Review PolicyIX. Internal Equity Review
Compensation & Benefits Strategy Design Drivers
o Compliance Related (Legal)o Strategy & Market Drivers e.g. Target markets, General strategy,
Competitive Positioning, Business model & complexity, M&A.o Operations Drivers e.g. Performance benchmarking, Operations
Excellence Programs, Process Innovation projects.o Technology Drivers e.g. New product/ service offerings, Integrating
technologies, Technology alliances.o Structure & Processes Drivers e.g. Organization & Cost structure,
Process re-design, creation of new divisions, departments, functionso Workforce Drivers e.g. Demographics & Diversity, Talent attraction, motivation, retention & engagement, Culture.
Human Resource Strategies
Strategies affecting
compensati-on
decision making
Societal
Corporate
Business
Functional
Governmental
Decisions
Organizational
Management Decisions
Function Level
Decisions
C&R Strategy: Challenges & Complexities
Limited Talent, especially in emerging economies or for “Hot Skills” Managing workforce diversity and aligning C&R to employee needs Increased flexibility in C&R programs e.g. Expatriates with “Split pay
requirements, flexible benefits programs, etc. Ever present threat of downsizing How to distribute scarce compensation & benefits $ Having a “Credible” performance management system that support
“Performance Based Pay” concepts Balancing the issue of: Linking Rewards to Performance vs. Building a
Team Culture Competitive position & the contribution required from the workforce.
Principles behind C&R Strategy
Always link back to strategy & business objectives Able to drive & align performance Establish a philosophy, policy guidelines & target objectives Evaluate costs in relation to value / impact expected NOT to “What others
do or generic benchmark numbers” Manage “PIE” - Perceptions, Implementation & Expectations Evaluate effectiveness against expected outcomes Keep it simple & flexible (Control fixed costs; consider adaptability across
countries & time periods) Decide on level of consistency required especially if you have “Hot Skills”. Base it on “Relevant Data” = Market Data + Business Value Data
STRATEGICALLY ORIENTED COMPENSATION SYSTEMS
Skill Based Pay Broadbanding Team Based Pay Variable Compensation
Skill Based Pay
Focuses on individual, not the job
With skill based pay, employees are able to increase their compensation as they acquire a broader range of skills
Although there are variations in how skill based pay is implemented, employees typically start out at a base rate and increase their compensation as they master a sequence of skill blocks
Typically employees take several years to master the content of all skill blocks
Difficult aspect involved in the administration of skill based pay involves the determination of the amount of pay that should be assigned to skill blocks
Market survey data are often used to establish the range and average values for skill blocks
Advantages Costs of higher wage rates are offset by higher
productivity and increased quality Employees’ heightened motivation for training Greater task variety Employee induced pressures on companies to provide
training Increase in employees’ self esteem Increase in compensation with expansion of skill sets
and not on the basis of seniority
Broadbanding
Broadbanding involves a reduction in number of salary bands
Large number of pay grades are consolidated into a few broadbands
Implemented in large, hierarchical organizations to flatten their organizations and remove levels of management
For example, an organization that had 8 levels of management could eliminate 4 levels, widen the salary ranges of remaining 4 levels and simply slot each manager into one of those ranges
With broadbanding, a manager can easily encourage his/her employees to broaden their skills and abilities
In order for employees to advance in pay and responsibilities, they have to further develop their specialized skills
So, it leads to skill acquisition and development
Employees’ salaries can be raised without a promotion
Team Based Pay
Team based pay involves specifying a goal and then allocating to all team members a reward for its accomplishment
Rewards can be cash as bonus, trips or time off from work
These rewards are provided to all members equally
Overcomes the problem of measuring individual contributions
Facilitate cooperation among team members
Variable Compensation
This type of compensation as by its name is variable. It means that one gets compensation as per the work done. If one does a remarkable job then he or she deserves a higher compensation package than one whose work is of poor quality.
Case Studyon
Novartis
Performance-based compensation policy is designed to:• Align the objectives of associates with the interests of
the shareholders• Incentivize associates to create sustainable value for
Novartis and its shareholders• Support a diverse and performance-oriented culture that
allows Novartis to reward people who perform well• Be competitive with world-class companies and industry
peers
Base Compensation
Each associate is given a fixed salary based on job characteristics, market competitiveness and the associate’s skills. Salary growth depends on the associate’s individual performance and level compared to the benchmark.
Variable Compensation
Short-Term Incentive PlansAwards under the short-term incentive plans are made each year based on the associate's individual target incentive percentage, individual year-end performance rating as well as on the Group’s or business area's performance.
Novartis Equity Plan "Select"Each year, approximately 10 percent of all full-time-equivalent associates worldwide may be eligible for a grant under the Equity Plan “Select”. Grants can be taken in the form of restricted shares, tradable share options or a combination of both, with a vesting period of three years. In some jurisdictions Restricted Share Units (RSU) are granted rather than shares.
Long-Term Performance PlanThe Novartis Long-Term Performance Plan rewards key executives who have a significant impact on the long-term success of the Group by aligning the incentives of key executives to the performance of Novartis
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