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Chapter 2 Outline

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  • 1. CHAPTER 2 STRATEGIC PERSPECTIVES LEARNING OBJECTIVES 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 that there is not yet consensus on the concept of strategy. 4. Understand the difference between transactional and relational returns. OUTLINE I. STRATEGIC PERSPECTIVES - strategy should tell us, “so what?” “why bother with this technique?” - how does it help achieve objectives - compensation decisions should fit strategy II. SUPPORT BUSINESS STRATEGY - “fit” between organization and compensation systems - ultimate purpose of compensation system: gain & sustain competitive advantage - business strategies should drive pay systems (these change w/strategy) a. innovator (differentiation) b. cost cutter (overall cost leadership) c. customer focused (focus) III. WHICH PAY DECISIONS ARE STRATEGIC?
  • 2. A. The following decisions taken together form a pattern to become the organization’s compensation strategy: a. Objectives: How should compensation support the business strategy and be adaptive to culture & regulations b. Alignment: How to pay differentially across jobs/skill levels c. Competitiveness: How total compensation should be positioned relative to competitors d. Contributions: Should pay increases be based on individual or team performance, improved skills e. Administration: Communication, involvement, management B. Articulated (Stated) Strategies - systematic & written for all to see and understand C. Emergent (Unstated) Strategies - unstated & ad hoc, inferred from pattern of compensation IV. STEPS TO DEVELOP A TOTAL COMPENSATION STRATEGY Step 1: Assess Total Compensation Implications A. Competitive Dynamics - firms need to understand the industry they compete in - pay differs across countries because of different practices & priorities B. Core/Culture/Values - pay systems should be congruent with firm’s philosophy - also how it should treat employee in the firm
  • 3. C. Social, Economic, and Political Context (global differences) - legal & regulatory requirements - cultural differences - changing work force demographics - expectations D. Employee Needs - Flexible Compensation Systems - employee vary & have different needs/wants - pay systems can be designed to be flexible to meet needs E. Unions - influence of unions on pay systems remain significant - unions are major players in Europe - firms must consider union desires and design a pay system to accomplish their goals and yet still satisfy the union F. Role in Overall HR Strategy: Support Catalyst of Change - pay can play a lead role or can support other parts of the overall HR strategy - pay must fit other HR processes too Step 2: A Total Compensation Strategy a. Objectives b. Consistency c. Competitiveness d. Contributions e. Administration Step 3 and 4: Implement (strategy) and Reassess (fit) a. Design system to translate strategy into action b. Choose technique to fit strategy ________________________________________________________________ c. Realign as conditions change d. Realign as strategy changes
  • 4. V. SOURCE OF COMPETITIVE ADVANTAGE: TWO TESTS A. Adds Value • attract & retain critical talent • control costs • motivate people B. Difficult to Imitate • even if competitors can copy strategy, system may have edge • depends on how well strategy & compensation systems fit together and the way compensation fits with other HR activities VI. TO IMPLEMENT OR INNOVATE: AND, NOT OR • advantages can be derived from both (jury still out) VII. BASIC ISSUE: DOES "FIT" PAY OFF? A. “Best Fit” Environment (socio-econ/political) – organizational strategy – HR/comp policies - competitive advantage Premise: • align pay decisions based on firm’s strategy & values • be responsive to employees & globally competitive • firm likely to achieve competitive advantage • little research support for this model B. “Best Practices” Environment (socio-econ/political) – HR/comp policies - organizational strategy – competitive advantage Assumption: • a set of best practices exist • these practices should be applied in all situations
  • 5. • adopting best pay practices lead to access of superior HR talent • the superior HR talent in turn influences firm’s strategy & be a source of competitive advantage • different views on what “best pay practices” are C. Different views on “best practices” a. New Pay • market based • variable pay depending on performance • risk sharing & employment insecure b. High Commitment • high base pay • sharing performance success but not risk • guaranteeing employment security • internal promotion XI. SO WHAT MATTERS MOST? Best Practices, or Best Fit? Research shows: a. Its not how much you pay but how you pay that matters: using performance bonuses & stock options (ex. of “best practices”) b. Compensation strategy's effect on firm performance equal to the impact of all other aspects of the HR system combined c. Whether fit matters still not clear. Suggested that compensation strategies have impact, whether or not they are aligned. d. HR systems appear to be interconnected: pay & job security – fewer layoffs in firms that have performance based (variable) pay strategies. A. Still Maybe After All These Years
  • 6. • total compensation strategies influence employee behaviors & organizational performance • much is still unresolved by research B. Virtuous Circle • total compensation package that emphasizes performance based pay is related to firm performance only when the firm is doing well firm perf. rises - perf. based pay rises – raises employee motivation– employee willing to take relative risk - this increases firm’s perf. C. Vicious Circle firm perf. drops - perf. based pay drops – employee motivation drops - employee unwilling to take relative risk - this decreases firm’s perf. XII. SO WHAT'S THE DEAL? Terms and conditions of the employment exchange is referred to as the implicit contract A. Transactional and Relational Returns Transactional: emphasizes cash and benefits Relational: emphasizes socio-psychological returns Firms' compensation strategies = transactional, relational, or both B. Four Pay/Commitment Approaches i. Lo Pay-Lo Comm.: “Commodity” (migrant workers) ii. Hi Pay-Lo Comm.: “Hired Guns” (stockbrokers) iii. Lo Pay-Hi Comm.: “Family” (Starbucks) iv. Hi Pay-Hi Comm.: “Cult-Like (Microsoft) XIII. YOUR TURN: Difficult to Copy: Not?
  • 7. XIV. YOUR TURN: Ethics In Compensation