Chapter 2

Strategy: The Totality

of Decisions
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 Learning Objectives
Similarities and differences in
strategies
Strategic choices
Support business strategy
Support HR strategy
The pay model guides strategic pay
decisions

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 Learning Objectives
Developing a total compensation
strategy: four steps
Source of competitive advantage:
three tests
Best Practices versus Best Fit?
Guidance from the evidence
Virtuous and vicious circles

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Exhibit 2.1 - Three
Compensation Strategies

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Similarities and Differences
in Strategies
Different strategies within the same
industry
Different strategies within the same
company

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 Strategic Choices
Strategy: Fundamental directions
that an organization chooses
Strategic perspective
Compensation choices that help the
organization gain competitive
advantage

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Exhibit 2.2 - Strategic
Choices

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 Support Business Strategy
Aligns pay systems with
organization's business strategy
Better the alignment, more effective is
the organization
Contingency notion
Change in business strategies should result
in change, pay systems

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Exhibit 2.3 - Tailor the Compensation
System to the Strategy

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 Support Business Strategy
Customer focused business strategy
Stresses delighting customers and
bases employee pay on how well they
do this
Cost leadership strategy- Firms that
cut costs
Differentiation strategy
Unique and innovative product or
service at a premium price
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 Support HR Strategy
AMO theory
P (Performance) = f(A,M,O)
A- Ability
M- Motivation
O- Opportunity
HR systems will be most effective
when:
Employee ability is developed through
selective hiring and training

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 Support HR Strategy
Compensation system motivates
employees
Roles allow employees to be involved
in decision making

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 Exhibit 2.5 - Fit Between HR Strategy
and Compensation Strategy and
Effectiveness

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 The Pay Model Guides
Strategic Pay Decisions
Strategic compensation choices
Objectives
Internal alignment
External competitiveness
Employee contributions
Management
Stated strategies - Written
compensation strategies
Unstated strategies - Inferred from
the pay decisions
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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Developing A Total
Compensation Strategy: Four
Steps
Step 1 - Assess total compensation
implications
Step 2 - Map a total compensation
strategy
Step 3 - Implement strategy
Step 4 - Reassess

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 Exhibit 2.6 - Key Steps in
Formulating a Total Compensation
Strategy

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Step 1 - Assess Total
Compensation Implications
Business strategy and competitive
dynamics- Understand the business
Changing customer needs
Competitors actions
Changing labor market conditions
Changing laws
Globalization
Assess global competitive dynamics

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 Step 1 - Assess Total
Compensation Implications
HR strategy - Pay as a supporting
player or catalyst for change?
Pay strategy
Is influenced by how it fits with other HR
systems
Can be a supporting player, as in the high-
performance approach
Can take the lead and be a catalyst for
change

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Step 1 - Assess Total
Compensation Implications
Culture/Values
Guide an employer's behavior and
treatment of employees
Reflected in the pay system
Social and political context
Legal and regulatory requirements
Cultural differences
Changing workforce
Demographics
Affects compensation choices
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 Step 1 - Assess Total
Compensation Implications
Employee preferences
How to better satisfy individual needs
and preferences
Choice
May confuse employees
Challenging to design and manage
Requires meeting codes and
regulations

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 Step 1 - Assess Total
Compensation Implications
Union preferences
Affect pay strategy
Unions' interests can differ
Compensation deals with unions can be
costly to change

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Step 2 - Map a Total
Compensation Strategy
Strategic map
Provides compensation strategy based
on pay model
Clarifies the message that company is
trying to establish with its
compensation system
Does not tell which strategy is best but
provides a framework and guidance

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 Exhibit 2.8 - Contrasting Maps
of Microsoft and SAS

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 Steps 3 and 4 - Implement and
Reassess
Step 3
Involves implementing the strategy
through :
The design and execution of the
compensation system
Step 4
Recognizes that the strategy must
change to fit changing conditions
Involves periodic reassessment

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Sources of Competitive
Advantage: Three Tests
Is it aligned?
With the business strategy
Externally with the economic and socio-
political conditions
Internally with HR system
Does it differentiate?
Does it add value?
Calculate the return on investment
(ROI)
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 Best Practices versus
Best Fit?
Best Practices Best Fit
Assumptions: An organization is
A set of best-pay likely to achieve
practices exists competitive advantage
Practices can be applied if the pay system:
universally across all Reflects companys
situations
strategy and values
Results in better
performance with Is responsive to
almost any business employees and unions
strategy needs
Is globally competitive

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 Guidance from the Evidence
Internal alignment
Pay differences among internal jobs can
affect results
External competitiveness
Paying higher than the average paid by
competitors can affect results
Employee contributions
Performance-based pay can affect
results
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 Guidance from the Evidence
Managing compensation
Consider all dimensions of the pay
strategy
Compensation strategy
Should be embedded within broader
HR strategy
Identify what practices pay off best
under what conditions

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 Virtuous and Vicious Circles
Research indicates that:
How you pay matters as much as how
much you pay
Performance-based pay:
Improves performance when combined with
high-performance practices
Can be the best practice under right
circumstances

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Exhibit 2.9 - Virtuous and
Vicious Circles

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not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.