COMPENSATION MANAGEMENT

A STRATEGIC PERSPECTIVE
Strategic Tool for Aligning Employee Performance with
Corporate Strategy and Increasing Shareholder Value

Do your compensation plans focus employee activity on

corporate goals?
Will you increase compensation by 5% - 10% this year? How
does that investment translate to the bottom line?
Is your employee compensation system a strategic tool for
delivering performance at every level and every function in
your business?
Can your compensation management system adapt to the
complexity of global, multitiered organisations and various
compensation types?
Does your employee compensation system allow you to model
and implement compensation plans that drive optimal
performance while keeping employees focused and motivated?
Are you confident that salary and benefit allocations are error
free and correctly delivered to the employees who earned
them?
Strategic Alignment

VISION/MISSION
CORE BELIEFS
OBJECTIVES
BUSINESS STRATEGY

COMPENSATION
SYSTEM

PERFORMANCE
What STRATEGIC CHOICES
business Corporate
should we strategies
be in ?

How do we win in Business

those business?
strategies

How should
HR help us? HR strategies

How should
total Social, competitive & Strategic
compensation
help us win?
regulatory environment compensation

Compensation
system

Employee
Attitude & Behaviour

Competitive
Advantage
Generic Business-level
Strategies

 Innovator

 Cost Cutter

 Customer
Focused
Compensation System Tailored to Three Different Business Strategies
HR
STRATEGY BUSINESS COMPENSATION
PROGRAMME
RESPONSE SYSTEMS
ALIGNMENT
Innovator: Product leadership Reward innovations in products
Committed to
Increase product Shift to mass and processes
agile risk taking
complexity customisation Market-Based pay
innovative people
Shorten Cycle time Flexible – Generic job
product life cycle description

Operational Focus on competitor’s labour cost

Cost cutter:
excellence Increase variable pay
Focus on
Pursue cost Do more with less Emphasise productivity
efficiency
effective solutions Focus on system control and
and cost cutting
work specifications

Customer focused:
Deliver solutions Delight customer, Customer Satisfaction incentives
Increase
to customer exceed expectation Value of job and skills based
customer
Speed to market on customer contact
expectation
Strategic Perspective

A strategic perspective focuses on those

compensation choices that help the
organisation gain and sustain
competitive advantages
Strategic Perspective

Strategic compensation decision can be

considered in terms five basic policies:
1.Objectives

2.Alignment

3.Competitiveness

4.Contributions

5.Management
Strategic Perspective

 These decisions, taken together, form

a pattern that becomes an
organization’s compensation strategy
 Stated versus unstated strategies
Example: The Strategic Compensation
Decisions Facing Starbucks
 Objectives: How should compensation support 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.
Example: The Strategic Compensation
Decisions Facing Starbucks (cont.)
 Alignment: How differently should the various types and levels
of skills be paid within the organization?
Starbucks’ Approach

 De-emphasize differences.

 Use egalitarian pay structures, cross-train employees to

handle many jobs, and call employees partners.
Example: The Strategic Compensation
Decisions Facing Starbucks (cont.)

 Competitiveness: How should total compensation 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 options for all
employees (including part-timers).
 Give everyone a free pound of coffee every week.
Example: The Strategic Compensation Decisions
Facing Starbucks (cont.)

 Contributions: Should pay increases be based 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 unit’s performance?
Starbucks’ Approach
 Emphasize team performance and shareholder returns.
 For new managers in Beijing and Prague, provide training
opportunities in the U.S.
Example: The Strategic Compensation
Decisions Facing Starbucks (cont.)

 Management: How open and transparent should pay decisions

be to all employees? Who should be involved in designing and
managing the system?
Starbucks’ Approach

 As members of the Starbuck’s “family,” our employees

realize what is best for them.

 Partners can and do get involved.

 Developing a Total Compensation Strategy

1. Assess Total Compensation

Implications
 Competitive dynamics
 Culture/Values
 Social and Political Context
 Employee/Union Needs
 Other HR Systems

2. Fit Policy Decision to Strategy

 Objectives
 Alignment
4. Reassess the Fit  Competitiveness
 Realign as Condition Change  Contribution
 Realign as Strategy Changes  Management

3. Implement Strategy
 Design System to translate
Strategy into Action Changes
 Choose Techniques to Fit Strategy
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
 Competitive dynamics can be
assessed globally
Step 1: Assess Total Compensation
Implications (cont.)
 HR strategy: Pay as a supporting
player or catalyst for change?
 Pay strategy is influenced by how it fits
with other HR systems
 Pay can be a supporting player, as in
the high-performance approach
 Pay can take the lead and be a catalyst
for change
Step 1: Assess Total Compensation
Implications (cont.)
 Culture/values
 A pay system reflects the values that
guide an employer's behavior and
underlie its treatment of employees
 Social and political context
 Context refers to legal and regulatory
requirements, cultural differences,
changing workforce, demographics,
expectations etc affects compensation
choices
Step 1: Assess Total Compensation
Implications (cont.)
 Employee preferences
 How to better satisfy individual needs
and preferences
 Choice
 People do not understand the
alternatives; too many choices confuse
them
 Challenging to design and manage
Step 1: Assess Total Compensation
Implications (cont.)
 Union preferences
 Union preferences for different forms of
pay and their concern with job security
affect pay strategy
 Unions' interests can differ
 Compensation deals with unions can be
costly to change
Step 2: Map a Total
Compensation Strategy
 A strategic map offers a picture of a
company’s compensation strategy
based on the five choices in the pay
model
 Clarifies the message the company is
trying to establish with its
compensation system
 Maps do not tell which strategy is the
“best”; provides a framework and
guidance
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