A strategic perspective of compensation

Pay Model
Business Strategy
(Porter’s Generic Strategies)

Not included in course content

 • Porter’s Generic strategies:
– Strategies through which companies gain competitive advantage

• (1) Cost Leadership - no frills

• (2) Differentiation – Uniquely products / services

• (3) Focus - Specialized service to a niche market

– (3a) Cost Focus
– (3b) Differentiation Focus

Not included in course content

 Compensation Strategy: Differentiation (Innovator)

Strategy
Increase Product Complexity; Reduce Product Lifecycle

Business Response
Product Leadership; Mass Customization; Product Cycle time

HR Alignment
Committed to Agile, Risk taking, Innovative people

Compensation System
Reward product or process innovation; Market based pay; Generic JDs
 Compensation Strategy: Cost Cutter

Strategy
Focus on efficiency

Business Response
Operational excellence; Cost effective solutions

HR Alignment
Focus on labour cost; People productivity; efficiency

Compensation System
Benchmark with competitor labor costs; Increase Variable Pay; Clear Work
specification and system control
 Compensation Strategy: Customer Focus

Strategy
Increase customer expectations

Business Response
Deliver solutions to customers; Speed to market

HR Alignment
Delight Customer - Customer Service; Exceed Expectations; Customer Acquisition;
Customer Retention

Compensation System
Customer Satisfaction Incentives; Job Value based on extent of customer interface
Steps in formulating a compensation strategy
1. Assess Total Compensation Implications

2. Fit Policy Decisions to Strategy

3. Implement Strategy

4. Reassess the fit

Step 1. Assess Total Compensation Implications… 1
Changing Customer Needs Company’s image and Country specific culture norms

Social & Political Context

Competitive Dynamics

Culture / Values
reputation
Changing Labor Market Gender roles
Conditions Behaviors that the company
values
Government regulations on
Changing Business Regulations compensation
Globalization / Deglobalisation How company treats its
employees
Lobbying by employers
(Note: Organizations cannot be
exclusively cost cutters or
innovators or customer
focused)
Step 1. Assess Total Compensation Implications… 2
Older / Younger workers Fit between other HR systems and

Employee / Union Needs

Dual Career couples
Need for customizing
compensation to specific
demographic profiles
Tax protection
Other HR Systems
compensation system – Eg. High
Performance Work Systems have
features of:
1. High Skill / Knowledge
requirements

2. Empowered Workplace
Job security

3. Performance based pay systems

Pay security

Income Protection
Step 2: Fit policy decisions to strategy

• Objectives

• Alignment

• Competitiveness

• Employee Contributions

• Management
 Step 3: Implement
&
Step4: Reassess & Realign

• Assess impact of pay system on desired outcomes

– Employee perception of pay system

– Employee behavior that gets desired business results

Three checks for an effective compensation system
 Three Checks :
Does your pay system create competitive advantage?

Is your pay system aligned?

Does it differentiate?

Does it add value?

 Three Checks for a Compensation System
Aligned with business strategy Is it differentiated from others Does it give Return on

Aligned

Differentiated
in the market
Aligned externally with socio /
political conditions (Note: Easier said than done.
Refer Towers Perrin
Compensation Model)
Aligned with other HR systems
Adds value
Investment (RoI)?
(Costs can be calculated easily
in a spreadsheet; but
calculating value created out of
those costs is not as easy)

• Even if pay systems are aligned and differentiated, it is possible that it may not add value

• Of the THREE tests the last test is the most difficult!

• Also, innovation in product / services benefits first movers; but it is not clear if innovation in
compensation gives similar results
Towers Perrin Model of Total Rewards
Towers Perrin Model of
TOTAL REWARDS
Transactional (Tangible)

Pay Benefits

Individual Communal

T&D, Growth Work Environment

Opportunities

Relational (Intangible)
 Towers Perrin Model

Upper Quadrant (Pay, Benefits)

Represents tangible rewards. Right Quadrant
Essential to recruit and retain employees Represent communal rewards
Can be copied easily by competitors

Lower Quadrant (T&D, Work Environment)

Represents intangible rewards
Left Quadrant Cannot be copied easily by competitors
Represents rewards available to Provides company with Human Capital
individuals and Process advantages
Essential to enhance the value of the
upper quadrant
‘Best Practice’ versus ‘Best Fit’
 ‘Best Practice’ versus ‘Best Fit’
• Ideal approach is to have a compensation system that is a good
STRATEGIC FIT

• But views differ. Some suggest “best practices” rather than “best fit”
• A set of best practice exists
• Can be applied universally across situations
• Allows employers to gain preferential access to superior talent
• Which in turn will turn into a competitive advantage

• Challenge is – what to select from the basket of best practices?

‘Virtuous Cycle’ & ‘Vicious Cycle’
 Virtuous Circle
• Some studies show that performance-based pay is beneficial only to
organizations that are already doing well
– When there is success to share, success-sharing plans work best

• The upward (Virtuous) Cycle:

– Organization profit increase leads to larger bonus pays out
– Leads to improved employee contribution
– Results in improved organization performance
– The circle gains upward momentum
 Vicious Circles

• But a circle can also gain downward momentum

– Organization performance declines
– Leads to lower or zero performance pay or lower value of stock options
– Results in lower employee performance (due to imbalance in risk-returns)
– Circle gains downward momentum

• Unfortunately, no clear compensation strategy can be prescribed for an

organization caught in a downward spiral (to shift it back to an upward spiral)
Virtuous and Vicious Circles
THANK YOU