4 Exhibit 2.4: Tailor the Compensation System to the Strategy Business ResponseHR Program AlignmentCompensation SystemStrategyInnovator:Increase Product Complexity and Shorten Product Life CycleProduct LeadershipShift to Mass Customization and InnovationCycle TimeCommitted to Agile, Risk Taking, Innovative PeopleReward Innovation in Products and ProcessesMarket-Based PayFlexible – Generic Job DescriptionsFocus on Competitors’ Labor CostsIncrease Variable PayEmphasize ProductivityFocus on System Control and Work SpecificationsCost Cutter:Focus on EfficiencyOperational ExcellencePursue Cost-effective SolutionsDo More With LessCustomer Satisfaction IncentivesValue of Job and Skills Based on Customer ContactCustomer Focused:Increase Customer ExpectationsCustomer IntimacyDeliver Solutions to CustomersSpeed to MarketDelight Customer, Exceed Expectations
5 Which Pay Decisions Are Strategic? ObjectivesAlignmentCompetitivenessContributionsManagement
6 Exhibit 2.5: Key Steps to Formulate a Compensation Strategy 1. Assess Total Compensation ImplicationsCompetitive DynamicsCore Culture / ValuesSocial and Political ContextEmployee / Union NeedsOther HR Systems4. Reassess the FitRealign as Conditions ChangeRealign as Strategy Changes2. Fit Policy Decisions to Strategy• Objectives • Contributions• Alignment • Administration• Competitiveness3. Implement StrategyDesign System to Translate Strategyinto ActionChoose Techniques to Fit Strategy
7 Sources of Competitive Advantage Three tests determine if a pay strategy is a source of advantageIs it aligned?Does it differentiate?Does it add value?Which hat is unique?
8 Best Fit vs. Best Practices If design of pay systemReflects company’s strategy and valuesIs responsive to employees’ needs andIs globally competitiveCompany is more likely to achieve competitive advantageBest PracticesAssumptionsA set of best-pay practices existsPractices can be applied universally across all situations
9 Example: Company XYZObjectives: How should compensation support business strategy and be adaptive to the cultural and regulatory environment?Alignment: How differently should the various types and levels of skills be paid within the organization?Competitiveness: How should total compensation be positioned against our competitors? What forms of compensation should we use?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?Management: How open and transparent should pay decisions be to all employees? Who should be involved in designing and managing the system?In groups, have students take one of the organizations they work for, address the questions for how the organization’s compensaiton currently addresses the following issues and how might it do a better job in the future?