2Exhibit 2.1: Strategic Perspectives Toward Total Compensation MicrosoftBristol - Myers SquibbFirepondSupport the business objectivesSupport recruiting, motivation, and retention of MS-caliber talentPreserve MS core valuesSupport business mission and goalsDevelop global leaders at every levelReinforce team-based cultureReduce costs, increase productivityDemonstrate respect for individual talent and the limitless potential of a highly motivated teamEncourage high standards of excellence, original thinking, a passion for the process of discovery and a willingness to take risksReward fresh ideas, hard work and a commitment to excellenceValue diverse perspectives as a key to discoveryObjectivesIntegral part of MS cultureSupport MS performance driven cultureBusiness/technology-based organization design structureFlexibility for development and growthReflect responsibilities, required competencies, and business impactPay differences that foster a collegial atmosphereReinforce high expectationsInternal Alignment
3Exhibit 2.1: Strategic Perspectives Toward Total Compensation MicrosoftBristol - Myers SquibbFirepondLead in total compensationMeet base pay and bonusesLead with stock awards (moving away from options)Compare favorably to higher-performing competitorsCash between the 50th and 75th percentile“Pay what others are paying”Externally CompetitiveSupport high performance, leadership cultureTeam-based increasesOptions align employee and shareholder interestTailor to business and team resultsBonus pool based on Firepond financial performance. Individual share of pool based on individual performance.Push stock ownership deep into companyBonuses and stock awards based on individual performanceEmployee ContributionOpen, transparent communicationsCentralized administrationSoftware supportedPerformance and leadership feedback –everyone is a leaderAdministrative easeGoal-focused, team-oriented, and self-managedAdministration
4Strategic Alignment VISION/MISSION CORE BELIEFS OBJECTIVES BUSINESS STRATEGYCOMPENSATION SYSTEMPERFORMANCE
6Exhibit 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
7Example: The Strategic Compensation Decisions Facing Starbucks Objectives: How should compensation support business strategy and be adaptive to the cultural and regulatory environment?Starbucks’ ObjectivesGrow 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.
8Example: The Strategic Compensation Decisions Facing Starbucks (cont.) Alignment: How differently should the various types and levels of skills be paid within the organization?Starbucks’ ApproachDe-emphasize differences.Use egalitarian pay structures, cross-train employees to handle many jobs, and call employees partners.
9Example: 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’ ApproachPay 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.
10Example: 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’ ApproachEmphasize team performance and shareholder returns.For new managers in Beijing and Prague, provide training opportunities in the U.S.
11Exhibit 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
12Step 1: Assess Total Compensation Implications Before any new compensation program is designed, there must be a clear understanding by the organization ofCompetitive dynamicsCustomer needsCompetitors’ actionsLabor market conditionsRegulationsGlobal environmentCulture/valuesA pay system reflects values guiding an employer’s behaviors and treatment of employees
13Step 1: Assess Total Compensation Implications (cont.) Social and political contextLegal and regulatory requirementsCultural differencesChanging work force demographicsEmployee values and expectations
14Step 1: Assess Total Compensation Implications (cont.) Employee needsContemporary pay systemsFlexible compensation systemsNature of union-management relationship
15Step 1: Assess Total Compensation Implications (cont.) Role of pay in overall HR strategySupporting playerAgent of change
17Steps 3 and 4: Implement and Reassess Involves implementing strategy through the design and execution of compensation systemStep 4Focuses on reassessing and realigning as conditions and strategy changesManaging links betweenCompensation strategyPay system andEmployee perceptions and behaviorsVital to implementing a pay strategy
18Sources of Competitive Advantage Three tests determine if a pay strategy is a source of advantageIs it aligned?Does it differentiate?Does it add value?
19Best 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
20Exhibit 2.11: Best-Practices Options The New PayExternal market-sensitive-based pay, not internal alignmentVariable performance-based pay, not annual increasesRisk-sharing partnership, not entitlementFlexible opportunities to contribute, not jobsLateral promotions, not career pathEmployability, not job securityTeams, not individual contributorsHigh CommitmentHigh wages: You get what you pay forGuarantee employment securityApply incentives; share gains, not risksEmployee ownershipParticipation and empowermentTeams, not individuals are base unitsSmaller pay differencesPromotion from withinSelective recruitingEnterprise-wide information sharingTraining, cross-training, and skill development are crucialSymbolic egalitarianism adds valueLong-term perspective mattersMeasurement matters