© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 2 Strategy: The Totality of Decisions © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objectives Similarities and differences in strategies Strategic choices Support business strategy Support HR strategy The pay model guides strategic pay decisions 2-2

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-3

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Three Compensation Strategies 2-4

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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 2-5

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Strategic Choices Strategy: Fundamental directions that an organization chooses Strategic perspective Compensation choices that help the organization gain competitive advantage 2-6

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Strategic Choices 2-7

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-8

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Tailor the Compensation System to the Strategy 2-9

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-10

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-11

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Support HR Strategy Compensation system motivates employees Roles allow employees to be involved in decision making 2-12

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Fit Between HR Strategy and Compensation Strategy and Effectiveness 2-13

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-14

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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 2-15

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Key Steps in Formulating a Total Compensation Strategy 2-16

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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 2-17

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-18

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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 2-19

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-20

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Step 1 - Assess Total Compensation Implications Union preferences Affect pay strategy Unions' interests can differ Compensation deals with unions can be costly to change 2-21

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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 2-22

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Contrasting Maps of Microsoft and SAS 2-23

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-24

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may 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) 2-25

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. “Best Practices” versus “Best Fit”? Best Practices Assumptions: A set of best-pay practices exists Practices can be applied universally across all situations Results in better performance with almost any business strategy Best Fit An organization is likely to achieve competitive advantage if the pay system: Reflects company’s strategy and values Is responsive to employees’ and unions’ needs Is globally competitive 2-26

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-27

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-28

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 2-29

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit Virtuous and Vicious Circles 2-30