1-strategic uses of compensation practices

7/26/2019 1-Strategic Uses of Compensation Practices

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Strategic Uses ofStrategic Uses ofCompensationCompensation

PracticesPractices


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Key Issues and Questions

What events in recent years have influenced the wayorganizations compensate their employees

What is organizational strategy and why is itimportant to align compensation with it

!ow have downsizing and reorganization affectedcompensation practice

!ow might compensation "e used as a device forimplementing "usiness strategy

!ow might pay "e used as a lag system #s a leadsystem


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$

Introduction % &he Strategic

Imperative&hree events have contri"uted to "usiness

environment changes%

'Increased domestic and international

competition

'# shift from manufacturing to a service

economy'(esponse to these changes "y many firms that

includes downsizing and restructuring


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&he Shift to Services

# dramatic shift from manufacturing "ased

economy to a service economy, -,g,1c 3onalds has moreemployees than Kra*atau Steel,

&he difference "etween selling services and

selling manufactured products,

When companies sell a service/ in contrast/ they

are selling an intangi"le, &he ma4or thing a service provider sells is the

performanceof the person delivering the service,


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&he Shift to Services

Traditional Economy Service EconomyTangible Products Intangiables Services

Selling stand-alone products Selling individual performance

Focus on product characteristic Focus on customer needs

Service is a cost and chore Service is a startegy

Margin of

discretionary

performance

(percents)

Pea

!cceptable

Manufacturing Service


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Compensation %

#n Implementation StrategyStrategic Challenges %

+, &he need to compete with discretionary effort in

service performance2, &he need to relate la"or costs to revenues '

productivity

$, &he need to stop treating compensation as sun* costs

), &he need to treat compensation dollars asinvestments for leveraging results related to strategic

plans


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-lement of Compensation

-lement -mployeeInterest

8rganizationInterest

9ase Pay Provide standard ofliving

anage e:ternal andinternal e.uity 'attract and retainemployees

-mployee 9enefits Protect standard ofliving

#ttract and retainemployees

Short;term incentives Prospect of more

income for moreeffort

otivate effort and

direct "ehavior


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Pay as lead System has four

potential advantages+, Pay can "e used to communicate "usiness plans

2, Pay can "e used to articulate unit/ group/ and

individual performance o"4ectives in terms of"usiness plans

$, Pay esta"lishes incentives for employees and

groups to change current practices and adopt

new ones

), Pay communicates management?s intentions


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Pay as lag System has four

potential advantages+, Pay reinforces individual and group

performance re.uired "y "usiness plans,

2, Pay rewards discretionary effort

$, Pay shares returns from productivity

improvements and long;run goal

achievement,


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#lternative Compensation

Strategies+, Performance;"ased pay

2, erit awards or incentives not tied to "ase pay

$,


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Performance;"ased pay

#d4ustments to pay are "ased on indivi;

dual or group performance and are not

granted simply "ecause of organizationalmem"ership or time with the employer,


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erit awards or incentives not

tied to "ase pay #d4ustments to pay must "e earned through

performance and are not rolled into "ase

pay, &hus/ they must "e re;earned eachyear and do not constitute a payment into

the future,


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Aain sharing Plans

#ny gain in actual dollars or hours within

the standard goal that has "een set is

shared with wor*ers in the form of gainsharing cash "onuses,


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S*ill=Competency "ased pay

Pay;for;*nowledge plans create incentives for

wor*ers

&o learn more than one tas* or position in a plant,S*ill "ased pay systems set higher level rates of each

new tas* or position that is mastered, &he highest rate

is achieved once all positions are learned,


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Profit;sharing plans

&hese plans esta"lish profit goals for the

organization and set aside share of all

profits e:ceeding the goal into a pool thatis distri"uted "ac* in the from of "onuses

to employees,


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Cafeteria plans

&hese are compensation plans that allow

employees individual fle:i"ility in their

choices among "enefit plan elements,Some cafeteria plans are total

compensation plans/ in that the employee

can pool dollars going into "oth direct payand "enefits,


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Corporate Strategy and

Compensation it9usiness plans often contain elements %

inancial o"4ectives

ar*et share o"4ectives

Arowth o"4ectives

#n organization design specifying units/each with performance o"4ectives derived

from the "usiness plan,


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Corporate Strategy and

Compensation it

9usiness

Strategy

Compensation

3esign

Performance

it


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our .uestion

+, &o what e:tent are organizations using

alternative compensation design

2, #re there any ris*s associated with suchdesigns

$, Is there any evidence that companies currently

adapt compensation designs to their strategies

), Is there any evidence that companies that do so

perform "etter than those that do not


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(is*s and 9enefits of alternative

Compensation 3esigns

-ntitlement

#t ris*


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atching Compensation 3esign

with 9usiness Strategy 3efinitions of Compensation Practices

Strategic 9usiness Units &ypes

Compensation 3esign

'Pay=Strategy it%Compensation 3esign

'Pay=Strategy it%Compensation #dministration

-merging Compensation Issues


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3efinitions of Compensation Practices

Compensation

Characteristic

"esign Elements

#$ E%ternal&Internal 'elative importance placed on-e%ternal

Euity Emphasis maret compettiton versus internal ob

value relationships

*$ Individual pay participation 'elative emphasis placed on entitlement

(Individual euity) based on membership versus merit

based on performance in setting

Individual pay rates

+$ Pay adsutment policy 'elative empahsis on ability to pay (productivity) versus broader business

plan performance

!dministrative Elements

,$ Participation in "esign "egree to hich employees are involved

in the design of pay system

.$ Participation in "egree to hich employees are involved

!dministration in administering pay practices

/$ 0entrali1ation& "egree to hich pay design and

decentrali1ation adminsitration are alloed to vary across organi1ational units

2$ 0ommunication "egree of openness and disclosure about

pay plan design and admnistration

3$ Formali1ation&standardi1ation "egree to hich pay practices are

constrained by e%plicit rules and

guide lines$

Issue

Strategic 9usiness Unit &ypes


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Strategic 9usiness Unit &ypesDefender Prospector Analyzer

Product market Narrow, stable Changing product Characterized by

Definition market; market emphasis; mixed strategy

market concerned search for new

with protecting market; focus on

market share innovation

echnology !ingle core "ultiple Prototype !ingle core

technology; tehnologies; invest technology;

investment in more in people than and investment in

improvements in machines people

"anagement Dominated by ends to change Dominated by

production, often; dominated marketing #

finance types by marketing # research relatively

$#D types stable

Design% &unctional Product centered Divisionalized or

'dministration Dividion of labor; division of labor matrix structure

highly formal( few formal rules combined of

market relatively structured and

open( centralized formal

work

Performance Criteria Promotion based Performance Performance

on past performance measured against measured on

cost and budget market outcomes combination

viz competitors of cost market

outcomes(


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Compensation 3esign

Pay&Strategy Fit 4 0ompensation "esign

Issue Defender Prospector

Maret versus internal euity Internal E%ternal

!ard 5asis Entitlement Performance

!t-ris earnings Productivity 5usiness Plan

performance


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Compensation 3esign

Pay&Strategy Fit 4 0ompensation !dministration

Issue Defender Prospector 0ommunication 6o 7igh

Participation&Involvement 6o 7igh

Standardi1ation-pay adsutments 6o 7igh

Standardi1ation-administration 7igh 6o

0entrali1ation 7igh 6o


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Emerging Pay Strategy

Pay Issue From to5ase pay 6arge 8 Small 8Incentive&Trigger 5udgets 5usiness Plan performance

Incentive&earnings Small 8 6arge 8

Pay determination Emphasis on the ob Emphasis on the individual


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Emerging Pay Methods Issues

Issue From to0ommunication Secret 9pen

"esign Top "on 5road involvement

"esign Traditional Strategy "riven

Pay mi% Standard 0hoice

1-strategic uses of compensation practices

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