Chapter Two

Strategic Compensation: Attaining a Competitive Advantage

Background Historical perspective

» Scientific management, time and motion studies» Welfare practices, federal and local laws» Competitive advantage (firm’s ability to maintain

market share and profitability over a sustained period of several years.)

– Compensation—promoting more-productive and highly skilled work forces. Merit pay to reinforce performance. Incentives to connect pay and work. Pay for knowledge. Discretionary benefits.

» Technology, job design, global competition

Strategic vs Tactical Compensation

Competitive strategy choices» Cost leadership» Differentiation

Tactical decisions that support the firm’s strategy» Human resource tactics» Tactics in other functional areas

Exhibit 2-1

Relationship Between Strategic and Tactical Decisions

• Competitive strategy• Human resource strategy• Compensation strategy

StrategicStrategicDecisionsDecisions

• Recruitment• Selection• Performance appraisal

• Compensation• Training

• Seniority pay• Merit pay• Incentive pay• Pay-for-knowledge• Discretionary benefits options

• Skill-based pay• Broadbanding• Two-tier pay

structures

GeneralGeneralTacticalTacticalHRHRDecisionsDecisions

SpecificSpecificTacticalTacticalHRHRDecisionsDecisions(Comp.(Comp.Examples)Examples)

General

Specific

Exhibit 2-3

Influences on Competitive Strategy

National Culture» Power distance» Individualism-collectivism» Uncertainty avoidance» Masculinity-femininity

Organizational Culture» Traditional organizational hierarchy» Flatter organizational structures» Team orientation

Organizational & Product Life Cycle» Growth» Maturity» Decline

Exhibit 2-4

Traditional Organizational Structure

ChiefExec. Officer

President

ExecutiveVP

VPHR

DirectorHR

ManagerHR

VPMfg.

DirectorMfg.

ManagerMfg.

VPFinance

DirectorFinance

ManagerFinance

VPAccounting

DirectorAccounting

ManagerAccounting

VPMarketing

DirectorMarketing

ManagerMarketing

Exhibit 2-7

Factors That Lead to Dysfunctional Turnover

Dysfunctional Turnover

Job SecurityJob SecurityTurnoverincreases

when employees believe job security is

better in other companies.

Personal Personal MobilityMobility

Turnoverincreases with

fewer family responsibilities.

Labor Market Labor Market ConditionsConditionsTurnoverincreases

when demand for employees

increases.

General General Economic Economic ConditionsConditionsTurnoverincreases

when general economic

conditions are favorable.

Exhibit 2-5

Designing Pay-for-Knowledge Programs

Establishing Skill Blocks» Skill type» Number of skills» Grouping of skills

Transition Matters» Skills assessment» Aligning pay with the knowledge structure» Access to training

Training and Certification» In-house or outsourcing training» Certification and recertification

Exhibit 2-6

Broadbanding Structure and Its Relationship to Traditional Pay Grades

and RangesA

nn

ual

Sal

ary

Band A Band B

Low HighJob Worth

Grade AGrade B

Grade C

Grade D

Grade E