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Page 1
The compensation
strategy formulation
process
The compensation
strategy formulation
process
Formulating the
compensation strategy
Formulating the
compensation strategy
Constraints on
compensation
Constraints on
compensation
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DATE TAKESCENES
7 1
PRODUCTIONOF
CREATED BY
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INTRODUCTION...
1
... The compensation strategy process..
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Constraints on
compensationThe
compensation
strategy
process Reward &compensation
strategyFourKey
understandings
Formulating
the
compensation
strategy
SCENE
1
Formulating the reward & compensation strategy
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Constraints on
compensationThe
compensation
strategy
process Reward &compensation
strategyFourKey
understandings
Formulating
the
compensation
strategy
SCENE
1
Formulating the reward & compensation strategy
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Four Key Understandings
Understanding your organisational context
Understanding your people
Understanding your compensation options
Understanding your compensation constraints
Reward &
compensation
strategy
SCENE
1
Formulating the reward & compensation strategy
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The compensation strategy process
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CONSTRAINTSON COMPENSATION
Legislated constraints
Labour market constraints
Product/Service constraints
Financial constraints of the organisation
Reward &
compensation
strategy
SCENE
1Formulating the reward & compensation strategy
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FORMULATING THE COMPENSATIONSTRATEGY
Define the required behaviour
Define t
he role of compensation
Determine the compensation mix
Determine compensation level
Evaluate the proposed strategy
Reward &
compensation
strategy
SCENE
1Formulating the reward & compensation strategy
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CASESTUDY
Southwest Airlines...
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Southwest Airlines Co. is an American
low-cost airline
The airline has its headquarters on the
grounds in Dallas, Texas
Southwest is the largest airline in the
world by number of passengers carried
per year.
Southwest maintains the third-largest
passenger fleet of aircraft among all of
the world's commercial airlines
Southwest operates more than 3,200
flights daily
Southwest Airlines has not had any
passenger deaths on any of its planes in
its history, but has had eight incidents/
accidents
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1
SouthwestAirlines Strategic Reward System
Strategic Base Pay
Strategic Benefits
Strategic Incentives
Strategic Recognition Programmes
Im lications for Management
Successful Reward System
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3
4
5
6
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Strategic Base Pay
3
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3SCENE
Strategic Base Pay ofSWA
One of the key aspects ofSWAs strategy is to retain valued employees and secure long-termcommitment
These objectives are attained, in part, though seniority and job security clauses in the collective-bargaining agreement.
Negotiated agreements reflect pay levels consistent with or slightly below market wages and
salaries. This helps to keep labour costs in line with the companys low-cost provider strategy. Employees can share in the company success throughvarious contingent compensation
programmes, thereby increasing their overall pay. In fact, many ofSWAs employees aremillionaires, including all of those who started with the company in 1971.
In terms ofexecutive compensation, the CEO is paid at below the median of the market forexecutives in companies of similar size.
Other senior managers are compensated slightly above the market, but they retain a smallerportion of the companys stock.
In this manner, company executives are relatively underpaid in cash compensation, but theyare committed to the companys long-term financial success and growththrough stock ownership
Employees and executives have the same opportunities for stock ownership.
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4
Strategic Benefits
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1
2
3
SWA offers medical
insurance, dental
insurance, vision
coverage, life insurance,
long-term disability
insurance, dependent care,
adoption assistance andmental health assistance,
among others (at no cost
to employees)
Employees and
their family fly
free with SWA and
enjoy discounted
travel with other
carriers.
Employees also
receive
thoughtful gifts
on major life
achievements
and a chance to
celebrate often
Strategic Benefits
It includes both traditional programmes and a few innovative initiatives
Benefits help to reinforce the organisations strategic intent of valuing its employees.
SCENE
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A tip:
One of the key concepts behind thisarray of benefits is the assurance that
employees matter at SWA and thatthe company will do its utmost to take
care of its most important stakeholder.
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5
Strategic Incentives
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SCENE
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The profit-sharing program,initiated in 1973, is strategic inthat it encourages employees tokeep costs as low as possible(thus likely higher profits), a keyaspect of company strategy.
Profits are shared equally basedon employee earnings andcompany profits, with those whowork longer hours or fly extratrips receiving a larger portion ofthe profit-sharing payouts.
The programme is composed ofa cash component, as well as adeferral to retirement account;however, as a result of employeerequests, beginning in 1990 the
total payout was made on adeferral basis, therebyincreasing the retirementbenefits of the employees.
In addition to the profit-sharinginvestment options, employeesmay purchase stock from payrolldeductions at a discount throughthe employee stock purchaseplan.
Employees now own about 12%of the company
The pilot contract allows for evengreater investments in thecompany through stock options.
Employees are acutely aware thatthe firms performance is pivotalto their pocketbooks.
The stock price is displayed ineach SWA facility so as to allowthe employees to keep a constanttrack ofSWAs and their owndestiny.
Corporate-wide
profit-sharing
programme
Employee stock
purchase plan
Two main contingent or variable pay systems
Strategic Incentives
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Strategic RecognitionProgrammes
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Strategic recognition programmes are at both the corporate and local
unit levels, and reward and celebrate exemplary service and
behaviours, as well as employee
s birt
hdays anniversaries, etc.
They all enjoy the support of top management, with senior executives
including the CEO often gracing the reward ceremonies; they mean
something to employees/winners; and they encourage behaviours
linked to firm strategy
These include the Heroes of the Heart programme, the Presidentsawards, and the Winning Spirit awards. (Behind the scene heroes).
The name of the winning group is painted on one ofSWAs aircraft. An
article is also run in the companys in-flight magazine, as well as itsnewsletter.
There are several other awards/recognition programmes at SWA,
including programs such as TogetherWe Make It Great, Ticket tothe Future, Walk a Mile, Helping Hands, Stuck on Service, and
Go See Do. These exhibit similar characteristics as the above in that
they promote behaviours pivotal in achieving the firms goals and
strategy.
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7
Implications for
Management
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There is no universal right reward strategy
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Implications forManagement
4There must be a supportive organisational culture for
these rewards to be effective.
5There must be a continuous evaluation of the
effectiveness of new reward systems and strategies.
3
These rewards must have meaning and value.
Winners must feel proud about their achievements.
2The planning and delivery of these rewards must explicitly
demonstrate commitment from organisational leaders.
1The reward system must be aligned with organisational
philosophy and strategy.
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THEEND
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Any Questions?Any Questions?Thank You AllThank You All