Chapter 2

Strategy: The Totality of

Decisions
McGraw-Hill/Irwin

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter Topics
Similarities and Differences in
Strategies
Strategic Choices
Support Business Strategy
Support HR Strategy
The Pay Model Guides Strategic Pay
Decisions
2-2

Chapter Topics (cont.)

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

Exhibit 2.1: Three Compensation

Strategies

2-4

Similarities and Differences

in Strategies
Different strategies within the same
industry
Different strategies within the same
company

2-5

Strategic Choices
Strategy refers to the fundamental
directions that an organization
chooses
A strategic perspective focuses on
those compensation choices that help
the organization gain and sustain
competitive advantage

2-6

Exhibit 2.2: Strategic Choices

2-7

Support Business Strategy

Pay systems should align with the
organization's business strategy
Based on contingency notions

When business strategies change, pay

systems should also change

2-8

Exhibit 2.3: Tailor the Compensation

System to the Strategy

2-9

Support HR Strategy
The AMO theory by Boxall and
Purcell
P = f(A,M,O)

HR systems will be most effective

when:
Employee ability is developed through
selective hiring and training and
development

2-10

Support HR Strategy (cont.)

The compensation system motivates
employees
Roles allow employees to be involved in
decisions

2-11

Exhibit 2.5: Fit Between HR Strategy and

Compensation Strategy and Effectiveness

2-12

The Pay Model Guides Strategic Pay

Decisions
Five strategic compensation choices:

Objectives
Internal alignment
External competitiveness
Employee contributions
Management

2-13

The Pay Model Guides Strategic Pay

Decisions (cont.)
These decisions, taken together, form
a pattern that becomes an
organizations compensation strategy
Stated versus unstated strategies

2-14

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

Exhibit 2.6: Key Steps in Formulating

a Total Compensation Strategy

2-16

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

Competitive dynamics can be assessed

globally
2-17

Step 1: Assess Total Compensation

Implications (cont.)
HR strategy: Pay as a supporting
player or catalyst for change?
Pay strategy is influenced by how it fits
with other HR systems
Pay can be a supporting player, as in the
high-performance approach
Pay can take the lead and be a catalyst
for change

2-18

Step 1: Assess Total Compensation

Implications (cont.)
Culture/values
A pay system reflects the values that
guide an employer's behavior and
underlie its treatment of employees

Social and political context

Context refers to legal and regulatory
requirements, cultural differences,
changing workforce, demographics,
expectations etc
2-19

Step 1: Assess Total Compensation

Implications (cont.)
Affects compensation choices
Lobbying is also part of compensation
strategies

2-20

Step 1: Assess Total Compensation

Implications (cont.)
Employee preferences
How to better satisfy individual needs and
preferences
Choice
People do not understand the
alternatives; too many choices confuse
them
Challenging to design and manage

2-21

Step 1: Assess Total Compensation

Implications (cont.)
Disapproval from the U.S. Internal
Revenue Service
Requires meeting codes and regulations

2-22

Step 1: Assess Total Compensation

Implications (cont.)
Union preferences
Union preferences for different forms of
pay and their concern with job security
affect pay strategy
Unions' interests can differ
Compensation deals with unions can be
costly to change

2-23

Step 2: Map a Total Compensation

Strategy
A strategic map offers a picture of a
companys compensation strategy
based on the five choices in the pay
model
Clarifies the message the company is
trying to establish with its
compensation system
Maps do not tell which strategy is the
best; provides a framework and
guidance
2-24

Exhibit 2.8: Contrasting Maps of

Microsoft and SAS

2-25

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

2-26

Sources of Competitive Advantage:

Three Tests
Is it aligned?
Does it differentiate?
Does it add value?
Calculate the return on investment (ROI)

2-27

Best Practices versus Best Fit?

Best Practices
Assumptions:

Best Fit

Practices can be applied

universally across all
situations

A company is more
likely to achieve
competitive
advantage if the
pay system:

Results in better
performance with almost
any business strategy

Reflects companys
strategy and values

A set of best-pay
practices exists

Is responsive to
employees and unions
needs
Is globally competitive
2-28

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

2-29

Guidance from the Evidence (cont.)

Managing compensation
All dimensions of the pay strategy need
to be considered

Compensation strategy
Embedding compensation strategy
within the broader HR strategy affects
results

What practices pay off best under

what conditions is an important
question to be answered
2-30

Virtuous and Vicious Circles

A study concluded that how you pay
matters as much as how much you
pay
Studies conclude that performancebased pay that shares success with
employees improves employee
attitudes, behaviors, performance
especially when combined with highperformance practices
2-31

Virtuous and Vicious Circles (cont.)

Performance-based pay can be the
best practice under right
circumstances

2-32

Exhibit 2.9: Virtuous and Vicious

Circles

2-33