15-1 strategy: the totality of decisions strategic perspective
TRANSCRIPT
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15-1
Strategy: The Totality of Decisions
Strategic Perspective
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When business strategies change,
pay systems should also
change
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Five Strategic Guidelines for Compensation Choices
• Objectives
• Internal Alignment
• External Competitiveness
• Employee Contributions
• Management
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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
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Step 1: Assess Total Compensation Implications
• Competitive Dynamics – Understand the Business– Changing customer needs– Competitors’ actions– Changing labor market conditions– Changing Laws– Globalization
• Competitive dynamics can be assessed globally
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Toshiba’s Managerial Compensation Plan, Annual Amount (in Yen)
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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.
– Affects compensation choices– Lobbying is also part of compensation strategies
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Medtronic Values
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Step 1: Assess Total Compensation Implications (cont.)
• Employee preferences– How to better satisfy individual needs and
preferences• Choice – Examples: Flexible benefits and choices• Union preferences– Pay strategies need to be adapted to the nature of
the union-management relationship– Unions' interests can differ– Compensation deals with unions can be costly to
change
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Step 1: Assess Total Compensation Implications (cont.)
• Prominence of pay in overall HR strategy: Supporting player or catalyst for change– Pay strategy is influenced by how it fits with other
HR systems– High-performance systems• High skill/knowledge requirements• Work designed so that employee teams enjoy
discretion in making decisions and continue to learn• Pay systems based on performance
– Pay can be a supporting player or a catalyst for change
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Step 2: Map a Total Compensation Strategy
• Mapping is used in marketing to clarify and communicate a product's identity
• Offers picture of a company’s 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”, providing rather framework and guidance
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Contrasting Maps Of Microsoft And SAS
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Steps 3 and 4: Implement and Reassess
• Step 3 – Involves implementing strategy through the design
and execution of compensation system
• Step 4– Reassess and realign, closes the loop and
recognizes that the strategy must be changing to fit changing conditions
– Involves periodic reassessment
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Sources of Competitive Advantage: Three Tests
• Three tests determine if a pay strategy is a source of advantage
Is it aligned? Does it differentiate? Does it add value?
– Calculate the return on investment (ROI)
Whichhat is unique?
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Best Practices” Versus “Best Fit”?Best Fit
• If design of pay system– Reflects company’s
strategy and values
– Is responsive to employees’ and unions’ needs
– Is globally competitive
• Company is more likely to achieve competitive advantage
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
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Guidance from the Evidence
• Consistent research evidence that the following practices do matter to the organization's objectives– Internal alignment• Pay differences among internal jobs can affect results
– External competitiveness• Paying higher than average paid by competitors can
affect results– Employee contributions• Performance-based pay can affect results
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Guidance from the Evidence (cont.)
– Managing compensation• Need to consider all dimensions of pay strategy
– 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
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Virtuous and Vicious Circles
• One study concluded that how you pay also matters as much as how much you pay
• Studies conclude that performance-based pay that shares success with employees improves employee attitudes, behaviors, performance – especially when combined with high-performance practices
• Performance-based pay can be the best practice under right circumstances
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Virtuous and Vicious Circles (cont.)