Download - 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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-merging Compensation Issues
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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-merging Compensation Issues
Emerging Pay Methods Issues
Issue From to0ommunication Secret 9pen
"esign Top "on 5road involvement
"esign Traditional Strategy "riven
Pay mi% Standard 0hoice