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Module Objectives

Readings

Activities and Evaluations

Similarities and Differences in Strategies

Different business units, even within the same company, can have different business conditions and as a
result have very different strategies. They will, as a result, use different compensation strategies such as
objectives, internal and external equity, employee contributions and management. In addition,
companies in the same basic industry, such as Microsoft and Google compete for essentially the same
pool of skilled candidates so it is important for each of them to differentiate from its competitors.

Strategic Choices

Compensation Strategies require decisions that are ongoing as opposed to being static and fixed. There
is a relationship between strategy and competitive advantage. The following questions need to be
asked:

1. What business should we be in?

2. How should we gain and sustain competitive advantage in this business?

3. How should HR help us win?

4. How should total compensation help us win?

Strategy refers to fundamental business decisions that an organization makes in order to achieve its
strategic objectives, such as what business to be in and how to obtain competitive advantage.

Competitive Advantage is a business practice or process that results in better performance than the
competition. It should support Business Strategy and HR Strategy.

It should always support business strategy since the primary reason for a business strategy is to obtain
competitive advantage in any case; once the business strategy is set, the HR strategy can follow.

From that, compensation systems including recruiting and selecting, retraining, rewarding,
compensating and motivating are all linked to the HR strategy.

The Pay Model and Strategic Pay Decisions

The Pay Model can be used to assess the strategic decisions along the following dimensions:

1. Objectives. How should compensation support the business strategy?

2. Internal Equity. How differently should the different types of skill levels and work be paid in the
organization?
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3. External Equity. How should total compensation be positioned against competitors?

4. Employee contributions. Should pay increases be based on individual or team performance, or

5. Management. How open and transparent should pay decisions be to all employees?

Steps to Develop a Total Compensation Strategy

Step 1 - Assess Total Compensation Implications

A. Business Strategy and Competitive Dynamics: Organizations need to understand the industry in
which they operate and with which they compete. Competitive dynamics can be assessed globally; pay
comparisons between countries can be difficult because of different practices and priorities.

B. HR Strategy. Is Pay a Supporting Role or a Catalyst for Change?: Compensation must fit the HR
Strategy so functions like performance systems support the HRM strategy. A flexible compensation
system can be used to activate changes in the HR strategy.

C. Culture/Values: Pay systems need to be consistent with the overall philosophy of the company and
the way it does business and the way it treats employees in the organization.

D. Social and Political Context: Due to legal and regulatory requirements, cultural differences and
changing work force demographics, expectations take on new meaning in a global context.

E. Employee Preferences: Employee preferences are different; to the extent possible, pay systems can
be designed to reflect these differences by increasing flexibility in the system.

F. Union Preferences: The influences of unions in Canada and Europe are major. Organizations must
consider union wishes and work to design a pay system that will accomplish its goals while satisfying the
union.

Step 2 - Map the Strategy

Step 3 - Implement the Strategy

Step 4 - Assess and realign the Strategy to Insure Achievement of Objectives

Four Decisions are outlined in the Pay Model

1. Set Objectives

2. Policy Choices: internal equity; external equity, employee contributions and management

3. Implement the Strategy: design and execution of the compensation system

4. Reassess the Fit: from changing conditions and realigns the strategy to close the loop; allow the
opportunity for continuous improvement.
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Source of Competitive Advantage-Tests

1. Is it Aligned? Is it aligned with the business strategy, externally with the economic and political
conditions and internally with the overall HR system?

2. Does it Differentiate? Differentiating is how the pay system is different from others.
Competitive advantage strengthens if the pay system is unique and can’t be copied.

3. Does it Add Value? Adding value is finding ways to calculate the ROI from incentives, benefits
and base pay. Allows focus on human capital as the recipient of company expenditures.

Best Fit

The challenge in any organization is to design the fit with the environment, business strategy, and pay
plan. The better the fit, the greater the competitive advantage.

Best Practices

The Best Practices perspective suggests that there is one best pay practice that can be applied
universally across situations and strategies attracting superior employees who then create a winning
strategy.

Pay-Satisfaction Model

Lawler (1971) theorized that satisfaction with pay greatly impacts an employee’s work attitude. Lawler
developed a model of pay-satisfaction that states that pay-satisfaction is dependent on two perceptions:

1. The perceived amount of pay that should be received

2. The perceived amount of pay received.

The perception of amount of pay received is based on wage history, actual pay rate and the perceived
pay of a comparison. However, in subsequent testing of variables affecting satisfaction, Lawler’s Pay-
Satisfaction Model failed to be a consistent predictor of pay satisfaction.

Additional Resource

Read more about the Pay-Satisfaction Module in Pay Satisfaction: An Empirical Test of a Discrepancy
Model (Shapiro and Wahba, 1978)

Summary

1. The four steps to develop a total compensation strategy are:

1. Assess total compensation implications including business strategy, competitive

2. Map out a total compensation strategy;

3. Implement the strategy;

4. Assess and realign the strategy to insure achievement of objectives.

2. To improve organizational effectiveness, managers should align the compensation strategy to

3. The three tests to determine if the pay strategy is a source of competitive advantage are:

1. Does it Align?

2. Does it Differentiate?

3. Does it Add Value?

4. The Best Fit perspective suggests that compensation be aligned or fit to maximize competitive
advantage. The Best Practices perspective suggests that there is one best pay practice that can
be applied universally across situations and strategies attracting superior employees who then
create a winning strategy.