© 2010 McGraw Hill Ryerson 2-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson 2-2 Strategy  A fundamental business decision that an organization has made in order to achieve its strategic objectives e.g., what business to be in, how to gain competitive advantage  The greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization

© 2010 McGraw Hill Ryerson 2-3 Strategic Perspectives Toward Total Compensation (1 of 2) GoogleMedtronic ObjectivesEmphasis on innovation Commitment to cost containment Recognize contributions Attract and reward the best Focus on customers Fully present at work and in personal lives Recognize personal accomplishment and share success Attract and engage top talent Control costs Internal Alignment Minimize hierarchy Everyone wears several hats Emphasize collaboration Reflect job responsibilities Support promotional growth opportunities Foster team culture

© 2010 McGraw Hill Ryerson Strategic Perspectives Toward Total Compensation (2 of 2) GoogleMedtronic Externally Competitive Explore novel ideas in benefits and compensation Generous, unique benefits Market value of jobs establishes overall pay parameters Choices in benefits Employee Contributions Recognize individual contributions Unrivaled stock programs Incentives directly tied to business goals Opportunity to earn above- market pay Recognition of individual and team performance ManagementLove employees, ant to know it Technology support Clearly understood; open Technology support Employee choice 2-4

© 2010 McGraw Hill Ryerson 2-5 Corporate objectives, strategic plans, vision, and values Strategiccompensationdecisions Compensationsystems Employee attitudes and behaviours Competitiveadvantage Business unit strategies HR strategies Social,competitive, and regulatory environment Strategic Choices

© 2010 McGraw Hill Ryerson 2-6 Strategic Compensation Decisions  Objectives  Internal Alignment  External Competitiveness  Employee Contributions  Management

© 2010 McGraw Hill Ryerson Assess Total Compensation Implications Competitive Dynamics Core Culture / Values Social and Political Context Employee / Union Needs Other HR Systems 2. Map a Total Compensation Strategy Objectives Contributions Alignment Management Competitiveness 3. Implement Strategy Design System to Translate Strategy into Action Choose Techniques to Fit Strategy 4. Reassess the Fit Realign as Conditions Change Realign as Strategy Changes Key Steps to Formulate a Compensation Strategy

© 2010 McGraw Hill Ryerson 2-8 Competitive Advantage  Three tests to assess competitive advantage of a strategy: 1.Does the pay strategy align with the business strategy, economic and sociopolitical conditions, and the overall HR system? 2.Is the pay strategy different and difficult to imitate? 3.Does the pay strategy add value by providing a return on investment in compensation?

© 2010 McGraw Hill Ryerson “Best Fit” versus “Best Practices”  “Best fit” approach suggests that aligning compensation decisions with strategy will be most effective  “Best practices” approach suggests that a set of practices exist that work with almost any strategy Emerging evidence suggests that a focus on “What practices pay off best under what conditions?” will be most effective 2-9

© 2010 McGraw Hill Ryerson 2-10 Conclusion  Managing total compensation strategically means aligning compensation and business strategies  The three tests for whether pay strategy provides competitive advantage are: (1) does it align?; (2) does it differentiate?; and (3) does it add value?  The four-step process to develop a compensation strategy is: 1.assess environmental conditions 2.decide on the best strategic choices 3.implement the strategy, and 4.reassess the fit