1. Strategy: The Totality of Decisions
Chapter 2
Strategy: The Totality of Decisions
© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

2. Learning Objectives Similarities and differences in strategies
Strategic choices
Support business strategy
Support HR strategy
The pay model guides strategic pay decisions
2-2

3. Learning Objectives
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

4. Exhibit 2.1 - Three Compensation Strategies
2-4

5. Similarities and Differences in Strategies
Different strategies within the same industry
Different strategies within the same company
2-5

6. Strategic Choices
Strategy: Fundamental directions that an organization chooses
Strategic perspective
Compensation choices that help the organization gain competitive advantage
2-6

7. Exhibit 2.2 - Strategic Choices
2-7

8. Support Business Strategy
Aligns pay systems with organization's business strategy
Better the alignment, more effective is the organization
Contingency notion
Change in business strategies should result in change, pay systems
2-8

9. Exhibit 2.3 - Tailor the Compensation System to the Strategy
2-9

10. Support Business Strategy
Customer focused business strategy
Stresses delighting customers and bases employee pay on how well they do this
Cost leadership strategy- Firms that cut costs
Differentiation strategy
Unique and innovative product or service at a premium price
2-10

11. Support HR Strategy AMO theory HR systems will be most effective when:
P (Performance) = f(A,M,O)
A- Ability
M- Motivation
O- Opportunity
HR systems will be most effective when:
Employee ability is developed through selective hiring and training
2-11

12. Support HR Strategy Compensation system motivates employees
Roles allow employees to be involved in decision making
2-12

13. Exhibit 2.5 - Fit Between HR Strategy and Compensation Strategy and Effectiveness
2-13

14. The Pay Model Guides Strategic Pay Decisions
Strategic compensation choices
Objectives
Internal alignment
External competitiveness
Employee contributions
Management
Stated strategies - Written compensation strategies
Unstated strategies - Inferred from the pay decisions
2-14

15. 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

16. Exhibit 2.6 - Key Steps in Formulating a Total Compensation Strategy
2-16

17. 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
Assess global competitive dynamics
2-17

18. Step 1 - Assess Total Compensation Implications
HR strategy - Pay as a supporting player or catalyst for change?
Pay strategy
Is influenced by how it fits with other HR systems
Can be a supporting player, as in the high-performance approach
Can take the lead and be a catalyst for change
2-18

19. Step 1 - Assess Total Compensation Implications
Culture/Values
Guide an employer's behavior and treatment of employees
Reflected in the pay system
Social and political context
Legal and regulatory requirements
Cultural differences
Changing workforce
Demographics
Affects compensation choices
2-19

20. Step 1 - Assess Total Compensation Implications
Employee preferences
How to better satisfy individual needs and preferences
Choice
May confuse employees
Challenging to design and manage
Requires meeting codes and regulations
2-20

21. Step 1 - Assess Total Compensation Implications
Union preferences
Affect pay strategy
Unions' interests can differ
Compensation deals with unions can be costly to change
2-21

22. Step 2 - Map a Total Compensation Strategy
Strategic map
Provides compensation strategy based on pay model
Clarifies the message that company is trying to establish with its compensation system
Does not tell which strategy is best but provides a framework and guidance
2-22

23. Exhibit 2.8 - Contrasting Maps of Microsoft and SAS
2-23

24. Steps 3 and 4 - Implement and Reassess
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
2-24

25. Sources of Competitive Advantage: Three Tests
Is it aligned?
With the business strategy
Externally with the economic and socio-political conditions
Internally with HR system
Does it differentiate?
Does it add value?
Calculate the return on investment (ROI)
2-25

26. “Best Practices” versus “Best Fit”?
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
An organization is likely to achieve competitive advantage if the pay system:
Reflects company’s strategy and values
Is responsive to employees’ and unions’ needs
Is globally competitive
2-26

27. 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
2-27

28. Guidance from the Evidence
Managing compensation
Consider all dimensions of the pay strategy
Compensation strategy
Should be embedded within broader HR strategy
Identify what practices pay off best under what conditions
2-28

29. Virtuous and Vicious Circles
Research indicates that:
How you pay matters as much as how much you pay
Performance-based pay:
Improves performance when combined with high-performance practices
Can be the best practice under right circumstances
2-29

30. Exhibit 2.9 - Virtuous and Vicious Circles
2-30