1. This week our seminar covers topics from chapters 1 and 2 in the text.
Chapter 1 begins with a discussion of how compensation is viewed from differing perspectives. Pay attention to the forms of pay, the pay model, and the four policies that every employer must address to accomplish its organizational compensation objectives.
Chapter 2 describes the idea of how a compensation strategy can be used to gain a competitive advantage in an industry. We will focus on the four steps involved in developing a total compensation strategy.
Chapter 1
The Pay Model
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Unit Topics
Compensation: Definition
Forms of Pay
A Pay Model

3. Perspectives of Compensation
Society’s Views
Stockholders’ Views
Employees’ Views
Managers’ Views

4. Perspectives of Compensation (cont.)
Society
Considers pay as a measure of justice
Benefits as a reflection of justice in society
Stockholders
Using stock to pay employees creates a sense of ownership and improves performance
Linking executive pay to company performance supposedly increases stockholders' returns

5. Perspectives of Compensation (cont.)
Managers
Major expense
Used to influence employee behaviors and to improve the organization's performance

6. Perspectives of Compensation (cont.)
Employees
Major source of financial security
Return in an exchange between employer and themselves
Entitlement for being an employee of the company
Reward for a job well done

7. Perspectives of Compensation (cont.)
Incentive and sorting effects of pay on employers’ behaviors
Incentive effect - degree to which pay influences individual and aggregate motivation among the employees
Sorting effect - effect that pay can have on the composition of the workforce
Different types of pay strategies may cause different types of people to apply to and stay with (i.e., self-select into) an organization. In the case of pay structure/level, it may be that higher pay levels help organizations to attract more high-quality applicants, allowing them to be more selective in their hiring. Similarly, higher pay levels may improve employee retention.

8. What is Compensation?
Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship

9. Exhibit 1.4: Total Returns for Work

10. Forms of Pay
Base wage
It is the cash compensation that an employer pays for the work performed
Some pay systems set base wage as a function of the skill or education an employee possesses

11. Forms of Pay Merit pay/cost-of-living adjustments
Merit increases are given in recognition of past work behavior
Cost-of-living adjustments give the same increases to everyone, regardless of performance

12. Forms of Pay (cont.) Incentives (variable pay)
Tie pay increases directly to performance
Do not increase base wage; must be reearned each pay period
Potential size of the payment will generally be known beforehand
Are one-time payments, and do not permanently increase labor costs
May be long-term (stock options) or short-term

13. Forms of Pay (cont.) Benefits
Income protection (Medical insurance, retirement programs, life insurance, and savings plans)
Work/life balance (vacations, jury duty, financial planning, referrals for child and elder care, telecommuting, nontraditional schedules, nonpaid time off)
Allowances

14. Forms of Pay (cont.)
A present-value perspective shifts comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions
Relational returns from work (nonfinancial returns) have a substantial effect on employees’ behavior

15. Forms of Pay (cont.)
Network of returns is more likely to be useful if bonuses, development opportunities, and promotions all work together

16. A Pay Model Three basic building blocks: Compensation objectives
Policies that form the foundation of the compensation system
Techniques that make up the compensation system

17. Compensation Objectives
Guide the design of the pay system
Serve as the standards for judging the success of the pay system

18. Four Policy Choices Internal alignment
Compares jobs or skill levels inside a single organization
Pertains to the pay rates both for employees doing equal work and for those doing dissimilar work
See the Lawler article, PP for details on these points. 18

19. Four Policy Choices (cont.)
Pay relationships within an organization affect employee decisions to:
Stay with the organization
Become more flexible by investing in additional training
Seek greater responsibility
See the Lawler article, PP for details on these points. 19

20. Four Policy Choices (cont.)
External competitiveness
Focus – pay comparisons with competitors
Pay is ‘market driven’
Objective:
To ensure that pay is sufficient to attract and retain employees
To control labor costs to ensure competitive pricing of products/ services
See the Lawler article, PP for details on these points. 20

21. Four Policy Choices (cont.)
Employee contributions
Directly affects employees’ attitudes and work behaviors
Management
Focus - right people get the right pay for achieving the right objectives in the right way

22. Chapter 2 Strategy: The Totality of Decisions
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

23. Chapter Topics Similarities and Differences in Strategies
Strategic Choices
Support Business Strategy
Support HR Strategy
The Pay Model Guides Strategic Pay Decisions

24. Chapter Topics (cont.)
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

25. Exhibit 2.1: Three Compensation Strategies

26. Similarities and Differences in Strategies
Different strategies within the same industry
Different strategies within the same company

27. Strategic Choices
Strategy refers to the fundamental directions that an organization chooses
A strategic perspective focuses on those compensation choices that help the organization gain and sustain competitive advantage

28. Exhibit 2.2: Strategic Choices

29. Support Business Strategy
Pay systems should align with the organization's business strategy
Based on contingency notions
When business strategies change, pay systems should also change

30. Exhibit 2.3: Tailor the Compensation System to the Strategy
HR systems will be most effective when:
Employee ability is developed through selective hiring and training and development
The compensation system motivates employees
Roles allow employees to be involved in decisions

31. The Pay Model Guides Strategic Pay Decisions
Five strategic compensation choices:
Objectives
Internal alignment
External competitiveness
Employee contributions
Management

32. The Pay Model Guides Strategic Pay Decisions (cont.)
These decisions, taken together, form a pattern that becomes an organization’s compensation strategy
Stated versus unstated strategies

33. 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

34. Exhibit 2.6: Key Steps in Formulating a Total Compensation Strategy

35. 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
Competitive dynamics can be assessed globally

36. Step 1: Assess Total Compensation Implications (cont.)
HR strategy: Pay as a supporting player or catalyst for change?
Pay strategy is influenced by how it fits with other HR systems
Pay can be a supporting player, as in the high-performance approach
Pay can take the lead and be a catalyst for change

37. 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

38. Step 1: Assess Total Compensation Implications (cont.)
Employee preferences
How to better satisfy individual needs and preferences
Choice
People do not understand the alternatives; too many choices confuse them
Challenging to design and manage

39. Step 1: Assess Total Compensation Implications (cont.)
Union preferences
Union preferences for different forms of pay and their concern with job security affect pay strategy
Unions' interests can differ
Compensation deals with unions can be costly to change

40. Step 2: Map a Total Compensation Strategy
A strategic map offers a 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”; provides a framework and guidance

41. Exhibit 2.8: Contrasting Maps of Microsoft and SAS

42. 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

43. Sources of Competitive Advantage: Three Tests
Is it aligned?
Does it differentiate?
Does it add value?
Calculate the return on investment (ROI)

44. “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
Best Fit
A company is more 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

45. 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

46. Guidance from the Evidence (cont.)
Managing compensation
All dimensions of the pay strategy need to be considered
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

47. Virtuous and Vicious Circles
A study concluded that how you pay 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

48. Virtuous and Vicious Circles (cont.)
Performance-based pay can be the best practice under right circumstances