Compensation Strategy

STRATEGIC PERSPECTIVES: Steps to Formulate a Total

Compensation Strategy

STRATEGIC PERSPECTIVES: Steps to Formulate a Total

Compensation Strategy

Steps to Formulate a Total Compensation Strategy 2

Group Members

Asif Anwar 03-05-08-054

Ashrafur Rashid Khan 03-04-06-041

Md. Rasula Kibria 03-05-08-022

Md. Anwar Hossain 03-05-08-027

Sadia Khan Mazlish 03-05-08-039


OVERVIEW

• The objective of every business organization is to maximize its profit. An organization is nothing without its employees. The employees work hard, generate ideas, sometimes give personal sacrifice etc. to take the organization toward its objective. The reward in return that the organization gives is compensation. It can be in the form of cash, stock options, good relation etc. Good/appropriate compensation can take the organization in a very competitive position resulting from its employees’ high morale, added effort and a sense of responsibility/ love towards the organization.


Need for Compensation Strategy?

Socio-Economic/ Organization HR/Compensation CompetitivePolitical Environment Strategy Policies Advantage

VS.

Socio-Economic/ HR/Compensation Organization Competitive Political Environment Policies Strategy Advantage


Strategic Choices

Corporate objectives, strategic plans, vision and values

Business unit strategies

HR Strategies

Social, competitive and regulatory environment

Strategic Compensation decisions

Compensation systems

Employee attitudes and behaviors

Competitive Advantage

What businessshould we be in?

How do we win (gain competitive advantage) in those business?

How should HR help us win?

How should total compensation help us win?


STEPS TO FORMULATE A TOTAL

COMPENSATION STRATEGY

1. Assess Total Compensation Implications

Culture and Values

Social, Economic and Political Context

Global Competitive Pressure

Employee/Union Needs

Other HR Systems

4. Reassess the Fit

Realign as Conditions Change

Realign as Strategy Change

2. Fit Policy Decisions Objectives Consistency Competitiveness Contribution Administration

3. Implementation Strategy Design System to Translate Strategy into Action Choose Techniques to Fit Strategy


Step 1: Assess Total Compensation Implications

a. Cultural Values

The values underlying an employer’s treatment of its employees are reflected in the pay system. Some employer’s articulate their philosophies. These philosophies guide their pay systems.

b. Social, Economic and Political Context

The environmental context also affects the compensation choices. Context refers to a wide range of pressures, including competitive pressures from product and labor markets, legal and regulatory requirements, cultural differences, changing workforce demographics, values and expectations etc. different regions of the world may require different approaches to pay. Also, living standards define the pay structure; where there is a high living standard, compensation package is relatively high rather than in a region with low living standards and less demand.


Step 1: Assess Total Compensation Implications (cont…)

c. Global Competitive Pressure

UK

US

A

Germ

any

Bangla

desh

Chin

a

India

Hourly Pay ($)

Paid Vacations

Hours w orked per Week0

5

10

15

20

25

30

35

40

45

50

Hourly Pay ($) Paid Vacations Hours worked per Week


Step 1: Assess Total Compensation Implications (cont…)

d. Employee Needs – Flexible Compensation Systems– Pay systems should be according to the need of individual employees

– An employee should be entitled to draw his salary the way he wants

e. Unions– Pay strategies also need to be adapted to the nature of the union-management

relationship.

– Internationally, the role of unions in determining pay varies greatly. In Europe, unions are major players and must be considered in any strategic pay decisions.

f. Role of Pay in Overall HR Strategy: On the Point, Support, Change Agent – The pay system in just one of many HR systems that make up the HR strategy

and the pay strategy in the organization

– In a highly decentralized and open organization where pay system is centralized and confidential, a successful operation of that company is highly doubtful.


Step 2: Fit The Policy Decision to Strategy

In step 1 we have discussed the factors that we should take into consideration to

design a total compensation strategy. Next we come into a policy decision to

formulate a compensation strategy.

Issues that are examined to fit this policy decision to company strategy includes -

– Objectives

– Consistency

– Competitiveness

– Contribution

– Administration


Step 3: Implement the Strategy

• Translate Strategy into Action

• Choose Technique to fit Strategy.

Step 4: Reassess the Fit

• Review the changed conditions and modify the Compensation strategy

• Modify the Compensation strategy with the change of company strategy.


COMPENSATION STRATEGY: SOURCES OF COMPETITIVE ADVANTAGE

A Company’s strategic compensation should be competitive. It provides the

sources of competitive advantages.

There are two ways to test whether the compensation is competitive or not.

1. Adding Value– By controlling cost

– By attacking and retaining critical talent

– By motivating people to learn and improve.

2. Difficult to Imitate– Competitors can not copy it.

– Organization’s business strategy and Compensation system fit together

– The fit among the compensation and other HR Activities

– Implementation of the compensation system.


COMPENSATION STRATEGY:

INTERNAL vs. EXTERNAL FACTORS • An organization Exists to accomplish specific Goals and objectives. • The individuals hired for the Organization have their own needs.

Hence there is a basis for an exchange – The Employee offers specific behavior desired by the Organization to meet its goals and objectives in return for money, goods, and services.

• If we go through the first four steps of compensation policy formulation, we can see that there are some external factors, such as social, economic and political context, global competitive pressure, etc are common for all organization that they have to consider in the same way before formulating compensation policy.

• But if we focus on internal factors, such as culture, value, objective, business policy, HR systems, we can observe that each organization differ from others.


Strategic Approaches

Recent studies have begun to research what really does matter, but

the answer is still fuzzy. Two alternative approaches have highlighted

that are-

1. Contingent business strategy approach – Which presumes that one size, does not fit all. The art of managing compensation strategically involves fitting the compensation system to the different business and environment condition.

2. Best Practice Approach – It assumes that there exist one best Way and focus on best implementation system.

Today’s business world is so dynamic, which is ever changing so in

practice we can say contingent business strategy approach is best

suitable.


CONCLUSIONAs each organization’s sustainability depends on the best effort of their employees, so to achieve competitive advantage over others each organization must focus on some basic individual factors of the employee to motivate and make enthusiastic them to work. These factors are -

1. Monetary return2. More socio-psychological return

So from the overall discussion we can conclude that before formulation of a compensation policy an organization should –

– Asses the environmental condition that exists– Decide the best strategic choice that based on the organizations objectives,

contingency, competitiveness, contributions and administration.– Implement the strategy, and – Reassess the fit

To do that one standard policy is not appropriate, so it is from our view is the best way to follow the Contingent business strategy or Environmental context approach considering the individual employee needs of the organization.


What Do You Want It To Do?

1. The basis of compensation. – Performance – Tenure – Cost of living – Owner’s discretion

2. Which positions are being addressed. 3. Which compensation components will be included in the compensation program.

– Base pay – Employee benefits – Perquisites – Short-term incentives – Long-term incentives

4. The assumptions and priorities of the firm related to compensation. For example: – The current group of professionals are key assets to be retained. – We expect incentive compensation to play a key role in the overall compensation strategy

because it helps focus on performance and business objectives. 5. The goals of the program. For example:

– The compensation program should be as competitive as possible when viewed in its entirety. – To the extent possible, the compensation program should allow for individual options and

choices. – The compensation program should be as simple as possible. – The compensation plan should be perceived as fair by the employees. – The compensation program should be affordable. – The compensation plan should be clearly communicated to all participants.

Compensation Strategy

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