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INTRODUCTION

A strategic perspective on compensation takes the

position that how employees are compensated can be a
source of sustainable competitive advantage.
Two alternative approaches are highlighted:
A “best fit” / contingent business strategy / environmental
context approach; and
A “best practices” approach.
The “best fit” approach presumes that one size does
not fit all. The art of managing compensation
strategically involves fitting the compensation system to
the different business and environmental conditions.

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INTRODUCTION (cont…)

The best practices approach assumes that there exists

a universal, best way.
The four-step process for forming and implementing
a compensation strategy includes:
Assessing conditions
Deciding on the best strategic choices following the pay
model
Implementing the strategy through design of the pay
system
Reassessing the fit

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OBJECTIVES OF REWARD SYSTEMS

Lawler is one of the best known writers in the field of reward

management.
 
Attract and retain employees

Motivate performance

Promote skill and knowledge development

Contribute to corporate culture

Reinforce and define structure and

Determine pay costs Free Powerpoint Templates

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 Pay-Design Process

Before any new compensation program is designed, there must be

a clear understanding by the organization of:

its current values

its structure

its people

its goals and vision for the future

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Controversies that Surround Pay for
Performance Plans

Single Mindedness

Control

Measurement error

Inflexibility

Misalignment of incentives

Line of Sight problem

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 Key Steps to Formulate a Compensation Strategy
1.
1. Assess
Assess Total
Total Compensation
Compensation Implications
Implications
• Competitive Dynamics
• Core Culture / Values
• Social and Political Context
• Employee / Union Needs
• Other HR Systems

2.
2. Fit
Fit Policy
Policy Decisions
Decisions to
to Strategy
Strategy
4. Reassess the Fit
• Objectives • Contributions
• Realign as Conditions Change
• Alignment • Administration
• Realign as Strategy Changes
• Competitiveness

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

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 Basic Issue: Does “Best Fit” Pay Off?

Socioeconomic / Organization
Organization HR
HR // Compensation
Compensation Competitive
Competitive
Political Environment Strategy
Strategy Policies
Policies Advantage
Advantage

Socioeconomic
Socioeconomic // HR
HR // Compensation
Compensation Organization
Organization Competitive
Competitive
Political
Political Environment
Environment Policies
Policies Strategy
Strategy Advantage
Advantage

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 Best Practices Options
THE NEW PAY
 External market-sensitive-based pay,
not internal alignment
 Variable performance-based pay, not
annual increases
 Risk-sharing partnership, not
entitlement
 Flexible opportunities to contribute, not
jobs
 Lateral promotions, not career path
 Employability, not job security
 Teams, not individual contributors
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HIGH COMMITMENT
 High wages: You get what you pay for
 Guarantee employment security
 Apply incentives; share gains, not risks
 Employee ownership
 Participation and empowerment
 Teams, not individuals are base units
 Smaller pay differences
 Promotion from within
 Selective recruiting
 Enterprise-wide information sharing
 Training, cross-training, and skill
development are crucial
 Symbolic egalitarianism adds value
 Long-term perspective matters
 Measurement matters
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CONCLUSION
Both approaches view HR as having an important role in
supporting organizational strategy and objectives.

Both approaches agree that reward practices should be

consistent with other HR practices.

Both see rewards as a way of reinforcing organizational culture

and structure.

Best fit is a contingency approach while best practice is a

universal approach.

For best fit, organizational strategy comes first and all

organization systems and practices, including reward follows,
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