Human Resource Strategy z

First Quarter 2009

Rewards Strategies
and Programs: Innovation
Versus Emulation

A
fundamental question facing total rewards
practitioners is whether the rewards strategies
and programs they use in their organizations
should look like those of high-performing competitors
or whether they should be unique to the organization,
potentially providing a competitive advantage. Paying Robert J. Greene, Ph.D.,
CCP, CBP, GRP
20 percent less than organizations who are the direct Reward $ystems Inc.

competitors for talent has rarely been shown to be a

winning strategy. But is paying, on average, exactly what
those competitors pay the correct answer? And is paying
in exactly the same way (e.g., a base pay, variable pay
and benefits mix) appropriate? A related issue is whether
the rewards strategies for all parts of the organization
should be consistent. These two questions together raise
the “innovate or emulate” issue that must be addressed
by all organizations … and the “same as” or “uniquely
different” approach applies to intra- as well as inter-
organization comparisons.
The internal consistency versus customization and
the external emulation versus innovation decisions are
explored in this paper. The objective is to treat HR as a
decision science and to provide a framework for making

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informed decisions about the type of rewards strategy and programs to be
adopted and implemented.

INTERNALLY CONSISTENT OR CUSTOMIZEd?

The author conducted a study for the board of one of the world’s largest private
organizations to determine if the same direct compensation management strategies
and practices should be used for all of its 10 major business units. The decision
makers found it difficult to decide whether it was better to be consistent across
business units or to locally customize to produce a better fit to each context.
The business units ran the gamut from high-tech innovation to low-tech
manufacturing, employing workforces that were dramatically different across
the divisions. One key issue was whether there should be a common salary
structure with job-grade assignments based on job evaluation and pay ranges
tied to national market data (international operations were excluded initially).
After 70 to 80 consultant interviews with the key executives of each business
unit, the opinions leaned strongly toward local customization. When the execu-
tives of the corporate staff functions were interviewed, the consensus was very
different than that of the unit executives, favoring standardization. Few would
be surprised by that result, as where one is in the corporate hierarchy generally
impacts one’s world view. Global organizations wrestle mightily with this “global
versus local” issue, and it is generally found that expatriates sent from corporate
are more inclined to favor global consistency than local nationals who grew
up within the business in the host location. Human nature explains these
varying perspectives, but it does not help the rewards strategist decide the
best approach.
In large, diverse organizations, much needs to be learned by looking across
the functions, business units and locations within the organization. Lew Platt,
the former CEO of Hewlett-Packard, once lamented, “If only Hewlett-Packard
knew what Hewlett-Packard knows.” Dissemination of innovation and emulation
within an organization can be the most efficient and least risky way to innovate.
Benchmarking against external organizations requires that the necessary infor-
mation is made available, but many effective rewards strategies are treated by
their users as a competitive advantage and a trade secret. It is much easier to
get cooperation from other units within the organization, and often corporate
provides the resources to create access to information. Increasingly, organizations
do “lessons learned” assessments after design and implementation of programs
and make these available through a database accessible through an intranet.
It is also much easier to contact those involved to do in-depth analysis of what
worked and what could have been done better if the parties are internal.
Many corporate HR policies prescribe design features to guide line management
in the design of tools, such as incentive compensation plans. But increasingly,
policies are more principle-based than rule-based, enabling plans to be designed

56 WorldatWork Journal
so they fit local contexts while remaining consistent with global principles.
One business unit might adopt an all-employee incentive plan tied to profits that
is distributed in an egalitarian fashion, a good fit to the local culture. Another
may differentiate between employees based on their performance appraisal rating
when distributing the profit-sharing fund, a good fit to its culture. Both base
compensation actions on performance, a principle mandated by corporate, but
they distribute it differently to achieve a better local fit.
As organizations increasingly struggle to meet their needs for talent, they are
attempting to look within to find people who are ready for added responsibility
and/or who can be developed to assume higher-level roles. A benefit of a consistent
rewards strategy is that mobility across units and functions is facilitated.
If different parts of the organization have dramatically different rewards strate-
gies, potential candidates may be reluctant to make the change. For example, if a
candidate from a division paying higher salaries with lower incentive opportuni-
ties is considering a move to another division that pays lower salaries with higher
incentive opportunities, how will that person feel about taking a salary cut?
Or starting the new role at or above his/her new salary-range maximum? It could
be argued that employees who do not prefer the high-incentive opportunity
should probably not make the move, as they might not fit culturally in the new
environment. But potential mobility issues should be identified in advance and
taken into account when developing the corporate philosophy dealing with the
consistency versus customization question.

EMULATE OR DIFFERENTIATE?
Benchmarking is common practice in the management world and the search
for best practices is an ongoing quest for formulating strategies. It is, of course,
prudent to know how one’s competitors are doing. It is also critical to know
why those strategies seem to work well or poorly. This sort of evidence helps
to inform management decisions and ensure that these decisions take advan-
tage of the experience of other organizations. When rewards strategy is the
issue, however, the relevance and value of benchmarking becomes a particu-
larly difficult determination to make (Greene 2008). The strategist attempting
to benefit from the practices of other organizations must decide if something
that worked “over there,” will produce the same positive results “here.” If six
successful competitors are surveyed, and it is found that four of them have
adopted gainsharing plans in their manufacturing plants, what does that tell
the strategist? If four adopters claim increased productivity, does that make
gainsharing a more attractive prospect? And what is the conclusion if the other
two organizations implemented gainsharing plans and then abandoned them?
The successful human resources management strategies are most often measured
in subjective terms such as these, yet benchmarking can be a valuable tool
for making decisions … if it is done the right way.

First Quarter | 2009 57

FIGURE 1 B enchmarking HR Strategies Figure 1 presents a framework for
Contextual deciding whether what worked else-
Evaluation
where can be imported and produce
similar results.
Competitor How Will It Our
Organizations Work Here? Organization
Contextual Evaluation
Conceptual
To compare contexts between one’s
Evaluation organization and those of competi-
tors, it is mandatory to understand
the business strategies employed
and how they influence the manage-
ment systems in place. Organizations employing different strategies may use
similar metrics to define overall performance (e.g., profitability, growth, cash flow
and customer loyalty), but they may view the path to performance differently.
Even though Wal-Mart and Costco might target profitability (as measured by return
on investment) as their key performance metric, it would be folly to assume their
business strategies for generating results are similar, especially their HR strategies.
The differences in pay levels between the two organizations are widely publicized,
as are differences in percentage of full-time employees, percentage of employees
receiving benefits and so on. The product lines offered in their stores differ and
the income levels of their customers differ, so the reality that the CEOs have
adopted different rewards strategies can be explained better if one examines how
differently they pursue the same overall performance results.
Finding competitor organizations in the same industry and of the same relative
size is usually possible, and often relative-performance metrics are available, particu-
larly if the entities are publicly traded. But to predict whether a particular program
used by another organization will produce the same results, the contexts of the
organizations must be compared. Costco management believes that higher pay levels
and more generous benefits increase the chances of having a more qualified and
satisfied workforce which, in turn, provides service levels expected by the customers
it counts on for its revenues. Wal-Mart management sees a different picture and
follows a different strategy. They both perform well as their rewards strategies fit
their contexts, not because a specific approach is effective in all contexts.
A model for defining organizational context and for evaluating what types of
rewards strategies will fit is shown in Figure 2. This model can also be used to
compare across contexts, either within the same organization or when comparing
to other organizations.
Once the mission/vision, culture, internal and external realities and struc-
ture are compared across organizations, it is also necessary to evaluate the HR
strategy being employed. Rewards strategies must integrate well with staffing,
development and performance management strategies adopted by the organization.
For example, if the comparator organization uses an HR strategy involving hiring

58 WorldatWork Journal
job-ready candidates, with little subse- FIGURE 2 D eriving Rewards Strategy
From Organizational Context
quent investment in development,
it is likely it will pay at higher levels Vision/
Mission
to induce people to take the same
job they are doing for someone Culture
else and suffer all the challenges
associated with changing employers. External
Strategy
Internal
Realites Realities
When the organization attempting
to formulate a rewards strategy Structure
compares to that organization, it must
be certain that its staffing and devel- HR Strategy
z Staffing
opment strategies are similar to those
z Development
of the comparator, or that differences z Performance
Management
are considered and factored into the
z Rewards
comparison. If its strategies are to Management

hire minimally qualified people and

invest in significant development,
it is likely that its pay targets should
be lower than the comparator organization, as it is not paying the “theft premium”
incurred when attempting to recruit job-ready people. This detailed information
about the various components of HR strategy of competitors is apt to be devilishly
difficult to get. But to make decisions about rewards strategy, the value of this
intelligence is high, and recognizing this fact may lead the practitioner to expend
the extra resources to gather it.
One approach to rewarding performance that has recently attracted wide-
spread emulation is the General Electric “20-70-10” forced distribution of
performance ratings for executive-level personnel, with rewards conse-
quences tied to the ratings. The number of companies adopting this approach
would lead an observer to think the Holy Grail had been found. But for this
approach to work, it requires well-trained managers who are willing to evaluate
people honestly and to confront them with the truth. It also requires a sound
performance-management system. And it requires that the workforce being appraised
is a good match with this numeric distribution. Many organizations have down-
sized to better fit their cost structures to their revenue streams. Once downsized,
it is wise to ask if the bottom 10 percent warrant aggressive action, particularly
in a tight talent market. The wisdom of using forced distribution across
units/functions within the organization should also be questioned; the influence
of implementing this strategy is bound to vary and may produce unwanted results.
GE relaxes the distribution used for executive-level personnel when dealing with
the remainder of employees, making it more of a guideline than a rule. Finally,
there is also the issue of national/ethnic culture. After receiving standing ovations
from Japanese executives during a speech, former General Electric CEO Jack

First Quarter | 2009 59

FIGURE 3 R
 elationship Between Performance Welch faced stony silence when he
and Impact
suggested aggressive action be taken
Mickey Mouse for the bottom 10 percent of the
workforce — on a relative, not
Impact

absolute, basis. This should give

Sweeper pause to strategists attempting to
adopt systems globally, indifferent
Performance to cultural differences.
There may also be considerable
differences between organizations
in the way specific jobs/occupa-
tions are valued relative to the criticality of performance in each. The book
Beyond HR provides an in-depth comparison of the sweeper job in Disneyland
and in Cedar Point, both amusement parks (Boudreau and Ramstad 2007).
Disney views the sweeper as an on-site customer-service person, charged with
contributing to positive customer relations. At Cedar Point the sweeper sweeps.
The relative importance of the sweeper at Disney is higher, and the additional
value of performing at a high level versus just getting by is viewed as considerable.
The variation in effect on park performance between exceptional performance
and acceptable performance is viewed by Disney as being greater than that of
those playing the Mickey Mouse character. Those playing Mickey Mouse have
a well-defined role, with specific rules governing behavior, while the sweepers
have much more latitude. The performance curves shown in Figure 3 compare
the two roles. Even though Mickey has a big influence, as long as perfor-
mance is acceptable (consistent with specific rules of behavior), Mickey has less
additional impact when exhibiting better performance than does the sweeper.
When comparing pay levels for sweepers, should Disney position itself at the
average prevailing pay at other parks like Cedar Point? Above? If above, how
much? And how wide should the pay range for the job be? And how much should
pay adjustments vary among incumbents based on performance? These questions
require an understanding of the competencies required in the jobs and the value
the organization places on them, based on their potential influence.
The relative internal value accorded various functions and occupations in
the organization is another factor to consider. For example, if competitive
compensation levels for engineers are being evaluated, care must be taken to
ensure equivalence in the nature of work performed and its criticality. If the
organization making the evaluation has engineers maintaining existing product
lines while the comparator organizations have many of their engineers doing inno-
vative design work, it may be inappropriate to set targets to match their pay levels.
If the differences are not reflected in the relative competitive levels, how will that
influence the organization’s ability to attract and retain engineers and/or the cost
of engineers? On the other hand, if the work is comparable across organizations

60 WorldatWork Journal
and incumbents are being lost to other organizations doing things differently,
it may be prudent to emulate the practices viewed as desirable when engineers
are making comparisons.

Conceptual Evaluation
A quip among academics is “Sure, it works in practice, but will it work in theory?”
There is actually value in asking that question. When an all-employee stock option
plan is considered effective by several major competitors, it is prudent to evaluate
how it would work in one’s own organization. First, it is necessary to figure out
what “effective” means. If the implementation of a stock option plan has coincided
with increased employee engagement (however measured) and reduced unwanted
turnover in other organizations, it would seem to be a step worth considering.
But even that rather obvious reaction might be questionable if other actions were
taken in conjunction with the implementation of the option plans. The difficulties
encountered when attempting to establish the effect of an action taken by another
organization are: (1) determining what contextual characteristics made the results
what they were, (2) attributing the results to one or more specific causes and
(3) ruling out other causes.
Good research studies are designed to establish cause and effect. The first step is
to formulate a hypothesis, often based on prior research or on theory. The straight-
forward hypothesis is in the “if A happens, then B results” format. An example
would be: if we increase pay rates by 10 percent to bring them up to market levels
(A), turnover decreases (B). The next step is to establish that any change in turnover
was the result of the pay adjustments. This is most often done by measuring what
it is that one is attempting to influence before the action and then measuring it
after the action, which can begin to establish that the action was the cause of the
effect. But to do this, all alternative explanations for the effect must be ruled out.
Few studies involving HR programs can produce the certainty that controlled
lab studies often generate. But if numerous studies show a correlation between
a specific type of action in a specific type of context and a specific result,
the evidence mounts, and the degree of confidence in the cause of an effect
increases. Researchers are increasingly using a technique called “meta-analysis,”
which combines multiple studies to produce more robust findings. This increases
the level of confidence practitioners might have in predicting the results of
actions to be taken.
Applying these concepts to the external emulation approach, it is possible to
increase the level of confidence that “what worked there, will work here” once:
(1) the organizational contexts are evaluated and found to be similar and (2)
research or theoretical support helps explain why the action produces the
desired effect. Using the pay-increase example, considerable research suggests
that paying at competitive levels contributes to reducing unwanted turnover.
Equity and expectancy theories of motivation support this as well.

First Quarter | 2009 61

INNOVATE RATHER THAN EMULATE?
It is possible that after benchmarking external practices, a strategist will conclude
that a new path is preferable to the one that has been worn smooth by competi-
tors. To gain competitive advantage, it is often necessary to break from the pack
and to innovate. Although it is risky to try something just because it is new, the
risk can be lessened by learning about what research shows about the probable
effects of actions and determining whether an approach is conceptually sound.
A few years ago, Sears Automotive was demonized in the press for offering
incentives to mechanics that resulted in unneeded work being performed.
The lesson seems to be “Don’t adopt this type of incentive in this context.”
But another lesson is “What is measured and rewarded you surely get more of.”
So a strategist could review the literature on motivation theory and find that
this conclusion is supported by substantial evidence. Using that knowledge, the
incentive strategy could be formulated to employ the power of incentives, but
also to design features to ensure unwanted behavior is not asked for. This is an
example of using evidence about what has happened elsewhere to decide to do
something else. Although claims have been made that pay does not motivate
performance when one thoroughly examines the literature, it becomes apparent
that pay can motivate performance. But for this to occur, employees must:
(1) know how performance is defined, (2) believe they are able to produce that
performance, (3) know the consequences of performing well or poorly and
(4) be given the resources and permission to do what it takes to perform well.
So, supported by evidence that paying for performance is a sound concept, the
strategist can take another path to producing the desired results.
Being new or unique is often overrated. Another term might be unproven.
So when a new path is pursued, it is wise to ensure the experiments are consistent
with sound conceptual design. As the literature is biased, lacking much informa-
tion on abysmal failures, the strategist is in danger of doing something that has
failed repeatedly in other organizations but never been reported. When a decision
maker is unaware of these failures and lacks evidence about why they occurred,
innovating can be risky. This places more pressure on the practitioner to seek
guidance from research and theories supported by past studies. For example, the
Sears Automotive case has multiple lessons: (1) paying for performance works and
(2) don’t define performance in a manner creating unintended negative consequences
(e.g., consumer lawsuits and loss of credibility). But the second lesson can lead
the designer to define performance more carefully … perhaps a combination of
productivity and customer satisfaction. Or, it can suggest that a quality review on
the work performed is needed. Great leaders espouse learning from mistakes as
well as successes, but they also discourage employees from continuing to do what
has produced unwanted results.

62 WorldatWork Journal
 Innovation can also be triggered RESOURCES PLUS
by changes in the context. Restricted- For more information related to this paper:

stock programs had never gained www.worldatwork.org

significant popularity relative to stock
options until changes in the generally
acceptable accounting principles
(GA AP) rules required a charge
to earnings for the value of stock
options. The extension of restricted-
Type in any or all of the following keywords
or phrases on the search line:
z Rewards strategy
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www.worldatwork.org/bookstore

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vation that was widely emulated.
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in attracting and retaining critical
skills in short supply. Environmental
scanning can produce early awareness
of such trends, and flexibility in rewards design can enable an organization to be a
first mover toward the types of programs that will be highly valued. An effective
rewards program produces the maximum amount of perceived value per
resource unit expended, and the willingness to step out in front may provide
a competitive advantage.
It must be remembered that innovation does not have to be invention.
Doing something that has been done before, but doing it better, is considered to
be innovative. Japanese organizations succeeded in automobiles and in consumer
electronics by building on what had been done by others rather than doing
something unique. Rewards practitioners can improve on the functioning of their
incentive plans by studying what has been done by others and by evaluating
their own organization’s objectives and context. By understanding what has been
effective and ineffective, the strategist may adopt programs with good results and
avoid the others … and then innovate by improving on what others have done.

First Quarter | 2009 63

 CONCLUSION
“What works is what fits” is a guiding principle that should be taken seriously.
What fits the mission, culture, internal and external realities, strategy and structure
is what will likely be effective. Therefore, it is wise to assess the characteristics
of the context within which a rewards strategy will be implemented and admin-
istered, to provide a basis for deciding what will fit.
Decisions should be informed by all relevant evidence. What other organizations
are doing and how effectively their strategies are working is certainly information to
consider. What other parts of the same organization are doing should be an input as
well. Research study results in the field should be incorporated into decision-making,
as this provides a conceptual framework to use in formulating strategy. Finally,
creativity should be applied when no clear path is evident from what others have
done. Effective innovation requires an understanding of organizational context and
a clear notion of the objectives for any strategy, including rewards strategy. It also
requires the conceptual base that theory and research can provide.
Emulate or innovate … but in all cases, do what fits the context and the objectives,
devoid of a bias that one is always better than the other. z

AUTHOR

Robert J. Greene, Ph.D., CCP, CBP, GRP is the CEO
of Reward $ystems Inc. in Glenview, Ill. He has
published more than 80 articles and book chapters and
was awarded the first Keystone Award for attaining the
highest level of excellence in the field by the American
Compensation Association (now WorldatWork).
He has designed and taught certification courses and
seminars for numerous professional associations
around the world. Dr. Greene serves on the faculty
for DePaul University in its master of business
administration and master of science in human-
resource management programs in the United States,
Europe and the Middle East.

References

Boudreau, John W. and Peter M. Ramstad. 2007. Beyond HR: The New Science of Human Capital. Watertown,
Mass.: Harvard Business School Press.

Greene, Robert J. 2008. “Human Resource Management Strategies: Can We Discover What Will Work Through
Benchmarking?” WorldatWork Journal. Second Quarter: 6-15.

64 WorldatWork Journal