STRATEGIC

COMPENSATION
A Human Resource Management Approach

Chapter 1:
Strategic
Compensation: A
Component of Human
Resource Systems

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 Learning Objectives
1. Describe what compensation is and give at
least three examples of core compensation
practices and at least three examples of
employee benefits practices.
2. Summarize at least two historical events in the
evolution of compensation practice leading to
the current strategic compensation era.
3. Discuss at least two differences between
strategic and tactical compensation.

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 Learning Objectives
4. Name and summarize the goals of
compensation professionals.
5. Identify the stakeholders of the compensation
and summarize their stake in the work
compensation professionals perform.

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 Learning Objective 1

Describe what compensation is and give at

least three examples of core compensation
practices and at least three examples of
employee benefits practices.

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 What Is Compensation?
• Compensation represents the rewards
employees receive for performing their job.
They are either:
– Intrinsic: intrinsic compensation represents
employees’ critical psychological states that
result from performing their jobs.
– Extrinsic: extrinsic compensation includes
both monetary and nonmonetary rewards.

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Components of Total
Compensation

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 Elements of Core Compensation

Base pay
- Hourly pay - Annual salary
Base pay adjustments
- COLAs - Seniority pay
- Merit pay - Skill-based pay
- Incentive pay - Person-focused pay

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 Base Pay
Compensable factors
• An employee’s skill level
• An employee’s effort
• An employee’s level of responsibility
• The severity of the working conditions

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 Base Pay Adjustments
COLAs: COLAs represent periodic base pay
increases that are founded on changes in prices
as indexed by the consumer price index (CPI).
Seniority pay: seniority pay systems reward
employees with periodic additions to base pay
according to employees’ length of service in
performing their jobs.
Merit pay: merit pay programs assume that
employees’ compensation over time should be
determined, at least in part, by differences in job
performance.

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 Base Pay Adjustments (cont’d)
Incentive pay: incentive pay (or variable pay)
rewards employees for partially or completely
attaining a predetermined work objective.
Pay-for-Knowledge plans: pay-for-knowledge
plans reward managerial, service, or
professional workers, for successfully learning
specific curricula.
Skill-based pay: skill-based pay is used mostly
for employees who perform physical work and
increases these workers‘pay as they master new
skills.

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 Employee Benefits

• Discretionary benefits

• Legally required benefits

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 Discretionary Benefits
Three broad categories
Protection programs: provide family benefits,
promote health, and guard against income loss
caused by such catastrophic factors as
unemployment, disability, or serious illness.
Paid time-off: provides employees with pay for time
when they are not working.
Services: provides such enhancements as tuition
reimbursement and day care assistance to
employees and their families.
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 Legally Required Benefits
Federal legislation designed to:

• Promote worker safety and health

• Maintain family income
• Assist families in crisis
• Provide assistance in case of
– Disability
– Unemployment

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 Learning Objective 2

Summarize at least two historical events in

the evolution of compensation practice
leading to the current strategic
compensation era.

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 Historical Perspective on
Compensation
• Many employers instituted so-called scientific
management practices to control labor costs,
as well as welfare practices to maintain control
over labor.

• Time-and-motion studies analyzed the time it

took employees to complete their jobs. These
studies literally focused on employees’
movements and the identification of the most
efficient steps to complete jobs in the least
amount of time.
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 Historical Perspective on
Compensation (cont’d)
• Welfare practices were generous endeavors
undertaken by some employers, motivated in
part to minimize employees’ desire for union
representation, to promote good management
and to enhance worker productivity.

• Competitive advantage refers specifically to a

company’s ability to maintain market share and
profitability over a sustained period of several
years.

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 Learning Objective 3

Discuss at least two differences between

strategic and tactical compensation.

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Strategic versus Tactical Decisions

• Strategic decisions: guide the

activities of companies in the market

• Tactical decisions: support the

fulfillment of strategic decisions

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 Competitive Strategy
• The planned use of company resources
– Technology
– Capital
– Human resources
• Two or more years of time span
• Competitive strategy choices
– Lowest cost strategy
– Differentiation strategy

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Competitive Strategy Choices

Lowest cost strategy: focus on being

lowest cost producer/seller of goods or
services

Differentiation strategy: focus on offering

unique goods or services to the public

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 Lowest-Cost Strategy
Effective when jobs:

• Include predictable behaviors

• Have a short-term focus
• Require autonomous activity
• Focus on quantity of output

Ex: Ryanair (reduced operations costs)

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 Differentiation Strategy
Effective when jobs:
• Require highly creative behaviors
• Have a long-term focus
• Demand cooperation and independence
• Involve risk-taking
Ex: P&G differentiates Eukanuba from Iams
(Brand image and price premiums)

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 Learning Objective 4

Name and summarize the goals of

compensation professionals.

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 HR’s Role
A quotation from Jay Hannah of BancFirst
Corporation:
“The HR department is the source and keeper
of critical information, which is key in today’s
workplace. With the information they provide, we
in turn can build and design strategies to hire and
retain the best workforce possible. And this may
sound cliché, but it’s very true—the real
competitive advantage is our company’s human
resources.”
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 Human Resources Practices

• Recruitment • Career development

• Selection • Labor-management
• Performance relations
appraisal • Employment
• Training termination
• Insuring legal
compliance

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 Compensation Department’s Main
Goals
Compensation professionals promote
effective compensation systems by meeting
three important goals:
• Internal consistency
• Market competitiveness
• Recognition of individual contributions

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 Internal Consistency
• Achieved when the value of each job is
clearly defined
• Represents
– Job structure
– Hierarchy
• Achieved using
– Job analysis
– Job evaluation
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 Market Competitiveness

• Compensation policies that fit with business

objectives

• Vital in attracting and retaining employees

• Are based on:

– Strategic analyses
– Compensation surveys

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 Individual Contributions

Pay structures: pay is determined by

employees’ credentials, job knowledge, and
job performance
Pay grades: based on compensable factors
and value
Pay ranges: builds on grades, uses
midpoints, minimums, and maximums

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Pay Grades and Ranges

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 Learning Objective 5

Identify the stakeholders of the compensation

and summarize their stake in the work
compensation professionals perform.

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 Stakeholders
Individuals or entities directly affected by
compensation practices
• Employees
• Line managers
• Executives
• Unions
• U.S. government
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 Stakeholders
Employees rely on compensation professionals to:
• Develop and implement systematic training
programs
• Inform them of training and pay links
• Offer discretionary benefits that provide:
– Income protection
– Paid time off
– Services
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.
 Stakeholders
Line managers rely on compensation
professionals to:
• Ensure knowledge of relevant laws to help
them make sound compensation judgments
• Advise for establishing pay differentials
• Train them how to properly evaluate jobs

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 Stakeholders
Executives rely on compensation
professionals to:
• Develop and manage sound compensation
systems
• Insure the company’s practices are:
– Legal
– Sufficiently attractive to recruit and retain
– Cost effective
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 Stakeholders
Unions rely on compensation professionals to:
1. Abide by their collective bargaining
agreements
2. Ensure they get their COLA adjustments
and seniority pay

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 Stakeholders
The U.S. government requires compensation
professionals to:
1. Keep updated and comply with all employment
legislation
2. Demonstrate that alleged discriminatory pay
practices are a business necessity
3. Demonstrate that alleged discriminatory pay
practices are not discriminatory
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© Pearson Education Limited 2015 1-38