Milkovich PPT Ch02
Milkovich PPT Ch02.pdfMilkovich IM Ch02.pdf
MILKOVICH NEWMAN GERHARTCOMPENSATIONTWELFTH EDITIONIntroducing the Pay Modeland Pay StrategyChapter TwoPart OneStrategy: The Totality ofDecisions 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–1
Overview Start with the pay model, and assess implications for the total compensationof your organization’s situation; map out the compensation objectives and fourpolicy choices to achieve them; translate policies into the workplace via thecompensation system and implement it; reassess by comparing results against thepay objectives; and continue to learn, adapt, and improve. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–2
EXHIBIT 2.1Three Compensation Strategies 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–3
Similarities and Differences inStrategies In Exhibit 2.1, all companies emphasizedoutstanding employee performance. Different industries may have different paystrategies, but there can be: different strategies within the same industry such as Google, Microsoft, and SAS, or even different strategies within the same company, for example the Korean company, SK Holdings. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–4
Strategic ChoicesStrategyThe fundamentaldirections anorganizationchooses.StrategicPerspectiveFocuses on thosecompensation choicesthat help theorganization gain andsustain competitiveadvantage. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–5
EXHIBIT 2.2Strategic Choices 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–6
Support Business Strategy Aligns pay systems with organization'sbusiness strategy. Better the alignment, more effective is theorganization. Contingency notion: Changes in business strategies should result inchanges in pay systems. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–7
EXHIBIT 2.3Tailor the Compensation System to the Strategy 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–8
Support Business Strategy Compensation strategies can be based ongeneric strategy frameworks. Michael Porter’s framework includes: the cost leadership strategy focuses on reducingcosts, while the differentiator strategy focuses on providing a uniqueand/or innovative product/service at premium prices. Miles and Snow’s framework includes: defenders in stable markets competing on costs, and prospectors who compete in innovative/new markets. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2–9
Support HR Strategy Boxall and Purcell use the “AMO theory” P (Performance) ƒ(A, M, O) Ability, Motivation, Opportunity HR systems will be most effective when: employee ability is developed through selectivehiring and training, compensation system motivates employees, and roles allow employees to be involved in decisionmaking. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 10
EXHIBIT 2.5Fit Between HR Strategy and Compensation Strategy andEffectiveness 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 11
The Pay Model Guides StrategicPay Decisions The five strategiccompensationchoices are: objectives, internal alignment, externalcompetitiveness, employeecontributions, and management. These decisions, takentogether, becomes thecompensation strategy. Stated strategies arewritten compensationstrategies. Unstated strategies areinferred from the paydecisions. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 12
EXHIBIT 2.6Key Steps inFormulating aTotalCompensationStrategy 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 13
Step 1: Assess Total CompensationImplications Business strategy and competitive dynamics– understand the business. HR strategy: pay as a supporting player orcatalyst for change? Culture/values are reflected in the paysystem. Social and political context is wide ranging. Employee preferences are also wide ranging. Choice is good. Yes, No, Maybe? Union preferences differ by location. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 14
Step 2: Map a Total CompensationStrategy Strategic maps offer a picture of acompensation strategy. They provide a visual reference. They are useful for analyzing a strategy as theyare easily understood. Strategic maps do not tell which strategy is“best” but provides a framework and guidance. Decisions in the pay model work in concert. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 15
EXHIBIT 2.8Contrasting Mapsof Microsoft andSAS 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 16
Steps 3 and 4: Implement andReassess Step 3 involves implementing the strategythrough the design and execution of thecompensation system. Step 4 recognizes that the strategy mustchange to fit changing conditions, andinvolves periodic reassessment. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 17
Source of Competitive Advantage:Three Tests Is it aligned? With the business strategy? Externally with the economic and sociopolitical conditions? Internally with HR system? Does it differentiate? Does it add value? Calculate the return on investment (ROI). 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 18
“Best Practices” versus “Best Fit”?Best Practices Assumptions: A set of best-pay practicesexists. Practices can be applieduniversally across allsituations. Results in betterperformance with almostany business strategy.Best Fit An organization is likelyto achieve competitiveadvantage if the paysystem: reflects the company’sstrategies and values, is responsive to employees’and unions’ needs, and is globally competitive. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 19
Guidance From the Evidence Consistent research evidence show thefollowing practices matter to objectives: internal alignment,external competitiveness,employee contributions,managing compensation, andcompensation strategy. Identify what practices pay off best underwhat conditions. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 20
Virtuous and Vicious Circles Research indicates that: how you pay matters as much as how muchyou pay. Performance-based pay: improves performance when combined with highperformance practices, and can be the best practice under right circumstances. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 21
EXHIBIT 2.9Virtuous and Vicious Circles 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 22
Summary This chapter showed the similarities anddifferences in strategies. Strategic choices that support businessstrategy and HR strategy was discussed. Next, the chapter looked at developing atotal compensation strategy in four steps. Finally, the chapter looked at three testsfor a competitive advantage source. 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution inany manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2 – 23
2-1Compensation – Twelfth EditionMilkovich Newman GerhartCHAPTER TWOSTRATEGY: THE TOTALITY OF DECISIONSOverviewThis chapter examines the key aspects of decisions taken during the creation of compensationstrategy. The key premise is that the way employees are compensated can be a source ofsustainable competitive advantage. The three tests to identify if a pay strategy providescompetitive advantage are discussed. The steps involved in developing a total compensationstrategy are described: (1) assessing conditions; (2) deciding on the best strategic choices usingthe pay model (objectives, alignment, competitiveness, contributions, and management); (3)implementing the strategy through the design of the pay system; and (4) reassessing the fit. Twoalternative approaches to developing a compensation strategy are highlighted: (1) “best-fit” and(2) “best-practices” approach. The best-fit approach presumes that one size does not fit all.Managing compensation strategically means fitting the compensation system to the business andenvironmental conditions. In contrast, the best-practices approach assumes a universal best wayexists. The focus is not on what the best compensation strategy is but on how to best implementthe system and ultimately fit the compensation system to the business and environmentalconditions.Learning Objectives Identify and describe similarities and differences in strategies, including differentstrategies within the same industry and different strategies within the same company.Discuss strategic choices that support business strategy and choices that support HRstrategies, included stated versus unstated strategies.Describe a total compensation strategy in four steps: assess total compensationimplications, map a total compensation strategy, implement strategy, and reassess.Apply the three tests for sources of competitive advantage: align, differentiate, and addvalue.Compare best practices versus best fit and virtuous and vicious circles.Lecture Outline: Overview of Major TopicsI.II.III.IV.V.Similarities and Differences in StrategiesStrategic ChoicesSupport Business StrategySupport HR StrategyThe Pay Model Guides Strategic Pay Decisions 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in anymanner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter Two: Strategy: The Totality of DecisionsVI.VII.VIII.IX.X.XI.XII.2-2Developing a Total Compensation Strategy: Four StepsSource of Competitive Advantage: Three Tests“Best Practices” versus “Best Fit”?Guidance from the EvidenceVirtuous and Vicious CirclesYour Turn: Merrill LynchStill Your Turn: Mapping Compensation StrategiesLecture Outline: Summary of Key Chapter PointsI.Similarities and Differences in Strategies Compensation strategies of three companies (Google, Nucor, and Merrill Lynch) arecompared and contrasted. All three are innovators in their industry. Their decisions onthe five dimensions of compensation strategy (objectives, internal alignment,externally competitive, employee contribution, and management) are both similar anddifferent. All three formulate their pay strategy to support their business strategy. Allthree emphasize outstanding employee performance and commitment. However, thereare major differences (Exhibit 2.1):o While Google is one of the largest companies in the world, it positions itself asstill being, at heart, the feisty start-up populated by nerds and math whizzes. Itoffers all its employees such generous stock options that many of them havebecome millionaires.o Nucor Steel is a pioneer in recycling steel scrap and other metals into steelproducts, including rebar, angles, rounds, channels, flats, sheet, beams, plate andother products. The emphasis is on high productivity, high quality, and low costproducts. Nucor provides an opportunity for those who are willing to work hard tomake a lot of money by helping the company be productive and profitable.o Merrill Lynch, now part of Bank of America, advises companies and clientsworldwide. Merrill Lynch pay objectives are straightforward: to attract, motivate,and retain the best talent. It relies heavily on the human capital of its employees tocompete.These three companies operate in different industries and vary in terms of theconditions they face, the customers they serve, and the talent they employ. So thedifferences in their pay strategies may not be surprising. Pay strategies can also differamong companies competing for the same talent and similar customers.A. Different Strategies within the Same Industry Google, Microsoft, and SAS all compete for software engineers and marketingskills but they focus on different components of an employees‟ compensation. In its earlier years, Microsoft adopted a very similar strategy to Google‟s, except 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale ordistribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole orpart.
2-3Compensation – Twelfth Edition Milkovich Newman Gerhartits employees accepted less base pay to join a company whose stock value wasincreasing exceptionally. But when its stock quit performing so spectacularly,Microsoft shifted its strategy to increase base and bonus to the 65th percentilefrom the 45th percentile of competitors‟ pay. It still retained its strong emphasison (still nonperforming) stock-related compensation, but eliminated itslongstanding, broad-based stock option plan in favor of stock grants. Its benefitscontinue to lead the market.SAS Institute, the world‟s largest privately owned software company, takes adifferent approach. It emphasizes work/life programs over cash compensationand provides limited bonuses and no stock awards.B. Different Strategies within the Same Company Sometimes different business units within the same corporation face verydifferent competitive conditions, adopt different business strategies, and thus fitdifferent compensation strategies. For example, the Korean company SKHoldings has even much variety in its business units. They include a gasolineretailer, a cellular phone manufacturer, and SK Construction. SK has differentcompensation strategies aligned to each of its very different businesses. A simple “let the market decide our compensation” strategy does not workinternationally. In many nations, markets do not operate as in the United States ormay not even exist. Emerging labor markets in some developing countries andhighly regulated labor markets in some developed countries are responsible forless movement of people among companies than is common in the U.S., Canada,or even Korea, and Singapore. Strategic perspective on compensation is more complex than it first appears.II.Strategic Choices Strategy refers to the fundamental directions that an organization chooses. Anorganization defines its strategy through the tradeoffs it makes in choosing what (andwhat not) to do.Exhibit 2.2 ties the strategic choices to the quest for competitive advantage.At the corporate level, the fundamental strategic choice is: What business should webe in?At the business unit level, the choice shifts to: How do we gain and sustaincompetitive advantage in this business?At the function level the strategic choice is: How should total compensation help thisbusiness gain and sustain competitive advantage?The ultimate purpose—the “so what?”—is to gain and sustain competitive advantage.Definition: A strategic perspective focuses on those compensation choices that help the 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in anymanner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter Two: Strategy: The Total
TWELFTH EDITION Part One Chapter Two . 2 . 2 - 1 Compensation – Twelfth Edition Milkovich Newman .
Textbook: Compensation by Milkovich, Newman, and Gerhart (12th edition) The textbook is available for purchase at the campus bookstore, on Amazon.com or as an online e-text for a greatly reduced cost. I often have students ask if it is OK to use an earlier edition of Milkovich. I don’t mind, but you will be held responsible for the
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