Solution manual for compensation 12th edition by newman gerhart milkovich

In Exhibit 2.1, all companies emphasized Different industries may have different pay • different strategies within the same industry • different strategies within the same company, © 20

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Introducing the Pay Model

and Pay Strategy

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Overview

• assess implications for the total compensation

of your organization’s situation;

• map out the compensation objectives and four policy choices to achieve them;

• translate policies into the workplace via the compensation system and implement it;

• reassess by comparing results against the pay objectives; and

• continue to learn, adapt, and improve.

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Three Compensation Strategies

EXHIBIT 2.1

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In Exhibit 2.1, all companies emphasized

Different industries may have different pay

• different strategies within the same industry

• different strategies within the same company,

Similarities and Differences in

Strategies

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The fundamental directions an organization chooses

Strategic Perspective

Focuses on those compensation choices

that help the organization gain and sustain competitive

advantage

Strategic Choices

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EXHIBIT 2.2 Strategic Choices

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Aligns pay systems with organization's

• Better the alignment, more effective is the organization.

• Contingency notion:

changes in pay systems

Support Business Strategy

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Tailor the Compensation System to the Strategy

EXHIBIT 2.3

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Compensation strategies can be based on

• Michael Porter’s framework includes:

costs, while the

 differentiator strategy focuses on providing a unique

and/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

Support Business Strategy

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 Boxall and Purcell use the “AMO theory” 

 Ability, Motivation, Opportunity

• HR systems will be most effective when:

hiring and training,

making

Support HR Strategy

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Fit Between HR Strategy and Compensation Strategy and

Effectiveness

EXHIBIT 2.5

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The five strategic compensation

choices are: 

• objectives,

• internal alignment,

• external competitiveness,

• employee contributions, and

• management.

These decisions, taken together, becomes the compensation strategy 

Stated strategies are written compensation strategies 

Unstated strategies are inferred from the pay decisions 

The Pay Model Guides Strategic

Pay Decisions

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Key Steps in Formulating a

Total Compensation

Strategy EXHIBIT 2.6

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Business strategy and competitive dynamics 

– understand the business

HR strategy: pay as a supporting player or catalyst for change? 

Culture/values are reflected in the pay system 

Social and political context is wide ranging 

Employee preferences are also wide ranging 

Union preferences differ by location 

Step 1: Assess Total Compensation

Implications

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Strategic maps offer a picture of a

• They provide a visual reference.

• They are useful for analyzing a strategy as they are easily understood.

• Strategic maps do not tell which strategy is

“best” but provides a framework and guidance.

Step 2: Map a Total Compensation

Strategy

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Contrasting Maps

of Microsoft and

SAS EXHIBIT 2.8

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Step 3 involves implementing the strategy through the design and execution of the

Step 4 recognizes that the strategy must change to fit changing conditions, and

Steps 3 and 4: Implement and

Reassess

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• Is it aligned?

• With the business strategy?

• Externally with the economic and socio- political conditions?

• Internally with HR system?

• Calculate the return on investment (ROI)

Source of Competitive Advantage:

Three Tests

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• Results in better performance with almost any business strategy.

An organization is likely

to achieve competitive advantage if the pay

• reflects the company’s strategies and values,

• is responsive to employees’ and unions’ needs, and

• is globally competitive

“Best Practices” versus “Best Fit”?

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Consistent research evidence show the

Guidance From the Evidence

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Research indicates that: 

• how you pay matters as much as how much you pay

• Performance-based pay:

performance practices, and

Virtuous and Vicious Circles

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Virtuous and Vicious Circles

EXHIBIT 2.9

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Summary

This chapter showed the similarities and

Strategic choices that support business

Next, the chapter looked at developing a

Finally, the chapter looked at three tests

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2 - 1 Compensation – Twelfth Edition Milkovich │Newman │Gerhart

CHAPTER TWO STRATEGY: THE TOTALITY OF DECISIONS

Overview

This chapter examines the key aspects of decisions taken during the creation of compensation strategy The key premise is that the way employees are compensated can be a source of

sustainable competitive advantage The three tests to identify if a pay strategy provides

competitive advantage are discussed The steps involved in developing a total compensation strategy are described: (1) assessing conditions; (2) deciding on the best strategic choices using the pay model (objectives, alignment, competitiveness, contributions, and management); (3) implementing the strategy through the design of the pay system; and (4) reassessing the fit Two alternative 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 and environmental conditions In contrast, the best-practices approach assumes a universal best way exists The focus is not on what the best compensation strategy is but on how to best implement the system and ultimately fit the compensation system to the business and environmental

conditions

Learning Objectives

 Identify and describe similarities and differences in strategies, including different

strategies within the same industry and different strategies within the same company

 Discuss strategic choices that support business strategy and choices that support HR strategies, included stated versus unstated strategies

 Describe a total compensation strategy in four steps: assess total compensation

implications, map a total compensation strategy, implement strategy, and reassess

 Apply the three tests for sources of competitive advantage: align, differentiate, and add value

 Compare best practices versus best fit and virtuous and vicious circles

Lecture Outline: Overview of Major Topics

I Similarities and Differences in Strategies

II Strategic Choices

III Support Business Strategy

IV Support HR Strategy

V The Pay Model Guides Strategic Pay Decisions

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Chapter Two: Strategy: The Totality of Decisions 2 - 2

VI Developing a Total Compensation Strategy: Four Steps

VII Source of Competitive Advantage: Three Tests

VIII “Best Practices” versus “Best Fit”?

IX Guidance from the Evidence

X Virtuous and Vicious Circles

XI Your Turn: Merrill Lynch

XII Still Your Turn: Mapping Compensation Strategies

Lecture Outline: Summary of Key Chapter Points

I Similarities and Differences in Strategies

 Compensation strategies of three companies (Google, Nucor, and Merrill Lynch) are compared and contrasted All three are innovators in their industry Their decisions on the five dimensions of compensation strategy (objectives, internal alignment,

externally competitive, employee contribution, and management) are both similar and different All three formulate their pay strategy to support their business strategy All three emphasize outstanding employee performance and commitment However, there are major differences (Exhibit 2.1):

o While Google is one of the largest companies in the world, it positions itself as still being, at heart, the feisty start-up populated by nerds and math whizzes It offers all its employees such generous stock options that many of them have become millionaires

o Nucor Steel is a pioneer in recycling steel scrap and other metals into steel

products, including rebar, angles, rounds, channels, flats, sheet, beams, plate and other products The emphasis is on high productivity, high quality, and low cost products Nucor provides an opportunity for those who are willing to work hard to make a lot of money by helping the company be productive and profitable

o Merrill Lynch, now part of Bank of America, advises companies and clients worldwide Merrill Lynch pay objectives are straightforward: to attract, motivate, and retain the best talent It relies heavily on the human capital of its employees to compete

 These three companies operate in different industries and vary in terms of the

conditions they face, the customers they serve, and the talent they employ So the differences in their pay strategies may not be surprising Pay strategies can also differ among 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 marketing skills but they focus on different components of an employees‟ compensation

 In its earlier years, Microsoft adopted a very similar strategy to Google‟s, except

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2 - 3 Compensation – Twelfth Edition Milkovich │Newman │Gerhart

its employees accepted less base pay to join a company whose stock value was increasing exceptionally But when its stock quit performing so spectacularly, Microsoft shifted its strategy to increase base and bonus to the 65th percentile from the 45th percentile of competitors‟ pay It still retained its strong emphasis

on (still nonperforming) stock-related compensation, but eliminated its longstanding, broad-based stock option plan in favor of stock grants Its benefits continue to lead the market

 SAS Institute, the world‟s largest privately owned software company, takes a different approach It emphasizes work/life programs over cash compensation and provides limited bonuses and no stock awards

B Different Strategies within the Same Company

 Sometimes different business units within the same corporation face very

different competitive conditions, adopt different business strategies, and thus fit different compensation strategies For example, the Korean company SK Holdings has even much variety in its business units They include a gasoline retailer, a cellular phone manufacturer, and SK Construction SK has different compensation strategies aligned to each of its very different businesses

 A simple “let the market decide our compensation” strategy does not work

internationally In many nations, markets do not operate as in the United States or may not even exist Emerging labor markets in some developing countries and highly regulated labor markets in some developed countries are responsible for less 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 An

organization defines its strategy through the tradeoffs it makes in choosing what (and what 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 we

be in?

 At the business unit level, the choice shifts to: How do we gain and sustain

competitive advantage in this business?

 At the function level the strategic choice is: How should total compensation help this

business 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

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