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Compensation Management > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Some organizations adopt a compensation strategy by simply paying market rates - what does that mean?

A

> that is, they let the market decide how much they should pay their employees.

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2
Q

What do the compensation strategies at Google, Nucor, and Merrill Lynch all have in common?

A

> All three emphasize outstanding employee performance and commitment.

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3
Q

Can compensation be different throughout the organization?

A

> Sometimes different business units within the same corporation will have very different competitive conditions, adopt different business strategies, and thus fit different compensation strategies.

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4
Q

Taking a strategic perspective requires what?

A

> requires a focus on compensation decisions that help the organization gain and sustain a competitive advantage.

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5
Q

What is strategy?

A

> Strategy refers to the fundamental decisions that an organization chooses.

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6
Q

An organization defines its strategy through what process?

A

> through the tradeoffs it makes in choosing what (and what not) to do.

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7
Q

What are the strategic choices to the quest for competitive advantage at the corporate level, the business level, and the function level?

A

> 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?

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8
Q

What is the ultimate purpose of strategy?

A

> The ultimate purpose is to gain and sustain competitive advantage.

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9
Q

A currently popular theory found in almost every book and consultant’s report tells managers to do what to their pay systems? What is the rationale behind this thinking?

A

> A currently popular theory found in almost every book and consultant’s report tells managers to tailor their pay systems to align with the business strategy.

> The rationale is based on contingency notions. That is, differences in a firm’s strategy should be supported by corresponding differences in its human resources strategy, including compensation.

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10
Q

What is the underlying premise to aligning compensation strategy with corporate strategy?

A

> The underlying premise is that the greater the alignment, or fit, between the organization and the compensation system, the more effective the organization

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11
Q

What is the innovator strategy in tailoring compensation to business strategies?

A

> The innovator stresses new products and short response times to market trends. A supporting compensation approach puts less emphasis on evaluating skills and jobs and more on incentives designed to encourage innovation.

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12
Q

What is the cost-cutter strategy in tailoring compensation to business strategies?

A

> The cost cutter’s efficiency-focused strategy stresses doing more with less by minimizing costs, encouraging productivity increases, and specifying in greater detail exactly how jobs should be performed.

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13
Q

What is the customer-focused strategy in tailoring compensation to business strategies?

A

> The customer-focused business strategy stresses delighting customers and bases employee pay on how well they do this.

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14
Q

What is the business response, HR Program Alignment, and Compensation system for the innovator strategy?

A

BUSINESS RESPONSE:
> Product leadership
> Shift to mass customization
> Shorter cycle time

WHAT IS HR PROGRAM ALIGNMENT:
> Product leadership
Shift to mass customization
Shorter cycle time

WHAT IS THE COMPENSATION SYSTEM:
> Reward for innovation in products and processes
> Market-based pay
> Flexible/generic job descriptions

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15
Q

What is the business response, HR Program Alignment, and Compensation system for the cost-cutter strategy?

A

BUSINESS RESPONSE:
> Operational excellence
> Pursue cost-effective solutions

HR ALIGNMENT:
> do more with less

COMPENSATION SYSTEMS:
> Focus on competitors’ labour costs
> Increase in variable pay
> Emphasis on productivity
> Focus on system control and work specifications

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16
Q

What is the business response, HR Program Alignment, and Compensation system for the customer-focused strategy:

A

BUSINESS RESPONSE:
> Deliver solutions to customers
Speed to market

HR ALIGNMENT:
> Delight customers, exceed expectations

COMPENSATION SYSTEMS:
> Customer satisfaction incentives
> Value of job and skills based on customer contact

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17
Q

In Michael Porter’s model, firms that cut costs are said to follow what strategy?

A

> said to follow a cost leadership strategy,

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18
Q

In Michael Porter’s model, those that seek to provide a unique and/or innovative product or service at a premium price are said to follow what kind of strategy?

A

> follow a differentiation strategy.

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19
Q

What do Miles and Snow refer to when they talk about defenders and prospectors?

A

> Likewise, Miles and Snow refer to defenders as those that operate in stable markets and compete on cost, whereas prospectors are more focused on innovation, new markets, and so forth.

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20
Q

What is Conventional wisdom for compensation strategy?

A

> Conventional wisdom is that competing on cost requires lower compensation, whereas competing through innovation is likely to be more successful with high-powered incentives or pay for performance programs.

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21
Q

What do generic business and pay strategies provide for organizations?

A

> These generic business strategy and pay strategy ideas provide a starting point for an organization to fashion its own unique way of adding value and gaining competitive advantage through aligning its business strategy with its pay strategy.

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22
Q

It also follows that when business strategies change, what should also change?

A

> Pay strategy

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23
Q

What other strategy should compensation strategies be aligned with?

A

> It is also imperative that there be alignment between its compensation strategy and its overall HR strategy.

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24
Q

HR systems will be most effective when what 3 things occur?

A

(1) when roles are designed to allow employees to be involved in decisions and to have an opportunity to make an impact,

(2) when employee ability is developed through selective hiring and training and development, and

(3) when the compensation system motivates employees to act on their abilities and take advantage of the opportunity to make a difference.

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25
Q

What is compensation the key to?

A

> Compensation is the key to attracting, retaining, and motivating employees with the abilities necessary to execute the business strategy and handle greater decision-making responsibilities.

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26
Q

All organizations that pay people have what?

A

> a compensation strategy.

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27
Q

How are compensation strategies inferred?

A

> Their compensation strategy is inferred from the pay decisions they have made.

28
Q

What are the components involved in step one of formulating a compensation system (1. Assess Total Compensation)

A

> Business strategy
competitive dynamics
hr strategy
culture/values
social and political context
employee/union preferences
other HR systems

29
Q

What are the components involved in step two of formulating a compensation system (2. Map a Total Compensation Strategy)

A

> objectives
internal alignment
external competitiveness
employee contributions
management

30
Q

What are the components involved in step three of formulating a compensation system (3. Implement Strategy)

A

> Design system to translate strategy into action
choose techniques to fit strategy

31
Q

What are the components involved in step three of formulating a compensation system (4. Reassess the fit)

A

> Realign as conditions change
realign as strategy changes

32
Q

Step One: assessing total comepnsation implications involves:

A

> includes an understanding of the specific industry in which the organization operates and how it plans to compete.

> to gauge the underlying dynamics in business, such as its business strategy, and to consider how the compensation system should change to support and be part of that strategy

>

33
Q

managers in multinational firms must become knowledgeable about what?

A

> about the competitive conditions and pay practices both globally and locally.

> There are differences in hourly labour costs and productivity (output per dollar of wages) between countries. Countries also differ in the average length of the workweek, the average number of paid holidays, the kinds of social programs, and even how pay is determined.

34
Q

Compensation or pay strategy is influenced by what?

A

> is influenced by how it fits with the overall HR strategy.

35
Q

A pay system reflects what in relation to employees? What does it mirror about the company?

A

> A pay system reflects the core values that guide an employer’s behaviour and underlie its treatment of employees.

> The pay system mirrors the company’s image and reputation.

> it can also relate to the company’s mission statement.

36
Q

What is context?

A

> Context refers to a wide range of factors, including legal and regulatory requirements, cultural differences, changing workforce demographics, expectations, and so on.

37
Q

What third party is a major stakeholder in determining compensation?

A

> As governments are major stakeholders in determining compensation, government relations to influence laws and regulations may also be part of compensation strategies.

38
Q

What is overlooked in formulation a compensation strategy?

A

> The simple fact that employees differ is too easily overlooked in formulating a compensation strategy.

39
Q

A major challenge of next-generation pay systems is what?

A

> A major challenge of next-generation pay systems is how to better satisfy individual needs and preferences

40
Q

Pay strategies also need to be adapted to the nature of what relationship when applicable?

A

> Pay strategies also need to be adapted to the nature of the union–management relationship

41
Q

What are union interests a part of in context of pressures?

A

> union interests are part of the environmental pressures that help shape compensation strategies.

42
Q

The compensation strategy is made up of the five decisions outlined in the pay model:

A

> set the objectives and specify the four policy choices of internal alignment, external competitiveness, employee contributions, and management.

43
Q

What is done in step 2 of developing a compensation strategy?

A

> mapping the 5 decisions outlined in the pay model

44
Q

Briefly describe each strategy that is considered when developing a compensation strategy?

A

1) Objectives: The organization’s objective is to make the right compensation decisions based on how the organization decides to compete.

2) Internal Alignment: How hierarchical is the organization? How much does pay differ among job levels and how well does compensation support career growth?

3) External Alignment; How much are our competitors paying, and what forms of pay are they using?

4) Employee Contributions: How does an organization go about recognizing and rewarding their employee contributions?

5) Management: What roles do non-HR managers play in making pay decisions? How transparent is the organization when it comes to communication about pay?

45
Q

What is step three and four of developing a compensation system:

A

> Step three is to implement the strategy through the design and execution of the compensation system

> Step four, reassess the fit, closes the loop. This step recognizes that the compensation strategy must change to fit changing conditions. Thus, periodic reassessment of the fit is needed to continuously learn, adapt, and improve.

46
Q

Three tests determine whether a pay strategy is a source of competitive advantage:

A

(1) Is it aligned?

(2) Does it differentiate?

(3) Does it add value?

47
Q

Alignment of the pay strategy includes three aspects:

A

(1) align with the business strategy,

(2) align externally with the economic and sociopolitical conditions, and

(3) align internally with the overall HR system.

> Alignment is probably the easiest test to pass.

48
Q

Some people believe that the only thing that really matters about a strategy is what?

A

> Some people believe that the only thing that really matters about a strategy is how it is different from everyone else’s.

49
Q

What is the most controllable expense in a firm?

A

> Compensation is often a company’s largest controllable expense.

50
Q

Trying to measure an ROI for a compensation strategy implies that people are what?

A

> implies that people are “human capital,”

51
Q

What is the most difficult test for competitive advantage in a compensation system?

A

> Of the three tests of competitive advantage—align, differentiate, add value—this last is the most difficult to achieve.

52
Q

The underlying premise of any strategic perspective is:

A

> The underlying premise of any strategic perspective is that if managers align pay decisions with the organization’s strategy and values, are responsive to employees and unions, and are globally competitive, the organization will be more likely to achieve competitive advantage.

53
Q

There is consistent research evidence that the following practices do matter to the organization’s objectives - what can be said about internal alignment?

A

> Internal alignment: Both smaller and larger pay differences among jobs inside an organization can affect results. Smaller internal pay differences and larger internal pay differences can both be a “best” practice. Which one depends on the context, including the fit with business strategy, other HR practices, organizational culture, and so on.

53
Q

In contrast to the notion of strategic fit, some believe that what exists?

A

> But not everyone agrees. In contrast to the notion of strategic fit, some believe that (1) a set of best pay practices exists and (2) these practices can be applied universally across situations.

> Rather than a better fit between business strategy and compensation plans that yields better performance, they say a set of best practices results in better performance with almost any business strategy

53
Q

There is consistent research evidence that the following practices do matter to the organization’s objectives - what can be said about employee contributions?

A

> Performance-based pay can affect results. Are performance incentives a “best” practice? Once again it depends on the context.

54
Q

There is consistent research evidence that the following practices do matter to the organization’s objectives - what can be said about external competitiveness?

A

> Paying higher than the average paid by competitors can affect results. Is higher competitive pay a best practice? Again, it depends on the context.

55
Q

There is consistent research evidence that the following practices do matter to the organization’s objectives - what can be said about management?

A

> Rather than focusing on only one dimension of the pay strategy, such as pay for performance or internal pay differences, all dimensions need to be considered together

56
Q

There is consistent research evidence that the following practices do matter to the organization’s objectives - what can be said about compensation strategy?

A

> Finally, embedding compensation strategy within the broader HR strategy affects results. Compensation does not act alone; it is part of the overall HR approach

57
Q

So specific pay practices appear to be more beneficial in some contexts than in others, and “best practices versus best fit” does not appear to be a useful way to frame the question. A more useful question is what?

A

> What practices pay off best under what conditions?

58
Q

What are two examples of compensation best practices?

A

> Studies have shown that performance-based pay and stock options grants may be examples of best practices

59
Q

When have studies determined that performance-based pay works actually works well? What phenomenon is this?

A

> suggest that performance-based pay works only when the organization is performing well. This phenomenon is like a virtuous circle.

60
Q

Describe the virtuous circle:

A

> an organization with increasing profits or market share can pay larger incentives in the form of bonuses and stock awards.

> And paying these incentives fairly improves employee attitudes and work behaviours, which in turn improves their performance and ultimately results in better organizational performance.

> The circle gains upward momentum.

> Employees receive returns that compensate for the risks they take.

> And they behave like owners, since they are sharing in the organization’s success.

61
Q

What happens when the virtuous circle goes downward?

A

> when organization performance declines, say in a recessionary period, performance-based pay plans do not pay off; there are no bonuses and the value of stock declines—with potentially negative effects on organization performance.

> Declining organizational performance increases the risks facing employees—no bonuses and even layoffs.

> Unless the increased risks are offset by larger returns, the risk–return imbalance will reinforce declining employee attitudes and speed-up the downward spiral

62
Q

Managing total compensation strategically means what?

A

> Managing total compensation strategically means fitting the compensation system to the business and environmental conditions.

63
Q

The major challenge in managing total compensation is:

A

> is to understand how the pay system can add value and make the organization more successful.

64
Q

Provide a brief overview for the summary of the pay model?

A

> The best way to proceed is to start with the pay model—the objectives and the four policy choices—and then take the steps discussed in this chapter:

(1) assess the implications of total compensation on your organization,

(2) map out the compensation objectives and make decisions on the four policy choices (internal alignment, external competitiveness, employee contributions, and management),

(3) implement the strategy, and

(4) reassess the fit by comparing the results against the objectives

Compensation Management (8 decks)

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