How to Build a Compelling Compensation Strategy

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HR 2021: Building the HR Framework of the Next Decade
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The Compensation strategy relates to the Compensation Philosophy of the organization. The strategy needs to clearly state the key strategic behaviors and values, which are in alignment with the Organization’s Core values. (Value and behavior which are guidelines for the Human Resource strategy of Hiring, Training, and development, Performance evaluation and Engagement.)

Robust Integration of Compensation Philosophy with- Business strategy

  • If the organization is in the business of High-end Technology Services, and the tag line is   – Top in Delivering Best of Technology Services.  To make it happen the required Talent, Skill, Structure, organization culture fit needs to be part of the Compensation Philosophy, HR Policies and Process for Attraction, Hiring, Engaging, Performance evaluation, Training and Development, and Career Growth.

The Approach of Total Reward

  • The Present and future Human Resources will need organizations to structure the Pay with best in class Cash Compensation and Benefits, and additionally to have the holistic approach of Total Rewards with Relational returns- Direct, Indirect, Intrinsic, Extrinsic benefits.
    • In addition to Pay, Fast-paced Learning, Social status due to organization, Challenging working assignments and work-life balance.

Compensation Philosophy should be Integrated with Business Strategy

  • Attracting and Hiring the Required cultural and Organizational fit.
  • Onboarding and Integration to have a reflection of the culture fit.
    • Google is looking for candidates who excel in four different categories: general cognitive ability, leadership, role-related knowledge, and “Googleyness. “Google News is basically a synonym for company culture fit and integration.
    • Facebook: Stages onboarding as a six-week boot camp. It may seem intense, but boot camp lets recruits get their feet wet before they settle into a department or specialization.
  • Engagement, Performance Evaluation, Skill Training- Technicalor behavioral alignment of agenda with the compensation strategy for the outcome of desired behaviors, skills, and styles of the Human Resources.

Focus on Reward, Recognition & benefits

Multiple Generational Workforce – Gen-X, Millennials and Gen Z just entering the workplace.

  • Need for different focus and policies for different groups without creating complexities.
    • Instant Gratification Reward for the work to Period Cycle wait for things to happen.
    • Engagement initiatives – DJ night V/s. Gazal Musical night with family, To Office Outing Party at the most happening place with disco V/s. Party at a peaceful location.
    • Benefits  Long term V/s. Short term or Monthly Cash.
    • Way and Pace of Learning optionsClassroom, Digital platforms,  for Self-development and self-Initiated, or wait for Organization to schedule one.

Compensation

“Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship” (George Milkovich) Stakeholders– Employer, Employee, Manager,  Investor, and society. The need is broader and it is a Total Reward Approach.

Total Reward -Approach

Total Compensation = Cash Compensation and Benefits+ Relational Returns. Relational returnsPsychological in nature (Learning opportunities, status, challenging work)

Total reward includes all types of reward – non-financial as well as financial, indirect as well as direct, intrinsic as well as extrinsic. It is a value proposition that embraces everything that people value in the employment relationship and is developed and implemented as an integrated and coherent whole. (Michael Armstrong)

Holistic – focuses on how organizations attract, retain and motivate employees to contribute to success using an array of financial and non-financial rewards.

Characteristics of a total reward strategy (CIPD)

  • Best fit – tailored to the organization’s culture and work processes.
  • Integrative – the reward system is integrated with HR policies and practices.
  • Strategic – aligns reward and business strategies.
  • People-centered –  focuses on employee needs and wants.
  • Customised – provides a flexible mix of reward that offers choice.
  • Distinctive – use rewards to create a distinctive employer brand.
  • Evolutionarylong-term, incremental approach

Compelling Compensation strategy, Alignment with the Pay  Model: G.T. Milkovich and J.M. Newman

1. Internal alignment

  • Focus – Comparisons among jobs or skill levels inside the organization, Pay Parity, development, and Growth for Retention.

2. External competitiveness

  • Focus – Compensation relationships external to the organization:  Benchmark, Pay is ‘market-driven’   Effects of decisions regarding how much and what forms: directly relates to your proposition to Attract, Retain and control the pay costs to ensure the competitiveness.

3. Employee contributions

  • Focus – Employee performance, Focus – Continuous Feedback, Evaluation, and development, Clear transparent outcomes.

4. Management of Pay

  • Focus – Transparent and clear communication from top Management for the compensation policies, structure, benefits, changes. Lacking above Impact is emotional and damaging. Policies ensuring the right people get the right pay for achieving the right objectives in the right way.

Most Critical move: Tailor the Compensation System to the Strategy: Create the best of the Alignment.

Broad Strategic Perspectives for business: 3 Types of Business Strategies explained below:

1- Strategy

  • Innovator: Increase product complexity and shorten product life cycle.
  • Cost Cutter: Focus on Efficiency.
  • Customer Focused: Increased expectations management.

2- Business Response

  • IN-Product Leadership, Cycle time.
  • CO-Operational Excellence, Pursue Cost-Effective Solutions.
  • CU-Deliver Solutions to Customers, Speed to Market.

3- HR Program Alignment

  • IN-Agile, Risk-Taking, Innovative People.
  • CO-Do More with Less.
  • CU-Delight Customer, Exceed Expectations.

4- Compensation

  • IN-Reward Innovation in Product and Process, Market-Based Pay, Flexible-Generic Job Descriptions.
  • CO-Focus on Competitors’ Labour Costs, Increased Variable Pay, Emphasize productivity. Focus on System control and work specifications.
  • CU-Customer Satisfaction Incentives, Value of Job and Skills Based on Customer Contact.

Developing A Total Compensation Strategy: Four Steps

Step 1: Assess Total Compensation Implications:

  • Competitive Dynamics –  Understand the Business.
  • Changing customer needs, Competitors’ actions.
  • Changing labor market conditions& Laws.
  • Globalization alignment with global Culture/values.
  • Cultural differences, changing workforce, demographics, expectations, etc.

Step 2: Map a Total Compensation Strategy:

  • Mapping Offers a picture of a company’s compensation strategy based on the five choices in the pay model.

Steps 3 and 4: Implement and Reassess:

  • Involves implementing strategy through the design and execution of the compensation system.
  • Reassess and realign, to close the loop and recognize that the compensation strategy must be changing to fit changing conditions needs periodic reassessment.

Summary

  • Robust integration of Compensation Philosophy with- Business strategy.
  • Approach of Total Reward.
  • Comp Philosophy – Alignment with the Pay  Model: (G.T. Milkovich and J.M. Newman)
  • Tailor Compensation System to Compensation Strategy
  • Assess and Reassess.

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