Compensation and Pay for Performance

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Should compensation systems differ depending upon the company’s objectives?

9.2 Strategic Compensation What is strategic compensation? Simply stated, it is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives of the organization. Strategic compensation has redefined the role and perceived contribution of compensation. No longer merely a “cost of doing business,” when used strategically compensation becomes a tool to secure a competitive advantage.

Developing a compensation strategy requires that the organizational objectives are first analyzed. What does the company want to be known for? What are its growth projections? What are its core competencies? Once you figure this out, you can then decide what types of behaviors and skills will be rewarded. By rewarding specific skills and behaviors, you demonstrate that you are willing to pay for performance and not just for showing up to work. Finally, as part of your strategy you need to decide on the compensation base most appropriate for the types of jobs in your company. For example, you might want to pay a sales representative based more on commission and a manager more on a yearly salary.

Strategic compensation goes beyond determining the appropriate market rates to pay employees, although market rates are one element of compensation planning. Strategic compensation should also purposefully link compensation to the organization’s mission and general business objectives. For example, while a company’s decision to increase base pay for all its employees is a strategic move to be more competitive with market rates, companies should also recognize that base pay is not everything. For example, one product development manager stated, “I could be making much more than I’m getting at Google, but I chose Google because of the flexibility to grow and work on exciting new products … plus, where else can you get a chef making you breakfast, lunch, and dinner anytime you want?”

In this regard, Google has not only aligned its compensation strategy with the external market, it has also aligned it with its desire to be a flexible and innovative company whose core competency is found in the creativity of its people. Commenting on the importance of strategic compensation to organizational success, Gerald Ledford and Elizabeth Hawk, two compensation specialists, note, “Companies throughout the economy have begun to rethink their compensation systems in search for competitive advantage.”

Additionally, strategic compensation serves to mesh the monetary payments made to employees with other HR initiatives, such as recruitment, selection, training, retention, and performance appraisal. For example, starting pay can make a difference in whether or not

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someone will apply for the job. A compensation specialist speaking to one of the authors noted, “The linkage of pay levels to labor markets is a strategic policy issue because it serves to attract or retain valued employees while affecting the organization’s relative payroll budget.” For example, colleges such as University of Arkansas, Fayetteville; Bridgewater State University, Monroe College; and Brown Mackie College know that they cannot attract or retain qualified professors unless their pay strategy is linked to competitive market rates.

Many fast-food restaurants, such as Burger King, Taco Bell, and Blimpie’s—traditionally low- wage employers—have needed to raise their starting wages to attract a sufficient number of job applicants to meet staffing requirements. If pay rates are high, which creates a large applicant pool, then organizations may choose to raise their selection standards and hire better-qualified employees. This in turn can reduce employer training costs. When employees perform at exceptional levels, their performance appraisals may justify an increased pay rate. For these reasons and others, an organization should develop a formal program to manage employee compensation. Step one of this program is to develop a compensation strategy that is linked to the organization’s objectives.

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