Competitive strategy, Corporate Policies and Compensation

The compensation plan should further the firm’s strategic aims – management should produce an aligned reward strategy. The employer’s basic task here is to create a bundle of rewards – a total reward package aimed at eliciting the employee behaviors the firm needs to support and achieve its competitive strategy. Table summarizes this cause and effect process.


Developing an aligned reward strategy

Questions to ask:

1) What must our company do, to be successful in fulfilling its mission or achieving its desired competitive position?
2) What are the employee behaviors or actions necessary to successfully implement this competitive strategy?
3) What compensation programs should we to reinforce those behaviors? What should be the purpose of each program in reinforcing each desired behavior?
4) What measurable requirements should each compensation program meet to be deemed successful in fulfilling its purpose?
5) How well do our current compensation programs match these requirements?

The employer’s compensation strategy will manifest itself in pay policies. For example a top hospital like Johns Hopkins might have a policy of starting nurses at a wage of 20% above the prevailing market wage. Note that paying higher salaries is no guarantee the employer will hire more qualified employees; many factors influence the quality of hires, for example union pressure and company reputation.

The employer will formulate pay policies covering various pay related issues. One is whether to emphasize seniority or performance. For example, it takes 18 years for a US federal employee to progress from step one to step nine of the government’s pay scale. Seniority based pay may be advantageous to the extent that seniority as an objective standard. One disadvantage is that top performers may get the same raises as poor ones. Seniority based pay might seem to be a relic reserved or some government agencies and unionized firms, but one recent survey found that 60% of employees responding thought it was the people who‘d been with their companies the longest that received the most pay; about 35% said their companies paid high performers more.

Distinguish between high and low performers are a related policy issue. For example, for many years Payless Shoe Source was fairly paternal in how it distributed raises. However, after seeing its market share drop over several years, management decided on a turnaround plan. The plan included revising its compensation policies to differentiate more aggressively between top performers and others. Other policies usually cover the pay cycle, hoe to award salary increases and promotions, overtime pay, probationary pay and leaves for military service, jury duty, and holidays.

Salary Compression

A salary inequity problem generally caused by inflation, resulting in longer term employees in a position earning les than workers entering the firm today

How to handle salary compression is another policy issue. Salary compression which means longer term employees’ salaries are lower than those of workers entering the firm today is a creature of inflation. Process (and starting salaries)go up faster than the company’s salaries and firms need a policy to handle it. On the one and, you don’t want to treat current employees unfairly or to have them leave with their knowledge and expertise. However, mediocre performance or lack of assertiveness not salary compression may explain some low salaries. One policy is to install a more aggressive merit pay program. Others authorize supervisors to recommend equity adjustments or selected employees who are both highly valued and victims of pay compression.


Geography also plays a policy role. For example, the average base pay for an executive secretary ranges from $37, 300 in Albuquerque, New Mexico to, $ 41,900 (Tampa, Florida) , $ 59,800 (New York, New York) and $ 60,100 (San Francisco, California).

The compensation level varies between cities in India as well. Compensation levels in the bigger or Type I cities like Mumbai, Delhi and Bengaluru are higher than in the smaller cites, To manage employment costs, many IT/ITES companies have established units in smaller cities, where the compensation packages are at lower levels. Cities like Ahmedabad, Jaipur, Coimbatore, and Bhubaneswar have attracted firms owing to lower compensation levels.