LER428: Total Rewards

Lesson 1 Overview

In this lesson, you will learn the definition of compensation and its place in the system of practices that defines it as a human resource management function. It is important to understand that the design and implementation of compensation practices can enhance or hinder a company’s attainment of its business goals (competitive strategy). Strategic compensation describes the relationship between compensation practices and competitive strategy. Promoting compensation’s value as a strategic tool requires that compensation professionals work with company leadership to ensure alignment between compensation system design and company strategies. You also will learn about the building blocks and structural elements of strategic compensation systems; pay and employee benefits are examples of building blocks, and both pay grades and pay ranges are examples of structural elements. Finally, you will learn how the compensation function fits within a company’s structure and discuss the stakeholders of the compensation systems (e.g., employees).

Learning Objectives

After successfully completing this lesson, you should be able to do the following:

• Define strategic compensation.
• Summarize the role of compensation as a strategic business partner.
• Explain strategic compensation decisions.
• Identify and discuss the building blocks and structural elements of strategic compensation systems.
• Describe the fit of the compensation function in organizations.
• Identify the stakeholders of the compensation function and summarize their stakes in the work that compensation professionals perform.

   

Readings and Activities

By the end of this lesson, make sure you have completed the readings and activities found in Lesson 1 of the Course Schedule.

 

 

Compensation and Strategic Compensation

We want to be compensated fairly for the work we perform. And most companies want to pay a sufficient amount to recruit and retain well-qualified employees. How do we achieve these objectives? We rely on the expertise of compensation and human resource (HR) professionals to build compensation systems. There are many moving parts that go into building compensation systems; we will study those parts and how they work together to make a system that balances the interests of employees and companies.

There is a difference between compensation and strategic compensation that you should understand. We must start by exploring what we mean by compensation, which will give us the foundation for describing strategic compensation.

Compensation

Compensation refers to two elements: intrinsic compensation and extrinsic compensation. Intrinsic compensation describes positive feelings and satisfaction that come from performing work (e.g., intellectual challenge) or the positive impact of performing work in the service of others (e.g., nursing). Extrinsic compensation refers to monetary and nonmonetary rewards associated with performing a job and having employment status in the company. Monetary rewards are the hourly pay, annual salary, or pay increases an employee receives for fulfilling job obligations or learning new knowledge and skill sets (which you will learn about in Lessons 3, 4, and 5). Nonmonetary rewards are employee benefits (which you will learn about in Lessons 10, 11, and 12). For example, health insurance coverage and paid time off are employee benefits. Employees receive benefits for working for the company and benefits determination is not contingent on job performance.

Strategic Compensation

Strategic compensation refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies. Compensation and benefits executives work with the lead HR executive and the company’s chief financial officer to prepare total compensation strategies.

 

Compensation as a Strategic Business Partner

Now more than in decades past, compensation professionals possess the opportunity to advance to the upper levels of a company’s management structure. We might see titles such as director of compensation or vice president of compensation. High-ranking compensation professionals understand the company’s competitive strategy and contribute to the HR and compensation strategies that support it. In fact, at all levels in the company, compensation professionals help shape competitive business strategy and consider the human capital of current employees and likely recruits. For example, if a company is embracing new technology for which employees have not yet had the opportunity to master, compensation professionals place a high importance on person-focused pay systems and extensive training, which are defined in Chapter 1 of your textbook. AT&T is an example of a company with a workforce facing the challenges of skills obsolescence. For decades, AT&T offered landline service and employed telephone-line workers who could install and repair wires on telephone poles. Telecommunications has evolved from landline service (though it is not yet extinct) to communications based on the use of cellular and fiber-optic technology. Most of the line workers' skills are rapidly becoming obsolete. AT&T faces the dilemma of whether to train its experienced workforce or replace them with others who are more well versed in the new technology.

 

Strategic Compensation Decisions

Companies seeking to earn profits face many challenges as leadership strives to meet financial objectives (e.g., return on investment) and market objectives (e.g., 10% annual sales growth). Companies must scan the external environment to identify opportunities for success and threats for loss. For example, the major retailer Sears did not anticipate the growth and importance of e-commerce and online retailers such as Amazon, which posed a threat to its success. As the staggering number of Sears brick-and-mortar stores closed, the company's online presence came too late. Your textbook contains examples of threats and opportunities some companies face. the "Competitive Strategy and Sportsman Shoes" case analysis assignment gives you an opportunity to identify threats and opportunities.

 

Building Blocks and Structure of Strategic Compensation Systems

Most compensation professionals' work centers on extrinsic compensation, largely leaving practices supporting intrinsic compensation to HR and organizational development professionals. Extrinsic compensation can be described by two sets of practices: core compensation and employee benefits. See Figure 1-2 in your textbook to visualize the organization of the building blocks of compensation systems.

Core compensation incorporates hourly wages or annual salaries and methods for increasing pay for overtime. We will address these practices in Chapters 3 and 5 of your textbook; you'll learn that some of the programs are job based while others are person focused. Some practices are based on pay-for-performance principles.

Employee benefits refers to compensation other than wages or salaries. These benefits can be distinguished as ones required by law and others offered at the discretion of the employer. Many new benefits appear in employee benefits packages, such as pet insurance. You will study employee benefits in Lessons 10, 11, and 12.

Compensation in an Organizational Structure

Compensation professionals do not operate in isolation. This point was made earlier when we discussed that some compensation professionals rise to the ranks of business partner. Most compensation professionals will be on the ground developing policies and practices and evaluating effectiveness. The Compensation in Action feature found toward the end of each chapter describes how compensation professionals work with HR professionals, line managers, and sometimes employees. For instance, compensation professionals work with recruitment specialists to determine competitive pay rates to successfully recruit and retain talented employees.

 

Stakeholders of the Compensation System

HR professionals, including those in the compensation area, provide services to stakeholders within and outside the company. The primary stakeholders include:

• Employees
• Line managers
• Executives
• Unions
• U.S. government

Compensation professionals’ work must keep stakeholder interests in mind; you could say that there is good news and bad news about satisfying their objectives. The good news is that labor unions and employees expect to be paid fairly for the work they perform and receive cost-of-living increases that guard against rising inflation. The bad news is that some stakeholder expectations are in conflict. For example, most executives prefer to avoid a higher overtime pay rate; however, the U.S. government's Fair Labor Standards Act (see Chapter 2) requires companies to pay a higher rate when certain criteria are met (for instance, when certain employees work more than 40 hours in a seven-day period).

The textbook discusses the listed stakeholders and the role of compensation professionals in balancing competing interests.

Lesson 1 Wrap-Up

In this lesson, you learned the concepts of compensation and strategic compensation, followed by the building blocks and structural elements of compensation systems. With this knowledge, you developed an understanding of the fit of the compensation function within a company’s structure. You also considered the many stakeholders and interests they expect to promote through the effective design and implementation of compensation systems. For example, employees expect fair and equitable pay for the work they perform. In Lesson 2, you will become familiar with the external context (e.g., government regulation) that influences the design and implementation of compensation systems.