Compensation as A Source of Competitive Advantage

1. Compensation as A Source of Competitive Advantage Christina L. Greathouse, Ph.D. Strategic Performance Group October 15, 2013

2. Strategic Performance Group • Founded 1995 • Three partners, 32 contract employees • Work across all industries • Human Capital Solutions, OD, Coaching • Christina Greathouse Bio • 25+ years consulting experience with Arthur Andersen and KPMG Peat Marwick prior to co-founding SPG • Ph.D. Industrial/Organizational Psychology • Taught graduate level courses at GMU and Marymount University

3. Strategic Performance Group • The Great Recession has radically changed the way many companies do business • Dramatic shifts in corporate strategy requiring re-alignment of compensation practices to support those changes • Newly conservative approach to compensation spending

4. Today’s Topics • What science has taught us about work motivation • The relationship between pay satisfaction and job satisfaction • Why “pay for performance” systems often fail • How compensation can be used effectively as a management tool to gain and keep a competitive advantage

5. Compensation Redesigned • The Great Recession has radically changed the way many companies do business • Dramatic shifts in corporate strategy requiring re-alignment of compensation practices to support those changes • Newly conservative approach to compensation spending

6. Compensation as a % of GDP

7. Compensation and Productivity

8. Global Salary-Budget Trends Source: WorldatWork 2013-2014 Salary Budget Report

9. Pay Dissatisfaction • Washington Post (9/29/13) reported: “Four years into an economic recovery in which most of the benefits have flowed to the top earners, a majority believe that the American Dream is becoming markedly more elusive (source: Washington Post-Miller Center Poll) • 58% of those polled believe they earn less than they deserve • 6 in 10 workers worry these will lose their jobs because of the economy • SPG employee survey research indicates that many employees are dissatisfied with their compensation

10. Employee Surveys: Low Scoring Items • I receive reasonable compensation compared to my peers at my company. • The pay at my company is competitive with other similar organizations. • I am paid fairly for someone with my qualifications. • I am paid fairly for my accomplishments at my company. • I receive reasonable compensation compared to my peers at my company. • People are compensated at my company for what they accomplish. • My hard work is rewarded appropriately. • I have been adequately recognized for my work contributions. • I understand how the current compensation system works. • I understand how performance increases are awarded.

11. Relationship of Pay Satisfaction to Job Satisfaction

12. Work Motivation Theories • Expectancy Theory (Vroom) • Equity Theory (Adams) • Motivator-Hygiene Theory (Herzberg) • Self-Determination Theory (Deci)

13. Expectancy Theory (Vroom)

14. Motivator-Hygiene Theory (Herzberg)

15. Equity Theory

16. Equity Theory (Adams) • There is an expectation to be paid according to one’s contribution • Research has shown that most people • Perceive themselves as top performers when compared with others • Believe they work as hard or harder than others • Attribute their success to hard work and/or skills • Attribute others’ success to luck or favorable conditions • This leads to feelings of inequity and unfairness when comparing one’s compensation with others’ compensation

17. Goal-Setting Theory • Clarity: Specific, measurable, time-bound • Challenge and Complexity: Enhances feelings of achievement • Commitment: Input and ownership • Feedback: Assessing progress

18. Self-Determination Theory (Deci) • People have three innate, psychological needs: • Competence: succeeding at challenging tasks • Autonomy: having choice over one’s actions • Relatedness: enjoying mutual respect and reliance with others • Meeting these needs leads to job satisfaction, work motivation, and high performance

19. Putting It All Together • Employees can be de-motivated by receiving less pay than they think they deserve (equity theory) • There are very few jobs where “paying for performance” is motivating because the rewards are too small (expectancy theory) • Compensation can lead to job dissatisfaction, but has a limited effect on job satisfaction (motivator-hygiene theory) • Employers need to get employees to stop obsessing over compensation, so they are open to other powerful motivators such as a desire to do meaningful work, intellectual challenge, recognition, and self-determination (self-determination theory)

20. Achieving a Competitive Advantage Adopt pay practices that avoid de-motivation: • Implement a transparent compensation philosophy and process in line with organization’s values • Pay people fairly in relation to the market and to each other (internal and external equity) • Stop using salary increases and bonuses as an incentive, unless they are large enough to make a difference • Reward results, not effort • Use pay as a recognition tool • Use goal setting to motivate performance, not as a method to determine compensation

21. Establishing Equity • Internal equity: job classification • External equity: market analysis • Integrate equity analyses into pay decisions • Establish fair pay administration processes

22. Differentiation Among Talent Segments • Must be willing to pay a premium to attract and retain highly skilled talent critical to the successful execution of the business strategy • Identify talent segments critical to success • Identify key drivers for each talent segment • Identify talents segments at risk • Design strategies employing a full range of rewards for critical talent segments • Integrate these strategies into corporate compensation program

23. Production R&D Quality IT Marketing Accounting HR Mapping an Organization’s Human Capital Architecture Unique skills Alliance/ Partners Core knowledge workers Lower strategic value High strategic value Employee Functions Traditional job-based employees Contract labor Generic skills

24. Pay Increases as a Function of Performance Source: Mercer 2013/2014 U.S. Compensation Planning Survey Report

25. Holistic Compensation Strategies • Use compensation programs strategically, to support the business strategy • Integrate the compensation system with other components of the HR life-cycle • Employ a full-range of strategies to recognize and reward employees

26. Holistic Compensation Strategies • Base salary • Short-term rewards • Long-term rewards • Equity-based rewards • Employee benefits • Non-financial recognition and rewards

27. Recognition and Rewards • Spot bonuses • Project completion bonuses • Retention bonuses • Investment in training and development • Paid time off • Flexible work schedules • Cross-training

28. Transparency and Communication • Employee input/buy-in • Providing market pricing data • Publishing internal salary ranges • Publishing total compensation statements • Publishing compensation and benefits information on website

29. Total Compensation Statements