Strategic Compensation as a Competitive Advantage

The competitive advantage is a necessary component for the modern organization. The competitive advantage has to be in products, services, internal and external processes and in Human Resources Management. The employees are the assets of the organization and the competitive advantage in Human Resources Policies can generate a huge impact into the net profits and overall performance and profitability of the organization. The competitive advantage in compensation area usually generates a huge portion of the overall competitive advantage in HR Management.

The competitive advantage in the compensation area is not about beating the pay market by paying higher salaries and bonuses to all employees. The managers tend to think, the better the pay of employees, the more competitive the organization is. It is not true, the organization has to carry the higher personnel expenses and during the crisis or the recession, it can be a huge competitive disadvantage in the compensation and the compensation strategy has to be redesigned quickly as the organization can continue in its operation and it has a destroying influence on the overall employee satisfaction.

The competitive advantage can be built by using two general approaches:

• General competitive position on the pay market
• Competitive pay market position for key job positions

General competitive position on the pay market

Setting the higher position than the median on the pay market is quite common competitive advantage setting in smaller companies, who have to fight for the best talents with the big organizations in the same industry.

It is quite dangerous to set the pay market position too high as the organization has to carry the increased costs and eats more from the margins on the products and services. The organization cannot make quick changes and the recession can be deadly dangerous for the organization as it carries higher costs to keep the processes operating and functional. The competitors have a better and bigger space to decrease the personnel costs in bad times.

The higher competitive position on the pay market can be used in the time, the organization grows dramatically and it needs the best talents from the job market and there is no time to decide about the key job positions in the organization and all employees are treated to be of the same importance.

Keeping the long-term higher pay market position is suitable just for the companies in the modern industries, with high margins and the companies with the excellent brand name being known for employing the best of the best.

Competitive advance through strategic pay market position for key job positions

The competitive advantage in compensation can be set just for the key job positions in the organization. This solution is cheaper as the rest of the population can be kept in line with the median of the pay market or it can be below the median as the whole organization keeps the median in general. But, the organization has to be able to reach the consensus about the key job positions in the organization.

Setting the key job positions is the painful procedure for Human Resources getting the consensus from the top management is a bit mission impossible, but HR has to accomplish this procedure successfully as the key job positions are identified and Human Resources can set the right compensation strategy for the key job positions.

The differentiation in the compensation strategy and setting the different pay level for the key job positions is quite usual for the larger organizations as they save the personnel expenses and they are able to protect the key employees. It does not protect the key employees automatically, but it supports the managers and other HR Processes as the employees feel pretty satisfied with their salaries.

The competitive advantage for the key job positions is usually the best pay strategy for the mature organizations, which does not grow aggressively and are purely focused on the product innovations. The key employees bring the innovations and the rest is paid fair enough for their job content.

Strategies to Drive Performance & Satisfaction

In addition to ongoing industry efforts to address the labor shortage including education, technology, and promotion companies must assess their own operations to develop the kind of positive and productive work environments that both attract and retain high-level performers. An effective strategic reward system is fundamental to business performance.

While many executives realize that they need solid performance management and reward strategies and systems, too often they make the common mistake of rewarding one behavior when they actually seek a different outcome. According to Reward Systems: Does Yours Measure Up?, a successful performance system features three primary elements:2

1)  Define desired performance in tangible goals and actionable items.

2)  Measure the right things and use the right measurements.

3)  Reward the right measures with the right rewards.

Define

Rather than maintaining vague or intangible mission statements, management must take a hard look at the activities that drive desired results and, ultimately, economic value. “Unmatched customer service” is a great slogan for a motivational poster, but, “responding to customer complaints within 24 hours 100% of the time,” is a specific, measurable employee expectation.

Goals should be based on the demands of stakeholders – customers, suppliers, owners, and others. The CEO and owner must be kept informed of performance on all goals. To keep employees focused, driven, and not overwhelmed, many experts recommend a limit of 3-5 employee goals. While some organizations have 10-20 critical, actionable goals, these goals should be assigned only to the appropriate people with the responsibility to accomplish them. The CFO might be assigned goals that relate directly to profitability, whereas the controller’s goals may be more operational.

Measure

Ensuring success, both in terms of business growth and employee satisfaction, requires developing metrics that track actions and progress toward goals. The quality of metrics rests heavily on how well strategic performance is defined. As the saying goes, “you can expect what you inspect.” In most situations, the ability to measure outcomes drives results.

Implementing a new performance and reward system that includes tracking performance with hard data can be intimidating at first. One recommendation to help employees move beyond the initial psychological barrier of data-driven performance is to use data for developmental purposes in the beginning of the implementation phase of a new performance system. Metrics are only used in performance evaluations once employees understand the goals and measures that support them.

Beyond the well-known key performance indicators (KPIs) like profit and revenue, construction executives should also measure economic indicators based on employee performance. (See “Key Performance Indicators Are Not Just About Profit” by Shane Brown and Andrew Steger in the March/April 2013 issue.)

Reward

Once goals are defined and measurements are implemented, it is time to consider rewards. Performance rewards can be both financial and nonfinancial, and must reinforce the organization’s performance metrics and measure employee contributions. Companies often have the right long-term goals but mistakenly reward short-term objectives.

The more significant the reward, the more employees will consider how it is measured. In addition to the size/value of a reward, three other elements make rewards impactful:

• Rewards that are highly visible are more powerful than hidden rewards.
• Timing rewards in association with outcomes drives positive behavior. For example, a bonus that comes a month after a goal is achieved will have greater impact on employees than one that occurs months later.
• Finally, staying power impacts reward power.

Bonuses, incentive pay, variable compensation, and compensation-at-risk are good methods for incentivizing positive behavior while preventing it from regressing.

Retooling a company’s performance strategy may seem daunting, but there is good news. It’s likely that competitors’ organization performance plans are not fully developed or implemented. This presents an important opportunity for companies to make a solid performance and reward system a distinctive competency and a competitive advantage. The remainder of this article will explore current tools and how your company can get strategic with its compensation.