The pay strategy is also influenced by how it fits with other HR systems in the organization. Whatever the overall HR strategy, a decision about the prominence of pay in that HR strategy is required. Pay can be a supporting player, as in the high-performance approach, or it can take the lead and be a catalyst for change. Whatever the role, compensation is embedded in the total HR approach.
So, the compensation implications of all the above factors—the organization’s business strategy, global competitive dynamics, culture and values, the sociopolitical context, employee preferences, and how pay fits with other HR systems—all are necessary to formulate a compensation strategy.
A pay system reflects the values that guide an employer’s behavior and underlie its treatment of employees. The pay system mirrors the company’s image and reputation. Most companies publish a values statement on their Web sites. Medtronic publishes theirs in 24 languages. Part of it is in Exhibit 2.7 . Medtronic’s value #5 recognizes employees’ worth by fostering “personal satisfaction in work accomplished, security, advancement opportunity, and means to share in the company’s success.” Its compensation strategy reflects this value by including work/life balance programs for security, incentives, and stock ownership to share the company’s success.
But there are some skeptics out there. Mission statements have been described as “an assemblage of trite phrases” which impressed no one. In contrast, Johnson and Johnson considers its statement its “moral compass” and “recipe for business success.”
Social and Political Context
Context refers to a wide range of factors, including legal and regulatory requirements, cultural differences, changing workforce demographics, expectations, and the like. These also affect compensation choices. In the case of Whole Foods, its business is very people-intensive. Consequently, Whole Foods managers may find that an increasingly diverse workforce and increasingly diverse forms of pay (child care, chemical dependency counseling, educational reimbursements, employee assistance programs) may add value and be difficult for competitors (other supermarkets) to imitate.
Because governments are major stakeholders in determining compensation, lobbying to influence laws and regulations can also be part of a compensation strategy. In the United States, employers will not sit by while Congress considers taxing employee benefits. Similarly, the European Union’s “social contract” is a matter of interest. And in China, every foreign company has undoubtedly discovered that building relationships with government officials is essential. So, from a strategic perspective, managers of compensation may try to shape the sociopolitical environment as well as be shaped by it.
The simple fact that employees differ is too easily overlooked in formulating a compensation strategy. Individual employees join the organization, make investment decisions, interact with customers, design new products, assemble components, and so on. Individual employees receive the pay. A major challenge in the design of next-generation pay systems is how to better satisfy individual needs and preferences. Offering more choice is one approach. Older, highly paid workers may wish to defer taxes by putting their pay into retirement funds, while younger employees may have high cash needs to buy a house, support a family, or finance an education. Dual-career couples who have doubloe family coverage may prefer to use more of their combined pay for child care, automobile insurance, financial counseling, or other benefits such as flexible schedules. Employees who have young children or dependent parents may desire dependent care coverage. Whole Foods, in fact, as described in its 2008 Annual Report, holds an employee vote every three years to determine the nature of their benefits program.
Based on the opinions of 10,000 U.S. workers, Hudson found that:
• Nearly three out of four U.S. workers claim to be satisfied with their compensation, yet a large portion of the same sample (44%) say they would change their mix of cash and benefits if given the chance.
• When given their choice of unconventional benefits, most employees would select a more flexible work schedule (33%) or additional family benefits (22%), including parental leaves and personal days, over job training (13%) or Supplemental insurance (16%).
• One in five workers say better health care benefits would make them happier with their compensation package. On the other hand, 41 percent said that the single thing that would make them happier is more money.
Choice Is Good. Yes, No, Maybe?
Contemporary pay systems in the United States do offer some choices. Flexible benefits and choices among health care plans and investment funds for retirement are examples. Whole Foods employees vote on the benefits they want. General Mills even allows many employees to swap several weeks’ salary for stock awards. The company believes that allowing employees their choice adds value and is difficult for other companies to imitate—it is a source of competitive advantage for General Mills. Whether or not this belief is correct remains to be studied.
Some studies have found that people do not always choose well. They do not always understand the alternatives, and too many choices simply confuse them. Thus, the value added by offering choices and satisfying preferences may be offset by the expense of communicating and simply confusing people.
In addition to possibly confusing employees, unlimited choice would be a challenge to design and manage. Plus, it would meet with disapproval from the U.S. Internal Revenue Service (health benefits are not viewed by the IRS as income). Offering greater choice to employees in different nations would require meeting a bewildering maze of codes and regulations. On the other hand, the U.S. federal government, including the IRS, already offers its employees a bit of choice in their work schedules. Forty-three percent avail themselves of the option to take compensatory time off for extra hours worked. In contrast, U.S. private sector workers covered by the Fair Labor Standards Act (i.e., nonexempt employees) must be paid time-and-a-half overtime if they work over 40 hours in a week. A compensatory time option is not permitted.
Pay strategies need to take into account the nature of the union-management relationship. Even though union membership among private-sector workers in the United States is now less than 10 percent of the workforce, union influence on pay decisions remains significant, especially in key sectors (e.g., manufacturing, health care, education). Union preferences for different forms of pay (e.g., protecting retirement and health care plans) and their concern with job security affect pay strategy.
Unions’ interests can differ. In Denver, Colorado, a merit pay plan was developed collaboratively by the Denver Public Schools and the Denver Classroom Teachers Association, the local union affiliate. Teachers approved the agreement by a 59 to 41 percent vote, and Denver voters approved a $25 million property tax increase to pay for it. Conversely, many teachers in Springfield, Massachusetts, left for neighboring, higher-paying school districts in part because the district wanted to impose a merit pay plan.
Compensation deals with unions can be costly to change. The U.S. auto companies negotiated “The Jobs Bank” program over 20 years ago with the United Auto Workers. Employees who were no longer needed to make cars continued to get paid until they were needed again. Some received up to $100,000 a year, including benefits. Their job: Do nothing but wait for a job to open. But for a number of people, those jobs never materialized. In various cities around the U.S., about 15,000 employees showed up at 6 a.m. each day and stayed until 2:30 p.m. with 45 minutes off for lunch. Some volunteered for approved community projects or took classes. Jerry Mellon claims, “They paid me like $400,000 over 6 years to learn how to deal blackjack.” Readers may wonder if the Jobs Bank was a compensation strategy that trumped the business strategy. No wonder GM eventually bought its way out of the Bank. No wonder GM recently found it necessary to go through bankruptcy.
EXHIBIT 2.7 Medtronic Values
Written more than 30 years ago, our mission statement gives purpose to our work, describes the values we live by, and is the motivation behind every action we take.
1. To contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health, and extend life.
2. To direct our growth in the areas of biomedical engineering where we display maximum strength and ability; to gather people and facilities that tend to augment these areas; to continuously build on these areas through education and knowledge assimilation; to avoid participation in areas where we cannot make unique and worthy contributions.
3. To strive without reserve for the greatest possible reliability and quality in our products; to be the unsurpassed standard of comparison and to be recognized as a company of dedication, honesty, integrity, and service.
4. To make a fair profit on current operations to meet our obligations, sustain our growth, and reach our goals.
5. To recognize the personal worth of employees by providing an employment framework that allows personal satisfaction in work accomplished, security, advancement opportunity, and means to share in the company’s success.
6. To maintain good citizenship as a company.