SHRM India - Archived Webinar - Designing a Rewards Strategy to Compete in a Talent scarce Market

©SHRM 2010 1©SHRM 2010

16th February 2011

The Society for Human Resource Management (SHRM)

All materials are Copyrighted 2010 by Strategic Human Resources Management India, Pvt. Ltd. or Society for Human Resource

Management unless otherwise expressly noted. All rights expressly reserved.

©SHRM 2010 2

Structure

1. Designing a competitive rewards strategy – Key elements

» Zubin Mulla

2. Reward challenges and implications

» Suman Shankar

3. Question and Answer Session

©SHRM 2010 3

Elements of a reward strategy

• Pay level

• Pay structure

• Pay mix: cash-benefits vs. variable

• Equity-based pay

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Raff, M. G., & Summers, L. H. (1987). Did Henry Ford pay efficiency wages?

Journal of Labor Economics, 5(4): S57-S86.

1913 1914 1915

Average workforce 13,623

Total leaving 50,448

Turnover rate 370 % ? ?

Absenteeism 10 % ? ?Henry

Ford

$5/day

introduced

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Raff, M. G., & Summers, L. H. (1987). Did Henry Ford pay efficiency wages?

Journal of Labor Economics, 5(4): S57-S86.

1913 1914 1915

Average workforce 13,623 12,115 18,028

Total leaving 50,448 6,508 2,931

Turnover rate 370 % 54 % 16 %

Absenteeism 10 % - 2.5 %

Henry

Ford

$5/day

introduced

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Are better employees worth the additional cost?

Average wages $ 10 / hr $ 17 / hr

Health care 47% get $3500/annum 85% get $5735/annum

Retirement plan 64% get $747/annum 91% get $1330/annum

Employee turnover 44% 17%

Shrinkage 1.7% of sales 0.2% of sales

Cascio, W. F. (2006). Decency means more than "Always low prices": A comparison of Costco to Wal-Mart's Sam's Club. Academy of Management

Perspectives, August, 26-37.

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Total employee costs must include direct & indirect

employee costs

Cascio, W. F. (2006). Decency means more than "Always low prices": A comparison of Costco to Wal-Mart's Sam's Club. Academy of Management

Perspectives, August, 26-37.

All figures are in percent of annual sales for 2005All figures are in percent of annual sales for 2005

Total Employee Cost

= 10.23% of revenue

Total Employee Cost

= 7.26% of revenue

Indirect

costs

Direct

costs

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Efficiency wages work best when…

1. Employees are “pivotal” to business success

2. The organization has a differentiation strategy and serves

premium customers

3. Other HR practices are aligned to compensation

4. Benefits from enhanced selectivity & higher performance

outweigh increased costs of higher pay

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Elements of a reward strategy

• Pay level

• Pay structure

• Pay mix: cash-benefits vs. variable

• Equity-based pay

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10

Pa

y (

Rs. L

ac/a

nn

um

)

Pa

y (

Rs. L

ac/a

nn

um

) “Tournament” Pay System

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Seniors are overpaid & juniors are underpaid

Years of service

Incom

e &

Pro

ductivity

Underpayment

Overpayment

The Twisted Pay

Scale

McKenzie, R. B., & Lee, D. R. (1998). Managing through incentives: How to develop a more collaborative, productive, and profitable organization.

New York: Oxford University Press.

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A hierarchical structure works best when..…

1. Performance can be measured only on a relative basis or over a

period of time

2. The organization relies largely on promotion from within

3. There are fewer opportunities for sabotage by team members

4. It is coupled with higher than market pay

©SHRM 2010 13

Elements of a reward strategy

• Pay level

• Pay structure

• Pay mix: cash-benefits vs. variable

• Equity-based pay

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Benefits work best when…

1. Benefits are valued by employees more than what they cost to the

employers

2. Benefits as a cluster support an employer branding strategy of

care and concern for the employees

3. They enable sorting (attracting desired employees)

4. They enhance employee performance and productivity

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An variable pay system divides value created among value

creators depending on their efforts

Value

Creator

A

Value

Creator

B

Returns of B

Efforts of A Efforts of B

Returns of A

Agency Theory Reinforcement Equity Theory

Expectancy Theory Goal Setting

Theory

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Which firm will attract high performers?

Productivity

Inco

me

Firm B

Firm A

P

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Variable pay works best, when…

1. Organizational outcomes are not too volatile

2. Some attrition (sorting) can be tolerated

3. Employees have prior work experience

4. Individual/group outcomes are easily measurable

5. Tangible measures are combined with subjective assessments

6. There is controllability and alignment

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Elements of a reward strategy

• Pay level

• Pay structure

• Pay mix: Fixed-Variable-Benefits

• Equity-based pay

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Accounting or Market (equity) measures?Accounting Measures

(historical)

Market (Equity)

Measures

(futuristic)

Organizational

Strategy

Cost Leadership Differentiation

Firm resource

profile

Slow cycle Fast cycle

Diversification

profile

Unrelated diversification Related diversification

Capital structure Highly leveraged Low leverage

Grossman & Hoskisson, (1998). CEO pay at the crossroads of Wall Street & Main: Toward the strategic design of executive compensation. Academy

of Management Executive, 12(1).

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Stock options work best when…

1. The company is following a differentiation strategy, is in a fast

cycle business, and has diversified in related businesses

2. The company is a start up or is short on free cash

3. In a mature and stable (or rising) stock market

4. They are given in moderate amounts and balanced with stock

grants

5. When firm performance is poor

6. When the employee is new

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All elements of the reward strategy must be well integrated with

other elements of HR strategy as well as the firm strategy

Compensation

Strategy

• Pay level

• Pay structure

• Pay mix

• Equity-based pay

Organization Strategy

HR Strategy

• Recruitment

• Selection

• Training

• Succession planning

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Workforce Trends…

Multi-generational Workforce

Younger age profile and aspiration for better lifestyles

Growth of new industries – IT, BPO

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Employment models…

Multiple employment models

Compensation strategies aligned to different types and

employment models

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Focus is more on Cash…paid

today….

• Employees emphasize more on Fixed pay

Difficult to get them interested in Performance Pay plans

or Stock Plans

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Inflation a concern…

• Inflation touching Compensation budgets in several

ways

Higher salary increases

Fuel costs increasing

Food costs higher

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Performance Management

• Managing differentiation through compensation

remains an issue

• Attention on performance management as never

before

– Need to have a more transparent system

– Identification of high potentials and managing their

development and careers

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Hiring and Premium Skills

Intensifying competition for talent

Niche skills

Internal equity of existing hires vs new hires

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Diverse Markets – Local and Global

Diverse markets

Growth of economy outside the Metros into 2

tier and 3 tier cities

Pressure on hiring quality talent at middle and senior

levels

Global workforce

Pay competitively

Compliance

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Benefit Trends…

Long hours leading to stress….

Increased focus on employee health and well being

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Manufacturing Sector….

• Non management staff a major area of concern

Inflation causing pressure

Employee relations a concern area

• Issue of contract staff salaries and parity with

regular employees

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