Reward philosophy

and strategy
LECTURE 3
Lecture Objectives

Where it fits
Reward philosophy
Reward strategy defined
Areas & levels of alignment
Corporate strategies & pay issues
 Effective Reward philosophy

Reflects
& underpins a positive
organizational culture
Provides
guiding principles on which to
develop reward policies
Addresses key people issues organization
faces viz. a viz. effort & contribution
Expresses
values & beliefs organization
wants to propagate
 Reward strategy defined
The deliberate utilization of the pay system as an
essential integrating mechanism through which
the efforts of various sub-units and individuals are
directed toward the achievement of an
organization's strategic objectives, subject to
internal and external constraints. When properly
designed, contingent upon the organization's
strategic objectives and constraints, it can be an
important contributor to the firms performance.
Gomez-Mejia and Balkin (1992)
Areas of alignment
 Levels of Strategy

Corporate-Level Managers Corporate

Strategy

Two-Way Influence

Division Managers Business Strategies

Two-Way Influence

Functional Mgrs Functional Strategies

Two-Way Influence

Operating
Operating Strategies
Mgrs
 Corporate Level Strategy
Vertical Integration
Input Domain & Output Domain
Control of Transaction Costs
Related Diversification
Leveraging Core Competencies
Sharing Activities
Pooled Negotiating Power
Unrelated Diversification
Corporate Restructuring
Portfolio Management
 Corporate Level Strategy
Related Diversification
Haircare: Pantene, Head & Shoulders, Clairol
Household cleaning/care: Flash, Fabreeze,
Laundry: Daz, Ariel, Fairy, Bounce
Paper: Bounty, Pampers
Beauty: Oil of Olay, Max Factor
Related Diversification through acquisition and internal start-
ups
Fits/Synergies
Same wholesale distribution
Common retail settings & shoppers
Advertised & promoted the same way
 Corporate Level Strategy -
Unrelated Diversification
Examples
Business Groups

Conglomerate Advantage
Alignment of organizational processes with choice of
business
Alignment of initiatives with each other
Alignment with ownership structure
 Troika of Issue / Problems in
Measurement
The Controllability Problem
It is difficult to know whether the outcome was a result of controllables
(effort, wise decisions) or uncontrollables (luck, chance, industry
landscape).
The Alignment problem
When a job requires multiple tasks, it is usually the case that
performance regarding some tasks is easy to measure relative to
others. Individual performance measures are incomplete (distorted)
and not perfectly aligned with value creation.
The Interdependency Problem
The value is often created by team of individuals. When a given
outcome is the joint performance of many; it is difficult to measure the
performance of individual team members.
Compensation Orientation
 Vertical alignment

Corporate Strategy
Diversifiedbusiness units --- business
unit performance
Lessdiversified businesses and more
coordination between units ---
corporate performance