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1.1.2 From a Pay Strategy to a Pay Mix

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Managing Employee Compensation

University of Minnesota

4.7 (553 ratings) | 11K Students Enrolled

Course 4 of 5 in the Human Resource Management: HR for People Managers Specialization

How do I pay employees? And how do I get paid? This course covers how to pay employees. We begin by asking: "What kind of a person do I need to attract, retain, and motivate for my business to succeed?" From here, we'll explain how to translate that pay strategy into the pay mix: the salary structure, short-term incentives, long-term incentives, and benefits that are aligned to your business objectives. Interested in learning more about the technical aspects of compensation, but don't know where to begin? We'll give an overview of key the key technical skills: compliance with pay regulations, understanding stock options, shopping for health insurance and pension providers, and designing incentive plans. Lastly, we'll discuss non-monetary methods of motivating employees. If you're interested in learning how to pay employees, or learning where your paycheck comes from, this course is for you!

Skills You'll Learn

Human Resources (HR), Incentive, Compensation And Benefits

Reviews

4.7 (553 ratings)

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PV

Apr 10, 2017

This course has helped me to understand various aspects of compensation management it is a very great course and it provides very good insights about the topics related to compensation.

SD

Jul 24, 2016

An engaging introduction to employee compensation, both monetary and non-monetary. Very useful for participants from other HR backgrounds looking to fill gaps in their knowledge.

From the lesson

Pay Determination

This module covers designing a compensation strategy and translating that into a pay structure.

1.1.1 Overview of the Pay Model6:59

1.1.2 From a Pay Strategy to a Pay Mix10:57

Taught By

Alan Benson
Assistant Professor
Mike Davis
Senior Lecturer

Transcript

Welcome.

In this video, we're talking about examples of pay strategy.

So first of all, what are the goals of our compensation plan?

Once again, our compensation plan needs to attract, retain, and

motivate the kind of person who we need to successfully execute our business

strategy, and we also want to do it in a way that's tax efficient.

That is we're spending all of this money on our compensation plan.

We want to make sure that we're allocating our pay mix in such a way that

we can get as much money to our employees to boost that value proposition and

also to save money ourselves.

We'll be talking more about the second part tax efficiency throughout

the Coursera course.

For now, I want to talk about some different ways that organizations

have tried to attract, retain, and

motivate the person they need to execute their business strategy.

Remember, so our methods for attracting, obtaining, and

motivating those workers are going to depend on our strategic messaging model.

We'll focus on each of those in turn.

So first of all, let's talk about how companies compete on money.

So here's an example of Costco.

Costco is an American retailer.

Their compensation strategy relies on them being an employer of choice.

That is they want to pay a premium for

workers in order to get premium productivity.

It's well known that Costco tends to pay their workers and

have a compensation package, since it greatly exceed their competitors,

both in terms of their base cash and also their benefits.

But we shouldn't really think about this as costing it

as $1 increase in pay per hour as directly mapping onto $1 in increased cost.

That is they also earn higher returns and if they have a very productive and

loyal workforce, they have relatively less loss and

leakage of their inventory from their stores.

And they also try to get the most advantage of their premium pay through

a whole set of complementary practices.

So for example, the Costco because they pay more than the market,

get a lot of applications and that let's them be very,

very selective in who they bring into the organization.

Once they've identified as somebody who they think would be a great fit for

Costco, they then invest intensively on training them.

They are able to do this because when someone joins Costco,

Costco since it pays above the market has very, very high retention rates.

And so by training them, they know that they can

make those investments because they're going to stick around for a long time.

After that, they also have intensive cross training across the different units, that

is again, they can afford to use cross training because again they tend to stay.

Then also they have to use workteams in order so

they can get a bigger sense of the organization and of Costco.

And since they have people who are trained across

the different tasks of running a retail store.

And because they are intensively selected and they are intensively trained,

they make relatively good candidates for management.

And Costco is also famous for our promoting from within.

And then we also have Walmart, so

interestingly Costco competes directly in the same space as Walmart.

Walmart's business strategy relies on cutting costs and operational efficiency.

And for them, this also translates into keeping compensation costs low.

And so their complementary practices rely on operational efficiency

in all aspects of the business including their selection.

They need to be able to select,

identify workers cheaply to train them at relatively low cost.

And also to standardize work practices so

that changes in their work force are minimally disruptive.

Let's go on to competing on pay mix.

So if we look at Costco, Costco again,

pays much higher base pay rates than their competitors.

And they also have very generous benefits and again this attracts is very helpful

for them to attract the kind of person who they wanted to attract,

entertain, and motivate.

But that's not how all organizations compete.

Another example is a company called SAS Institute.

SAS Institute tends to unlike other software companies,

they rely very little on short term incentives and long term incentives, and

rather they focus on their benefits package and base pay.

They see these very generous benefits as

allowing their employees to focus directly on their work.

They're pioneers in offering such benefits as on site daycare and

a reduced work week.

And when the company's founder was asked whether he sees

this as paternalistic, he sees us being really just being good to the employees.

So that their employees can give their best to the company.

Another example is competing on short term incentives.

Lincoln Electric is a manufacturing company headquartered in Cleveland.

And their base pay is relatively similar to their competitors, but

interestingly their short term incentives can

typically constitute two-thirds of their total compensation package.

That is they very intensively use piece rates and they also have a bonus program

that rewards people for producing products of high quality, for

being highly reliable, for being innovative and so on.

And so Lincoln Electric because their total pay package tends to be

more than their competitors, they can also be very selective on who they bring in.

And likewise for those who do stay,

they attract some of the most productive workers in their industry.

And they also are successful in motivating them and retaining them as well.

Early days in Microsoft, Microsoft used to try to target the market median in terms

of base pay back when there were companies such as IBM and Hewlett Packard and so on.

And they're competing for that talent and Microsoft was a relatively young company.

So they had a mix of base pay, benefits, short term incentives, and

long term incentives.

And the way that they would model their

pay would be to again match the market on base pay, but

then to try to be very aggressive in their use of long term incentives.

And Microsoft was one of the early tech firms

that offered their employees very aggressive long term incentives.

Their intentions for offering

very generous long term incentives was in part as a retention tool, that is

individuals who left the organization before their long term incentives.

Their stock options vested would be foregoing that income,

and also it's conveyed a since of shared destiny for early Microsoft.

And so if we look at these organizations altogether we should need to be reminded

that these all have different implications for their messaging.

Now one of Microsoft's competitors for software engineers could be Netflix.

And so Netflix is an example of a company that tends to pay very high base pay.

One of Netflix's informal mottos

was that at an average company the average employee gets an average raise.

But at Netflix the average employee gets a very generous severance package.

That is they tend to pay far above their base pay to try and attract and

retain the very best workers.

And they're motivated just to keep their jobs.

Another way to put this is that we might think about short term incentives as

being a method for attracting or obtaining and

motivating the very most productive workers.

But in some sense base pay can work the same way, that is your incentive for

staying at a company like Netflix, is just the ability to continue to collect

that very high, very competitive base pay.

Another thing that's interesting about Netflix's compensation model

is that they offer employees a lot of flexibility.

And how they allocate that very,

very high base pay across the different benefit structure and incentives.

Interestingly at Netflix,

Netflix allows it's employees to purchase stock at a 50% discount.

And also their options invest immediately

and so what's interesting about Netflix is that Netflix is essentially allowing their

employees to exercise a lot of freedom or responsibility over their paycheck.

And likewise, freedom with responsibility is one of Netflix's informal models,

that is Netflix as an organization that has to adapt with the times,

adapt with business practices.

It's had to reinvent itself from a mail order DVD company to a company that offers

streaming video to now a company that also develops content.

And as these business needs changes, so do their workforce.

And just as part of the deal of

Netflix says that we have to have this flexibility.

We're also going to allow our employees to have that same sort of flexibility

in terms of the way they're compensated.

So once again, I'm messaging for all these different companies varies.

Costco tries to communicate that we want to be an employer of choice,

we want to be the first company that people to come to.

Because we're an employer that offers a very

competitive total compensation package.

SAS is trying to message its employees that they want relatively few

worries so you can focus on your work, and so

they have a compensation package that concentrates on benefits.

Lincoln Electric communicates that it wants to have a star culture,

an organization where the very most productive people would want to

come to work.

Those people who would be attracted to Lincoln Electric,

because they can earn more on their short term incentives

at Lincoln Electric then they can at Lincoln Electric's competitors.

The message behind Microsoft is that we have a shared destiny, and

we're also going to use long term incentives as a retention tool.

And then lastly, Netflix.

Netflix is an organization that needs to adapt.

Also imparts that same freedom with responsibility onto it's workers when they

choose the allocation of their compensation practices.

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