Module 1--Supporting Business Objectives Through Variable Pay Flashcards
What are the ELEMENTS of COMPENSATION?
Elements of Compensation
Compensation is perhaps the most visible component of the total rewards model and as such deserves a significant amount of attention and planning. Compensation can be divided into two
primary elements:
■ Fixed pay – nondiscretionary compensation that does not regularly vary according to performance or results achieved. Base salary or base hourly rate are primary examples.
■ Variable pay – compensation that is discretionary or contingent on performance or results achieved, and can be designed for any individual or combination of individuals (e.g., an entire organization, business unit, division, department, location [site], workgroup or special team). It is termed “variable” because the amount actually paid will vary based on whatever criteria the organization chooses.
What are the Primary Elements of Variable Pay?
Primary Elements of Variable Pay
■ Variable pay rewards for accomplishments and results
* Based on organizational, group or individual results – aligns and focuses organizations, business units, teams and individuals on the accomplishment of key goals and objectives, assesses their performance, and rewards those who accomplish them
- Performance-based compensation – serves as a pay differentiator between those who achieve results and those who do not
- Flexible and adaptable
What is the GOAL of VARIABLE Pay?
The Goal of Variable Pay
The ultimate goal of variable pay is to improve organizational performance.
In order for the compensation professional to be able to design and implement the right variable pay plans, one must first understand the business strategy and the objectives of the organization. Only then can the practitioner develop plans that are consistent with the organization’s desired outcomes.
What is the BUSINESS STRATEGY?
BUSINESS STRATEGY
Business strategy is the broad framework of principles and approaches that guide the day-to-day decisions affecting the business. It ensures that the business supports the organization’s mission, goals and objectives. Although organizations must employ many strategies to a certain degree, organizations will place primary focus on one of three strategies.
What are the 3 BUSINESS STRATEGIES?
■ Operational excellence – primarily a price / cost-based strategy
* This strategy often includes a combination of price, quality, dependability and ease of purchase that competitors cannot match. The corporate culture typically strives to minimize waste and reward efficiency.
■ Product / service leadership – primarily an innovation-based strategy
* This strategy focuses on innovation, product development and market exploitation. The corporate culture encourages imagination and a mind-set driven by the prospect of creating the future.
* Organizations that use this strategy offer products and services that expand performance boundaries (the best products), leapfrog / replace technologies or products, create more /
better ideas and commercialize them faster than their competitors.
■ Customer intimacy – primarily a solutions-based strategy
* This strategy focuses on creating results for carefully selected customers (making them successful). The corporate culture encourages deep and lasting relationships with customers.
* Organizations that use this strategy build bonds with targeted customers; they meet or exceed customer needs to build customer loyalty.
Business Strategy Drives Business Objectives
In defining the business strategy, the organization determines what business objectives it will focus on. Business objectives are the link between an organization’s business strategy and the specific actions employees must take or behavior they need to exhibit. The following are examples of business objectives that are commonly associated with each strategy.
■ Business strategy: operational excellence
* Product quality
* Operational efficiency improvement
* Process improvement
* Cost reduction
■ Business strategy: product / service leadership
* Market share / market penetration
* Product development
* Time from innovation to market (shorter than 90-days)
■ Business strategy: customer intimacy
* Customer opinion of products
* Product quality
* Customer retention
* Customer satisfaction
Business Life Cycle
Business life cycle is the progression of steps an organization passes through from its creation to its decline. An organization’s focus will change as it moves through the various phases of the life cycle. Where an organization is in its life cycle can have a major impact on the types of variable pay programs best suited to meet organizational objectives.
There are four stages of a business life cycle:
■ Start-up – The organization is new with little or no formal policies or procedures. The organization’s focus is on obtaining capital, marketing products or services, initial sales growth and cash conservation.
■ Growth – In this stage, the organization is highly focused on growing sales, increasing distribution capability and determining how to efficiently produce products or services to meet growing demand. Growth typically generates the need to begin standardizing procedures through policy creation.
■ Mature – The mature stage is characterized by a focus on maintaining / increasing market share, improving productivity and otherwise reducing cost of sales. Improvements to products are more evolutionary than revolutionary. The organization typically has higher levels of bureaucracy and greater amounts of cash on hand than at other stages.
■ Decline – At this point, the organization’s revenues are declining. It must decide whether to reinvest in current products, create new products or maximize profits with current products as long as possible.
Business Life Cycle Influences Business Objectives
Business Life Cycle Influences Business Objectives
The organization’s position in the business life cycle should be considered in selecting the proper business objectives.
■ Start-up
* Obtaining capital
* Cash conservation
* Develop brand awareness
* Develop marketing plan
■ Growth
* Production capability
* Market share / market penetration
* Sales volume / revenue growth
■ Mature
* Improve operational efficiency
* Stock price appreciation
* Maintain / increase market share
■ Decline
* Maximize profits
* Extend product demand
* New product development
Variable Pay Helps Achieve Business Objectives in 4 major ways
Variable Pay Helps Achieve Business Objectives
The ultimate goal of variable pay is to improve organizational performance. Once an organization has identified its key business objectives, the proper design and implementation of variable pay programs will help motivate employees to behave in ways that accomplish those objectives. Variable pay influences organizational performance by providing:
■ Focus
* Clarifies the important tasks / accomplishments employees must perform in order to contribute to organization-wide performance
* Identifies what is important by establishing measures and objectives
■ Alignment
* Goals cascade from the organization to the business unit to the individual * Emphasizes the balance between organizational success and individual performance
■ Motivation
* Fosters engagement and functions as feedback, enabling employees to see how they make a difference
* Facilitates change by using the pay / reward lever
* Encourages continuous improvement
■ Reinforcement
* Acknowledges desired behavior / results and provides positive reinforcement
* Represents a commitment by the organization to employees
Variable Pay in Tandem with Fixed Pay
Variable Pay in Tandem with Fixed Pay
Both fixed and variable pay are crucial elements in the overall cash compensation program. Both elements should be designed with the other in mind to ensure they work together in meeting business
objectives. Depending on the business strategy and compensation philosophy of the organization, different combinations may be appropriate.
Examples:
* Company A – A relatively new company desiring high growth may elect to keep base pay lower to conserve fixed cash expenses while providing the opportunity to earn high levels of
variable pay if company growth objectives are met.
* Company B – An R&D company with a desire to be on the “cutting edge” may elect to provide high levels of both fixed and variable pay in order to attract the very best talent.
* Company C – A mature company with a mature product line may elect to provide higher levels of fixed pay to promote retention while setting variable pay at more moderate levels.
- Which of the following describes a purpose of variable pay?
A. To reward individuals for acquisition of new skills and competencies
B. To ensure the individuals’ value relative to the labor market
C. To differentiate the pay of individuals who achieve results from those who do not
D. To reward individuals for their sustained performance over time
C. To differentiate the pay of individuals who achieve results from those who do not
- What business strategy often includes a combination of price, quality, dependability and ease of purchase that competitors cannot match?
A. Operational excellence
B. Product / service leadership
C. Customer intimacy
A. Operational excellence
- Which of the following business objectives would relate most to a product / service leadership strategy?
A. Improve operational efficiency
B. Time from innovation to market
C. Customer attraction and retention
D. Reduce costs
B. Time from innovation to market
- In which of the following stages of the business life cycle would an organization generally be focused on maintaining / increasing market share, improving productivity and reducing cost of sales?
A. Start-up
B. Growth
C. Mature
D. Decline
C. Mature
- Which of the following business objectives would relate most to the start-up stage of a business life cycle?
A. Maximize profits
B. Product quality
C. Maintain / increase market share
D. Obtaining capital
D. Obtaining capital
- What influences can variable pay provide in relation to organizational performance?
A. Customer satisfaction, brand awareness and product quality
B. Focus, alignment, motivation and reinforcement
C. Attraction, penetration, innovation and collaboration
D. Growth, efficiency and capability
B. Focus, alignment, motivation and reinforcement
What influences can variable pay provide in relation to organizational performance?
A. Growth, efficiency and capability
B. Attraction, penetration, innovation and collaboration
C. Customer satisfaction, brand awareness and product quality
D. Focus, alignment, motivation and reinforcement
D. Focus, alignment, motivation and reinforcement
Which of the following describes a purpose of variable pay?
A. To reward individuals for their sustained performance over time
B. To differentiate the pay of individuals who achieve results from those who do not
C. To ensure the individuals’ value relative to the labor market
D To reward individuals for acquisition of new skills and competencies
B. To differentiate the pay of individuals who achieve results from those who do not
What business strategy often includes a combination of price, quality, dependability and ease of purchase that competitors cannot match?
A. Customer intimacy
B. Operational excellence
C. Product / service leadership
B. Operational excellence
Which of the following business objectives would relate most to the start-up stage of a business life cycle?
A. Product quality
B. Maintain / increase market share
C. Obtaining capital
D. Maximize profits
C. Obtaining capital
Which of the following business objectives would relate most to a product/service leadership strategy?
A. Improve operational efficiency
B. Customer attraction and retention
C. Reduce costs
D. Time from innovation to market
D. Time from innovation to market
In which of the following stages of the business life cycle would an organization generally be focused on maintaining / increasing market share, improving productivity and reducing cost of sales?
A. Decline
B. Mature
C. Start-Up
D. Growth
B. Mature
