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May 11, 2007
How to Improve Your Pay Strategy

By Bob Brady, BLR Founder and CEO

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Does your organization pay employees above market or below? Does it have the same strategy for all jobs, in all divisions? When there are differences, do you have a clear strategy that is driven by business goals?

Most employers have a strategy for pay positioning, and many--perhaps most--have paid at least lip service to the premise that the same rules should apply organization wide--and that is often a mistake, according to William H. Ferguson, principal, Mercer Human Resource Consulting.

Speaking at WorldatWork's 2007 Total Rewards Conference in Orlando this week, Ferguson said the pay strategy should be a function of a combination of factors, including the company's profit model, the supply of labor, the power of its "brand," and its position in the labor market. Most companies end up using two factors: Labor supply and geography.

Energy Company

Ferguson used as an example an unnamed energy company which, though it had one major value chain spanning oil field exploration to retail sales at the pump, actually had three different profit models. It used a single talent model across all three that traded heavily on the company's elite brand, was career focused, and differentiated little on the basis of performance.

This worked well for exploration, refining, and even marketing, but it didn't fit with the needs of retail, and as a result the company was having trouble hiring and retaining the kind of people needed to drive retail to success.

During the session, he presented a table showing how retail differed. The differences include: Time horizon, profit margin, business brand, geographic perspective, and organizational structure. In all cases, retail differed markedly. Neither was "right" or "wrong." Neither was "better" or "worse." They just "are what they are."

Segmented Approach

To deal with the differences, Mercer came up with a segmented approach that took into account all of the different factors. It is summarized below:

Global organization


Pay above market for hot skills

Pay with market

Build talent

Buy talent

Career-based rewards

Spot rewards

Company profit and EH&S measure

Local financial and customer satisfaction measures

Non-differentiated awards

Differentiated awards

Emphasis on learning and development

Little emphasis on learning and development

Centralize decision-making

Entrepreneurial decision-making

Pain Points

All of this seems to make total sense, so why did it take the services of an expensive consulting company to figure it out?

Ferguson argues that a big reason is that most compensation decisions are driven by just two factors: Ability to attract and retain and geography. These pain points may be urgent, but profit models, culture, and mobility are also important. Using just the two former factors, you end up with pay programs that are "segmented," but with some very dysfunctional characteristics. As a consultant, he was able to go in and structure a look into the company's various profit models, unburdened by the institutional pressure to apply rules dictated by the dominant culture of the organization.

Starting Out

Step one in this approach is to identify the various profit models of your organization. He gave numerous examples, including: Customer solutions, product pyramid, multi-component, time, blockbuster, low-cost new products, etc. There are many and most organizations have more than one.

The next step is to identify the "high value capability sets" that account for success in each profit model. Once those have been identified, the next steps are to estimate future supply of those labor groups, evaluate the positive/negative impact of the employer's "brand" on the groups, and establish the employer's external labor market position. The sum of these factors helps to understand what your pay strategy should be. (Simplistically, someone with abundant supply, a good brand, and a dominant position, should be able to recruit and retain high quality personnel even its pay position is below market median. Conversely, an employer who is expanding into a new area cannot necessarily use the aura of its brand and may have to pay above median until it becomes known as a good place to work.)

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