Formulating

Constraints
The the
on
compensation
compensation
strategy
compensation
formulation
strategy
process

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PRODUCTION OF Chapter 8

CREATED BY Group G

DATE SCENES TAKE

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INTRODUCTION...
... The compensation strategy process..

CHAPTER 8
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Formulating the reward & compensation strategy
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Constraints on
The
compensation
compensatio
n strategy
process Reward &
Four Key compensation
understandings strategy

Formulating
the
compensation
strategy

CHAPTER 8
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Formulating the reward & compensation strategy
SCENE
1

Constraints on
The
compensation
compensatio
n strategy
process Reward &
Four Key compensation
strategy
understandings

Formulating
the
compensation
strategy

CHAPTER 4
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Formulating the reward & compensation strategy
SCENE
1
The compensation strategy process

Four
Four Key
Key Understandings
Understandings
Reward &
compensation
strategy
 Understanding
Understanding your
your organisational
organisational context
context

 Understanding
Understanding your
your people
people

 Understanding
Understanding your
your compensation
compensation options
options

 Understanding
Understanding your
your compensation
compensation constraints
constraints

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Formulating the reward & compensation strategy SCENE
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CONSTRAINTS
CONSTRAINTS ON
ON COMPENSATION
COMPENSATION
Reward &
compensation
strategy
 Legislated
Legislated constraints
constraints

 Labour
Labour market
market constraints
constraints

 Product/Service
Product/Service constraints
constraints

 Financial
Financial constraints
constraints of
of the
the organisation
organisation

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Formulating the reward & compensation strategy SCENE
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FORMULATING
FORMULATING THE
THE COMPENSATION
COMPENSATION STRATEGY
STRATEGY
Reward &
compensation
strategy
 Define
Define the
the required
required behaviour
behaviour

 Define
Define the
the role
role of
of compensation
compensation

 Determine
Determine the
the compensation
compensation mix
mix

 Determine
Determine compensation
compensation level
level

 Evaluate
Evaluate the
the proposed
proposed strategy
strategy

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CASE STUDY
…Southwest Airlines...

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Southwest Airlines Co. is an American
low-cost airline

The airline has its headquarters on the

grounds in Dallas, Texas

Southwest is the largest airline in the

world by number of passengers carried
per year.

Southwest maintains the third-largest

passenger fleet of aircraft among all of
the world's commercial airlines

Southwest operates more than 3,200

flights daily

Southwest Airlines has not had any

passenger deaths on any of its planes
in its history, but has had eight
incidents/ accidents

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Southwest Airlines Strategic Reward System SCENE
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1 Strategic Base Pay

2 Strategic Benefits
3 Strategic Incentives
4 Strategic Recognition Programmes
5 Implications for Management
6 Successful Reward System

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Strategic Base Pay

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Strategic Base Pay of SWA SCENE
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• One of the key aspects of SWA’s strategy is to retain valued employees and secure long-term
commitment
• These objectives are attained, in part, though seniority and job security clauses in the collective-
bargaining agreement.
• Negotiated agreements reflect pay levels consistent with or slightly below market wages and
salaries. This helps to keep labour costs in line with the company’s low-cost provider strategy.
• Employees can share in the company success through various contingent compensation
programmes, thereby increasing their overall pay. In fact, many of SWA’s employees are
millionaires, including all of those who started with the company in 1971.
• In terms of executive compensation, the CEO is paid at below the median of the market for
executives in companies of similar size.
• Other senior managers are compensated slightly above the market, but they retain a smaller
portion of the company’s stock.
• In this manner, company executives are relatively underpaid in cash compensation, but
they are committed to the company’s long-term financial success and growth through stock
ownership
• Employees and executives have the same opportunities for stock ownership.
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Strategic Benefits

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Strategic Benefits SCENE
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It includes both traditional programmes and a few innovative initiatives
Benefits help to reinforce the organisation’s strategic intent of valuing its employees.
Employees and
SWA offers medical their family fly
insurance, dental free with SWA
insurance, vision 1 and enjoy
coverage, life insurance, discounted travel
long-term disability 2 with other
carriers.
insurance, dependent 3
care, adoption assistance
and mental health
assistance, among others
(at no cost to employees)

Employees also
receive
A tip: thoughtful gifts
One of the key concepts behind this on major life
array of benefits is the assurance that achievements
“employees matter” at SWA and that
the company will do its utmost to take and a chance to
care of its most important stakeholder. celebrate often
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Strategic Incentives

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Strategic Incentives
Two main contingent or variable pay systems
 The profit-sharing program,
initiated in 1973, is strategic in
that it encourages employees to
keep costs as low as possible
(thus likely higher profits), a key
aspect of company strategy.
 Profits are shared equally based
on employee earnings and
company profits, with those who
work longer hours or fly extra
trips receiving a larger portion of
the profit-sharing payouts.
 The programme is composed of
a cash component, as well as a
deferral to retirement account;
however, as a result of employee
requests, beginning in 1990 the
total payout was made on a
deferral basis, thereby
increasing the retirement
benefits of the employees.
SCENE
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 In addition to the profit-sharing
investment options, employees
may purchase stock from payroll
deductions at a discount through
the employee stock purchase
Employee stock plan.
purchase plan  Employees now own about 12%
of the company
Corporate-wide  The pilot contract allows for even
greater investments in the
profit-sharing company through stock options.
programme  Employees are acutely aware that
the firm’s performance is pivotal
to their pocketbooks.
 The stock price is displayed in
each SWA facility so as to allow
the employees to keep a constant
track of SWA’s and their own
destiny.
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Strategic Recognition
Programmes

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Strategic recognition programmes are at both the corporate and local
unit levels, and reward and celebrate exemplary service and
behaviours, as well as employee’s birthdays anniversaries, etc.

They all enjoy the support of top management, with senior executives
including the CEO often gracing the reward ceremonies; they mean
something to employees/winners; and they encourage behaviours
linked to firm strategy

These include the “Heroes of the Heart” programme, the President’s

awards, and the “Winning Spirit” awards. (Behind the scene heroes).
The name of the winning group is painted on one of SWA’s aircraft.
An article is also run in the company’s in-flight magazine, as well as
its newsletter.

There are several other awards/recognition programmes at SWA,

including programs such as “Together We Make It Great,” “Ticket to
the Future,” “Walk a Mile,” “Helping Hands,” “Stuck on Service,” and
“Go See Do”. These exhibit similar characteristics as the above in that
they promote behaviours pivotal in achieving the firm’s goals and
strategy.

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Implications for
Management

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Implications for Management SCENE
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There is no universal “right” reward strategy

The reward system must be aligned with organisational

1 philosophy and strategy.

The planning and delivery of these rewards must explicitly

2 demonstrate commitment from organisational leaders.

These rewards must have meaning and value.

3 Winners must feel proud about their achievements.

There must be a supportive organisational culture for

4 these rewards to be effective.

There must be a continuous evaluation of the

5 effectiveness of new reward systems and strategies.
THE END

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Any Questions?
Thank You All