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 payments 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 course. For now we 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. So, our methods for attracting, retaining 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 has a compensation package that tends to 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 $1 increase in pay per hour, as directly mapping on $1 in increase cost. That is, they also earn higher returns in that 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 complimentary practices. So for example, Costco, because they pay more than the market, get a lot of applications. And that lets them be very, very selective in who they bring into the organization. When they've identified somebody who they think would be a great fit for Costco, they then invest intensively on training them. They're 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. And then also, they use work teams so they can get a better sense of the organization, 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're intensively trained, they make relatively good candidates for management. Costo's also famous for promoting from within. 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 and all aspects of their 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 workforce are minimally disruptive. Let's go onto to competing on payments. So if we look at Costco, Costco again, pays much higher base rates than their competitors. And they also have very generous benefits. And again, this is very helpful for them to attract the kind of person they want to attract, retain, 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 saved these very generous benefits 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 being paternalistic, he sees this as really just being good to the employees, so 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 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 the 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 we 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, of 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 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 various 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 conveyed a sense of shared destiny for early Microsoft. And so, if we look at these organizations all together, we 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 to attract and retain and 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 and maintaining and motivating their 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. 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 in how they allocate that very, very high base pay across the different benefits and incentives. Interestingly, at Netflix, Netflix allows its employees to purchase stock at a 50% discount. And also their options vest immediately. And so what's interesting about Netflix is that Netflix is essentially allowing their employees to exercise a lot of freedom and responsibility over their paycheck. And likewise, freedom with responsibility is one of Netflix's informal models. That is, Netflix is an organization that has to adapt with the times, adapt with business practices. Has had to re-invent 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 change, so does their workforce. And just as part of the deal with Netflix, is 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, 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 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'd be attracted to Lincoln Electric because they could earn more in their short-term incentives at Lincoln Electric than they can Lincoln Electric's competitors. The message behind Microsoft is that we have a shared destiny, and that 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 of responsibility onto its workers when they choose the allocation of the compensation practices.
