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Sources of Competitive Advantage

Developing and implementing a pay strategy that is a source of sustained competitive advantage is challenging. Not all compensation decisions are strategic or a source of competitive advantage. Three tests determine whether a pay strategy is a source of advantage: (1) Is it aligned? (2) Does it differentiate? (3) Does it add value? Alignment of the pay strategy includes alignment with the business strategy, externally with the economic and sociopolitical conditions, and internally within the overall HR system. Alignment is probably the easiest test to pass. If the pay system is relatively simple for any competitor to copy, then how can it possibly be a source of competitive advantage? The answer, according to the advocates of the strategic approach, is in how the pay system is managed. Organizations continue to look for the return they are getting from their incentives, benefits, and even base pay. Compensation is often a company’s largest controllable expense. Since consultants and a few researchers treat different forms of pay as investments, the task is to come up with ways to calculate the return on those investments. But trying to measure an ROI for any compensation strategy is difficult. Many people argue that viewing pay as an investment with measurable returns diminishes the importance of treating employees fairly. Are there advantages to an innovative compensation strategy? In products and services, innovators have well-recognized advantages that can offset the risks involved—high margins, market share, and brand recognition. Whether such advantages accrue to innovators in total compensation requires more study.