Base on the reading, what are the three tests used to determine whether a pay strategy is a source of competitive advantage? Discuss whether these three tests are difficult to pass. Can compensation really be a source of a competitive advantage?

LO3 SOURCE OF COMPETITIVE ADVANTAGE: THREE TESTS Developing and implementing a pay strategy that is a source of sustained competitive advantage is easier said than done. Not all compensation decisions are strategic or a source of competitive advantage. Three tests determine whether a pay strategy is a source of competitive advantage: (1) Is it aligned? (2) Does it differentiate? (3) Does it add value? Align Alignment of the pay strategy includes three aspects: (1) align with the business strategy, (2) align externally with the economic and sociopolitical conditions, and (3) align internally with the overall HR system. Alignment is probably the easiest test to pass. Differentiate Some people believe that the only thing that really matters about a strategy is how it is different from everyone else's. If a pay system is relatively simple for a competitor to copy, it cannot sustain as a source of competitive advantage for very long. The pay strategy is woven into the fabric of the company's overall HR strategy. Copying one or another dimension of a strategy means ripping apart the overall approach and patching in a new one. So, in a sense, the alignment test (weaving the fabric) helps ensure that the differentiation test is passed. Microsoft's use of stock awards for all employees, often worth considerably more than base pay, is difficult for its competitors to copy. The SAS work-family balance strategy is difficult to copy. It might be relatively easy to copy part of what a competitor does (e.g.grant stock options to more employees or offer more choices in benefits), but the strategic perspective implies that the way the various programs fit together and fit the organization is what is difficult to copy. Simply copying others-blindly following so- called best practices-amounts to trying to merely stay in the race, not to win it 26 Add Value 27 a Organizations today look for the return they are getting from their incentives, benefits, and even base pay. Compensation is often a company's largest controllable expense. Because consultants and some researchers treat different forms of pay as investments, the task becomes how to come up with ways to calculate the return on those investments (ROI). But this is a difficult proposition. Costs are casy to fit into a spreadsheet, but any value created as a result of those costs is difficult to specify, much less measure. Trying to measure an ROI for a compensation strategy implies that people are "human capital." just like other factors of production. Many people find this view dehumanizing. They argue that viewing pay as an investment with measurable returns diminishes the importance of treating people fairly. 28 of the three tests of competitive advantage-align, differentiate, add value-this last is the most difficult to achieve. It is known that in products and services, first movers (innovators) have well-recognized advantages that can offset the risks involved- high margins, market share, and brand recognition.29 What is not known is what advantages accrue to innovators in total compensation in the talent market. For example, do Microsoft (one of the first to offer very large stock options to all employees) or American Express (among the first to offer flexible benefit programs in Canada) enjoy any advantages now that many of their competitors are doing the same. Docs a compensation innovator attract more and better talent, induces talent to stay and contribute, or provide cost advantages? Studies are needed to find the answers