Organisational Approaches to the Design of Pay - Essay Example

? Managing Human Resources Identify and discuss external and internal factors which might shape organisational approaches to the design of pay and other reward systems. Total Number of Words: 4,027 Introduction In general, failure on the part of the HR managers to retain competitive employees could lead to unnecessary cost associated with hiring new employees and training them to improve their expected work performance. As a common HR knowledge, pay and reward system is considered as a significant part of improving employees’ retention strategy. Aiming to minimize the cost associated with high rate of employee turnover, the study of human resource management is being challenge to learn more about strategic ways on how to develop and implement effective pay and reward system. As a work motivational approach, Cummings and Worley (2009, p. 434) explained that rewards can either be intrinsic or extrinsic by nature. In line with this, intrinsic rewards include the use of sincere acknowledgement for a good performance whereas extrinsic rewards can be in a form of increased salary, stock options, work promotion, or bonus given to employees (Cummings and Worley, 2009, p. 434). As compared to the use of extrinsic rewards, it is easier to implement intrinsic rewards because HR managers can easily make it a habit to acknowledge the effort of each employee in making the organizational goal attainable rather than requesting the business owners and board of directors to increase the available fund which can be use to reward employees for any improvements in their work performance (Shamir et al., 1993). According to Pfeffer (1998, p. 110), HR managers often ask the question “how much to pay employees” or “how much compensation package should be included in the company’s reward system” in order to increase the work performance of each employee. Pertaining to the importance of developing and implementing effective pay and reward system, this report will focus on discussing how internal factors (i.e. organizational vision and mission, organizational structure, organizational culture, business objectives and business strategies) and external factors (i.e. competitors’ pay and reward system that is heavily influenced by economic pressures, the current labour market condition, government implemented labour policies, legal issues concerning the basic labour requirements, and the global labour environment) could shape the organizational approaches when designing a business organization’s pay and reward system (Heneman, Fisher and Dixon, 2001; Zingheim, Ledford and Schuster, 1996). Based on the research findings, the researcher will analyze how each factor is link with the other identified factors when designing pay and reward systems. Internal Factors that Shapes the Organizational Approaches when Designing Pay and Reward Systems Several research studies revealed that internal factors that could significantly affect the shaping of organizational approaches when designing pay and reward systems includes the organizational vision and mission, organizational structure, organizational culture, business objectives and business strategies (Heneman, Fisher and Dixon, 2001; Zingheim, Ledford and Schuster, 1996). Depending on organizational vision and mission, organizational structure, business objectives and business strategies, a business organization can develop a culture with regards to its accepted and widely practiced pay and rewards system. Communicating the organizational vision to the rest of the employees serves as a guide in the development and implementation of strategic planning. In line with this, a shared vision can be use as a guide in developing the kind of reward system which could effectively motivate each employee to improve their work performance (Worldatwork, 2007, p. 39). Upon analyzing the significance of organizational vision and mission in the designing of pay and rewards systems, it is necessary for HR managers to be familiar with the organizational vision, mission, and values since these factors could actually guide them in terms of being able to accurately identify and understand the driving forces behind what actually motivates employees and what does not motivate employees. Organizational structure or the shape of organization (i.e. flat or narrow) can somehow affect the way pay and reward system is designed. In line with this, Heneman, Fisher and Dixon (2001), explained that the HR management group considers the level of specialization and authority of each employee when deciding for effective pay compensation and reward system. Based on hierarchical pay structure, Heneman, Fisher and Dixon (2001) suggest that HR managers need to focus on determining the kind of compensation package that will work effectively for each employee in each hierarchical position. For instance: The Chief Executive Officer (CEO) is more likely to receive higher pay and better rewards opportunity as compared to the Finance Manager or Human Resources Manager within a business organization. Depending on the work performance of the Finance Manager, the Human Resources Manager could design attractive pay and compensation packages to prevent the Finance Manager from becoming less motivated at work (Bamberger and Meshoulam, 2000, p. 109). Bamberger and Meshoulam (2000, p. 109) revealed that egalitarian pay structure is characterized by having a flat pay structure with lesser pay grades on top of special monetary bonuses. Basically, the main purpose of using a flat pay structure is enable the HR manager come up with a reward system that could give more financial opportunities to deserving employees. To allow HR managers determine the best way to know how each type and skill levels should be compensated within the business organization, the HR managers should de-emphasize the differences in each job criteria. This is possible through the application of egalitarian pay structure. The case of Starbucks Coffee is unique in the sense that the company offers a base pay slightly higher as compared to what other fast-food employers are awarding its employees. To make their pay and reward compensation more attractive, the company provides their full-time and part-time employees with health insurance, domestic partner benefits, emergency financial aid, retirement savings plan, paid time off, and stock options plus a free pound of ground coffee each week (Starbucks, 2011). The ability of the HR manager to develop effective corporate pay and reward systems is a good HR strategy in terms of providing the general public with the kind of bureaucracy, entitlement, and internal equity a company have in order to improve its overall business performance (Schuster and Zingheim, 1992). In line with this, HR managers should customizing the company’s pay and reward systems with its business strategy, organizational structure, and organizational culture in order to increase the competitive advantages of its corporate pay and reward system. According to Heneman, Fisher and Dixon (2001), “the most effective compensation programs align reward systems with the business strategy, organizational structure, and organizational culture”. Aside from organizational structure, HR managers should also pay close attention to the kind of business strategy implemented within the business organization. This is the primary reason why the pay and reward systems of each business organization vary from one another. Since business strategy, organizational structure and organizational culture are subject to change in response to the changing demands of the external business environment, HR managers are also challenged to continuously exert an effort to improve the pay and reward systems of a business organization. As stated by Zingheim, Ledford and Schuster (1996, p. 1), “pay systems are designed to communicate strong messages of strategy and direction are necessary to generate organizational performance”. Given that a company promotes talented individuals for entertainment purposes, the talent manager are more likely to use competencies or reward system based on talent-based interpretation such that an artist who has an exeptional charisma, outstanding knowledge, skills, behavior, and ability to perform well is more likely to receive higher pay and better reward system as compared to an artist who failed to attract the public’s interest (Zingheim, Ledford and Schuster, 1996). In some cases, HR managers could design pay and reward systems based on innovation, improvements in customer satisfaction, cost-cutting, or improvements in employees’ retention rate as the core business strategy (Harhoff et al., 1997; Zingheim, Ledford and Schuster, 1996). Given that a company adopts innovation as its core business strategy, the company is expected to increase its product complexity within a short product life cycle in order to establish a brand name as a product leader. To be able to motivate a group of employees to support this particular business strategy, the HR manager is expected to implement HR program that is aligned in making employees commit to the development of a responsive and risk taking behavior among its employees who are encouraged to innovate new products (Harhoff et al., 1997). According to Harhoff et al. (1997), “market-based scheme is based on the expected innovation value”. For this reason, HR manager is more likely to develop and implement reward innovation in products and services using a more flexible job description and market-based pay scheme. Even though the use of a market-based pay could create internal competition among a group of artists being managed by a talent manager (Harhoff et al., 1997), the application of market-based pay in this particular situation could also encourage other artists to improve their existing talents. To determine the level of a competitive market-based scheme, Heneman, Fisher and Dixon (2001, p. 95) strongly suggest the need to conduct a market research survey study in order to determine the monetary level of salaries and wages offered by other employers within the same industry. By doing so, HR managers will be able to easily attract, motivate, and retain a large number of its competitive employees. Furthermore, the actual market research survey results can be useful in terms of allowing the HR managers to make an industry comparison with regards to the basic salary and other rewards system (Heneman, Fisher and Dixon 2001, p. 95). Considering the case of a company that is more focused on customer satisfaction, the company is more likely to develop customer intimacy by delivering product and service solutions to its valued customers. In order to exceed the expectations of its valued customers, the HR manager should take advantage of using the customer satisfaction incentives based on customer satisfaction results. In line with this, Allen (2004, p.34) explained that customers’ satisfaction can somehow be measured through the use of customer feedback which will enable the HR management reward and recognize employees who are capable to keeping their customers satisfied. With regards to the need to develop a competitive pay structure, Swanepoel et al. (2003, p. 508) strongly suggest the need to use employee information that has been gathered through job evaluation process or market surveys. By doing so, the HR manager will be able to come up with differential pay rates for each satisfied customer. In case the business strategy adopted by a company promotes cost-cutting behaviour as a way to improve their production efficiency, HR manager of that particular company is likely to align its HR program in such a way that employees are encouraged to increase their overall productivity within the shortest possible time. In order to achieve operational excellence through the implementation of cost-effective strategies, the HR manager is more likely to design a pay and reward system based on employees’ increased productivity. In determining the actual pay and reward system for a company that is focused on implementing cost-cutting strategies, HR manager should design and implement the use of work performance evaluation system that is more focused on controlling and monitoring employees’ ability to accomplish their work specifications. Aiming to improve the customer service and improve the company’s cost-cutting strategy, HR managers can take advantage of using variable-performance pay. According to Schuster and Zingheim (1992, p. 155), variable-performance pay is a kind of pay and reward strategy that uses variable pay instead of direct pay which is not added in employees’ base-pay and their corresponding performances. By aligning the variable pay cost to the overall financial performance of the business, the use of variable-performance pay enables the HR manager minimize the risk of creating internal problems and mistrust between the employer and employees in times of economic recession. In times when the company have good financial gains, the HR manager will automatically be able to rewards its employees with variable pay in exchange with their good work performance. Since variable pay costs are aligned with the overall financial performance of the company, the HR manager could protect the company from excessively high operational costs in times when the company’s financial performance is down. The use of variable-performance pay is cost-effective as compared to the act of rewarding employees with health care benefits. In line with this, Shields (2005) reported that one of the main reasons why General Motors had to layoff some of its employees was because of expensive healthcare benfits which had significantly affected the company’s cashflows. As a result of incorporating healthcare benefits in employees’ compensation package, the workers of General Motors end up becoming less productive at work due to lower employee morale. It is a common knowledge that there is a close relationship between the use of pay incentives and employee retention. In terms of improving employees’ retention rate, HR managers should be able to make companies adopt with the use of skill-based pay system since this strategy is far better off as compared to companies that are using of group-based compensation since the use of group-based compensation could lead to higher employees’ turnover rate (Guthrie, 2000). The use of extrinsic rewards are still effective in terms of motivating low-ranking employees to work harder in order to improve their overall work performance (Cummings and Worley, 2009, p. 434). The problem with excessive use of hierarchical reward system is that the HR managers will have less opportunity to reward and motivate low-ranking employees to improve their overall work performance. For this reason, it is better to design pay and reward system based on the concept of egalitarian payment scheme. By strictly implementing the performance-related pay instead of hierarchical pay system, the HR managers could somehow narrow down the payment gap between the higher- and lower ranking employees. Pfeffer (1998b, p. 216) stated that “there is no such thing as a perfect pay system, but that good systems are about customizing and tailoring, rather than off-the-shelf solution”. According to Marchington and Wilkinson (2005, p. 17), corporate responsibility is about the business organizations’ committment to develop sustainable working environment by reaching out to the needs and wants of employees, employees’ family members, and the local community members. For this reason, HR managers should always consider the needs of its employees when designing a contemporary pay system. Likewise, it is equally important on the part of the HR managers to be more flexible when designing pay and reward systems that could technically increase the work efficiency of its employees. External Factors that Shapes the Organizational Approaches when Designing Pay and Reward Systems There are quite a lot of external factors that HR managers should consider when shaping the organizational approach in designing the corporate pay and reward systems. In most cases, the pay and reward system offered by a company’s close competitor is often influenced by the economic pressures we are currently facing today. In line with this, the market-pay rate can easily be explained through the use of the law behind supply and demand. Given that the economy of a country is booming, it follows that the demand for human resources (workforce) increases. This allows men and women to have the option to take double jobs and work for longer hours just to compensate for the high cost of living. Since demand for human resources is high, large-scale companies are most likely to offer better competitive pay and reward systems as a way of attracting competitive employees to work for the company (Armstrong, 2007, p. 626). In order to attract more competitive employees to join the workforce, business organizations are competing with other companies within the same industry by offering more attractive pay and rewards. It is more costly and expensive to continuously hire new employees because of the high cost of advertising, reduction in production level, weakens existing customer relations, and high cost of training (Pienaar 2007, p. 21). To avoid high employee turnover rate, HR managers may end up offering basic salary and wages based on the prevailing market rates. HR managers should always include the base pay in employees’ compensation package simply because the UK government requires employers to comply with the minimum wage law. To attract more competitive employees to join the team, it is the prerogative of the HR manager to offer slightly higher than what is required by the minimum wage law. For this reason, Lynch (2000, p. 274) considers the base pay or basic salary as the core payment given by the employer(s) to their employees. During economic recession, it is expected that the demand for human resources would decrease since a lot of large-scale companies are most likely to announce massive lay-offs and implement cost-cutting strategies just to enable the company survive low demand for its goods and services. Since there is excessive supply of labour, a company could have more bargaining power in terms of offering low basic pay so long as the company obliged with the government’s implemented minimum base pay (Armstrong, 2007, p. 626). In response to tight domestic and global market competition, HR managers are being challenged to develop new HR management strategies that could increase the competitive advantages of each business organization as compared to its close competitors. In line with this, Armstrong and Murlis (1994, p. 17) explained that the pay structure within a competitive labour market should respond to these external pressures by changing the use of traditional pay and reward system with a more flexible one. As a result of the continuous external business challenges, non-standard working arrangements like part-time, contractual, and temporary job to qualified employees is becoming a common trend in large multinational companies (Chang and Liao 2009). In order to motivte part-time employees, HR manager can make use of skill-based pay to improve their individual work performance or group-based compensation to improve the work performance of temporary employee who works in team (Guthrie, 2000). In some cases, HR managers could also consider the use of pay-for-performance or performance related pay scheme as a way of rewarding part-time or contractual employees (Chang and Liao 2009). Even though pay-for-performance or performance-related pay scheme can be effective in terms of motivating part-time or contractual employees to improve their work performance, several authors noted that exessive use of pay rewards like cash incentives could eventually demotivate employees who are at work (Cecil Hill, 1989). Since exessive use of pay rewards could decrease the work satisfaction of employees, Bowley and Link (2005) revealed that the use of ‘pay-for-performance’ strategy will never guarantee that the HR managers will able to see improvements in employees’ work performance, retention rate, and job satisfaction. On the contrary, Graham and Unruh (1990) revealed that it is more effective to use intrinsic rewards such as congratulating the employees for a job well done or through public recognition in terms of increasing employees’ work satisfaction, improvements in employees’ work performance and retention rate. For this reason, HR managers should consider combining the use of pay-for-performance or performance-related pay scheme with intrinsic rewards. Since HR management today is shifting from the traditional hiring of full-time employees to temporary or part-time employees, it is crucial on the part of the HR managers to stay focus on developing pay and reward system that will work best for a diverse group of employees. On top of giving importance to work diversity, HR managers today should promote the importance of work-life balance in order to increase work productivity, reduce employees’ turn-over rate, and increase the total business’ cost savings (Beauregard and Henry, 2009). By doing so, HR managers will be able to prevent its employees from being burn-out from excessive work load. For instance: Part of the company’s newly proposed pay and reward system should somehow award competitive part-time or contractual employees a few days off from work but with pay (Beauregard and Henry, 2009; Chang and Liao 2009). The presence of labour union is one of the major external factors that could affect the HR managers’ decision when designing pay and rewards system. Specifically the purchasing power of money decreases each time there is a high inflation rate in the country. Each time the cost of living increases, the labour union have the right to negotiate their basic pay with the HR manager. By going through collective bargaining process, the HR manager should be able to achieve a win-win negotiation result in order to protect the interests of the entire business organization (Heneman 2002, p. 149). When dealing with labour union, HR managers should be careful in designing employees’ pay and reward system by balancing the interests of the labour union and the company. To prevent organization problems related to labour union, Heneman (2002, p. 149) strongly suggest that the need to make use of skill-based pay and avoid discretionary judgment when it comes to assessing employees’ work performance. To avoid legal problems concerning the basic labour requirements, HR managers should always pay attention with the government implemented labour policies particularly with regards to the minimum wage requirements, maternity and paternity leave, and child labour code among others. In general, a minimum wage is referring to the minimum hourly, daily, or monthly wage wherein employers are required to pay the workers in exchange of their service. Basically, the UK government is implementing a minimum wage bracket in order to protect the socio-economic welfare of the workers from abusive employers. Specifically in UK, the minimum wage as of 2010 is ?5.93 per hour (BBC News 2010). For this reason, HR managers should always make use of the minimum salary required by the UK government when deciding for employees’ base pay. Given that the minimum pay requirement in UK is ?5.93 per hour, companies operating throughout the United Kingdom should pay full-time employees not less than ?5.93 per hour (ibid). Because of the minimum wage law, employees throughout the United Kingdom could enjoy the benefit of improving their standard of living by actually removing poverty from the lives of the people (Filion, 2009). In respect to family policy, the UK government strongly promotes the need to offer employees with a more “flexible work and shared parental leave” (Ben-Galim, 2011). In line with this, women who are qualified to apply for maternity leave are entitled to at most “39 weeks of paid maternity leave and a total of 52 weeks” provided that the employee has been permanently employed by her employer for at least 26 weeks before the 15th week of the expected delivery schedule (European Parliament, 2010, p. 13). On the other hand, expecting fathers can file for a paternal leave up to 4 weeks non-paid leave provided that the employee has been employed by his current employer for at least 1 year (ibid). Since it is illegal in UK not to provide full time employees with the option to file for maternal or paternal leave, HR managers are obliged to consider this particular labour issue when designing the pay and reward system for full-time employees. With regards to global labour environment, the HR managers should be aware of the government required work-related policies in another country. To avoid facing legal sanctions, the HR managers should at all times comply with the labour law implemented in other countries. Conclusion To avoid facing legal problems with regards to the designing of pay and reward system, HR manager should develop a more flexible pay and reward system based on labour policies and pay and reward system used by other close competitors within the same industry (BBC News 2010; Heneman, Fisher and Dixon 2001, p. 95). Depending on the business objectives and strategies used by the company, HR manager can simply choose the best option from skill-based pay system, market-based scheme, or customer satisfaction incentives based on customer satisfaction results. The kind of pay and rewards system implemented by the HR managers could greatly affect employees’ attitude and behaviour at work. 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