Challenges of Establishing Effective Incentive, Reward System and the Executive Compensation - Term Paper Example

REPORT ON THE CHALLENGES OF ESTABLISHING EFFECTIVE INCENTIVE, REWARD SYSTEM AND THE EXECUTIVE COMPENSATION OF THE ASTRAZENECA PLC COMPANY AND OTHER COMPANIES. By Student’s name Code + Course Name Professor’s Name Name of the Institution City, State Date Abstract This report investigates some of the challenges faced by organizations in general to establish effective incentives, how they reward and compensate their executive. Brief histories of AstraZeneca plc Company and its operations are outlined. The discussion then focuses on the recommendation on the challenges in regard to the AstraZeneca plc. It is concluded that putting these recommendations to practice can help to curb the challenges faced by the organization. It is also suggested that fair treatment of all workers is the key to the increased production and profit making in an organization. TABLE OF CONTENT Page Abstract……………………………………………………………………………………….. .2 1.0. INTRODUCTION……………………………………………………………………….....4 2.0. HISTORY.............................................................................................................................. 4 3.0. OPERATIONS...................................................................................................................... 4 4.0. CHALLENGES OF EFFECTIVE INCENTIVE AND REWARD SYSTEM ESTABLISHMENT………………………………………………………………..............5 4.1. Separation of ownership andcontrol………………................................................5 4.2. Incentive system…………………………………...................................................6 4.3. Fairness....................................................................................................................6 4.4. Executive remuneration and corporate governance……………………………....7 5.0. COMPENSATION OF THE EXECUTIVE BY MODERN ORGANIZATIONS…………………………………………………………………………… 7 6. 0 RECOMMENDATION……………………………………………………………………9 7.0 CONCLUSION…………………………………………………………………………….. 10 8.0. REFERENCES…………………………………………………………………………….. 11 1.0. INTRODUCTION Modern organizations play an important role in the society. Controversies have risen over a period of time on the financial and accounting organization of these companies. This majorly involves the payment relationship between different levels or posts of employment. The executive position tops the cause of these controversies. Even Though most of the companies are highly and widely recognized worldwide, they still undergo difficulties in financial operation. This report therefore seeks to look at the challenges companies undergo to establish effective incentive and reward system. It also sets out how modern organizations may constructively seek to compensate their executive. It gives recommendations on the various listed challenges. Views are given in the conclusion. This covers how organizations should treat their employees in terms of payments. This is because financial accountability is the major challenge in the running of an organization. 2.0. History AstraZeneca plc is a British- Swedish biologic and multinational pharmaceutical company. It is amongst the world’s largest drug sellers. With operations in more than 100 countries, it is headquartered in London. It is amongst the companies in the primary listing in London stock exchange. Besides, it has secondary listing on the New York Stock Exchange and OMX exchange. At the same time, it is also a constituent of the FTSE 100 Index. Its market capitalization as per 2011 was approximately £39.5 billion. The senior executive office is composed of eight members (Reuters 2012). 3.0. Operations. It develops, manufactures and sells biotechnology and pharmaceutical products. This product treats disorders in areas like cardiac and vascular, respiratory, psychiatric and neurological, gastrointestinal, oncology and pathological inflammation. Its research and development headquarters are based in Sodertalje in Sweden. Its largest research and development site is at Alderley Park England. It employs over 11, 000 people at the research facilities. The largest site has around 45 000 staff (ACS 2000). 3.0. CHALLENGES OF EFFECTIVE INCENTIVE AND REWARD SYSTEM ESTABLISHMENT Every business must have strength and weaknesses. Various challenges are faced by these companies to perform efficiently. Some of these challenges include-: Separation of ownership and control Fairness Incentive system Executive remuneration and corporate governance 3.1. Separation of ownership and control Most of the organisations characterised by this challenge does not make maximum profit. They provide to their customers to their perfection. They deliver products demanded by their customers at the lowest price but they end up not hitting their financial target. They don’t cover the costs effectively. Most of their decision agents bears substantial share of the wealth effect of their decision. Hence slim chances of their survival (Eugene et al, 1983). 4.2. Incentive system Most organizations give incentives to its employee to induce them to contribute activity. Aspects of organizational behaviour and change do not put into consideration the differing consequences of different incentive systems. They assume that the function of executive is to perpetuate his group. This makes them to alter incentives to adapt to changes in the supply of the resources that yield these incentives. Internal activities of an organization affect its operation a great deal. It affects their purposes and the tactics used to achieve these purposes. This in turn influences the political, social and economic processes of the organizations. Competition for autonomy and resources results to conflicts, co –operation and other relationships among organizations. The predictable consequences for the character of organisations is characterised by the gradual changes of personal motives within a society (Peter et al, 1961). 4.3. Fairness Fairness is the backbone of prosperity in any given organization. Most of the employees are concerned about equity and fairness in their working environment. This implies both internal and external equity and fairness. Most of the leaders of the companies are full of favouritism. Some employees are seen to be better than others. This brings about separation and segregations in the company. This intern lowers the productivity of the organization. On the contrary, research by reward professions shows that most employees are more concerned with internal rewards as opposed to external. Most of them do not know how the reward affects their payments. This is as observed by World at Work on The total reward association (Fletcher et al, 1979). 4.4. Executive remuneration and corporate governance This is a major challenge worldwide. A controversy is building as per the remuneration of the executive. This is seen as the cause of the effectiveness remuneration as a tool of corporate governance. There is a dispersed, block holding ownership fault line that covers much corporate governance. A close relationship exists between governance system and sophistication. It also involves the rigor of the regulatory response to executive remuneration. This has rendered many workers to be passive in their work. They argue it out that executives gain more than them. This is at their expenses. The lower class and the middle class workers have always strived for their voices to be heard on this issue. Still the remuneration of the executive continues to hike ( PL Davies, 2003). 5.0. COMPENSATION OF THE EXECUTIVE BY MODERN ORGANIZATIONS The payment of the modern executive has been scrutinized by the government worldwide. Companies should refine how they compensate their executive. Payment that is related to performance reinforces long term sustainability. The compensation should include financial compensation and nonfinancial awards. Most of the organizations put together bonuses, salary and shares obtained from the organizations’ perquisites, benefits and stock. It normally considers the tax law, government regulations, the executive and organization desires and rewards for performance. The CEO and other top executives in modern corporations are given total cash compensation. In The Barclays Bank Plc for example, short term incentives are formula driven. A performance criterion is attached to it depending on the executive role. For sales directors it may be based on the turnover of the incremental revenue growth. The compensation package of other companies may also include health insurance, interest free loans, retirement plans and even an executive jet and a chauffeured limousine. The executive stock option pay has risen in the past years. This is as result of improved factors that make it cost effective for equity payment of executives. The interests of CEOs are aligned to those of shareholders. This is when option’s strike price is below the stock price. Compensation level has been rising dramatically in all countries over the past decades. This includes both absolute and relative terms. The highest paid executive gets around 400 times pay more than an average worker. It is confirmed that the U.S has the world’s highest executive compensation. This is relative to a worker of manufacturing production. The 2005 estimate shows the following ratios of CEO’S to production worker pay in some of the countries as follows-: U.S: 39:1, UK : 31.8:1, Zealand: 24.9:1 and in Italy :24.9:1 (Bruce, 20 3. 0 RECOMMENDATIONS. I). For AstraZeneca plc to survive the challenge of separation of ownership and control, it must deliver the products demanded by costumers at affordable prices. While doing this, it must ensure that it covers the costs. The important decision agents should not bear a substantial share of the wealth effects of their decisions. Its aim being to increase life expectancy, it must strive to do more research so that the needed drugs are availed to its customers (Reuters 2010). II). To prevent the consequences of financial incentive, AstraZeneca plc need not to look at incentives as a tool of pushing its employee to activity. Instead, it should be seen as their right. The executive should not be left to perpetuate his group but should act as a uniting force in the company. They should work towards the betterment of all members. More steps should be taken to protect the Political, social and economic process of the organisation. For instance, the reduced productivity of the R& D Investment can only be uplifted to fulfil its earlier mission by reduction of wide financial incentive in pipeline decisions (Lucian 2004). III). Fairness should be practiced in all aspect of leadership. A neutral venue should be provided to its stake holders. AstraZeneca should ensure that its employees are well motivated. This will enable them to work efficiently in its research centres and other areas. It should conduct its rewards and incentives prevalence properly. Any form of favouritism or opposition should not exist in its operations. This will lead to the rise of the falling drug output to the market. Fairness should be total reward element in this company (Adam et al, 2012). IV). An intervention should be carried out in remuneration practice. This should be done with respect to disclosure. The regulatory strategies should focus on the company disclosure and corporate governance structures. They should adhere to both public regulation and corporate governance best practices. Every worker in this organization contributes towards its profit making. The wide gap in the ratio between the executive remuneration and other workers pay should be reduced. This is for the betterment of the organization at large and many of its branches worldwide (Fletcher et al, 2012). 6.0. CONCLUSION Human resource is the most important resource for organization effectiveness. It is the task of the manager to keep them in their job. This is a great challenge to most of the managers. These challenges are broadly noticed to be influencing the organization at large. Understanding who and when to reward may boast the productivity of the organization. Good and timely compensation of the executive boosts their morale to work. The wide gap between the executive pay and average wages has raised the concern of the public about fairness. When the remuneration is imbalanced, the organization long-term strategy is hindered. This causes the organization to focus on a short term gain (Tom et al, 2011). There is controversy in exploitation in executive pay. This is criticized by both conservative establishments and leftists. A question has a rose over huge pay checks being part of beneficial system. Economics driving stock options and other alleged payments for performance raises eye brows. Motivation and incentives boosts the performances of executives. Therefore they should be rewarded. This should consider the state of the stock. Is it moving or not moving. It should not only apply to executive only, but to all employees in an organization (Lucian, 2004). Bibliography .ACS publication 2008, "Organizational Portraits – AstraZeneca". The Pharmaceutical Century: Ten Decades of Drug Discovery. Washington, D.C. Bruce, A. 2002.The complete guide to executive compensation. Pinnacle, Durban. Eugene, A. & Michael, D,. 1983, Journal of Law and Economics vol 26, No 2 Corporations and Private Property: A Conference Sponsored by the Hoover Institution. Fletcher &Gowing, D. 1979.Effective Writing for Accountants, The Institute John, R. 2009.A Crisis of Ethic Proportions. Jon, A & Bradley, T 2012.Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality, Evidence from U.S. Tax Return Data. Lucian, B & Jesse, H,. 2004, Pay Without Performance. Of Chartered Accountants in England and Wales: London. Peter, S & James, I,. 1961, Administrative Science Quarterly Vol 6. Sage Publications, Inc. PL Davies 2003, Workers on the Board of the European Company? Industrial Law Journal 75 Reuters 2010, "The 20 largest pharmaceutical companies". Retrieved 24 April 2012. Tom, Hay Group 2011.A report by World at WorkDow Scott, Loyale University Chicago. Read More