The Effectiveness of Remuneration Practices at Origin Energy Limited in Australia - Case Study Example

Human Resources: Evaluating the Effectiveness of Remuneration Practices at Origin Energy Limited in Australia / Course Date Total Number of Words: 1,749 Introduction Australia is rich in natural resources like petroleum, natural gas, and coal reserves. As of 2004, Australia was reported as the second largest OECD energy exporter next to Norway (Energy Information Administration: Official Energy Statistics from the U.S. Government, 2009). As part of Australian exporter of energy resources, Origin Energy is one of the largest companies is capable of providing the people with green energy, LP gas, electricity and natural gas, rainwater tank, and solar energy throughout the country (Origin, 2009c). On February 2000, Boral shareholders decided to dissolve the energy business from its building and construction materials business (Origin, 2009a). Since then, the company’s energy business was publicly introduced as the Origin Energy. Serving more than 3 million customers in Australia and the Pacific today, the company employs almost 4,000 employees throughout Australia, New Zealand, and the Pacific Region (Origin, 2009b). Due to the tight competition in the energy sector, the practice of pirating an employee from one business organization to another becomes difficult to control. By offering Origin’s competitive employees a higher salary and more attractive benefit packages, companies that produce and sell energy products could easily hire and convince these talented people to shift their loyalty and services to them. Given that Origin Energy is serving more than 3 million valued clients in Australia alone, the HR manager at Origin Energy is being challenged to offer competitive remuneration packages to its competitive employees in order to ensure that its competitive employees would remain loyal to the company. In line with this, the effectiveness of remuneration practices at Origin Energy will be thoroughly examined followed by providing recommended solution on how the HR manager will be able to lessen the turnover rate of its employees. Remuneration Practices and Its Rationale at Origin Energy The main purpose of remuneration practices at Origin Energy is not only limited in compensating employees in exchange for the services they have rendered to the company but also attract more competitive individuals to join the team for a long period of time. In line with motivating competitive people to actively participate in managing the daily operations of the company, remunerating practices offered by the company aims to retain the best employees who have the necessary skills needed by the business (Origin, 2009d). Non-executive Directors Remuneration packages offered to Origin’s executive and non-executive directors as well as its employees varies from one another in the sense that senior employees are more likely to receive higher remuneration benefits as compared to new employees. Based on the shareholders’ approval, Origin Energy offers its non-executive directors a remuneration package in the form of annual fees for being a member of the Board sub-committees, superannuation, and non-executive share plan. In general, the superannuation or retirement plan is widely used in Australia only because the local employment law as stated in the Superannuation Industry Supervision Regulation 1994 makes it a compulsory component which is at least 9% on top of each employee’s fixed salary and wages (Commonwealth Consolidated Regulations, 2009). As an additional award, the non-executive share plan is given to non-executive directors as a way of motivating them to perform the role and responsibilities well and maintain their loyalty with the company (Goodman, Olson, & Fontenot, 2007, p. 238). Prior to the 31st of December 2002, some of the non-executive directors were given retirement allowance benefits (Origin, 2009e, p. 2). Since 2000, a lot of companies around the world were experiencing a serious economic crisis. As a way of making the company able to sustain the financial difficulty, there is a strong possibility that the company has decided to remove the retirement allowance benefits as a way of cutting the daily operational costs. By doing so, the company will be able to reduce its annual operational expenses which is necessary in maintaining the company competitive within the industry. Executive Directors In most cases, the executive directors at Origin Energy are receiving fixed remuneration based on Total Cost basis. Similar to remuneration package given to non-executive directors, executive directors at Origin Energy are most likely to receive remuneration in the form of cash, payments to superannuation, or non-cash benefits like giving them a new car, gasoline allowance per month, or free meals and lodging (Origin, 2009e, p. 2). The rationale for rewarding the efforts of the executive directors with cash and superannuation is the same as mentioned above. With regards to non-cash benefits, the company is somehow acknowledging the good performance of its executive directors as a sign of gratitude. Not only does awarding non-cash benefits to qualified individuals a source of good motivation, this strategy is also useful in terms of lowering the company’s annual tax payment. Employees at Different Levels The company rewards their employees in order to encourage them to go through the process of personal development, recognizing the importance of good performance, teamwork, and the need to foster equal of opportunity at work. (King, 2007, p. 4, 16) Using a systematic role evaluation method, Origin Energy normally base its remuneration packages with what other organizations offer its employees. Among the qualification for a given remuneration package includes each of the employees’ role and responsibilities as well as their job level within the organizational chart (Origin, 2009e, p. 2). In general, remuneration package at Origin Energy includes: the fixed remuneration such as the basic pay and the performance-based remuneration. After one-year of being employed at Origin, the company qualifies its full-time and part-time employees to participate in the Employee Share Plan or the Equity-based remuneration (Origin, 2009e, p. 2). For example: Depending on employees’ performance at work relative to financial and safety targets of the top management, the company would award a total of $1,000 worth of company shares for qualifying employees each year. This option is given to all employees except for the executive directors (King, 2007, p. 18; Origin, 2009e, p. 3). The same reward system is given to senior executives through the Senior Executive Option Plan (p. 4). As part of motivating Origin’s employees to deliver their best performance at work, the company offers short-term incentives by rewarding their job performance or long-term incentives based on the medium and long-term interests of the shareholders (Origin, 2009e, p. 3). Basically, offering qualified employees a long-term incentive would somehow ensure the company that employees who were able to acquire the necessary skills would retain with them for a longer period of time. Effectiveness of Remuneration Practice at Origin Energy The remuneration practice at Origin Energy is effective in terms of increasing the company’s profitability, retaining their best employees and motivating them to do better at work. In line with this, the company was able to increase their compounded shareholder return at 32.4% between the years 2000 to 2007 (King, 2007, p. 3). Since the company manages to earn as much as 6.45 billion in 2007 (p. 9), the company managed to generate as much as $1,294 million for their stakeholders in 2007 which is equal to 14% increase as compared to 2006 (p. 5). The fact that the company was able to improve their health and safety performance from 16.3% in 2003 up to 25.9% in 2007 proves that employees within the business organization are effectively working towards the organizational goals (King, 2007, p. 3). The existing remuneration practice of Origin is also effective attracting highly competitive employees from various industries. Because of the continuous business expansion project particularly in coal seam gas operations, the company was able to employ as much as 3,239 people around Australia back in June 2007(p. 17). This figure is basically 5% more as compared to the number of employees that was hired in 2006. (ibid) The company was also able to improve its employee retention. However, the company experienced an increase of employee turnover between the years 2006 and 2007 due to family and personal matters (p. 19). Even though the employee turnover rate slightly increased, the number of unplanned absenteeism between the same years fell from 6.1 days down to 5.8 days (ibid). Recommended Solution In general, “Pay for Performance” is not always the best solution to a problem. (Lawler, 1971: 151) According to Deci (1988), it is possible for the employees motivation to be lowered using money incentives since it lowers the company’s ‘intrinsic rewards’. In line with this, Kohn (1988) revealed that the use of too much incentive schemes could create a bad long-run effect on the business. In order to minimize the negative effects of using too much monetary rewards, the HR management of Origin Energy should be aware that there are situations wherein the use of reward system in a form of simple praises that comes from the workers’ supervisors or the co-workers including the promise for future promotional opportunities are good enough to effectively motivate the employees. (Baker, Jensen, & Murphy, 1988) Basically, the use of simple praises could effectively enlighten the workers and increase their self-esteem, confidence, and work motivation. Therefore, the HR management should pay more attention in creating organizational culture that practice simple praises at work. Based on evaluating the impact of Origin’s remuneration practices on employees’ turnover rate, the 2007 sustainability report revealed that the reason behind the increase in employees’ decision to leave their job is related to personal and family matters. With regards to this issue, the HR manager of Origin Energy should be aware of the importance of work and life balance. Although there is a need for HR manager to maximize the use of its human resources, it is equally important to provide these people with sufficient time for themselves and their family members. By doing so, the HR manager will be able to prevent them from becoming over stress at work. In line with this, the use of monetary rewards is not sufficient in enabling employees to increase their work performance once the employees become burn-out from work. As an important part of work and life balance, HR manager should consider making their maternal and paternal leave more attractive. Conclusion Origin Energy is very much committed in maintaining a fair and equitable remuneration practices in order to serve the interests of the business organization and its stakeholders. By financially satisfying the financial and non-financial needs of its employees, Origin is able to retain its valuable employees over a long period of time. Given the fact that the company is able to reward and recognize the importance of its human resources, it is easier to maintain the positive business performance and profitability of Origin. *** End *** References Baker, G., Jensen, M., & Murphy, K. (1988). Compensation and Incentives: Practice vs. Theory. Journal of Finance , XLIII(3): 593 - 616. Commonwealth Consolidated Regulations. (2009). Retrieved September 7, 2009, from SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 - SCHEDULE 1 : http://www.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/sch1.html Deci, E. (1988). The Effects of Contigent and Non-Contingent Rewards and Controls on Intrinsic Motivation. in. Baker G.P., Jensen M.C., Murphy K.J. Compensation and Incentives: Practice vs. Theory. Organizational Behavior and Human Performance , XLIII(3):593 - 616. Energy Information Administration: Official Energy Statistics from the U.S. Government. (2009). Retrieved September 7, 2009, from Australia - Background: http://www.eia.doe.gov/emeu/cabs/Australia/Background.html Goodman, A. L., Olson, J. F., & Fontenot, L. (2007). Practical Guide to SEC Proxy and Compensation Rules. Fourth Edition. Aspen Publishers. King, G. (2007). Origin Energy. Retrieved September 7, 2009, from What have we done so far? In Our Journey Continuous. Sustainablity Report 2007: http://www.originenergy.com.au/files/sustainability_performance_summary_07.pdf Kohn, A. (1988). Incentives Can be Bad for Business. INC , 93 - 94. Lawler, E. (1971). Pay and Organizational Effectiveness: A Psychological View. New York: McGraw-Hill. p. 151. Origin. (2009a). Retrieved September 7, 2009, from Our History: http://www.originenergy.com.au/233/History?rt=y Origin. (2009b). Retrieved September 7, 2009, from Who We Are: http://www.originenergy.com.au/1758/Who-we-are Origin. (2009c). Retrieved September 7, 2009, from Products and Services: http://www.originenergy.com.au/2379/Products-and-services Origin. (2009d). Retrieved September 7, 2009, from Remuneration: http://www.originenergy.com.au/1449/Remuneration Origin. (2009e). Retrieved September 7, 2009, from Remuneration Policy: http://www.originenergy.com.au/1449/files/Remuneration_Policy.pdf Read More