Reward Management in GE Organization - Case Study Example

1.0 EXECUTIVE SUMMARY For over a century, GE has placed great emphasis on its greatest assets: its human resources. It’s commitment to reward management has in many ways exceeded industry norms. GE has an innovative way of rewarding employees who are motivated to religiously uphold the values considered important by GE. GE’s success in correlating reward with performance has commanded the respect and admiration of many business gurus. While the perks for working at GE are many, the performance evaluation incorporates a ranking system which punishes relatively weaker performers with outright termination of employment. This has caused some controversy. However, it is concluded that GE is superior in its reward management practices because it can motivate its employees to perform to its best abilities towards the achievement of GE’s corporate objectives. 2.0 INTRODUCTION 2.1 GE’s Business GE is the parent company of 11 technology, services, and finance businesses with more than 300,000 employees spread across 160 countries. It deals with computers, jet engines, power plants, capital services, plastics, illumination equipment, and medical tools. Regardless of the business, GE is dedicated to turn imaginative ideas into profitable products and services for the benefit of all stakeholders (GE, 2006). Despite being a huge organization, GE has instilled a strong corporate culture and maintained consistent HR practices across all its business units. This is applicable to its infamous reward management policies too. 2.2 GE’s Vision, Mission Statement and Corporate Values GE’s vision is to be the most competitive company in the world. But uniquely, GE does not have a clearly articulated mission statement. It has chosen not to define its mission since it recognizes the fast changing nature of the dynamic business world. However, it does have a set of corporate values. They are: - Corporate Values Desired Performance Expected of Employees Imagine Focuses on the employees’ ability to think outside the box. Spurs employees to come out with innovative ideas, which translates into superior new products and services. Build To turn imagination into reality. To create products and services springing from the 1st value. Solve A problem solving mentality which is applied across all areas of GE’s business. Lead The vital component which comes from the managerial skill and leadership in a particular field of expertise. 3.0 GE’S VISION AND REWARD MANAGEMENT GE’s corporate values are designed to propel its employees to achieve its strategic vision. Employees are motivated to strive towards, and maintain these values in the long term. They are also measured on how well they achieve the desired performance expected of them. There is an undisputable correlation between performance and rewards, and the latter is closely intertwined with GE’s vision as illustrated below. Welch (2005, Pg. 16) has this to say The legacy of Welch thus continued with a 2 pronged approach, which soon became characteristic of GE’s reward management policies: - 4.0 PERFORMANCE MEASUREMENT AND EVALUATION GE’s performance appraisals methods were outlined by Welch (2005). It is clear that the characteristics supports 1 main goal; rewarding the achievement of its vision. FACTORS RATIONALE RESULTING EFFECTS Timely (Quarterly Appraisals) Continual and rapid feedback to employees on their output and work done for the company. Employees know exactly where they stand. Underperformers are not shocked when the decision for termination comes. Honest (Open discussion on all points) It lets the employee know exactly where they stand and what they can do to improve the situation. Employees can be motivated. Avenues for employees to suggest ways of their own to bring up their performance to higher levels. Broad-ranged Covers a variety of methods by which an employee can give inputs the company All aspects of performance are analyzed for improvements or rewards Employees know that they can work on all aspects of their job to improve their relationship with the company as per the given values. Many areas to excel in as long as it helps company to achieve its business objectives. Directly connected to rewards Performance connected to rewards ensures that the same performance would likely in the future. Employees are motivated to work towards a goal and seek further rewards. Positive reinforcements. 5.0 GE’S COMPENSATION AND BENEFITS 5.1 System of Meritocracy As early as the 1930, GE was focused on cooperative labor relations and had created profit based employee bonuses as well as pension plans. Simply being offered a position at GE is a cause for celebration since GE was well known to groom leaders internally to take up management positions. The reward is based strictly on meritocracy. Benefits, perks and bonuses are only given out to those who exceeded expectations. As mentioned on slide 4 regarding pay components, GE’s base salary has to be better than that offered in the market since G.E has been reported to aggressively recruit the best minds in the business (Welch, 2005). I believe that their base salary is much higher than the upper 70% estimates which are normally used in business and are probably closer to the upper 90th percentile for workers in their fields. If a company wishes to recruit the best then they would have to pay them better than other competitors in the market. Similarly, for short and long term benefits, GE would have to offer more than the general payment in the industry since the head hunters are always ready to offer top performers more money in terms of base salary. Only with short term incentives could GE keep the minds they want in their offices. Long term benefits are directly related to the values of the company which are given to those employees who show persistent and continual commitment to the company’s values. Additionally, GE is composed of 11 different companies who work under the same umbrella, therefore I expect these companies to have slightly modified variable salary structures (slide 16) even though the base salary bands are be the same. For instance, GE capital, which deals with the finance industry, can be expected to have a high level of variable income directly connected with the performance evaluation of the individual. As mentioned on slide 3 (Pay component distribution) GE’s Aircraft equipment manufacturing unit would have a less variable structure. However, bonuses and rewards can be given to any employee who shows that he/she has maintained and worked on the values of GE. If someone in the manufacturing unit comes up with a new idea for creating aircraft engines (Supporting the value of building), I am sure GE would have no issues with giving him/her a hefty bonus for advancing the overall business of the company as a whole. Moreover, as given on slide 7, having a variable component for the manufacturing unit would motivate employees to work on the four values upheld by GE. 5.2 Rewards by Selection In GE, after each performance appraisal, employees are clearly differentiated into 3 distinct groups. Welch’s policy was to clearly differentiate so that the right employees are encouraged and motivated with generous rewards. This method has a strong motivational effect which appeals strongly to the individuals, driving a positive spiral effect for even better results. The process of determining who is in the top 20% bracket is rather delicate, has strong elements of subjectivity, and often creates a huge debate for the senior management group. But only after the differentiation is done, can the appropriate strategies as highlight below be employed to tighten the nexus between performance and pay. I can expect that GE works on a percentage profit sharing system which means that the better the company does as a whole, the more rewards are given to the stars and the major players. This agrees with the ideas presented on slide 11 and slide 16 (Compensation Components & Merit and Incentive Schemes & Benefits) that a component of salaries should be linked in some form to the performance of the employee. GE has the majority of design consideration for variable compensation (slide 17) as a part of their reward system, especially when it comes to improving the link between reward and performance with their Quick Thanks system. The goals of the company are clarified to the employers with the vision points and their targets are defined by their managers. Not meeting, meeting and exceeding the targets sets up the positions for rewards or punishment which makes it a very simple system. Action Taken A B C Employees are evaluated and placed Top 20% of the company Middle 70% of the employees Bottom 10% of employees Short term strategy Rewarded and awarded Motivated and trained to achieve higher standards Warned and motivated Long term strategy Considered for, and given leadership positions Moved within the company, or within departments to find best fit Removed from service 5.3 Salary, Bonuses and Stock Options Salary Surveys GE does not publicize the figures on how much money is paid for various positions in the company other than the information on the board of directors listed on the company website (GE, 2006). The sources are concerned more with the managerial and ideological basis of GE’s reward process rather than the financial aspects. None of the sources give suggestions on how GE calculates the basic salary/benefits for any position. However, it can be assumed that GE’s overall salary packages are more than a cut above the industry standard since GE recruits only the strongest. As suggested on slide 37 (Reward Management II) salaries and raises at GE are directly linked with performance and raises are given to those employees who show that they have upheld the values of the company. Kerr (1996) gives examples from his own experiences at GE where rewards and raises in salaries were unassociated with promotions. At one point, GE had nearly 30 different salary ranges but they were combined and reduced to 6. People at GE could strive for and be rewarded with increased salaries, while not being forced to compete for positions higher up the corporate ladder. This must have been a very difficult task for GE to perform due to the sheer size of the company. A large number of people in a company and the nature of positions within an organization will often create many salary ranges. However, even with thousands of employees across the country, GE manages its salary structure with just 6 ranges. By default, this also makes the company have a nearly flat hierarchical structure which makes it works more like a small company than a giant organization. This again, is important if they are to be nimble enough to react to its competitors’ moves. The overall compensation packages at GE can be broken down as shown in the following table: Pay Component Example Purpose Base Salary Hourly or yearly salary given to employees Attracting and retaining the best talents into the company. Allowances/Benefits Daycare services, discounts on company products and services, healthcare provisions, retirement funds, family plans Giving additional pull factors to entice target audience. Provision of hygiene factors. Short-term incentives Programs like the employee awarded “Quick Thanks!” policy Improvement of employee motivation and cooperation between employees. Motivates all towards the achievement of corporate values and objectives. Long-term incentives Stock options for a broad range of employees Sense of ownership and pride for the employees along with financial benefits. Bonuses A bonus is a lump sum payment paid to an employee. To be effective, a bonus payout must be able to reap the positive motivational effects to reinforce the right employee behavior. None of the sources given declares the exact amount of bonuses paid per salary bracket at GE. However, Grote (2002) says that the appropriate figures for a bonus payout should be between 9-12% of the person’s yearly income. This is a significant amount and GE uses them as a reward tool at the end of a quarter for those employees who show their commitment to the achievement of GE’s corporate goals. GE gives a substantial bonus to their stars. Welch (2005) discusses the case where a scientist working for GE won an award for his achievements in science. Welch asked that the GE board recognizes the scientist’s achievements with a large cash bonus since even the Nobel Peace Prize comes with a significant dollar figure attached to it. In our opinion, this is a superb strategy which ingrains the positive behavior. Stock Options Giving stock options as a reward has benefits for the employees as well as the employer. It is perceived to be a monetary benefit, and yet at the same time instills in the employees a sense of ownership and stake in the company. It can be appreciated that the rewards given to the stars are not limited to money (even though that is a big factor for motivation), since other influences like appreciation and training can also serve as rewards for many. GE is generous with stock options and does not reserve them only for members of the board or for employees who have achieved a certain level of seniority. Most importantly, the largest rewards are not given for the duration of service, or the number of direct reports. Such measures are not correlated to performance, and have no bearings at all to GE’s corporate vision. Instead, rewards are given exclusively to those who deliver the best results. This system ties in with the idea that efforts which are rewarded tend to be repeated by those who get the reward. The values of the company as given by Welch (2005) come across clearly with this compensation and reward system. Turnover Rates It is difficult to estimate the actual voluntary turnover at GE because of its compulsory removal of the bottom 10% of non-performers. Our extensive research also does not reveal if any of its staff leaves due to reasons related to reward management. In our humble opinion though, we find it unlikely that an employee will voluntarily leave a multinational company as renowned as GE because GE is also well known for its generosity in rewarding strong performers. The more probable reasons for resignations could well be related to non-performance or personal related reasons. The reward and evaluation system would not receive the acceptance and praise that it does if people had been leaving the company simply due to inadequate compensation. It is obvious that at GE, top performers stay on, looking for further financial and career advancement while the bottom performers simply fade away. 6.0 STRENGTHS AND WEAKNESSES OF GE’S SYSTEM It is to GE’s credit that their differentiation system for reward management has been respected, tested and accepted by some of the biggest names in the world. However, there are certain situations where GE’s system has been questioned. Critics have aptly pointed out that cultural barriers may prevent this system from being used in places like Japan. For example, while Kerr (1996) recommends that bonuses should be announced since it will motivate both the recipient and those who see it being given to the recipient, he is also quick to warn that unless a manager is willing to defend their choice, announcing bonuses could be a big and costly mistake. The idea of publicly announcing the stars and underperformers means that everybody knows exactly where they stand. Many echo the opinion that the GE’s system is the best since it accurately pinpoints the position of an employee because it is based on facts, tested rigorously, and is honest in assessment. Once the results are published, there are few cases where a person’s position is challenged or asked to be reevaluated (Morris & Colvin, 2006). In certain instances however, there may be some employees who are uncomfortable of having their bonus-related information made public. Or in a highly cohesive work environment characteristic of Japan where public commendation of an individual may be seen as an affront to group harmony (Kerr, 1996), then the GE system may prove difficult to implement. In countries with such similar cultures, the system might prove difficult to implement. In these situations, the methods advocated by GE can be inappropriate since there exists a more predominant culture which dictates a person’s behavior. Hence, instead of monetary recognition, more intangible benefits can be used as motivational tools for performance. At the end of the day, the reward management policy must help in the achievement of the corporate goals and be consistent with its values. A summary of the strengths and weaknesses is present in the table below: - Component Strength Weakness Public announcements of rewards Recognition for performers Managers may need to explain the situation and defend their choices with those who did not attain the reward Employee recommended rewards (Quick Thank! Program) Validation of an employee’s effort comes from his/her peers in the company which holds a lot of meaning of the employee The reward amount is not significant therefore it is possible that it may be seen as a gimmick by some Reward Amount is significantly large Gives the employees an objective to work towards and keeps them motivated Since 90% of employees will get a reward of some sort, they may consider this to be a part of the salary package and may even need it for their expenses Rewards are based on performance only Motivates employees at all levels to work as best as they can Disenfranchises senior members of the staff who have served with the company for many years. 7.0 RECOMMENDATIONS FOR CHANGE Welch (2005) gives very little attention to the actual theories behind motivation through rewards, and the academic side of reward management. Despite his scorn for academics, Theory Y and Hertzberg’s ideas can both be applied to the GE model. Theory Y shows the strengths of the GE reward and compensation management system, while Hertzberg’s two factor theory points towards some things which could be improved. While looking at the applicable hygiene factors, we can see these influences at work: - Hygiene Factors Influence Example Application Base Salary Positive GE salary structure is competitive with the industry Getting and keeping the best talents in the market. Working Conditions Positive Bonuses for research conducted by employees Rewarding employees with outstanding academic achievements. Supervision Positive/Negative Employee reviews and placement within the 20/70/10 division sets the range for bonuses and raises The aim of the employee is to improve performance for the benefit of him/herself and the company. Interpersonal Considerations Positive/Negative Quick Thanks program and peer appreciation Appreciation of peers lets an employee knows that their input is valued by others. Supervision and interpersonal considerations come with some negative influences since there are elements of subjectivity and human emotions at play. The review process must be as objective as possible, and be crystal clear in the setting of objectives. Although GE’s review process has been given high scores by analysts, seniority and time spent with the company should also given some due consideration while making decisions for rewards. This is because with seniority and experience, an employee is motivated to make decisions which are aligned to the long term strategies of GE, versus reaping only short term benefits. Focusing solely on current performance comes with a real danger of creating an environment so competitive that it becomes toxic or even short termed based. Unscrupulous managers may be temped to manipulate the performance measures to reflect short term growth and take actions detrimental to GE’s long term strategies. Even though that has not happened at GE, there is a risk that it might. The GE’s model of reward management has been advocated as a best practice. It is a robust system which has proven to work very well for GE for many years. While it has been subjected to criticisms, many large organizations worldwide have chosen to adopt this system. The biggest area which can be improved on is the management of perceptions and expectations. The advocators of the GE system should educate and communicate the merits of the system in a perspective manner. For any system to be accepted there must be buy-in by those involved. Theory Y is very applicable to the reward management system at GE since 90% of the employees come out unscathed after a review and show that they either are the stars of the company or are on their way of becoming stars. Empowerment and responsibility is created at every step of the way since the company rewards those who show high capabilities as evidenced in their performance. Of course, those who can not make the grade at GE are quickly shown the exit. This leaves only those in the playing field who are able to exercise self-direction and work towards goals created by the company. We strongly believe that this is the correct way to correlate rewards with performance in a company that wishes to keep its best human resources motivated, and remove those who have been recruited as a mistake, or promoted to a level of incompetence. 8.0 LIMITATION OF SOURCES This report has been written after much extensive research and reading. One major limitation inhibiting the depth of our research was the inability to conduct personal interviews with current or ex-employees of GE. On top of that, our group has no access to confidential information regarding hard facts of salary ranges within GE’s organization. All information collected is from secondary sources and the focus has been placed on the process of selection and rewarding. Indeed, GE has often been voted as the most admired companies, making it difficult to find constructive criticisms about the policies of GE. It came as no surprise that most of the reference books advocated GE’s policies as best practices. Thus, it has been relatively challenging to find meaningful insights to the weaknesses of this system. Business magazines like Fortune are an important resource since they are quick to react to new happenings in the field of management. The articles which come from fortune magazine are less than a few weeks old and show how GE has maintained and enhanced its position in the market as a leader. The information about compensation policies, rewards and salary ranges at GE comes from Grote who worked for GE for several years and knows the ins and outs of the company. This makes him an excellent resource for gathering information about the organization and its practices. Perhaps the best source for information about GE is the person who ran the company for the better part of 2 decades and made it the most admired company in America and the world. Jack Welch is considered by some to have the last word when it comes to good management practices. His book titled Winning (2005) is the best resource which we came across not only in terms of information about GE’s policies and reward management, but also as a guide to managing and being an effective leader. 9.0 CONCLUSION The business world has become increasingly dynamic. Organizations can create and maintain a competitive edge by attracting and retaining the most talented human resources. Organizations who realize the importance of it HR assets will stand out strongly against its competitors because the right focus can be placed in employee motivation and reward management. Rewarding employees by monetary or intangible means has become increasingly critical and has to be performed by managers at all levels of the company. Welch was, and liked being personified as tough. He made GE grow into a solid organization using its infamous reward plans. It is difficult to find companies which have innovated to such an extent that their name becomes associated with certain management practices. The vast majority of organizations will fade into history without establishing any leadership in management innovations. GE holds not only the unique position of having an established name, but they have been the leaders in management innovation for the better part of their existence (Colvin, 2006). It managed to create a variable compensation package for its employees by linking rewards to performance. The evaluation and reward selection process has become a source of motivation for performance rather than a source of conflict amongst colleagues. In the final analysis, it is easy to see how having an effective reward management policy has given GE the human resource necessary to accomplish its strategic goals and long term vision. 10.0 REFERENCES 1. Armstrong, M. 1999 A Handbook of Human Resource Management Practice, Kogan Page, USA 2. Beardwell I. and Holden L. (1997) Human Resource Management: A contemporary Perspective, 2nd Ed. Pitman: London 3. Boxall P. and Purcell J. (2003) Strategy and Human Resource Management, Palgrave & Macmillan: New York 4. Colvin, Geoffrey. 2006. What Makes GE Great? Fortune. 153(4): 90-96. 5. Demos, Telis. 2006. The World’s Most Admired Companies. Fortune. 153(4): 72. 6. Fisher, Anne. 2006. America’s most admired companies. Fortune. 153(4): 65-76. 7. GE, 2006. ‘General Electric’. ge.com [Online] Available at: http://www.ge.com/en/ge/morefaqs.htm 8. Grote, Dick. 2002. Forced Ranking: Behind the Scenes. Across the Boar. 39(6): 40-46 9. Kerr, Steven. 1996. Risky business: The new pay game. Fortune. 134(2) 94-97. 10. Morris, Betsy and Colvin, Geoffrey. The GE Mystique. Fortune. 153(4) 98-104. 11. Neo R.A., Hollenbeck J.R., Gerhat B. and Wright P.M. (2000) Human Resource Managemetn: Gaining a Competitive Advantage, 3rd Ed. McGraw-Hill: New York 12. Schmitt, Joseph. 2001. Welch has a lesson, even for small shops. Contractor Magazine. 48(10): 16. 13. Torrington D. and Hall L. (1995) Personnel Management: HRM in Action, 3rd Ed. Prenetice Hall: London 14. Welch, Jack. 2005. Winning. HarperCollins: New York. Read More