What Are the Most Effective Ways to Reward Labor - Case Study Example

Running Head: Pay and Reward Systems Pay and Reward Systems [Institute’s Pay and Reward Systems Introduction It is not impossible not to find books on job satisfaction in any management library, or any human resource management student claiming that he is unaware of elements concerned with job satisfaction, or may be any manager remaining on his position despite he is not able to create satisfaction for his employees. Organizations now understand that employees are one of the most important stakeholders in any firm and their satisfaction has links with productivity, growth and success of the company. Conversely, their dissatisfaction will result in a nightmare, a complete disaster for the company. It is quite understandable that why there has been so much of ink spend on discussing elements of job satisfaction in the past few decades (Johns, & Saks, pp. 247-289, 2001). It is accepted that pay and rewards are not the primary factors contributing to job satisfaction but their importance can never ever be underestimated. Companies, which commit this mistake, find themselves in a huge trouble of losing key talent high turnover, low productivity and profitability. A study concluded in worldwide business organizations in 2006 revealed that only 45 percent of the employees thought that pay is the prime factor in motivating them (Mathis, & Jackson, pp. 56-74, 2008). However, the surprising part was that 71 percent of the top performers believed that it is the prime factor in motivating them towards their jobs (Mathis, & Jackson, pp. 56-74, 2008). This is also true that the higher you pay the more motivated your employees would be towards the job. The higher you pay, the higher is the probability of getting more talented and skillful staff, who in turn contributes with greater margins to the profitability of the organizations. However, all organizations also realize that salaries and pays are the biggest operating cost for them and increasing them decreases their profitability to some extent. Therefore, it becomes a crucial decision for the organization to decide their pay level. This paper focuses on different methods that an organization may use or have been using in using pay as a motivating factor for employees. Different Methods & Forms of Pay Before coming to accepting of different methods of pay and reward, the organization needs to understand and answer a few questions regarding how is the company going to pay them. For that, the managers must decide that in what position the want their company to be. Is the organization aiming to be the market leader, market matcher or market lager in pay? The answer to this question is detrimental in coming up with a pay structure. If the organization decides to be a market leader in pay then it indicates that it firmly believes that giving out higher pay then the market, is the only way to attract and retain key talent. However, if the company matches the market price, then it wants the same with lower costs. In addition, if any firm decides to pay below the market price because it is not able to afford higher pays then it is giving out the message that they are willing to bear the cost of losing employees and then training new ones. In short, the firm is ready to face the situation of high turnover and less talented staff (Wilson, pp. 12-56, 1999). Fixed Pay The traditional way of paying the employees is the fixed pay method in which the staff is hired on a fixed amount of salary for each month or year. The employees normally do not witness any change in that amount regardless of their performance, skills, tenure, productivity etc (Feldberg, pp. 12-46, 1975). This method is turning as obsolete very quickly as the business world is becoming more sophisticated and complex. There are many drawbacks associated with this system and that is the reason why, variable pay systems were introduced. Variable pay systems will indirectly be discussing all the drawbacks and problems with fixed based pay system. Variable Pay Method “Why should I make an extra effort for this job? Why should I try to contribute and think more about the organizational goals and success? Why should I work harder than usual when all this is bringing no monetary or any other benefit for me?” (Langton, pp. 46-76, 2000). These were the most common questions that employees used to ask themselves when working under a fixed pay system. This frustration and dissatisfaction amongst the employees was obviously dangerous for the particular organizations. Therefore, the big heads of the corporate world had no choice but to sit down and come up with a method to solve the problem. Variable pay plan was their solution. A variable pay program is a plan that bases a portion or all of the employees’ earnings on some individual or organizational formula or measure of productivity (Torrington, Hall, & Taylor, pp. 365-348, 2005). Therefore, the earnings of an individual fall up and down with the passage of time depending on his or her performance. Variable pay program has been long used for sales people and executives (Noe, pp. 38-94, 1997). However, in recent times many organizations are using it for all their employees. IBM, Wal-Mart, Pizza Hut, John Deere, and Cigna Corporation are just a few examples of firms who are using this method for all of their employees (Rothwell, Stavros, Sullivan, & Sullivan, pp. 61-92, 2009). According to a research, almost 80% of the firms in the United States use the variable pay system in one form or the other indicating the new order of the day (Mathis, & Jackson, pp. 56-74, 2008). The best part about this system is that it helps firms to shift the burden of fixed labor costs to variable cost, thus reducing the expenses for the company when productivity and performance decrease. In this way, a company can even absorb shocks of a recession or bad time with minimal losses compared to the market. In addition, it compensated high performers for their hard work and pushes low performers to match their performance to an acceptable level (Stone, Eugene, & Romero, pp. 52-145, 2007). It creates a method of self-accountability or self-examination for the employees and the employers. There are different forms of variable pay programs out of which some of them are briefly discussed below: - 1. Piece Rate Pay Piece rate pay is not a new concept since it has been popular with factories workers, production workers and sales people. In this pay plan employees are paid a pre decided sum of amount for unit of work done or production completed (Thorpe, & Homan, pp. 211-267, 2000). This system links pay closely with the output produced. The more the output in quantity, the more the pay you receive. The drawback for such a system is that it completely neglects that portion of “quality” in the output produced (Torrington, Hall, & Taylor, pp. 365-348, 2005). 2. Merit-Based Pay In order to overcome the shortcomings of piece-rate pay plan, mangers came up with Merit based pay. This pay plan bases the variable pay on performance appraisal rather than simply the number of units produced. In this way, the element of quality of the output also comes in which is very important now a days. Experts believe that these programs can motivate employees very strongly to increase their performance in terms of quality and quantity both, which is in turn beneficial for the organization (Feldberg, pp. 12-46, 1995). Many large organizations are following this method. IBM is the most important out of them. IBM’s merit based pay program provides increases in the salaries of the employees based on their annual performances (Torrington, Hall, & Taylor, pp. 365-348, 2005). During the 90’s when the recession hit Japan’s economy very badly, many of the Japan’s big companies turned towards this pay system. One of the Japanese Business Expert suggests, “It is not just a method of changing the wages of employees, but it is way to achieve the organizational goals set by the company’s top management” (Rothwell, Stavros, Sullivan, & Sullivan, pp. 61-92, 2009). Despite the greatness of this system, it also has certain negative aspects. The most important of them is that it measures the performance annually and you receive the rewards after more than a year’s time. In addition, the performance ratings for this merit-based pay can be correct and incorrect as well. On top of it, many labor and employee unions oppose this system and want to make sure that they under the traditional system where pay increases are witnessed by seniority levels (Block, pp. 311-349, 1996). 3. Bonuses Bonuses have an edge over the merit-based pay program because bonuses are aimed at rewarding employees for their current performance rather than past ones. In this way, employees get their rewards quickly and immediately, which further increases their motivation level. Experts have praised this plan by saying that in this way we can move from entitlement towards a society of meritocracy (Bratton, & Gold, pp. 277-349, 2001). 4. Skill-Based Pay Skill based pay program is pay plan which sets an employee’s pay on the bases of the number of skills he possess or the number of jobs he can perform with in a company (Langton, pp. 46-76, 2000). It sounds good that more skillful the person, the higher the pay he receives. This method is used at American Steel and Wires where you can boost up your income to 12,480 dollars annually by acquiring up to ten skills (Steers, & Porter, pp. 219-237, 2006). The same is the case with Frito-lay Corporation (Sonnentag, pp.362-375, 2002). More skillful employees are a better resource for the organization since they become interchangeable in different departments. It also boosts communication between several departments since now many people are working on inter departmental basis (Steers, & Porter, pp. 219-237, 1991). However, like any other pay program it also has some drawbacks. What if all the people in the organizations learn all the possible skills? It will then create an environment of frustration and uselessness amongst employees. Employees at times also can acquire skills, which are of no immediate use for the company, and now the company is liable to pay him or her more. This ultimately results in loss for a company if not properly managed (Brown, & Harvey, pp. 72-83, 2001). Rewarding Employees George works for a small pizza hut outlet in California as a floor coordinator. He gets a mediocre pay with no big tangible rewards. His job is not very challenging or interesting. Yet George is very much satisfied with his job and always talks very enthusiastically about his work and the contributions he makes to the company. He explains the reasons of his passion towards his job as the recognition he gets from his boss and other colleagues. He is very happy about the compliments that he gets on the floor. In addition, he also feels proud when he tells that he has been nominated as the “employee of the month” several times (DeCenzo, & Robbins, pp. 23-45, 1999). Many organizations are now realizing what affects the performance of employees like George. It is the rewards other than the pay employees get out of their job. Rewards can be both extrinsic and intrinsic (Bratton, & Gold, pp. 277-349, 2001). Following are some of the major extrinsic rewards discussed below: 1. Profit Sharing Plans “Programs in which the company distributes rewards or compensation based on some formula designed around the factor of company’s profitability” (Yeatts, & Hyten, pp. 170-189, 1998). These can be in either the form or cash or may be in the form of stocks. Experts regard it as a good way to reward employees for their contributions in the profitability of the company. Nevertheless, this plan is entirely based on the profitability of the company and the pre-determined formula. 2. Gain Sharing Large manufacturing companies such as champion, spark plug and mead paper are most famous firms, which practice gain sharing. However, approximately 45 percent out of the fortune 1000 companies practice gain sharing in some way or the other (Robbins, Judge, Campbell, pp. 112-154, 2009). “Gain sharing is a formula based incentive plan like profit sharing, but is different profit sharing that it is not based on the profitability of the company but on the group productivity (Mathis, & Jackson, pp. 56-74, 2008). Therefore, even if the company is not making profits, employees can still reap the rewards from gain sharing. 3. Employee Stock Ownership Plans (ESOPs) ESOP’s are generally company-established program through which employees are offered tocks of the company normally at lower price than the current market rate. Companies like Publix Supermarkets and W.L. Gores and associates are now more than 50 percent employee owned. In fact, many companies around the globe practice ESOPs (Torrington, Hall, & Taylor, pp. 365-348, 2005). It is beneficial in the sense that it helps creating a sense of association and ownership amongst the employees of the company (Thorpe, & Homan, pp. 211-267, 2000). Research has also shown that ESOPs increase employee satisfaction but they impact on productivity is not as evident (Robbins, Judge, Campbell, pp. 112-154, 2009). As earlier discussed that rewards can be intrinsic are as well. Now a day’s companies are focusing more towards these rewards because they almost cost nothing to the company but create a great deal of job satisfaction for the employees and it is obvious that satisfied employees are more productive than others are. A few years back, there was a huge survey aimed at finding out the prime motivator of employees at job and the answer was unanimous. Their response was Recognition, recognition and more recognition (Block, pp. 311-349, 1996). Another survey held in 2002 revealed that 84 percent of the companies worldwide have some kind of employee-recognition reward programs since they believe that it is very effective (Wilson, pp. 12-265, 2003). Different companies perform these reward programs in different ways. At NIIT, they name one of their conference rooms or training rooms after the name of the outstanding performer employee of the year (Robbins, Judge, Campbell, pp. 112-154, 2009). At Federal Express, an employee can have one of the 500 planes of Federal Express, named after his or her child (Rothwell, Stavros, Sullivan, & Sullivan, pp. 61-92, 2009). Many companies also give out caps, ties, gift vouchers and employee of the month activities to reward their employees (Brown, & Harvey, pp. 72-83, 2001). Conclusion It is now very simple for even any layman to conclude that pay and rewards have a positive correlation with job satisfaction and in turn productivity. However, it is important to recognize differences between various pay programs and decide the best one according to the job, industry and the situations. Besides, it is very important for every firm to understand the importance of rewards and recognition programs since they are the most cost effective out of all. References Arnold, John, & Silvester, Joanne. (2005). Work psychology: Understanding human behavior in the workplace. Prentice Hall/Financial Times. Block, Peter. (1996). Stewardship: Choosing service over self-interest. Berrett-Koehler Publishers. Bratton, John, & Gold, Jeffrey. (2001). Human Resource Management: Theory and Practice. Routledge. Brown, Donald R., & Harvey, Donald F. (2001). An Experiential Approach to Organization Development. Pearson Education India. DeCenzo, David A., & Robbins, Stephen P. (1999). Human resource management. John Wiley & Sons. Feldberg, Meyer. (1975). Organizational behavior: text and cases. Juta. Gellerman, Saul W. (1992). Motivation in the real world: The art of getting extra effort from everyone-including yourself. Dutton Publishers. Johns, Gary, & Saks, Alan M. (2001). Organizational behavior: Understanding and managing life at work. Addison Wesley Longman. Knowles, Michael Cosby. (1990). Organizational behavior: Changing concepts and applications. Harper & Row. Langton, Nancy. (2000). Organizational Behavior: Concepts, Controversies, Applications. Pearson Education Canada. Lawler, Edward E. (1990). Strategic pay: Aligning organizational strategies and pay systems. Jossey-Bass Publishers. Mabey, Christopher, Skinner, Denise, & Clark, Timothy. (1998). Experiencing human resource management. Sage Publications. Martin, John (2001). Organizational Behavior. Thomson Learning. Mathis, Robert L., & Jackson, John H. (2008). Human Resource Management: Essential Perspectives. Southwestern Cengage Learning. Noe, Raymond A. (1997). Human Resource Management: Gaining a competitive advantage. Irwin. Robbins, Stephen P., Judge, Timothy A., & Campbell, Timothy (2009). Organizational Behavior. Pearson Education, Limited. Rothwell, William J., Stavros, Jacqueline M., Sullivan, Roland L., & Sullivan, Arielle. (2009). Practicing Organization Development: A Guide for Leading Change. John Wiley and Sons. Sonnentag, Sabine. (2002). Psychological management of individual performance. Wiley. Steers, Richard M., & Porter, Lyman W. (1991). Motivation and work behavior. McGraw-Hill. Stone, Dianna L., F, Eugene, & Romero, Stone (2007). The influence of culture on human resource management processes and practices. Psych Press. Thomas, Kenneth Wayne. (2002). Intrinsic motivation at work: Building energy & commitment. Intrinsic motivation at work: building energy & commitment. Sage Publications. Thorpe, Richard, & Homan, Gill. (2000). Strategic reward systems. Financial Times. Torrington, Derek, Hall, Laura, & Taylor, Stephen (2005). Human Resource Management. FT Prentice Hall. Wilson, Fiona Margaret. (1999). Organizational behavior: A critical introduction. Oxford University. Wilson, Thomas B. (2003). Innovative reward systems for the changing workplace. McGraw-Hill Professional. Wood, Adrian. (1978). A theory of pay. CUP Archive. Yeatts, Dale E., & Hyten, Cloyd. (1998). High-performing self-managed work teams: a comparison of theory to practice. Sage Publications. Read More