Reward and Performance in Human Resource Management - Case Study Example

Reward and Performance Table of Contents Executive summary……………………………………………………………………..3 Introduction…………………………………………………………………………..…3 Performance management System……………………………………………………..4 Performance management System in SMEs…………………………….…………….5 SME in question- IIC Company…………………………………………….………….6 Personal goal setting process @ IIC………………………………...…………..7 Total reward system………………………………………………………..……………7 Meaning of reward……………………………………………………………….8 Theories underpinning the Total Reward System…………………….…………8 Components of total reward strategy……………………………………………10 Evaluation of performance management system @ IIC………………….…….11 Conclusion…………………………………………………………………………...…..11 Appendices……………………………………………………………………..………..13 References……………………………………………………………………………….17 Executive summary Performance management in today’s business environment has gained immense importance as it now involves triggering suitable change agents which modify the employee behavior in the desired direction and manner. Under the purview of performance management comes the total reward strategy which is not restricted to monetary benefits alone. Now personal development and learning has replaced the significance of money and tangible benefits. The present report is an attempt to throw light on literature and fundamentals of performance management systems and factors which govern the performance evaluation criteria. Components of total reward system are also discussed to provide comprehensiveness to the developed insights. The basics and theory has been tested and recommended with the help of a real organizational context setting which has implemented balanced scorecard approach in its performance management system. How evaluation strategies pertain to different corporate levels and what reward management factors have been taken care of by the company are also analyzed against existing content. Introduction “Performance management is the process of establishing a shared understanding about what is to be achieved and how it is to be achieved. It is an approach to managing people that increase the probability of achieving success” (Performance management process handbook 1999). Due to increased complexities of business, individuals are not able to effectively communicate their shared expectations and perceptions with others and thus, linkage between individual and organizational objectives seems a distant reality. In hierarchical organizations, communication gets blurred with every level and results in information asymmetry. As such, it becomes imperative to implement formal rules and compliance guidelines so that behavioral change process of individuals becomes simpler. A robust and sophisticated performance management system takes into consideration each and every level of performance and measures the cost incurred at every single execution. In the context of this paper, individual and organizational goal setting and performance management systems have been devised after improving the present system and making information more relevant, reliable and sufficient. Also, the practices and policies of performance management systems should fit at successive levels of the hierarchy and align the individual goals with that of the corporate strategies to avoid any conflicts and negative effects. Performance management System Performance management is better known as performance measurement or performance appraisal and is aimed at measuring or assessing the performances of individual or groups. Being a sequential process, it starts with establishing performance standards, evaluating employees’ performance on the basis of those laid down standards, preparing documented reports and finally communicating the performance evaluation results to the employees. This entire cycle or process is termed as performance management system (Appendix 1). Appraisals done in a simple manner involve processes and activities which involve only employees and an employer while modern performance management systems are intact with quality management propositions also. This is important because human resources are the biggest assets for an organization and like operational processes, activities for their appraisals, measurements, frequency, methods, storage and timing attach a greater significance. Theoretically, a bigger picture comes into existence by combining small parts. Likewise, an organization is a big picture where different departments are its parts and employees working under each department the sub-parts. Thus, to manage and improve the performance of the organization, it is essential to measure and manage the performance from the grass root level which starts from individual employees. The needs of employees turn to be the needs of the organization and vice versa. Thus, accountability remains as a key factor of performance evaluation and aligning this component at every process, operational and managerial level establishes the relationship between performance management systems and business objectives. More precisely, it is the better communication and way of informing the employees of what is expected from them, how they are required to perform, how well they fared and what rewards would they get in successful stances (Randell 1994). Performance management systems in SMEs Though globalization has gripped the entire globe, yet SMEs are the one which are still lagging behind in the implementation of performance management systems as compared to Large Enterprises (LEs). Triggering factors like knowledge sharing and network based culture are encouraging the need for SMEs to get more organized. Traditionally, the focus of performance systems was measurement but not it has changed from measurement to management. According to Amaratunga and Baldry (2002), organizations now have to manage through measures to reap the benefits of globalization. There has also been a shift from individual to collaborative performance management and measurement in the existing state which is turning to be a key component in the change management philosophy of organizations. Earlier, performance management systems were based on lagging measures rather than leading measures. While lagging measures provide the base for feedback control based on the past objectives, leading measures provide a balanced framework of current performance and future plans and objectives to ensure better management and control (Busi & Bititci, 2006). SME in Question- IIC Company IIC is a Japanese subsidiary located in United Kingdom and operating in the financial and insurance services industry. It also underwrites business risks for corporate clients with the help of its brokers and agents network (Shulver et al 2009). The company was established in the year 2001 and soon expanded its staff to 110 members. However, increased demand was faced to manage the performance evaluation system and individual employee behavior which aligns the employee goals with the company’s strategic future commitments. As such, the company came up with an improved performance management system with two major objectives. First was individual goal setting by means of improved communication and information systems and secondly, development of an individual performance management system which fosters the desired behavior in employees and checks them against laid standards. For this purpose, the management embarked upon the introduction of a balanced card approach bases performance management system to develop the evaluation strategies at every successive level. As evident from the figure (Appendix 2), the individual goal setting process has been tried to be aligned with corporate objectives according to the needs of levels of organizational hierarchy. This is logical and feasible too as expected behavior outcomes change according to the roles and responsibilities at different levels. Setting common standards and evaluative criteria for all levels is neither justified nor beneficial in the context of employee and organizational performance. The goal setting process at IIC depicts its alignment with business strategy at individual, departmental and corporate levels. At the individual level, line managers would be responsible to define and design individual roles and development objectives. Departmental level will encompass definition of departmental goals set by teams in conjunction to the top level goals. These will include strategy maps while top level goal setting will be undertaken by senior management and include long term objectives defined for a span of 3-5 years. It will include not only the destination statement but also the combination of strategy maps developed by individual departments. Personal goal setting process @ IIC The personal goal setting process at IIC is designed very carefully so that it fulfills the objectives of performance management system without putting any burden on the employees. As such, per person is assigned to only 2 development and 5 business objectives. Every personal objective will try to fulfill one departmental goal and these were measured and weighted for next year or promotion stances. For new hires, the objectives weighted 25% while for experienced ones; the weight assigned to these objectives for evaluating performance was set at 10%. This process helped IIC to strike an optimum balance between personal and corporate goals for an employee and establish clear and two-way communication channels between managers and subordinates. This way, performance can be evaluated more objectively and links the performance and reward in a very formalized and controlled manner (Appendix 3). Total reward system With constant update of business practices and working environment, the remuneration system prevailing in organizations is also faced with a challenge to cope up with the current economic and financial situations. Astonishingly, pay structures and cash rewards have dropped down in the list of employee motivators and the ranks have been substituted by learning culture, appraisals, empowerment and flexibility in working hours. As such, non-monetary components are gaining significant importance in the reward structure and management. It also implies matching of reward components with the ethics of the workplace and directly linked to employee performance. Meaning of reward Reward is the compensation given for the services rendered by employees within an organization. It encompass not only the monetary benefits and tangible currencies, but also non-measurable amenities like supportive relationships, growth opportunities, decision making authority and a comfortable environment (Appendix 4). A direct function of reward is motivation which seeks to establish and enhance quality proposition and better focus on customers (Figure 1). Figure 1: Performance and Motivation With relation to a performance management system, rewards are used as tools to motivate and attract the employees towards strategic goals and their responsibility of delivering their contribution to its fulfillment. Components of a total reward system allow everything which is perceived by an employee as valuable for his/her existence and better performance. In this regard, Fernandes (1998) describe “Total reward is the sum of the values of each element of an employee’s reward package” and takes into consideration added components which help employees embrace the organizational culture and active involvement in the achievement of goals and objectives (Appendix 5). Theories underpinning the Total Reward System As discussed above, motivation is a direct function of reward management and the first motivational theory was propounded by Maslow in the year 1943. According to the theory, individual behavior and the extent to which he/she is willing to exert efforts are determined by the strongest need prevailing at that time (Appendix 6). Initially, most basic needs of physiology are met followed by safety, social interaction, self-esteem and self-actualization (Krietner & Kinicki, 2007) Unlike Maslow’s theory, ERG (Existence, Relatedness, and Growth) theory propounded by Alderfer opines that higher level need functions as a motivator regardless of the fulfillment of the previous need. However, it also states that individuals tend to satisfy their most concrete needs first. Thus it means that individuals suffer from frustration-regression where they ‘drop back’ to the previous level if not successful in satisfying their demand in a specific level of abstraction (George and Jones 2002). Thus, total reward system is important for an organization in determining the concrete needs of employees. When monetary needs are fulfilled, they aspire for recognition. If high level components of total reward system are not available to the employees, they will drop back to their previous level of working and not feel motivated because their basic needs are getting fulfilled and so the desire for enhancing performance do not emerge. The role of Expectancy theory in the total reward strategy cannot be undermined as it establishes the relations between pay for performance and expected behavior of employees (Appendix 7). This theory opines that employees feel motivated if they are able to perceive the outcome of the goal by actions and efforts on their part as a result of reward attractiveness. Probability of higher rewards generates higher motivation and more efforts into the work. The dimensions of expectancy, valence and instrumentality should be high to instill the desired behavior in employees (Vroom 1994). Fair treatment in reward system is also crucial to avoid grievances and conflicts. The Equity theory (Drafke & Kossen 2002) states that employees perceive equitable return for their inputs as a prime factor of employee performance and fair work culture (Appendix 8). If they feel they are getting less compared to their inputs or some other person is getting more than them for the same work, the procedural justice of performance management system is challenged and questions are raised upon the fairness and balance between pay and performance which ultimately leads to employee dissatisfaction. Components of total reward strategy According to Patricia & Jay (2000a), pay structure and total reward strategy holds much more than just monetary aspects. Inclusion of positive workplace, growth opportunities and compelling future along with increased pay serves as an optimum foundation to base the performance management system upon (Appendix 2). It not only motivates the employees but also envisions them of the future goals of the organization, the skill set needed to contribute their lot to its achievement and add value to personal, professional and organizational growth. In order to impart comprehensiveness and totality to the total reward system and establishing its linkage with the performance management system, Tropman (2001) devised an equation which signifies the components of a total reward system: Where TC= Total Compensation, BP= Base salary, AP= Augmented salary, IP= Indirect pay, WP= works pay, PP=special benefits/perks pay, OA=opportunity for advancement and increased responsibility, OG=opportunity for growth through training and development, PI=psychic income/emotional enhancements, QL=quality of life, X= any other element perceived or required by the employee. Total reward strategy inclusive of such components facilitates the evaluation of performances of individuals on different criteria. It improves the individual efficiency, job satisfaction and overall performance of employees by taking into account all the physical, psychological and perceptual aspects of motivators. It establishes more routes for the management to link with the employee and develop positive attitude while serving as a connector between organizational and individual psychology. Ittner & Larcker (1995) have found that organizations with greater use of integrated reward philosophy and formal improvement practices have registered better performance and fostering accountability, communication, flexibility and retention in and of its workforce. Evaluation of performance management system @ IIC The balanced scorecard approach proves very innovative as it brings together teams, employers, employees at one single platform and addressal of performance management system components more effectively and formally. Laying down departmental objectives facilitates team leaders and departmental heads to share information with employees more closely and focus their performance for years ahead on the basis of current achievements. The destination statement serves as a clear guideline for HR practices to percolate down the managerial and operations levels including the performance management and reward strategies. It presented a broader picture of the corporate goals which were further defined and refined by departmental and personal objectives. Under the reward management category too, this approach tends to reduce the repercussion of achieving a few high level corporate goals without serving the personal and intrinsic motivating factors behind employee performance. Had it been only business objectives, employees would have lost interest in the job and also in the achievement of coveted goals because there would be nothing more than incentives to achieve. However, under present settings, not only extrinsic but intrinsic motivators of both joy and rewards are being addressed to in the balanced way. Conclusion IIC Company has responded well to the needs of increased complication in SME environment by adhering to the hierarchical nature of business practices and matching personal objectives with departmental and corporate level objectives. Following the layered set of motivation and reward theory, the present approach seeks to enhance the performance of employees on a successive basis by starting from physiological to top level managerial ones. Thus it follows the basic tenets of total reward strategy where performance is maximized by incorporating a mix of tangible and intangible benefits perceived by employees. The performance management system at IIC serves as an example for other SMEs that are still working under traditional evaluation systems and conducting performance appraisals to achieve corporate objective only. Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4: The Five phases of reward Appendix 5: Total Reward Components Appendix 6: Maslow’s Need Hierarchy Appendix 7: Relation between Expectancy theory and Pay for Performance Appendix 8: Equity Theory of Motivation References Amaratunga, D. and Baldry, D. (2002). Moving From Performance Measurement to Performance Management. Facilities, 20(5/6), 217-23. Busi, M. and Bititci, U.S. (2006). Collaborative performance management: present gaps and future research. International Journal of Productivity and Performance Management, 55(1), 7-25. Drafke, M. W. & Kossen, S. (2002). The human side of organizations, 8th Edition, pp. 287. Fernandes, F. N. (1998). Total Reward-An Actuarial Perspective. Actuarial Research Paper, No.116. George, J. M. & Jones, G. R. (2002). Organizational Behavior, 3rd Edition, pp. 191. Ittner, C. D. & Larcker, D. F. (1995). Total Quality Management and the Choice of Information and Reward Systems. Journal of Accounting Research, Vol. 33, Studies on Managerial Accounting, pp. 1-34. Krietner, R. & Kinicki, A. (2007). Organizational Behavior, 17th Edition, pp. 237. Patricia, K. Z., & Jay, R. S. (2000a). Pay People Right! Breakthrough Reward Strategies to Create Great Companies, San Francisco: Jossey-Bass Publishers. Performance management process handbook. (1999). Office of Personnel Management, State of Oklahoma. Randell, G. A. (1994), Employee Appraisal, In Sisson K. (Ed), Personnel Management: a comprehensive guide to theory & Practice in Britain, Oxford: Blackwell Publishers Ltd. Shulver, M, Lawrie, G, Barney, W & Kaiff, D. (2009). A case study in aligning individual performance management practices with business strategy. 2GC Active Management Tropman, J. E. (2001). The compensation solution: how to develop an employee-driven rewards system. University of Michigan Business School and management series. Publisher: John Wiley and Sons. Vroom, V. H. (1994). Work and motivation. 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