Managing High Employee Turnover through Compensation and Benefits in Medium-Sized Sales Companies - Literature review Example

“Managing High Employee Turnover Risk through

Compensation and Benefits in Medium-Sized Sales Companies”

Chapter Two: Literature Review

Table of Contents

ContentsPage no.

2.1 Introduction2

2.2 People Risk2

2.3 Importance of Employee Motivation in Reducing People Risk4

2.4 Factors Leading to High Turnover7

2.4.1 Discrimination7

2.4.2Employees’ Needs and Demands8

2.4.3Lack of Employees’ Recognition8

2.5 Role of Benefits and Compensation in Managing People Risk9

2.5.1 Importance of Organizational Culture10

2.6 Relationship between Compensation-Based Motivation and Turnover11

2.7 Designing Compensation Plan15

2.8 Conclusion15

2. Literature Review

2.1 Introduction

This chapter is about exploration of the existing literature about the issue under investigation that will form the basis for basing discussion, conclusions, and recommendations. As the objectives of this particular study were to identify the factors that lead to high employee turnover within mid-sized sales companies, as well as to establish the role of compensation and benefits in reducing the risk of turnover, the exploration of the literature will help in achieving an understanding of the relationship between the independent variables (motivation, compensation, and benefits) and the dependent variable (employee turnover) for midsized companies. Medium or midsized companies are those that have 100 to 250 employees and have annual revenue of $50 million to $1 billion (Gartner, 2016; Merritt, 2016). Such companies are the point of expansion and need more capital to invest in business operations. Therefore, focusing on the development of a comprehensive compensation plan is not easy job for such companies due to which they are at the risk of high employee turnover.

Keeping this in view, this chapter includes review of the existing scholarly literature about the relationship between motivation, compensation plans, and employee turnover. Motivation means to stimulate the desire and efforts of people to achieve the targeted set of goals and objectives. When the level of motivation is low, employees are less focused towards their job responsibilities and adopt counterproductive behaviors at work that are definitely not good for any business (Thomas, 2009). The most negative impact and the most obvious indicator of low employee morale/motivation is high rote of employee turnover, which affects businesses on financial and production grounds. With the exit of skilled employees of a company, the skills, knowledge, and efforts also go away that have played a critical role in the achievement of organizational goals and objectives in the past (Nase, 2009).

This is the reason why companies give extreme importance to the measures leading towards reducing the people risk within companies. In the following sections, the focus would be on understanding the relationship between motivation, compensation and employee benefits, and reduction in people risk, particularly, the risk of high employee turnover.

2.2 People Risk

People risk is a critical issue concerning both emerging and established businesses. It is a risk that relates to the occurrence of costs for businesses on occasion of the occurrence of common problems related to employees. People risks occur in many areas that range from workplace safety to succession planning and employee turnover issues (Donaldson, 2009). Some of the main events that cause people risks within companies include resignation of a skilled employee, retirement of an experienced employee or job switching (Donaldson, 2009). All of such incidents result in creating a gap between organizational goals and efforts towards accomplishment of those goals. Through building a strong and effective risk management culture and finding consensus on risk management culture, companies can avert the possibility of people risk (Krivkovich& Levy, 2015). Large companies are at a better position to fill such gaps through effective planning in order to reduce the suffering for businesses caused through any particular incident related to employees. In case of large organizations, management of people risk is far superior due to better infrastructural facilities and organizational framework as compared to its management in case of small and mid-sized companies (Donaldson, 2009).

Design and implementation of appropriate and future-focused human resource management strategies along with well-designed compensation plans and financial provisions is the only way ahead towards resolving unwanted situations caused as the result of people risks. Such strategies not only help in reducing the disruptions and costs occurring due to people risks but also help in protecting employees from financial impacts of the risks (CPA Australia, 2009). Implementation of employee-centered compensation plans is one of such strategies that companies use to avert some part of people risk .i.e. job switching risk. Development of an employee oriented culture and provision of rewards and benefits to employees are viable tools/sources that motivate employees to continue working for their companies instead of thinking towards job switching (Mushrush, 2016).

2.3 Importance of Employee Motivation in Reducing People Risk

Having understood the people risk and its impact on organizations, let us now discuss the role of motivation in reducing people risk. Organizations from all sectors are at a risk of confronting various people risks as a result of not having a spurred or motivated workforce. Some of those risks incorporate poor performance, diminished worker efficiency, diminished level of worker commitment, expanded worker absenteeism, poor client administration, and huge worker turnover (Thomas, 2009). These issues can be managed through motivating the staff and representatives to show their maximum efficiency for accomplishing authoritative objectives (Jacobson, 2011).

Motivation is a tool to make employees achieve better results (Mosley &Pietri, 2011; Mak and Sockel, 2001). Without motivated and dedicated workforce, an organization cannot prosper in today's market of intense competition. It is for this reason that it has become critical for the managers of every organization to direct performance appraisals at least once within the span of twelve months to know how and to what degree they ought to motivate representatives to earn the maximum levels of profit (Addison & Belfield, 2008, p. 521). Managers of all small, medium, and large enterprises focus on motivating employees due to the fact that they understand the relationship between a motivated workforce and reduction in people risk. “Motivational factors, such as reciprocal benefits, knowledge self-efficacy and enjoyment in helping others were significantly associated with employee knowledge sharing attitudes and intentions” (Lin, 2007, p.135).

People risk is considered a core issue affecting the market performance and overall yields of manufacturing companies and organizations. High employee turnover risk is a type of people risk and is not ever in favor of a company because employees are the driving force behind the success of any organization. When key employees start leaving the company time by time, there occurs a direct effect on the level of productivity and efficiency of the company. “High labor turnover risk rates have caused poor quality, low productivity, and unfilled orders” (Jiang, Baker and Frazier, 2009, p.169).

A calamity associated with turnover risk is that it five rise to the practice of job search among employees, which is not a good sign for small and midsized companies (Felps et al., 2009, p.545). It is due to this reason that companies, in order to overcome the challenge of high rate of employee turnover, try to retain high performing and skilled employees through designing and implementing employee benefits and compensation programs (Samuel and Chipunza, 2009).

Among small and growing businesses, people risk in terms of high employee turnover is a more serious problem because such companies do not have much capital to invest in time by time recruiting and training of employees. According to Yang, Wan and Fu (2012), managers of companies should give attention to the needs of the employees and should provide them with career advice and on-the-job training programs not only to improve their job performances but also to enhance their interest in keeping working for their companies (p. 837).

Creation of a flexible job environment is equally important in managing people risk because a healthy work environment ensures employee loyalty and job commitment, which results in improving their job performances and reducing job search behaviors among them. Many companies also focus towards ensuring flexible work arrangements for employees, in order to make them feel relaxed and satisfied with their jobs. Employees like to work in flexible job environments. Therefore, companies should bring little and affordable changes to the work environment and work timings in accordance with the needs of employees to provide them with great job experience, enhance satisfaction level among employees, and reduce people risk eventually (McNall, Masuda, &Nicklin, 2009).

While talking about the role of motivation in increasing employee performance and reducing people risk, it is necessary to uncover some of the key issues that make employees dissatisfied with their current jobs and that make them to search for jobs in other companies. The following section addresses the issues that lead to an increase in people risk within companies.

2.4 Factors Leading to High Turnover

A high degree of employee turnover is a alarming sign for companies. Several factors can play a role in raising this alarming situation for companies. Some of those factors include discrimination among employees, inflexible job environment and work timings, centralization of powers, lack of employee orientation .i.e. less inclination towards the needs and demands of employees, and lack of employee recognition regarding implementation of compensation and incentive schemes. All of these factors hold huge importance in raising the level of dissatisfaction among employees, and eventually causing employee turnover risk for companies. Given below are the details are some of the above-mentioned factors that lead to people risk within companies.

2.4.1Discrimination

One of the main factors that lead to employee turnover is discrimination among employees based on race, sex, and religion. According to Reskin (2000), employees do not feel comfortable working in such environments where managers give preference to any particular group of employees based on any factor. Today, we see the vast majority of the organizations having workers from different backgrounds. The organizations hire those people based on their aptitudes and capacities. In case an organization begins discriminating between people based on their religions and social backgrounds, the workers will feel disadvantaged, as well as the level of motivation of the workers will go down as the result (Bartlett, 2009). Moreover, in case of compensation and employee benefits programs, companies ought to design and execute them purely on performance rather than on the basis of race, sex, or religion of workers. Only those organizations get achievement in the market which gives value and weight to the job performance of workers instead of considering their individual backgrounds.

2.4.2 Employees’ Needs and Demands

Lack of attention towards employees’ needs and demands regarding their job structure and job environment is another factor the leads to people risk. The administration of any organization needs to consider employee opinions since employees are the primary contributors in achieving market success and high profits (Mosley Jr. &Pietri, 2011). In case an organization does not consider the opinions and needs of the employees during the phase of compensation program design, it cannot achieve success in boosting up the level of productivity. Giving the due level of attention to the needs and demands of employees is critical in developing an employee-centered compensation plan (Segalla, Rouzies, Besson, &Weitz, 2006). Employees demonstrate more concentration and interest towards their work when they realize that the organization will value their diligent work in the form of rewards, promotions, and cash prizes. Rewards help the organizations accomplish higher employee productivity. So with a specific end goal to keep up great notoriety among the employees and to hold gifted employees, it is crucial for an organization to consider the opinions of employees while building up an employee benefit plan.

2.4.3 Lack of Employees’ Recognition

Lack of employee awareness about organizational policies regarding employees is another factor that disconnects employees’ commitment with their jobs and companies. For example, in case of compensation plans within companies, the staff members/employees need to comprehend the compensation plan to know what they need to do to achieve the listed benefits and prizes. It is very important for all employees to have a detailed understanding of all points included in the incentive program in order to bring their performances in line with the requirements (Hisrich& Jackson, 1993). Awareness is necessary because when the employees would not know the essentials of claiming the benefits, they would not have the capacity to show required performances.

In short, there are some important issues that are directly connected with job satisfaction for employees. This section addressed some of those factors, which were discrimination, lack of focus on employees’ needs and demands, and lack of employee awareness about organizational policies that lead to occurrence of people risk within companies. Moreover, some ways were also discussed to avert that risk. In the following section, the focus will be on the role of employee benefits and compensation in reducing the employee turnover risk.

2.5 The Role of Benefits and Compensation in Managing People Risk

People risk in the form of high turnover rate leads to added business costs and recued business productivity both of which are the indicators of business failure. This problem can be reduced by implementing employee-centered compensation plans (Menguc& Barker, 2003). Excitement for employees in terms of implementation of employee benefits and incentive schemes is imperative because lack of excitement makes employees disconnected with their job responsibilities, which eventually brings a negative impact on overall organizational performance (Deeb, n.d.).

Commissions and bonuses are the two widely accepted types of compensations because they not only attract new employees but also play a vital role in retaining existing employees. Commission is a form of cash incentive that a company gives to its employees on achieving some targets. It is given as some specific part of the business an employee brings to the company. On the other hand, bonuses are the added cash prizes that are given on achieving some specific targets. Increase in salaries is also one of the most effective ways to retain key employees of a company. Employees do not want to leave their companies when they are being rewarded in terms of increase in their salaries (Mosley Jr., &Pietri, 2011).

In short, compensation and employee benefits programs make employees produce maximum efforts to achieve the rewards and incentives, which in turn help the companies to achieve desired yearly and monthly yields and reduce the occurrence of people risk. However, along with the focus on the elements of a compensation plan, companies also need to have a thorough understanding of the organizational culture in order to make an alignment between the company’s financial strength, human resource structure, and the compensation plan.

2.5.1 Importance of Organizational Culture

Schwartz (2006) found that for sales department of any small to mid-sized company, designing and implementing a basic compensation plan is very critical to keep employees working for the company (p. 140). However, rewards and employee benefits included in the incentive plans vary depending on the size, structure, and culture of organization. According to Colt and Perrin (1998), the values of organizational culture and employee acceptance level are enhanced due to development of sales incentives and employee benefit programs within companies, which is a good way to reduce the risk of turnover (p.15).

Here, an important point is that in some organizations, preference is given to pay for performance methods, whereas some organizations measure individual performance to stand employees eligible for obtaining the listed benefits. However, whatever the case may be, organizational culture is the element that plays a critical role in designing a suitable compensation plan for employees. Understanding of the organizational culture helps managers in ensuring alignment in organizational values, vision, people, mission, financial strength, communication networks, and employee orientation (Coleman, 2013). All of these elements hold importance in successful implementation of a compensation plan. It is for this reason that managers of companies need to do a thorough analysis of the culture and structure of the organization to make the compensation plan in line with the organizational culture.

Having discussed the role of organizational culture and employee benefits and compensation plans in reducing people risk within companies, let us now investigate the role of compensation-oriented motivation for managing the turnover risk.

2.6 Relationship between Compensation-Based Motivation and Turnover

Employee motivation is related directly with the implementation of compensation plans within a company. Through well-designed compensation plans, companies can get benefits like improved organizational development, increased employee commitment, better resource integration, employee engagement, and improved business processes. It can be said that compensation is a way towards building employee motivation, which is a stepping stone towards decreased employee turnover (Mosley Jr., &Pietri, 2011).

Managers can use employee benefits and compensation plans as a tool of motivation for employees because employee orientation drives the job performances and job behaviors of employees (Wilner, 1998; Brown, 1990). Development of employee-centered policies reduces many problems concerning to companies like poor employee performance, decreased employee productivity, decreased level of employee commitment, decreased income and profits, poor customer service, and employee absenteeism. When companies acknowledge employees’ concerns in preparing annual budgets and business policies, they actually prepare an environment where employees can feel valued. Although this results in adding up to expenses a little but the results are far great in terms of improved job satisfaction among employees. Therefore, companies should always aim towards giving weight to the needs of employees because they are the employees who actually shape annual return for companies.

One way to improve job satisfaction level of employees is to design realistic and practical compensation plans, which is also a form of extrinsic motivation. Extrinsic motivation refers to the use of benefits and incentive schemesto encourage and motivate employees. For example, a company may use high grades, rewards, and benefits as a way to motivate employees to keep up showing good work. This also results in retaining employees and keeping the turnover level down because employees want to be the part of the companies that value their efforts in terms of monetary and non-monetary rewards (Thompson, 2008).

The consequences of making no efforts towards increasing employee motivation may include decreased interest of employees in fulfilling their job responsibilities, rude behaviors of employees with customers, and poor performances (Deeb, n.d.). Extrinsic motivation solves the above-mentioned issues as it is related directly with injecting the desire to work for the company. This results in increased employee productivity and reduced absenteeism. Extrinsically motivated employees show increased interest in their job tasks and responsibilities because they have in their minds that their work and efforts will not be left aside and that their managers will reward the level of efforts the employees would be making in accomplishing the targeted goals and objectives. Positive employee motivation/morale has many indicators, such as, high confidence, work discipline, low employee turnover, and willingness to accomplish organizational goals. The implementation of compensation plans not only results in increasing the job commitment level as well as the passion to serve but also injects a sense of competition among employees who try to excel in their performances in order to be eligible for the highest level of rewards included in the incentives/compensation plan (Thomas, 2009).

One of the key features of extrinsic motivation is the development of a strong bonding between the company, its employees, and managers as workers' motivation level raised and their link with organizations becomes stronger when they realize that their administrators or managers will welcome them through rewards upon showing optimal performances (Mosley Jr., & Pietri, 2011). Representatives feel esteemed and fulfilled when their directors go to their work areas and welcome them for their exhibitions. Thankfulness and support are the indications of positive gathering and endorsement that higher powers give to the subordinates.

Rewards can be provided based on both individual and group performances and have proven to be effective in managing teams. Effective team/group administration is one of the principle zones of interest for managers (Thompson, 2008). They can set prizes for groups so that they demonstrate enhanced performances and accomplish the set prizes. For instance, when workers realize that the most outperforming employee will get a company car and free fuel, they will work with more dedication with the passion to excel in competition, which will subsequently build a good environment of competition among the employees. This is an exceptionally positive part of extrinsic motivation as all people strive to win the prizes set by their companies.

Another beneficial outcome of compensation based extrinsic motivation is enhanced levels of business profitability and productivity (Thompson, 2008). Compensation plans includes certain benefits that almost every sales employee seeks in professional life. Here, an important point to mention is that along with the development and implementation of compensation plans, the environment also matters a lot for employees in building their passion to continue working for the company. The results of making such workplaces in case of sales companies where sales representatives and supervisors work together to reach the desired set of monthly targets are positive, which not only enhance employee attachment with the company but also results in business expansion particularly for small and medium sized sales companies.

Lorimer et al. (2006) state that success of a compensation plan can be measured using performance appraisals, as when employees are satisfied, they show more commitment towards their job responsibilities. According to Colletti and Fiss (2001), sales companies generally allocate huge amounts for sales incentives schemes every year as a way to motivate employees. However, for small and growing firms, it is not an easy task because such companies are in the phase of development and expansion, thus they cannot reserve huge sums to pay in form of highly attractive rewards and bonuses. In view of Hisrich and Jackson (1993), people working in the sales industry earn a good part of monthly income through the bonuses, commissions, and incentives that they receive upon reaching targets (p.226). This statement is supported by the view of Bohlander and Snell (2010) who state that the companies that provide incentives to employees make a good use of their employee-centric policies to reduce people risk in terms of reduced employee turnover (p.457).

2.7 Designing Compensation Plan

Having discussed the relationship between compensation plans and employee turnover, let us put some light on the mechanics of designing an effective and result-oriented compensation plan. To design an effective compensation plan for sales companies, managers need to consider some important points like understanding the needs of sales employees, including both cash and non-cash rewards, financial methods to be applied, and implementation procedures (Schwartz, 2006). Managers should pay attention towards the implementation procedures of the compensation plan in order for it to reap maximum benefits for the company, as well as for employees. The reason is that once a sales incentive scheme is out, then it is extremely hard to take it back if the monetary ramifications of it on the organization have not been addressed properly. All stakeholders need to be aware of all dimensions and points of the plan. It is also very important to convey all points of the plan to the concerned parties to make them become fully aware of the scheme (Cichelli, 2004).

2.8 Conclusion

This chapter explored the relationship between motivation, compensation, and employee turnover. Through exploring the scholarly literature, it was found that a high employee morale/motivation is extremely important in ensuring the success of businesses in today’s competitive economic environments. Low employee morale is a challenge for companies because it plays the role of a hurdle in the accomplishment of goals and targets and also leads to an increase in employee turnover rate. A higher employee turnover is never in favor of companies when employees start seeking job switching, they lose their focus from their assigned job responsibilities as the result of which business efficiency and productivity levels go down. Implementation of employee-centered compensation plans helps in resolving the issue of increased employee turnover in companies because employees like to continue working for companies that reward their efforts through implementation of compensation/incentive plans.

It was also found that employee-centered incentive schemes help in attracting new employees and retaining existing employees, hence, reduce employee turnover. Although previous researches have stressed on the significance of employee motivation and performance appraisal in increasing commitment level among employees, but there is still a researchable gap in the areas of employee loyalty and organizational competitiveness that needs attention. For instance, there is comparatively less literature on the role of compensation plans in reducing employee turnover, particularly, in midsized sales companies. This study filled some part of this particular aspect of the identified gap by providing a good amount of information on the link between incentive schemes and employee turnover. The literature review provided a good insight into the factors that drive employee behaviors and improve organizational performance. The information collected from the review will be useful in making conclusions and recommendations for the study.