Organization experiencing challenges with its compensation and benefit system - Research Paper Example

? Organization experiencing challenges with its compensation and benefit system Table of Contents Introduction 3 Thesis ment 4 Review of the Literature 4 Reinforcement and Expectancy Theories 5 Equity Theory 5 Implications of the Literature 8 Conclusion and Recommendations 10 Reference 13 Bibliography 14 Introduction The compensation practices undertaken in organizations have far reaching effects on the competitive advantage of the firm. In order to develop competitive advantage of a firm in the global market, the compensation plans developed by the firm must align with the strategic plans and actions of the same. Apart from the attainment of competitive advantage compensation practices also have influence over recruitments, turnover, productivity of labour, etc. in firms. Thus it is crucial that firms make thorough analysis of how people perceive about the firm’s compensation and how these perceptions consequently affect their behavior. A substantial amount of job satisfaction of employees depends on the amount of compensation that he receives as well as the benefits he derives from the organizations. The financial compensations complemented with adequate benefits such as insurances, sick leaves, paid vacations, discounts, pension plans etc. impacts on the satisfaction level of employees and subsequently their behavior and commitment towards the same (Singer & Francisco, 2009, p.176). The American Airlines (AA) confronted with serious compensation and benefit issues due to the restricting of their compensation plans for employees. Due to the great losses incurred by American Airlines, one of the world’s largest airlines, the management had to undertake massive cost cutting and restructuring campaign with the purpose of restoring profitability. This resulted in massive job cuts of employees. The policy only invited random resistance from employees which further aggravated the amount of losses incurred by the company (Sherman, 2003). The project would bring forth the various problems that aroused out of the compensation restructuring plans in the company, in terms of productivity, job satisfaction, employees attrition, etc, and the ways in which AA dealt with the problems to restore stability and commitment from the employees (Sherman, 2003). The problem would be supported by presentation of critical literature which would include various arguments presented by researcher, practitioners and author and also empirical evidence on the subject. Thesis statement Following is the thesis statement developed for the study; Due to the critical role played by compensation and benefit plans on employees’ job satisfaction, commitment and productivity, companies need to strive to exploit full potential of their human resources through adequate compensation and benefit structures. Review of the Literature As organizations continue to be confronted with increased competitive pressures, they seek to achieve more using fewer resources. Along with the rise in emphasis on such aspects as sales volume, innovation, profits, quality etc, many cases have revealed tight control over employments with substantial employment cuts. The idea to manage human resources effectively using fewer employees has evolved over the years. Subsequently the emphasis has shifted towards the system of employee compensation with the view to manage human resources better (Gerhart, Minkoff & Olsen, 1994, p.1). Employee compensation and benefits play a key role as it lies at the heart of employment relationships having critical importance for both employers and employees. The financial compensation paid by employers in the form of salaries and wages comprises of the main income of the employees. On the other hand benefits account for the health and other security of employees. A large proportion of employee’s job satisfaction and performance depends on the combination of both the compensation and benefits he receives. From the perspective of the employer, the compensation decisions undertaken influences the costs associated with doing the business and consequently their abilities to sell products and services at competitive prices in markets. In addition to this it is the compensation decisions which determine employer’s abilities to attract and retain talents from the market and also influence their attitudes and behaviors (Gerhart, Minkoff & Olsen, 1994, p.2). Reinforcement and Expectancy Theories According to Thorndike’s law of effect, a response if likely to reoccur in future if it is rewarded. The implication of this theory on managing compensation is that high performance of employees when followed by a certain amount of monetary reward is more likely to ensure high performances in the future. On the contrary it is seen that when high performance is not rewarded properly ends in lower performances in future. Similar to the reinforcement theory, expectancy theory, presented by Vroom, (1964) also focuses on bringing a link between rewards and employee behaviors (Gerhart, Minkoff & Olsen, 1994, p.5). Motivation is found to be a function of two other aspects like expectancy which is the perceived association between the efforts and performances; and valence which accounts for the expected outcome or the expected reward (Gerhart, Minkoff & Olsen, 1994, p.5). Equity Theory Adam, (1963) made the suggestion that the perception of employees contributing towards the organizations is directly linked what they expect to get in return; and how this return compares against others either inside or outside the organization (Gerhart, Minkoff & Olsen, 1994, p.6). This comparison forms the basis of fairness of their employment relationship with the organization. Two empirical studies undertaken recently revealed some of the counterproductive behaviors that could generate out of such perceived inequity. Greenberg (1990) examined the effects of communicated pay cuts on the perceived inequity of employees. The reasons for the pay cuts were communicated to the employees in different ways (Gerhart, Minkoff & Olsen, 1994, p.6). The group to which the reasons were communicated in the best way, their perceived inequity was found to be the least and had little impact on their attitudes and behaviors towards the organization. On the other hand, the group which was not communicated properly about the salary cuts resulted in high perceived inequity and unfavorable attitudes towards the management and organizations. This empirical evidence necessarily reveals that any HR policies when changed must be communicated well and with enough transparency in order to ensure avoiding any adverse reaction from employees, in the form of job dissatisfaction, low productivity or poor performances (Gerhart, Minkoff & Olsen, 1994, p.6). Researchers have tried to find a link between pay and performance. It is not surprising to note that the potential benefits of associating payments made to employees with their performance are obvious. That is why economists have shown their concern towards firms resisting their bonus based compensation strategies for inculcating motivational effects. One explanation of the reasons why organizations resist ‘pay for performance’ strategies is that monetary rewards can be counterproductive. Deci (1972), have argued that money results in lowering motivation level of employees and this occurs through the reduction of intrinsic rewards received by the employees through the job (Baker, Jensen & Murphy, 1988, p.6). Kohn (1988) has put forth his views that incentives might not always be in favor of the businesses. This is because monetary rewards encourage individuals to pay very little attention to their tasks and generally influence them to perform tasks with as little efforts as possible and through minimum risks. In such cases people are completely controlled and influenced by rewards (Baker, Jensen & Murphy, 1988, p.6). Researchers have identified another pervasive and adverse effect of salary or wage cuts. Salary cuts are known to have driven employee thefts. Employee thefts can prevail in the form of moral laxity in the workforce, job dissatisfaction and other forms of non violent crimes against businesses. According to a survey conducted by Holligner & Clark (1983), to find the causes and effects of employee thefts, the results revealed that employees were more involved in criminal acts against their organizations as a mechanism of correcting the perceptions of being victim to injustice and inequity (Greenberg, 1990, p.1). Adams (1965) has claimed that employees who have the perception of being inequitably underpaid, or who believes that the rewards they receive in return to the contributions they make towards the organization, might also respond by trying to improve on their performance for earning greater rewards (Greenberg, 1990, p.1). Even though researches are supportive of this statement, studies have been restricted to such situations in which individuals paid according to piece rate system produce more products of poorer quality to increase outcomes rather than putting in greater inputs (Greenberg, 1990, p.1). Additionally recent research on procedural justice also revealed that the perceptions of outcomes and fair treatments not only depended on one’s outcomes but also on the explanations provided for those outcomes. For example, research has found that the procedures and decision outcomes were better accepted by people when they were provided with the assurance that the managements and higher authorities were sensitive to their viewpoints (Greenberg, 1990, p.2). Moreover they were also supportive of favorable outcomes when the decisions were free of biasness, applied consistently and justified adequately on the basis of concrete information. Moreover it also depended considerably on the honesty with which the strategies were communicated by the decision makers and the manner in which the people to be influenced by the strategies were treated. The following diagram would reveal the extent of employee thefts in relation to pay cuts. Figure 1: Employee theft (mean percentage) relative to pay cuts (Source: Greenberg, 1990, p.5) Thus the critical literature reveals the various arguments put forth by authors with regards to impacts of HR strategies on employee behaviors and attitudes. In this regard, special emphasis has been provided to the impacts of salary cuts in organizations as a measure for curtaining costs. Implications of the Literature It is important to make a review of the critical literature to identify its specific implications. The critical literature highlights on the various aspects researchers have focused on to bring about the relationship between the compensation strategies in organizations and attitudes and behaviors of employees. The following section would deal with the implications that arise from each of the statements made by authors in such contexts. Based on those implications recommendations would be suggested for American Airlines on strategies to overcome its present crisis. As presented by Gerhart, Minkoff and Olsen (1994) compensation decisions have free reaching effects from the perspectives of both employers and employees. It accounts for the basis of attractiveness to employees as compared with other employers. Thus compensation plans must be aimed at not only attaining commitment and loyalty of employees but also must be directed towards attaining competitive advantage in the market. There are certain implications of the Reinforcement Theory which states that a particular response is more likely to occur in future if it is adequately rewarded. The theory implies a certain amount of correlation between the monetary reward enjoyed by an employee and his performance. Greater the monetary reward associated greater is the performance of employees. Moreover it also has an implication on the motivation level of employees. Monetary reward acts as an easy motivator for employees and workers. On the other hand the equity theory implies that employees directly compare his returns with others inside or outside the organizations which also determines his perceived satisfaction with his compensation. The views presented by Grenberg (1990), also reflect some of the impacts that organizations can have on it its employees because of its HR strategies and plans. As human resources are the first ones to be influenced by the implications of such strategies, it is crucial that organizations make a prior analysis and study and foresee the implications that such strategies could have on the employees. Special emphasis must be provided in terms of pay cuts or salary cuts of employees. Pay cuts account for a major part of the human resource strategies in organizations as an act of curtailing costs. It is obvious that such acts are not accepted willingly by employees and there can be various resistances in the form of withdrawal from work, job dissatisfaction, conflicts etc. However, the impacts of such acts can be brought under control to a substantial extent through effective communication with employees. Managements need to be transparent with the reasons why such steps are being taken, in what interest and state how employees could be compensated in other ways. Researchers like Greenberg and Adams, have specifically emphasized on the implications of such HR strategies in the forms of employee thefts. The honesty behind every strategy and the way they are communicated to the employees are instrumental in tackling employee thefts considerably. The decisions and procedures made by the management are more likely to be accepted by employees if it can be assured that the higher authorities were considerate about their view points. Moreover employee commitment, loyalty and performance are considerably increased if the decisions demonstrate fairness, unbiased and transparency. Conclusion and Recommendations As reveals from the case of American Airlines, immense employee resistance emerged out of the management’s decisions to cut down wages and salaries in order to curtail costs. In order to tackle the problem, and considering the views reflecting from arguments presented by various researchers, the following recommendations are suggested in the project. Firstly, any HR strategy decisions undertaken in the management must be in the strategic interest of the organization. However, it does not mean that it should bring unfavorable impacts on the employees. The well being of employees must be ensured in case of any decision changes or implementation in order to ensure their commitment and satisfaction. Compensation decisions must be performance oriented. In the case of American Airlines, since the employees’ wages were cut down drastically, it is possible that employees could draw back from contributing their work towards the organization. However instead of cutting down salaries, if the management had fixed their bas pay and allocated a substantial extent of their salary as variable based on incentives and bonuses, the repercussions would have been less. This is because in that case employees would not feel cheated or exploited by the management. Rather they would focus would be more on improving performance for attaining greater monetary rewards (Mathis & Jackson, 2010, p.401). As apparent from the equity theory, employees value their remunerations against that paid by other contemporary organizations and their degree of contribution towards the organization. The attempt to cut down salaries of employees without considering the standards of salaries existing in the markets would only lead to employee dissatisfaction and discontentment. American Airlines accounts for one of the largest airlines in the world and is compared against such airlines like the Southwest Airlines, Delta Airlines, and AirTran Holdings etc. Thus employees would seek to compare their salaries with the industry standards and a lower salary would result in poor performance and employee attritions (Simon, 2009, p.263). It is crucial to realize that salary and wage cuts can be beneficial to curtail costs in the short run, however, the extent of discontentment and discomfort that would arise would eventually lead to considerable employee thefts which would consequently result in raising costs even further. Thus salary cuts must be regarded as the last resort. Moreover, when such a decision is imperative it must be communicated to employees with transparency and honesty. The honesty of thoughts must be reflected in the management decisions and the way they are communicated. In such cases, even if the decisions are unfavorable upon employees they would not put up resistances as Effective communication plays a major role in influencing employee behavior and attitudes towards management and the organization at large. Reference Sherman, P. (2003). Massive wage cuts imposed on American Airlines workers. Retrieved on September 26, 2011 from http://www.wsws.org/articles/2003/apr2003/aa-a18.shtml. Singer, P. M. & Francisco, L. L. (2009). Developing a compensation plan for your library. ALA Editions. Gerhart, B., Minkoff, H. & Olsen, R. (1994). Employee Compensation: Theory, Practice, and Evidence. Retrieved on September 26, 2011 from http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1193&context=cahrswp&sei-redir=1#search=%22compensation%20theories%20practices%22. Baker, G. P., Jensen, M. C. & Murphy, K. J. (1988). Compensation and incentives: practice vs. theory. Journal of Finance, vol. XLIII, No. 3, July 1988, pp. 593 - 616. Retrieved on September 26, 2011 from http://business.illinois.edu/aibrahim/readings/compensation%20and%20incentives.pdf. Greenberg, J. (1990). Employee Theft as a Reaction to Underpayment Inequity: The Hidden Cost of Pay Cuts. Journal of Applied Psychology 1990, Vol. 75, No. 5,561-568. Retrieved on September 26, 2011 from http://www.personal.psu.edu/faculty/k/r/krm10/PSY597SP07/Greenberg%20costs%20of%20pay%20cuts.pdf. Mathis, R. L. & Jackson, J. H. (2010). Human Resource Management. Cengage Learning. Simon, H. (2009). Hidden champions of the twenty-first century: success strategies of unknown world market leaders. Springer. Bibliography Taylor, S. (2002). The employee retention handbook. CIPD Publishing. Cascio, W. F. (2010). Managing Human Resources (Sie) 8E. Tata McGraw-Hill Education. Read More