The Value of Different Paradigms - Dissertation Example

Introduction In today’s rapidly changing economy and turbulent environment, employers increasingly look for ways to work smarter, faster, and more efficiently. The birth of new industries and emerging markets brings forth mergers and acquisitions, globalisation and internationalisation, downsizing, corporate restructuring, technology advances and many other up-to-date management innovations. With these drastic changes executives and HR managers want to ensure the recruitment and retention of a highly quality workforce. But the workforce has also changed, now it became more diverse and mobile, educated and often exacting. Thus, designing and implementing an employees reward strategy that meets both parties’ needs appears to be a significant task for many organisations (WorldatWork, 2007). Armstrong (2006) asserts that reward management is concerned with the formulation and implementation of strategies and policies, the purposes of which are to reward people fairly, equitably and consistently in accordance with their value to the organization and thus help the organization to achieve its strategic goals. A few decades ago it was quite sufficient to reward employees with decent money for compensation, sometimes adding health care and retirement benefits, and people worked, enjoying their life-long services with companies. Nowadays this approach may not be providing the best results, HR professionals need to seek new, wider reward mechanisms, rethink their directions and focus far more than just to pay. In the context of managing transformation the Modern Rewards Management (as a specific action scheme of company strategic objectives and values) appears and develops (Jiang et al., 2009). It indicates that indirect income and some no-monetary compensation play parts of increasing importance in Reward Structure Design. Generally, Modern Rewards Management is carried out through Total Reward Management. Today Total Reward Management became an important managerial concept that emphasises the relationship between employees’ enjoyment of reward system and organisational effectiveness. Total reward origins and definitions WorldatWork, the Total Reward Association of U.S., represents a brief description of history of the total reward approach. They say that in the early beginning of twentieth century a little number of workers was aware about benefits – the most companies were offering nothing outside of cash compensation. Benefits are becoming popular during World War II as an acceptable way to evade wage and price control. The industrial boom after World War II increased competition on domestic markets; but manufacturing was the order of the day, number of staff functions was limited and salary structures were still rigid and highly controlled. Benefits programmes were mainly based on formulas that served the entire employee population, which was quite homogeneous. In 1970s-1980s, changes of organisational environment were hastened, integration became a key business process, and old simple benefits programmes required rethinking and aligning with new business strategies. Increasingly, in 1990s it became clear that even highly effective, strategically designed, compensation and benefits programmes were not sufficient for proper attraction, motivation and retention of good employees (WorldatWork, 2007). In 1998 Harvard Business Review published an article of Professor of Organizational Behaviour at the Stanford Graduate School of Business Jeffrey Pfeffer “Six Dangerous Myths About Pay”, where the author discusses issues of compensation. He represents his opinion in a form of myths or wrongheaded notions about how to pay people and why (Pfeffer, 1998): 1. Labour rates are the same as labour costs. 2. Cutting labour rates will lower labour costs. 3. Labour costs represent a large portion of a companys total costs. 4. Keeping labour costs low creates a potent and sustainable competitive edge. 5. Individual incentive pay improves performance. 6. People work primarily for the money. Pfeffer calls these myths “dangerous”, because often businessmen make wrong decisions, adopting these notions. He disproves them with evidence, and offers advice on how managers should pay their employees. In particular, he argues that any organization can solve its attraction, retention, and motivation problems solely by its compensation system. They should spend more time and effort on the work environment – on defining its jobs, on creating a culture, and on making work fun and meaningful. The article was very important for understanding real motives of modern companies’ workers. Final conclusions, which Pfeffer gives in a form of advices to managers, have played a significant role in developing of total reward approach. The most important of them are (Pfeffer, 1998): Managers should be sufficiently aware of the difference between labour rates and labour costs. Only labour costs are the basis for competition and not necessarily a large component of total costs. It’s not what you pay people it’s what they produce. To test the myth about individual incentives, managers should include a large amount of collective rewards in their employee compensation package and study the results. Managers should not portray pay as the main incentive for working at their company. Pay has substantive and symbolic components. Pay reflects and helps determine the organization’s culture, thus, it is important for managers to be sure that the messages implied by pay practices are intended. Companies should make information on pay available and not kept secret. Secrecy suggests to an organization’s employees that they are not trusted or that the company has something to hide. Thus, to the beginning of twenty-first century the concept of total reward has emerged, based on the general assumption that people work for more than money, they need more intangible rewards like the work environment, quality of life, the opportunity for advancement and recognition, flexible working and so on. Figure 1 shows elements of a modern reward system and their interrelationships as it is suggested by Armstrong (2002). The most important elements there are: Base (or basic) pay – the fixed salary or wage, the level of pay that constitutes the rate for the job. It may be expressed as an annual, weekly or hourly rate. Variable pay (or contingent pay, or pay at risk) – additional financial rewards related to performance, competence, contribution, skill and/or experience. Employee benefits (or indirect pay), include annual holidays, pensions, sick pay, insurance cover, company cars. They comprise elements of remuneration additional to cash pay. Total remuneration – value of all cash payments (total earnings) and benefits. Non-financial rewards include any rewards focused on the need of people perceive to varying degrees for achievement, recognition, responsibility, influence and personal growth. Armstrong (2006) also distinguishes allowances – elements of pay in the form of a separate sum of money for such aspects of employment as overtime, shift working, call-outs and living in large cities. Thus, the scheme illustrates well the definition of total rewards as “the sum of the values of each element of an employee’s reward package” (Fernandes, 1998, p.2). Or as defined by Manas and Graham, total reward includes “all types of rewards – indirect as well as direct, and intrinsic as well as extrinsic” (2003, p.1). Each aspect of reward are linked together and treated as an integrated and coherent whole. But all these elements can be combined in many different ways – there is no any ideal model for a reward system. Each company designs its own pattern depending on strategic objectives, organisational context, market conditions and other conditional variables (Armstrong, 2006). General effects, benefits and features of a total reward approach WorldatWork (2007) argues that the total reward approach is a big issue of the day in today’s economic environment mainly because: It addresses today’s business needs for managing costs and growth. More limited view of rewards can be more costly, because organisations tend to respond to every situation with cash. It fits with a movement away from cash and stock, helps to redefine and differentiate offers in the market for talent. It meets the evolving needs of today’s employees, whose expectation change. Today’s employees make more strong emphasis on job enrichment, flexible work schedules, and the overall work environment. The latter is supported by a statement about the term “total rewards” refers to everything that employees value in the employment relationship (i.e., everything an employee gets as a result of working for the company). It is also asserted that “the monetary and nonmonetary return provided to employees in exchange for their time, talents, efforts, and results” (WorldatWork, 2007, p.4). It involves the strategic integration of 5 key elements that effectively attract, motivate, and retain the talent required to achieve desired business results: Compensation – Pay provided by an employer to an employee for services rendered (i.e., time, effort, and skill). Includes both fixed and variable pay tied to levels of performance. Benefits – Programmes an employer uses to supplement the cash compensation that employees receive (for health, income protection, savings, and retirement). Work-Life – A specific set of organizational practices, polices, and programmes plus a philosophy that actively supports efforts to help employees achieve success at both work and home. Performance and Recognition – Alignment of organisational, team, and individual efforts toward the achievement of business goal and organisational success, and acknowledges or special attention to employee actions, efforts, behaviour, or performance. Development and Career Opportunities – A set of learning experiences designed to enhance employees’ applied skills and competencies, and a plan for employees to advance their career goals. WorldatWork says: “Total reward strategy is the art of combining these five elements into tailored package designed to achieve optimal motivation” (2007, p.4). Total reward strategy will be successful, if employees perceive monetary and nonmonetary rewards as valuable for them. But, what do organisations hope to achieve by implementing total reward strategy? Thompson (2002) summarised the main benefits that businesses gain from taking a strategic approach as follows: Improved recruitment and retention. The way that organisations value their “human capital” is clearly a factor in keeping the right people on board. Heightened visibility in a tight labour market. By assembling and marketing a compelling reward package that will attract, engage and retain the people needed for organisational success, a good HR brand can position a company as an “employer of choice” and create a competitive advantage. Increased flexibility. Adopting a total reward approach is a useful way of offering significant overall choice within your reward strategy, which meets the needs and lifestyles of individual employees. Cost effectiveness. Companies are more likely to provide the broader reward package that employees even want, so to hold on their most talented and productive employees. These well-designed total reward programmes not only add more value, they are relatively low in cost. However, managers should keep in minds that while they will consider both financial and nonfinancial tools for attracting, motivating, and retaining employees, it would be a mistake to conclude that monetary rewards are not highly important. As it was demonstrated by several surveys’ results, the importance of monetary rewards in any particular situation can be evaluated by considering both the situational variables (e.g., pay variability) and individual variables (e.g., performance level) that best describe the context of a particular manager’s decision (Rynes et al., 2004). To ensure the success of the total reward strategy it is extremely important to achieve a vertical integration of corporate, personnel and reward strategies (see Figure 1), as well as it also has to be a horizontal integration in connecting reward strategy to other aspects of the HR strategy (training, development, recruiting, resourcing, etc.). Gratton (2000) considers that while aligning rewards strategy to business goals is moving up the corporate agenda, the use of this potential lever is fraught with difficulties. Some companies experience an impact of the highly competitive environment, in which they operate. It creates razor-thin profit margins for them, so they have to focus on containing costs, which wipes out the potential benefits of performance-related pay. Other companies try to measure accurately team or individual performance, while the link between pay, job-related performance and business goals is still not clear for them. Berry (2008) analyzed the results of study of 755 UK employers, which revealed that less than one-third of companies had a formal business and other strategies. “Most UK companies are wasting money by not having a documented reward strategy in place”, - he says in his article on PersonnelToday.com (Berry, 2008). This means HR departments were struggling to implement changes to their reward policies, with about half reporting difficulties in obtaining the budget. One-third claimed they lacked the ability to measure the success of new initiatives. Four out of 10 companies said they could not even report on their total reward costs. Employers are still struggling with staff perception of their benefits, with 36% claiming their reward strategy was not valued by employees or not well communicated to them. Silverman and Reilly agree that many organisations struggle to develop overarching reward strategies and to integrate their HR activities. “Even if there is a desire to connect career management, development, recognition and reward, there are often obstacles that impede this ambition” (2003, p.28). Organisational structures, or culture, may be a barrier to joined-up people management; the HR function may not be working well with line management partners to deliver what is required. Corporate initiatives may founder on local, operational indifference. These challenges become even more serious when a company needs to manage them globally. Peculiarities of a total rewards in an international company As it was mentioned above, reward systems and processes should be designed and developed in the light of understanding of the organisational culture. Thus, to understand total reward principles in an international company, one should study the international context and its impact on pay and reward systems. To emphasize connections between the organisation and global effects Edwards and Rees (2006) suggest viewing international company as operating within a “transnational social space”. They argue that multinational firms create organisational boundaries that cross national and institutional contexts, so that practices and procedures that work routinely in one national context can become problematic in different national contexts, each of which has distinctive “rules of the game”. So, cultural and environmental diversity is a key issue in international HRM. Hofstede (1980) emphasises that there are a number of cultural dimensions that affect international operations: Equality versus inequality. Certainty versus uncertainty. Controllability versus uncontrollability. Individualism versus collectivism. Materialistic versus personalisation. Sparrow (1999) gives some useful example of different approaches to managerial qualities. The Anglo-Saxon sees management as something separate and definable, based on general and transferable skills, especially interpersonal skills. In Germany, an entirely opposite view is adopted: value is placed on entrepreneurial skills, technical competence, functional expertise and creativity; managers rely more on formal authority than in other European countries. In France, management is seen as an intellectually demanding task and management development systems are elitist. Brewster (1999) comments that the “universalistic” approach to HRM prevalent in the USA is rejected in Europe where the basic functions of HRM are given different weights between countries and are carried out differently. So, if such approach is adopted by a US international company, it might be difficult to get it accepted in Europe. If managers of a new international music production company understand the issues mentioned above, they will likely able to provide and maintain the appropriate balance between coordination, control and autonomy in their company, or what is also said as: “Think globally and act locally” (Barlett and Ghoshal, 1991). As for the impact of global competition and national diversities on a total reward system, they need to focus on three main challenges: 1. Flexible approaches to reward strategy to help business react more swiftly to new demands and pressures. If organisation wants to prosper in a world of diversity, increased competition and changes, reward needs to be more flexible and adapted to business circumstances and environment. Flexible benefits, also referred to as “cafeteria benefits” or just “flex”, typically allow employees to choose from a menu of optional benefits to suit their specific preferences and lifestyle requirements. It can be medical insurance, holidays, season-ticket loans, pension, company cars and many others (Silverman and Reilly, 2003). 2. Paying for performance and competence to provide competitive edge. It involves providing monetary reward through carefully designed compensation system that base pay on measured performance or competences within the control of participants. Pay for performance is considered as the most appropriate pay system for manufacturing companies, which intend to get better performance results. It makes major contributions to performance through positively influencing the motivation to perform and through the attraction and retention patterns of organisations (i.e., who joins and who remains). Monetary rewards can be delivered at the individual, small group or divisional or organisational level (Locke, 2004). 3. Emergence of globally mobile workers and making a decision about how they should be rewarded. Parent companies may transfer staff to work abroad as expatriates for some period of time. The management of expatriates is a major factor determining success or failure in an international business. There are two basic approaches to devising expatriate pay packages: home-based pay (with the same value as in the home country) and host-based pay (with a package which is in line with those given to nationals of the host country in similar jobs) (Armstrong, 2002). Generally speaking, international HR polices will deal with the extent to which there should be convergence or divergence in the HR practices adopted in overseas subsidiaries or units. These will have to take account of differences in employment law, the character of the labour market, different employee relations processes and any cultural differences in the ways in which people are treated (Armstrong, 2006). The main rule here is making employees a priority for the future of the company’s business. Conclusion Today it becomes increasingly recognised that in order to differentiate one’s organisation from others it is necessary to offer more than just a good salary and pension. In a climate of rapid changes and skills shortages, employees are becoming more sophisticated in seeking a more appropriate work-life balance. It is clear that each organisation needs a tailor-made system to address its particular needs, and that a one-size-fits-all approach will not succeed. The past few years have seen an increase in the development of total reward programmes (Thompson, 2002). The benefits that flow from a total reward scheme are: easier recruitment of better-quality staff; reduced wastage from staff turnover; better business performance; and an enhanced reputation of the organisation as an “employer of choice”. The provision of a total reward scheme demonstrates that the employer takes into consideration the needs of the individual employee and is prepared to be flexible in meeting those needs. Our conclusions are highly consistent with the motivational views of former General Electric’s CEO Jack Welsh: “I think showering rewards on people for excellence is an important part of the management processes. …You have to get rewarded in the soul and the wallet. The money isn’t enough, but a plaque isn’t enough either. …you have to give both” (Jack Welsh, quoted in Hymowitz and Murray, 1999, p.B1). For a company that want to work globally international HRM involves a number of issues often not present when the activities of the firm are confined to one country. These issues comprise the variety of international organisational models that exist, the extent to which HRM policy and practice should vary in different countries (convergence or divergence), the problems of managing in different cultures and environments, and the approaches used to select, deploy, develop and reward expatriates who could be nationals of the parent company or nationals of countries other than the parent company. References Armstrong, M. (2002) Employee Reward, 3rd edition. Trowbridge, Cromwell Press. Armstrong, M. (2006) A handbook of human resource management practice, 10th edition. London, Kogan Page. Bartlett, C. A., and Ghoshal, S (1991) Managing Across Borders: The Transnational Solution. London, London Business School. Bramham, J. (1997). Benchmarking for People Managers. 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