Compensation and Reward Systems Used in Today's Companies in the UAE - Research Paper Example

Compensation and reward systems used in today's companies in the UAE – Al Futtaim Group Abstract The increase of employee motivation in modern organizations has been proved to be related to the improvement of employee performance, either in the short or the long term. Firms that are interested in securing their growth need to ensure that their employees’ are adequately motivated. Using appropriate compensation and reward systems can help HR managers to ensure that employee motivation will be kept at high levels. The case of Al Futtaim Group verifies the above assumption. The particular organization has emphasized on compensation and rewarding of employees, so that fairness and equality are promoted across the organization. The literature published in this area further verifies the value of compensation and reward systems for securing organizational growth. In addition, emphasis should be given on the following fact: the establishment of compensation and reward systems is feasible in organizations of all sizes; however, the structure and the elements of these systems are not standardized being influenced by the organizational objectives and the resources available. Table of contents Abstract 2 Section A. Introduction 4 Section B. Literature Review 4 Section C. Analyses 13 C1. Analysis of literature review 13 C2. Compensation and Reward Systems in UAE – the case of Al Futtaim Group 14 C.2.1 The role of HR in formulating and executing company’s strategy 14 C.2.2 Compensation and Reward Systems in Al Futtaim Group 17 Section D. Conclusion 19 References 21 Section A. Introduction HR management can be characterized as a key element of organizational success. In fact, the growth of organizations in the global market is depended on the organizations’ ability to manage their human resources appropriate, so that employee motivation is kept at high levels (Daft and Marcic 2010). The strategic HR management aims to address the above issue, i.e. to promote strategies that will be quite effective in keeping employees at all organizational levels highly motivated (Daft and Marcic 2010). A specific aspect of HR management is explored in this paper: the compensation and reward systems. Particular reference is made to the use of these systems in firms across UAE. A specific company, the Al Futtaim Group, has been used as an example for showing the level at which compensation and reward systems are part of HRM in UAE’s organizations. The firm’s practices in regard to employees’ compensation and rewarding are presenting and evaluating using appropriate literature. The theories developed in regard to employees’ motivation are discussed, at the level that these theories help to understand the reasons for the introduction of compensation and reward systems in modern organizations in all countries, including UAE. It is proved that the above systems are indispensable part of each firm’s HRM framework. However, the level at which these systems are used in each organization can be differentiated according to a series of criteria, as analyzed below. Section B. Literature Review The identification of compensation and reward systems that are appropriate for promoting employee motivation is one of the major challenges that HR managers have to face. The role of HR managers in each organization is clearly presented through the Ulrich’s HR model, as presented below, in Graph 1. Figure 1 – HR model as developed by Ulrich (1997) (source: KennisNet voor Controllers en Managers 2013) According to the above graph, HR managers need to be able to respond to the needs of four business functions. In order to achieve the above target, HR manager should combine different characteristics, being able to think strategically but also to respond to change without delay, as implied in the first two parts of the graph: ‘Strategic partner and change agent’ (Figure 1 above). Also, Sparrow, Brewster and Harris note that a HR manager should be able to develop activities of the following type: ‘transactional activities, capability development and business development’ (Sparrow, Brewester and Harris 188). The first of the above categories refer to the support that expatriates need in order to respond to the demands of their position; the second category focuses on the training and development needs of each organization while the third category refers to the use of HR as a tool for enhancing business growth (Sparrow, Brewster and Harris 188). The role of HR managers, as presented above, is explained in order to make clear that introducing appropriate compensation and reward systems is part of the duties that a HR manager has in the context of his role. More specifically, the obligation of HR managers to address the needs of people is highlighted in the HR model of Ulrich, as presented in Figure 1, as the term People in the relevant Graph is related to the term Process. Through the view of Sparrow, Brewster and Harris also, the obligation of HR managers to provide fair compensation to employees is included in the Business Development activity, as one of the duties of HR managers (Sparrow, Brewester and Harris 188). Indeed, business development cannot be achieved without securing employee satisfaction; the latter can be promoted only by ensuring that employees are given fair compensation for their work. At the same time, Werner and DeSimone note that the provision of fair compensation and rewards to employees is among the key priorities of each firm’s HR division (Werner and DeSimone 9). It is explained that the HR department in each business should include a ‘compensation and benefits administration’ (Werner and DeSimone 9), i.e. a section that should focus on the empowerment of employee satisfaction, so that the achievement of organizational objectives is secured (Werner and DeSimone 9). The use of compensation as a means for enhancing employee performance is a common practice. In fact, compensation has a key role not just in the ‘improvement of the living standard of employees but also in their personal development as members of their organization’ (Bohlander and Snell 415). In this context, it has been proved that by providing fair compensation to employees an employer can ensure that employee performance will be kept high, a fact that will influence organizational performance (Bohlander and Snell 415). Various theories have been developed for explaining the necessity of reward for securing employee motivation, as related to employee performance. The most known theory of such type is the equity theory which based on the principle of fairness: employee should be rewarded with fair compensation according to ‘his contribution in the organization’ (Bohlander and Snell 415). This theory emphasizes on the dependency of employee compensation on employee skills and performance (Bohlander and Snell 415). On the other hand, the equity theory implies the necessity of employees’ fair compensation, so that employee motivation is guaranteed (Pravin 316). Indeed, an employee who is not fairly compensated for his ‘contribution in the organizational performance’ (Pravin 316) will not be satisfied, a fact that will negatively influence his performance, either in the short or the long term. In this context, the equity theory, focusing on ‘the balance between ‘employees’ contribution and employees’ compensation’ (Pravin 316), ensures that the relationship between the employer and the employees is ‘mutually beneficial’ (Pravin 316), meaning that the interests of each party will be appropriately addressed. From another point of view, the equity theory shows to HR managers the method through which they can secure the increase of employee performance. If employees realize that the compensation provided to them is higher than their contribution in the organization then they will be willing to increase their performance, so that a balance exists between their contribution and their rewarding (Pravin 316). In opposition, if employees realize that the compensation given to them is lower than their contribution in the organization, then their performance will be decreased, affecting the performance of the organization (Pravin 316). The above case can be characterized as a negative aspect of the equity theory. Another important theory in the field of employee motivation is Vroom’s Expectancy Theory. The particular theory is presented in the graph included in Figure 2 below. Figure 2 - Vroom’s Expectancy Theory of motivation (source: http://www.web-books.com/eLibrary/NC/B0/B66/057MB66.html) The Expectancy Theory of Vroom is based on the following assumption: an employee will be highly motivated only if he believes that his efforts have many chances to be successful (Pravin 316). At the next level, an employee needs to believe that his efforts, if they reach the required level of performance, will be appropriately rewarded (Pravin 316). If this expectation is fulfilled, i.e. if the employee is finally rewarded fairly, then all requirements of the Expectancy Theory are met (Pravin 316). In such case, the employee will be highly motivated to keep his performance at high levels (Pravin 316). In the context of the Expectancy Theory, the following assumptions can be developed: a) within each organization employees are able to choose among different practices, in regard to the reward related to each task (Simons 145). Employees are expected to make their option based on the following criterion: whether the practice chosen is able or not to lead to the required level of performance so that rewards are secured (Simons 145). In other words, the expectancy theory is based on the view that employees, before proceeding to any action for completing the tasks assigned to them, tend to check available practices so that the chances to be given a specific reward are increased (Simons 145); b) when distributing tasks, HR managers should make sure that the rewards related to each task are carefully reviewed, so that a balance between tasks and rewards is secured (Simons 145). If the tasks assigned are too difficult and there will be no chance for completing them successfully, employee motivation will be radically decreased (Simons 145). Indeed, if an employee realizes that the chances to develop a tasks successfully are quite limited, he is expected to avoid the particular task or to perform low, since there will be no reward expected (Simons 145); c) the Expectancy Theory can offer to HR managers an important advantage: if HR managers are aware of the actual needs of employees, then they can set the rewards that the employees would most prefer (Simons 145). Employees are expected to increase their performance, since they would be interested in the rewards related to the tasks assigned to them (Simons 145). From another point of view, employee motivation could be enhanced using the goal-setting theory (Rowley and Jackson 148). The above theory is based on the following view: rewards should be related to specific goals (Rowley and Jackson 148). This means that rewards will be given to employees only if the latter have achieved certain goals (Rowley and Jackson 148). Goals, as a term used above, can have different aspects, meaning either a specific level of performance or the achievement of particular targets, as set by the HR manager (Rowley and Jackson 148). The goal setting theory can be considered as not clear, leaving space for doubts as of the achievement of the goals set (Rowley and Jackson 148). Indeed, the theory does not refer to the criteria used for evaluating the achievement of the goals involved; it is implied that the HR manager in each organization is free to make his own assumptions in regard to the achievement or not of these goals (Rowley and Jackson 148). Another weakness of the goal – setting theory is the following one: using the goal setting theory when designing a firm’s HR strategy, HR managers contribute in the following phenomenon: in the transformation of the employment relationship to a relationship similar to a sales transaction. Such perspective would severely threaten cooperation and coordination within each organization. Figure 3 – Two factors theory of Herzberg (source: http://www.provenmodels.com/21) Another theoretical model that helps to understand employee motivation is the Two-Factor theory of Herzberg. This theory, which is presented above in Figure 3, is based on the following view: employee performance is influenced by two factors, hygiene factors and satisfiers, or else, motivation factors (Stredwick 251). The hygiene factors refer to issues such as the level of compensation, the conditions in the workplace, the mode of supervision and so on (Stredwick 251). These factors have the following characteristic: they are not considered as able to lead to the increase of employee performance, even if an employee is fully satisfied as of all the elements of the particular category (Stredwick 251). However, if the employee needs related to these factors are not covered, then the employee performance can be decreased (Stredwick 251). As for the motivation factors, these factors are mostly related to employee motivation. These factors refer to issues, such as ‘achievement and recognition’ (Stredwick 251) are considered as more powerful, compared to hygiene factors, to influence employee performance. According to the above theory, HR managers who aim to increase employee motivation should proceed to the following activities: a) primarily they should ensure that hygiene factors are aligned with employees’ existing position and obligations; unfairness should be avoided since it could lead to the limitation of employee motivation, as related to employee performance; b) emphasis should be given on motivation factors; the re-design of jobs across the organizations could ensure that tasks assigned to employees are aligned with the compensation related to each position. This means that the efforts of each employee should be appropriately recognized; for example, specific criteria should be set for promotions. Finally, reference should be made to Maslow’s Hierarchy of Needs theory (Figure 4). The specific theory is considered as similar to the Herzberg’s Two Factors theory at the following point: both these theories emphasize on employees’ needs. However, the involvement of employees’ needs in each theory is differentiated. Maslow’s theory is based on the context that employees’ needs can be presented as a pyramid; at lower levels, basic employees’ needs, such as food and safety, would be included (Stredwick 250). The higher levels are dominated by factors related to self-recognition and achievement (Stredwick 250). Needs at lower levels need to be covered in order for needs at the higher level of the hierarchy are taken into consideration (Stredwick 250). The Maslow’s Hierarchy of Needs theory is differentiated from Herzberg’s theory at the following point: Maslow sets the basic needs of employees as prerequisite in order for needs related closely to motivation to be addressed. Figure 4 – Maslow’s Hierarchy of Needs theory (source: http://communicationtheory.org/maslow’s-hierarchy-of-needs/) On the other hand, for Herzberg, the needs related to motivation can be addressed, even if basic needs are not fully addressed. This assumption can be also based on the graphical representation of the two theories: Maslow’s theory is represented through a pyramid, which Herzberg’s theory is represented as two parts, side-by-side (see Figure 3 above, as compared to Figure 4 above). Section C. Analyses C1. Analysis of literature review The literature presented above reveals a series of important facts: a) the management of compensation within organizations is related to a series of factors, such as the skills of HR practitioners, the financial status and the market position of each organization, the organizational objectives and so on; b) employees’ needs are necessarily taken into consideration by HR managers when designing an organization’s HR strategy; however, the level of influence of employees’ needs on a firm’s HR plans is not standardized; c) compensation and reward systems are valuable for enhancing employee motivation; still, in each organization the form of these systems need to be aligned with organizational culture and structure; d) the following rule should be always apply when having to decide the reward system used within a particular organization: the reward system chosen should aim ‘to add value to people’ (Armstrong 267). Indeed, it has been made clear that a HR manager can identify effective HR plans only if he is able to understand the needs of employees in all organizational units (Amos et al. 2009). In any case, the responsibility of HR managers for identifying effective HR strategies are made clear in most studies related to HR management. In regard to this issue, it has been revealed that not all HR managers are appropriately skilled for facing the challenges of such plans. On the other hand, the theories related to the issue under examination seem to have certain gaps. In addition, it is clear that each of these theories is based on different criteria in regard to compensation and rewarding within organization. It would be possible to combine these theories in order to develop a theoretical framework less vulnerable to market turbulences. In order to produce an effective framework of employee motivation, HR managers in modern organizations should study the theoretical models presented above. Then, they could choose an appropriate strategy for enhancing the motivation of their employees under the following term: that organizational objectives and culture are not harmed; otherwise, the suggested HR strategy could not survive in the long term. In the case of Al Futtaim Group, as analyzed below, a similar approach should be used. C2. Compensation and Reward Systems in UAE – the case of Al Futtaim Group C.2.1 The role of HR in formulating and executing company’s strategy The Al Futtaim Group is a conglomerate of companies operating in different industries. The organization that dominates the UAE market have been established in 1930s and has become one of the most powerful group of businesses in the greater Gulf region (Al Futtaim Group, Group Profile 2013). The companies that operate currently under the control of the organization reach the 65 (Al Futtaim Group, Group Profile 2013). The organization’s employees are estimated to 20,000 and are dispersed in the organization’s units worldwide, including ‘Saudi Arabia, Egypt, Singapore and Europe’ (Al Futtaim Group, Group Profile 2013). The organization is divided into seven units/ operational sections, including ‘automotive, electronics, retail and financial services’ (Al Futtaim Group, Group Profile 2013). Mergers and acquisitions are key part of the organizational strategy so that the position of the organization in the global market is secured. Reference should be made to the acquisition in 2008 by the organization of a large share of the firm Associated Motorways, a major competitor in the automotive industry of Sri Lanka (Salama 2008). Figure 5 – Income in Al – Futtaim Group (source: Al – Futtaim Group, consolidated financial statements for 2011) The firm’s financial statements related to the years 2010 and 2011, as presented above, reveal the following fact: the revenue of the organization has been increased in 2011, compared to 2010. On the other hand, the operating expenses of the organization have been also increased, indicating that the improvement of the firm’s profitability is expected to be increased. The above figures, related to the performance of the business for 2010 and 2009 indicate that the performance of employees’ levels across the organization is kept at high levels otherwise rapid organizational growth could not be achieved. HR has a critical role in the success of the organization. In fact, firm has managed to secure its market position by focusing on ‘flexibility and social responsibility’ (Al Futtaim Group, Group Profile 2013). The importance of HR for the firm’s success is reflected in the following facts: a) the organization has developed an impressive network of employees, reaching the 20,000 employees worldwide; this means that the organization does not focus on automation in regard to its daily operations; rather it focuses on quality of work and the development of personal initiatives; b) emphasizing on the future development of its employees is one of the organizations’ priorities, as explained in the corporate website (Al – Futtaim, Careers Centre, A Future with us, 2013); particular emphasis is also given on fairness and equality in regard to employees’ remuneration (Al – Futtaim, Careers Centre, A Future with us, 2013); c) the various aspects of employment relationship in Al-Futtaim are described in the organization’s website where features have been implemented so that interested candidates are able to be informed on the requirements of each position and the support provided to employees at all levels of the organizational hierarchy. It should be noted that the organization welcomes candidates from various backgrounds, ensuring that diversity and equality are promoted in the workplace (Al – Futtaim, Careers Centre, A Future with us, 2013). Moreover, it is made clear that rewarding is used as part of the organization’s strategies for securing high employee performance, a fact that can also secure organizational growth (Al – Futtaim, Careers Centre, A Future with us, 2013). In fact, it is noted that organizational success is highly related to the ability of the firm’s HR managers to hire appropriately skilled individuals (Al – Futtaim, Careers Centre, A Future with us, 2013). Furthermore, the continuous support provided to employees in regard to their daily tasks ensures that organizational operations are developed successfully, being aligned with the organization’s needs (Al – Futtaim, Careers Centre, A Future with us, 2013). C.2.2 Compensation and Reward Systems in Al Futtaim Group At this point, the compensation and reward systems implemented in Al Futtaim Group should be presented; in this way, the level at which the firm values compensation and rewarding will be made clear. According to the organization’s website, employees in Al Futtaim are highly compensated since their role in the growth of the organization is considered as crucial (Al – Futtaim, Careers Centre, A Future with us, 2013). The exact remuneration provided to each position is not clearly stated in the corporate website. Still, it is noted that each employee in Al-Futtaim is rewarded with ‘excellent career opportunities and attractive remuneration’ (Al – Futtaim, Careers Centre, A Future with us, 2013). In addition, the benefits and rewards related to each position are not clearly described (Al – Futtaim, Careers Centre, A Future with us, 2013). From the emphasis made on the value of employees for organizational growth and on the provision of attractive remuneration to all the firm’s employees, the following assumptions could be made: a) the organization uses a specific program for ensuring fairness and equality in regard to the remuneration of its employees; b) benefits and rewards are not described since they are customized accordingly to the skills and the performance of each individual/ employee; c) since the organization operates in a variety of sectors, the benefits and rewards for the organization’s employees cannot be standardized. Rather, it is expected that each of the firm’s companies can use its own compensation and reward system taking into consideration its resources available and its objectives. In any case, the use of appropriately customized compensation and reward systems in the group’s companies could ensure the increase of employee motivation, as explained in the literature. For example, the use of the Equity theory of motivation would result to the further promotion of equality and fairness among the Group’s employees. Also, the use of the Maslow Hierarchy of Needs theory would help the Group’s HR managers to understand the value of employees’ basic needs. In this way, the communication within the organization would be improved, while employees would feel free to seek for their personal development as members of the organization. In general, among the HR models presented above, in the literature review section, two seem to be more appropriate for the specific organization. Reference is made especially to: a) the Hierarchy Needs Theory of Maslow and b) the Two Factor theory of Herzberg. These theories, which have similar structure and elements, would offer to the organization the following advantage: the needs of the organization’s employees would be covered, so that employees could start to focus on their professional needs, such as the need for self-development and recognition. Using the two theories mentioned above, the suggested compensation and reward systems for the organization would meet the following requirements: a) the basic needs of employees would be covered; according to the corporate website, this target has been already achieved. In fact, in Al-Futtaim employees are compensated with competitive rates, meaning that their basic needs are appropriately addressed; b) rewards would be introduced for rewarding the employees according to their contribution in the organization; these rewards would have various forms. For example, a ‘pay for performance’ scheme would be a rewarding scheme of such kind; c) additional benefits could be also used for motivating employees not only to keep their performance at high levels but also to take initiatives and to propose ideas that would help to the increase of the organizational competitiveness. A scheme for the acquisition of a diploma related to each employee’s position would be an example of such plan. A scheme arranging the terms of promotion of employees on the basis of their performance in their position, would be also considered as an example of a plan for securing employees’ personal development and self-actualization. Section D. Conclusion The use of well – known theories for promoting the motivation of employees can lead to the significant increase of employee performance, even in the short term. In the literature, different methods have been developed for enhancing employee motivation. Most commonly, appropriately customized compensation and reward systems are used for ensuring that employee motivation will be kept at high levels, a fact that would result to high employee performance. In the case of Al-Futtaim the following problem is revealed: despite the fact that in organizations across UAE the role of employees in supporting organizational growth is recognized, a lack of schemes for keeping employees’ continuously motivated has not been avoided. At least these schemes should be clearly described in the corporate website, so that future employees are informed. The above phenomenon does not necessarily mean that employee motivation is not valued in UAE. In opposition, the fact the emphasis is given on the role of employees in keeping organizational performance high and in achieving a long-term organizational growth indicates that for HR managers in UAE employee motivation is vital. The plans used for the promotion of employee motivation in firms across UAE should become clearer, as the case of Al-Futtaim shows. As for the level at which compensation and reward systems are used in UAE for enhancing employee motivation and employee performance, the following assumptions can be made: firms in UAE seem to be willing to compensate employees fairly for their contribution in the organization; at least, the statements of strategic planners in Al-Futtaim in regard to this issue, as these statements are published through the corporate website, gives such impression; b) still, HR managers have not realized that compensation and rewarding, as part of the organizational strategy, should be clear; this means that the level of compensation, as related to each position, and the rewards/ extra benefits for employees’ achievements should be analytically described in corporate website so that potential candidates can be attracted. It would be also possible for these terms, of compensation and rewarding, to be incorporated in a career-plan/ framework, so that future employees are aware of their potentials for personal development in organizations across UAE. References Al Futtaim Group, Career Centre. 2013. Retrieved from http://www.afuturewithus.com/careers/al-futtaim/Home.aspx?ln=en Al Futtaim Group, Corporate. 2013. Retrieved from http://www.al-futtaim.ae/content/organigram.asp Al Futtaim Group, Croup Profile. 2013. Retrieved from http://www.al-futtaim.ae/content/mainfull.asp?sessionID=B125AE02-3FE9-4847-95C6-27D501581B61 Al Futtaim Group.2011 Consolidated Financial Statements, 2013. Retrieved from http://www.majidalfuttaim.com/data/vvzhhzll.pdf Amos, Trevor, Ristow, Adrian, Pearse, Noel and Liezl Ristow. Human Resource Management. Cape Town: Juta and Company Ltd, 2009. Armstrong, Michael. Armstrong's Essential Human Resource Management Practice: A Guide to People Management. 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