McDonalds Current Reward Management System - Case Study Example

TITLE by Name of author Name of class Name of Professor Name of school Location of school Date Introduction McDonalds is the world’s leading and largest fast food restaurant chain. It has more than 35,000 restaurant stores in over 150 countries (McDonalds 2013). 70% of these stores are owned and solely operated by independent individuals making it the largest franchise globally and serving over 70 million customers worldwide. Due to its size, McDonalds has employed about 1.8 million employees worldwide which is a huge employee base by any standard. This huge number of employees poses a great challenge to the company in terms of motivation, training and employee turnover, but most importantly motivation (McDonalds 2013). It is worthy to note that a majority of McDonalds’ employees are under the age of 21, most likely in their first job, and this has been the major cause of the high employee turnover. Research shows that employees under this age are prone to changing employers once they feel that the thrill they once felt has subsided. This creates a bit of a challenge in this highly service oriented industry. A reward management system is thus important for any company that wants to retain its employees and manage its employee turnover rate (Perkins and White 2011). Reward management thus refers to distribution of financial or non-financial incentives to employees in an attempt to align employee interests, organisational goals and objectives and shareholder interests (Perkins and White 2011). McDonald’s Current Reward Management System McDonalds has not been left behind as about five years ago, it decided to take a closer look at the relationship existing between employee contribution and organisational outcomes. The company had been faced with a longstanding problem of how it could utilize insights gathered by the HR department in order to add value to the company’s strategic direction (McDonalds 2013). The company does understand that a higher level of employee engagement will lead to a more motivated staff, consequently improving customer experience and more importantly, achievement of organisational objectives (Poudel 2013). Currently, McDonald’s uses a performance based reward management system. Its ‘pay for performance’ philosophy basically means is that, the better the performance of an employee the better the rewards he/she is to receive. The company’s rewards system includes monetary rewards, non-monetary rewards and psychological rewards. For example, among the rewards and incentives that McDonald’s hourly paid staff can enjoy include: 28 days’ holiday, life insurance, stakeholder pension, childcare vouchers and a free meal allowance. This range of benefits is so wide compared to other equivalent employees in the hospitality sector (Zhu 2007). These employee benefits solidify a model that McDonald’s holds dear; the people-chain model (Marchington and Wilkinson 2002). The company has therefore, continuously over the years, adequately equipped its employees through ‘on the job training programs’ and other types of rewards, thus enabling staff to give top notch service to customers. This is the people-profit model which suits McDonald’s perfectly and Neal Blackshire, the company’s Benefits and Compensation Manager could not have put it any better, that ‘if it moves, we measure it.’ McDonald’s is very much an employee oriented firm and has a vast array of monetary and non-monetary rewards that all employees at all levels can enjoy. This all-inclusive package gets support from McDonald’s internal research, thereby demonstrating the company’s people-profit chain model (Herzberg 2001). McDonald’s internal research department has gone ahead to show that there exists a strong relationship between levels of employee satisfaction, consumer satisfaction and financial performance. At McDonald’s, measurements of employees’ engagement is through the company’s ‘Your Viewpoint” survey whereby employees give an account of their opinions on various topics. In the US, the survey gets about 80% response rate from employees, a figure that has made the management to grant it with the seriousness it deserves. Below is a figure that illustrates the people-profit chain model that McDonald’s uses From the people-profit chain model above, it is clear that McDonald’s breaks the ability of employees to contribute towards the company into two components: confidence and competence (Marchington and Wilkinson 2002). The confidence index is represented by the amalgamation of responses from the employee survey to questions regarding, motivation, looking forward to going to work, and how they felt working for the company. In 2004, the confidence index was at 61 per cent, however, this figure rose to 81 per cent in 2012 indicating that over the last five years employee confidence has been on an upward trend. Over the same period, McDonald’s initiatives to train its employees have been aimed at increasing their competence so as they are able to meet customer demands. Its employee competence index rose from 86 per cent in 2004 to 92 per cent in 2012. These improvements have been made possible by McDonald’s winning strategies (Marchington and Wilkinson 2002). McDonald’s relies on two basic winning strategies: firstly, adaptation and innovation in an effort to meet the demands of an ever growing diverse market and secondly, a franchise model that allows management and shareholders share profits and risks. These strategies are supported partly by the company’s reward management system (Shields 2007.). The people-profit chain model, the ‘pay for performance’ philosophy the company’s strategies are all integrated and the achievement of company objectives is dependent on proper management and consequent successes of the paid staff. Every employee would want to enjoy the benefits and incentives the company has to offer and as such, every employee works hard to make the company successful. This gives employees a chance to get involved in McDonald’s innovation process whereby they are allowed and have the freedom to present, to store managers, any new ideas that may give the company an advantage over competitors (Reynolds 2012). Employees whose ideas are incorporated into the company’s innovation strategy are rewarded for their achievement; however this is not to say that the company does not appreciate ideas from other employees that don’t make it to the company’s strategic team. What McDonald’s management does is that it encourages these employees to go back and improve their ideas and even personally work with them whenever they can (Reynolds 2012). McDonald’s ‘pay for performance’ reward philosophy also fits perfectly into its second strategy that allows management, franchise owners and shareholders to share the rewards and risks that come with the day to day running of the company operations (Giester, Cooman, Hofmans, Pepermans, and Jegers 2012). It is important to note that most McDonald’s restaurant stores operate as individual profit units. However, this notwithstanding, all employees are familiar with the concept of teamwork and therefore do their best to ensure that the company is successful. Most of the rewards and benefits at McDonald’s are dependent on the company’s overall performance. The better the company performs, the better the bonuses and rewards. This is enough to make employees work harder and provide unrivalled service to customers just so that the benefits they receive quarterly, semi-annually or yearend are improved. On the other hand, employees do understand that if they perform poorly, then the company may incur losses and subsequent loss of customers (Giester, Cooman, Hofmans, Pepermans, and Jegers 2012). Although sharing this loss across offers a ‘soft landing pad’ for them, the damage already done may last a while and correcting it may involve working extra hard. Reward Management Systems Available for McDonald’s Although McDonald’s has an already existing reward management system, performance based reward management system, it does not mean that it cannot analyse other available options that, although different, will still be aligned to its winning and successful strategies. The performance based rewards management system used by McDonald’s is the most common among companies today (Armstrong 2002.). These companies refer to this system as the merit reward system. Despite this fact, performance based reward management systems are easier appear easy theoretically but are much harder to implement in reality. The reason for this is that, although possible, it is mostly difficult for management to clearly specify the kind of performance that it desires form employees and then decide if they have demonstrated the desired performance. This is enough evidence to prove that if McDonald’s at one point in time poorly designs its reward management system designs, then it will do be of no use to the company (Armstrong 2002.). However, if the company is able to effectively tie rewards to demonstrated desired performance, as McDonald’s has done over the years, then the system will help motivate staff thereby attracting new employees and retaining those that continue to perform outstandingly. This type of reward system however demands a lot from McDonald’s Corporation as management has to keep redesigning performance appraisal tools so as to keep up with competition and prevailing economic conditions. One option that is available to McDonald’s is the Internal-External Comparison based reward management system. This kind of reward management system is anchored on the premise that the degree to which most organizations attempt to narrow employee pay and reward gap, is different (Suri, Ratnam, and Gupta 2004). For organizations whose focus is on maintaining internal equity strive to make sure that staff performing the same roles receive similar payments and rewards even though they maybe in different locations. If McDonald’s was to adopt this system then it would have to set a pay and rewards structure across it over 700 McDonald’s owned stores globally using the highest pay and reward a particular job role gets as the base. On the other hand, firms that are more externally oriented in employee equity usually rely on the labour market as a base on what one should be earning and rewarded (Boxall and Purcell 2000). By adopting the internal rewards comparisons system whereby the company will be rewarding employees in similar job roles the same, McDonald’s will definitely enjoy certain advantages. Firstly, McDonald’s management will find it easier to transfer staff from one location to another without worrying on redesigning the particular employee/s pay, benefits and rewards structure (Boxall and Purcell 2000). This is because the company will have done away with any existing rewards and benefits disparities that may have existed before. Secondly, this type of reward management system will promote a sense of homogeneity as an organisational culture and hence make every employee feel that they are all being treated in a fair manner. Thirdly, this reward management system will reduce employee turnover rate that McDonald’s used to struggle with a few years back. This would be possible because it would effectively prevent employees from wanting to move to other well rewarding divisions or competitor organizations (Boxall and Purcell 2000). Despite these advantages, the Internal-External Comparisons rewards management system can prove to be very expensive. This is more likely to be so if the organization adopting it is highly diversified. Although this may not be the case with McDonald’s since its core business lies solely in the fast-food service industry, setting pay and rewards at the highest market levels will lead to the company paying and rewarding more than is economically necessary just so that it can attract high calibre employees while at the same time striving to retain the high performing employees. Another option that is available to McDonald’s is the Centralized Vs Decentralized Reward Management System. This option focuses on which entity is responsible for developing rewards for an organization (Perkins and White 2011). For a centralized reward management system, McDonald’s would assign the responsibility of designing rewards structures to corporate employee groups who would essentially develop various kinds of reward schemes and benefits, promotion systems and performance appraisal system that would be similar across the company. On the other hand, if McDonald’s decides to adopt a decentralized reward system then the same responsibility of designing reward schemes and appraisal and promotion systems is left to a local option (Perkins and White 2011). McDonald’s definitely has guidelines and stand for certain principles with regards to rewarding employees; however the decentralized reward management system will only allow that the day to day company operations regarding employee rewards be the responsibility of a local entity. The responsibility of centralized reward management system rests upon the expertise of the administrative office charged with pay and reward (Suri, Ratnam and Gupta 2004). Since in this system employee benefits and rewards are developed in McDonald’s central administrative level, homogeneity that accompanies it will lead to giving the company a clear image in terms of its culture, employee attitudes and further give a both employees and consumers a sense that the firm stands for something. The decentralized reward management system also has an advantage in that it promotes local innovation which would in a way fit into McDonald’s strategy of innovation (Suri, Ratnam and Gupta 2004). Just as with other choices discussed earlier, there is no wrong or right choice when choosing between a centralized and a decentralized reward management system. However, a more decentralized system would be highly appropriate for a company whose core business faces different market segments. It allows for the decentralization of rewarding practices which would lead to diverse innovative practices to surface based on the different markets thereby giving McDonald’s a competitive advantage over competitors, globally (Armstrong 2002). For example, bonuses offered to McDonald’s employees working in less competitive locations around the world would make no sense to employees working in highly competitive environments. Lastly, McDonald’s may opt to adopt the Degree of Hierarchy reward management system. In this system, rewarding of employees depends on an organization’s hierarchical system and this is consistent with the way most firms are run today (Milkovich and Newman 2002). This means that McDonald’s would have to give higher rewards or huge bonuses to employees as they move up the company’s hierarchical ladder. In such a case, greater prerequisites are given to office symbols. In order to adopt this system fully and make it effective, McDonald’s management would have to create an environment for employees would easily understand that there exist different power levels in the organization. McDonald’s may decide to make its hierarchical reward management system steep such that it allows for more power levels and different status to be formed (Milkovich and Newman 2002). Most organizations tend to go for the hierarchical reward management system as it a top down authority is needed. This reward management system acts as a motivation to all employees to work harder and move up the hierarchical ladder so as to enjoy that rewards and benefits that come with a higher status level. In considering all reward management systems discussed above and determining which suits McDonald’s and its paid staff, it is important to note that there is no particular system that works better than the other. All these rewards management systems, if designed the right way, will definitely lead to a more motivated staff which would in turn translate to a positive company performance in terms of profits, attracting high caliber employees and retaining well performing employees. However, a company’s resources should dictate the type of reward system to adopt. Given McDonald’s brand and reputation globally over the years, a hierarchical reward management system would fit perfectly into its winning strategies (Morgan 2001). It would even be better for McDonald’s to retain it performance based ‘performance for pay’ philosophy and incorporate the hierarchical reward management system. This hierarchical reward management system is more suitable for McDonald’s since employees working in the over 7000 company owned McDonald’s stores would want to climb up the management ladder one day and as such, they work hard to improve their performance day by day (Perkins and White 2011). The possibilities of having a reserved parking space, using executive rest rooms and the use of private entrances among other benefits are motivation enough to make employees give their best in service delivery. The fact that s steeply hierarchical reward system would require the creation of several levels of power and status will not be a problem to McDonald’s given the company’s huge organizational structure. By having an organizational structure that accommodates relevant managerial roles without the risk of cloning duties will act as an added motivation because the company will create a picture in employees mind that there will always room for managerial offices to be occupied only if the desired performance is met (Shields 2007). In addition, McDonald’s has the aptitude to set up this system given that it is relatively expensive. This added cost would be as a result of the several power/managerial levels that are characteristic of a steeply hierarchical reward management system (Zhu 2007). Considering that McDonald’s spends in excess of $1300 weekly per store in cash rewards on well performing stores, it is more than capable to add on top of its already existing rewards, other benefits and rewards such as fully paid vacations to well performing employees. The kinds of rewards that McDonald’s gives to its employees are so diverse and vary widely. The company is able to do this as it applies the reward mix principle. This thus enables management to give money rewards in various different forms; from company stocks to medical insurance. Rewards available to McDonald’s employees include car programs, on-the-job training programs, recognition programs and long term and short term incentives. It should be noted that the degree of motivation that a company’s reward mix has on its employees and potential employees will depend on the makeup of the mix itself (Herzberg 2001). Overall, in almost all companies, the value of cash to employees is universally high. However, when this cash is given in the form of fringe benefits, then it loses its value and consequently referred to by many employees as a bad investment. Due to the tricky nature of a pre-designed reward mix, it would be practical for McDonald’s to adopt the flexible/cafeteria rewards and benefits program. This would allow its staff to develop their own reward package that would fit their individual needs and aspirations (Herzberg 2001). This type of reward program is becoming more and more popular around the world and it’s sure to help McDonald’s get the best value for money since it will be literally be giving employees what they need only. Such a program would also give employees a sense that McDonald’s management is treating them as adults c can decide for themselves by giving them the opportunity to choose rewards that they think would capable of making individual relevant choices rather than as people who just rely on welfare that’s already been structured for them (Shields 2007). As with any other business, the reward system that a company chooses has to be aligned to its strategies if the company is to achieve its goals and objectives. Adopting the hierarchical reward management system should not mean that McDonald’s dump its performance based reward management system because it would still be much needed for measuring performance staff performance at the individual level (Reynolds 2012). McDonald’s two major strategies of innovation and adaptation and capitalizing on a business model that allows employees, management and shareholder to share risks and rewards will be greatly supported by the hierarchical rewards system. Firstly, hierarchical reward management system will ensure that employees and management are driven to perform much better with the thought in mind that success for the organization will lead to shared profits and rewards from top management to lower ranked employees. Secondly, it is important to understand that McDonald’s two winning strategies are long term strategies and as such, the hierarchical reward management system will put emphasis upon the long performance of its employees (Reynolds 2012). Particularly, short term rewards compensation for top executives are supplemented with maybe five year incentive plans which are so attractive. This will encourage all employees to keep a trend of exceptional performance hence making the company successful over the long term. Thirdly, hierarchical reward management system will thrive more in a skill based organizational structure where innovation has been known to thrive (Zingheim and Schuster 2002). Employees with exceptional skills in customer service, menu design, interior décor design and culinary skills will have their innovativeness pay off as they may be rewarded better than higher ranked employees just for their innovative idea. This will motivate employees to come up with innovative ideas that the whole organization will benefit from and give it an edge over its competitors. Conclusion Although no one reward management system is better than the next, it is important to understand that a reward management system the firm chooses must be make clear what kind of employees McDonald’s wants to attract and retain, the amount of time they will have to be retained and the kinds of skills potential and existing employees should have. With the hierarchical reward management system, rewards are more congruent with McDonald’s management style and its business strategy. Adoption of the hierarchical reward management system will lead to major organizational changes although the organization’s systems to be affected will not occur simultaneously (Zhu 2007). References Perkins, S., and White, G. (2011). Reward Management, 2nd edition. London: CIPD. Zingheim, P., and Schuster, J. (2002). Reassessing the Value of Skill-Based Pay. WorldatWork Journal, 11(3): 72-77 Shields, J. (2007). Managing Employee Performance and Reward: Concepts, Practices, Strategies. 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