Assessment of Reward Systems in Organisations - Pro-Fit Inc - Case Study Example

Running Header: Assessment of Reward Systems in Organisations Assessment of Reward Systems within Organisations Pro-Fit Inc. By…………. University Name: Date : 1. Introduction A company aiming to succeed over the fierce competitiveness in today’s business-scape needs to accomplish it through creating competencies that are hard to replicate. Some companies have successfully excelled at utilizing their employees to create a differentiation in their operations. Theories support that employee motivational level is a closely associated and influencing factor on organisational performance (Kerr & Slocum, 1987; Weiss, 2001). High motivation is associated with greater levels of employee retention, less absenteeism, innovation and achievement orientation (Weiss, 2001). Theories of motivation indicate that extrinsic factors such as company reward system play a crucial role in managing the workforce motivation. Therefore, managing the reward system effectively within an organisation becomes critical for ensuring achievement of overall organisational goals. The organisation in context is Pro-fit Inc.- Australia, which operates as a chain of retail outlets in the fitness equipment market. With over 28 outlets nationwide, the company differentiates its offer by not only offering the basic core product which is the equipment itself but also a host of other value added services such as nutritional guidance, physiotherapy services and expert advice on exercise routines. In this scenario, Pro-fit involve its human resource to deliver the service component of the product offer which makes up a crucial element in satisfying the customer. Therefore, it is exceptionally important that Pro-fit outlet teams are motivated to ensure proper service delivery, reduced absenteeism, and attracting and retaining high caliber staff. Rewards are directly linked to the employee motivation, which in turn impacts the level of productivity and performance. Therefore, reward system need to be well integrated to the overall business strategies. An organisation, which aims to develop an effective reward system, should set its policies and reward strategies in alignment with business realities in the market, the overall company objectives and the core business model of the company (Dyer and Reeves, 1995). This report assess the current reward system at Pro-fit Inc. and propose changes to develop a new reward system deemed more suitable for the company. 2. Market and Organisational Background Fitness industry is rapidly growing in Australia and more and more people are interested in following a routine and systematic physical exercise program. A large percentage of people choose to attend a gym but there is a sizable market that is growing at about 9-10% where customers wish to have their own fitness equipment at home. The main idea is that they save time travelling to the gym and also manage to squeeze in a workout in any given time available during busy schedules. Mothers at home are one of the key customer groups targeted by home fitness equipment. The market for fitness equipment retailing is heavily competed with many large scale retailers operating in the segment. Some regional level outlets also compete heavily in their own localities, based on goodwill and value added services. Pro-fit Inc. was incorporated in 1979 with its head office in Melbourne, Australia. Starting with one retail outlet, the company has grown to be the 2nd largest fitness equipment retailer in the market. Currently there are 28 Pro-fit outlets nationally and each outlet employees and nutritionist, physiotherapist and a number of sales staff, all with fitness instructor backgrounds. The head office operates with a functional organisational structure with each department concentrating on separate functions. The marketing and sales department is arranged regionally and has a department manager and regional managers. The equipments are sourced from recognized branded suppliers as well as from more cost effective sources such as China. Finance, procurement, IT , HRM , Sales and Marketing are some of the key functional departments at Pro-fit Inc head office. Although Pro-fit experience phenomenal growth in the market with its first mover advantage, it had lost its market leadership to Workout World almost a decade back. Other competitors as Fitness Market, Life Span etc. have also managed to encroach on Pro-fit’s market shares since of recent years. The main problem identified by Pro-fit attributing to falling market shares and stagnant growth rates is the difficulties in retaining the professional staff at outlets. Most of the Pro-fit’s physiotherapist and nutritionists have been job hunted by the competitors and sizable customer base has shifted to competitor brands due to recommendations of these experts that left Pro-fit. Even though the trend of offering value added services such as nutritional guidance and physiotherapy advice was initiated by Profit, now, all the major competitors have adopted the practice and offering comparatively better services in this regards than Pro-fit. Overall, the work force moral and motivation is low and the pressure of sales increase targets have been pushed down to retail outlet levels by the middle managers in the head office. A consultant hired by the company CEO has indicated that the company needs to assess and revamp its reward systems to address the employee motivational levels and performance contributions towards organisational objective achievement. 3. Role of Rewards in Organisations An organization’s remuneration system involves financial and non-financial benefits, which an organization is able to and willing to offer to its employees in exchange of for employee contribution (Cascio, 1998). Remuneration management is one of the key areas, which has impact on the performance of the overall organization and its competitiveness in the market place. An effective remuneration policy will look in to increasing productivity, efficiency and reducing costs through numerous aspects of human resource management. In administering a reward system, it should fulfill numerous objectives including, acquiring of qualified personnel, retain present personnel, reward desired behaviour, control costs, and comply with legal regulations and ensuring equity (Schwind & Wager, 2002). HRM personnel needs to continually be alert to the effectiveness of reward strategies within the organisation and develop, operates and maintains a sophisticated reward system. According to Hollenbeck et al. (2010) highly caliber employees needs to be rewarded and allowed to progress in a timely and appropriate way to maximize their motivational levels, so that they are prepared to work towards organisational goals (Hollenbeck et al., 2010). 3.1 Integrating Remuneration Strategies with Company Objectives Remuneration Strategies should be addressed with an integrated approach rather than treating in isolation and should be developed in a systematic manner than resorting to ad-hoc means. The lack of a strategic reward management system in any organizations takes away the opportunities to influence the behavior of employees in a way that could benefit the business. For instance, those organisations that desire innovation can link a certain percentage of remuneration to innovation and learning of the employee. As remunerations generally represent one of the most significant costs for the majority of organizations, the focal point of many remuneration management programs remains on lowering the costs of the system instead of analyzing the benefits that comes with a well-designed remuneration structure (Mejia & Balkin, 1992). An effective remuneration strategy will aid the company in attaining not only the cost control objectives but also a host of other objectives, which has direct impact on achieving the Organization’s overall Strategic Goals and Corporate Vision. Some of the key objectives of a Remuneration system will include acquiring quality personnel who can add value to company operations, retaining present employees, ensuring equity, rewarding desired behavior in compliance with company culture and goal and also comply with the legal regulations (Schwind & Wager, 2002). In case of Pro-fit that depends of staff that possess specialized qualifications as nutritionists, physiotherapists and fitness instructors, the need for attractive reward systems that can attract, motivate and retain them is important. Aligning the remuneration strategies of the company with its overall goals and objectives is a challenge and requires a systematic approach. To fully gain competitive advantage from remuneration systems, it is essential that the system is understood by and designed with the full participation of those who hold overall responsibility for the business and those who stand to be remunerated. A company’s reward system should reflect its business strategy, the organizational culture and its values. Google Inc. is an excellent example of a company that use rewards to shape its organisational culture and motivate its employees to attract, retain and maximize their performance to achieve the organisational objectives of innovation and dynamism in internet environment (Towers, 2006). Since Pro-fit’s main business strategy is to augment its fitness equipment offers with expert advice in usages, diet plans etc, the key objectives of a reward system will include acquiring quality staff and as well as ensuring high level of motivation and team spirit within the company. This will mean that the company’s service staff will play a crucial role in achieving these business objectives. The values placed upon expert knowledge will also be a driving factor in designing Pro-Fits’s reward system. The company should aim to create and sustain a team culture which is also referred to as a communal or integrated culture (Kotter & Heskette, 1994; Goffee & Johnes, 1996)’s which helps organisations align their core values and objectives closely with all the employees. In such cultures the people collaborate, cooperate and work together to achieve common goals. The reward strategies should address needs of team behavior and link a component of rewards to team achievements through a restructured high performance autonomous work groups within retail outlets. 3.2 Rewards and Employee Motivation In developing a remuneration system, it is important to consider the motivational aspects involved. Remuneration provides the reinforcement needed to ensure company goals are achieved. Theory of Reinforcement in motivational studies indicates that Consequences, which give Rewards, increase a behavior while consequences, which give Punishments, decrease a behavior. Consequences, which give neither Rewards nor Punishments, extinguish a behavior (Weiss, 2001). Practical applicability of this theory for organizations is that the reward systems should incorporate rewards for reinforcing desired behavior while having punishments and penalties for signaling the undesired behaviors. Another motivational theory, which has implications for remuneration strategy, is the expectancy theory. Expectancy Theory of motivation aims at understanding how individuals make decisions regarding various behavioral alternatives. In an organizational context for example, the behavioral alternatives will be to work at average level or be innovative and strive for excellence. The theory suggests that when deciding among behavioral options, individuals select the option with the greatest motivation forces (MF). Motivational Force is defined as a function of three factors: Expectancy, Instrumentality and Valance. Expectancy refers to the Probability of the desired outcome. That is the belief that one's effort will result is attainment of desired performance goals. This belief, or perception, is generally based on an individual's past experience, self-confidence, and the perceived difficulty of the performance standard or goal. The instrumentality is the belief that by meeting the performance expectations, a greater reward will be forthcoming. The valance refers the value of the reward to the individual and will is a function of his or her needs, goals, values and sources of motivation. (Weiss, 2001, pp 108 - 110) Practical applicability of this theory for Pro-fit is three pronged. The Expectancy factor indicates that organizations should maintain consistency in the remuneration policies, have the faith of the workforce and should have attainable and realistic goals linked to the remuneration system. The instrumentality aspect suggests that the company should have proper means of measuring performance and have performance-linked remuneration so that greater the performance the higher will be the reward. The valence aspect also has critical implications for the development of an effective remuneration system. Valence factor of the theory suggests that individuals will have differing values attached to the rewards and this will depend on their value system. For some, the financial benefits will be most crucial while some others will value the fringe benefits. The equity theory of motivation suggests that people compare their efforts and rewards with the others to determine the fairness of the outcome. Perceived inequities may prompt the individuals to take actions to remedy the felt inequities. Such actions may include demand for more rewards, reducing of efforts or leaving the workplace for better offers. Pro-Fit reward system should therefore consider how comparable their rewards would be in the external labour market and also how fair the pay structures are within the organisation. In developing the reward system for Pro-Fit, the above implications of motivational effects should be considered as the operation depends upon employees to achieve the uniqueness of the business concept, which is the value addition through expert advice. Theories such as Expectancy theory indicates that Pro-Fit should also focus on developing proper performance measurement systems in line with the new reward systems being proposed. Understanding whether the different employee groups, i.e. the manager vs. sales assistants have different valency factors is also important to ensure effectiveness of the system. For example, the performance pay components of sales staff may differ from that of nutritionist and the physiotherapist who are in executive cadre. They may also appreciate non-monetary rewards such as company maintained vehicle or interest free car loans, etc. while the sales staff may place greater importance on the monetary value of the reward and fringe benefits which promote quality of life such as paid holidays. 4. Reward Management Process In order to develop an effective remuneration strategy that is well aligned with its organizational objectives, Pro-Fit needs to utilize a systematic process (Kohn 1993). A basic framework that is recommended in formulating an effective remuneration strategy includes, analysis of the existing situation, developing a remuneration policy, planning the implementation, Job evaluation (concerned with internal equity), Market surveys (concerned with external equity), establishing Salary structure and development of a performance appraisal system that is geared to assess what the remunerations system aims to reward. The remuneration policy should establish the organization’s position on the key structural factors that needs to be addressed in a remuneration system design. These involves, 1) Whether the remuneration will be Job or Person Based. 2) The degree of importance placed on Performance and how it is linked to remuneration. 3) The position sought by the organisation in the labor market (i.e. Pay Master or Low Payer). 4) Level of importance of internal and external equity. 5) Degree of importance of hierarchy in pay. 6) Level of flexible in the remuneration mix. 7) Level of significance the seniority and job security. 8) The emphasis placed on group and organisational pay to promote a team culture within an organisation. (Lawler, 2000). Having considered these key structural questions, the following reward policy is proposed for Pro-Fit Inc. 5. Existing Reward System at Pro-Fit Inc. An analysis of the existing situation of remuneration administration in Pro-Fit indicates that the remuneration strategy has so far been administered in a rather isolated manner and not linked to organisational objectives or the desired behaviors needed by employees to survive in the new competitive scenario. In fact the company has maintained the same reward system which has been used over the past 25 years with minor adjustments and additional incentive schemes. Flat salaries have been administered for office staff without considering the opportunities to apply motivational incentives to critical performance areas of the operation. Senior Management consists of the CEO and three Functional Directors. They are paid fixed salaries which has no links to organisational performance, which allows for higher management complacency. No links has been established with the remunerations and management responsibilities of the senior management cadre. Areas of applying Agent/Principal theory concept for remuneration of Higher-level executives have been overlooked (Conway & Briner, 2005). Agent theory suggests that the motives and interests of the Agent (managers in the case of organizations) may differ from those motives and interests of the Principal (The Owners and shareholder in organizational context) Remuneration strategies as Profit sharing and Stock Options aimed at aligning the interests of the agent with those of the principal (Cieri, 2003). The organizational structure of Pro-Fit has remained as a traditional hierarchical structure with multiple levels of supervision burdening the cost of the company. The management has realized the need to convert its organizational structure in to one of High Performance structures advocating team efforts and flatter supervision layers, in order to achieve a competitive advantage in the face of aggressive competition. The company’s head office has 180 employees in the retail operations and 56 employees allocated to functional departments in the Head office. Such functional allocation has created a “Stove Pipe” mentality arising from these functional structures. Current performance appraisal system is at rudimentary level and carried out annually with rather subjective superior recommendation in the form of Global Essay format of performance appraisal coupled with some trait rankings in the appraisal format. The company has devised a high incentive pay remuneration package for the retail staff but due to the competitiveness of the market, most of the Pro-Fit outlets repeatedly fail to achieve set targets which the retail staff feels is absurd and unreasonable. They claim that the high management has simply forced down the responsibility of the sales and marketing of the company on to them. Allocating more than 50% of their pay to achieving these sales targets leaves most of the Profit retail staff with salaries that are 40-50-% less than what employees of other fitness retail companies are earning. This factor was not prominant in the past as the company managed to achieve its sales targets but with new competition and loss of market share, this strategy is failing to keep the staff motivated. 6. Proposed Reward Policy Having analyzed the existing reward system at Pro-Fit, the following proposal is being made to leverage on human contribution of Pro-Fit employees to recapture the competitiveness which the company once held. This has to be facilitated by attracting and retaining professional staff that are well motivated. The changes in organisational structure will create empowered, autonomous work groups at retail outlet levels which should be fully geared and motivated to achieve their targets without middle manager supervision. The desired behaviors are close alignment of employees with organisational objectives, pro-active customer care, innovative approach to retail store management and integrated team behavior. Since Pro-Fit aims to attract high caliber staff that is geared to work within highly empowered conditions, there should be a balance between the base pay and the performance pay components of the rewards. While incentive pay is important to motivate personnel, its component should not be too high, especially for professional level staff. Thus the policy will advocate a Skill based remuneration system with high component of base pay, which aims to place the company as a paymaster in the labour market. Performance related incentives would focus more on group and organisational performance while being linked to a small component of individual performance. With the company structure being converted to an empowered team structure, the policy outlines team and organisational, based incentives. Seniority factor will not have any implications for remuneration benefits within the new system. However it is proposed to reward skills accumulation of staff so that desire for training and acquiring multi tasking abilities, which is essential for performing within teams is promoted. For instance, the new system will reward those in retail teams for acquiring stores management qualifications and training. Those in sales positions can acquire professional nutritionist and physiotherapist licenses. There can be separate programs to offer financial support or sponsorships to acquire such qualifications and skills. Such intrinsic factors as chances for career development are considered as highly motivating to the workforce (Capelli, 2008). This will strengthen the retail team in to highly empowered and highly dynamic work teams that can multi task to increase productivity and efficiency of operations (Weiss, 2000). 7. Proposed Reward Strategies Based on the above remuneration policy the following Reward Strategies are proposed for Pro-Fit with the aim of developing a competitive advantage through excellent customer care and high level of expert advice; reduced costs through acquiring and retention of high caliber staff and boosting performance through innovation and excellence through its employees. 7.1 Base Pay Component For the purpose of administering the remuneration strategies, the total workforce will be treated within one main category as team members. The strategies being proposed aims at setting 60% of total remuneration to be a base salary and balance 50% to be linked to performance based rewards and indirect pay elements. The Base pay should be linked to market rates and the Skill acquisition. Pro-Fit will utilize salary surveys to establish the 40% base pay component related to the market pay where they will pay up to 20% more than the existing paymasters to attract the high caliber staff which they aim to acquire. The balance 20% Base pay of Pro-Fit pay strategy will be a linked to skills where the pay system vary pay as a function of the number of different jobs or skills that an employee is capable of performing competently. Skill Base pay systems aim at increasing functional flexibility of the work teams (Bratten & Gold, 1999). 7.2 Performance Based Pay With the aim to promote a team culture within the company Pro-Fit will focus on team rewards and organisational rewards rather than individual rewards where performance pay is concerned. 30% of the total pay will be linked to Performance and 10% of this will be in the form of individual commission. Another 10% of the performance pay will be linked offered as “branch commission” for each outlet team. In an aim to instill a sense of long term loyalty and commitment, the company is offering the balance 10% of the performance pay in the form of 7.5% profit sharing and 2.5% Gain sharing. While this type of reward tools are mainly offered to the senior management only in most companies, some companies such as Tesco has offered them to the outlet sales personnel and had reaped the benefits of commitment such schemes offer. The individual performance will be linked to the individual sales target achievement and this will be applicable to each sales assistant as well as to the nutritionists and physiotherapists who can double up at any given time to attend to a customer and achieve a sale. In administering the group performance reward the retail outlet teams will be placed on a Branch Incentive Scheme. Branch Incentive Schemes focus on key measures that a branch or retail outlet’s team can influence and relates to the achievement of overall organizational objectives (Armstrong & Muralis, 1988). Such criteria will include sales revenue development, customer attraction and retention levels, minimized customer complaints and high customer care. In order to ensure that team members varying degree of contribution is taken in to account and “free rider” issue is identified if present, a peer rating system will be tested and applied within the team to decide on the sharing of the incentive. This aims to reward those team members who contribute more to the team performance to a greater degree than those who contribute less (Cascio, 1998). The organisational- based performance rewards will be offered annually where Pro-Fit targets a minimum 14% ROI for the shareholders annually. A pay off up to 4% of net profits, above the 14% compulsory target has been proposed for this reward element. That is to say that if 16% net profits is achieved, 2% will be allocated for bonus pay for the entire organisation. A 19% or more ROI will result in a 4% profit sharing between the employees. This bonus will be paid in lump sums to employees as New Year bonuses. Gain sharing plans or Scanlon plans emphasis the win-win philosophy and motivates employees to work together to improve the organizational performance, imperative of their functions and the resulting profits through productivity improvements, cost reductions and other organizational improvements are shared between the employees and the employer (Bratten & Gold, 1999). The proposed ratio of sharing is 50%: 50% where 50% of the gains will be shared among the employees on an equal dollar amount. These schemes have positive impact on not only the organizational performance but also the organizational culture as well. With the new plan to convert the Pro-Fit organisational structure to a empowered work teams, the savings to be achieved in eliminating supervisory positions will be one item that will contribute to the Scnlon plan of Profit. Innovative and pro-active proposals from the staff can further increase contributions toward this fund that is beneficial to the company and to the employees. 7.3 Indirect Pay Component Pro-Fit will incorporate a 10% of total pay in terms of indirect pay where by mandatory payments required by legislature will account for 4%. The balance 6% will be in the form of health and life insurance cover available for all Pro-Fit employees, pay for time not worked such as paid annual leave, the medical leave and other forms of leisure time offered with pay. In addition to this a provision of automobile are proposed for high performing team leaders in retail level. The nutritionists and the physiotherapist will be offered company maintained automobiles while other staff over two years of employment will be entitled to apply for interest free automobile loan payable over 3 years. 8. Limitations and Restrictions In developing a remuneration strategy, a company has to take in to account the prevailing legislature concerning remunerations and collective bargaining agreements and enterprise bargaining agreements. These enterprise bargaining reflect the decentralized nature and flexibility attached by the Australian Labor legislature to the collective bargaining process. While collective bargaining encompasses wage agreements negotiated by trade unions to be applicable for a whole industry, enterprise agreements are more organizational specific (Weilis & Lansbury, 1999). Pro-Fit employees have their own employee committee but have not so far used it for bargaining rewards. Furthermore, Pro-Fit has also taken in to consideration the limitations associated with performance based incentives which is an extrinsic motivator to work. Scholars suggest that best motivators are in fact related to intrinsic motivators related to job environment and job satisfaction (O’Neill, 1995; Weiss, 2001). Therefore, while rewards have to be a driving force, it should address behaviors that can strengthen the organization’s capability to perform successfully in the market than allocating responsibility of achieving sales on to the individuals. The reward strategies have also to take in to consideration the cost incurred as a percentage of sales on rewarding function. Therefore, it is important to stress to the employees that the implementation and continuation of the new reward strategy can only be sustained with improved sales and market share of the company. This should be a reason for the employees to pro-actively perform as a group towards achieving organisational goals. 8. Conclusion In conclusion its can be noted that rewards play a host of crucial functions by aiding the company to acquire and high quality staff and gaining a high performance through them to achieve the overall organisational objectives. However, in order to ensure that the rewards are administered effectively and fairly, there should be a proper reward system in place with reward policies outlining the broader views of the company’s remuneration strategies. Based on a reward policy a company can craft its reward strategies and choose among the many options of rewards which falls under main categories of base pay, pay for performance and indirect pay. While many options are available within these categories, more and more companies are now choosing market based or skill based pay for base pay components while letting go of hierarchical and job based pay. In Performance based pay components too, many companies seek to instill and promote team performance via team performance incentives and organisational incentives in place of individual performance incentives. Lastly it should be recognized that while direct rewards are a very significant aspect of reward system, indirect pay such as insurance, leisure time and holidays as well as status symbols such as company maintained vehicles all appeal to the different motivational needs of individuals. References Amstrong, M. & Murlis, H. (1988). Reward Management: A Handbook of Remuneration Strategy & Practice, 3rd ed. London: Kogan Page Limited. Bratten, J. & Gold, J. (1999). Human Resource Management: Theory & Practice, 2nd ed, New York: McGraw-Hill Publishing Company Ltd,. 237-261. Cascio, W. F. 1998, Managing Human Resources: Productivity, Quality of Work Life, Profits, 5th ed. New York: McGraw-Hill Companies. Conway, Neil & Briner, Rob B. (2005). 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