Compensation Strategy of Nokia Corporation - Case Study Example

COMPENSATION PLAN ………………………….. College ……………………………… ……………….. Introduction To strategically manage the wealth of human capital, the human resource management designs and develops or adopts various techniques such as compensation, performance-based pay system and reward and recognition. Compensation strategy is a set of values and beliefs that the organisation takes with regard to monetary and non-monetary benefits payable to employees. Compensation, as an HR strategy, must contribute to and support the ability of the organization to meet its goals and objectives by attracting and retaining talented and skilled workforce (Bogardus, 2006). This paper will evaluate the compensation strategy of Nokia Corporation by discussing the rationale, current pay structure followed in the company and the ratio of internally consistent compensation systems. Compensation strategy of Nokia Corporation Nokia is a leader in the markets of network infrastructure and location based and advanced technologies. Nokia brand name is one the most widely renowned and highly reputed brands worldwide. Through its technologies and global presence, it employs around 57,000 people (Our Company, 2014), and it continues to attract most talented and skilled workforce through its strategic compensation programs. From the general outset, it can be found that Nokia follows external competitiveness as its compensation plan. There are basically four compensation plans, namely 1) internal alignment, 2) external competitiveness, 3) employee contribution, and 4) management of the pay system. Internal alignment refers to comparisons among jobs or skills levels within the organization, whereas external competitiveness refers to compensation relationships that are external to the organization. External competitiveness takes an approach to comparing the compensation levels among the competitors. It is also about how the company is positioned itself according to its pay relative to that of its competitors. Employee contribution takes an approach towards differential pay based on different performance base, whereas, management of the pay system refers to a pay system that ensures that right people get the right pay (Milkovich and Newman, 2004). External Competitiveness involves employee perception of the fairness of their compensation relative to those outside the firm. For implementing this plan of compensation, employers are required to become aware of salary structures of competitors and to understand that this compensation would certainly impact motivation, commitment, engagement and productivity (Mello, 2001). As compensation is an important factor that determines the level of employee satisfaction, motivation and engagement leading them to become high-performers, Nokia has long been valuing compensation. It has been attracting best fit of skills and talents especially in field of technology to help the organization achieve its organizational objectives and goals. The compensation structure adopted for its CEO, board of directors and employees seem to be externally competitive strategy. www.payscale.com, an official website that reports about the average pay and compensation at various industries levels, reported that Nokia typically pays 8% above the industry level (Pay Scale, 2014). Nokia has recently updated its compensation plan, by simplifying its approach to compensation. According to this, Nokia has ended the granting of stock options and significantly limiting the use of restricted shares and set up executive compensation benchmarks. Nokia’s newly appointed CEO and president, Rajeev Suri, has been offered with an annual base salary of EUR 1 million from May 2014, an incentive target of 125% of annual base salary based on performance against his specified targets, participation in long term equity based compensation programs according to Nokia’s policies, future payments that are expected from a Network-specific equity incentives, and customary benefits in line with company policies (Compensation, 2014). This compensation system basically involves basic pay scale plus a performance-based pay system. It thus involves external competitiveness and performance based incentive systems. Nokia offered additional compensation and share-based performance payments to its interim CEO- Risto Siilasmaa. According to this compensation plan, Siilasmaa received a totalof EUR 500,000 as compensation of his additional responsibilities. Nokia has also offered an additional 200,000 shares for his better performance. Nokia’s previous CEO- Ellop has been paid according to severance payment and contractual terms that were considered not very usual for a large and multinational company. According to the contract, he received a severance payment of EUR 24.2 million in total, including basic salary and management incentives of EUR 4.1 million, and value of equity awards of EUR 20.1 million (Compensation, 2014). The basic theory that underlies the compensation system in Nokia is external competitiveness. The rationale of external competitiveness in Nokia Milkovich and Newman (2004) found that the basic reasons why organizations adopt external competitiveness for compensation are control costs and attract and retail best employees. Pay-level decisions have significant impacts on expenses, and the basic norm is that higher the pay level relative to what competitors pay, the greater the relative costs to provide similar products or services. Secondly, companies will be able to attract and retain best talented workforce only when it offers a higher pay than what its competitors pay to the similar workforce. Internally consistent and market consistent pay systems of Nokia As mentioned earlier, Nokia follows mainly external competitiveness- often termed as- external equity- system of compensation to structure its compensation to its employees. Nokia has adopted a strategic approach to maintain both internal consistency and market consistency in its compensation strategies. Internal consistency or internal alignment deals with comparisons of rewards across different jobs within the same organization (Sims, 2002). It addresses the issue of relative worth, for instance, of a financial analyst versus a software engineer working within Nokia. Nokia’s Board of Directors have recently approved Nokia Equity program, comprising of Employee share purchase plan entitling eligible employees to contribute a part of their salary to purchase Nokia shares (Nokia Corporation, 2014). While designing and developing this package, Nokia’s board of directors have considered a strategic ratio between different employees at different levels in the company. It has taken strategic step to maintain a strategic internal consistency. As outlined earlier, Nokia’s compensation plan is based on the external competitiveness or market consistency. It is also termed as external equity. Sims (2002) stated that external equity or market consistency refers to comparing rewards and pay scaling across similar jobs in the labor market. It is reported that Nokia is a good employer in the sense that its pay is 8% higher than the average market pay scale (Pay Scale, 2014). Nokia management was keen about increasing the industry level compensation by offering an outstanding pay scale to its employees with a view to attract as well as retain highly talented workforce. Pay Structure and Employee contributions Nokia’s current pay structure is best in the industry. Senior Software Engineer is paid an average salary of $ 114,017 in Nokia, whereas a senior software engineer in Apple is paid an average salary of $140,832. As compared to Samsung Electronics, Nokia pays higher salaries to most of its senior managerial and other relevant posts. Pay structure is an important element that determines the contributions to the overall output and productivity of the organizations. Nokia has been the leader in the mobile handset market between 1990s and 2007. Nokia remained as the market leader till 2007, but it experienced a sudden decline in its market share and profitability when Apple launched the iPhone and Google launched Android in 2007 and 2008 (Hammerich and Lewis, 2013). When Nokia has been severely affected by the 2008 economic crisis, it was quite slow to react to the new competition in the smartphone market. Nokia’s net sales in 2009 have been declined by 19 percent (Hill and Jones, 2012). In order to hold back in the market, Nokia’s board of directors replaced its CEO-Olli Pekka with Ellop, and caused a remarkable change in Nokia. His compensation has been one of the best ever in the industries during his tenure while he was in Nokia. He implemented a strategic alliance with Microsoft and came back to smartphone market with new techniques and trends that could significantly attract some new emerging markets like India and China (Hill and Jones, 2012). Recommendations for improving discretionary benefits Nokia currently provide many discretionary benefits to its employees. Nokia recognizes that life is more than work, and therefore, a successful life is a balanced one. Hence, Nokia has offering a balanced life to its employees. Nokia offers comprehensive occupational health and safety and life as well as medical insurance benefits. Its retirement plans are designed to foster employees’ engagement and participation in long-term retirement objectives (Work-life Balance, 2014). While designing, adopting and administering the benefits, the human resource management should assess the relationship of the benefits to the total compensation costs, costs relative to benefits, competitor offerings, and the advantages of benefits in relation to attraction and retention. This part of the paper recommends the management of Nokia to assess 1) the costs relative to benefits, and 2) role of benefits in attraction, retention and motivation. The total costs that will be incurred for benefits can be considered as investments if it would ensure greater returns to the company. This is about return on human capital investments. Benefits are implemented with a view to motivate employees and thus to increase their productivity and performance. High performance will lead to increased profitability, and return will be positive. Secondly, the management of Nokia should assess the results of the benefits packages. The benefits offered to its employees must be able to attract talented and best fit employees and to retain them longer in the company so as to make use of their competencies for improved performance. Retirement plans and health insurance of Nokia Nokia has adopted the TyEL pension system, applicable for Nokia’s CEO and other executives, providing for a retirement benefit based on years of service and earnings according to the statutory rules. Under the Finnish FyEL system, base pay, incentives and other taxable fringe benefits are included in earnings. Nokia’s one major competitor- Samsung Electronics- implanted a regular employee pension plan until the retirement, equivalent to 3 percent of employee’s monthly salary (Employment, 2014) Nokia offers a comprehensive occupational health and safety policy, whereby, injuries and risks faced by employees while they are at work will be fully covered by the policy. The premiums will be paid by the company itself (Work-life Balance, 2014). Apple inc, a major competitor of Nokia in smartphone market, provides comprehensive health insurance to both its full time and part time employees. In 2009, Apple has been offering an average $8,000 per year for health and life insurance, and this has been extended to part-time employees, costing an additional $ 80 million to Apple (Lane, 2009). Conclusion This paper has briefly evaluated the compensation plan and strategic approaches of Nokia Corporation to attract and retain talented workforce. This paper discussed that Nokia adopted external competitiveness, or termed as external equity strategy for planning its compensation. Company has maintained internal consistency as well as external consistency for its compensations packages. This paper recommended Nokia to assess the relative costs of benefits and its impacts on attraction and retention. 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