Managing Human Capital - Essay Example

Managing Human Capital Assignment Employee motivation through merit issues In order to motivate employees in the workplace, it has been traditionally taken for granted that a system of rewarding employees with monetary benefits will provide the necessary incentive for them to perform according to the standards and goals set by management. It was assumed that the desire to be eligible for such rewards would be sufficient reason to expect employees to consistently deliver the desired quality and quantity of service or output demanded of their job. In contemporary human resources management, however, it is now acquiesced that the factors influencing human volition are not quite so simple as to lend themselves to simplistic generalization. People are complex, and the elements that motivate the human will involve more than the material or financial. Figure 1 is an author’s conception of the gamut spanned by the human resource reward system in an organization. Rewards may be intrinsic or extrinsic; intrinsic rewards are those values that an employee perceives he attains when he performs a certain job well. The value pursued by the employee is intangible, and the flawless execution of the job is itself its own reward, from which the employee derives immeasurable personal satisfaction. Factors that may enhance intrinsic rewards to the employee include the ability to participate in decision-making, relative freedom and discretion on the job, the assignment of work the employee finds more interesting, and the opportunity for personal growth, among others. There are likewise rewards that are of an extrinsic nature, that is, the source of the personal satisfaction derived by the employee is not part and parcel of the job itself, but is a result of the workings of the company’s incentive policies and system. Extrinsic rewards may be classified as either financial or non-financial. Financial rewards may be performance based (e.g. piecework, incentive pay plans, performance bonuses and merit pay plans), implied membership based (e.g.. profit sharing, cost of living increases, time-in-rank increase), and explicit membership based (e.g. protection programs, pay for time not worked, and services and perquisites). Those non-financial rewards include preferred office furnishing, assigned parking spaces, and ability to determine one’s preferred work assignments. Reference to different types of rewards or combinations thereof shall be made in the discussion. 1.1 Merit issues Merit issues span a broad and differentiated set of considerations, but which principally involve the determination of those aspects of performance for which merit may be attributed. Much depends on the nature of the job in the identification of merit issues. In economic, academic and financial circles, for instance, merit issues involve that continuous learning by the individual employee becomes the most important indicator of employee’s competency and by which quality of performance may be gauged. Secondary indicators would involve the work experience the employee gains on the job and the facility by which he is able to imbibe problem solving skills. (Shih, Liu, Jones & Lin, 2010:1503). Another study drew up a list of four attributes benefit systems should posses so that employee attitude and behaviour may be effectively influenced: these are employee participation, system quality, communication quality, and benefit importance. In a survey of 974 employees of an energy industry firm listed among the Fortune 500 companies, it was determined that the ideal benefit system is that of a partially mediated model where the benefit features indirectly and directly impact on employees’ benefit knowledge as well as their emotional commitment towards the company. Employees’ benefit knowledge may be improved by organizational communication dissemination, which the company would do well to systematically undertake ((Sinclair, Leo & Wright, 2005:3-29). 1.2 Employees’ Stock Option Plan (ESOP) The key behind motivation is to create the situation by which the employee’s personal goals and that of the company are aligned, so attainment of one necessarily involves attainment of the other. This is the rationale behind ESOPs, where employees are allowed to own stocks in their company upon attainment of certain standards of service or performance, thereby making the employee a shareholder in the business. The reason for the adoption of ESOPs is for employee benefits to be enhanced while at the same time meeting corporate financial objectives. The two-fold purpose, however, is not always reconcilable, according to Mauldin (1999). This study differentiated between the firms that adopted ESOPs primarily to improve employee benefits, from those that aim mainly for corporate finance reasons. Findings suggested that a significant increase in benefits after the ESOP is implemented is evident among the firms that use the ESOP as an employee benefit with no finance objectives. For the companies that aim to improve their financial situations, there was a significant decrease in benefits. Thus the reason the ESOP is adopted materially affects its design and, therefore, the overall benefits to the employee are variable. The study likewise determined that ESOPs with positive increases in total retirement benefits are associated with increases in sales per employee (Mauldin, 1999:141). Attitudinal effects of ESOP are moderated by four cultural dimensions that likely modify employee ownership attitudes. This leads to the recommendation that employee stock ownership plans should be designed and communicated in different ways for different cultural settings. These cultural dimensions are masculinity, power distance, uncertainty avoidance, and individualism. The paradigm on this finding is shown in the page following, where employee ownership is seen to be qualified by several attributes (possessions, financial value, and participation in decision making) or by different schemes or terms (individual or collective) The effectiveness of these attributes are tempered by the four cultural dimensions, which eventually influence the resultant work attitudes and ownership preferences. In short, the ESOP will only be satisfactory if the attributes and schemes that comprise the plan are viewed as favourable in light of the four cultural factors. It is therefore possible that ESOPs could fail as motivators. Figure 2: Cultural values as moderators of the attitudinal effects of employee ownership (Caramelli & Briole, 2007:300) In relation to ESOP, there are some plans offered by corporations to its employees that allows these employees to set aside a portion of earned wages into a tax-deferred investment account (Henry, 2007:69). The employer matches this amount, either fully or partially, with or without limits. At times, this matching amount is restricted by employers to the equivalent in company stock. This is a disadvantage to the employee in that their benefits are linked to the volatility of the stock price. On the other hand, the company tends to benefit from such a matching arrangement: (1) there are lower price volatilities, (2) lower bankruptcy risks, and (3) the chances for hostile takeovers are avoided by putting the company’s stock into friendly hands (Brown, Liang and Weisbenner, 2006:1315). 1.3 Scanlon Plan The Scanlon plan is “a management system that focuses on a balanced approach using both financial and nonfinancial mechanisms to increase organizational effectiveness” (Dreher, 1980:89) and is based on the principle that “present in the work force is a reservoir of creativity and experience that, if property tapped, has the potential to greatly increase productivity (White, 1979 in Dreher, 1980:89). The plan is attributed to Joseph “Joe” N. Scanlon, former prize-fighter who became “the most sought-after labor-relations adviser in the U.S.” in his time (Time, 1955). The main component of a Scanlon plan is an organization-wide pay plan, where a bonus based on savings in payroll costs is usually distributed to employees as a percentage of their base pay. The second feature of the plan is the extensive use of employee participation in decision-making processes (Dreher, 1980). The attraction of the Scanlon plan is that it institutionalises a reward system that is based on measurable performance and provides a potential mechanism to enhance a firm’s environmental performance; it features collectiveness and cooperation, employee participation, quantifiable performance and bonus measures, and an equitable reward system (Massoud, Daily & Bishop, 2008:15). Two seminal researches on the Scanlon plan are still cited in studies today. Dreher (1980) measures Scanlon’s relationship with the four individual needs described by Murray’s needs theory (1938), namely achievement, affiliation, autonomy and dominance. Dreher determined that the satisfaction and involvement that resulted from positive reception of the Scanlon plan tended to relate positively with achievement and dominance, but negatively with autonomy, and inconclusively with affiliation. The other work is by Driscoll (1979) which showed that experience with the use of the Scanlon Plan in industry resulted in greater willingness of workers and unions to cooperate with management. The favourable result is contingent upon acceptance and respect of both sides for the other, and an willingness on the part of the company to share the benefits directly resulting from the application of cost-saving ideas generated by employees (Driscoll, 1979:61). 1.4 Annual Bonus Contradictory findings are arrived at by different studies on annual bonus schemes. A widely cited study is Healy (1985), which found that managers tended to manipulate their earnings in order to increase their cash compensation. – that is, they tended to raise earnings when they expected it to be below the lower bound required to earn any bonus, and to lower their earnings when it is close to the upper boundary beyond which no further increases in bonuses are obtained. Holthausen, Larcker and Sloan (1995:19) investigated this same topic and found that there appears to be no evidence of such manipulation, at least at the lower bound below which no bonus is earned (it is silent on the upper bound). This is not the end of the controversy, however. A similar study was conducted by Guidry, Leone & Rock (1999) reprised the study and extended the study using business unit-level (rather than aggregated corporate) data, where managers are paid bonuses solely based on business unit earnings. This study finds evidence of manipulation of earnings to maximize bonuses, consistent with Healy (1985). 1.5 Gain sharing Gain or profit sharing is generally undertaken by management in an attempt to improve the financial performance of their company. A study was conducted on German firms, and it was found that profit sharing indeed positively affected profitability (Kraft & Ugarkovic, 2006). Profit sharing tends to induce conflicting forces in the relationship between supervisors and workers, according to Heywood (2010). On the one hand, it may enhance cooperation and helping effort; on the other hand, it may intensify direct monitoring and pressure by the supervisor on his subordinates, and peer monitoring and pressure from co-workers. In the U.K., profit sharing tended to reduce employees’ satisfaction with their supervisor, whether or not it affects other dimensions of job satisfaction. Two groups are particularly vulnerable to lower satisfaction as a result of peer pressure: women employees who are generally more sensitive to pressure tactics, and non-union workers who tend to lose more for lack of affiliation to a pressure group (Heywood, 2010:859). In another study, the relationship between goods-market competition and profit sharing was investigated, and it was found that in the United States, at least, and increase in the degree of goods-market competition should be accompanied by an increase in profit-sharing arrangements, as increased competitions in the market for goods increases the weighting on firm profits as a determinant factor (Duca & VanHoose, 1998:525). 1.6 Merit plans Merit plans may or may not work depending upon the disposition of the employees to which they are applied. Merit pay raises were successful in eliciting strong favourable reactions from employees, only in the cases where these employees already had high raise expectations and high pay-for-performance (PFP) perceptions (Schaubroeck, Shaw, Duffy & Mitra, 2008). There are also important implications of the possible removal of performance evaluation and merit pay plans that have already been institutionalized in organizations. The normal reaction would be for employees to resent the abrupt removal of such devices from their company’s policies. It has been found, however, that it was possible for policy changes to be favourably received by employees. This is done by replacing a traditional performance appraisal with a combined concerted performance feedback and coaching effort, replacement of the merit pay with a blanket pay increase; these measures tended to enhance employees’ perception of pay fairness, pay satisfaction, and job satisfaction (Waite & Doe, 2001:187) 1.7 Synthesis How now may the effectivity of different merit issues be viewed? As with all human undertakings, there is no single solution to the question of motivation. Even the very principles uncovered in the literature review reveals that variables such as terms of the plan, perceptions of the individual employees, manner of program implementation, degree to which employees have been informed, and countless other uncontrollable aspects will tend to influence how well employees are motivated by a merit plan. This being said, there are a few principles that practitioners have acknowledged as helpful in the effective implementation of a rewards program. (1) Firstly, all employees must truly be eligible for the recognition, in order for the credibility of the program to be maintained in the eyes of the employees. (2) The recognition must specifically inform the employer and employee about which behaviour or actions in particular are being awarded. (3) After the first reward is given, all other employees who may emulate the awarded to perform at the same standard or level should likewise receive the award. (4) The award should be conveyed as close chronologically to the performance of the laudable act as possible, in order for the recognition to reinforce the recognition behavor the employer wishes to encourage. (5) Managers should not be allowed to “select” the awardees for the recognition. Such a system would tend to be viewed as a form of fostering favouritism, or give the impression that an employee was selected for the award because he was the only one not yet awarded, or that it was his turn to get recognized this time around. It is for this reason that incentive schemes such as “Employee of the Month” is seldom effective in motivating employees. The reward should be earned by the employee through attainment of a certain objective metric, such as the amount of output or the quality of work based on a measureable attribute. Nearly all major corporations would have some form of institutionalized rewards system that would be a combination of the incentive devices. For instance, the international fastfood chain McDonald’s offers an incentive pay for performance that exceeds the employee’s goals. There are likewise long-term incentives, recognition programs, and a company car program. Coffee company Starbucks has its ESOP called the “Bean stock” and the stock investment plan (SIP). Another worth mentioning is UK retail firm Sainsbury’s, which has a company profit sharing plan, gift cards and vouchers for its employees, among others. 2. Job analysis and human resource planning The job of a manager is comprised of four fundamental functions: planning, organizing, leading, and controlling. The human resources manager is tasked with the responsibility of human resources planning. Good human resource planning involves “meeting current and future personnel needs”, necessitating and understanding of the organization’s strategic directions and an analytical perception of the requirements to meet these goals (Ornstein & Lunenburg, 2008:486). “Human resources planning involves identifying staffing needs, forecasting available personnel, and determining what additions or replacements are required to maintain a staff of the desired quantity and quality to achieve the organization’s mission.” (Ornstein & Lunenburg, 2008:486) Human resources planning is comprised at least of three basic elements: job analysis, forecasting demand and supply, and legal constraints., Job analysis is “the process of obtaining information about jobs through a systematic examination of job content” through two parts: job description and job specification. Job description outlines in writing the duties and responsibilities of a position, while job specification outlines, also in writing, the qualifications needed by a person in order that he may fulfil the duties and responsibilities specified in the job description (Ornstein & Lunenburg, 2008:486). From the definitions of these concepts, it is apparent that a logical relationship exists between them. Human resources planning involves the assessment of company targets and goals, and assessing the manpower needs based on these requirements. Job analysis is undertaken when a particular need has already been identified, and a position is created to be manned by an individual. Job analysis involves setting down the tasks this individual will be doing, based on the need of the organization, and from this set of tasks, determining the necessary qualifications of the individual who will eventually be hired to execute this set of tasks. 2.1 Job analysis preceding human resources planning in restructuring The occasion has been posited when job analysis is first undertaken prior to human resources planning “as part of a restructuring process”. In this case the logical chronology of planning the human resource requirement before conducting job analysis is reversed. In the straightforward planning when the job is first created, this order would normally create havoc. However, in the case of restructuring or reorganization, the position or job is already created and staffed. Restructuring admits of a change in the organization because a better organizational structure is suggested by the current one. Since there are financial, operational, and legal implications, among others, in the unnecessary displacement of currently engaged personnel, aside from the possibility of demotivation among others who may feel unsure about their job security, it becomes imperative that a job be analyzed before it is deemed redundant or superfluous to the organization. Only after it is so considered that a proper plan to best situate the job in the organization, or to transfer those personnel to be displaced, is made. Employees whose positions have been dissolved, and whose qualifications do not suit any of the available existing jobs is then terminated pursuant to the existing corporate or legal prescriptions on this matter. 2.2 When the HR plan differs from desired performance It is also the case, sometimes, that a well thought out and implemented human resources plan yields results that deviate from the performance expected. This is nothing new; variances in performance are experienced regularly in all aspects of organizational activity, including finance, operations, marketing, and particularly research and development. HR is not exception. Human imperfections and forces beyond our control would tend to influence the workings of the organization such that what is expected is not sometimes achieved. In such cases, it is the HR manager’s job to be prepared for contingencies, particularly those that are foreseeable from experience, and to be aware of the first signs of deviation in order to apply corrective measures as soon as possible. In human resources, this may require training, orientation, or redirection from the errant employee’s immediate supervisor. Oversight should be minimized as early as the planning stage by a careful and deliberate system of consultation, maybe even teamwork, to eliminate errors even in the planning stage. Finally, when the undesirable result shall have materialized, the HR manager should assess which aspects of the situation, if any, are salvageable and how elements of the error that are worth saving could be rehabilitated. The best one can do in this case is to institutionalize measures so that the organization learns from its mistakes, and the same error may not happen again. References Brown, J R; Liang, N; & Weisbenner, S 2005 401(k) matching contributions in company stock: Costs and benefits for firms and workers. Journal of Public Economics, 90:1315-1346 Caramelli, M & Briole, A 2007 Employee stock ownership and job attitudes: Does culture matter? Human Resource Management Review, 17:290-304 Decenzo, A & Robbins, P 2008 Fundamentals of Human Resource Management. John Wiley & Sons Dreher, G F 1980 Individual needs as correlates of satisfaction and involvement with a modified Scanlon Plan company. Journal of Vocational Behavior, 17:89-94 Driscoll, J W 1979 Working Creatively with a Union: Lessons from the Scanlon Plan. Organizational Dynamics, Summer 1979, pp. 61-80. Duca, J V & Van Hoose, D D 1998 Goods-Market Competition and Profit Sharing: A Multisector Macro Approach. Journal of Economics and Business, 50:525-534 Green, C P & Heywood, J S 2010 Profit sharing and the quality of relations with the boss. Labour Economics, 17:859-867 Healy, P 1985 The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics 7:85-107. Heathfield, S M 2010 “Five Tips for Effective Employee Recognition”. Retrieved 10 October 2010 from http://humanresources.about.com/od/rewardrecognition/a/recognition_tip.htm Henry, S M 2007 The New Bankruptcy Code: Cases, Developments, and Practice Insights since BAPCPA. Chicago, Illinois: American Bar Association Holthausen, R W; Larcker, D F; & Sloan, R G 1995 Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19:29-74. Kraft, K & Ugarkovic, M 2006 Profit sharing and the financial performance of firms: Evidence from Germany. Economics Letters, 92:333-338 Massoud, J A; Daily, B F; & Bishop, J W 2008 Reward for environmental performance: Using the Scanlon Plan as catalyst to green organisations. International Journal of Environment, Workplace and Employment. 4(1):15-31 Ornstein, A C & Lunenburg, F C 2007 Educational Administration: Concepts and Practices. Belmont, CA:Thomson Brooks/Cole Schaubroeck, J; Shaw, J.D.; Duffy, M.K. & Mitra, A. 2008 An Under-Met and Over-Met Expectations Model of Employee Reactions to Merit Raises. Journal of Applied Psychology, 93(2): 424-434 Sinclair, R R; Leo, M C; & Wright, C 2005 Benefit System Effects on Employees’ Benefit Knowledge, Use, and Organizational Commitment. Journal of Business and Psychology, 20(1): 3-29, DOI: 10.1007/s10869-005-6981-1 Shih, K-H; Liu, Y-T; Jones, C; & Lin, B 2010 The indicators of human capital for financial institutions. Expert Systems with Applications. 37:1503-1509. Time Magazine 1955 “Management: The Scanlon Plan”. Time Magazine, 26 September 1955. Accessed 9 October 2010 from http://www.time.com/time/magazine/article/0,9171,807657,00.html Waite, M.L. & Sites-Doe, S. 2001 Removing performance appraisal and merit pay in the name of quality: An empirical study of employees’ reactions. Journal of Quality Management, 5:187-206 Read More