The purpose of this paper is to analyse and evaluate the best practices in compensation and benefits adopted by organisations in the high tech industry. High technology companies incur a high cost due to retention and recruitment of human resources and thus design of suitable compensation programs are important to their bottom lines.
We studied literature to understand the view of academia on the best compensation and benefit strategies in high technology industry. To understand the application of these strategies we selected three ‘fortune 1000’ firms Microsoft, IBM and Netflix and compared their current compensation strategies with the recommended best practises.
It was observed that best practices in high technology firms are primarily based on performance priorities to encourage key contributors. However each firm had a customised approach in developing a compensation strategy keeping in view employee needs, business goals and organisation environment. Firms with aggressive performance goals, followed exclusive incentive based compensation plans, while some firms chose to adopt a more holistic reward system.
In conclusion this paper highlights that compensation strategies should be built with a ‘best-fit strategy’ rather than ‘best practice strategy’ in mind. There is no one – size – fits all strategy which should be applied to an organisation.
“Compensation refers to all forms of the financial returns and tangible services and benefits employees receive as part of an employment relationship.”
(Milkovich, Newman and Gerhart, 2010). As per the 2007 Emerging Workforce Study by Spherion Corp. (HR Trendbook, 2008), both monetary compensation and non-financial benefits comprise the key factors of compensation which lead to retention. Compensation programs are measured in terms of general pay effectiveness, contribution to organizational goals and are used as recruitment tools and finally used as a motivational and retention tool (Balkin and Gomez-Mejia, 1987).
Meiyu Fang (2004) states that since the high technology industry has higher investments and higher returns than contemporary traditional manufacturing firms. These high technology companies were selected for the study because human resources costs are a major expenditure in such firms and thus design of compensation programs important to their bottom lines.
This essay endeavours to understand the best compensation and benefits strategies that high performing organisations in the high technology industry have undertaken.
Summary and Analysis of literature
Key Elements of a compensation plan
Milkovich, Newman and Gerhart (2010) suggest a four step strategy for development of a compensation strategy. HR professionals should begin by assessing total compensation implications on business strategy, competitive dynamics, employee and union needs, organisation culture and values. The next step would involve mapping a total compensation strategy keeping in mind the firms’ external competitiveness, internal alignment and employee contributions. Only then should the final implementation of strategy be done and followed by a continuous re assessment of strategy. The challenge is to find a compensation plan which is the best fit with the business strategy in the given environment. The literature (Milkovich, Newman and Gerhart, 2010, p. 53) goes on to recognise that some organisations however would prefer a ‘best practise’ strategy than a ‘best-fit’ strategy.
Compensation in High technology Industry
High technology firms are characterized by (i) a high proportion of scientists and engineers (ii) geographic concentration (iii) high expenditures on research and development aimed at products which are at the cutting edge of technology; (iv) rapid technical innovation; (v) a very small/specialized labour market for scientists and engineers, resulting in high attrition rates (vi) entrepreneurship, since several of these firms are led by entrepreneurs who get financial support from venture capitalists. (Balkin and Gomez-Mejia, 1985)
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It is imperative for high technology companies to focus on productivity, high quality and profit performance. A study done by Sibson and Company in the year 1982-1983 on different compensation program designs adapted by 66 high technology firms to understand whether financial rewards help an organisation perform better had divided the companies into two groups ; 24 companies that designed their compensation plans based on performance priorities and 42 that did not.
It was seen that companies who designed their compensation programs based on performance priorities did significantly better. These were categorised as the ‘best performing ‘ companies while the others as ‘poor performing companies’. These performance priorities may include profit performance, employee contribution & community responsibility, responsiveness to customers and technical excellence. Compensation programs are seen to reinforce these priorities throughout the organisation. Organisations that did not perform well were seen to lack direction, employees were not linked through common performance goals and their overall financial performance fluctuated.
Better performing organisations had adopted the following methodologies to reflect their performance priorities. They considered pay as a foundation to design incentive plans. These companies allocated incentives on group performance whereas poor performing companies rewarded incentives based on individual performance. They also used special award programs to recognise employees for noteworthy contributions to the company. Best performers were also seen to include a combination of stock and non stock plans that integrate short term incentive plans as part of the long term compensation strategies, where as poor performers were seen to focus only on stock type incentives. The study successfully pointed out that designing compensation plans based on performance priorities directly benefited the company’s financial performance.
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This study also proved to be a guideline for high technology companies to adapt proven compensation practices. Such as every organisation should enforce performance priorities that reflect the culture of the organisation. They should evaluate current compensation plans to reinstate these policies and identify changes if required. Lastly the long term – short term components of compensation should also be aligned with the performance priorities of the organisation. (Schuster , 2005)
Compensation in global organisations: Best Fit Strategy
Such a strategy is practised in fortune 500 firm – Microsoft. Microsoft’s compensation strategies are seen to have evolved over time. Prior to year 2000, a majority portion of the pay packages consisted of stock options but after the dotcom crash the company graduated from stock options to a combination of merit pay increases, annual bonuses and restricted stock units. Managers found this approach very cumbersome and therefore Microsoft adopted an integrated system to clearly connect rewards to performance. The integrated approach included performance reviews where employees received ratings from their managers based on achievements of goals/commitments, long term performance records and behaviour with peers and managers. Based on these ratings the employee is then awarded bonus, merit pays or RSU’s. In addition to the system Microsoft also introduced a portal allowing employees to analyse the shifts in compensation based on their performance, thus ensuring that the whole process of compensation was clear and transparent. With the incentive based system it was found that employees were more satisfied with respect to compensations. By rewarding results and achievement of goals, rather than increasing compensation based on seniority or time, employees are encouraged to perform better and benefit a company.
However, when studying the literature we found that every organization is unique. There is no one-size fits-all framework for compensation management (Rumpel and Medcof, 2006). The stress is on the best -fit compensation strategy which is effective in achieving organizational goals.
A contrasting opinion by Rumpel and Medcof (2006) discusses a holistic approach to rewards which goes beyond the strong focus on pay and benefits, a hallmark of traditional compensation practices. Technology firms like IBM have now moved to approaches where rewards include opportunities for learning, quality work environment and development.
IBM’s new practices for achieving higher employee productivity focus on flexible working hours, cutting voluntary turnover with training opportunities, and increasing employee engagement through a robust performance management system which is integrated with the monetary compensation system to fetch optimal results for the reward system in totality.
IBM has a four pronged approach of:
- Pay includes “direct financial items, such as variable pay, incentives, base pay, monetary recognition programs and stock and equity sharing programs”(Rumpel and Medcof, 2006).
- Benefits include “indirect financial rewards, such as health/welfare benefits, retirement /savings plans, vacation and other paid time off”(Rumpel and Medcof, 2006).
- Learning and Development includes “programs for employee development and career training, supporting performance management and succession planning systems”(Rumpel and Medcof, 2006).
- Work Environment “includes programs and practices related to organizational climate, such as diversity and organizational culture initiatives, performance support, work/life balance such as flexible working arrangements, elements related to organizational reputation, elements related to challenging and interesting work and the quality of relationships with colleagues.” (Rumpel and Medcof, 2006)
Such a diverse set of rewards, provided by IBM, caters to diverse employee needs. It manages reward expectations and reduces overall turnover rates and costs.
It goes without saying that for any compensation strategy to work, it must take into account which rewards are valued by employees and ask whether these rewards are likely to achieve the desired retention and motivation effects. If the rewards offered don’t attract the employees, or they are unaware of their availability, then the desired behavioural effects may not occur irrespective of whether they have been linked to the organizational strategy. Further, for organizations where employees are primarily drawn to monetary compensation, such comprehensive rewards will definitely not be the most cost-effective approach. (Rumpel and Medcof, 2006)
Another noteworthy example of a distinctive style of compensation management is that of Netflix- a fortune 1000 company. Netflix has faced fierce competition from Apple and Amazon in its early stages and has managed to stay afloat due its talented employees. Contrary to the companies focussing on developing compensation strategies, the founder of Netflix, Reed Hastings, has successfully inculcated the culture of freedom and responsibility where in the company adopted some unique employment practices that were meant to attract, retain, and motivate employees. Among these practices was an unconventional compensation system features such as exorbitant salaries, unlimited vacations and allowing employees to structure their own compensation packages .Most companies provide compensation packages with a predetermined combination of cash and equity-based awards, but Netflix allowed its employees to request their own combination of preferences. In return Netflix expected employees to have ultra high performances. Therefore Netflix managed to retain the best talent by giving employees a choice on their compensation requirements. In line with this aggressive policy Netflix would let go of employees who failed to perform with high severance packages. ( Conlin,2007)
Compensation is an important and powerful tool used by organisations to influence motivate, retain and recruit employees. When the compensation strategy is in tune with organisational strategy and developed after understanding of employee needs, there can be far reaching benefits. A suite of benefits built to cater to globalized and diverse work force is key to the organisations in the 21st century. Given the nature of the industry selected for discussion in this paper, High Technology, where highly skilled human resource is critical, compensation plays a key role in reducing employee turnover. In our exploration of various literatures for the best practises of compensation programs, we found that each organisation identified specific strategies based upon their business goals and employee needs and organisation environment. The importance of using a ‘best -fit’ strategy instead of ‘best-practise’ strategy is clear.
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