Enhancing performance reward system

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Executive summary

As one of the most outstanding company of global packaging industry, keeping up the competitive advantage and sustainable growth within the international vicissitudes was the primary objective of Sonoco Product Company. The case study outlines the changes of performance and reward strategy made by the company's senior vice president of human resource, Cindy, Hartley. Through analyzing Hartley's strategy practice, the case study highlights two significant supporting factors as well as two obstacles of the new performance and reward system in Sonoco. To be specific, improvement of performance evaluation system and psychological contract were defined as two merits while incorrect feedback and unsound compensation system were listed as potential pitfalls. Generally speaking, this case study analyzed the background and current situation about Sonoco, explored the threat and opportunities of HR function related to the company, indicated the strength and weakness of the two models set up by Hartley, and evaluated the alternatives and recommendations of the actions Hartley was going to take,.

1. Background

Sonoco Products Company is a global industrial and consumer packaging company that founded in 1899 in Hartsville, South Carolina. During the twentieth century, Sonoco became one of the largest packaging companies in the world, mostly by acquisition. And by 2000, Sonoco acquired $2.6 billion revenue, and owned 17,300 employees across 285 operations in 32 countries, serving customers in 85 nations. Business of Sonoco was mainly divided into two segments: industrial and customer packaging, of which industrial division possessed more employees and accounted for 55% of total revenue. The traditional culture of Sonoco is tightly knitted. Within the collaborative, friendly and ethical environment, many staff members chosen to spend their entire career at Sonoco and over 60% of the executive committee had been with the company at least 20years.

From business operation review, Sonoco had seen many up and downs. During 1990's the United States was enjoying a surge economic growth, so was the packaging industry. Sonoco was found to be susceptible to the changes in the world economy, and had suffered two challenges in the 1990s. First one is the competition and opportunities caused by globalization, for instants, heavy manufacturing companies moved their factories to those countries where labor was cheaper. The globalization ended up with huge organization changes, market share was more centralized. In order to follow the trend, Sonoco changed its business model and started to build its own brand value. The second challenge appeared when new technologies like computer science accessed to the packaging market. The packaging business began to focus on how to make full use of the booming computer technology. An increasingly segmented consumer society prompted diversified product types, more advanced equipment, and variety of policies and action programs to meet the consumer needs. Thus, Sonoco realized that a more coordinated market approach was needs to keep itself stay ahead in the ever-changing global packaging industry.

2. Introduction

Since hired in 1995 as senior VP, Hartley had found a series of shortage in the human resource (HR) function of Sonoco. She started to commit herself on a plan to rehabilitate HR in Sonoco and link HR processes to business strategy of the company immediately mainly by creating a new performance management and compensation system.

2.1Two major problems in the old system

Hartley's first challenge was the inequitable compensation system caused by excessive decentralization of HR function. A companywide decentralization of HR function was started in Sonoco by the late 1980s, when HR managers began reporting solid line to general managers of the business and dotted line to corporate HR. However, the entrenched decentralization of HR function had an adverse effect on cooperative competition and communication among divisions, which directly leaded to the inefficient of performance and compensation system. According to Heady (1996), decentralization and centralization are distinguished by the ownership of the authority, whether it is belonging to the top leaders or passed down to lower organization levels. Both centralized or a decentralized structure approaches have advantages and shortcomings.  The best fit practice of human resource management (HRM) is to perform distinct but inter-related HR functions on planning, development, compensation, integration and maintenance (Dessler, 2007, p. 22). And the emphasis is on how extensive decentralization of HR functions should be (Soeters, Joseph, 2009). 

The second problem of the old HR function was the unitary performance evaluation system. The performance review was conduct by the division managers once a year only based on result-based assessment. Under this approach, employees' performances were roughly divided into 5 rating criteria without specific key result indicators. The source of feedback was simply came from the division manager which provided easy access for them to manipulated performance rating in order to get larger salary increase for their staff. Result-based performance measurement is convinced to be an effective tool to improve service delivery and cost effective, while it requires self-monitoring, cross-functional work teams and continuous feedback (Jorjani, Hamid. 1997). In addition, result-based evaluation could be short-termism when the settled objectives was not responding to the leadership culture and changing environment. To make things worse, lacking of soft skill measurement like communication and teamwork may impair cooperation between divisions and downplay employee's behavior performance and competencies (Woehr, D.J. 2006).

2.2 Hartley's proposal and actions

To settle problems analyzed above and create a more professional, business-oriented, contributing HR group, Hartley identified three main priorities after careful investigation. Firstly, changing the compensation and performance management system into a linked consistent one to make sure it can reflect the contributions of employees accurately. The second priority was to create an employee development process to improve their competency and commitment. The third one was building a succession-planning process to selecting next generation of leaders. In other words, all proposals put forward were aim to solve the problem of diversity and creating a desirable working place.

The action taken by Hartley revolves around three stages of performance evaluation and compensation. And she founded an HR council to ensure all HR objectives and outcomes support strategic business goals and was aligned with Sonoco's desired culture.

Performance planning stage

In this stage, overall business goal of Sonoco and individual business objectives were set with mutual agreement. To be specific, supervisor and employees initially agreed on the evaluation approach (including result-based assessment and competency assessment) and business goals were directly connected to individual objective. An adequate training period was provided to both managers and employees in the company to familiarize them with the new system.

Compensation planning stage

Changes of wage scale and incentives were made in this stage and managers were required to own the compensation process including recording employees' contribution and making equitable decisions of annual merit awards.

Leadership development and succession planning stage

A new leadership development model was endorsed by a team of general managers of Sonoco; the model includes assessment, gap identification, creation of individual development and implementation. In this stage, 360-degree feedback was applied and criteria were jointly determined by both employees and managers.

2.3 Hartley's new challenge

As Hartley was well on her way, Harris DeLoach, the newly appointed Chief Executive Officer had asked Hartley to devise two alternative HR structures to reduce HR's cost by 20%, or $2.8 million. Other pressing reasons for the request include ensuring top-level accountability for talent management and upgrading, providing for a more even distribution of HR talent and support and leading the way in supporting the company's new growth strategy.

On the executive committee, Hartley has to prove the best fit HR practice of the company's goals between the two options recommended by the task force, the horizontal or hybrid structures. Both structures have pros and cons. The hybrid structure left a form of divisional Human Resources management intact for general managers to appeal for, and the new group of Human Resources managers would provide the strategic interact between corporate Human Resources functions and Sonoco's business goals. Relatively, the centralized HR function would reduce the cost of administration while individual interest may not align to the business objective.

3. Analyzing Hartley's actions

On the basis of the introduction and analyze above, it is obvious that the new performance and reward system could cause waves in Sonoco, while both opportunities and threats can be seen in Hartley's action.

3.1 Identification and analysis of shining point

Among the strengths of the new practice such as employee communication and development system and new merit award program, there were two significant supporting factors that would facilitate the changes Hartley made in Sonoco: the competency assessment and psychological contract.

3.1.1 Competency assessment approach

Approaches to monitoring performance vary from difference organizations and “dimensions of performance include productivity, quality measures as well as job tasks or generic skills such as communications” (Griffin, Patrick, 1995). The application of competency assessment performs an important function in the performance management system of Sonoco. Within this approach, the organization set suitable behaviorally-anchored rating scale for manager and employees through the analysis of competency which includes knowledge, skills, emotions, value and abilities (Epstein & Hundert, 2002). This type of assessment is built on the principle of demonstrating proficiency in specified performance areas, and ensures that performance are integrated within an organization to produce the desired performance results(Naquin & Holton, 2003). Since knowledge, skills and ability are becoming increasingly important for service delivery, the competency-based assessment approach is more suitable to evaluate the contribution of employee dealing with specific customers. Compare to the old, unitary result-based performance evaluation system, competency assessment is of great help in the long-term development of individual competency and organizational competitive advantage, especially when the organization hopes to change its culture (Bennett, W., Lance, C. & Woehr, D. J. 2006). In the case of Cascio1994, the organizational change and the harvest of employee training were well reflected in competency outcomes. Meanwhile, employees would conduct self-managing instead of traditional job assignment. More than that, in the new policy, a considerable right to autonomy was granted to division managers within certain restriction, which made the approach more flexible and kept pace with the changing environment.  

3.1.2 Improvement of psychological contract

Work behavior is generally divided into three key types (membership behavior, task behavior and organizational citizenship behavior) and is causally linked to desired performance result (Drenth and Groenendijk, 1998). The attitudinal drivers for such behaviors include work motivation, job satisfaction and organizational commitment (Estes, Annette,2003). First emerging in the 1960s (Argris 1960), the psychological contract has been widely used to interpret the relationship between employer and employee such as job satisfaction and employee contributions (Robinson 1996), and neglect organizational commitment (Turnley and Feldman, 1999). It refers to the perception of the fundamental exchange relationship and expectations between the employee and employer include performance requirements, job security, training, compensation and career development (Ravlin, Elizabeth C 2010; Rousseau 1989).

By changing the psychological contract from relational to transactional, in other words, build a flexible, mutually beneficial partnership as long as necessary (Ryan, Ann Marie 2010), Hartley's actions would improve the attitude outcomes and behavior outcomes. Particularly, by improving the compensation system, training process and organizational cooperative culture, the expectations and needs of individual were directly linked to the objective of organization. Annual face to face meeting was held in Sonoco between employee and manager to discuss the strength and weakness of the employee contribution and current performance reward system, as well as the future prospects and project. Thus a multi-trust was built between the two parties and the behavior of employee would be transformed from membership behavior (remain with the organization) or task behavior (employee perform specific work task assigned to them) into organizational citizenship behavior (exceed membership and task compliance, employees take voluntarily action) and both personal competency and organizational productivity were upgrading. The improvement of psychological contract might be a virtual prompter of the new performance management and compensation system.

3.2 Identification and analysis of potential treat

Having analyzing the merits, there were pitfall traps within Sonoco that cannot be overlooked. None of the weakness had been discussed in any detail in the case, but they might be stumbling blocks on Hartley's way to success.

3.2.1 Intentional errors of evaluation

In most organizations, the collection of performance review data is not the most difficult challenge in performance management. “The real payoff comes in the objective evaluation of the data collected and in putting the information gained to effective use” (Sielaff, Theodore, 1974)

When the assessors (managers) see assessment as a tool for furthering their personal interest within the organization, the intentional errors may arise (Kozlowski, Chao & Morrison 1998). These conscious attempts to manipulate assessment can be divided into three main types: leniency error, harshness error and central tendency error (Longenecker, Sims&Gioia 1987).

As introduced above, the culture of Sonoco was family friendly, ethical and paternalistic. A considerable amount of employees had spent their entire career at the company and over 60% of the executive committee had been with Sonoco at least 20 years. Surely the collaborative organizational culture has a positive effect on retaining the employees, but the downsides to a tightly knit culture such as internal reluctance to hold underperformers accountable and barriers on providing negative feedback cannot be ignored. 

The new evaluation approach of behavior performance was susceptible to leniency error. The manager or supervisor might give all employees an undeservedly high rating to enhance the relationship with the subordinates and to avoid interpersonal conflict and maintain a friendly environment, (Murphy &Cleveland 1995). Also, the assessor probably tempted to engage in central tendency which was failing to distinguish accurately between high performance and low performance by locating all employees at the midpoint of the assessment range (Kowert, Paul A. 2006). Both kinds of the intentional errors would lead to the ineffective of the performance management and compensation system.

3.2.2 Loopholes in new compensation system

Besides the rating error of performance evaluation, there were controversial weaknesses in the compensation system Hartley was building.

Firstly, the merit award program was a problematic remuneration practice. Sonoco's 18 salary grades were replaced by five wider-range salary bands and managers were the arbitrators to make award decision aiming to provide greater managerial flexibility in differentiating and awarding merit increase.  However, there were no detailed standards for the managers to refer to when designing reward system. Thus the performance appraisal system could be inaccurate and unfair. Research on merit pay for staff in US universities indicated that failure to differentiate adequately between high and low performers had adverse effect on organization (Terpstra &Honoree 2005).

Secondly, the new merit award program was individualistic which means there were no correspondingly award to encourage team work. This loophole might impair team cooperation in the long term and conflated Sonoco's collaborating business culture.

In addition, the lack of non-financial awards could be another loophole in the system which would have hindered the success of Hartley proposals. Compare to the cash bonuses, non-cash rewards are more motivating and less costly (McAdams 1996), also more fitted in the cost saving target of Sonoco. The evidence are too numerous to mention, for instance, in the survey conduct by Towers Perrin on 2003, high-performing US companies were making greater use of non-cash rewards (57%) than those low-performers (36%). A similar phenomenon can be seen in another longitudinal study, in which financial incentives and non-financial recognitions were compared by recording customer service and employee turnover of 21 fast food stores. The survey revealed that the cash incentives had strong initial influence while non-financial incentives had an equally significant impact on customer service and volume of business on the long term (Peterson&Luthans 2006).

4 Recommendation and conclusion

In the volatile, ever-changing global packaging industry, Sonoco needs a structure that reacts fast to changes in the market. A hybrid structure was recommended since the structure allowed the divisions to have direct involvement with HR process and function such as planning, performance evaluation, compensation, and career development. The divisional Human Resources management was more closely connected to general managers. Moreover, the hybrid structure rationalized the interaction between corporate Human Resources functions and Sonoco's overall strategy.

On the basis of the analyzing above, Hartley had achieved great success on the change of performance evaluation system by the application of competency assessment and the improvement of psychological contract.

The diversified performance rating system combined with result-based assessment and competency assessment ensured the validity and reliability of the measuring results, facilitated greater communication between supervisor and subordinate, encouraged creativity on goal achieving, while contribution of employee and improvement of individual competencies were also taken into account, which guarantees the self-fulfillment and career development of employees. At the same time, the improvement of psychological contract created a flexible, mutually beneficial partnership within Sonoco as well as a beneficial organizational citizenship behavior.

While there was a continued need for additional enforcement efforts taken by Hartley and her team on the training of impartial decision makers and on the development of a sounded compensation system which includes accurate and felt-fair performance appraisal and non-financial incentives. Since both of them are incentive for higher performance and productivity in the future. For instants, setting company-wide general criteria of merit award as well as non-cash incentives like paid maternity leave to improve work-life balance of employees. Besides, more attentions were required on performance counseling and how to provide negative feedback to the employees in a friendly but problem-solving way in performance coaching. Those recommendations may help Hartley to achieve a more successful implementation of the new performance management and compensation system.