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In this Assignment the researcher is going to look at the range of merit issues faced by employers and assess whether it is a good idea to reward employees with these merit issues. The researcher is going to talk about the different motivation factors from different authors. Then the researcher is going to look into the different pay and reward methods that exist followed by the factors that affect the pay decisions. A few examples of the different pay and incentive methods in Asia are also provided. This essay will end with an in-depth critical analysis and a conclusion.
Human capital is the most important asset that any company has (Leslie. 2003). It, therefore, becomes imperative to keep the employees motivated so as to get a better output inside and outside of the work environment. The success of any company is backed by the hard work and dedication of its employees at all levels. Success comes from patience, persistence and hard work. Companies work so hard to keep their external customer's happy, satisfied and delighted; however, they tend to ignore their internal customers, who are an integral part of their overall success.
Example 1 "You have to be very good at finding wonderful people to run your company, properly incentivise and properly motivate them and give them the freedom to go ahead and make good things and make mistakes" (Richard Branson). Example 2 Likewise, Steve Jobs and Bill Gates say that, "We have attracted great people and everything that has been done at Apple and at Microsoft has been done by remarkable people". As such it is important to reward employees with merit issues.
Whilst only few decades ago, the trend was one job, or at least one employer for life, the new generation displays the tendency of staying for shorter period with one employer. Indeed, the average stay with one employer has significantly shortened over the years, and there is no sign of any reverse trend in the coming years.
Example 3 Our 2010Â Resourcing and talent planningÂ surveyÂ reported the overall employee turnover rate for the UK to be 13.5%.
Coupled with this is the increasing competition, especially from China and other emerging economies, arising from the inexorable globalization of trade, which compels companies to cut cost to enable them to stay competitive, andÂ Â ... alive!
Example 4 "Davis (1998) shows that the increase in unemployment, due to international
trade, in a minimum-wage economy like the EU is exacerbated in the presence of a flexible-wage economy like the US."
Motivation is the driving force that is required in order to achieve anything in life. Without motivation people give up at the first hurdle. Motivation inspires, instigates and encourages people to do their best. It compels a person to think "when there is a will, there is a way" and will make them do anything to achieve success. "What are the factors that motivate employees?" has always been a very big challenge for the early theorists. Different theorists have come up with different approaches describing what does and does not motivate people in a work place, for instance, "Maslow's Hierarchy Of Needs", "Frederick Taylor's Scientific Management", "Victor Vroom's Expectancy Theory", "Herzberg's Two Factor Theory", "McGregor Theory X and Theory Y", "Alderfer's ERG Theory" and many more. The researcher has taken some of these motivational theories into consideration for the purpose of this assignment.
Frederick W.Taylor (1911) is known as the father of 'scientific management'. He concluded that every job was measurable and each element of a job could be timed. As such, the managers just had to remunerate the employees according to what they produced. This is the theory that gave birth to the "piece rate" method of pay and hence motivated workers to be more productive.
Frederick Hertzberg (1959) is another well known theorist who carried out a large-scale survey into motivation in the American industry. After thorough research, he came up with the 'two-factor' theory of motivation, which are termed as the "Motivators" and the "Hygiene" factors. Motivators being the satisfiers and the Hygiene factors being the dissatisfiers.
He found that if an employee's basic needs (such as a good working environment and a basic rate of pay) were not met, then that would show a lack of satisfiers. On the other hand, the absence of more intangible factors (such as recognition and possibility of growth) would lead to dissatisfiers.
Maslow's hierarchy of Needs
Another very well known theorist working in this field was Abraham Maslow. He came up with the "Hierarchy of Needs" in 1940-50s USA.
Figure 1: Maslow's Hierarchy of Needs
Human motivation, management training, and personal development are the main areas covered by this theory (A. Maslow 1970). Abraham Maslow discusses that people have different motivational levels. He identified five different need stages that an employee goes through. According to Maslow, the physiological needs (very basic needs such as air, water, food, sex, sleep, etc.) on this hierarchy need to be satisfied before the employee could look to the next level. If these are not satisfied, the employees may feel sickness, irritation, pain, discomfort and so on.
However, like any other theory, this model also has certain shortcomings and so it is advised not to stick to this theory alone. These are as follows:
People do not necessarily have to work through these stages one by one. These may be less structured to suit their personal needs.
Different people from different backgrounds may have different hierarchy of needs.
There are other needs which have not been identified, for instance, in McClelland's theory where he identifies the need for achievement, affiliation and power.
Example 5- Motivate Your Employees Like Jack Welch "Follow the former GE CEO's advice and energize your staff by helping them believe in the mission and understand how to achieve it."
Pay and Reward Methods
Money is an important feature that the human resource management has to look into- after all, it is the main reason why people work. This is one of the most sensitive and controversial topics that has been extensively debated at both practical and theoretical levels.
Milkovich et al (2001: 6) state that: "Employees may see compensation as a return in exchange between their employer and themselves, as an entitlement for being an employee of the company, or as a reward for a job well done"
The different types of reward methods available for managers to chose from, are "Individual incentive programs"; "group incentive programs"; and "profit-sharing plans".
A commonly used incentive method is aÂ cashÂ reward, but there are several other ways of inspiring employees to perform beyond the call of duty.
Some of these incentive plans are discussed below:-
Merit Pay- this refers to a pay rise based on performance appraisal (Heneman, 1992). The higher the employee's performance, the larger is the increase in pay granted to him.
Example- Now, however, political leaders such as Barack Obama have supported merit pay for teachers.
Incentives for Professional Employees - The work of a professional employee involves the use of academic expertise to come up with solutions to the firm's problems, for instance, lawyers, doctors, economists and so on.Â Â These employees are usually well paid and hence it becomes very challenging to design incentive pay for them.
Piecework Plans - this is a plan where the employee is paid a set amount for every unit produced.
Straight piecework maintains a balance between the results and the extras while ignoring the output. Whereas a standard hour plan establishes a fixed unit of time for completion of a task or job. An employee receives the wage for the standard unit of time for completion of the task without regard to the actual time needed. For example, assume that in an automobile repair shop the standard time for replacing a muffler is one hour. Under a standard hour plan an employee would receive one hour's wage for replacing a muffler, regardless of the actual time required.
Recognition-Based Awards - Recognition is one among the several other types of non-financial incentives. Recognition program usually refers to formal programs, for instance, employee of the month program. Studies show that recognition has a very positive impact on performance, be it alone or in conjunction with other financial rewards.
Commission Plan - this is more of a results based plan; hence, this helps firms in attracting high-performing people who know that hard work leads to high rewards.
However, a major disadvantage of this plan is that it discourages employees from looking after less income generating jobs like catering for small accounts, look after loyal customers, and pushing slow moving items.
Bonus Pay - for this plan to work a specific target is to be set. It is important that the employees understand and appreciate this target set. Before this incentive program is created, it is important to carry out a study on the department which they are planning to give the incentives to.
For instance, if the management is thinking about giving an incentive to the accounts payable department, then they will have to see the number of invoices that are generated in an average month. Based on this figure, the incentive can be provided for exceeding that figure.
Employee Stock Ownership Plans (ESOP) - Under this plan, the company offers its own shares to a trust established to buy shares on behalf of the employees. This motivates the employees as they are getting a share of the firm's success through equity participation. This purchase is mostly funded by loans through banks for which the company takes responsibility. ThisÂ planÂ costsÂ little or nothing to the company as the loanÂ principalÂ is reimbursed from theÂ dividendÂ paymentÂ to the employees, while on the other hand, the loanÂ interestÂ is aÂ tax-deductible expense.
Scanlon Plan - This incentive plan came to be in 1937 by Joseph Scanlon.Â Â The basic characteristics of this plan include: competence, philosophy of co-operation, involvement system, identity and sharing of benefits formula. It also works as a cost savingÂ productivity-incentiveÂ planÂ where any saving (perÂ unitÂ ofÂ output) is compared with an agreed uponÂ standardÂ labour costÂ and is shared equally between theÂ workersÂ and theÂ firm.
"Scanlon Plans" have been frequently used by various public and private companies for many decades.Â They are a combination of total workforce education, leadership, and widespread employeeÂ participation with a reward system linked to group and/or organization performance.Â
This is a variable reward policy whereby employees are given an income based on the profitability of the entire organization or selected subunits (Florkowski, 1987: 622). "Profit sharing gives the firm's managers some flexibility to reduce its labour costs when resources are scarce and profits are low by reducing employee earnings, as an alternative to using layoffs" (Gomezâ€Mejia and Balkin, 1992). This plan helps in establishing a sense of job security among the employees. There are three basic types of profitâ€sharing plans are (1) cash, (2) deferred, and (3) combination cash-deferred plans (Kruse, 1993).
Gain sharing Plan
This is a groupÂ pay-incentiveÂ planÂ which is designed with the main aim to motivateÂ workers to improve the output of theirÂ workgroupÂ through a more efficient use ofÂ resourcesÂ (energy,Â labor, materials and so on). Any savingsÂ are then distributed to all the membersÂ of the group by using aÂ formulaÂ which measuresÂ the current improvementsÂ against pastÂ resultsÂ or aÂ benchmark. However, gain sharing can only achieveÂ substantial improvements with the participation of the top management.
Advantages of gaining sharing:
Helps companies achieve a sustainable upgrading in key performance measures
Rewards only for improvement in performance
Payouts are funded generally from savings generated by the plan
Matches employee goals to organization goals
The difference between Gain sharing and Profit Sharing
To drive performance of an organization by promoting awareness, alignment, teamwork, communication and involvement.
To share the financial success of the total organization and encourage employee identity with company success.
The plan commonly applies to a single facility, site, or stand-alone organization.
The plan typically applies organization-wide; companies with multiple sites typically measure organization-wide profitability rather than the performance of a single site.
Payout is based on operational measures (productivity, quality, spending, service), measures that improve the ?line of site? in terms of what employees do and how they are compensated.
Payout is based on a broad financial measure of the organization?s profitability.
Gains and resulting payouts are self-funded based on savings generated by improved performance.
Payouts are funded through company profits.
Payouts are made only when performance has improved over a historical standard or target.
Payouts are typically made when there are profits; performance doesn?t necessary have to show an improvement.
Typically all employees at a site are eligible for plan payments.
Some employee groups may be excluded, such as hourly or union employees.
Payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit periods.
Payout is typically annual.
Form of Payment
Payment is cash rather than deferred compensation. Many organizations pay via separate check to increase visibility.
Historically profit plans were primarily deferred compensation plans; organization used profit sharing as a pension plan. Today we see many more cash plans.
Method of Distribution
Typically employees receive the same % payout or cents per hour bonus.
The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower level employees.
Plan Design &Development
Employees often are involved with the design and implementation process.
There is no employee involvement in the design process.
A supporting employee involvement and communication system is an integral element of Gainsharing and helps drive improvement initiatives.
Since there is little linkage between ?what employees do? and the ?bonus,? there is an absence of accompanying employee involvement initiatives.
Pay for Performance Plan versus Entitlement
Gains are generated only by improved performance over a predetermined base level of performance. Therefore, Gainsharing is viewed as a pay-for-performance initiative.
Profit sharing often is viewed as a entitlement or employee benefit.
Impact on Behaviors
Gainsharing reinforces behaviors that promote improved performance. Used as a tool to drive cultural and organization change.
Little impact on behaviors since employees have difficulty linking ?what they do? and their ?bonus.? Many variables outside of the typical employee?s control determine profitability and the bonus amount.
Impact on Attitudes
Heightens the level of employee awareness, helps develop the feeling of self worth, builds a senses of ownership and identity to the organization.
Influences the sense of employee identity to the organization, particularly for smaller organizations.
At-Risk Variable Pay Plans - Under this plan, part of the employee's weekly pay is put at risk so as to help the firm to meet its financial goals.
Factors Affecting Pay decisions
There are many factors affecting Pay that have to be taken into consideration. These are as follows:-
The Fair Labor Standards Act (FLSA)- prescribes standards for the basic minimum wage and overtime pay, affects most private and public employment. It requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of one-and-one-half-times the regular rate of pay. (http://www.dol.gov/compliance/laws/comp-flsa.htm)
Hours of Work
Equal Pay Act (EPA):- TheÂ Equal Pay Act 1970Â is an Act of theÂ United Kingdom ParliamentÂ which prohibits any less favourable treatment betweenÂ menÂ andÂ womenÂ in terms of pay and conditions of employment. It was passed by Parliament in the aftermath of theÂ 1968 Ford sewing machinists strikeÂ and came into force on 29 December 1975. The term pay is interpreted in a broad sense to include, on top of wages, things like holidays, pension rights, company perks and some kinds of bonuses. The legislation has been amended on a number of recent occasions to incorporate a simplified approach underÂ European Union lawÂ that is common to all member states.
Union membership: - The Davis-Bacon Act (1931) and Walsh-Healy Public Contracts Act (1936) require federal contractors to pay employees no less than the prevailing wages in the area. The prevailing wage is set by the Secretary of Labour and is greatly influenced by relevant union contracts in the area. This shows how labour unions influence the wage levels set by the companies.
Company policy:- Company policy, is one of those subjective forces that's best understood and harnessed to your advantage. Many believe that the employer has the power. Their reasons include the fact that the employer is the one paying the salary, the employer has the choice of other candidates, the employer has already decided the salary grades and bands, the manager has seniority or position power etc. Yes these are all sources of power, and yes they all demand adequate respect and research. (http://www.calumcoburn.co.uk/articles/articles-salary-negotiation/)
Competitive strategy:- An effective pay policy is an important aspect of a company's overall competitive strategy. Just as organizations compete to sell their products and services, they also compete with one another for talented employees. Toward that end, a competitive pay policy is the cornerstone of an organization's human capital investment strategy. How a company competes depends on three recruiting market conditions:
The extent to which qualified employees are available in targeted recruiting markets.
The aggressiveness of other employers competing within those same recruiting markets.
The company's clout in the marketplace to recruit qualified employees (e.g., financial resources to pay employees, perception
Equity:- This is the factor where people evaluate the fairness of their pay as compared to other people.
A person will compare his or her ratio of perceived outcomes (e.g., pay, benefits, etc.) to perceived inputs (e.g., education, effort, experience) to the ratio of a comparison other.
If the person's ratio is higher, research suggests that rationalization will occur to account for the perceived overpayment. If the comparison other's ratio is higher, the person may attempt to restore equity by reducing one's inputs (e.g., working less), increasing one's outcomes (e.g., asking for a raise), or leaving the company.
Three types of employee social comparisons of pay are especially relevant in making pay-level and job structure decisions.
Employees make external equity pay comparisons, which focus on what other organizations pay for roughly the same job. These comparisons influence decisions to join and remain in the organization. A market-pay survey is used by organizations to examine the level of other organizations' pay.
Internal equity pay comparisons focus on what employees within the same organization, but in different jobs, are paid.
Employees make internal equity pay comparisons with others performing the same job.
Some examples of PAY AND INCENTIVE PLANS in ASIA
The political structure, state of economic development and cultural tradition vary from country to country, and so is the case for the Asian countries. As such, there are also differences in their remuneration and reward practices.
China:Â Â With economic reforms, the wage system is undergoing changes. The concept of performance-pay is gaining support.
Hong Kong:Â Pay and benefits are negotiated based on market forces.
India:Â Link between pay and performance is being established in the steel sector.
Indonesia:Â Performance-based pay is gaining acceptance in the private sector.
Japan:Â the annual Spring Offensive is a wage determination process in the private sector.Â Â The process plays the role of setting a national leading wage rise standard.
South Korea:Â Collective bargaining is the most common method for determining pay in unionized companies. While seniority remains an important criterion, performance-based pay is gaining acceptance.
Malaysia:Â Pay and benefits are determined by negotiation between employers and their employees.
Philippines:Â There have been some changes in the compensation system.Â Â Some companies are linking pay with performance.
Singapore:Â The government is encouraging a flexible wage system.
Taiwan:Â Group-oriented performance pay and relatively equal bonus are the norm.
Thailand:Â Large companies guarantee an annual pay increase that will match the inflation rate, regardless of performance of employees.
Vietnam:Â MNCs are linking pay with performance, especially for sales and engineering professionals.
In the face of the above mentioned situations, management is required to devise quite a number of tools to minimize this highÂ labour turnover, sort of stopping it, and also ways and means to increase productivity.
However, it is widely known that despite utilization of the best equipment and state of the art technology within the workplace, there is no guarantee of reaching the desired objectives if the workforce is not motivated.
As such, management needs to find innovative ways towards retaining their employees, especially the talented one, and also making them become more committed and motivated, and, hence, become even more productive.
Still, in their quest towards achieving the set objectives, they also need to study both the positive impact/s as well as the possible weaknesses or reverse effects.
Whilst, implementation of a merit issue is surely a potential motivator both towards retaining talented employees, and motivating them, the challenge remainsÂ Â the setting up of a proper performance appraisal system, which would enable fair assessment of the performance of each employee.
Indeed, whilst this is rather straight forward in some organizations with not much variety of operations and categories of employees, this exercise becomes quite complex where activities are more diversified. Still, this hurdle should in no way mean that such a system should not be implemented.
However, the other challenge would be to also ensure that it does not frustrate the "unrewarded" employees, out of misunderstanding of the appraisal system, thereby leading to the perception of unfair treatment vis-à-vis their colleagues. As such, any such tools need to be implemented after a thorough explanation of its functioning to employees, describing each criterion, and the weightage of each one of them.
There are a variety of tools that can be applied to retain employees and/or make them become more productive, still, whatever has succeeded within one company, need not necessarily be as much successful in another one.
Indeed, many aspects need to be taken into consideration when deciding upon and eventually designing the tool selected. The culture of management and that of employees and/or trade-unions within the organization, the motivating factors of individuals, the company objectives, the type of operations, the financial status of the organization, the nature and intensity of competition will definitely be decisive factors.
Pay and merits are a very important part of any industry. During the process of this research, the researcher has come across various theories of motivation. He understood what theories are relevant and in what situation and how the management can use the understanding of the above to reward their employees. Employees are internal customers and so having knowledge about what they like and what not will give the management an upper hand while dealing with them. Management can design "Golden Handcuffs" in order to retain key employees by giving them the right incentives.
During the process of this research the researcher has also been able to identify the different types of merits that can be awarded in order to motivate the workers and further develop their productivity. The researcher has come across the merits for individual, for experts, for sales people and for teams. The researcher has also clearly addressed the various issues that may be faced when designing these incentives.
The researcher has therefore come to the conclusion that merit issues are justified and hence should be considered when motivation of the employees has to be addressed.
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