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Employee compensation management is one of the challenges facing many businesses today. These challenges increased many times when an organization is transforming from government sector to public monopoly company and then confronts with competition of the open market. The sturdy is based on using the qualitative method, and interviews were conducted to analyze HR Architecture of the organization. The research also identifies the factors influences the pay determinants. This research examines the compensation practices, how the compensation system works in an organization by taking the example of Agri-Bi-Con. The research also expresses the HR architecture of the organization, the changes in compensation of the organization due to internal and external forces of the organization, along with the hindrances in the compensation of the company. The study produces the compensation experiences of a company transforming from public to private sector.
CHAPTER 2: LITERATURE REVIEW
A professional literature is like mapping and analyzing the geography of an unknown island. The expansion of the island of knowledge, reveals more important features of that island, it can be a clear answer to a research question. It leads and identifies the areas of new work that could be done. It provides the broader understanding of the different areas of knowledge. It also leads to Interesting, new questions.
My topic is about the HR Architecture and compensations; and their major determinants, which relate to employees of an organization. The Southwest Airline is considered as one of the best companies on HR stand point of view where the prime reason for employees to stay in the company was the culture and its HR architecture, which brought excellence to the company. Many efforts were made to replicate this in different countries, but this could not be achieved due to different environment and country cultures. The main forces for success of an organization are culture; interest of employees' leads to competitive advantage and the HR Architecture of this airline. (Parker, 2012).
HR Architecture and Workforce Scorecard
HR architecture is the designing and construction of organization in terms of positions and the reporting lines, Job's roles of the organization. This Architecture is with regards to specific, industry or culture. Workforce differentiation means that in an organization, there could be different types of employees. These employees could be different in terms of job status, or it could be based on the strategy of the business.
Workforce Scorecard helps an organization to identify and measures the impact on outcome through the employees' mind-set, competencies, cultures and behavior. The main emphasizes of the workforce scorecard is on outside-in approach as compare to inside out approach on business results through the HR function. (Mark A. Huselid, 2005).
A firm's workforce strategy and its workforce are different as the organization's business strategy. Developing a differentiated workforce requires that the HR management policies and practices a firm adopts be differentiated as well, not just by business strategy but more importantly by strategic capability - the bundle of information, technology and people needed to execute strategy. It requires a clear understanding as of why change is necessary, how it will happen and an action plan to ensure that it happen. HR's primary responsibility is to partner with leadership in the advocacy and delivery of strategic talent for the customer. The workforce is the deliverable of HR.
Pay Scales System
Now, coming towards the pay scales systems, the pay scales are the base of any compensation system. The pay scales define as the pay progression at pre-determined intervals. These progressions could be specified percentages or specified amounts. Normally, it has minimum and maximum limits. (Bethesda, 2008). Now, the pay systems are changing from the pay scales, and seniority based pay scales to the new performance-based pay system. They are called as new pay scales. The new pay system does not achieve the results due to experimental and behavioral economics. (Lah, 2008) and (Bregn, 2010). They must be considered while designing the compensation systems.
An employee is an asset of any company. The successful companies and unsuccessful companies normally have the similar equipment, the identical products, matching assets, but the difference in the results of the company is the human resource an organization has. It is very important to manage the employees. The compensation acts as attracting and retaining force of a company. The Compensation can be categorized into two part one is monetary and other is non-monetary salary provided to an employee in return for work performed. (payroll.naukrihub.com, 2012)
Direct Compensation includes basic salary, House rent allowance, conveyance, bonus, and other special allowances mostly committed to employees in return of worked he performed. Most of the times, these payments are made at equal intervals.
(Heathfield, http://humanresources.about.com/od/glossaryc/g/compensation.htm, 2012)
Figure : Direct Compensation
Salary or pay is the most commonly used word for the compensation paid to an employee in return for worked he performed. Salary is paid to employees on the monthly or bi-monthly or weekly basis other than daily wage payment. Salary income exceeding prescribed limits are taxable. These tax payments are deducted from the salary and made to government, where applicable. The majority of lifestyles of the employees are based on this salary. (Finance & Investment Dictionary)
Incentive's payments are considered as the oldest part of the compensation package. These payments are for a specified output or enhance output. Normally, these incentive payments enhance the output of manufacturing organization or increase sales. The fairness of pay supplements is more related to the perception of employees. It is most of the times seen negatively if the employee cannot understand the system, or it has some complexities.
Research also indicates that the incentive programs in the organizations improve the performance of the large number of employees. The incentive programs which are carefully selected and implemented in an organization helps improve the performance of employees even if the incentives are in the form of gift cards, travels, vacations, cash or time off increase performance, etc. it is to be observed that the incentives given to teams can increase productivity as much as 44%. Incentive programs also result in quality of work from employees. They do their work with great dedication. Due to the incentive programs, the employees do their work with new and energetic attitude, and executives see a comfortable and healthier work environment around them. The incentive program that gives reward on achieving of target, they can best work in an organization. (Management, 2012)
The indirect and non-cash compensations are considered as benefits. Some of them are mandatory benefits, and others are industry specific. The mandatory benefits are Employee Old Age Benefit, Social Security. Whereas, the industry-specific benefits are health insurance, life insurance, pension, gratuity, leave encashment, and medical, etc. The indirect compensation also includes leave pay, when employees are unable to work because of accident or sickness. These payments are in consideration of past services or expected services of the employees. (Blogspot, 2008)
Figure : Compensation in an organization
Benefit administration and determination are considered as the most important part of compensation. In some companies, the add-ons are permanent; some employees continually perform specific jobs, which make them entitled to these benefits. (Heathfield, 2011)
Performance Based Pay
There are two types of performance-based salary increase one is the lump sum bonus, and the other is the permanent salary increase. The design of the pay scales system is varied in different countries. The new pay systems are trying to develop the relationship between performance and salary. It is assumed that this linkage improved the motivation of good performers, and it helped companies to retain the suitable employees. On the other hand, these new pay scales have been criticized due to problems with performance appraisals and poor implementation. (Milkovich, 1991), (Kellough, 1993), (Marsden, 1994), (Makinson, 2000), (Cutler, 2004) and (Perry J. L., 2009). The other problem is inadequate performance pay. Expectancy theory of Vroom explains that there is a gap of effort and the expected outcome, and employees feel that they are not rewarded what they deserved. (Vroom, 1964, 2005) (Perry, 19/6).
Concept of Equity in Pay and Benefits
The approach of any company in considering equity is also very important for running its current affairs. Companies when desire to build their compensation structure usually have a look towards the external equities in the market. Employees who are more encouraged to have an equity base pay treatment would be more motivated and encouraged to perform their duties with great dedication. The focus on external equities makes a company aware about the whole market and all its relevant activities due to which it becomes able to design an excellent compensation structure for its employees who in turn give them the huge amount of motivation. The perceptions of various employees about inequity and equity are equally important, and these should be carefully observed when a company is going to make a compensation based structure. (Kent Romanoff)
Pay and Benefits Influences
The salaries are normally, decided based on employee's skills, talent and experience. There are many reasons that influence the compensations. One factor is the compensation budget based on job evaluation and industry standards. Second factor is the relevant Doman expertise and experience. The third reason is the relevant industry experience and last drawn salary. It is also perceived that employees of some sector or area work more. It could also effect on the salary.
Effect on Productivity
The government employees are always facing criticism that they work less than that of the private-sector employees. That is why they are paid less. A major question arises from that does the average private employee work more than an average public sector employee? For this question, the best answer was given by the American times use survey based on this survey it is noticed that private-sector employees work average 3 hours per week more than that of government sector employees and roughly private-sector employees' work one month more than government sector employees in the whole year. (Richwine, 2012)
Salary and Employee Turnover
There were various researches that were undertaken to know; the basic reasons of fast switching jobs of employees. Lots of years were spent in these researches and after that the researchers come to the conclusion that not increasing of the pay package, and benefit is the primary reason of the turnover of various employees from an organization. This conclusion is derived from the survey of 2000 employees conducted by the chartered Institute of personnel and in that survey, they found that 54% of the employees are changing their jobs only due to high salaries and benefits offered in the new jobs and 42% of employees are changing their jobs to improve their job satisfaction. In another survey of year 2001, it is to be observed that 61% employees are changing their jobs to improve their job satisfaction and 48% employees are switching their jobs to improve their pay packages and other benefits because good money and facilities are very important for spending a good life. (The Chartered Institute of Personnel and Development's).
Employees Layoff and Compensation Cost
It has also proven that the layoff of employees do not reduce the expense, on the other hand, expense continues to increase. The employees are the most important investment and asset of an organization. The layoff effect reduces the cost temporarily. The cost increases within few years of layoff of employees. (Heathfiled, 2012)
The common theme in this literature review is an emphasis on the utilization of human-resource management that influences HR Architecture; the compensation factors that starts from the salary and goes to indirect compensation. The internal and external equity of the organization is important for the organization. It is also evident that the seniority based pay scales are shifting towards the performance-based pay scales. In the end literature review suggests that reduction in employees do not lead to reduction in cost of the company.
CHAPTER 3: RESEARCH METHODOLOGY
It is about answering unanswered questions or creating that which does not currently exist. The discovery and the creation of knowledge, therefore, lies at the heart of research, or as Leedy puts it, research is 'a systematic quest for undiscovered knowledge' (Leedy, 1989).
Compensation is like blood of a Human Resource System and it architecture is the bones of the whole organization system. The compensation system help organization to live and it architecture help it to function properly. Compensation is one of the major factors to retain, motivate skilled employee in the company. The compensation system is backed by the other benefits of the organization.
This research is intended to examine the pay practice of a company converted from the government sector to public sector. It explores the hindrances of pay practices and its effect on the employees general perception.
Scope of Research
We are intending to study a Pakistani organization which is privatized from government environment. We will study the changes in the last decade and want to study the different segments of workforce, and their pay determines.
The research questions are the queries arises after the literature review; the answers to these queries may help the researcher to reach to any conclusion. These research questions are hereunder:
Question 1: Why and how does the exiting pay and benefits system work for different employee segments of Agri-Bi-Con Company?
Question 2: What were the drivers for change in pay practices for last decade in the company?
Question 3: What are the forces which have hindered the change in pay and benefit packages and why?
The research propositions are the roads which help the researcher to find the answers to its question. The following propositions are developed to answer afore mentioned questions.
Effect of External equity is more pronounced in determining pay and benefit package of employees as compared to internal equity.
Performance Pay introduced more adverse effect among employees than the preserved benefits.
Noncompetitive pay package of contract employees increased turnover rate of the contract employees.
The Productivity of contact non-management employees was compromised due to inappropriate revision of pay scales.
Golden Hand Shake Scheme did not reduce the compensation cost of the company.
Introducing other allowances to organization employees contribute effectively as incentive tool.
Research Method Adopted
There are many ways to answers the research questions, to answer the research question under consideration the following research type seem appropriate.
Type of Research
By analyzing the type of research questions (i.e. 'how' and 'why' type questions), already presented in this section, it can be concluded that it is explanatory type of research. It specifically seeks to look at the cause/effect relationships between two or more phenomena. Explanatory research asks 'how' or 'why' questions. For example, it is aimed at knowing 'how' or 'why' a program has worked or not. The illustration of espoused research purpose is made by an elaboration of other research purposes available for the research work:-
Explorative Research. This type of research asks "what" questions which can further be divided to two categories; simple 'what' questions with a goal being to develop pertinent hypothesis and propositions for further inquiry, and second category is 'how many' or 'how much' line of questions aimed at defining prevalence. Essentially, it explores both simple and sometimes complex questions. Exploratory research usually searches the facts within the data. Normally, some data is collected before the start of research. As a conclusion one can say that it helps to prepare a whole structure of the study. A pilot study could be one of the examples of this type of method. ( (Yin R. K., 1984); and (McDonough, 1997))
Descriptive Research. Descriptive research studies situation either to see if it gives rise to any general theories, or to see if existing general theories are borne out by the specific situation. In short, descriptive research usually describes the facts and events within the specific set of data. (Yin R. K., 1984). The pattern matching in one particular situation could be one of the examples of this type of method. (Pyecha, 1988).
Creative Research. Creative research involves the development of new theories, new procedures and new inventions. Creative research includes both practical (design of physical things (artifacts) and the development of real-world processes) and theoretical (discovery or creation of new models, theorems, algorithms, etc) research. Therefore, this type of research is much less structured and cannot always be preplanned.
Action Research. Kurt Lewin said that '[t]here's nothing so practical as a good theory' (Baron, 1994). This idea is one of the keys to his particular approach to research, which has become known as 'action research'. As an example, if a company had a problem with absenteeism, then the researcher would gather comprehensive data about this specific problem (from the company) and the general topic (from a literature study). After reaching to some recommendations between the researcher and the stakeholders, these would be implemented by the company. The effectiveness of these changes are determined on pre-agreed measurement method by the researcher (Appelgryn, 1991).
Analysis of the research questions indicated in preceding paragraphs are mainly the 'how' and 'why' questions which indicate that the "case study" research strategy is the most suited strategy for this research proposal. This research work is based on a single case study solution and is organized around a single organization. Hence, all the components of the research are described and elaborated for this organization.
Comparison with other strategies
Following paragraphs illustrate the comparison of adopted research strategy with other research strategies:-
Experimental Research. Differentiating component between 'case study' and 'experiment' is answer to the condition that in experimental research, the investigator can exercise control over the behavioral events in research being undertaken. In this research, no control over research variables is exercised.
Survey. In contrast to the 'case study' research strategy, herein the research goal is to describe the incidence or prevalence of a phenomenon or when it is to be predictive about certain outcomes. It elaborates the 'how' questions of case studies towards 'how many', 'how much', and / or 'who', 'what' and 'where' questions.
Archival Analysis. 'Case study' research strategy differs from 'archival analysis' strategy as it also elaborates the 'how' questions of case studies towards 'how many', 'how much', and / or 'who', 'what' and 'where' questions as in 'survey' research strategy. However, it also differs from 'survey' research strategy by delimiting itself to more towards analysis only.
History. Studies of the past to answer 'how' and 'why' questions are known as historical research. This type of research is differentiated from case study by the fact that it does not focus on contemporary as it entirely relies on history as opposed to case study strategy.
Advantage for Selection of Case Study
The case studies have many advantages; the main three are explained in this paragraph. First, the research is conducted in the same environment where the activity took place. (Yin R. K., 1984); It explains thoroughly the original data, to investigate the strategies within researcher environment. This would be different with experiment; besides this, it deliberately differentiates an event by aiming at specific variables. (Zainal, 2003)
Second, it also allows to analysis of data qualitatively and quantitatively. The longitudinal studies rely on qualitative data, which give descriptive accounts of behavior. Yin also explained that the case studies could also be quantitative. (Yin R. K., 1984)
Third, it also help explains the complex situation which is an advantage over the survey based or experimental researches. Case studies examine the strategies used, identify the reasons of those strategies, and at times it gave the relationship with other strategies. The behaviors involve difficult cognitive processes, and it cannot be investigated alone but rather in relation to other successful strategies. (Zainal, 2003)
There are some limitations to case studies. As per Yin, there are three arguments against case study research (Yin R. K., 1984). First, it often accuses of lack of rigor. Yin explains that the case study examines various tasks, and sometimes biases may effect the discoveries and results. (Yin R. K., 1984). Second, one case study or little evidence cannot be generalized. (Yin R. K., 1984) and (Tellis, Introduction to Case Study. The Qualitative Report, 1997). Third, most of the case studies are huge, long and not easy to understand. (Yin R. K., 1984). Especially, the properly handling of data is very important.
Case study method is considered as microscopic because of the limited sampling cases (Yin R. , 1994). However, establishment of proper parameters and imperial setting are more important as compare to larger sample size. (Hamel, 1993) and (Yin R. , 1994))
Evidence Used for the Research
Each research is based on certain evidence which tends to provide answers to its research questions. Following are the two basic types of evidence which can be used for the research:-
Qualitative research is influenced by the empiricist paradigm, which means that it is concerned with cause and effect of social phenomena and uses the data - which is based on empirical observation and their critical interpretation. Data collection approaches for qualitative research usually involves either direct interaction with individuals on a one to one basis or direct interaction with individuals in a group setting. Following are some of the methods in this type of evidence:-
Observations (participant observations i.e. internal and non-participant observations i.e. external)
Analyzing documents and artifacts to get insight into the cultural components
Quantitative research is concerned with counting and measuring things. It reduces and restructures a complex problem to a limited number of variables, looks at relationships between these variables and establishes cause and effect in highly controlled circumstances and uses statistics to generalize a finding. Following are some of the methods in this type of evidence:-
Instruments (or devices)
Questionnaire / surveys
Statistics; to evaluate their results. In many fields, computer hardware and software and mathematics are vital additional tools (Leedy, 1989).
Data Collection Methodologies Employed
Keeping in view the research questions and correspondingly identified variables, it is considered essential to use both types of evidences. However analyzing the strengths and weaknesses of each type, following data collection methodologies are employed to find answers to research questions:-
Analyzing documents elaborating already available organizational data
Focus group interviews to explore different aspects of the research.