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According to Milkovich and Newman, pay structure refers to the range of pay rates for different work or skills within an organization. Pay structure is describes by the number of level of works, the differentials in pay between the levels, and the criteria used to determine those differences. Pay structure involve the internal and external analysis to decide the compensation for specific position and setting up the pay for a job in an organization. Pay structure helps to estimate the incentives which level of incentives is depends on the level of the job position in the organization. It also helps to analyze the role and status of employee in the organization. It should be a fair treatment to all employees. There are three types of pay structure that plays a major role in determining the pay structure which are internal equity, external equity and individual equity.
Internal equity often called internal alignment is defined as the pay structure according to the jobs level and relationship among different jobs, skills and competencies within an organization. It also refers to the internal relationship inside the organization that will form a pay structure that support the organization strategy, support work flow, being fair to all employees, and motivate employees' behavior toward organization objectives.
According to Infineon's annual report, Infineon's compensation system includes two components which are fixed compensation and variable compensation. The fixed compensation is the basic annual salary which is not link with the performance and is paid in monthly. Secondly is the variable compensation, which often called performance-related compensation. This compensation includes three components which are short-term incentive (STI), mid-term incentive (MTI) and long-term incentive (LTI).
The short-term incentive (STI) constitutes 20 percent of the Infineon's target total compensation. It was set by the Supervisory Board of Infineon. The bonus payments are determined using performance indicators, free cash flow and return on capital employed, in the section which titled Internal Management System. Short-term incentive will only pay to employees when the level of target achievement reaches the 50 percent for both indicators.
Besides that, mid-term incentive (MTI) was introduced to reward sustained performance by the Management Board align with the medium-term process of Infineon. The MTI also constitutes 20 percent of the Infineon's target total compensation. Mid-term incentive is paid at the end of the three year period by calculating the arithmetic mean of the three annual target achievement levels, even if the mean level of target achievement is below 50 percent. There is a new compensation system designed to prevent company from losing out as a result of being no maturing MTI tranche. This arrangement not only guarantees the level of target achievement reach at least 50 percent, but also to be calculated using the actual level of target achievement for the end of the first year and the average of levels achieved in over the two years at the end of the second year.
Lastly is the long-term incentive (LTI) which reward long-term sustained performance of the members of the Management Board in order to make sure their interest are aligned with the company's shareholders' interest in a rising share price. Different with STI and MTI, LTI constitutes only 15 percent of the target total compensation. The Supervisory Board awards the members of Management Board with an LTI in a form of an annual tranche of stock options. The number of options to be rewarded is determined on their fair market value which did not take account of the cap applicable and is equivalent to the fair market value of options given to the employees under the Infineon stock option plan.
Other than the fixed compensation and variable compensation, Infineon introduced a new compensation system on October 1, 2010 which removes the link between variable compensation and individual target. The new arrangement gives employees greater stake in achieving company's business goals. Every employee will receive an basic salary and a performance-related bonus that based on the targets an metrics to reflect the commercial success of the company. This new arrangement not only makes the internal processes work faster and more efficient, it also reduces the administrative work and streamlining the human resources processes in the company.
What shapes internal pay structure?
There are factors that shape the internal structure of an organization. The factors are normally categorized into two factors, which are external factors and organization factors. External factors may include economic pressure, government policies, laws and regulations, stakeholders, and cultures and customs. Meanwhile organization factors include the organization strategy, technology, human capital, HR policy, employee acceptance and cost implication. In this case study, we will choose some of the factors to discuss how Infineon shapes their internal structure.
One of the external factors is the cultures and customs. Culture is defined as the mental programming to process information that people share in common. In shaping internal pay structure, culture and custom do pay an important role which it determine how fairness is judged. Cultures and customs that believed in an organization will influence the mind set of employees about the fairness of the pay they received. In order to minimize the conflicts between employees, organization shall emphasis its own culture to create a fair internal pay structure.
In Infineon, they believed that an attractive workplace culture is one of the important elements of a high performance company. To become a high performance company, Infineon arranged a Great Place to Work employee survey at the beginning of year 2010, in order to understanding how their employee feel about their workplace, what employees consider as important and identify issues for improvement. After understanding the needs of employees, Infineon engage actively in the cultivation of a positive employer image among their employees and trying hard to gain a good image among world's top employers by enhancing their workplace culture.
Other than external factors, organizational factors also important in how internal pay structure is shaped. Organizational factors include the organization strategy which pay structure must be aligning with the organization strategy so that it won't become an obstacle to the organization's success. Besides that, another main factor that influence on the internal pay structure is the human capital which defined as the education, experience, knowledge, abilities and skills needed to perform certain jobs in organization. The more skills and experience needed to perform specific jobs, the more organization should pay.
Infineon in Kulim announced recently that they will invest RM4 billion in the Kulim Hi-Tech Park over the next 10 years. When this new investment is once operational, Infineon Kulim may need to employ more than 1,000 staffs which most of them are highly skilled and production capacity is doubled. When Infineon hired more highly skilled employees, the company should design different pay structure for the particular levels of work. Different jobs level paid different salary. The levels of work may define the numbers of jobs in an organization and the nature of jobs.