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CASE 6: Total Rewards and Employee Engagement

The amount of money a company uses to pay workers' salaries is usually the most significant cost. In fact it can make up to 60% of company's costs in manufacturing companies. Salary is also the main reason why people even go to work and a common reason why people change their jobs. Thus it is extremely important to establish an effective compensation policy and to communicate it well with the employees.
A compensation has three components: based compensation (the fixed amount that an employee receives every month), pay incentives (reward for good performance, bonuses, profit sharing,...) and indirect compensation, also called benefits (health insurance, paid vacation,...).

While designing the compensation system, the company has to consider several factors:

  • Firstly, the company has to reach internal (fairness among the company) and external (fairness among other employers) equity. In order for the pay to be perceived as fair by employees, the wage should follow the labor market model (where the demand for workers meets the supply of these workers) and the set of outcomes an employee receives should match the inputs the employee gives to the company. Naturally, the company also considers the domestic and global factors and that's why salaries vary so much among countries. Most employees are paid so called going rate which is based on the previously mentioned factors. A worker in India will get much lower salary than a worker that does the same job in Finland, because the cost of living in both countries differs. 
  • Secondly, the company has to decide what portion of the pay will be fixed and and what portion will be variable. Naturally, a fixed pay means a lower risk for the employees, but especially in small firms or start ups, the employees may be promised a lower pay now, but higher portion of variable pay in the future as the company grows.
  • Employees can be either paid based on their performance (How many units produced, sales commissions) or based on the type ob job they do, which is called membership-contingent compensation. In this system, all employees, a similar wage is paid to every employee in a certain type of job. Nowadays, companies tend to shift from this system because it doesn't encourage higher performance and creativity among workers.
  • Similarly, other two criteria are whether to pay based on employees' jobs they do, This system is suitable for firms, where the skills needed don't change often and the technology is stable. On the other hand, for innovative companies, where there is a large set of skills needed, the workers can be paid based on how many skills they can perform and use.
  • As mentioned above, pay is one of the main factors that can attract new employees, that's why companies, who pay above-market are more likely to gain the most talented workers. The usual practice is that within one company, key positions (R&D) are paid above market, while manufacturing workers are paid below-market rate. 
  • The compensation does not only consist of monetary rewards. Those are more important in companies focused on achievements and sales growth. On the other hand non-monetary rewards are emphasized by companies with stable workforce that focus on customer relationships. Those rewards include flexible working time, paid time-off, recognition of personal achievements, etc.
  • A company can decide whether  the pay of individual employees will be secret (which may cause low perception of fairness) or open (where employees tend to be less dissatisfied with their compensation)
Next, I will mention, what tools does a company use to design the compensation system. There are two approaches: Job-based approach and skill-based approach. 


In the Job-based approach  people are paid to perform designed jobs. More important jobs are paid more. To reach internal equity in this system, the company has to conduct a complex job evaluation where the company defines the job specifications, hierarchy and classifies the jobs by grade levels. As the extend of an employee are expanded, the pay also increases. This practice is called job banding. 
To reach external equity, companies conduct market surveys among similar industries. The advantages of this system are that it is rational, objective and systematic. That's why it is used by majority of companies. The negatives are that this system ignores the uniqueness of businesses, it is not very flexible and it requires a lot of paperwork and bureaucracy. 

The other approach, Skill based approach,  is less common. The worker's pay is based on how flexible this worker is at performing multiple tasks. On a positive site, this system requires less supervision, it ensures a cross-training and makes the jobs more flexible. On a negative site, it is costly and skills that an employee doesn't use on a daily basis may become rusty.

As in other fields of HR, also compensation has to be designed in compliance with the legal environment. In the US there is the Fair Labor Standards Act, which defines the basic working conditions every employee has to be provided with, Those cover minimum wages and overtime rules. Also, every company is obliged to keep and report accurate records of earnings and hours worked within the company. In the EU there is a similar institution called EurWork (European Observatory of Working Life). From their website anybody can find information on for example minimum wage in a  certain country. In Finland there is currently not a minimal wage, the wage is defined by collective agreements.
Other institution in the US that deal with the fairness of compensation are The Equal Pay Act . This act mainly guarantees the fairness in pay between men and women. 

I will now focus on the second chapter regarding this week's topic; Rewarding Performance. There are some assumptions that have to be fulfilled in order for the company to adapt the rewarding performance system. Those are:
  • there is a clearly distinguishable difference in the contribution within teams and individuals
  • the performance of the company heavily depends on the performance of the individuals
  • the company rewards employees' relative performance
There are several challenges in this approach. And the company has to have an available solution for those challenges. I will present some of those challenges and the solution suggested by the book:
  • Employees will only perform those tasks that are measured and rewarded. In this case the company should adopt such reward system, that supports all important tasks.
  • the hunt for the rewards leads employees to unethical behavior (for example creating a psychical pressure on customer to buy a product so that the sales person get a commission). To avoid this, it is necessary to link the pay and the performance appropriately and highlight the importance of the quality of the work done. 
  • When employees are paid based on their performance, it creates a competition among the workers, which can be on one hand healthy, on the other hand it can create an unwanted impact on the vital cooperation. In this case the company should make sure it has an integrated HR system that avoids these situations in the first place for example by an effective staffing.
  • A serious problem is so called  credibility gap. This means that most employees (based on surveys) don't believe in the fairness of this system and don't see the linkage between their performance and the reward they get. The managers should pay attention to employee involvement and have the employees participate in the designing of the reward system.
  • Employees can feel like they have to perform at their best all the time and constantly be on the top of everything. This may create a huge pressure, which can lead to dissatisfaction and frustration. Managers should train the employees and ensure their well-being to prevent such situations. 
The pay for performance systems are categorized based on whether it rewards individuals, teams, units (plants) or the organization as a whole.

The Individual based plan is the most widely used one. Usually the system works so, that the employees receive a merit pay (once in a year the employee's salary rises based on his performance), further they can receive lump-sum payments, which is a one-time bonus, which does not raise the salary permanently and finally, for an exceptional an employee can be given an award (usually in a tangible form). 
This system is motivating, because employees tend to repeat the behavior they are rewarded for and the individual goals can be relatively easy shaped in accordance with the company's objectives. On the other hand it creates high competition and often a quality of products or services is sacrificed over

quantity as the employees try to fulfill the quotas.

The Team-based plans are increasingly used by companies as they allow people with unique set of skills and background work together. In this system, all people within one team are rewarded the same. This system can be very motivating and performance measurement is more reliable than this in individual based plan. On the other hand, the free-ride effect can occur and again, employees may feel under the pressure. 
This system is suitable for companies when most of the work is done in teams, where there is hard to distinguish, who did what and where the group goals are key for the company.

Some companies adapt Plant-wide plans, where everybody within a plant (unit) is rewarded the same way. The most common program is Gainsharing. The main idea is that there are cost-saving plans generated and the money saved is in some portion divided among the company, the managers and workers. 
The employees are encourage to participate actively and to influence their reward and the production process can be significantly improved. The disadvantages are that this system tends to protect low performers (again- the free-ride problem) and it is also hard to set the criteria that will trigger the rewards.
Plant-wide plans are designed for companies with small to mid-sized plants, where the technology or other factors do not significantly affect the performance. Also, the demand for firm's products or services should be relatively stable. 

Finally, in some companies the employees are rewarded based on the performance of the whole company. The two most common ways are Profit sharing (mechanistic process that does reward the workers' productivity, eg. funding retirement plans) and ESOPs (employee stock ownership plans). The corporate-wide plans are especially suitable for large organizations, where the different parts are interconnected and there are cyclical ups and downs in the prices of the company's stocks. 
This systems is highly flexible for the company and it increases the commitment of the employees. On the other hand the employees are at considerable risk and exposed to macroeconomic factors. Thus this program shouldn't be applied on employees close to retirement. 

There are special conditions in designing the Pay for performance are applied in case of executives and sales people. 
The compensation of executives are usually very high and grow with much larger speed than salaries of workers'. The problem is that there isn't usually a very clear linkage between the performance of a CEO and his or her compensation. The reward simply grows as the company grows. The complete 'package' of a CEO can include salary, short- and long- term incentives, rewards for social responsibility and 'perks'. In case a CEO is terminated he usually receives a golden parachute which is often criticized for its size. 
The sales peoples' reward can be done in three different ways; a straight salary (the salary is fixed without any incentives- usually in case of companies that value a long term relationship over quick sales), straight commission (the opposite- no part of the pay is fixed and the salary is derived from the amount the person sells, eg. those, who sell used cars, door-to-door sales people) or combination plan (most used, includes a fixed part and a commission part).

The final matter related to this topic is employee engagement. The importance of employee engagement has already been mentioned with some topics in the two book chapters, but really they were mostly related to the reward. Even though financial reward is a very important motivating factor, not all people are able to perform stereotypical, uninteresting jobs for a long time even with a good pay. 
Highly engaged employees are crucial to organizations and that's why managers have to find ways to have the employees perform at their best and be committed to the organization and its goals. Companies nowadays don't want workers who just come to work for their 8 hours per day to get a payroll at the end of the month, companies want people, who actually care about their job, want to perform it well and want to achieve the highest results. And those people are called engaged employees. If a company achieves to have such employees it has a significant impact on the overall organization.  

Sources

Eurofound. EurWork. Avaliable from: https://www.eurofound.europa.eu/observatories/eurwork. Accessed: 5.4.2018.

European Commission- Employment, Social Affairs and Inclusion. Labor Law. Available from: http://ec.europa.eu/social/main.jsp?catId=157&langId=en. Accessed: 5.4.2018.


Gómez-Mejia, L. & Balkin, D. & Cardy, R. Managing Human Resources. Pearson Global Edition. 8th edition.

 HayGroup. The New Rules of Employee Engagement. Available from: http://f.datasrvr.com/fr1/414/25154/Hay_Group_New_Rules_of_Engagement_Report.pdf. Accessed: 5.4.2018.

 MacLeod, D. & Clarke, N. Engaging for success. Available from: http://engageforsuccess.org/wp-content/uploads/2015/08/file52215.pdf. Accessed: 5.4.2018.

 TED Talk. The Puzzle of Motivation. Available from: https://www.ted.com/talks/dan_pink_on_motivation?language=en#t-475057. Accessed: 5.4.2018.

U.S. Equal Employment Opportunity Commission. The Equal Employment Act of 1963. Available from: https://www.eeoc.gov/laws/statutes/epa.cfm. Accessed: 5.4.2018.




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