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REWARD AND COMPENSATION STRATEGY: ISSUES AND CHALLENGES

Sami A. Khan

The procurement, development and retaining of employees have never been so important than today in most of the organizations worldwide. Companies are relentlessly searching for ways to retain their core employees. Understand- ing the interlinkages between peljormance management strategy, training and development strategy. compensation strategy. and deployment of em- ployees has become very vital for attracting, motivating and retaining good employees. In this era of restructuring and downsizing, much needs to be done by the employers to motivate their employees. The companies who are restructuring themselves are finding it difficult to keep up the morale of their employees. In many cases. the huge incentive and performance related pay systems have failed, and the psychological contract between employees and employers is under the process of redefinition. To sustain the motivational level of employees. organizations must demonstrate to them a close link be- tween performance and rewards. This is the rationale which is advocated for the Lise of merit pay. But in spite of its attractiveness. the PRP and ESOP sometimes bring about results precisely the opposite from the desired ones. The role of H R manager has to be a facilitator’s one to encourage line man- agers in creating such an environment. The communication level between the different st’akeholders is also required to be high to dispel any misunder- standing and then a right kind of performance based work culture can be nurtured.

INTRODUCTION

1fhe decade of the 90s will be known for mergers, acquisitions,restructuring and downsizing in business history. Companies. started looking beyond the internal boundaries for repositioning them- selves to face the eventuality of the new, complex and fast-changing busi- ness scenario. Though this was a difficult proposition for them as the rules ofthe game were changing very fast, some ofthem grabbed this opportunity nicely and became winners whereas some lagged behind. Gary Hamel re-

Management & Change. Volume 4. Number I (January-June 2000) ~ 2000 Institute for Integrated Learning in Management. All Rights Reserved.

92 Reward and Compensation Strategy: Issues and Challenges

marks that, “simply catching up to where others have been is necessary to stay in the game, but the winners will be those companies who have the ability to invent fundamentally new games.” He is of the view that what- ever any organization needs to know to create the future, it can. Microsoft knew what it wanted as did CNN. He poses a question: Why was it CNN rather than the BBC that created the global news network?!

In fact, the success of the company depended on its adaptability, re- ~ponsiveness and the extent of new learning. A business strategy with a facilitating structure, system and processes acquired more attention in the firms at the tail end of the twentieth century. The people management func- tion also gained more status in the last decade, though now it is under much pressure to deliver results serving the business strategy of the firm. Much have been written about business strategy and its importance in creating competitive advantage. Anderson (1997) prescribes in this regard that a com- plete business strategy should have three key components: (i) an operating strategy (ii) a financial strategy, and (iii) a people strategy. He suggests that the HR and the corporation’s management group should engage themselves in the strategic management process which links business strategy, organiza- tional capability and people strategies. Discussing his experiences at Amoco Corporation, he avers that the HR function has developed a “Renewal Star” framework (Figure-I) which is the focus of the corporate-wide change pro- cess. The people and reward strategies are important ingredients of this change process at Amoco.

LINKAGES BETWEEN THE BUSINESS STRATEGY AND RE- WARD AND COMPENSATION STRATEGY

The procurement, utilization, development and retention of employees have never been so important in most of the organizations worldwide. Companies are relentlessly searching for ways to retain their core employees. Adoption of merit payor performance-related pay, employee stock option plans (ESOP), gain-sharing and profit-sharing plans are very common practices being used to lure the core workers in recent times. The shift from “compliance” to “commitment” has forced managers to regularly search for newer ways of providing motivational inputs to reinforce self-regulated behaviour among employees in the organization. In fact, the reward and compensation strat- egy has become one of the important parts ofHR strategy. Ina country like India, it assumes a central focus of the HR strategy (Figure-2). In India, the

Management & Change. Volume 4. Number I (January-June 2000)

• Mission, Vision, Values, Goals and Strategies

• Strategy Reformulation

• Amoco Performance Management Process

• Amoco Management Learning Center

• Recruiting • Career Management • Diversity

• Recognition and Reward • Amoco Performan.ce Share Plan • Variable Pay • Gainsharing

Figu re-I: Amoco Renewal Star: Integrating Activities

• Business Units • Decentralization • Delegation of Authority • Corporate Centers Study

• Cost Management • Management Principles • Task Force • Assessment Process (Surveys) • Continuous Improvement:

Project Spring Business Process Reengineering Continuous Improvement! Employee Involvement Quality Customer Focus

Source: Based on Anderson (\ 997: 20).

94 Reward and Compensation Strategy: Issues and Challenges

aggregate wage bill of 100 large companies having a turnover of more than Rs. 300 crore in 1998-99 has increased by 13.2 percent from Rs. 8,344 crore in 1997-98 to Rs. 9,447 crore. Even companies like Tata Steel, TELCO, Grasim, Associated Cement, Reliance, Mahindra & Mahindra, Century Tex- tiles, Voltas, and Eveready among others have failed to check the rise in their wage cost.2

Figure-2: Relationship Between Business Strategy and Compensation. Strategy

Business Strategy

~ HRStrategy

Deployment < “II > Performance St'”t~ Reward& . ~ilt,gy

~ comp,n’inst,ateg,lC(,

Training & Development Strategy

Competitive Advantage

To understand the interlinkages between the performance appraising strategy, training and development strategy, compensation strategy, and de- ployment strategy is very vital for HR managers for attracting, motivating and retaining good employees. This has been stressed by the proponents of both schools ofHR strategy, i.e., hard approach (Michigan School) and soft approach (Harvard School).3

Beaty and Schneier (1997) using Treacy and Wiersema’s (1995) model suggest HR executives to align their compensation strategy with the organization’s primary strategic path to competitive advantage. These paths may be: (i) operational excellence, (ii) product leadership, and/or (iii) cus- tomer intimacy (Table-1).

An operational excellence strategy following firm is a low price pro- vider. It builds operational systems that contiimally reduce cost while offer-

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Table-l Strategic Choice of the Firm and its Relationship with Reward, Performance, and Development Strategies

HR Strategies

Work D~sign

Performance Measures

Rewards

Development

Operational Excellence

• Centralized/Controlled • Strict policies/procedures

• Total cost productivity • Errors • Waste • Abandoned calls • Lost customers/accounts • Net sales head count • Times/deadlines met

• Team productivity awards • Profit sharing tied to

performance criteria • Skill-based pay

• Strong orientation on expectations, rules

• Predictable career ladder

Product Leadership

• Coordinated • Teams (cross functional)

• % Sales from new products (e.g., lastJ years)

• Margin • Sales growth • Customer growth • Industry accolades/recognition • Copyrights • Patents

• Team innovation awards • Competency-based pay

• Employees responsible for learning

• Mandatory Competency growth • Feedback on professional

competency growth

Customer Intimacy

• Autonomy • Know the customers’ needs

• Customer guarantees • Customer retention rate • No. of referrals from

current customers

• Individual awards • System awards • Nonfinancial awards • “Fee for Service” awards

• Oriented toward long-term focus with customer

• Not a lot of leaders • Acts as a consultant to

customer/partner

Source: Adapted from Beatty and Schneier (1997: 32)

96 Reward and Compensation Strategy: Issues and Challenges

ing a quality product which adds greater value to its customers than the competitors’ products. The right kind of behaviour can be reinforced using gain sharing plan of compensation in this kind of scenario (Stack, 1992; Becker and Huselid, 1997). A firm with an operational excellence strategy focuses on short-term production objectives, avoids waste, and is concerned more about the quantity. Some of the examples include: Federal Express, Dell, and Nucor (Beatty and Schneier, 1997).

An organization pursuing product leadership strategy puts primacy on innovation, has long-term focus, is antibureaucratic, is driven by learning, has high tolerance for ambiguity and offers a greater degree of risk-taking to its employees. These firms provide their employees with cross-functional collaboration and encourage a high degree of creative behaviour and entre- preneurial mindset. Companies like Sony, Glaxo, Merck, 3M and Intel among others are true product leaders in this regard. Whereas, firms such as Four Seasons, Airborne, Roadway, Home Depot, and Cott following a customer intimacy strategy focus on providing unique customer solutions and treat it as the source of their competitive advantage. In these organizations, reward management plays a critical role and focuses more on the primary contact of employees with customers to reinforce employee networking, communi- cation and relationship-building with the customer to enhance the degree of customization (Beaty and Schneier, 1997).

The relationship between the strategic choices and reward and com- pensation strategy of a firm is quite evident from Table-I. But it depends to a large extent on the history, culture, mindset of the workforce, and owner- ship of the firm to adopt a mix of reward strategy which facilitates the right kind of learning inculcating the right kind of behaviour among its employ- ees. Beaty and Schneier (1997) advocate that besides HR’s role in executing the business strategy, the role of managing a cultural transformation by shaping the mindset and behaviour that impact on the firm’s operational and finan- cial outcomes is very important for HR managers. The reward strategy adopted to reinforce the right kind of mindset and behaviour among people is the most lethal weapon in the hands of HR managers in this regard. In fact, for retaining good people, the compensation decisions have become very strategic in the present scenario. “Compensation strategy has become central to many companies’ businesses and they are concerned less about acquiring physical resources and more about how their human resources can efficiently exploit them,” is the view expressed by Richard Walker, who has recently written a report on “Motivating and Rewarding Managers” for the

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EIU, a sister company of The Economist. Albert Knab, head of compensa- tion and benefits at the Stuttgart offices of Daimler Chrysler, a company which is going through a cultural change, also opines that “compensation policy is central to supporting the company culture” (The Econolllist, 1999). But the adoption of compensation and reward strategy poses certain funda- mental questions which are supposed to be answered before going for its execution. The traditional job evaluation method is becoming irrelevant and most of the companies are adopting skill or competency based compensa- tion plans these days. They are identifying compensable skill and compe- tency blocks and adopting mechanisms to certify these blocks and translate them into pay packages. Some of the objectives of these plans as enunci- ated by Lawler (1994) are as follows:

To signal the employees that continuous learning is valued and is a key to the organization’s success; To provide employees an incentive or reward to acquire additional skills and competencies which are relevant in the company; To remove job barriers to encourage flexibility or multi skilling; To establish a workable, agreed-upon pay structure; To explain/reduce disputes in terms of skill differences; and To ensure that the pay arrangement supports other human resource programmes such as training and career planning.

DESIGNING RELEVANT SKILLS AND COMPETENCIES

In traditional job evaluation methods, the jobs are valued in terms oftheir relative worth and their contribution to the overall organizational goals. Apart from grading, ranking, factor comparison, and point methods, the Hay method is widely used in organizations. More than 5,000 employers use it world- wide, and 130 out of the 500 largest US corporations have been using this method for long. This method uses a combination of both factor and point methods of evaluation. Hay chart lays emphasis on three key areas of a job know how, problem solving and accountability factors inherent in a job. Many companies have redefined their old Hay-charts to suit the demands of the emergent business scenario. Hallmark is one of the good examples in this regard. When Hallmark Cards realized that the original Hay factors were no longer adequately reflected in what they wanted to value in their work and business strategy, they changed its structure to infuse the elements ofteam-

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98 Reward and Compensation Strategy: Issues and Challenges

involvement, leadership and cross-functional expertise (Milkovich and Newman, 1996).

Table-2 Revised Hay Factors at Hallmark Cards

ORIGINAL FACTORS PROPOSED FACTORS

1. Know-how 1. Capacity Functional expertise Business system Managerial skills Integrating resources Human Relations Teaming skills

2. Problem solving 2. Improvement opportunities Environment Context Challenge Challenge

3. Accountability 3. Scope Freedom to act Empowerment Impact of end results Impact of end results Magnitude Reach

Source: Adopted from Milkovich and Newman (1996: 141).

Companies who are adopting cultural change to meet the needs of the market place in the new business scenario are also adopting a competency framework linking it with an open and honest performance management system and gradually moving towards the paying for performance plan. They are paying their people for acquiring relevant competency which is also referred by specialists as DNA 4 of the organization. This DNA gives life to the firm and helps it in developing relevant organizational capability. Glaxo Wellcome, UK (GWUK) which employs 1500 employees and is val- ued at over £30 billion is the leading pharmaceutical company which had successfully adopted this kind of competency framework. GWUK assess- ing its employees around these competencies gave the right kind of rein- forcement, that was needed in certain areas of operations. The company adopted BPR in the year 1994-95 which led to the alignment of a number of human resource strategies. The business imperative for change arose from

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the employees’ needs at all levels to respond much more flexibly and quickly to the changing business reality. At GWUK, a reward and development strategy was adopted to drive this change and to acquire organizational capa- bility for delivering the highest level of competence. GWUK adopted a com- petency framework and defined competency as “what you know, what you do and how you do it which, when applied by an individual or a team, leads to proactive outcomes for GWUK.” The company identified 20 core com- petencies which were needed to be acquired by everyone across the busi- ness regardless of their individual roles and functions. It also adopted a performance management system to help employees to “build up a picture” of what they should achieve which also acted as a “development checklist” for employees and managers to identify the gap which can be bridged by experiential learning. The performance management system was “feedback- rich” with the intention of supporting the strong communication culture of the organization. The important thing to observe here was that the pay re- view was not kept directly connected to the developmental needs of the employees. In fact, assessment of performance and competence contributed towards the determination of pay but the performance appraisal system was successfully positioned as first and foremost an ongoing development and monitoring tool. The managers at Glaxo Wellcome also believed that nothing fails quite as badly as a failed reward scheme and they continued to learn about the differential competencies of the high performers. These steps con- tributed to -agreat extent in achieving success at GWUK (Stredwick, 1997). The interventions experienced at Glaxo can be benchmarked and replicated elsewhere to put in place the right kind of competencies and capabilities required by individuals, teams, and organization as a whole.

STRATEGIC COMPENSATION ISSUES

Some of the basic questions which are to be addressed at the time of adopt- ing a reward and compensation strategy by the compensation specialists today, are: i) Whether pay is going to be job-based or skill/competency-based; ii) In the case of pay for performance, whether it will be individual or

team-based; iii) The extent of equity and market positioning of the firm; whether the

finn is trying to be a market leader, a laggard or in-between these two situations, benchmarking from the market and adopting it with some

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time difference; Table-3

Core Competency Framework at GWUK

DIMENSIONS COMPETENCIES

1. Personal Qualities

2. Planning to Achieve

3. Business and Customer Focus

4. Supportive Leadership

5. Working With Others

Source: Based on Stredwick (1997: 30).

• Personal accountability • Personal organization

Self-development • Creativity and innovation • Flexibility • Continuous improvement

Gathering, analyzing and interpreting data to produce information

• Problem solving and decision making • Establishing a plan • Implementing and monitoring achieve-

ment • Company environment • Business environment • Customer focus • Effective leadership • Empowering • Team-working, managing conflict and

being supportive • Developing colleagues

Giving and receiving feedback • Networking and building relationships

Communication

iv) The degree of standardization of the package across the functions and levels;

v) The balance between base pay, added pay, deferred payment, long- term and short-term benefits, and services; and

vi) The degree of involvement of the line managers in the designing and implementing of the reward strategy. Lawler (1984) prescribes nine fundamental strategic issues to be con-

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sidered carefully at the time of designing the compensation strategy given in Table-4. He talks about the basis of pay, mode of pay for performance, extent of internal and external equities, degree of centralization of the reward strategy, degree of hierarchy in reward, reward mix, process issues regarding compensation decision-making, and modes and channels of its communica- tion, and congruency of the reward system. In the present situation, when the pay variance is becoming wider, equity is a tricky issue though a good number of companies are benchmarking and market pricing their key jobs. Issues such as the extent of centralization and hierarchy of reward are of grave importance and it depends to a great extent on the culture, history and vision of the company while deciding these issues. It is evident from the experiences of many successful companies that a reward system is highly circumstantial. Some times, firms lose their focus because of the lack of congruence in their reward strategy and its non-alignment across the organi- zation. These are the issues which can motivate or de motivate employees, help retain or force people to quit. Therefore, firms should be very careful while designing the reward and compensation strategy and more impor- tantly in implementing it to give the right kind of signal to employees.

Table-4 Strategic Issues in the Design of Compensation Systems

1. The Basis for Rewards 2. Pay for Performance 3. Market Position 4. Internal-External Pay Comparison-Orientation 5. Centralized-Decentralized Reward Strategy 6. Degree of Hierarchy 7. Reward Mix 8. Process Issues:

• Communication Policy • Decision-making Practices

9. Reward System Congruence

Source: Based on Beaumont (1996: 104) who adapted from Lawler (1984: 131-46).

Gomez-Mejia and Welboume (1996) also identify issues which are stra- tegic and need to be considered while designing compensation programmes. They categorize them into three following categories:

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102 Reward and Compensation Strategy: Issues and Challenges

a) the criteria or bases for determining pay levels; b) the design of the compensation system; and c) the administrative framework.

These issues are to be dealt with cautiously and in line with the business strategy while adopting them. Gomez-Mejia and Welboume (1996) also classify them as mechanistic and organic compensation strategies depend- ing on the nature of these issues and orientation of the firm. They are of the view that the organic compensation strategy where emphasis is more on skill, performance, risk taking, and qualitative aspect of performance are practised by the firms which have dynamic growth whereas the mechanistic and bureaucratic organizations which are relatively old and matured, and looking for maintaining their current market share pursue mechanistic com- pensation strategy in most of the cases (Gomez-Mejia and We1boume, 1996).

Table-S Strategic Compensation Patterns

MECHANISTIC COMPENSATION STRATEGY

Basis for Pay Job Seniority Emphasis Individual Appraisals Short-telm Orientation Risk Aversion Corporate & Division Performance Internal >External Equity Hierarchical Emphasis Quantitative Performance Measures Design Issues Pay Level> Market Fixed Pay> Incentives Frequent Bonuses Reliance on Intrinsic Rewards Administrative Framework Centralized Secrecy Policies No Participation Bureaucratic Policies

ORGANIC COMPENSATION STRATEGY

Skills Performance Emphasis Group and Individual Appraisals Long-Term Orientation . Risk Taking Division Performance External >Internal Equity Egalitarian Emphasis Qualitative Performance Measures

Pay Level < Market Incentives >Fixed Pay Deferred Income Reliance on Extrinsic Rewards

Decentralized Open Communication PaI1icipation Flexible Policies

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WHAT MOTIVATES EMPLOYEES?

In this era of restructuring and downsizing, much needs to be done by the employers to motivate their employees. The companies who are restructur- ing themselves are finding it difficult to keep up the morale of their employ- ees. In many cases, the huge incentive and performance-related pay system has failed. The psychological contract between the employees and employ- ers is under the process of redefinition.

In such a scenario, where the firms are looking for knowledge manage- ment and adapting themselves to behave like a learning organization, the availability of self-regulated, committed and motivated employees gives them a competitive edge over others. Lester Thurow (1999) proclaims that “the dominant competitive weapon of the twenty-first century will be the edu- cation and skills of the workforce.” Companies are offering an array of benefits to motivate their workers. Some of the present practices are: over- time and holidays; retirement plans and insurance benefits; general and special fringe benefits; tax-advantage programmes; vacation and sick leaves; employee services/assistance; special work-related expenditure plan; edu- cational expenditure plans; etc.

Attracting, developing and retaining employees are posing a challenge to employers. They are looking more concerned now. It is more evident in those sectors where turnover of employees is very high, e.g., software, where the attrition rate is more than 25 percent. Milkovich and Newman (1996) find that employers generally look concerned for four types of behaviour of their employees: i) How do we get good .employment prospects to join our -company? ii) How do we retain these good employees once they join? iii) How do we get employees to develop skills for current and future

jobs? iv) How do we get employees to perform well on their current job?

But the concern of the employers is not being seen translated most of the time due to the lack of the will on their part to understand what moti- vates the employees despite the fact that a number of motivational theories right from the content to the process theories are there to explain the behaviour of employees. It is well understood that motivation is the inner feeling and drive of the person which force him/her to behave in a certain way. In this regard, the Vroom’s Expectancy Theory of motivation is worth mentioning

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104 Reward and Compensation Strategy: Issues and Challenges

which helps managers to understand the behaviour of the people in a better way. Vroom (1964) identifies three factors which constitutes motivation. These are: expectancy, instrumentality, and valence.

Figure 3: Vroom’s Expectancy Theory

Efforts ~ Level of hi Result I~I Reward____ ~I /1 Performanc~ •.•……1′— _ t I Motivation 1-<—–

M=ExVxI [Where M = Motivation, E = Expectancy, V = Valence, and I = Instrumental- ity].

In this theory of motivation, the three important factors play critical roles and there is a linkage among them which is required to be established and managed while designing compensation and reward plans.

The first and foremost important factor is the valence, i.e., the attrac- tiveness of the reward. The HR and line managers have to act judi- ciously in choosing the reward mix which can attract employees across the organization. It is a difficult task and it depends to a great extent on the perception of the individuals whether a reward is a reward. A de- centralized approach empowering line managers to have more discre- tion in deciding the reward mix can play an important role in maintaining the higher level of valence among employees. Otherwise, a reward will not be a reward. In fact, some kind of perception of management strategies is also required to play up the importance of the reward in such a scenario. It is the person not the job who is going to be paid in the present time. Though firms are intensively trying to adopt creative com- pensation strategies, what it depends on is how you sell your reward. The relationship in this regard is also important. Managers who regard themselves more as valuable individuals like stars and less as members of a team have to change their attitudes. It is not possible to rely on mere money to recruit and motivate people. Dave Beirne, a silicon valley headhunter says grandly that “I never sold compensation, I sold psychic reward” (The Economist, 1999). The second important factor is the instrumentality factor inherent in a

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motivational design. It is the belief among employees that if they work hard and perform, their performance will be rewarded accordingly. HR managers are supposed to create a well-defined performance appraisal system which appreciates and rewards performers. The message has to reach the employees that the performance appraisal system is objective, open, and bias-free. Unless the employees feel so, it will be difficult to motivate them. Rewarding employees for their performance is a rein- forcing exercise and it gives a message to the people that the system cares for the performers and rewards them. Line managers are also required to be objective, honest and bias-free in implementing appraisal systems and reassuring the employees in regard to pay for performance. Communication methods adopted by the organization also playa critical role in reaffirming the faith of employees in ajust and objective reward strategy. The third and the most important element of motivation identified by Vroom is expectancy. Expectancy is the employee’s faith and belief in his or her ability to perform the required task. To inculcate this feeling among employees, the HR and line managers have to play an active role in providing learning opportunities for the growth and development of the workforce. It also requires to create an environment based on trust and empathy helping the workers to learn the required skills to perform better. Mentoring, coaching and counselling interventions also play an important role in increasing the confidence level of employees and helping them to have more experimentation. An environment needs to be created where mistakes are tolerated and new learning is encour- aged through experimentation. In an age oflearning organizations, incul- cating this kind of behaviour among employees is very much required. Therefore, any compensation strategy is required to be highly linked with the performance strategy and the training and development strat- egy of the firm. In a true sense, the objective of the performance man- agement system should be a developmental one which is better than an evaluative one since it will help employees in instilling faith in them- selves and extend the sense of ownership in them.

TOTAL REWARD SYSTEM

Reward is a wider term and it includes a non-compensation dimension apart from the compensation one. All rewards that can be classified as monetary

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payments and in-kind payments comprise the compensation component of a reward. All other rewards constitute the non-compensation system. Henderson (1997) describes a non-compensation system as situation- re- lated rewards not included in the compensation package. There are an infi- nite number of components which relate to the work situation and to the physical and psychological well-being of each worker. Any activity which has an impact on the intellectual, emotional, and physical well-being of the employees and is not specifically covered by the compensation system can be termed as non-compensation system (Henderson, 1997).

Table-6 Components of a Total Reward System

1. Compensation Wages, cormnissions and bonuses 2. Benefits Vacations, health insurance 3. Social interaction Friendly work place 4. Security Stable, consistent position and re-

wards 5. StatuslRecognition Respect, prominence due to work 6. Work variety Opportunity to experience differ-

ent things 7. Workload Right amount of work (not. too

much, not too little) 8. Work importance Is work valued by society? 9. Authority/ControVAutonomy Ability to influence others; control

own destiny 10. Advancement Chance to get ahead 11. Feedback Receive information helping to im-

prove performance 12. Work conditions Hazard free 13. Development opportunity Formal and informal training to learn

new knowledge/skills/abilities

Source: Based on Milkovich and Newman (1996:305)

Henderson (1997) identifies some of the dimensions ofnon-compensa- tion system as follows:

Enhancing the dignity and satisfaction from the work performed; Enhancing physiological health, intellectual growth, and emotional ma-

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turity of the empluyees; Promoting constructive social relationships at workplace

• Designingjobs that require adequate attention and effort; Allocating sufficient resources to perform work assignments; Granting employees sufficient control over the job to meet personal demands; and Offering a supportive leadership environment to the employees. Milkovich and Newman (1996) also categorizes the reward system

consisting of both compensation and non-compensation dimensions into 13 categories as given in Table-6. Barring the first two, all are non-compensa- tion components. Some of the factors such as friendly workplace, stable, consistent position and rewards, respect, workload, work importance, au- tonomy, advancement, element of feedback, work conditions and learning opportunities are worth mentioning in this regard. In today’s organizations which are becoming more flexible, flat, networked, diverse and global, these kinds of reward inputs will surely playa facilitating role in helping them in achieving competitive advantage for excellence.

PERFORMANCE RELATED PAY (PRP)

Companies world over are adopting different strategies to motivate their workers to contribute more. They are recognizing the worth and value of their skills and competencies. To reinforce positive behaviours in employ- ees, to learn relevant skills and competency and to use them while at work, many companies in the decade of 90s adopted merit payor performance- related pay. Most of the specialists agree that performance based pay re- sults in a better individual and organizational performance (Milkovich and Newman, 1996; Cooke, 1994; Heneman, 1992). In a study, 663 companies reported an increase in their earning by $2.34 for every $1 spent on perfor- mance-based pay. Likewise, one study of841 union and non-union compa- nies found gainsharing and profit sharing plans increased individual and team performance by 18 to 20 percent (Cooke, 1994).

But there are a number of questions which are required to be answered before adopting a PRP. Schuler and Huber (1990: 308) present ten difficult questions and suggest organizations find answers to these before implement- ing a PRP system. These are:

Is pay valued by employees? What is the objective ofPRP?

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Are values of the organization conducive to PRP? What steps would be taken to ensure that employees and management are committed to the system? Can performance be accurately measured? If not, what type of an ap- praisal system will be used? How frequently will performance be measured or evaluated? What level of aggregation (individual, group or organization) will be used to distribute rewards? How will pay be tied to perf0J!TIance (e.g. merit increase, bonus, com- mission, incentive)? Does the organization have sufficient financial resources to make per- formance-based pay meaningful? What steps will be taken to control and monitor the system? To sustain the motivational level of employees, organizations must cl.em-

on strate to them a close link between performance and rewards. This is the rationale which is advocated for the use of merit pay. However, inspite of its attractiveness, the PRP sometimes brings about results precisely the op- posite from the desired one. Common among them are dissatisfaction, dis- couragement, and decreased performance (Campbell, Campbell and Chia, 1998; Gomez-Mejia and Balkin, 1992; Hughes, 1986; and Kanter, 1987).

Whatsoever the critics ofPRP say, one thing is clear that organizations are devising reward strategy in such a way that they can reward the efforts and contribution of the performers. More companies are adopting bonus plans or gainsharing plans based on specific performance goals. In this kind of scenario, nobody is guaranteed an annual pay increase. The “entitlement era” is going to be over and one has to earn the increase by giving a purpose- ful contribution in that regard. In fact, in recent times, the across-the-board- pay increase is becoming less prevalent and the existing situation is forcing employees to give their best. But PRP will be a failure if it cannot be fair and consistent in measuring performance. To negate this, employees are required to be involved in the designing, developing and operation ofPRP. It should be able to create a work culture conducive to an objective and fair appraisal system and its appreciation by its stakeholders also. The involvement ofline managers and key managers in designing and developing the PRP is very much required. They also need more power and discretion to reward the subordinates to reinforce the designed objectives being pursued by the PRP. The role of the HR manager has to be a facilitator’s one to encourage line managers in creating such an environment. The communication level be-

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tween the different stakeholders is required to be high to dispel any misun- derstanding and then a right kind of performance based work culture can be nurtured.

Employee Stock Ownership Plan (ESOP)

Though there are a number of approaches to provide incentives, merit pay, gain sharing and bonuses, nothing has proved to be more successful than employee stock ownership plans (ESOP) in recent times. This is the maxi- mum that an employee can think of, i.e., his or her share in the stock of the company. For the last two decades or so it has been making waves in the US wage market. Past surveys have also indicated that the companies providing ESOPs are 1.5 times more profitable than the conventionally-owned com- pany (Marsh and McAllister, 1981):

ESOP is a means for employees to buy stock in the firm. These stocks are sold to employees in lieu of their payor pay increases. Sometime, they simply pledge to buy stock as a way of helping the company pay-off a debt (Werther and Davis, 1996). For providing ownership to the employees, the employer creates a trust known as employee stock bonus trust (ESOT) and contributes stock to it. It is a tax-exempt employee trust in US. ESOPs can be enjoyed in two ways: (i) stock bonus ESOP, where employer contributes to ESOT but he cannot use it as a mechanism for obtaining funds, and (ii) a leveraged ESOP, where employer uses the tax benefit granted to an ESOT and obtains fund for various purposes (Henderson, 1997).

The magic wand, stock option has churned out many billionaires in US, and America today has more of them relative to size of the workforce than it had even in the early years of the century. Many of them are e-founders, creators of Silicon Valley’s successes. A recent survey of350 large Ameri- can Companies by William M. Mercer, a consultancy firm, found that the chief executives’ median total compensation was $8.6 m. A majorpercent- age of this package came through stock options. Walt Disney head, Michael Eisner earned $ 576 m. in the year 1998 which. was roughly equal to the GDP of the Seychelles and much of it was acquired through realising vast option gains. Likewise, Mel Karwazain, head of CBS, a network television company got $ 200 m. In the same period, he took only $ 9.8 m. in the form of salary and bonuses and the rest came in stock options. Ira Kay, director of human capital g~owth at Watson Wyatt, a New York based consultancy firm, thinks that the prevalence of stock options in US and its relative ab-

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sence elsewhere is one of the main reasons for the Americans’ superior economic performance. Options provide the motivation to run companies better (The Economist, 1999). But now the stock option plan is also reach- ing to the other side of the world. A country like Japan, where the salary spread is more evens because the Japanese believe that employees should share profits equally in the interest of group harmony, is also experiencing change in this regard. About 150 out of 3,000 listed companies in Japan introduced share options for their employees last year (Management Today, 1999).

In India too, a good number of companies ranging from public sectors to private sectors to MNCs have taken lead in offering stock options to their employees. Notable among them are: Oil and Natural Gas Commission (ONGC), Infosys, Wipr06, Satyam Computers, Sonata Software, Aditi Soft- ware7, Proctor & GambleS, Mastek, Cadence Design, GE, and Hughes Softwares. The multinational corporations are finding themselves at a dis- advantageous position because of the Reserve Bank ofIndia guidelines as employees are not allowed to hold foreign stocks directly. However, MNCs have found a solution to it and the shares are being held on their behalf which can be given in rupees equivalent when employees want it. The other bigger problem employees are facing is the higher rate of income tax, and the phenomenon of double taxation. Under the current Indian rules, an em- ployee is liable to pay a 33 percent income tax on the difference between the granted price and the market price of the share which has a very discourag- ing impact on the attitude of employees. Again, if the employee sells the shares, he is liable to pay capital gain tax on the difference between the exercise price of the option and the sale price. It is proving to be a significant hindrance in enjoying the benefits of ESOP. Presently, the matter is pending before the court (Outlook, 2000).

Some of the Indian companies, who have recently introduced stock option plans, are: Kinetic Motors Ltd.9, Jindal Polyester’O, Birla Sun Life AMC (BSLAMC) I I , Kothari Pioneers, Pharmacia & Upjohnl2, McDonaldu, Enron, Intel, Gray Cell, Mind Tree’\ Zee Telefilms’5, Dabur

‘6, SRFI7, Max India1s, Zip Telecom’9, NIIT20 and Information Technology (India) Ltd. (ITIL)21.

But stock option plans at times prove to be a stumbling block also as it was observed in the case of Daimler-Benz and Chrysler merger.22 One should also be very careful that rewarding individuals may not hurt those who perform well in teams. The greatest risk in this regard is the widening

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gap of pay and benefits between the senior managers and the rest. Unfor- tunately, very few employers think like B. Ramlinga Raju, chairman, Satyam group.n The group has adopted recently an employee venture capital scheme in addition to the stock option scheme, which encourages people to come out with their ideas. Commenting on the scheme, Raju says that “it is to encourage creative ideas thereby creating opportunities for individuals with bright ideas” (The Times of India, Sept. 20, 1999).

CONCLUSION

In the infonnation age, where employees with their scarce skills can live in one country and work in another, the challenges are huge before the HR managers in formulating the reward strategy. The globalization process is trying to reduce the gap in pay across the country but it is being seen realized more in IT sector alone. The pay variance has become wider in recent times. The gap between the senior managers and the shopfloor people has widened. The stock option plan has benefited a few elite managers or knowl- edge workers. It is a paradoxical situation for most of the companies as they are trying to adopt softer issues of people management through empower- ment and team-building strategies but they have not been able to pass the benefit of the performance and contribqtion across the organization which is hurting the team feeling and morale of the workforce. The widening gap between the senior managers and the rest has further reinforced this kind of feeling among employees. Furthermore, the restructuring and downsizing has negated to a great extent the efforts of cultivating the fruit of a creative compensation design. When companies are distributing pink slips24 to their workers, it becomes a difficult job for the poor HR manager to come out with a strategic compensation tool to sustain and raise the motivation and morale of the employees. PRP in a good number of cases has also failed to deliver its strategic edge because of the absence of a well-understood perfor- mance management system, and matching work culture and environment. This can be done by actively involving line managers in the designing and implementing of PRP plan. Ultmost care has to be taken by managers in creating an honest and able performance management system in this regard. Otherwise, “giving an award to an individual for an entire team’s perfor- mance can quickly prove to be highly divisive … and it makes little sense for a manager to bestow an award that demotivates other members of the work team” (Ford and Newstrom, 1999).

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In the present business scenario, where HR managers are forced to be actively involved in the management of cultural change, system and struc- ture, relationship, politics, information, and new learning, the management of performance and reward is central for attracting, developing, retaining and motivating employees. The level of needs in this regard also goes up if a company is passing through the pangs of downsizing and restructuring.

It is the psychological contract between the employer and employees which has become more important now and the psychological experience of ownership on the part of employees is more critical for organizational effectiveness. HR managers have to learn to diagnose and doctor this pyschological experience of ownership on the part of employees while adopt- ing PRP or ESOP (Khan, 1999). Line managers are also required to be involved in this process. In fact, they have to own this process whereas the role ofHR is to network with them. The adoption of a reward mix is a very tricky issue and HR and line managers have to work as a team spending more time on deciding these strategic aspects of compensation manage- ment. Line managers have to be given more discretion and power through the decentralization of the compensation administrative process where they can have the feeling of discretion over the reward issue. In this kind of scenario, the reward management can contribute to create value addition through effective management of competencies.

Though specialists are critical about the impact of the ESOPs in bringing team feeling and its availability also to the elite and previleged ones, employ- ees are harvesting the benefits of ESOPs in a few cases. We need more employers like N. R. Narayana MurthyZ5,’the chairman ofInfosys to make ESOP more pervasive. Murthy wanted to create a thousand millionaires in his company, and he has done it in two years’ time. There is no company other than Infosys in India where good number of drivers, attenders, electri- cians, plumbers and other employees low down in the pecking order are millionaries (in Indian rupee) in their own right (The Times a/India, Feb. 19, 2000).

The success of a reward and compensation strategy depends to a great deal on the attitudes of the managers in creating a high degree of commit- ment, involvement and cooperation among employees. It has to ensure that employees’ contribution and performance are rewarded accordingly, and is aligned with other people policies, practices, and programmes towards de- veloping the organizational capability and competency for achieving the objectives and goals of the firm.

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NOTES

1. Hamel (1999) observes that “it wasn’t that CNN spent more time building scenarios about the future. All of the things that you needed to create CNN were visible to anyone who cared about how the world was changing. You had cable television eroding the monopoly of the traditional broadcasters. You had people who didn’t come home every night at an hour when they could watch the 6 0′ clock news or the 90′ clock news or whatever. You had satellite technology that made it possible to put a team anywhere in the world and get a signal out. Anybody who was willing to challenge their own assumption could see those things.” And it was CNN who was willing not the BCC, ac- cording to Gary Hamel.

2. Human capital is proving to be more expensive now. The share of wage bill in sales tumover has increased from 7.4 percent in the year 1996-97 to 7.5 percent in 1997-98 and to 7.9 percent in the year 1998-98 in India, see Human Capital, November, 1999. In fact, in the year 1997-98, top 50 business houses in India paid Rs 12839.5 crores, i.e., 47.1 percent of the total wages and salaries paid by the private sector enterprises (CMIE, 1999).

3. The Michigan school puts primacy on the business strategy of the firm and its interconnection with the organizational structure and key HR systems, i.e., selection, appraisal, rewards, and development. The Harvard approach which is also refened to as the soft approach to HRM emphasizes on the responsi- bility and capacity of managers to manage workplace relations by bringing a unitary, integrative, and individualistic system. Reward system is one of the key policy areas of soft approach other than employee influence (participa- tion), human resource flow, and work systems (work organization) (Mabey, Salaman and Storey, 1998: 61). Both schools identify reward management as an important strategic HR tool. See also, Fombrun, Tichy and Devanna (eds.), 1984; Beer et al., 1985; Blyton and Turnbull (eds.), 1992; Hendry and Pettigrew, 1986; and Saini and Khan (eds.), 2000.

4. . Sandra 0 ‘Neal calls competencies as “The DNA of Organization.” 5. In Japan, the annual income of a CEO is on an average only about 10 times that

of an entry level employee, see Management Today, 1999. 6. A booming stock market is the most important factor driving the stock option

search in the IT industry. Azim Premji is the richest Indian and the third richest person in the world. Wipro had 300 millionaire employees. A few weeks later, it had 1,600 millionaire and now it has some 32 billionaires among its stakeholders (Outlook, 2000).

7. As per the Nasscom estimate, some 10,000 infotech sectors have been vested with 18 million shares in 151 companies that might be worth Rs. 12,000 crores at current market capitalization levels (Outlook, 2000).

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8. At Proctor & Gamble, 700 employees have been given stock options with a five year vesting period (Outlook, 2000).

9. Kinetic Motors Ltd. is the first company who offered ESOP to employees after the new SEBI guidelines allowing the companies to enjoy the benefit of ESOP (The Times of India, Sept. 17, 1999).

10. Jindal Polyster Ltd. (JPL), a Rs. 310 crore company decided to issue ten lakh equity shares of nominal values ofRs. 10 each to employees including execu- tive and non-executive directors (The Times of India, Sept. 17, 1999).

11. Birla Sun Life planned to issue 5-10 percent of the equity capital under a phantom share option plan (Human Capital, Dec., 1999).

12. Phalmacia & Upjohn India, an MNC, has given stock options to its 170 mar- keting and sales personnel (Human Capital, Dec., 1999).

13. McDonald has offered stock option plan to its 40 employees and it will offer to more employees in the near future (Outlook, 2000).

14. At Mind Tree, even the entry-level employees have been given stock options (Outlook, 2000).

15. Some 4.6 lakh stock options convertible into equity shares of Rs. 10 each were given to some 65 employees of Zee and its associate companies (Out- look, 2000).

16. Dabur has offered 25,000 equity shares to 50 key executives at a discount price ofRs. 300, nearly a quarter of the scrip’s market price (Outlook, 2000).

17. SRF has issued about 28 lakh shares appreciation right to all its employees including the factory workers (Outlook, 2000).

18. Max India has reserved some 5 percent of its issued capital for employees (Outlook, 2000).

19. At Zip Telecom, 210 employees will collectively reap Rs. 132 crore if all goes well according to the company plan (Outlook, 2000).

20. NUT is also diluting 5 percent of its cunent equity to grant 1.3 million shares to its 800 employees (Outlook, 2000).

21. ITIL, a software company who generates 70 percent of its revenues from ex- ports also announced stock option to its 250 employees in the first go at a discount rate of 43 percent of the cunent market price (The Times of India, Feb. 18, 2000).

22. When Daimler-Benz announced its plan to merge with Chrysler, German news- papers were aghast at the size of the options given to Chrysler’s executives (The Economist, 1999).

23. Sat yam Computer alongwith Wipro and Infosys forms the top three IT com- panies in India. Its chairman B. Ramlinga Raju is of the view that employee capital scheme will enable the £(}mpany to generate multi-fold value cre- ation as a venture capitalist, and it will be a win-win situation as per him (The Times of India, Sept. 20, 1999).

24 . AT&T Corp., the number one US long-distance telephone company, has

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trimmed its slower-growing businesses to cut $ 2 billion in expenses, and thousands of employees have to be downsized. On Feb. 1, 2000, the com- pany gave pink slips, i.e., the notice of 60 days to hundreds of managers and workers saying they would lose their jobs in two months’ time (The Times of India, Feb. 5, 2000).

25. The astonishing entrepreneur N. S. Narayanamurthy is referred to as the man who started the stock option phenomena in Indian IT industry. Keeping just 7.7 percent equity for himself, he distributed the rest to the public and empolyees (Outlook, 2000).

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Sami A. Khan, Ph. D., is Associate Professor and Coordinator-HR..l\1 Area, at the Institute for Integrated Learning in Management (IILM), Lodhi Institutional Area, Lodhi Road, New Delhi-I 10 003. Earlier, he was with the Shri Ram Centre

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for Industrial Relations & Human Resources, New Delhi. His areas of special interest include Strategic Human Resource Management; Labour Management Relations; Training and Development; Compensation Management; Organizational Design and Development, and Strategic Management and HR Benchmarking. He was a member of the research team which conducted an all India Study on the Problems and Prospects of Rehabilitation of Voluntary Retired Workers at Shri Ram Centre for Industrial Relations and Human Resources (SRC), New Delhi. The report has been published by SRC as a book. He has recently co-edited a book, Human Resource Management: Emerging Perspectives in the New Era (Response Books, A Division of Sage Publications, New Delhi, 2000). He is also the associate editor of Management & Change. the journal ofllLM.

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