GSBS6040 Human Resources Management [email protected] Pay and Rewards Learning Objectives 1 2 3 4 Understand the strategic considerations, challenges and choices involved in employee reward management Appreciate the importance of reward management in contemporary human resource management strategy and practice Identify the four main elements of a ‘total reward’ approach, namely financial, developmental, social and intrinsic rewards Compare and contrast the main components of employee remuneration and distinguish between base pay, benefits and performance-related pay (cont.) Learning Objectives (cont.) 5 Critically analyse the main types of performancerelated reward, including individual and collective plans, short-term and long-term plans and the advantages and disadvantages of each 6 Understand the processes and challenges involved in developing a strategically-aligned reward management system 7 Understand the nature of executive incentives and the reasons for the controversy surrounding them Introduction ‘A reward may be anything tangible ... or intangible ... that an organisation offers to its employees in exchange for their potential or actual work contribution ... to which employees as individuals attach a positive value as a satisfier of certain selfdefined needs.’ (Nankervis, Compton, Baird & Coffey 2011, p.395) Strategic remuneration also known as Compensation Remuneration: What employees receive in exchange for their work. Includes pay and benefits (total remuneration) or just pay (cash remuneration). Remuneration is one of the most important HRM functions. It can help to reinforce the organisation’s culture and key values and facilitate the achievement of its strategic business objectives. A significant mismatch between remuneration and organisational strategy is likely to result in major barriers to business achievement. Importance of Remuneration Impacts employer’s ability to attract & retain employees Ensure optimal levels of employee performance in meeting organization’s strategic objectives Compensation’s components Direct compensation in wages or salary Base pay (hourly, weekly, monthly) Incentives (sales bonuses &/or commissions) Indirect compensation in form of benefits Legally required benefits (e.g. superannuation) Optional (e.g., health cover) Key Strategic Issues in Remuneration Determining compensation relative to market Balance between fixed & variable compensation Deciding whether or not to utilize team-based versus individual pay Creating appropriate mix of financial & nonfinancial compensation Developing cost-effective compensation program resulting in high performance Remuneration philosophy A formal remuneration policy should: reflect the organisation’s strategic business objectives and culture; articulate the objectives that an organisation wants to achieve via its remuneration programs; be communicated to all employees; provide the foundation for designing and implementing remuneration and benefit programs. Market posture (Positioning) Market posture: An organisation can adopt one of the three market postures: Pay above market average Pay market average Pay below market average. IMPLICATIONS? REM Objectives Create a reward culture Remain competitive Maintain salary equity Motivate employees Control salary costs Attract and retain excellent people Reduce unnecessary turnover Reinforce organisation culture Support business plans and direction Key Issues in REM For what will people be rewarded? Reward mix - fixed, variable, non-financial Where should we position ourselves? top? median? bottom? Individual pay - award? market rate? experience? contribution, performance Variable pay - what? how? makeup? at risk? Reviews - how often? Total employment costs V Total employee rewards - transparency issues Influences on REM strategies Legal - Awards, EBAs, Contracts, Statutes Market forces - Supply of labour, economics. Value of work - Knowledge, skills, impact on organisation, complexity, problem solving. REM Philosophy - What to reward? Can we afford? Who to attract? Fixed or variable? Benefits? Individual contribution - performance, contribution, bargaining power, competences Link to performance The Law of effect. Remuneration (REM) Strategies Employee Issues Am I being paid fairly? Equity with others? Equity with market? How do I get a pay rise? Benefits/rewards? Packaging? Incentive schemes? Performance links? REM issues for employers Will we attract the calibre of individuals we need? Are rates equitable across organisation? Are rates equitable across the competition? What can we afford? Is our system simple and easy to understand? Is it flexible? Is it acceptable to our people? Is it easy to change? A strategic model of reward management Reward system objectives Attract The right people at the right time for the right jobs, tasks or roles Retain Develop Motivate The best people by satisfying their workrelated needs and aspirations and recognising and rewarding their contribution Required workforce capabilities by recognising and rewarding employees for knowledge, skill and ability enhancement To contribute to the best of their capability by recognising and rewarding high individual and group contributions towards meeting the organisation's strategic objectives Secondary reward system objectives Satisfy relevant human needs Equitable Legal Affordable Cost-effective Strategically aligned ‘Rewards’ and ‘total reward’ Extrinsic associated with but external to the job Financial rewards base pay benefits performance related Development rewards Social rewards Intrinsic from the content of the job itself Elements of ‘total reward’ Incentives: for and against The case for The case against Agency theory, reinforcement theory, expectancy theory and goal setting theory all emphasise the centrality of employee cognitive processes to understanding and managing the relationship between rewards and task motivation Incentives undermine intrinsic interest in the job Performance-related rewards operationalise the ‘equity’ norm of distributive justice Rewards motivate people to pursue one thing above all else Rewards punish Rewards rupture cooperative work relationships Rewards ignore underlying reasons for work problems Rewards discourage risk-taking Should teachers be paid for performance? If so, how? If not, why not? Strategic reward management Internal fit External fit Competitive strategies defender analyser prospector Pay determination in the changing Australian regulatory environment HRM and reward strategies and practices are influenced by the dynamic external environment Economic Political Legal Industrial relations contexts Pay determination in the changing Australian regulatory environment 20th century remuneration standards for the majority shaped by award determinations Last two decades have witnessed an accelerating trend away from centralised system of pay-setting and pay adjustment towards agreement-making at enterprise and individual levels WorkChoices Act 2005 Fair Work Act 2009 ‘Pay-setting by means of individual agreement-making is good for business; paysetting by means of collective agreements is bad for business.’ Discuss this statement. Pay plan types Base pay plans • The foundational or fixed component of employee remuneration and is generally regarded as the pay best suited to addressing the objectives of staff attraction and retention Benefits plans • Financial entitlements that directly supplement cash base pay, including employer contributions to superannuation and health and medical insurance, paid leave etc. Performance-related pay plans and rewards • Also known as incentive plans, these are rewards given in recognition of past performance and in order to reinforce and enhance future performance Job-based base pay Job-based base pay Skilled-based pay Competency-based pay Why does the gender pay gap persist, who is responsible for it, and what (if anything) can be done about it? Options for base pay Performance-related pay plans and rewards Performance-related pay plans and rewards Collective short-term incentive plans Profitsharing • regular bonuses to eligible employees using formula Gainsharing • management shares financial gains with employees Goalsharing • collective goal-based bonus Team incentives • small group adaptation of goalsharing Benefits plans Mandatory benefits Provision for employee economic security Include such benefits as superannuation, workers’ compensation, various forms of paid leave Voluntary benefits Enhance an organisation’s ability to attract and retain high-value employees and enable it to offer employees a more appealing ‘value proposition’ Includes such benefits as company cars, gym membership, self- education, computers, mobile phones Flexible benefit plans Diverse 21st century organisations reflect the diversity of employees. Accordingly, different benefits are needed. Some organisations offer flexible (cafeteria or buffet) benefits. Employees can select benefits based on: Personality Interests Values Needs. Examples of employee benefits International perspective Differences may be due to particular social, cultural, legal- institutional, economic, and political context Move from an ethnocentric approach to a polycentric approach or a blend of the two (geo-centric approach) How can a multinational firm ensure that the rewards it offers to host country professionals working beside home country expatriates in a low labour cost country such as India best address the need to attract, retain and motivate these local employees? Meeting the challenge of strategic reward alignment 1. Preparing a statement of reward philosophy and strategy 2. Determining total reward mix 3. Determining remuneration levels 4. Ensuring strategic fit or alignment 5. Communicating the ‘deal’ Which is best from the organisation’s perspective: pay openness or pay secrecy? Why? Executive incentive plans Increasing linkage of executive pay to performance Short-term incentives: generally one year and linked to goals in organisational financial performance instrumentality and reinforcement susceptible to manipulation (cont.) Executive incentive plans (cont.) Long-term incentives: generally for three or five years and in the form of company equity rather than cash main types are restricted share plans, option plans, performance shares and share appreciation rights If we are happy to see film stars, rock stars and sports stars receive astronomical incomes, shouldn’t we also be willing to see ‘celebrity’ CEOs rewarded in a similar way? Summary Aim is to maximise contribution of human resources to organisational effectiveness and success Importance of ‘total reward’ approach Three main elements of total remuneration Incentives for line employees Incentives for executives Challenging and complex but also allows HR to demonstrate their worth Equity theory People evaluate the fairness of their situations by comparing them with those of other people. It is a matter of perception. Internal Equity Perceived fairness of pay and reward differentials between different jobs in organization – and people. External Equity Perceived fairness of organizational compensation levels relative to external compensation External Equity Lag policy Lower wages than competitors, compensates employees through other means Opportunity for advancement Incentive plans Good location Good working conditions Employment security Market policy Wages equal to competitors Neutralizes pay as factor Lead policy Higher wages than competitors to ensure organization becomes employer of choice Importance of Pay Equity External equity Pay relative to ‘market’ determined by salary surveys Internal equity Pay differentials within the organisation Determined by job analysis and evaluation Individual equity Perceptions of fairness of pay in relation to skills, work, position of an individual – perception is reality. Collective equity Perceptions of fairness of pay in relation to other occupation/professional groups, same kinds of workers in other industries Individual Equity Fairness about pay differentials among individuals in same job Established by using Seniority-based pay systems: Reward longevity Merit-based pay systems: Reward employee performance Incentive plans: Employees receive part of compensation based on performance Skills-based pay systems: Compensation based on employees possessing skills that firm values Team-based pay plans: Encourage cooperation & flexibility Individual Equity Team-based pay plans Can be less time-consuming than administering individual reward systems May impact group dynamics Can adversely impact & intensify conflict Need decentralized decision-making system Need high level of communication with employees Employees should have voice & provide input into design Team members need to feel system is fair & equitable Equity & Work-Related Outcomes Broader notions of Equity Distributive justice (also distributive fairness). The perception that rewards are distributed in relation to contribution. Perceptions again!! Procedural justice – A concept of justice focusing on the methods used to determine the outcomes received. Is the system fair? Valid? Reliable? Understandable? Market Testing Where do you get it? Published reports Customised remuneration survey HR professionals in other organisations Newspaper advertisements Employer associations, conferences, recruitment consultants Questions? Class Exercise
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