Employee Remuneration: Old and New Remuneration Systems
Abstract
Employees are the backbone of all business and service organizations. Organizations have to ensure retention of committed, sincere and skilled employees. Employee remuneration concepts and systems have undergone changes to ensure motivation to employees. Salaries, rewards, recognition and other benefits are the means adopted by employers with regard to policy and planning for employee remuneration system. At the same time, employers look for performance (increased productivity and quality output) from employees. Systems are designed to link performance with remuneration. Technological developments and market competition are two major factors affecting the remuneration policy. In fact, skilled employees are at an advantage and have the opportunity to choose the higher paying jobs and employers. The trend results in increased manpower-turnover in organizations. The change for ‘good’ (improvement) (Kaizen) in managing/ensuring employee retention is the challenge for employers. This paper discusses and compares the employee remuneration systems and compares their efficacy.
Introduction
Remuneration is one of the components of ensuring employee motivation and commitment for achieving organization-goals. The overall satisfaction felt by employees with the employment reflects the efficacy of the type and methods of motivation. Champagne and McAfee (Motivating Strategies for Performance and Productivity: A Guide to Human Resource Development) have stated some aspects to address the employee needs. These practices include factors that address employee needs related to offer direct benefits and providing an ideal workplace environment to achieve employee satisfaction and consequently better performance and productivity.
There are no universal norms that can be applied to all types of organizations, because each organization operates within the scope of its resources, management philosophies and expectations. Nevertheless, a business organization can continue to grow and develop, if the organization’s goals are one with employee expectations and vice versa. Researchers have studied the topic from different perspectives and suggested varying measures to address the complexities of employee-employer relations. Management, human relations and organizational communication practices are the related target areas.
Ramlall (2004, 59) has summarized different employee retention practices and the gaps in implementation in areas of job analysis, performance linked compensation and other aspects related to employee expectations of growth and development. Employer organizations are aware of the shortcomings in the implementation of ideal approach to resolve related issues, but have adopted the policy and measures, that just comply with legal obligations, rules, restrictions and regulations. The aspect of safety of employees is missing from the studies and researches. The discrimination and diversities in the workforce have not been included in the study of employee remuneration. Remuneration is linked with performance; nevertheless the performance norms, standards and measurement need to be
well defined. Job specifications should be explicit.
The old remuneration systems have their root in the post-industrialization systems followed by employers. Since then the remuneration systems have undergone changes and reforms in response to demands of employee unions and government laws. This paper discusses some related researches in the field and compares the old and new systems of employee remuneration and the positive outcomes of measures introduced in the system.
In this context, the Japanese concept of Kaizen brings out the importance and impact of employee relations and positive involvement of employees in achievement of organisation-goals. The perspective of the topic will keep the roles of all stakeholders in focus and how motivation theories are implemented to have a positive effect on the employee performance and productivity.
Literature Review
The paper, ‘Accounting, Remuneration and Employee Motivation in the New Organisation’, by Ezzamel and Willmott (1998) contains two case studies of global manufacturing companies and the changes implemented in remuneration systems. The article concentrates mainly upon workforce and also administrative staff. The authors comment that human performance should be assessed and expressed into “a set of calculations”. Comparing the performance level with preset targets enable the management to decide upon the award/reward to the individuals who meet the performance standards of achievement. The competition, so evoked, among colleagues works as a stimulant and motivation for employees for better performance and productivity.
Cheser (1998) discusses employee motivation based on the Japanese concept of Kaizen, and points out that this concept is based on scientific management principles and methods and helps in making the job more attractive and interesting for employees. Besides, employees experience growth and development in their skills with dedication to their duties.
Appendix 1 shows the Kaizen roles of different roles of individuals and team, for continuous improvement in performance. Cheser points out that managing a change for the better is a challenge and primarily depends upon leadership and management philosophy, policy and favourable support in the process. Thomas A. Wright cites five personality traits that characterize managers. The traits show the sentimental reactivity, extrovert attitude, neutral perception, compassion and dedication to the implementation of change.
Burr and Cordery (2001) discuss the role of self efficacy as a negotiator or interpreter between the job requirements/standards and employee motivation. The authors point out the gaps in job design that lack the clarity in specifying performance. The employee applies self beliefs in assessing task performance. The beliefs in self managed performance has direct effect on employee motivation. The skill utilization by employee affects the level of job satisfaction and motivation for performing the assigned tasks. The stress is upon the clarity of job design as it provides the opportunity for skill utilization and scope for growth and development to employee.
Cesare and Sadri (2003) discuss the relation between culture and employee motivation. The article states the relevance of theories of Maslow (Need Hierarchy), Herzberg (Two Factor Theory) and Vroom (Expectancy theory). Different cultures affect individuals in motivational aspects related to individual and collective perspectives. While human needs are universal, the cultural backgrounds play a significant role in motivational prompts to individual perspectives. Carr and Li-Ping Tang (2005) discuss the additional benefits/perquisites offered to employees for motivation. The relaxation and diversion from job duties (Sabbaticals) work as an important and effective motivation for employees. The motivation ensures retention of efficient performers in the organization and encourages them to offer their best efforts to perform better. The motivation reduces job related stress and ‘burn-outs’ and acts like a catalyst for improving and enhancing employee performance.
Orpen (1997) discusses the role of manager in ‘mentoring’ by providing support, assistance and guidance to subordinate and motivating the employee to perform better. Mentoring or advising includes interpersonal communication, interaction and understanding. Manager assesses the skill-shortcomings of a subordinate, in performing assigned tasks and offers useful instructions and guidance. The practice encourages and inspires the subordinate in acquiring more skills and learning new ways to achieve higher level of performance. The conflicting situations in the work place are avoided. Mentoring helps in evoking accommodative attitude in mentees. Orpen (1997, 55) observes, “In turn, such relationships in?uence the extent of work motivation and organizational commitment of mentees.” The outcome of the motivation and commitment to organizational goals is reflected in better performance by the mentees.
Hong et al (1995) conducted a research to study ‘Impact of employee bene?ts on
work motivation and productivity’. The questionnaire contained 27 employee benefit programmes as stimulus parameters and were measured for responses from employees. The summary of the research results mentions direct link between employee benefits and employee performance and work motivation. Monetary benefits are more appealing to both executives and workers. The management views on employee benefit programmes differ from the views of employees. The other differences exist in the type of organization (private or public), gender difference, marital status and age of employee, education levels and job position in the organization. The differences reflect the varying perspectives of the employees.
Implementation of employee benefit programmes to motivate employees for higher performance levels also depends upon organizational philosophy, management practices, recognition and evaluation of performance and the system of rewards, awards, communication and maintaining a congenial workplace environment and equity for the
employees at all levels of employment hierarchy, within the organization. Lloyd (1996) discusses Fostering an environment of employee contribution to increase commitment and motivation. Lloyd suggests implementing a well structured ‘employee suggestion scheme’, by which employees will share their ideas and suggest ways for improvement. While the employee benefit programmes are aimed at addressing employee expectations, the suggestion scheme asks for active involvement of employees and voice their ideas for better outcomes.
Lloyd (1996) cites the results of a survey of United Kingdom Association of Suggestion Schemes (UKASS). The results showed the creativity and eagerness of employees for involvement. The results further indicated that the workforce valued recognition more than money as a stronger motivation. The acceptance and implementation of creative suggestions provided greatest motivation for the employees. Considering the advantages of the suggestion scheme, the investment in the practice was low and risk-free.
Managers are responsible for motivating the employees. Providing opportunities to employees for development of skills and ability works as a motivational tool for manager. The enhanced skill levels will make the employees confident, boost their morale. Employees will recognise, appreciate and welcome such opportunities and feel happy with the gain in the skills achieved. The growth of employees in this regard will work as an effective motivation.
In this context, Hopkins (1995) suggests employee development activities. These activities are ‘Social gatherings, Employee recognition, Continuing education, Employee meetings and Empowerment.’ Social gatherings will invoke the sense of belonging among the employees. Activities like picnics or a social service provide the occasions for interaction and interpersonal communication. Public recognition of a well accomplished task and offering a reward/award, prize or rise in pay are the most important means to encourage performance. Skill development programmes, training and lectures serve to take the employee performance to a higher level. Employee meetings provide the opportunity to the
workforce to submit important feedback and suggestions for improvements. Employee meetings also improve interaction and communication. Empowerment is the practice by which employees can participate in decision making related to practices, processes and procedures within organization. The active participation of employees in decision making will ensure workforce compliance to changes in norms of related activities.
The studies and researches have linked employee remuneration with performance, productivity and motivation. Old system of employee remuneration was linked either with time spent on job or piece rate payment. The working hours were extended to increase production. Mass production concept linked remuneration with product or product component produced by an individual employee.. Ezzamel and Willmott (1998, 100) state, “The pay Structure was, according to the manufacturing director, ‘widget per unit driven’ and each production Manager was entrusted to arrange the flow of production activities so that each operator could achieve high productivity rates.”
While the concept, pay for performance still prevails, the stress is upon improving performance and consequently productivity. With technological advances, changes in economic environment, globalization, need for special skills and spread of markets and competition across continents, employers face the challenge of employee retention. Employee motivation has taken the place of employee remuneration.
Schuster and Kesler (2012) discuss integrating reward system in organization design and state that reward system has to be designed judiciously because improper incentives offered may bring unintended outcomes. In such cases, the perspective of employees shift away from organizational interests to self interest, responsibility and accountability are misunderstood and conflicts arise between groups and departments. Incentives/rewards should be designed ‘in line’ with organization design. Reward system design should include organisation size, capability and prevailing labour market conditions.
Dr. Herman Aguinis’ (2011) exhaustive discussion ‘Performance Management’ covers related aspects including the process, planning and implementing. The aim of performance management is brought out in discussion about employee development. Dr. Aguinis (2011) mentions that reward system consists of basic pay, Cost-of-Living Adjustments and Contingent Pay or Dearness Allowance, short term incentives for better performance, long term incentives (bonus, additional leave etc.) and retirement benefits (income protection) like pension after a fixed period in employment. The author stresses upon the fact that performance management is an ongoing process. Efficient performance management will ensure the growth and development of employees and organisation.
Modern systems of employee remuneration focus on employee performance and consider different means and methods of implementing motivation schemes to inspire and encourage and prompt workforce for better performance. Involvement and commitment of all stake holders at all levels in organisation are the key factors for successful and sustained outcomes. Pay linked with performance is a sound system; at the same time the system has to be resilient to absorb unexpected internal and external affectations.
Methodology
The outcomes or effects and efficacy of a change are observed and results are evaluated to arrive at validating a hypothesis. Studies/researches are conducted by questionnaires, interviews of different stake holders, quantitative or qualitative measurements of change are analysed, assessed and evaluated. The domain of research/studies should cover a representative cross-section of the respondents (people, processes, procedures). The method is selected with focus on the aim of study.
Ezzamel, M and Willmott, H. (1998) cite the Case Study of Heavy Metal. The focus of the study was to examine the effects of change in the reward structure and related to “teamworking, empowerment and accountability.” Established in 1930, Heavy Metal
was acquired by a foreign company (60% shares), and remaining share was owned by a leading UK company.
Company Background
The company had made changes in team working and introduced ‘total quality
management’ (TQM) and incentives for employees. The vision of the company was to establish itself as a global leader in manufacturing with value added high quality products.
Company had introduced production control technology and plant layout to speed up product flow and save time in material handling. The purpose of the study aimed at studying effects of change in reward system.
The Old Reward Policy. The old system of offered wages as 67% (average) fixed and a variable bonus component. The pay was based on productivity. This system resulted in conflicts about the pay. Ezzamel, M and Willmott, H. (1998) cite the works director, “There were traditional battles over individual schemes and individual payments and this was on-going'. The old system benefits were not equitable. The system lacked coordination and as a result quality of the products was not maintained. Unsold stocks of the products affected the finances of the company. The sub-standard quality of products caused rejection from customers. Workers focused on quantity of products (linked with wages); and showed no concern for the quality of the products processed. Shop-floor managers could not help and exercise real control to improve the situation.
Despite the availability of resources and finances, the company faced a situation which warranted measures to address the demand for higher productivity and high quality for products. The bonus system was not effective because it also stressed ‘pay per piece’ policy. The bonus served only as the incentive to go for higher and higher productivity to gain more pay. Quality consideration was out of focus in the system. The workers responded to the reward system as would address their needs for higher monetary returns.
The New Reward System
The new system removed the fluctuations in the short term income of employees. New production technology placed machines in ‘product focused’ groups/cells. The employees worked as a team. The team performance was evaluated after a period of 13 weeks. The system ensured regular weekly payments and simultaneously the ‘new’ method of incentive improved productivity and quality. The positive outcomes were observed in stock reduction, customer satisfaction and flow of information ensuring coordination between sales and manufacturing. The system also evoked better and effective supervision and monitoring. The planned production schedules addressed customer demands.
People Empowerment and Control. The new scheme introduced the concept of employee growth and satisfaction. Ezzamel, M and Willmott, H. (1998) state, “Heavy Metal noted that the hierarchy of the company had become significantly flatter, and therefore that rewards for most employees could no longer be primarily based on promotion.” Other investment in people included training and health and safety policy. This policy served to evoke the employee feeling of confidence and trust in the company. The conflicts vanished and the company environment became congenial.
However the issue of empowerment was debatable. The idea of empowering people to use their discretion in related aspects was not acceptable to management hierarchy. The human trait to dominate and control still prevailed in form of monitoring twice in every shift.
Nevertheless, the new reward system brought forth the positive effect of rationalizing the payment system. The company’s needs for productivity and quality were addressed to a level of satisfaction. Simultaneously, the employees also showed more involvement with company goals.
Ezzamel, M and Willmott, H. (1998) also cite the case of StitchCo, a family owned manufacturer and retailer company, comparing the old and new reward systems.
Findings
Grant (1990) mentions four interlinked principles on the results of motivational incentives. Employees show positive response when they feel that their efforts will enhance performance. Then, the employees will assess if the performance will be linked to rewards. Next, the employees will analyse if the cost structure meets the expectation of rewards for performance. Employees are inclined to chose the best available option from different alternatives. Grant comments that there is no universal system of motivation which will influence all employees at all times and in all situations.
Different theories explaining employee needs have been discussed by Ramlall (2004) and have been cited from the work of Champagne & McAfee. (Appendix 2). Besides the needs vary with individuals depending upon their socioeconomic level, literacy, status and skill level. The choice of motivation is not only related to monetary incentives, but also should address the psychological factors related to job satisfaction, work environment, human relations, interaction and communication within organization.
Management philosophy, policy and strategy planning in employee remuneration systems and motivational schemes have a significant impact upon the whole system. Ultimate goal of any organization is to make/generate profit. The assets include human and financial resources. Of these two, the management of human resources is more challenging. Design of organization structure has to include benefits for all stake holders.
History bears witness to strikes, lockouts and trade union protests. The conflicts have their roots in strained relations between employers and employees. The interfering activities of politicians, union leaders and government do not help in resolving conflicts.
Economic activities are integral part of human life. Finding a problem is easier than offering and implementing a corrective measure with sincerity and commitment. Employee remuneration and motivational systems are such issues to be addressed effectively.
Discussion
The excessive implementation of different benefit-programmes for employees results in decreased attention and interest of employees. This indicates that employee benefit-programmes should be designed upon a sound base of rationale, logic and understanding of the needs that will actually address the motivational needs. While the benefits do contribute to better work performance, they do not show as much effect on productivity. Workers and executives show higher preference for monetary benefits. Other indirect or implicit advantages have less effect in motivation. Management and workforce have different perspectives in selection and nature of benefit programmes.
The benefit needs of males and females differ. As such the design of such programmes has to consider the variation. Single and younger employees respond more positively to the motivation programmes, while married and older employees have their family and social needs in focus. Employees with higher education levels are more interested in self growth opportunities, whereas those with lower education level are more responsive to direct benefits. Employees in higher positions in organization show moderate interest in benefit programmes. Middle and basic level executives react depending upon individual needs and perspectives. (Hong et al., 1995)
Employee benefit programmes are designed, keeping in view the most effective stimulus which would maintain and sustain the positive response from the entire cross section of employees. In practice and in actual set-ups, it is not because of diversities in workforce (culture, education, skill level etc.). Nevertheless, motivational measures cannot and should be given up, as motivation is one of the most important and impactful tool for achieving change and ensuring better performance, productivity and profit in organization. Different theories explain the human needs and how these needs reflect in human attitudes and actions. Organisational design and employee benefit programme schemes should be collinear.
Conclusion
Employee remuneration system of old times, post industrialization, was mainly focused mainly on the productivity. The workforce had to work more hours to get more pay. The growth and development in the fields of education, science and technology offered new knowledge and skills. The era of automation brought more changes in production techniques, which also increased the demand for skilled engineers, technicians and workers. The new ideas of linking pay with performance and vice versa ushered in the new concepts of human relations in the management systems. Employers realized the importance of retaining qualified, skilled, and efficient workers in employment.
Different policies are formulated for motivating the existing workers as well as recruiting workers with high potential for performance. Philosophers, psychologists, economists, management professionals, sociologists, politicians and government have been involved in studying the topic of motivation. The perspectives, of studies and researches, have differed; nevertheless, all have tried to offer motivational theories and methods, for improvement in performance and productivity. In this context, Thomas A. Wiight cites Peter Drucker, "We know nothing about motivation. All we can do is write books about it." The observation is significant and shows the limitations in the domain of understanding and evaluating human needs and finding the right stimulus to address the needs.
The basic concept of remuneration is rooted in offering the means of livelihood, creating an environment for decent and satisfying life, evoking the confidence of achieving self growth and development, and the satisfaction with occupation and activity. Motivation in this regard is a catalyst to initiate human involvement and action in the right direction. The motivation content is important, but more important is the method and manner in which it is offered. Remuneration and motivation address the needs of not only the employees, they also address the needs of employers who stand to lose more than employees.
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