Pay and Reward (PRSs) Systems - (Compensation) 20/11/2018 MSc Management IHRM Module 20.3.17 Pay and Reward (PRSs) Systems - (Compensation) Presentation LUBS

20/11/2018 Presentation LUBS

20/11/2018 Reward! Presentation LUBS

Reward Systems (PRSs) 20/11/2018 Compensation and Financial Reward lie at the heart of the Employment Relationship however the ER is more than an economic exchange it involves a psychological contract that connects the commitment of the employee to that of the employer. Reward shapes the psychological contract through signalling the behaviour that is valued~expected and defines the specific nature of the Employment Relationship If the rationale of HRM is to increase employee commitment, the Reward system lies at the heart of this objective and must also engender commitment (Bratton and Gold 2012). (perceived obligations between employee and employer) Presentation LUBS

Pay and Reward (PRSs) Systems - (Compensation) 20/11/2018 Pay and Reward (PRSs) Systems - (Compensation) Aim: To provide an understanding of Reward and management rationale for the introduction of various PRSs and the nature and consequences of Pay and Reward Systems (PRS) particularly in an international environment. Learning Outcomes: By the end of the lecture, you should be able to: Understand the nature of Reward and management reward strategy Identify various forms of PRSs Understand issues relating to International Compensation … Presentation LUBS

Detail the key components of an international compensation program. 20/11/2018 … Hence: Examine the complexities that arise when firms move from reward/compensation at the domestic level to compensation in an international context. Detail the key components of an international compensation program. Outline the two main approaches to international compensation and the advantages and disadvantages of each approach. Presentation LUBS

A number of key dimensions and issues: 20/11/2018 Reward Management objectives The Pay System Motivation and Commitment Presentation LUBS

Reward 20/11/2018 ‘…[A] bundle of returns offered in return for a cluster of employee contributions’ (Kessler 2000 in Bach and Sisson 2000) ‘Reward refers to all of the monetary, non-monetary and psychological payments that an organisation provides for its employees in exchange for a bundle of valued work related behaviours’ (Bratton and Gold 2012:364). Presentation LUBS

Reward Systems (PRSs) 20/11/2018 The term ‘Compensation’ is sometimes used to indicate that employees generally receive more than pay from their employers. The terms ‘Reward’, however, seems to best capture the contemporary nature of business and the Employment Contract~Relationship. Presentation LUBS

Compensation systems can be considered from a number of perspectives: 20/11/2018 Compensation systems can be considered from a number of perspectives: Reward systems are socially, economically, institutionally and culturally constructed: Workers affect pay: abilities (human capital); risk preference; fairness norms Work organisation affects pay: monitoring costs of particular jobs; output and effort variance; bargaining power of workers Institutional variance also determines pay: formal rule systems and internal labour markets; role of unions in the workplaces; firm strategy and HR strategy See Groshen, E. ‘Five Reasons Why Wages Vary Among Employers’, Industrial Relations, vol. 30, no. 3, Fall 1991. Presentation LUBS

Reward Systems (PRSs) Question? 20/11/2018 Question? What might the organisational and individual objectives of a Reward~Compensation system be? Presentation LUBS

Strategic Reward Management: 20/11/2018 ‘Old’ Versus ‘New’ Compensation Bratton and Gold 2012) Strategic Reward Management: Pay is increasingly likely to be linked to organisational performance (of the individual, the workgroup or the organisation) Presentation LUBS

Reward Systems (PRSs) Question: 20/11/2018 Question: Might Reward systems be the source of conflict? Presentation LUBS

Intrinsic and Extrinsic Reward 20/11/2018 Intrinsic and Extrinsic Reward Remuneration can take various forms. Important distinction between Intrinsic and Extrinsic Reward: Intrinsic reward – self-esteem; fulfilling work Extrinsic reward – monetary and non-monetary payments A motivator to better performance or source of disincentive? … “it is easier for management to de-motivate employees by changing payments systems, than to motivate them” (Brown, 1989). Presentation LUBS

Motivation and Commitment (Psychology/HRM) 20/11/2018 Motivation and Commitment (Psychology/HRM) Money as Motivation Herzberg (1968, Harvard Business Review) - money as a ‘hygiene’ factor – money only motivates to a certain level, after which ‘higher’ order awareness (sense of achievement, personal growth) are more important Expectancy theory (Vroom, 1964, Work and Motivation) – people will be motivated if they value the reward and they expect the reward to be given for an achievable target. Presentation LUBS

The Pay System – rules linking reward to effort and status 20/11/2018 The Pay System – rules linking reward to effort and status Pattern of pay relationships or pay structure (Sisson and Storey 2000). Several types of payment systems, often combined: Time based systems: Based on the job and temporal dimension i.e. hour, week, etc. Performance based systems: Unit of performance Individual, group or organisation Nature of performance measures Input or Output i.e. skills~competence or measured production Presentation LUBS

Job-Based ……………to………...Individual Based Pay. Payment Systems 20/11/2018 Payment systems can be thought of as being arrayed along a continuum from: Job-Based ……………to………...Individual Based Pay. Presentation LUBS

Performance Pay and Individual Performance Related Pay (IPRP) 20/11/2018 Performance Pay and Individual Performance Related Pay (IPRP) IPRP reflects the attempt to link basic pay to market rates supplemented by variable pay element linked to individual performance. Indicates move from payment for job to individual reduced reliance on job evaluation. Links with employee commitment, performance, organisational culture and organisational change Reinforces the role of line management and scope for management discretion Sends messages to employees about the value put on their individual contribution, but the consequences of sending the wrong messages can be extremely de-motivating. Trend in US and UK not to consolidate into basic pay but for one off cash bonuses. Also: Links with employee commitment and performance How far is individual pay individualised? 'standardised packages, individually wrapped' Organisational culture Send important messages Reinforces role of line management and scope for management discretion Role in organisational change Implementation and operation Overall, individual PRP is supposed to send messages to employees about the value put on their individual contribution, but the consequences of sending the wrong messages can be extremely de-motivating Individual performance pay may undermine HRM: Short-term goals rather than longer-term perspectives and team co-operation May inhibit flexibility That is 'internal fit' is weak Presentation LUBS

International Reward/Compensation 20/11/2018 Managing people in a multinational context International Reward/Compensation Trend in US and UK not to consolidate into basic pay but for one off cash bonuses. Also: Links with employee commitment and performance How far is individual pay individualised? 'standardised packages, individually wrapped' Organisational culture Send important messages Reinforces role of line management and scope for management discretion Role in organisational change Implementation and operation Overall, individual PRP is supposed to send messages to employees about the value put on their individual contribution, but the consequences of sending the wrong messages can be extremely de-motivating Individual performance pay may undermine HRM: Short-term goals rather than longer-term perspectives and team co-operation May inhibit flexibility That is 'internal fit' is weak Presentation LUBS

International Reward Context 20/11/2018 Managing reward in an international context is not new but in the last 25 years many more firms have required their employees to work in other countries. This is increasingly associated with the development of global corporate culture, control and the connection of outcomes with costs (Dowling et al 2008) There is of course the wider issues of how MNCs reward all their employees across the MNC Presentation LUBS

Objectives of International compensation: 20/11/2018 Objectives of International compensation: Compensation is an aspect of International HRM that has important strategic significance and that organisations have choice in developing. Some key organisational objectives are: Consistency with overall strategy, structure, and business needs of the MNC – protect competitive advantage Work to attract and retain (the best) staff in the areas where the MNE has the greatest needs and opportunities Be cost effective and fair for employees transferring abroad Give consideration to equity and ease of administration. Presentation LUBS

Objectives of International Reward 20/11/2018 Objectives of International Reward Mechanism to develop & reinforce a global corporate culture Primary source of corporate control Explicitly linking performance outcomes with associated costs (Dowling et al (2013) Presentation LUBS

What factors/issues might affect the pay of expatriate employees? 20/11/2018 Question: What factors/issues might affect the pay of expatriate employees? Presentation LUBS

20/11/2018 Question: What might Employees expect from an International Compensation package? Presentation LUBS

Components of an International Compensation System 20/11/2018 Regardless of the approach, international compensation has a number of components. These include: The base salary Foreign service hardship premium Allowances (housing, home leave, education, and relocation) Benefits (e.g. pensions). The question also arises is pay to contain a performance element? Presentation LUBS

Components of an International Compensation System 20/11/2018 The base salary component can be linked to either: The salary structure of the host country - (Going Rate Approach) OR That of the home country - (Balance Sheet Approach). Presentation LUBS

Host country Salary Structure 20/11/2018 Going Rate Approach - Host country Salary Structure Based on local market rates Relies on survey comparisons among: - Local nationals (HCNs) - Expatriates of same nationality - Expatriates of all nationalities Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries Presentation LUBS

Advantages and disadvantages of the Going Rate Approach 20/11/2018 Advantages and disadvantages of the Going Rate Approach Advantages Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities Disadvantages Variation between assignments for same employee Variation between expatriates of same nationality in different countries Potential re-entry problems Presentation LUBS

The Balance Sheet Approach - Home Country 20/11/2018 The Balance Sheet Approach - Home Country Basic objective is maintenance of home-country living standard plus financial inducement Home-country pay and benefits are the foundations of this approach Adjustments to home package to balance additional expenditure in host country Financial incentives can be added to make the package attractive Underpinned by ‘tax-equalization (no change in tax liability compared to home country – firm deducts home rate of tax and pays host country liability) Most common system in usage by multinational firms Balance Sheet Approach categories: Goods & services Housing Income taxes PC & HC income taxes Reserve contributions to savings, payments for benefits, pension contributions, investments, education expenses, S.S. taxes, etc. - Does not typically include: COLA, mobility premiums, hardship allowances, familiarization visits, home leave, cross-cultural training, other pre-departure or spouse assistance Tax equalization – firm deducts home rate of tax and pays host country liability Presentation LUBS

Advantages and disadvantages of the Balance Sheet Approach 20/11/2018 Advantages and disadvantages of the Balance Sheet Approach Presentation LUBS

Maximum marginal federal tax rates 20/11/2018 Maximum marginal federal tax rates Country Max. marginal % rate Australia 45.00 Belgium 50.00 Canada 29.00 Chile 40.00 Denmark 26.48 France Germany Italy 43.00 Japan Korea 35.00 Country Max. marginal % rate Mexico 28.00 Netherlands 52.00 New Zealand 39.00 Poland 40.00 Spain 27.13 Sweden 25.00 Switzerland 11.50 Turkey 35.00 United Kingdom United States Presentation LUBS

Social security contributions by employers and employees 20/11/2018 Social security contributions by employers and employees Presentation LUBS

Range of working times required to buy one Big Mac 20/11/2018 Range of working times required to buy one Big Mac Presentation LUBS

Pay in an International Context 20/11/2018 Pay in an International Context A case of similar pressures (towards a pay-performance link) and divergent outcomes (White and Druker, 2000) Cultures that avoid uncertainty (Greece, Portugal, Italy Spain) favour seniority, skill and competence pay Cultures that are individualistic (USA, UK, The Netherlands) have more IPRP. Less male dominated cultures (Norway, Sweden) like flexible benefits (child care, career breaks) Countries which have respect for authority (France, Greece and the Far East) dislike share ownership for low level staff Institutional histories and managerial competencies also important, may be explored through the very different cases of the USA and Germany … Presentation LUBS

Pay in an international context 20/11/2018 Pay in an international context USA (emphasis on individualism) Very low levels of collective bargaining Extensive use of variable pay supported by confidentiality clauses Some ‘internalisation’ but ‘marketisation’ dominant Priority – individual freedom Presentation LUBS

Pay in an international context 20/11/2018 Pay in an international context Germany Industry collective agreements – high coverage of collective agreements, but more local bargaining recently Worker influence on company boards Overall, markets more regulated and controlled High productivity per worker but also high labour costs, high unemployment and social welfare costs Priority – social stability Presentation LUBS

Some issues when considering International Benefits 20/11/2018 Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it? Enroll expatriates in host-country benefit programs and/or making up coverage differences? Does host-country legislation regarding termination affects benefit entitlement? How is host country cost of living measured? Do expatriates receive home-country or host-country social security benefits? Should benefits be maintained on a home-country or host-country basis? Who is responsible for the cost? Should other benefits offset any shortfall in coverage? Should home-country benefit programs be exported to local nationals in foreign countries? Presentation LUBS

Conclusion 20/11/2018 In summary, international compensation/pay strategy can be envisaged in ‘terms of a series of interlocking strategic choices on Reward (Dowling et al 2008): The basis of pay – job versus skill, performance versus seniority Unit – individuals, groups/teams, organisations Patterns of variation – degree of risk, hierarchical or egalitarian culture Internal or external equity – job evaluation or the market Home or host country orientation Nature of industry/sector MNC business strategy Presentation LUBS

Complexity, challenges & choices in global Reward 20/11/2018 Figure 8.1 Complexity, challenges & choices in global Reward From Dowling et al 2013 Presentation LUBS

Pay and Reward Systems (PRSs) 20/11/2018 Job evaluation and the reward model – see ACAS web site A systematic process designed to determine the relative worth of jobs within a single work organization. Job evaluation can help to ensure that reward structures are internally equitable. The process depends ultimately upon subjective judgements. The process of job evaluation has four steps: collection of data; selection of compensable factors; evaluation of job; and the assignment of reward for the job. Methods of job evaluation Non-analytical: Ranking Paired comparison Job classification Analytical: Points rating Presentation LUBS

Reward Systems: Trends and developments 20/11/2018 Reward Systems: Trends and developments Strategic Reward Management: Pay is increasingly likely to be linked to organisational performance (of the individual, the workgroup or the organisation) Associated with the need to reduce the indeterminacy of labour contract – often part of a control strategy to increase worker effort (prevents shirking) Also reflects a perceived need to align the interests of employers and employees The nature of this link will vary greatly from workplace to workplace and will depend on internal and external ‘fit’. Presentation LUBS

20/11/2018 Question: There is no such thing as a good pay system; there is only a series of bad ones. The trick is to choose the least bad one. True? Presentation LUBS

Reward Systems (PRSs) Forces for change : 20/11/2018 Forces for change : Organisational : downsizing has meant fewer promotion opportunities and incremental opportunities. Also, emphasis on flexibility makes a rate for a job appear rigid. Institutional : decline of collective bargaining Governments and the law: Government has a direct impact on reward management. Market forces (supply and demand for labour as a determinant of pay, curtailed by equal pay and pay equity legislation Managerial: using pay to deal with new management objectives. See Kessler (2000) Presentation LUBS

New management objectives: Reward Systems (PRSs) 20/11/2018 New management objectives: Recruitment, retention and motivation Fairness Promote changes in organisational culture To restructure the employment relationship To reinforce the role of line management Tighten financial control Increase in management discretion Presentation LUBS

Reward Systems (PRSs) 20/11/2018 However, most organisations do not reflect leading edge practice. Lowe et al (2002), international survey suggests management ambition leads reward practice. Only China, Taiwan and Japan rated pay incentives as an important part of current reward system much higher than in the USA and Australia (chapter 5 Redman and Wilkinson). Only in Korea were incentives a significant part of pay. USA, Canada, Australia low, this might be surprising in view of the cultural value of individualism in these latter countries. Presentation LUBS

Reward Systems (PRSs) Conclusion 20/11/2018 Conclusion Financial Reward lies at the heart of the employment relationship Brown (1989) suggests that, ‘the management of pay is central to the employment relationship between an organisation and its employee’ and the shift towards individualised pay might have more to do with reshaping the employment relationship towards an emphasis on the individual employee, and away from the collective, rather than with performance per se. In theory, individual PRP is meant to elicit greater employee commitment and strengthen the role of line managers whilst it has undoubtedly done the latter, the evidence on the former is inconclusive. see Dowling and Welch (2004) Presentation LUBS

Discussion Questions 20/11/2018 What should be the main objectives for a multinational firm with regard to its compensation policies? Describe the main differences in the Going Rate and Balance Sheet Approaches to international compensation. What are the key differences in salary compensation for PCNs and TCNs? Do these differences matter? What are the main points that MNEs must consider when deciding how to provide benefits? Why is it important for MNEs to understand the compensation practices of other countries? Explain how balancing the interests of global and local, occupational and functional perspectives might play out in a compensation decision scenario. Presentation LUBS