1. Pay and Reward (PRSs) Systems - (Compensation)
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MSc Management
IHRM Module
Pay and Reward (PRSs) Systems - (Compensation)
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Reward!
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4. Reward Systems (PRSs)
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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)
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5. Pay and Reward (PRSs) Systems - (Compensation)
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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 …
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6. Detail the key components of an international compensation program.
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… 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.
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7. A number of key dimensions and issues:
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Reward
Management
objectives
The Pay System
Motivation and
Commitment
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8. Reward
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‘…[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).
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9. Reward Systems (PRSs)
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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.
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10. Compensation systems can be considered from a number of perspectives:
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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.
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11. Reward Systems (PRSs) Question?
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Question?
What might the organisational and individual objectives of a Reward~Compensation system be?
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12. Strategic Reward Management:
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‘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)
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13. Reward Systems (PRSs) Question:
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Question:
Might Reward systems be the source of conflict?
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14. Intrinsic and Extrinsic Reward
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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).
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15. Motivation and Commitment (Psychology/HRM)
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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.
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16. The Pay System – rules linking reward to effort and status
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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
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17. Job-Based ……………to………...Individual Based Pay.
Payment Systems
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Payment systems can be thought of as being arrayed along a continuum from:
Job-Based ……………to………...Individual Based Pay.
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18. Performance Pay and Individual Performance Related Pay (IPRP)
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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
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19. International Reward/Compensation
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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
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20. International Reward Context
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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
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21. Objectives of International compensation:
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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.
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22. Objectives of International Reward
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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)
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23. What factors/issues might affect the pay of expatriate employees?
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Question:
What factors/issues might affect the pay of expatriate employees?
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24. 20/11/2018
Question:
What might Employees expect from an International Compensation package?
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25. Components of an International Compensation System
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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?
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26. Components of an International Compensation System
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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).
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27. Host country Salary Structure
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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
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28. Advantages and disadvantages of the Going Rate Approach
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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
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29. The Balance Sheet Approach - Home Country
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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
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30. Advantages and disadvantages of the Balance Sheet Approach
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Advantages and disadvantages of the Balance Sheet Approach
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31. Maximum marginal federal tax rates
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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
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32. Social security contributions by employers and employees
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Social security contributions by employers and employees
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33. Range of working times required to buy one Big Mac
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Range of working times required to buy one Big Mac
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34. Pay in an International Context
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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 …
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35. Pay in an international context
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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
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36. Pay in an international context
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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
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37. Some issues when considering International Benefits
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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?
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38. Conclusion
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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
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39. Complexity, challenges & choices in global Reward
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Figure 8.1
Complexity, challenges & choices in global Reward
From Dowling et al 2013
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40. Pay and Reward Systems (PRSs)
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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
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41. Reward Systems: Trends and developments
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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’.
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42. 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?
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43. Reward Systems (PRSs) Forces for change :
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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)
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44. New management objectives:
Reward Systems (PRSs)
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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
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45. Reward Systems (PRSs)
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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.
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46. Reward Systems (PRSs) Conclusion
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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)
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47. Discussion Questions
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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.
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