Summary Human Resource Management part 2

Deze samenvatting is gebaseerd op het studiejaar 2013-2014.

Chapter G: Performance management

Companies that seek competitive advantage through employees must be able to manage the behaviour and results of all employees. Traditionally, the former performance appraisal system has been viewed as the primary means for managing employee performance, but today performance appraisal is viewed as an annual ritual. Because most people dislike confrontation, feedback gets little attention of some managers. Performance appraisal was primarily the function of HRM.

The definition of performance management is the methods and techniques through which managers ensure that employee activities and outputs are congruent with the organisation’s goals. Performance management is central to gaining competitive advantage. It has three parts:

• Defining performance. Through job analysis is specified which aspects of performance are relevant to the organisation.
• Measuring performance: through performance appraisal, which is the process through which an organisation gets information on how well an employee is doing his or her job.
• Feeding back performance information: through performance feedback. This is the process of providing employees information regarding their performance effectiveness.

The goal of these performance systems is to measure the performance of employees.

G.1      Process of Performance Management

Figure 8.1 shows the performance management process. The first step starts with understanding and identifying important performance outcomes or results. The second step of the process involves understanding the process to achieve the goals established in the first step. This includes identifying measurable goals, behaviours, and activities that will help the employee achieve the performance results. Step three, organizational support, involves providing employees with training necessary resources and tool and frequent feedback communication between the employee en the manager. Step four involves performance evaluation, that is, when the manager and employee discuss and compare the targeted performance goal and supporting behaviours with the actual results. The final steps involve the employee and manager identifying what the employee can do to capitalize on performance strengths and address weaknesses and providing consequences for achieving performance outcomes. 

Performance management has three purposes:

• Strategic purpose. The performance management system should link employee’s activities to the company’s strategy and goals. The system has to be flexible, in case the strategy changes.

The performance system can also be useful for communicating corporate culture and values in companies whose business operations are becoming more global.

• Administrative purpose. Organisations use performance management information in many administrative decisions like salary, promotion, termination and recognition of individual performances.
• Developmental purpose. To develop employees who are effective at their jobs. When employees are not performing as well as they should, performance management seeks to improve this by feedback and determine the causes of the low performance. It is hard for managers to confront employees with their performance weaknesses, because it is not good for the everyday working relationship.

Fulfilling these three purposes is central to gaining competitive advantage.

G.3 Criteria

Once the company has determined what kind of performances it expects (through job analysis and design), it needs to develop ways to measure those performances. There are five criteria to use in evaluating a performance management system:

• Strategic congruence. This is the extent to which the performance management system elicits job performance that is consistent with the organisations strategy, goals and culture. This requires systems flexible enough to adapt to changes in the company’s strategy. A challenge is how to measure customer loyalty, employee satisfaction and other nonfinancial performance areas that affect profitability.
• Validity. This is the extent to which a performance measure assesses all the relevant and only the relevant aspects of job performance. This is often referred to as content validity. Validity is concerned with maximising the overlap between actual job performance and the measure of job performance. For a performance measure to be valid it must not be deficient nor contaminated. A performance measure is deficient if it does not measure all aspects of performance. A contaminated measure evaluates irrelevant aspects of performance or aspects that are not job related.
• Reliability. This is the consistency of a performance measure: the degree to which it is free from errors. Interrater reliability is the consistency among the individuals who evaluate the employees’ performance. Internal consistency reliability is the extent to which all items rated are internally consistent. Test-retest reliability is that the measure should be reliable over time.
• Acceptability. This is the extent to which a performance measure is deemed to be satisfactory or adequate by those who use it. For the manager, the performance measure should not consume too much time. For the people that are measured, acceptability is affected by the extent to which they believe the performance measure management is fair. There are three categories of perceived fairness: procedural, interpersonal and outcome fairness. The first is important in development (create consistent standards), the second is important in use (give timely feedback) and the third in outcomes (communicate expectations regarding evaluations and rewards).
• Specificity. This is the extent to which a performance measure tells employees what is expected of them and how they can meet these expectations.

Specificity is relevant to both strategy and developmental purposes of performance management. If a measure does not specify what an employee must do, he or she will not be able to help to achieve the company’s goals. And, if the measure does not point out employees’ performance problems, they can not be corrected.

G.4 Approaches figure 8.9

1) The comparative approach

The comparative approach to performance measurement requires the rater to compare an individual’s performance with that of others. This approach usually uses some overall assessment of the individuals performance and then seeks to develop some ranking of the individuals within a work group.

There are three techniques that fall under this approach:

• Ranking. Simple ranking requires managers to rank employees within their departments from highest performer to poorest performer. Alternation ranking consists of a manager looking at a list of employees, deciding who is the best and crosses that name off. From the remaining employees the manager decides who is the worst and crosses that name off, etc.
• Forced distribution is a method that ranks employees in groups. The manager puts certain percentages of employees into predetermined groups (like exceptional, high standard, or not acceptable). It is difficult to rank employees into distinctive categories when criteria are subjective or when it is difficult to differentiate employees on the criteria.
• Paired comparison is a method which requires managers to compare every employee with every other employee in the work group, giving the employee an score of 1 every time he or she is considered the higher performer. Once all pairs have been compared the manager computes all the 1’s and that is the performance score.

The comparative approach is an effective tool in differentiating employee performance and eliminates problems of leniency, central tendency and strictness.

Evaluation: It’s strategic congruence is poor, validity can be high if ratings are done carefully, reliability is moderate, acceptability is moderate and specificity is very low.

2) The attribute approach

This approach focuses on the extent to which individuals have certain attributes (=characteristics) that are believed to be desirable for the company’s success. The techniques that use this approach define a set of attributes (such as initiative, leadership, and competitiveness) and evaluate individuals on them.

• Graphic rating scales. This is a graphic with some performance dimensions at the left side and a rating scale for every dimension, to rate how much of that characteristic the individual has.
• Mixed-standard scales are developed to avoid some graphic problems. To create a mixed-standard scale, you define the relevant performance dimensions and then develop statements representing good, average and poor along each dimension. These statements are then mixed with the statements from other dimensions on the actual rating instrument.

The attribute based performance method is most popular and easy to develop, but there isn’t much congruence between this method and the company strategy. The results are open to different interpretations and they have very vague performance standards.

Evaluation: It’s strategic congruence is low, validity is usually low but can be fine if development is done carefully, reliability is usually low, acceptability is high and specificity is very low.

3) The behaviour approach

This approach attempts to define the behaviours an employee must exhibit to be effective in the job. Some techniques that rely on the behavioural approach:

• Behaviourally anchored rating scales is designed to specifically  define performance dimensions by developing behavioural anchors (=examples) at every level of performance. The behavioural anchors can increase interrater reliability by providing  precise and complete definition of the performance dimension. An disadvantage is that they can bias information recall, that is: behaviour that closely approximates the anchors is more easily recalled than other behaviour.
• Behaviour observation scale is a variation of the behaviourally anchored ratings scale but this approach uses specifically behaviours rather than a large number of behaviours. And rather than assessing which behaviour best reflects an individuals performance, a behaviour observation scale requires the managers to rate the frequency with which the employee has exhibited each behaviour during the rating period. These ratings are then averaged to compute an overall performance rating. A drawback of this method is that it requires more information than most managers can remember.
• Competency models. Competencies are sets of skills, knowledge, and personal characteristics that enable employees to successfully perform their jobs. A competency model identifies and provides descriptions of competencies that are common for an entire occupation, organization, job family of a specific job. Competency models can be used to help identify the best employees as the foundation for development plans that allow the employee and manager to target specific strengths and development areas.

Evaluation: Its strategic congruence can be quite high, validity is usually high (it minimizes contamination and deficiency), reliability is usually high, acceptability is moderate and specificity is very high.

4) The results approach

This approach focuses on managing the objective, measurable results of a job or work group. It assumes that subjectivity can be eliminated from the measurement process and that results are the closest indicator of one’s contribution to organisational effectiveness.

• Management by objectives. The top management team first defines the company’s strategic goals for the coming year and how they plan to achieve them. These goals are passed on to the next layer of management and these managers define the goals they must achieve for the company to reach its goals. This goal setting process cascades down the organisation so that all managers set goals that help the company achieve its goals. These goals are used as the standards by which an individual’s performance is evaluated.

This system has three components: the systems require specific, difficult and objective goals (e.g. increase portfolio value by 10% in 1 year). The manager gives feedback throughout the rating period. This system is effective and can have a positive effect on an organisations performance. Considering the process through which goals are set, it is also likely that management-by-objectives-systems effectively link individual employee performance with the firm’s strategic goals.

• Balanced scorecard. Some companies use the balanced scorecard to measure performance. This includes four perspectives: financial, customer, internal and learning and growth.
• Productivity measurement and evaluation system. The main goal of this system is to motivate employees to higher levels of productivity. It is a means of measuring and feeding back productivity information to personnel. It consist of four steps.

First people define the products or activities that the organization expects to accomplish. Second staff defines indicators of the products (=measures of how well the products are being generated, e.g. % of quality-control inspection passed). Third the staff establishes the contingencies between the amount of the indicators and the level of evaluation associated with that amount, fourth a feedback system is developed that provides employees and work groups with information about their specific level of performance on each of the indicators. An overall productivity score can be computed by summing the effectiveness scores across the various indicators.

Evaluation: It’s strategic congruence is very high, validity is usually high (it can be both contaminated and deficient), reliability is high, acceptability is high and specificity is high regarding results, but low regarding behaviours necessary to achieve them.

5) The quality approach

This approach has two fundamental characteristics: customer orientation and a prevention approach to errors. Its primary goal is to improve internal and external customers’ satisfaction.

A performance management system designed with a strong quality orientation can be expected to

• emphasise an assessment of both person and system factors in the measurement system.
• emphasise that managers and employees work together to solve performance problems.
• Involve both internal and external customers in setting standards and measuring performance.
• use multiple sources to evaluate person and system factors.

Holding employees accountable for outcomes affected by systems factors (like competitors prices) is believed to result in dysfunctional behaviour and lower motivation for continuous improvement.

The major focus of performance evaluations should be to provide employees with feedback about what and how to improve. There are two types of feedback necessary: subjective feedback about the personal qualities of the employee and objective feedback based on the work process, using statistics.

Statistical process control techniques are very important in the quality approach, because they are an objective tool to identify causes and potential solutions.

These techniques include:

1. Process-flow analysis, which identifies each action and decision necessary to complete work. It identifies redundancy.
2. Cause-and-effect diagrams, which identifies possible events or causes that result in undesirable outcomes.
3. Pareto charts, this highlights the most important cause of a problem (charts where the reason with highest frequency is the left column)
4. Control charts, this involves collecting data at multiple points in time, so employees can identify what factors contribute to an outcome and when they tend to occur.
5. Histograms, they display large sets of data, where data are grouped into a smaller number of categories. They are useful for understanding the amount of variance between an outcome and the average outcome.
6. Scattergrams, these show the relationship between two variables, events or different pieces of data. They show whether the relationship is positive, negative or zero.

Evaluation: It’s strategic congruence is very high, validity is high, but can be both contaminated and deficient, reliability is high, acceptability is high and specificity is high regarding results, but low regarding behaviours necessary to achieve them.

G.5 Sources

Whatever approach to performance management is used, it is necessary to decide whom to use as the source of the performance measures. There are five sources:

• Managers. They are the most frequent source of performance information. Usually, supervisors have extensive knowledge of the job requirements and have adequate opportunity to observe their employees. Some supervisors can be biased because of favouritism against a particular employee.
• Peers. The employers’ co-workers are an excellent source because they see the employer all the time. This information can also be biased, because of friendship.
• Subordinates. They have the best opportunity to evaluate managers. Upward feedback: managerial performance appraisal that involves subordinates’ evaluations of the manager’s behaviour or skills.
• Yourself. Self-ratings are valuable, but have a tendency toward inflated assessments.
• Customers. Customer evaluation of employees’ behaviour is especially necessary in the service sector. A drawback is the expense of those customer surveys (printing, telephone, labour costs, etc).

What the best source is, depends on the particular job. You can also choose a combination of sources. The 360-degree appraisal is a performance appraisal process for managers that include evaluations from a wide range of raters (boss, peers, subordinates, customers).

G.6 Errors

Rater errors occur a lot because of people’s limitations of processing information. Some common errors are:

• Similar to me is the error people make when judging those who are similar to them more highly than those who are not.
• Contrast error occurs when we compare individuals with one another instead of against an objective standard.
• Distributional errors are the result of a rater’s tendency to use only one part of the rating scale. Leniency is always high ratings, strictness is always low ratings and central tendency is rating always in the middle of the scale.
• Halo and horns errors refer to failure to distinguish among different aspects of performance. Halo error occurs when one positive performance aspect causes the rater to rate all other aspects of performance positively. Horns error works in the opposite direction.

There are two approaches to reduce rating errors:

1. Rater error training attempts to make managers aware of ratings and help them develop strategies to avoid the errors.
2. Rater accuracy training attempts to emphasis the multidimensional nature of performance and thoroughly familiarise raters with the actual content of various performance dimensions. This is also called frame-of-reference training.

Appraisal politics are a situation in which evaluators purposefully distort ratings to achieve personal or company goals. This is most likely to occur when raters are accountable to the employee being rated and a direct link exists between performance appraisal and highly desirable rewards. Calibration meetings: meetings attended by managers in which employee performance ratings are discussed and evidence supporting the ratings is provided. The purpose of the meetings is to reduce the influence of rating errors and politics on performance appraisals.

G.7 Feedback

The feedback process is important, because it’s uncomfortable so judge somebody and being judged also. Effective managers provide specific performance feedback to employees in a way that elicits positive behavioural responses. Recommendations for effective performance feedback:

• Feedback should be given frequently.
• Create the right context for the discussion: neutral location, not the managers’ office.
• Ask the employee to rate his or her performance before the session.
• Encourage the subordinate to participate in the session.
• Reinforce effective performance through praising it. Don’t focus on the problems only.
• Focus on solving problems.
• Focus on feedback on behaviour or results, not the person.
• Minimise criticism.
• Agree to specific goals and set a date to review progress.

Different types of employees need different ways to manage their performance. Figure 8 and table 8.12. For example, a marginal employee is an employee performing at a barely acceptable level due to lack of ability and / or motivation to perform well, and not because of poor work conditions. Performance feedback will not really help these people to improve.

• Solid performers are employees with high ability and high motivation. They are likely good performers. Managers should reward good performance, identify development opportunities and provide honest, direct feedback to these type of employees.
• Misdirected effort is poor performance resulting from lack of ability, but these people have high motivation. Managers should coach them, give frequent performance feedback, set goals, provide training and restructure their job assignment.
• Underutilizers are employees who have high ability but lack motivation. Managers should give them honest, direct feedback, provide counselling, use team building and conflict resolution, link rewards to performance outcomes, offer training and manage stress.
• Deadwood is poor performance due to low ability and low motivation. Managers should withhold pay increases, use demotion, outplacement, firing and specific, direct feedback on performance problems.

When you are finally developing and implementing a performance management system, it has to follow the legal guidelines. Discrimination and unjust dismissal are the most important cases.

An increasing trend in companies is using sophisticated electronic tracking systems to ensure that employees are working when they should be: electronic monitoring. There is also software available to help monitor performance problems and decision making.

Chapter H: Employee Development

Employee development is a key component of a strategy to retain employees and prepare them for career opportunities within the company.  For managers it is important that they can identify high-potential employees. They have to be able to make sure the talents of these employees are used and convinced them of their utility for the company before they are dissatisfied and leave. Managers have to work on good relationships with their employees. Poor relationships are one of the major reasons for good employees to leave the company.

H.1      Training and development

Development and training

Development refers to formal education, job experiences, relationships and assessment of personality and abilities that help employees prepare for future. Training focuses on helping employees’ performance in their current jobs. Development prepares them for other positions in the company and increases their ability to move into jobs that may not yet exist. If training becomes more strategic, the difference between Training and development become smaller and smaller.

Development and careers

Careers have been described in many different ways. Three examples:

1. Careers as a sequence of positions held within an occupation.
2. Careers in the context of mobility within an organization
3. Careers as characteristic of the employee

The new concept of the career is often referred to as a protean career. A protean career is a career that is based on self-direction with the goal of psychological success in one’s work. Compared to the traditionally way of looking at careers, employees in the new vision take major responsibilities for managing their own career.

The development of the protean career is influenced by changes in the psychological contract. A psychological contract deals about the expectations that employers and employees have about each other. The goal for the new career is psychological success. This remains the feeling of pride and accomplishment that comes from achieving life goals that are not limited to achievements at work.

Employees need to develop new skills rather than rely on a static knowledge base. They have to “know why” and “know whom”, instead of only “know how”. This has resulted from companies’ need to be more responsive towards clients. To retain and motivate employees, companies need to provide a system to identify and meet the employee’s development needs. This is especially important to retain good performers and employees who have potential for managerial positions. This system is often known as a career management system or development planning system, which is a system to retain and motivate employees by identifying and meeting their development needs. 

Companies´ development planning systems vary in the level of sophistication and the emphasis they place on different components of the process. There are four steps: Self-assessment, reality check, goal setting and action planning, figure 9.1.

Companies career management systems vary in the level of sophistication and the emphasis they place on different components of the process.

1.         Self-assessment

Self-assessment refers to the use of information by employees to determine their career interest, values, aptitudes and behavioural tendencies. Through the assessment a development need can be identified. This need can result from gaps between current skills and the skills needed today.

2.         Reality Check

Reality check refers to the information employees receive about how the company evaluates their skills and knowledge and where they fit into the company’s plans. Usually this information is provided by the employee manager as part of performance appraisal.

3.         Goal Setting

Goal setting refers to the process of employees developing short- and long term career objectives. These goals usually relate to desired positions, level of skill application or work setting. These goals are discussed with the manager.

4.         Action planning

Action planning is the phase when employees determine how they will achieve their goals.

H.2  Approaches

Although much development activity is targeted at managers, all levels of employees may be involved in the development. We can distinguish four types of development approaches.

Formal education program, Assessment, Experiences, Interpersonal relationships

H.2.1   Formal education programs

Employee development programs, including short courses offered by consultants or universities. These programs may involve (business) lectures, games, simulations, adventure learning and meetings with customers. There are several trends in Formal education programs: employee development programs, including short courses offered by consultatns or universities, and executive MBA programs. The most important topics in executive education are Leadership, entrepreneurship and e-business. Another trend for companies is to create short custom courses with content designed specifically for the audience. It is also a trend to supplement formal courses with development activities like team projects. The primary purpose according to companies of education is providing the employee with job specific skills.

H.2.2   Assessment

Assessment: collecting of information and providing feedback to employees about their behaviour communication style or skills. This is mainly used to identify employees with managerial potential and measure current manager’s strengths and weaknesses. Companies vary in the methods and the sources of information they use in developmental assessment. Many use psychological tests or ratings.

Myers Briggs Type Indicator (MBTI) this is a psychological tests used for team building and leadership development that identifies employees preferences for energy, information, gathering decision making and lifestyle. It contests more than 100 questions about how a person feels or preferable would behave in a certain situation. The MBI identifies individual’s preference for energy, information gathering, decision making, and lifestyle. The energy dimension determines where individuals gain interpersonal strength and vitality.

The MBI is valuable for understanding communication styles and the ways people prefer to interact with others but it doesn’t measure how well someone performs.

Assessment centre is a process in which multiple raters evaluate employees’ performance on a number of exercises.

The types of exercise used in assessment centres include

1. Leaderless group discussion which is a process where a group of people solve a problem they get assigned together.
2. Interviews.
3. In-basket, which is a simulation of the administrative tasks of a managers job.
4. Role-play.

The assessors observe and record the behaviours of the employers and rate them.

A recent trend in performance appraisals (the process through which an organization gets information on how well an employee is doing his or her job) for management development is the use of upward feedback and the 360-degree feedback. Upward feedback is a performance appraisal process for managers. It includes subordinates evaluations. The 360-degree-feedback is a special kind of upwards feedback. It is a performance appraisal system for managers, which includes evaluations from a wide range of persons who interact with the manager. The process includes self-evaluations as well as evaluation from their peers, customers and bosses. The raters complete a questionnaire asking them to rate the person on a number of different dimensions. The benefits of the 360-degree feedback include collecting multiple perspectives of manager’s performance, allowing employees to compare their own scores with others. Potential limitations of the 360-degree feedback include the time demands placed on the raters to complete the evaluation. Regardless of the assessment method, the information should be shared with employees for development to occur.

Based on the assessment information and suggestions the employee should develop an action plan to guide their self-improvements efforts.

H.2.3   Experiences

Most employee development occurs through job experiences. These are the relationships, problems, demands, tasks and other features that employees face in their jobs. To succeed in their jobs employees must develop their skills and apply this in a new way and master new experiences. Although job experiences are usually for managers, employees can also learn from it. To create a successful team, the members need skills which were in de past only thought for the managers.  Development not only occurs by creating a team. Employees also develop by switching roles within the team. Other ways in which job experiences can be used for employees are current job, job rotation, transfers, promotions, downward moves and temporary assignments with other companies.

Job enlargement refers to adding challenges or new responsibilities to an employee’s current job. Job rotation is the process of systematically moving a single individual from one job to another over the course of time. The job assignments may be in various functional areas of the company or movement maybe between jobs in a single functional area or department.

Job rotation helps employees gain an overall appreciation of the company’s goals, and increases their understanding of different functions. Effective job rotation systems are linked to the companies training development and career management systems. Job rotation should be used for all types of employees, not only for those with a managerial potential.

Tranfers, Promotions and Downward Moves.

Transfer is the movement of an employee to a different job assignment in a different area of the company. Transfers do not necessarily increase responsibility or compensation. They are more like lateral moves. Transfers can provoke anxiety; so many companies have difficulties getting employees to accept them. Promotions are advances into positions with greater challenge, more responsibility and more authority than the employer’s previous job.

Downward move is a job change involving a reduction in an employer’s level of responsibility and authority. Employers are more likely to accept promotions than a downward move. Many employers don’t see transfers and downward moves as a development. They see it like a punishment rather than a opportunity.

To ensure that employees accept transfers, promotions and downward moves as development opportunities companies can provide:

• Information about the content, challenges and potential benefits of the new job and location.
• Involvement in the transfer decision.
• Clear performance objectives and early feedback about their job performance.
• A host ate the new location to help the employee to adjust.

• Information about how the job opportunity will affect the employee.
• Reimbursement and assistance in selling and purchasing or renting a place.
• An orientation on how the job experiences will support the employee’s career plans.
• Assistance for dependent family members.
• Help for the spouse.

Temporary assignments with other organizations. For example an externship: when a company allows an employee to take a full time operational role at another company. Another example of temporary assignment is a sabbatical: a leave of absence from the company to renew or develop skills.

H.2.4   Interpersonal Relationships

Employees can also develop skills and increase their knowledge about the company and its customers by interacting with more experienced organization members. Mentoring and coaching are two types of interpersonal relationships that are used to develop employees.

A mentor is an experienced, productive senior employee who helps develop a less experienced employee (protégé). Mentoring relationships can also develop as a part of a planned company effort to bring together successful senior employees with less experienced employees.

Besides the development of informal mentoring relationships, developing successful mentoring programs is important. In that way anyone can have a mentor when needed. There are several benefits of mentoring relationships: Mentors provide career and psychosocial support to their protégés, mentoring relationships provide opportunities for mentors to develop their interpersonal skills and increase their feelings of self esteem. The purpose of mentoring programs is that they socialize new employees increase the likelihood of skill transfer and provide opportunities for minorities. The group mentoring program is a program pairing a successful senior employee with a group of four to six less experienced protégés.

A coach is also helpful for employees to develop themselves. It is a peer or manager who works with an employee to motivate her, help her develop skills and provide reinforcement and feedback. The coach can play three roles: they can be one-on-one providing feedback, they can learn the employee learn for themselves or they can provide resources.

To develop coaching skills, training programs need to focus on four aspects:

1. Managers may be reluctant to discuss performance issues because they avoid    confrontation.
2. Managers may be better to detect performance problems than to help employees solve them.
3. Managers may also feel that the employee interprets coaching as criticism.
4. As companies downsize and operate with fewer employees, managers may feel that there is not enough time for coaching.

H.3.1   Other implications

Break the glass ceiling

A major issue today is to get rid of the glass ceiling. In other words: creating opportunities for women and minorities. The glass ceiling is likely caused by lack of access to training programs and not enough development changes.

Succession Planning

Many companies use succession planning, which is the tracking and identification of high- potential employees capable of filling higher-level managerial positions. This helps the company to review new leadership in the company. High-potential employees develop in three stages:

1. High-potential employees are selected.
2. High-potential employees receive development experiences.
3. High-potential employees have to be seen by top management who will decide if the employees fit in the company’s culture and can represent the company.

It can take 15 to 20 years to reach stage 3. In every stage employees drop out for different reasons.

Chapter I: Employee Separation and Retention

Every executive recognises the need for satisfied loyal customers. Firms that fail to secure a loyal base of workers constantly place an inexperienced group of non-cohesive units on the front line of their organizations; to their own regret. This is especially the case in the service sector, where confused workers create a large number of unsatisfied customers. It is clear that many managers have been picking up the relationship between retention and organizational performance too slow. This provides another area where one organization can gain competitive advantage over another. Thus, to compete effectively, organizations must take steps to ensure that good performers are motivated to stay in the organization and low performers leave the company. Much of what needs to be done to retain employees, involves compensation and benefits. Involuntary turnover is initiated by the organization (often among people who would prefer to stay). Voluntary turnover is initiated by employees (often whom the company would prefer to keep).

I.1        Managing involuntary turnover

Despite a company’s best efforts in the area of personnel selection, training and design of compensation systems, some employees will fail to meet performance requirements or will violate company policies while on the job. When this happens organizations need to invoke a discipline program that could ultimately lead to the individual’s discharge. Discharging employees can be a very difficult task and should be handled with care.

First there are legal aspects to this decision that can have an important impact on the discharging policy of the company. Employment at will doctrine is the doctrine that in the absence of a specific contract either an employer or employee could sever the employment relationship at any time. This doctrine has changed over time, now employees sue their employers when they are falsely discharged. This could be on the ground of violated an implied contract, or violated a public policy.

Principles of justice

When someone gets fired it has to be for legit reasons; the reason has to be fair. Outcome fairness is the judgement that people make with respect to the outcomes received relative to the outcomes received by other people with whom they identify. The focus here is on the ends, procedural and interactional justice focus on means.

If the employer sees the negative decision as fair he will be more willing to accept it. Procedural justice is a concept of justice focusing on the methods used to determine the outcomes received. Procedural justice deals with how a decision was made, interactional justice refers to the interpersonal nature of how outcomes were implemented. In this case the decision is accepted when it is seen as socially sensitive, considerate and empathetic by the employer.

Progressive discipline

An employer doesn’t get fired at a first offence, but usually at the end of a systematic discipline program and after a few warnings. Effective discipline programs have two central components: documentation ad progressive punitive measures. The punishment measure should only be taken after the increasing magnitude is clearly documented.

Alternative dispute resolution

When the company and the employer can’t resolve their conflicts, the individual might invoke the legal system but to avoid this, companies turn to alternative dispute resolution. Alternative dispute resolution is a method of resolving disputes that does not rely on the legal system. It often proceeds through the four stages of open door policies, peer review, meditation and arbitration where, in the last step, an agreed upon neutral party resolves the conflict unilaterally if necessary. Whereas ADR is effective in dealing with problems related to performance and interpersonal differences in the workplace, many of the problems that lead an organization to want to terminate an individual’s employment relate to drugs or alcohol abuse. In these cases the dismissal program should also incorporate an employee assistance program.

Employee assistance program

Employee assistance program (EAP) is an employer program that attempt to ameliorate problems encountered by workers who are drug dependent, alcoholic or psychologically troubled. An EAP is a referral service that supervisors or employees can use to seek professional treatment for those problems.

Outplacement counseling

The terminal nature of an employee discharge not only leaves the person angry, it also leads to confusion as to how to react and what happens next. When a person has the feeling there’s no way back and he can’t lose more, the potential for violence and litigation is higher.

To help the employee manage the transition from one job to another the company provides outplacement counseling.

Some companies have their own in-house staff for conducting this counseling. Outplacement counseling is aimed at helping people realize that losing a job is not the end of the world and there are other opportunities.

I.2 Managing voluntary turnover

Process of job withdrawal

Job satisfaction plays a large role in voluntary employee turnover. Job withdrawal is a set of behaviors that dissatisfied individuals enact to avoid the work situation. The overall set of behaviors is grouping into three categories: behaviour change, physical job withdrawal and psychological job withdrawal. We present the various forms of withdrawal in a progression as if individuals try next category only if the proceeding is either unsuccessful or impossible to implement. This is the theory of progression of withdrawal. The withdrawal behaviors are clearly related to one another, and they are all at least partially caused by job dissatisfaction. Figure 10.3

Behaviour change

You would expect that if an employee isn’t satisfied with the work circumstance, he would try to change it. This can lead to confrontations and even conflicts, because managers could be feeling threatened when employees try to change policy or upper-level personnel. But in stead of feeling threatened, managers should see it as an opportunity to do something positive with this reaction. A different way to initiate change is trough whistle-blowing: making grievances public by going to the media or government. Employees can also sue their employers.

Physical job withdrawal

If the job conditions cannot be changed, the dissatisfied worker may be able to solve the problem by leaving the job. This could take the form of an internal transfer if the dissatisfaction is job specific or an organizational turnover if the dissatisfaction relates to organizationwide policies. In addition to the overall turnover rate, it is necessary to be concerned with the nature of the turnover in terms of who is staying and who is leaving. Many employees would like to leave but haven’t got any alternatives. Another way to stay away from work is to be absent or be late for work. Absence and being late or missing work can be very costly for the company.

Psychological withdrawal

When employers are dissatisfied with their work and can’t change their situation, they may psychologically disengage themselves from work (being with their mind elsewhere). There are several forms of psychological withdrawal. The first one is Job involvement. This is the degree to which people identify themselves with their jobs. A second form of psychological disengagement is a lower level of organizational commitment. This is the degree to which an employee identifies with the organization and is willing to put forth effort on its behalf.

Job satisfaction and withdrawal

The key driving force behind all the different forms of job withdrawal is job satisfaction, which is the pleasurable feeling that results from the perception that one’s job fulfils or allows for the fulfilment of ones important job values. People’s perceptions are often strongly influenced by their frame of reference (a standard point that serves as a comparison for other points and thus provides meaning.

Personal Dispositions

Negative affective is a dispositional dimension that reflects pervasive individual differences in satisfaction with any and all aspects of life. These people are more likely focus on negative aspects of themselves and others. It isn’t entirely clear where this feeling comes from. Another construct useful in understanding disposition aspects of job satisfaction is the notion of core self-evaluations. Core self evaluations have been defined as a basic positive or negative bottom-line opinion that individuals hold about themselves. The more positive an individual is about himself the higher the job satisfaction will be, because these people seek out jobs with more desirable characteristics. Job dissatisfaction can also be a result of private circumstances.

Tasks and roles

There is also a strong relationship between task complexity and job satisfaction. Boredom and simplicity, repetitive jobs (that don’t challenge the worker), leads to frustration and dissatisfaction. The second aspect of a task that affects job satisfaction is the degree to which the job involves physical strain and exertion. The third aspect is whether the job promotes something of value to the worker.

There are several interventions aimed at reducing job dissatisfaction. The most important one is Job enrichment: ways to add complexity and meaningfulness to a person’s job. Another intervention method is job rotation (the process of systematically moving a single individual from one job to another over the course of time).

Supervisors and co-workers

The two primary sets of people in an organization who affect job satisfaction are co-workers and supervisors. A person can be satisfied with these persons for three reasons:

• The co-workers and supervisors have the same values as the employee.
• The co-workers and supervisors provide social support to the employee.
• The co-workers and supervisors helps attain some valued outcome for the employee.

Because a supportive environment helps attaining satisfaction with the job, many companies work in teams.

Pay and benefits

Another reason for job satisfaction is the pay and benefits the employees get from working at that company.

Measuring and monitoring job satisfaction

One standardized measure of satisfaction is the job descriptive index (JDI), which emphasizes various facets of satisfaction: pay, the work itself, supervision, co-workers and promotions.

Survey-feedback interventions

Employee survey research should be a prominent part of HR strategy for a number of reasons. First it makes it able for a company to watch trends over time.

In this way some problems can prevent before they cause voluntary turnover. Second, you can easily see the impact of changes in policy, personnel or on worker attitudes. The third reason is the result of a employee survey research is a standardized scale. With this scale it is possible to compare one company with another (in the same industry). Finally, yearly surveys give employees a constructive outlet for voicing their concerns and frustrations (so voicing is a formal opportunity to complain about one’s work situation).

Chapter J: Pay Structure Decisions

Pay is a powerful tool for furthering the organizations strategic goals. It has a large impact on employee attitudes and behaviours. It influences the kind of employees who are attracted to the organization and it can be a powerful tool for aligning current employees’ interests with those of the broader organization. Pay is also a significant organization cost and needs careful monitoring. From the employees’ point of view, policies having to do with wages, salaries and other earnings affect their overall income and thus their standard of living. Both the level of pay and its seeming fairness compared with others’ pay are important. Employees attach great importance to pay decisions and it is considered as a sign of status and success.

Pay decisions can be broken into two areas:

1. Pay structure: the relative pay of different jobs and how much they are paid
2. Individual pay

Pay structure entails a consideration of pay level and job structure. Pay level means the average pay including wages, salaries and bonuses of jobs and organizations. Job structure refers to the relative pay of jobs in an organization.

J.1       Equity theory

Employees often evaluate the fairness of their pay, by comparing it with those of other people. The equity theory suggests that person (P) compares her own ratio of perceived outcome (O) to perceived inputs (I) to the ratio of a comparison other (o).

The consequences of P’s comparison depend on whether equity is perceived. If equity is perceived no change is expected in P’s attitude or behaviour. If there is inequity employees can do three things:

1. Reducing one’s own input (not work so hard)

2. Leaving the situation that generates perceived inequity (leaving the organization or refusing to work with those employees who are perceived as overrewarded).

3. Increasing one’s outcome (theft).

Equity theory’s main implication for managing employee compensation is that to an important extent, employees compare their income with others and the outcome of these comparisons has an influence on their behaviour and attitudes. Another implication is that the employee perceptions are what determine their evaluation and has nothing to do with the managers’ point of view.

Two types of employee social comparison of pay are especially relevant in making pay level and job structure decisions.

• External equity pay comparisons focus on what employees in other organizations are paid for doing the same general job.

• Internal equity pay comparisons focus on what employees within the same organization, but in different jobs are paid.

In addition, employees make internal equity pay comparison with others performing the same job.

J.2 Pay levels

Any organization faces two important market challenges in deciding what to pay its employees:

• Product market competition. Organizations must compete effectively in the product market. An organization that has higher labour costs than its product market competitors will have to charge higher sales price for their products.

Therefore product market competition places an upper bound on labour costs and compensation. This is more constructive when labour costs are a large share of the total costs and when sales depend on price. The pay structure consists of wages, salaries, bonuses, insurance’s, and staffing level.

• Labour market competition. Labour market competition is the amount an organization must pay to compete against other companies that hire similar employees. Labour market competition places a lower bound on pay levels.

Employees as a resource

Employees aren’t just costs but they are a resource in which an organization has invested in and form which it expects valuable return. Although controlling costs directly affects an organization’s ability to compete in the product market, the organization’s competitive position can be compromised if costs are kept low at the expense of employee productivity and quality.

Having higher labour costs than your competitors is not necessarily bad if you also have the best and most effective workforce. Pay policies and programs are one of the most important HRM resource tools for encouraging desired employers behaviour and therefor must be evaluated in terms of costs and in terms of return.

Deciding what to pay

The pay level is influenced by important external labour- and product market pressure. Organizations have to decide to pay above or below the market level. The advantage of paying above is retaining top talent but the disadvantage is the added costs. When do the higher wages outweigh the higher costs? According to the efficiency wage theory, which is a theory stating that wages influence workers productivity.  The theory is that employees who are paid more than they would be paid elsewhere will be reluctant to shirk because they whish to retain their good jobs.

Market pay surveys

To compete for talent, organizations use benchmarking. It means they compare practices of the organization to those of competitors. In compensation management, benchmarking is accomplished by pay surveys that provide information about pay among competing organizations. Pay surveys can tell you something about:

• Which employee should be included in the survey?
• Which jobs are included in the survey?
• Which rates are used by multiple surveys?

Several factors affect decisions on how to combine surveys. The comparisons are important when attracting and retaining qualified employees. It is difficult and the costs of recruiting replacements are high. It is also necessary to know what those organizations are getting in return for their investment (salaries). To examine this you can use these ratios:

1. Revenues/employees which include the staffing component of employee costs but not the average costs per employee.
2. Revenue/labour costs. This ratio includes both.

Rate ranges

Rate ranges are when different employees in the same job may have different pay rates.

In surveys there is a distinction between key jobs (benchmark jobs used in pay surveys that have relatively stable content and are common to many organizations) and Non-key jobs. These are jobs that are unique to an organization and that cannot be directly valued or compared through the use of market surveys.

J.3       Job structure

A job structure can be defined as the relative worth of various jobs in the organization, based on internal comparisons. One way to measure internal job worth is job evaluation, an administrative procedure. This is composed of compensable factors and weighting schemes, based on the importance of each compensable factor to the organization. These characteristics can be for example working condition, job complexity, required education, required experience and responsibility. After generating scores that the job evaluation had done for each compensable factor on each job, they apply them on a weighting scheme to account for the difference in importance of the compensable factors to the organization. Weights can be generated in two ways: a priori (using expert judgements about the importance of each compensable factor) or derived empirically, based on how important each factor seems to be.

J.4       Pay structure

There are three pay setting approaches. They differ according to their relative emphasis on external or internal comparisons.

• An approach with the greatest emphasis on external comparisons is achieved by directly basing pay on market surveys that cover as many key jobs as possible.
• A second pay setting is pay policy line based on the key jobs. This pay policy line is a mathematical expression that describes the relationship between a job’s pay and its job evaluation points. It combines information from external and internal comparisons.
• Pay grades are used to group jobs into smaller number of pay classes. A five-grade structure for example is when each job has the same rate range. The advantage of this approach is that the administrative burden of setting separate rates of pay of different jobs is reduced and it permits greater flexibility. The disadvantage is that some jobs will be overpaid and some will be underpaid.

J.5 Compensation costs

Pay structure influences compensation costs in a number of ways. The pay level at which the structure is pegged influences these costs. The pay structure represents the organization’s intended policy, but the actual practice may not coincide with it. The compa-ratio is an index of the correspondence between actual and intended pay. Pay levels also differ globally. This creates a global dilemma.

J.6 The process

It is important, when changing pay practices to decide which programs or combination of programs makes most sense and how the decisions are made and how they are communicated.

Participation

Employee participation in compensation decision-making can take many forms, like recommending and designing a pay program. They may also be asked to help communicate and explain its rationale. It is important to distinguish between participation by those affected by policies and those who must actually implement the policies: managers.

Communication

Communication is very important feature in a organization especially when telling employees changes in pay policies. Managers play the most crucial role because of their day-to-day interactions with their employees

J.7       Challenges

Problems with Job-based pay structures

Job based pay structures have a number of potential limitations:

• They may encourage bureaucracy. The job description sets out specific tasks and activities for which the incumbent is responsible.
• The structure’s hierarchical nature reinforces a top-down decision making and information flow as well as status differentials, which do not lend themselves to taking advantage of the skills and knowledge of those closest to production.
• The bureaucracy required to generate and update job descriptions and job evaluations can become a barrier to change because wholesale changes to job descriptions can involve a tremendous amount of time and cost.
• The job-based pay structure may not reward desired behaviour, particularly in a rapidly changing environment.
• The emphasis on job level and status differentials encourage promotion seeking behaviour but may discourage lateral employee movement because employees reluctant to accept jobs that are not promotions or that appears to be step down.

Delayering and banding

In response to the problem caused by job-based pay structures some organizations are delayering which means they are reducing the number of job levels within an organization. One disadvantage of delayering is a reduced opportunity for promotion. Therefore organizations need to consider what they will offer employees instead, in addition to the extent that there are separate ranges within bands, the new structure may not represent as dramatic as it might appear. Broad bands can also lead to weaker budgetary control and rising labour costs. Alternatively the greater spread can permit managers to better recognise high performers with high pay. It can also permit the organization to reward employees for learning.

Paying the person: pay for skill, knowledge and competency

A second response to job based pay structure problems has been to move away from linking pay to jobs and toward building structures based on individual characteristics such as skills or knowledge. Skill based pay is pay based on the skills employees acquire and are capable of using. This system seems to fit well the increased breadth and depth of skill that the changing technology continues to bring. An advantage of this approach is its contribution to increased worker flexibility, which in turn, facilitates the decentralisation of decision making to those who are more knowledgeable. It also provides the opportunity for leaner staffing levels.

The disadvantages are that there has to be careful planning to use the new skills effectively. If pay is based entirely on skills, there isn’t any pay growth when the skills needed are required by the employees. Skill based plans may generate a large bureaucracy.

J.8       Regulating employee compensation

Top executives have disproportionate ability to influence the organizations performance and have special skills that other employees may not have that’s why they get a higher pay than others. There are laws like the equal employment opportunity regulation that prohibits sex and race differences in pay. It is likely that organizations will differ in terms of where women’s earnings disadvantages arise.

Comparable worth: a public policy that advocates remedies for any undervaluation of women’s job.

Minimum wage: the lowest amount that employers are legally allowed to pay.

Chapter K: Recognizing Employees Contribution with Pay

The pay system must encourage behaviours that both contribute to profits in the short run and build customer satisfaction in the long run. Employees’ pay doesn’t solely depend on the job they are doing. Instead, differences in performance are used as a basis for differentiating pay among the employees. Regardless of cost differences, different pay programs can have very different consequences for productivity and return on investment.

Pay plans are usually used to energise, direct, or control employee behaviour.

K.1      Influences of pay

Three additional theories also help explain compensation’s effects:

• The reinforcement theory states that a response followed by a reward is more likely to recur in the future. The implication for compensation management is that high employee performance followed by a monetary reward will make future high performance more likely.
• The expectancy theory is the theory that says motivation is a function of valence, instrumentality and expectancy. Behaviours can be described as a function of ability and motivation. Compensation systems differ according to their impact on motivational aspects like expectancy, valence and instrumentality. Some authors have their doubts. They arguing that monetary rewards may increase extrinsic motivation, but decrease intrinsic motivation.
• The agency theory focuses on the divergent interests and goals of the organization’s stakeholders and the ways that employee compensation can be used to align these interests and goals.  The separation between owner and manager is important. There are several advantages of this separation, but it also creates agency costs. This means the interests of the principals (a person who seeks to direct another person’s behaviour) and their agents (a person who is expected to act on behalf of a principal) may no longer converse.

There are three types of agency costs,

• Managers can spend money on things not relevant to the shareholders. So they making acquisitions that do not add value to the company but may enhance the manager’s prestige or pay.
• Managers and shareholders may differ in their attitudes towards risk.
• Decision making horizons may differ.

To minimise agent’s costs, the principal must choose a contracting scheme that helps align the interests of the agent with the principal’s own interests.

When deciding which type of contract to use, the following factors should be used:

• Risk aversion among actors makes outcome-orientated contracts less likely.
• Outcome uncertainty.
• Outcome uncertainty. Agents are less willing to have their pay linked to profits to the extent that there is a risk of low profits. They would therefore prefer a behaviour-oriented contract.
• Job programmability. As jobs become less programmable outcome orientated contracts become more likely because monitoring becomes more difficult.
• Measurable job out comes.
• Ability to pay.
• Tradition of using outcome-orientated contracts will make such contracts more likely.

The reinforcement, expectancy and agency theories all focus on the fact that behaviour reward contingencies can shape behaviours. However agency theory is part of particular value in compensation management because of its emphasis on the risk-reward trade off, an issue that needs close attention when companies consider variable pay plans, which can carry significant risk.

Different pay systems appear to attract different people. The design of compensation programs needs to be carefully co-ordinated with the business and human resource strategy.

K.2 Programs

In compensating employees an organization does not have to choose one program over another, a combination of programs is often a better solution. Each program shares a focus on paying for performance.

The programs differ according to three features:

• Payment method.
• Frequency of pay out.
• Ways of measuring performance.

Two contingencies that may influence whether a pay program fits the situation are management style and type of work.

These programs are table 12.1:

1. Individual Incentive
2. Merit pay
3. Ownership
4. Profit sharing
5. Skill-based pay
6. Gain sharing

1. Incentives pay

Like merit pay individual, incentives reward individual performance, but with two important differences. First, payments are not rolled into base pay. They must be continuously earned and re-earned. Second, performance is usually measured as physical output rather than by subjective ratings. Nevertheless, individual incentives are relatively rare for a variety of reasons:

• Most jobs have no physical output measure; instead they involve what might be described as knowledge work.
• Individual incentives usually do not fit well in a team.
• Individual incentives may do such a good job motivating that employees do whatever they get paid for.
• Many potential administrative problems often prove intractable.
• Individual incentives may be inconsistent with the goals of acquiring multiple skills and proactive problem solving.

Some incentive plans reward output volume at the expense of quality or customer service.

2. Merit pay

In merit pay programs annual pay increases are usually linked to performance appraisal ratings. Many merit pay programs work off of a merit increase grid, which is a grid that combines an employee’s performance rating with the employee’s position in a pay range to determine the size and frequency of his or her pay increases.

In general merit pay programs have the following characteristics:

• They identify individual differences in performance, which are assumed to reflect differences in ability or motivation.
• The majority of information on individual performance is collected from the immediate supervisor.
• There is a policy of linking pay increases to performance appraisal results.
• The feedback under such systems tends to occur infrequently, often once pr year at the formal performance review session.
• The flow of feedback tends to be largely unidirectional, from supervisor to subordinate.

There is criticism on the way merit programs measure performance. If this is not perceived as being fair and accurate, the program can break down. Another disadvantage of the program is that it is unfair to rate individual performances because it discourages teamwork.

3. Ownership

Employee ownership is similar to profit sharing in some aspects, such as encouraging employees to focus on the success of the organization as a whole. The motivation is usually when the employee sees the result. Ownership is accomplished through stock options: an employee ownership plan that gives employees the opportunity to buy the companies stock at a previously fixed price.

4. Profit sharing

Profit sharing is a compensation plan in which payments are based on a measure of organization performance and do not become part of the employees’ base salary. It has two advantages. First, it may encourage employees to think more effectively, think more like owners. Second, labour costs are reduced because they are not part of base pay. It is not proven that profit sharing contributes to better organization performance. Employees may be disappointed when profit sharing isn’t paid during a economic downturn. One solution some organizations choose is to design plans that have upside but not downside risks. Although profit sharing may be useful as one component of compensation system it may need to be complemented with other pay programs that more closely link pay to outcomes that individuals or teams can control. In addition profit sharing runs the danger of contributing to employee resistance and higher labour costs, depending on how it is designed.

5. Skill-based pay

Whereas gain sharing plans are often plant wide, group incentives and team awards typically pertain to a smaller work group. Group incentives tend to measure performance in terms of physical output whereas team award plans may use a broader range of performance measures. As with individual incentives plans these plans have a number of potential drawbacks. Competition between individual may be reduced but it may be replaced by competition between groups or teams. Also whit any incentive plan a standard setting process must be developed that is seen as fair to the employees and these standards must not exclude important dimensions such as quality.

       6. Gainsharing

Gainsharing is a form of compensation based on group or plant performance (rather than organization wide profits) that does not become part of the employee’s base salary. Gainsharing differs with profit sharing in two ways:

• Instead of using an organization level performance measure, the programs measure group or plant performance, which is likely to be seen as more controllable by employees.
• Payouts are distributed more frequently and not deferred.

Commonly factors of gain sharing include;

• Management commitment,.
• A need to change or strong commitment to continue improvement.
• Management acceptance and encouragement of employee input.
• High levels of co-operation and interaction.
• Employment security.
• Information sharing on productivity and costs.
• Goal setting.
• Commitment of all involved parties to the process of change and improvement.
• Agreement on a performance standard and calculation that is understandable

Balanced Scorecard

Every pay programs has advantages and disadvantages. Therefore rather than choosing one program some companies find it useful to design a mix of pay programs. One approach that seeks to do this is the balanced scorecard, which is a way for companies to track financial results while simultaneously monitoring progress in building the capabilities, and acquiring the intangible assets they would need for future growth.

K.3 Managerial rewards

Executives are often rewarded compared to the stock market, if the stock is going up, so are their rewards. It can also be the case that principals can set goals for the agents, and if they achieve these goals, their pay also rises. These goals can be measurements of their effectiveness and be measured on a balanced scorecard.

Organisational pay structures differ because of:

• Employee participation in decision making
• Communication
• The relationship between pay and process in the organisation

All this depends on the fit between the strategy of the organisation and its compensation system. Important factors are:

• Risk sharing
• Time orientation
• Pay structure (long and short term)
• Benefit level
• Centralisation in decision making
• Focus in analysis of pay (Skill or knowledge or job etc.)

Chapter L: Employee Benefits

Benefits are a part of total compensation but they have unique aspects. First there is the question of legal compliance. Although direct compensation is subject to government regulation, the scope and impact of regulation on benefits is far greater. Some benefits like social security are mandated by law. Others are mandated by regulations like pensions and savings. The heavy involvement of government in benefits decision reflects the central role benefits play in maintaining economic security. A second unique aspect of benefits is that organizations so typically offer them that they have come to be institutionalised; it now would be unusual to not provide any benefits. A third unique aspect of benefits is their relative complexity, compared with other forms of compensation. The value of medical coverage, pension provisions, disability insurance etc is rarely as clear as the value of one’s salary. It is important to increase employees understanding of the value of these benefits, because if the employee does not understand the benefit or is not even aware of them, then the employer will has very low return for this investment.

L.1 The reason for benefits of growth

The proportion of compensation in the form of benefits has grown over the years because of a number of reasons:

• Laws, wage and price controls.
• Growth of organized labour
• The tax treatment of benefits programs is often more favourable for employees than the tax treatment of wages and salaries. The marginal tax rate is the percentage of an additional dollar of earnings that goes to taxes. Deferring compensation until retirement allows the employee to receive cash, but at the time (=retirement) when the employers tax rate is sometimes lower because of a lower income level. Besides, investment returns on the deferred money typically accumulate tax free, which results in much faster growth of the investment.
• Organizations that represent large groups of employees can purchase insurance at lower rate because of economies of scale, which spread fixed costs over more employees to reduce the costs per person. Besides, insurance risks can be more easily pooled in large groups and large groups have greater bargaining power in dealing with insurance people.
• Employer may want to provide unique benefits to differentiate themselves.

L.2 Programs

Most benefits fall into one of these five categories: social insurance, private group insurance, retirement, pay for time not worked or family-friendly policies.

1) Social security

This benefit is legally required, so employers do not have discretion in designing this one. It is for the old-age insurance and unemployment insurance. A benefit of this program is that is free from tax. To finance this, both employees and employers are assessed a payroll tax.

• Unemployment insurance

This program has four major objectives:

1) to offset lost income during involuntary unemployment

2) to help unemployed workers find new jobs

3) to provide an incentive for employers to stabilise employment and

4) to preserve investments in worker skills by providing  income during short term layoffs (so they will come back).

This is financed largely through federal and state taxes on employers. A very important feature of the unemployment in insurance program is that no state imposes the same tax on every employer. The size of the tax depends on an employers experience rating: if you lay of a lot of employees, you have to pay higher taxes. Unemployed workers are eligible for benefits if they 1. have a prior attachment to the workforce, 2. are available for work, 3. are actively seeking work, 4. were not discharged for cause nor quite voluntarily.

• Workers compensation

These compensation laws cover job-related injuries and death. These laws operate under a principle of no-fault liability, meaning that an employer does not need to establish gross negligence by the employer. In return employers receive immunity from lawsuits. Employees are not covered when injuries are self-inflicted or stem from wilful disregard of safety rules. Workers compensation benefits fall into four major categories: 1. disability, 2. medical care, 3. death benefits, 4. rehabilitative benefits.

2) Private group insurance

The cost advantage associated with group insurance together with tax considerations and a concern for employee securit, helps explain the prevalence of employer sponsored insurance plans.

There are two types:

• Medical insurance. Employees find this one very important. It includes hospital expenses, surgical expenses and physician’s visits. The challenge it to provide quality medical benefit while controlling costs.
• Disability insurance. This can be categorized into short-term disability plans and long-term disability plans.

3) Retirement

This is not legally required, but many employers do offer a private retirement plan. A defined benefit plan guarantees a specified retirement benefit level to employees’ based typically on a combination of years of service and age as well as on the employees earnings level. Defined plans insulate employees from investment risk, which is borne by the company. In the event of severe financial difficulties that force the company to terminate or reduce employee pension benefits, special agencies exist to provide some protection.

Unlike defined benefit plans defined contribution plans do not promise a specific benefit level for employees upon retirement. Rather, an individual account is set up for each employee with guaranteed size of contribution. The advantage of such plans for employers is that they shift investment risk to employees and present fewer administrative challenges because there is no need to calculate payments based on age and service.

There is a wide variety of defined contribution plans. One of them is the money purchase plan, under which an employer specifies a level of annual contribution. At retirement age the employee is entitled to the contributions and the investment returns. Profit sharing plans and employee stock ownership plans are also often used as retirement vehicles.

A combination of defined benefit plans and defined contribution plans is the cash balance plan. This is a retirement plan in which the employer sets up an individual account for each employee and contributes a percentage of the employee’s salary; the account earns interest at a predefined rate.

As said before, pension plans are not required, but if you set up a retirement plan, is must meet certain requirements. One of these requirements is making a summary plan description, which is a reporting requirement of the employee retirement income security act (ERISA) that obligates employers to describe the plan’s funding, eligibility requirements risks and so forth within 90 days after an employee has entered the plan.

4) Pay for time not worked

The employer pays the employee for time not spent working, receiving no tangible production value in return. Therefore some employers may see little direct advantage. Sick programs often provide full salary replacement for a limited period of time, usually not exceeding 26 weeks. The amount of sick leave is often based on length of service, accumulating with service. Sick leave policies need to be carefully structured to avoid providing employees with the wrong incentives. Some organizations allow sick days to accumulate and then pay employee for these days, so a “use it or lose it mentality” is avoided.

Although vacation and other paid leave programs help attract and retain employees, there is a cost to providing time off with pay, especially in a global economy.  The fact that vacation and other paid leave practices differ across countries, contribute to the differences in labour costs.

5) Family-friendly policies

To ease employees´ conflicts between work and non-work, organizations may use family-friendly policies such as family leave policies and childcare. These programs have a spill over effect on other employees, who see the organization as having a lot of concern for human resources, thus promoting loyalty even among employee groups that do not use the programs.

Companies increasingly provide some form of childcare support to their employees. This support comes in several forms that vary in their degree of organization involvement. At the lowest level of involvement, the company only gives information about the cost and quality of available childcare. At a higher level, the company gives discounts to use existing childcare facilities. At the highest level the company provides a day care centre itself.

L.3 Goals and strategies

Nowadays, employees expect certain things from employers. If employees believe their employer feels little commitment to their welfare, they can hardly be expected to commit themselves to the company’s success.

To manage the benefits, the company compares their benefits plans with those of the competitors using information of consultants.

This is called benchmarking.

The costs have to be controlled. To do this, you have to consider some factors:

• The larger the cost of a benefit category, the greater the opportunity for savings.
• The growth of the benefit category is also important, even if costs are currently acceptable, because the rate of growth may result in serious costs in the future.
• Cost containment efforts can only work to the extent that the employer has significant discretion in choosing how much to spend in a benefit category.

One benefit, medical and other insurance’s, stands out as a target for cost control for two reasons: Its costs are substantial (they have except for the past few years been growing rapidly, and this growth is expected to continue), and employers have many options for attacking costs and improving quality.

One of the trends in employers’ attempts to control costs has been to very required employee contributions based on the employee’s health and risk factors rather than charging each employee the same premium. Another trend is to focus on reducing costs through activities as preadmission testing and second surgical opinions. Or the use of employee wellness programs, which focus on changing behaviours both on and off work time that could eventually lead to future health problems.

Employers may change staffing practices to control benefit costs. Because benefit costs are fixed, these costs per hour can be reduced by having employees work more hours. Employers may also be more likely to classify workers as independent contractors rather than employees, which eliminate the employer’s obligation to provide employee benefits.

Employers must consider the specific demographic composition and preferences of their current workforces in designing their benefits packages. Also, effective (written) communication of benefits information to employees is critical if employers are re realize sufficient returns on their benefits investments. Flexible benefit plans permit employees to choose the types and amount of benefits they want for themselves, which offers advantages.

All benefit packages must meet certain rules to be classified as qualified plans; for example it should not be discriminating.

Chapter M: HRM globally

Business competes in a rapidly globalizing environment. Companies are trying to gain a competitive advantage through global expansion, because this way a lot of new customers are gained. They can also take advantage of lower labour costs for relatively unskilled jobs in other countries. The rapid increase in telecommunication and IT enables work to be done more rapidly and efficiently around the globe.

M.1 Global Changes

Several recent social and political changes have accelerated the movement towards international competition. The effects of these changes have been profound and far-reaching. Many are still evolving.

M.1.1 The European Economic Community

One of these major developments is the European Economic Community (EEC). European countries have managed their economies individually for years. It led to al lot of problems to get one line in the economic policy in all of Europe. But because of the introduction of the EEC (free trade), all of this changed. Europe has become one of the largest free markets in the world.

M.1.2   The NAFTA

NAFTA is an agreement among Canada, the US and Mexico that has created a free market even larger than the EEC. NAFTA has increased US investment in Mexico because of Mexico’s substantially labour costs of low skilled employees. This had two effects on employment in the US: many low skilled jobs went south, so employment opportunities for US citizens with low-level skills are decreased. On the other hand, it has increased employment opportunities for Americans with higher-level skills.

M.1.3   Growth of Asia

An additional global market that is of economic consequence to many firms lies in Asia, like Japan, Singapore and Malaysia. China presents a tremendous potential market for goods.

M.1.4 GATT

The general agreements on tariffs and trade (GATT) are an international framework of rules and principles for reducing trade barriers across countries around the world.

The changes described above all exemplify events that are pushing companies to compete in a global economy.

M.2 Factors of influence

Companies that enter the global market have to recognise the differences between that country and their home country. There are a number of factors that can affect HRM in the global market, like culture, the political-legal system, education-human capital and the economic system. Figure 15.1

Culture

Culture is defined as the set of important assumptions that members of a community share. These assumptions consist of beliefs about the world and how it works and the ideals that are worth striving for.

Culture is important to HRM because culture affects laws and human capital and is closely intertwined with the economic system. Culture determines the effectiveness of various HRM practices, for example: individual-based evaluation in Japan is not as effective as in the US.

According to Geert Hofstede, culture can be classified in five dimensions.

• Individualism vs. collectivism, which describes the strength of the relation between an individual and other individuals in a society. The degree to which people act as individuals rather than as members of a group.
• Power distance, which describes how a culture deals with hierarchical power relationships, particularly the unequal distribution of power. It describes the degree of inequality among people that is considered normal. Differences in power distance often results into miscommunication and conflicts between people from different cultures.
• Uncertainty avoidance, which describes how cultures seek to deal with an unpredictable future. It defines the degree to which people in a culture prefer structured over unstructured situations.
• Masculinity-femininity dimension describes the division of roles between the sexes within a society. A masculine culture promotes values that are considered traditionally masculine.
• Long term/short term orientation, which describes how a culture balances immediate benefits with future rewards. Cultures high on the long term orientation focus on the future and hold values in the present that will not necessary provide an immediate benefit, such as saving and persistence.

These dimensions help us understand the potential problems of managing employees form different cultures.

Cultural characteristics influence the ways managers behave in relation to subordinates as well as the perceptions of the appropriateness of various HRM practices. Cultures differ strongly on things as motivation and the expected behaviour of managers. Cultures can influence compensation systems and the overall communication. However, while differences exist between nations, they also exist within nations.

Education - Human Capital

A company’s potential to find and maintain a qualified workforce is an important consideration in any decision to expand into foreign markets. Human capital refers to the productive capabilities of individual: their knowledge, skills and experience that have economic value. This is different in different countries. A countries human capital is determined by a number of variables, like the educational opportunities. A county’s human capital may profoundly affect a foreign company’s desire to locate there or enter that country’s market. Countries with low human capital attract facilities that require low skills and low wage levels. Countries with high human capital are attractive sites for direct foreign investments that create high skills jobs.

Political – Legal System

The regulations imposed by a country’s legal system can strongly affect the HRM practices. It dictates the requirements for certain HRM practices such as training, hiring, firing, and lay-offs. An example of this is the effects of the political- legal system on HRM in the EEC.  It provides the rights of workers like freedom of movement, freedom to choose an occupation, security benefit, collective bargaining and equal treatment for everyone.

Economic System

An economic system can influence HRM in the way of developing human capital but with different costs. The economic environment affects HRM through taxes and different labour costs. Companies that do business in other countries have to present compensation packages to expatriate managers that are competitive in take-home-pay rather than gross pay. In socialist economic systems, there are a lot of opportunities for developing human capital because of the free education. However, here is little economic incentive to develop human capital because there are no monetary rewards for increasing human capital. In capitalist systems the opposite situation exists.

M.3 Managing Employees

A parent country is the country in which the company’s corporate headquarters are located. A host country is the country in which the parent country organisation seeks to locate a facility, or has already located one. A third country is a country other than the host country or parent country and a company may or may not have a facility there.

There are also different categories of employees. Expatriate is the term generally used for employees sent by a company in one country to manage operations in a different country. With the increasing globalisation of business there are different expatriates:

• Parent country nationals (PCN) are employees who were born and live in the parent country.
• Host country nationals (HCN) are employees who were born and raised in the host country and not in the parent country.
• Third country nationals (TCN) are employees born in a country other than the parent or host country.

Different levels of global participation exist, figure 15.3. These are domestic, international, multinational and global. Companies begin by operating within a domestic marketplace and try to meet the needs of the small market niche. When more competitors enter the domestic market, companies can expand in the internationally markets. This is usually done by exporting products, but ultimately by building production facilities in other countries. The decision to participate in international competition raises a host of human resource issues like location problems.  Whereas international companies build one or few facilities in another country, they become multinational when they build facilities in a number of different countries, attempting to capitalize on lower production and distribution costs in different locations. The lower production costs are gained by shifting production from higher-costs to lower-costs-locations. The HRM problems that multinational companies face, are similar to those that international companies face, but only magnified. The multinational country has to address the differences of cultural, economic and human capital for a large number of countries.

Multinational countries now employ many expatriates (managers from different countries who become part of the corporate headquarters staff). This creates a need to integrate managers from different cultures into culture of the parent company. In addition, multinational companies now take more expatriates from countries other than the parent country and place them in facilities of other countries.

The fourth level of integration is global. Global organisations compete on top quality products and services and do so with the lowest costs possible. Whereas multinational companies attempt to develop identical products distributed worldwide, global companies increasingly emphasise flexibility and mass customisation of products to meet the need of particular clients. Global companies have multiple headquarters spread across the globe, resulting in less hierarchically structured organizations that emphasize decentralized decision-making.

A transnational HRM system is characterized by three attributes: transnational scope (a company’s ability to make HRM decisions from an international perspective), transnational representation (which reflects the multinational composition of company’s managers) and transnational processes (the extent to which a company’s planning and decision making processes include representatives and ideas from a variety of cultures). These three characteristics are necessary for global companies to achieve cultural synergy.

So, entry into international markets creates a host of HRM issues that must be addressed if a company wants to gain competitive advantage. They need to manage employees who are sent to foreign countries, which means focusing on culture, human capital, and political-legal and economic influences of the host country too, developing selection systems, etc.

M.4 Managing Expatriates

Selection

A successful expatriate manager must be sensitive to the country’s cultural norms, flexible enough to adapt to those norms and strong enough to make it through the culture shock. The family also must be capable of adapting to the new culture. Adaptive skills can be categorized into the self-dimension, the relationship-dimension and the perception-dimension. The use of women in expatriate assignments is as good as using men. Table 15.3 presents a series of considerations for potential expatriates.

Factors important for expats are:

• Family situation
• Flexibility and adaptability
• Knowledge of the job and motivation
• Relational skills
• Openness to other cultures

Training and development

Cross-cultural training needs to be given. However, these training are hardly universal, but most try to create an appreciation of the host country’s culture so that expatriates can behave appropriately. Second, expatriates must understand the particular aspects of culture in the new work environment. Third, expatriates must learn to communicate accurately in the new culture. Effective cross-cultural training helps ease an expatriate’s transition tot the new work environment. It can also help avoid costly mistakes.

Compensation

To determine the compensation, many organizations use a balance-sheet approach. This approach entails developing a total compensation package that equalizes the purchasing power of the expatriate manager with that of employees in similar positions in the home country and provide incentives to offset the inconveniences incurred in the location. Figure 15.4

Re-acculturation

This is when the mangers re-enter their home country. A reverse culture shock occurs: the individual has changed, the company has changed. This is important, because if the expatriates leave, the company has to recoup a big investment in human capital.

Two characteristics help in this transition process: communication and validation. Communication refers to the extent to which the expatriate receives information and recognizes changers while abroad. Validation refers to the amount of recognition received by the expatriate upon return home.

Chapter N: Strategically Managing the HRM function

N.1      Activities

HRM activities can be categorized into Transformational, Traditional and Transactional activities figure 16.1. Transactional are the day-to-day transactions and are low in strategic value. Traditional activities (such as recruitment, selection, training and compensation) have moderate strategic value, because they often form the practices and systems to ensure strategy execution. The transformational activities (like knowledge management, cultural change and strategic redirection) create long-term capability and adaptability for the firm and have the greatest strategic value for the firm. In HRM, most time is spent on transactional activities and least to transformational ones.

N.2      Strategy

In light of the various roles and activities of HRM function, it is easy to see that it is highly unlikely that any function can effectively deliver on all roles and all activities. Although this is the laudable goal, resource constraints in terms of time, money and head count require that the HR-executive make strategic choices about where and how to allocate these resources for maximum value to the firm.

HRM has been seen as a strategic partner that has input into the formulation of the companies strategy and it develops and aligns HRM programs to help implement the strategy. The HRM executive has to take a customer-orientated approach to implementing the function, figure 16.2; this is one of the most important changes in the attempts of HRM to become strategic. It entails first determining who the customers are and then the products of the HRM department have to be identified to accomplish high-quality management (with high-quality employees). The technologies through which HRM meets customer needs vary depending on the need being satisfied. Selection systems ensure that applicants selected for employment have the necessary knowledge, skills and abilities to provide value to the organisation. Training and development systems meet the needs of both line managers and employees by giving employees development opportunities to ensure they are constantly increasing their human capital and thus providing increased value to the company. This customer-service-orientation may be the trend of the future; it provides means for the HRM function to especially identify who their customers are, what their needs are and how to meet these the best way.

Building an HR Strategy

How to build a HR strategy that supports the business strategy? Figure 16.3

• Scan the external environment, to determine the trends or events that might have an impact on the organization.
• Identify strategic business issues or needs (do we want to grow /…)
• Identify people issues (such as lack of diversity)
• Develop an HR strategy
• Communicate that HR strategy to all relevant parties, internal and external to the HR function.

Involving line executives in this process can increase the quality of information from which the HR strategy is created.

There are 4 levels of linkage with the business. HR-Focused are about what the HR function currently does and not so much about understanding how those people outcomes relate to the larger business. People-linked functions have clearly identified and aligned their HR activities around people issues and outcomes, but not business issues ant outcomes. Business-linked functions assess what HR is doing, identify the major people outcomes they should focus on and how those might translate into positive business outcomes. Business-driven functions begin by identifying the major business needs, consider how people fit in, what people outcomes are necessary and then build HR systems focused on those needs.

N.3 Measuring effectiveness

The strategic decision-making process for the HRM function requires that decision makers have a good sense of effectiveness of the current HRM function. This information provides the foundation for decision regarding which processes, systems and skills of employees need to be improved. Having good measures of the function’s effectiveness provides these benefits:

• Marketing the function: evaluating is a sign to the rest of the organisation that the HRM function does care about the whole.
• Providing accountability: determining whether HRM effectively uses its budget.

There are two approaches for evaluating the effectiveness of HRM practices:

• The audit approach. This is a type of assessment that involves reviews of customer satisfaction or key indicators related to various outcomes of an HRM functional area.

Key indicators are about staffing, equal employment opportunities, compensation, training, planning, labour relations, etc. The development of electronic employee databases and information systems has made it easier to collect, store and analyse the functional key indicators. Many companies use surveys to see if the effectiveness of the HRM is met. If the firm wants to be customer-oriented, customers are a good source of data about effectiveness. Internal customers (= employees) are also a good source.

• The analytic approach. This is a type of assessment of HRM effectiveness that involves determining the impact of, or the financial cost and benefits of, a program or practice (like a training program or new compensation system). So, this focuses on determining the dollar value of a training program, taking into account all the costs, or on determining the degree of change associated with the program. The analytic approach is more demanding than the audit approach because it requires the detailed use of statistics and finance.

N.4 Improving effectiveness

After the strategic direction has been established and the effectiveness of HRM is determined, the HRM managers can evaluate how to improve effectiveness and efficiency to contribute to the firm’s competitiveness. They can do so by redesigning the structure and / or processes (through outsourcing and IT).

For HRM to be involved in a strategic way, the HRM senior manager has to be part of the top management. According to a generic structure, HRM is divided in three divisions underneath the manager: the centres for expertise, the field generalists and the service centre. Such structural arrangements improve service delivery through specializations. Figure 16.10

The centres for expertise usually consist of the functional specialists in the traditional areas of HRM expertise like recruitment, selection training and compensation (so, traditional / transformational activities). The field generalists consist of the HRM generalists who are assigned to a business unit within the firm (transformational / traditional activities). The service centre consists of individuals who ensure that the transactional activities are delivered throughout the organisation (so, they have transactional activities).

Outsourcing to improve HRM effectiveness

Outsourcing entails contracting with an outside vendor to provide a product or service to the firm, as opposed to producing the product using employees within the firm. Outsourcing is done for two reasons: the partner can provide the service more cheaply than it would cost to do it internally, or the partners can provide it more effectively than internally.

The partner can do so because they are specialists or/ and have a certain expertise. Firms primarily outsource transactional activities and services of HRM such as pension and benefits administrations as well as payroll. However, some traditional and transformational activities are outsourced as well.

In addition to structural arrangements, process redesign enables the HRM function to be more effective and efficient.  Process redesign often uses IT. Reengineering is the review and redesign of work processes to make them more efficient and improve the quality of the end product or service. The reengineering process involves four steps:

• Identifying the process to be reengineered.
• Understand the process. Techniques that you can use to understand processes are data-flow diagrams, scenario-analysis, cost-benefit analysis, surveys and focus groups. Several things need to be considered when evaluating a process, such as: can jobs be combined? can employees be given more autonomy? Can decision making and control be build into the process through streamlining it? are all the steps in the process necessary? are data redundancy unnecessary checks and controls built into the process? how many special cases and exceptions have to be dealt with? are the steps in the process arranged in their natural order? what is the desired outcome?
• Redesigning the process
• Implementing the process

New Technology

Several new technologies can help improve the effectiveness of HRM. New technologies usually involve automation (replacing human labour with equipment, information processing of both). Some HRM functions in which technology is used are:

• Transaction processing: computations and calculations used to review and document HRM decisions and practices
• Decision support systems: problem-solving systems which usually include a ‘what if’ feature that allows users to see how outcomes change when assumptions or data change.
• Expert systems: computer systems incorporating the decision rules of people recognized as experts in a certain area.
• The Internet
• Voice technology
• Network: a combination of desktop computers, computer terminals and mainframes or minicomputer that share access to databases and a method to transmit information throughout the system.
• Client-server architecture: computer design that provides a method to consolidate data and applications into a single host system (the client).
• Relational database: a database structure that stores information in separate files that can be linked by common elements.

Groupware is the software that enables multiple users to track, share and organize information and to work on the same database or document simultaneously. Intranets are cheaper and simpler to use but pose potential security problems.

Technology has transformed a lot of processes. Recruitment and selection has become easier: firms can gather considerable amounts of data about potential employees without being physically near them. There are also applications for HRM, which helps a company maintain its information about the job candidates and identify suitable candidates for particular positions. Firms can also monitor hiring processes to minimize the potential for discriminatory hiring decisions. Also, compensation and rewards, and training and development have become faster, more effectively and efficiently by using technology.

A CHRO (Chief Human Resource Officer) is the head of the HR department. This person has to be a:

• Strategic advisor: a role of the CHRO that focuses on the formulation and implementation of the firm’s strategy.
• Talent architect: a role of the CHRO that focuses on building and identifying the human capital critical to the present and future of the firm.
• Counselor/Confidante/Coach: focuses on counselling or coaching team members or resolving interpersonal or political conflicts among team members.
• Head of the HR department
• Liaison to the board: focuses on preparation for board meetings, phone calls with board members, and attendance at board meetings.
• Workforce observer: focuses on identifying workforce morale issues or concerns.
• Representative of the organisation: focuses on activities with external stakeholders, such as lobbying speaking to outside groups, etc.