Managing Human Capital MBA1 ‘C’

Table of Contents

1. INTRODUCTION............................................................................................................. 2

2. LITERATURE REVIEW.................................................................................................. 22.1 Financial Rewards............................................................................................................... 32.2 Non-Financial Rewards...............................................................................................12

3. CONCLUSION............................................................................................................. 14

4. REFERENCES..................................................................................................................................16

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Managing Human Capital MBA1 ‘C’

1. INTRODUCTIONAn organisation can be efficient only if they will be able to utilize the

resources that they have with them appropriately. The resources usually include

infrastructure, workforce and capital, all of which are inter dependable but the

most important among them is the work force. Labour can be considered as one

of the most important resource so as to maintain or utilize the other resource

like infrastructure and capital. Any organisation that will be successful to persist

their employees will do well. Hence it is important on the part of the

organisation to handle the human resource effectively. The employees that are a

part of the organisation will have the qualities that are demanded by their job

description. Some of the employees might have high levels of skill that is

required for their job or might even have a lot of experience in that field. Each

person gets paid differently depending on their levels of skills and experiences.

Reward policy is a prerequisite for strategic management of pay and benefits.

Managers have always been interested in making arrangements for the

better performer to be paid more than the average performer. To support this

there are a lot of schemes currently available that are working towards the

objective. “The objectives of a policy towards payment could be described as ‘ to

remain competitive for labour whilst rewarding good performance and adopting

a position on pay which controls costs and is felt to be fair by all

employees’”(Tyson & York, 2000). This paper will focus mainly on employees

and what are the different ways employers use to manage them and retain them

within an organisation.

2. LITERATURE REVIEW

Pay and job security are the important factors that employee consider

when they are looking for jobs. Employees usually prefer to work with an

organisation that provides to them different types of pays and benefits. They

even desire rewards that could bring about improvement of their status in the

society. Rewards can be of two types:

Financial Rewards

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Managing Human Capital MBA1 ‘C’

Non-Financial Rewards

2.1 Financial Rewards

Financial rewards consist of the payment methods that can be achieved

by the various assessments carried out in the organization. Some forms of

financial rewards are discussed below.

Base pay: Base pay is the amount of money given to a particular employee for

working in a specific position of employment in an organisation for specific

period of time.

Example 1: Mitchells & Butlers chairman will get a pay rise by 75 per cent up to

300,000 pounds.

Performance-based pay/ Competence based pay: These pays are considered

to be additional and add more value to the base pay an employee is set to get.

The employees can get these pays if they have performed well enough to fulfill or

satisfy a certain goal designed by the organisation. These pays are given to show

recognition and to imply the kinds of actions and attitudes that the organisation

wishes to reward for their employees. Competence based rewarding system uses

improvements in competence or any job related skills as criteria for increasing

the pay.

Advantages of Performance-based pay/ Competence based pay-

1. During time of low inflation, the only possibility for increases in pay is

through productivity improvement.

2. If rewards can be linked to objectives, it will help the employees to drive

towards the objectives.

3. Since there is clarity about rewards for obtaining the objectives, all the

staff can participate and try to achieve the objective thus increasing their

productivity level for the company.

Disadvantages of Performance-based pay/ Competence based pay-

1. This type of payment does not motivate employees.

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Managing Human Capital MBA1 ‘C’

2. Initially there might be improvements, but there are chances that there

might be diminishing marginal utility to the organisation.

3. Objectives can change very quickly, so it cannot be used as a criterion for

performance reviews during the end of the year.

Example 2: Luxottica Retail is the home of LensCrafters, Sunglass Hut, Watch

Station and Watch world follows Performance based pay system. “Take

notice, performance pays. Those who perform their best will receive higher

raises” is what is found in their ‘Base Pay Program’ brochure. (Franke 2004,

p. 148)

Example 3: Procter & Gamble Co. one of the America’s top fortune 500

companies uses competency based pay system so as to obtain more

productivity level from their staff. (Berger & Berger, p. 145)

Example 4: Burger King provides its staff with competence related pays in

order to increase the efficiency of work.(Shields 2007, p.244)

Variable Pay: Variable pay is an “add-on” to a competitive base pay. This

means there is no risk for employees in loosing any base pay they are

adhered to. Instead it is an upside potential for them. Variable pay is truly a

win-win opportunity for the company as well as for its employees. Awarding

variable pay can be through profit sharing, bonuses, incentive schemes,

holiday bonus and deferred compensation.

Profit Sharing: The systems in which the payout is a function of some

measures of profits or profitability. The determinant for this particular

variable pay system can be accounted profits, operating profits, return on

assets and investments. Absolute profits maybe shared from the very first

value received or from the threshold value and the profitability measure may

apply to a company, division or any other organizational entity. Profit sharing

payments are usually made only if the company has been in profit for a

specific period of time. Profit sharing is generally calculated at the end of the

business year only after the profitability result of the organisation is

evaluated.

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Managing Human Capital MBA1 ‘C’

Advantages of Profit sharing-

1. It has a positive impact and sends a message to the employees so that

they work together as a team so that the profits can be maximized.

2. All the employees are made to attain the same set of goals and are

rewarded equally thus decreasing the sense of competition between the

employees.

Disadvantages of Profit sharing-

1. The main disadvantage of this payment scheme is that the employees

will not be able to see their own work and actions that they put

forward when attaining the goals of the organisation and increasing

the overall profit of the company.

2. The true essence of Profit sharing is motivation but it will merely

remain as an entitlement that employees would enjoy.

3. Regardless of the contribution and effort offered by the employee,

they would be just receiving their profit sharing money. (Torrington,

Hall & Taylor 2002)

Example 5: TESCO PLC uses profit sharing schemes and the company has to

allocate money in millions to pay its employees based on this scheme. In one

report of Evening Standard, it was written that a total of 106 million pounds has

been allocated to reward the staff of Tesco who had invested in the profit sharing

scheme for their contribution in doubling the company’s profit.

Example 6: Profit sharing scheme followed by HP, awarded above 228 million

dollars to its employees around the world in 1996.

Example 7: Motorola distributes approximately 3 million dollars to its

employees through profit sharing scheme.

Employee Stock Ownership Plans: An Employee Stock ownership plan (ESOP)

is designed to give the employees significant stock ownership in the employers.

An adoption of ESOP would mean that the employees would have a share

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Managing Human Capital MBA1 ‘C’

ownership of their own corporation. This scheme provides the employees of an

organisation with an option in buying of shares of their company at a reduced

price. Therefore the employees will have no obligation to buy the shares of the

company. (Mathis & Jackson 2008)

Advantages of Employee Stock Ownership Plan-

1. Major advantage of this scheme is that the organisation can receive

favorable tax treatment on the earnings for use in the ESOP

2. It gives employees a piece of action so that they can share in the growth

and the profitability of their organisation. This would make the employee

to be more focused and productive on the organisations’ earnings.

Disadvantages of Employee Stock Ownership Plan-

1. This type of sharing scheme can also mean that the employees both their

salary and retirement plans will totally depend on the performance of

their employers in the market.

2. It poses a major threat to those employees who are about to retire, as

their value of pension will be dependent on how well the organisation is

doing.

Example 8: Hy-Vee is an employee owned group of retail supermarkets located

in the Midwest of United States. This company provides ESOP to their employees

and is running successfully. Employees are enjoying their share of the

organisation and are contributing to its success. (Mathis & Jackson 2008, p. 404)

Example 9: United Airlines also exercises ESOP schemes. This scheme made the

unions of the company demand for increase in their pay. This was agreed but

only for a short term. The employees were locked in their stock scheme due to

which the company landed in an eventual bankruptcy.

Example 10: Infosys technologies employees earn in millions with the ESOP

scheme in place.

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Managing Human Capital MBA1 ‘C’

Gain Sharing: “Gain sharing systems in which the payout represents a share of

the financial gains associated with improvements in the group or organizational

performance measures for long term. Commonly used criterions include costs,

productivity, material and supplies utilization, quality, timeliness or

responsiveness, safety, environmental compliance, attendance and customer

satisfaction. The foundation for these criterions is the current performance, past

performance or any improvements over the current performance.” (Belchers

1996, p. 11)

Advantages of Gain sharing-

1. The long-term aspect will provide steady earnings.

2. Employee participation helps to overcome the ‘them and us’ attitudes and

helps to build trust within the employees.

3. This scheme can also prove to encourage employees to be better problem

solvers.

Disadvantages of Gain sharing-

1. Individual employees contribution may go unnoticed and might not be

reflected when working within large teams. So the employees who work

very hard might get fewer amounts when compared to their effort they

put.

2. Complex schemes might prove to be difficult for the employees to

understand that scheme and difficult for the employers to explain.

3. Gain sharing requires ongoing management and must be reviewed

regularly to ensure that the effectiveness will be continued.

Example 11: NUMMI provides a number of gain sharing schemes. For employees

at NUMMI, pay is attached to increases in productivity and to performance based

on productivity and indicators to the quality of cars they produce. The presence

of NUMMI unions implies that the gain sharing system would stay for a long term

thus help the employees to motivate in sharing their ideas and enforce high

efforts within the factory. (Levine 1995, p. 50)

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Managing Human Capital MBA1 ‘C’

Example 12: Mill Steel drives production with gain sharing plan. Unionized

production workers of Mill Steel Company have been able to increase their

earnings due to gain sharing plan. (Franke 2004, p. 164)

Example 13: A pharmaceutical plant in Lincolnton, N.C., obtained competitive

edge by following the gain sharing measures and employees received $825 by

the end of first quarter.

Scanlon Plan: This scheme is a combination of suggestion plan and a collective

incentive scheme. The suggestion plan was a part of the system for drawing ideas

from the workforce about improvements that could be jointly achieved by the

management and union. It operates a bonus depending on reductions achieved

by the workers in labour costs compared with the revenue obtained from the

sales. These rewards come from employee involvement in improving the

productivity and reducing costs for the organisation.

Advantages of Scanlon Plan-

1. It will help in developing a cooperative team culture in the organisation as

these plans help in solving problems as a team.

2. Team incentives reduce the trend of jealousness and complaints amongst

team members.

Disadvantages of Scanlon Plan-

1. There is high tendency that individual team members may feel that their

effort is more than the other members and they contribute more towards

the team success.

2. Complexity of the payout formulas may become hard for the employees to

understand.

Example 14: The first Scanlon plan had been adopted by the Timber Roots MTD

back in 1930s. Since they have put this plan in action, Timber Roots employees

have generated above 200 plant improvement suggestions and thus their

productivity level has increased to a greater extent.

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Managing Human Capital MBA1 ‘C’

Merit Plans: Merit pay plans are links an increase in base pay to how

successfully an employee performs his or her job. The merit increases are usually

given if the employee has been successful in attaining some standard goals that

have been set by the organisation. A meaningful merit increase will catch the

attention of the top performers that will help in the organizational progress.

(Bohlander & Snell, p.461-462)

Advantages of Merit Plans-

1. These plans help in boosting the employees confidence and will have trust

in performance appraisal

2. It helps in encouraging the employees to work harder for the organisation

Disadvantages of Merit Plans-

1. Amount of money given may appear to be inadequate for the performance

put in by the employee

2. These plans may cause a lack of honesty and cooperation between

management and employees.

3. Merit pay plans may create feelings of pay inequity.

Example 15: Compsat Technology Inc provides its employees with merit pay

plans. They pay their employees more money based on their quality of

performance and good attitudes. (Franke 2004, p. 150)

Example 16: British Gas in 1994 increased the merit pay plans from 11% to

75% for the directors who earned more than 200,000 pounds. (Price 2007, p.

479)

Example 17: A survey report by Dowling & Richardson (1997) suggests that

British NHS managers have been satisfied with the use of merit pay schemes and

it has had a positive motivational effect.

Annual Bonus: These are gratuitous payment by the employer that is not

directly earned by the employee. These payments have no entitlement to the

employees pay as a result of contract of employment and cannot be expected in

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Managing Human Capital MBA1 ‘C’

return for a specific performance. These payments are done only after going

through the effort presented by the employee on a yearly basis. (Reda, Reifler,

Thatcher 2005)

Advantages of Annual Bonus-

1. The bonuses provided by the organisation can be a positive factor for the

employees to earn more money and would motivate the employees to

strive for it.

2. Employees can enjoy their bonus and feel satisfied with their role of job.

Disadvantages of Annual Bonus-

1. The employees may tend to get uncertain if they would receive their

bonus for the performance of their job.

2. If the company is not doing well enough then the annual bonus that was

promised could be terminated.

Example 18: Plante & Moran are providing their employees with bonuses

relating to their competencies and on the result measures. Performance on

goals, like getting a job done in particular time is used to drive annual

bonuses to their employees (Franke 2004, p. 157)

Example 19: At Nixon Uniform Service & Medical Wear, the employees are

given an opportunity to increase their earnings through various bonus

programs. Some of the bonus programs include MICOMP, PROCOMP, Lead

Trader, Quality Bonus and Safety Bonus. With these bonuses a good

employee can earn between 500 to 10,000 dollars annually. (Franke 2004, p.

158)

Example 20: Marks & Spencer will be distributing an annual bonus pot of 80

million pounds within its employees as the result of excellent performance in

the company’s plan.

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Example 21: British Telecom Staff are benefiting from one of Britain’s

biggest bonus schemes and company has distributed around 22million

pounds among its staff.

Incentive Pay: Incentive pay plans are typically based on pre-established

performance goals. These are good ways of supporting the strategic plans of

the company. Well-executed incentive plans demand effective

communication of those goals and monitoring the progress on a regular basis.

This allows even the employees to keep record of their own performance and

help them to improve their potentials.

Advantages of Incentive Pay-

1. Incentives help employees in keeping the focus to attain certain

performance targets.

2. Incentives are directly related to operating performance. If these

performance qualities are met then the incentives are paid, else it is

not.

Disadvantages of Incentive Pay-

1. Employees may feel that their production standards are not set fairly.

2. Incentive plans may create a sense of competition between the workers. It

may also cause distort between the management and staff.

Example 22: Comforce Health Care of Orange County believes in developing a

large variety of performance based incentive schemes and commission

structures. Their policy is not to provide employees with large sum of money

instead they will provide somebody with the opportunity to earn a large

commission based on achieving certain goals. (Franke 2004, p. 155)

Example 23: Agilysys Inc is following incentive schemes rigorously. They have

high percentage of people having the incentives opportunities. They believe in

attracting people who are more confident to work as they are risk-takers and

drive themselves hard for results. (Franke 2004, p. 155)

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Example 24: General Electrics have offered their employees with cash incentives

ranging about $750 for quitting smoking in 2008. Due to this incentive success, it

plans to go tobacco-free by 2011.

2.2 Non-Financial RewardsNon-financial rewards imply to advantages employee gets in their work

place that can be in the form of Achievement, Recognition, Influence and

personal growth.

Achievement: It can be regarded as a measure put forward by the management

to distinguish employees based on their efficiency.

Example 25: Devon Partnership NHS Trust provides employees with wide

variety of achievement awards as a way to celebrate the staffs hard work.

Example 26: Orkut Buyukkoten, a software engineer at Google had his

achievement when the social networking site that he developed for Google was

named after him.

Recognition: Employers use this approach to let their staff know how well they

have worked or obtained their objectives. Recognition can be attained either by

promotion, job enlargement and different forms of status or appreciation

symbols.

Example 27: Conwy Council has revised its schemes to recognize and reward

employees. They have introduced Customer Service award, Manager of the year

and the winners will be presented with a certificate and a trophy.

Example 28: Dell Computers have recognition programs that are voluntary.

They recognize the Dell employees who actively support their local community.

Dell honors such employees.

Perks/Vouchers: Employers can provide perks to employees based on their

effort and efficiency. A few forms include providing employees with gift

vouchers, arranging a dinner in a well-known restaurant, paid holidays, free air

miles, cafeteria benefits, healthcare, dental benefits etc.

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Example 29: Google employees enjoy the perks such as free meals in their

cafeteria, on-site doctors, dry cleaners and gym facilities. The googlers also get

perks for referring an employee who is planning to leave Google.

Example 30: The cabin crew of BA was stripped off from their travel perks due

to the continued strikes during the Easter weekend.

At the end of the day even saying a simple “Thank You” could make the employee

feel happy and positive about his work.

3. CONCLUSION

According to my view, it is important for the organisation to award

employees with merit issues. For an organisation to be successful and become a

leader in the market, it has to make sure that the employees are satisfied and

motivated to work towards the organisation’s goals. To assure this, the

employees should be treated as an asset for the organisation and one of the

means to achieve this is by ensuring that the employees get awarded and

recognized for their effort and performance. The factors that the management

should consider in order to provide employees with merit issues include the

following.

Individual performance

The company should monitor their employee’s performance based on

sincerity, quick grasp of knowledge, learning ability and other skills.

Education and Experience

Based on individual employees’ qualification and experience level, they

should be given benefits that would possibly motivate them

Individual Potential

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Management should look for people who are dynamic and contribute to

the organisation success. The employees should have the potential to gain

better position in the organisation and remain loyal to the organisation.

Budget of organisation

Every organisation invests heavily for training their staffs to the

organisation’s standards, so that they can increase and maintain their

profitability.

Change Management

When the company is undergoing change management processes, it is

likely that there would be many changes to which employees would

resist. In order to bring the level of resistance down, employees can be

provided with materialistic incentives.

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4. REFERENCES

1. Armstrong, M, Murlis, H & Group, H 2007, Reward Management: a

handbook of remuneration strategy and practice, 5th edition, London ;

Philadelphia : Kogan Page.

2. Berger, LA & Berger, DR 2000, The compensation handbook: a state-of-the-

art guide to compensation strategy, 4th edition, McGraw-Hill, New York.

3. Belchers, JG 1996, How to design and implement a results-oriented variable

pay system, AMACOM, New York.

4. Bohlander, G & Snell, S 2009, Managing Human Resources, South-Western

Pub.

5. Bratton, J & Gold, J 1999,Human Resource Management: Theory and

Practice, 2nd edition, MACMILLAN Press Ltd, London.

6. Franke, LR 2004, HR networking: performance management, Chicago IL,

USA.

7. Levine, DI 1995, Reinventing the workplace: how business and employees

can both win, Brookings Institution, Washington, D.C.

8. Mathis, RL & Jackson, JH 2008, Human Resource Management, 12th edition,

Mason, OH : Thomson/South-western.

9. Price, A 2007, Human Resource Management in a Business Context, 3rd

edition, London: Thomson.

10. Reda, JF, Reifler, S & Thatcher, LG 2005, Compensation committee

handbook, 2nd edition, Hoboken, N.J: Wiley.

11. Shields, J 2007,Managing employee performance and reward: concepts,

practices, strategies, Cambridge [u.a.] : Cambridge Univ. Pr

12. Torrington, D, Hall, L & Taylor, S 2002, Human Resource Management, 5th

edition, Financial Times : Prentice Hall.

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13. Tyson, S & York, A 2000, Essentials of Human Resource Management, 4th

edition, Oxford [u.a.] : Butterworth-Heinemann.

14. Scanlon Plan example, Retrieved on 29th March 2010,

http://www.scanlonfoundation.org/index.php?

option=com_content&view=article&id=95&Itemid=156

15. General Electric to go tobacco-free in 2011: Work sites to be tobacco-free,

Retrieved on 29th March 2010,

http://www.tradingmarkets.com/news/stock-alert/ge_general-electric-

to-go-tobacco-free-in-2011-work-sites-to-be-tobacco-free-823424.html

16. 25 Secret Perks of Google Employees, Retrieved on 30 t h March

2010, http://www.bandwidthblog.com/2007/04/05/25-secret-perks-

of-google-employees/

17. ESOP example, Retrieved on 29th March 2010,

http://www.capitalownership.net/archives/esopindia/msg00003.html

18. Marks & Spencer Annual benefit, Retrieved on 5th April 2010,

http://www.employeebenefits.co.uk/cgi-bin/item.cgi?

id=10363&d=23&h=0&f=0

19. HP Profit Sharing, Retrieved on 31st March 2010,

http://www.allbusiness.com/company-activities-management/financial-

performance/7292084-1.html

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