Revolutionary Shifts in Business Practices

Global shifts from Traditional to Creative Competency Based Compensation Systems

           Employee-employer relationships have existed ever since the birth of money, trade and business. This contractual bond between the employer and the employee has always been bound and enforced by the concept of monetary compensation (disregarding, of course, the cases of slavery throughout history). The understanding that the employee will get paid if he/she performs certain tasks to assist the employer in sustaining his trade or business has been sufficient enough motivation or incentive in the past. But with the recent developments and changes brought about through globalization, needs of employees have been dramatically. Ed Miliband, Labour Party leader stated in his Labour Party's annual conference, "the new generation of Labour is different. Different attitudes, different ideas, different ways of doing politics." It is not surprise fact that people change over the decades. The world’s workforce, and this system of simple “salary plus bonus” fails to satiate the growing demands of the dynamic pool of employees, and corporations around the world find themselves innovating to find the compensation system that will attract and retain the most talent possible.

In exploring this shift in global business practice of employee compensation, we will explore;

1.     The factors that have changed the global workforce

2.     The traditional compensation system and its flaws

3.     The modern competency-based compensation system

We will conclude this blog with

Changing global workforce

         
     Due to factors of rapid globalization, rising education levels, labor unions and a rising demand for knowledge based workers; the global workforce is more dynamic than ever. As multinational marketing and globalization shrinks the world and presents an infinite array of choices for the modern consumers, consumers become increasingly demanding in services and products. The moment consumers feel dissatisfied, they will move on to the one million other substitutes that they have. So the only way that businesses can satiate the endless demands of the consumers is through hiring and retaining talented, competent, experienced and dedicated employees who know exactly what to do. But to the dismay of many employers, it is not only consumers who have become ever more demanding and elusive; skilled employees also have a broader array of choices in employment now than ever before, due to several factors. Firstly, the supply of young workers has dropped. The 20% drop in the birthrates a generation ago is now catching up with the times, and there are less fresh graduates and youths entering the job market. On top of this, these scarce, young workers are more prone to challenging the status quo and refusing to settle for only the best jobs for them. Secondly, despite the financial hiccups of the last decade, the world economy continues to expand annually. As the economic pie gets larger, there are more jobs created in retailing, manufacturing, and other service oriented fields that will compete for the same pool of applicants which means that employees have a wider range of employers to choose from. Also, as technology develops and the redundant, easy jobs are automated, firms need knowledgeable and people friendly employees. But because the demands for these employees are high, they enjoy unprecedented global mobility. Given the trend towards this highly skilled, flexible, and mobile global workforce, it becomes obvious that there is exists a need to shift away from the traditional HR system of compensation and motivation, onto a newer system that properly addresses the new generation of workers and their motivations in order for companies to attract and retain the best possible talent.

The Traditional Compensation System

The traditional approach to compensation programs is simple and familiar. Once employed, the employee is given a job title and contract that quantifies the fixed salaries that he will be receiving while performing his or her job, along with some basic benefits such as a pension plan and or an insurance plan. Promotions and the increase in pay raises were given not on a basis of merit but instead on years spent at the company, and existing hierarchy. Also, organizations normally gave equivalent pay raises or bonuses to their employees depending on the performance of the firm, or the department. These 1%-5% salary increases sent the wrong message to underperformers and rewarded them undeservingly, and left good performers feeling dissatisfied and unmotivated because they were not being paid as much as they deserve. This system was presumably implemented under the assumption that humans work for money only, and that there was no space for other psychological and social needs of workers to perform their jobs. It was also assumed that employees will stay with one company permanently and seek job security and promotions through accumulating seniority and experience within one firm, but as we have already discussed above, this is no longer the case as the global workforce becomes ever more demanding and mobile.

Modern Competency-based system

As shown above, the traditional compensation systems make the false assumption that humans work for money only, and that there are no space for other psychological and social needs for workers. But through management and psychological studies, we now know that money only satisfies up to the certain point.Jean Martin executive director of the Corporate Leadership Council said that by studying years of data, the emotional side, love of and from job, is actually four times stronger than the rational side, getting enough payment, when it comes to driving the business impacts, which are essentially employees who want to stay with the company and employee productivity. This proves that human need something elses than just money in order to fullfill their need.

Maslow’s Hierarchy of needs states that human beings seek to realize the triangle bottom-up; that is; we will first seek to fulfill our physiological needs, then safety and security needs, and so on until ideally we have fulfilled all 5 needs. The traditional system ignores the needs of employees such as “love and belonging”, “self-esteem”, and “self-actualization”, and without taking the employees wants and needs into full consideration, it is now impossible to align business goals and objectives with those of the employees and maximize productivity. In the workplace, Maslow’s hierarchy can be applied as such;

1. Physiological Needs (basic issues of survival such as salary and stable employment)

2. Security Needs (stable physical and emotional environment issues such as benefits, pension, safe work environment, and fair work practices)

3. “Belongingness” Needs (social acceptance issues such as friendship or cooperation on the job)

4. Esteem Needs (positive self-image and respect and recognition issues such as job titles, nice work spaces, and prestigious job assignments.)

5. Self-Actualization Needs (achievement issues such as workplace autonomy, challenging work, and subject matter expert status on the job)

Typically, more skilled, valuable and experienced workers will be more concerned with the higher levels of the hierarchy, such as “Belongingness”. To meet this need, for example, businesses can create an environment where staff cooperation is rewarded and simultaneously encourage interpersonal effectiveness. Most workers, given that they are not a complete introvert, want to work in an environment where they feel accepted and can interact with their colleagues. Managerial communication about the firm’s directions or operations is also a crucial component of meeting an employee’s social needs. Employees, especially virtual employees, who are “kept in the dark” feel as though they are an organizational outsider, and tend to be dysfunctional. This is an example of modern firms transitioning away from the traditional “direct compensation” matters such as basic salaries, bonuses and travel allowances, and focusing more on “indirect compensations”, such as operational communication, or flexible timing, that are more relevant and important to the dynamic modern workforce.

But what about the “Self Esteem” and “Self Actualization” needs of the employees? Firms can make themselves more attractive and satiate these more complex and difficult needs of workers by adopting the “competency-based compensation system”, which is a system that identifies and rewards employees on a basis of individual job performance, before anything else. "Competency" was defined by E.G Bogeley as  "demonstrable characteristics of the person, including knowledge, skills, and behaviors, that enable performance". As opposed to the traditional compensation system where compensation was based largely upon factors of seniority, experience and hierarchy and overall company or team performance, the competence based model recognizes that modern workers need both direct and indirect compensations, and that effectively addresses all levels of needs of workers on Maslow’s hierarchy, instead of just the most basic needs.

Indirect Compensation

One of the trends is called "creative compensation." Of course, this trends does not always work for every organization. Some companies chooses to take crerative compensation to provide friendly, and comfortable work environment or to replace the more expensive perk like year- end bonus that they could not afford. It is very easy to hear people describe desirable work climate as "high trust,""collaborative,""feeling connected,"and "feeling valued." The traditional montary compensation system cannot provide these kinds of climates in workplace. The creative compensation works effectively among employees to provide the climate they want.  The decrease in turnover rate and employee dissatisfaction prove that non-montary compensation provide what employees actually want.

< Real life examples>

1. Rothbeg. scientific non-profit Institution.
:Work meal allowance for employee who work late
:Employees are allowed to take 'work-out' time and institution has shower facility
:Friday afternoon feature movie and popcorn event

2.Glendale Human Service
:Employees are allowed to bring their dogs to company.

3. Peninsula Habitat for Humanity
:Workers received $200 allowance each month to spend on their personal time such as taking yoga class or membership of fitness club.

4.Razorfish, IT company
:Employees receiving handyman's or housekeeper's service while they are enjoying given tickets to theater or spa.
:The company leases Harley Davison or Volkswagen Beetle to whoes referral results in successful hiring action
These kinds of unusal compensation helps workers to feel more comfortable being at work which eventually make them effective work-force.

Competency based pay in practice

In practice skill / competency /knowledge based pay programs generally contain four main elements:

1)        a system for defining skills, and a process for tying the person’s pay to his or her skill level;

2)        a training system that lets employees seek and acquire skills;

3)        A formal competency testing system, and

4)        A work design that lets employees move among jobs to permit work assignment flexibility.

There are 3 main advantages to the competency-based compensation system.

Support High performance work systems


The competence based system will encourage high performance because the employees will see a direct correlation between their hard work and the rewards that they reap. They will be more motivated to take responsibilities that they not ordinarily take under the traditional system. So in essence, the competence based system will create a self-motivated system of flexibility among employees where they will rotate freely among jobs and work around in teams, while striving to achieve excellence in their respective individual roles. 

Support Strategic aims

A system that rewards specific knowledge, skills and competencies can support the company's strategic aims and business goals. For example say that Canon Corporation wants their employees to develop specific knowledge and abilities in maintaining and designing precise and meticulous manufacturing components to develop cameras and copiers. By rewarding individuals based on their competence in these two skills and attracting and retaining individuals who have acquired these skills, the company can move further along their business goal and achieve their strategic aims. 


Conclusion


In the past the characteristics of the traditional compensation system have failed to satisfy the demands of emerging employees. These traditional methods fail to strike beyond the second level of Maslow's hierarchy of needs and frequently sends the wrong message to underachievers. As the emergence of greater globalization has provided consumers with increased choice, the quality of customer service has become increasingly important. This, coupled with the idea that the workforce of businesses is becoming increasingly knowledgeable and having higher expectations, has forced companies to break away from these traditional compensation methods in order to maintain a strong workforce.

In current times as this modern-based compensation is becoming more commonplace, employers are more able to penetrate higher up Maslows's hierarchy of needs by encouraging employees by different means. As things like staff cooperation can now be rewarded, employees are more likely to fulfill their 'love & belonging' needs. These new compensation systems have now lead a shift away from the tradaitional hierarchies within organisational structure as operational communication increases and empowerment becomes more frequent. This in addition to factors such as flexible timing are just some of the new ways in which employers are able to keep their employees satisfied whilst not increasing their wages.

This revolutionary shift in the way in which employers compensate their employees as changed many workplaces around the world. ELDC's however, have seen less of this global shift as much of thier employment is in the secondary sector. Additionally, the competition for work is higher as their expectations are lower. Culture also plays a huge role in the implementation of compensation methods. Asians cultures have a tendency to use more traditional methods as hierarchy is of greater importance. Despite this however, there has definitely been a very visible shift in the way in which companies compensate their workers as companies switch from simple methods such as wage and small bonuses to methods that include flexible working hours, operational communication ect..

Perhaps if the traditional compensation method represents the past, and these modern-based compensation methods mark the present, the future may lie with the emergence of these new more creative methods. Perhaps in the future there shall be another revolutionary shift in the way employers reward their employees and that in the future our wage might matter less than our benefits. Just a thought.

more at http://www.citeman.com/10080-why-use-competency-based-pay.html#ixzz1rYSuHdKt


Extension:

The HRM shift to competency-based pay for Leaders and are Leaders more responsible for the ethical climate of a firm than other employees?

Most of us may be in one way or another may have been intrigued by the word ‘leader’ when we were a little younger. The word leader represents as being number one, the best, first choice and the list goes on. Interestingly as we grew to understand, visualise and take on leadership roles from our growing-up stages to adult life, a leader is no more simply just being number one or first choice. We are always incumbent by situations that sometimes stir the leadership in us to rise up to the occasion to take on challenges.

Lee (2000) mentions that leaders are born and not made, these are unique individuals that command the respect of others and possess a sphere of influence that make others want to be part of them. We look at Steve Jobs and how the world associates themselves with the brand Apple, something which reminds you of him when you hold an Apple product. Likewise in Obama’s campaign towards presidency, the American folks were cheering for this man to assume authority. They believed the beliefs of this man and the change he would bring to the nation.

Many were awed by this charisma in the hope for change because many of us look at a leader differently from the ordinary, believing that this man or woman could truly bring a better and brighter change.  Indeed the making of a leader depends on the individual’s characteristics and attitudes that we as individuals can associate and identify with closely. It is a wave of positivity that intrigues many to command that respect given to a leader. (Lee 1999).   

It could be seen in ancient times, since the Stone Age where the best are usually chosen to lead the tribe and at the same time in a distribution of food or gold the leader gets the largest chunk (Caulkin, 2001). This practice where the leader gets the largest chunk somewhat remains true in today’s context. Frequently we read on the newspapers where an organisation is bleeding monetarily in compensating their chief executives despite a bad job done. We often wonder how this is ever possible but nonetheless because of clauses and pre-hiring agreements it stands in the way of proper justification being done.

Competency based-pay today for leaders is not just about monetary remuneration; it could be drawn in reference towards the Maslow’s hierarchy chart where self -esteem and self- actualisation of a leader needs to be rewarded too. We see how leaders are shown with intrinsic rewards such as recognition for their efforts and experience or even flexibility towards changing policies within an organisation (Wren & Bedeian, 2009). It was unlike in the earlier days where only leaders (Chief Executives) could only perform duties and be paid according to their job scope.

The CEO incentive packages are usually seen as a tool to help motivate executives to take risks and work to maximize the long-term value of the company (Flannery, 2012). We often wonder what entails inside these fat pay packages that Chief Executives (CEO) receive. The content could vary from one to another organisation, it usually constitute; monthly pay, allowance, stock grants, insurance, performance bonus, variable component pay-outs. In some organisations, the CEOs are given larger preferential incentives like; personal lodging, chauffeuring services, private jets, personal bodyguards and butlers (Llense, 2009).

As the list goes on it may sound rather extreme and absurd, you begin to question yourself if this is logical or even reasonable. Your CEO is given the superstar treatment while the people below him slogged for the organisation. So is this one person really worth the payment over the so many others under him? As we looked back in 2008 during the US economy melt down the CEOs of some notable organisation where given big pay-outs despite their incompetency in casing their organisations to go into bankruptcy.

If we look at the American Investment Group (AIG) which was eventually bought over and bailed out by the government, their CEO Martin Sullivan received $25.4 million, including $322,000 for private use of corporate aircraft, $153,000 for car and parking, $160,000 for home security and $41,000 for financial planning (Goldman, 2009).

The CEOs from the big investment banks were also having a good fat chunk of the pie in the pay-outs; O'Neal of Merrill Lynch received $66 million, including $357,000 for car services and personal use of aircraft in 2007; Goldman Sachs CEO Lloyd Blankfein made $76.2 million, including $233,000 for car and driver services and $61,000 for financial and benefits counselling services (Jones & Iwata, 2008).With the company in such bad shape and the inadequate management policies, it is unbelievable how the CEOs truly deserve such pay outs. If this amount of money would have been forfeited would it have been better to sooth the profit and loss of their organisations or even prevent retrenchment of many employees just to make a payment to one man?

Enron Corporation a conglomerate organisation which was about to face bankruptcy begin paying out their top executives million dollars bonuses and retrenching their employees. The employees that were retrenched were denied of their packages but yet these guys on the top were receiving their pay-outs which totalled to $55million, took it as if they deservingly owned it (Tapper, 2002). Nonetheless to say as Enron was consistently and unethically balancing their sheets, the company was soon liquidated and it had cause thousands to lose their jobs.

As mentioned earlier in the essay, followers associate leaders with the organisations they represent. For Enmax the actions of their leader was closely scrutinised and thus gave the organisation bad reputation. Gary Holden the CEO of Enmax was caught holding lavish parties, recommending himself for pay increment and took funded trips from clients (Connelly, 2011). Therefore when the media caught him in the act, the board of directors had no choice but to oust the flamboyant leader.

Having seen in the darker side about leaders not making the mark, there were also some that were successful and rightfully deserved their pay packages. For most of us that grew up through the 80sa and 90s, at the mention of the word Disney our eyes brighten as we would instantly thought about Mickey Mouse.

Bob Iger the CEO of Disney joined the company in 2005. In the midst of an internal struggle, Iger managed to regain a large amount strategic control. He also reconciled the relationships among the board members and the management team. His recent success saw the acquisition of Pixar at $7.4 billion, which has propelled Disney back to its roots in animation. This has saw Disney’s continual progression with technology and not become a facade. His take home package for the year 2011 was a whopping $31.4M (Bond, 2012).

The other man that we may not be familiar with is Eric Schmidt, the leader behind Google’s exponentially growth. Under Schmidt’s leadership, Google grew from its $27 billion IPO to a worldwide phenomenon. He played an instrumental role in the developing the culture at Google. He was constantly encouraging deep collaboration among teams and setting up platforms for creativity (Yarrow, 2012).

As a keen aspirer, Schmidt surrounded himself with talented individuals that helped successfully navigated antitrust lawsuits, international threats to censorship, and managed to keep Google’s dominant position in Internet search. His compensation for 2011 was at $101million. Indeed Google’s success does speak for Schmidt; the keen foresight of a visionary leader would only take an organisation from valleys to mountains (Groth & Bhasin, 2011).

Ethics is the assessment of moral standards and is developed actively through the use of theories and experiences. Therefore, it has relevance to the way people behave in organisations (Trevino & Nelson 2006). We certainly recognise leaders as role models to their followers or members, leading their people towards milestones and key success gives them the stardom overnight but are all success achieved ethically? We often question ourselves.

The success of the leader’s implementation of an ethical climate could be seen when employees recognize the ethical issues at their work, develop necessary framework of decisions to make the right choices and these choices are translated into support by the organisational environment (Wren & Bedeian, 2009).

Understanding the nature of reward systems, it may be the most essential way to convey the behaviours that are expected. The sole intention is not about getting the reward but to encourage an environment of ethical likeness. Though Skinner (1972) mentioned that people do what’s rewarded and avoid doing what’s punish, at the senior management level it is important to reward individuals that has exhibited ethical behaviours in the long term. This motion indicates that the leaders are serious in this stimulus motion of using the reward system as a positive influence of ethical behaviours throughout the organisation.

The reward system does not only recognize people that are niche in their area of performance but also recognizes the reputation of an individual with the customers, peers, subordinates and bosses with the up most integrity (Trevino & Youngblood 1990). The recommended way to hold employees accountable for their ethical conduct would be to incorporate it into the 360 degree performance feedback systems, making the evaluation a clear component of compensation and decision matters.

As leaders develop reward systems, the guiding principles use as measurement towards the reward of positive ethical behaviours lies heavily on their shoulders. These factors have to be strictly vetted because whatever may be permissible may not be beneficial after all (Vitell & Encarnacion 2006).

For new and existent employees it is essential to have both orientation and training programs in place. Leaders would have thought through the curriculum needed to be place in these training programs to ensure ethics is being reiterated in the trainings. Preparation towards the different types of issues that may arise in various business and positions, the trainings helps employees to draw the line when an issue of ethics and bottom line are in conflict (John 2009).

The orientation and trainings should allow leaders to be able to share their own experiences or the success of other successful employees that were put in the line to make an ethical decision. Making ethical decisions helps in the long term towards the success of the business, giving the organisation a reputable front to all stakeholders (Trevino & Brown 2004).

At the same time as change is performed, it is important how the leader sets the ethical climate in his organisation. As visual learners, we look and take after what is being taught or communicated to us. Likewise we look forward towards a leader for a direction because we believed he or she possess this great reverence which is only exemplary for us to adopt and follow. Indeed psychologist have studied that it takes an individual 28 days for a habit to form and 40 days for a lifestyle to be in sync. As a leader today let’s take a pause to reflect about how we are best leading our folks, it is not the legacy that matters but it is the difference as leaders we aspire to achieve. 

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W06_the Big Deal about Employee Engagement.pdf
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