Employee Performance Recognition and Compensation Policies
Essay Question One: Introduction
Air World International was established by Carolyn Laker in 1994, a property developer by profession, with an aim of providing quality air travel services between Europe and the U.S.A. In its initial years the company managed to establish itself as a major player in the airline industry and notched up consistent profits. However, as the global recession took hold in 2007, by 2008, the company’s fleet was running on below average capacity. Despite employee recommendations of lowering its fare structure to attract more passengers (a strategy being implemented by its competitors), Carolyn and the Board of Directors decided against doing so on the profit projections provided by the Finance Department.
Instead, a decision was made to focus the jumbo fleet on more profitable routes within Asia and the Gulf countries and for a while, this strategy helped the company regain financial stability. The increasing fuel costs, a worldwide economic slowdown combined with increased taxes and rising costs required for fleet maintenance however, soon began putting a strain on the company’s bottom line. In an effort to minimize costs, Carolyn made the decision to launch a separate business unit that would be a low-cost carrier featuring smaller aircrafts, called Air World Mini. Sometime later, a merger was announced with Blue Sky Airways .
Both of these announcements were made by Carolyn through an internal email sent to the staff. The problem was that the workforce was already highly dissatisfied with their treatment by Air World, and believed that the current Compensation and Benefits Structure in place was unfair because the company profits were not being shared with them and salary levels were considerably below the industry average. The fact that the introduction of a low-cost carrier and the merger did not come with details of how the human resource would be re-structured, it added to the anxiety and stress of the employees. The problem was that complete information regarding their future status as Air World International employees was under question, as was the fact that the company had not given any increments since 2009, while at present, most employees were put on ‘forced leave’.
Eventually, the consistent lack of honest communication from the top management to the employees reached boiling point when the employee union issued a strike notice to the management if their demands were not met.
Psychological Contract Defined
Within the context of Organizational Behavior, psychological contract governs the employee-employer relationship. While the employment contract executed between both concerned parties constitutes a written agreement specifying the job description and expected responsibilities of the new hire as well as the benefits and rights of the employer, a psychological contract is a less concrete aspect of the relationship .
The term was originally coined by organizational psychologist Denise Rousseau, who defined it as the set of unwritten set of expectations that include verbal agreements and contracts that an employee and employer enter into, either at the time of recruitment, or at a subsequent point in time. Issues such as the number of days required for a leave application to be processed, claiming a ‘sick leave’ when the employee was not actually sick but requested the employer to grant it, are the kinds of situations that fall under the psychological contract. It is important to understand that while this type of contract involves two parties, it is primarily considered from the point of view of the employee’s rights and expectations from the employer. If employers are expected to not convey perceptions or commitments they are aware they will not be able to fulfill, it is also the responsibility of the employee to ensure that personal difficulties do not result in material loss to their organization .
The case of Air World International highlights the significance of a psychological contract and how it can benefit not just the employee, but the employer as well, in terms of maintaining employee loyalty at times of crisis.
Integrating the Psychological Contract at Air World International
As mentioned above, the employee-employer relationship is determined not just by the stipulations in the employment contract or the organization’s policy manual, but also by the unwritten, mutually understood and acceptable practices . At Air World International, the staff, comprising the flight crew, maintenance engineers and the operational team on the ground, worked tirelessly to ensure that the company delivered superior service to its clientele.
Their employment contracts with the company would have mentioned the job descriptions for each and the designated remuneration for each. However, a psychological contract, in this situation would have dealt with more subtle issues such as taking into account the feelings of the employees in the changing organizational culture.
An important motivational theory that explains why employers must keep tabs on how their workers are feeling is the Equity Theory of Motivation, coined by John Stacey Adams. The theory is based on the premise that an employee’s level of motivation is contingent on their perceptions of “whether or not their inputs or contributions are being rewarded justly”. This implies that if employees ‘believe’ that their efforts (inputs) are equal to the rewards (outputs) that they are receiving, whether intrinsic or extrinsic, they will continue performing at their current levels. On the other hand if a worker feels that the returns from the employer do not justify the level of effort he/she is putting in, then such an individual is likely to reduce his/her own productivity and efficiency and do only the ‘bare minimum’ that is required of them .
At the other end of the spectrum, if a person realizes that he/she is receiving rewards far in excess to his/her performance levels, then such individuals are likely to work harder with a willingness to contribute more, in order to justify the higher rewards they think they are receiving.
At Air World, the Equity Theory is in play. At a time when the employees had not been given raises for several years, the prevalent opinion among the workforce was that they were highly underpaid compared to employees in other airlines. The management’s justification of fuel, taxation and maintenance expenses was invalid as the employees reasoned that other airlines were also operating under similar conditions, yet managed to give the people their due.
Integrating a psychological contract in such an unsettled environment helps both employers and employees in staying connected to each other and a strong relationship helps businesses in surviving troubled times . Even after Carolyn had announced the structural changes, she only communicated the most basic of information, believing that if she kept employees in the loop, it would be sufficient in keeping them appeased. What she and the Board of Directors failed to take into account is the fact that the employees expected more details; in other words, they expected their employers to inform them of the complete details about how expected future decisions would impact their job and economic status.
Conclusions and Recommendations
While it may not have been expressly stated in their employment contracts that they will receive annual bonuses or increments, if the management had chosen to share its financial success with them, it would have motivated them even further to engage in productive behaviors .
Similarly, when the company began implementing cost-cutting measures such as launching a low-cost subdivision in the form of Air World Mini, or by merging with Blue Sky Airways, the psychological contract would have entailed sharing details with the employees about what measures were being taken and why. Even if Carolyn was unable to guarantee job security for everyone who worked at Air World, honest exchange of communications would have re-established trust between both parties. Instead of announcing that there was a possibility of movement for existing Air World employees into Air World Mini, it would have been a far more effective strategy to orient employees about the procedures they would have to follow in order to be eligible for the transfer.
It is simple enough to understand why Carolyn did not consider this to be important; nowhere in the company’s policy manual was it stated that it is the executive management’s responsibility to educate employees in case a major change within the organization is announced. Therefore, an important management lesson is doing more than the basic that is stated in company policy. This is a recommended course of action, not because the employees can hold the business accountable and liable in court if they fail to do so, but because it makes business sense to have your strongest asset on your side in an uncertain future .
Had the top brass recognized the important role a psychological contract can play, the situation would not have deteriorated to a point where the employees refuse to come to work unless their terms and conditions are complied with. The cost-cutting measures implemented in the past, in reality, ended up costing Air World International far more dearly than Carolyn, the Human Resource or the Finance Departments could have anticipated.
Essay Question Two: Introduction
Back in 1994, Carolyn Baker established Air World International, an airline set to soar to new heights in the aviation industry. With the commencement of its operations, Air World International flew from London to New York and then gradually spread its wings towards 50 more travel destinations. With 200 aircraft in its fleet as of August 2014, Air World International was known to be one of the fastest growing airlines in the region. As far as the crew was concerned, they weren’t little either. There were more than 15,000 employees recruited, including the pilots, engineers, ground crew and other administration staff, ordered to work for 24 hours, 365 days and 7 days a week, just like every other airline. Carolyn knew that if she could find the right balance to the equation of successful aviation, she could very well be known as one of the top players in the airline industry, and with no scarcity of financial resources, it seemed as though, she was on her way to the top.
Initially, finances were the least of Carolyn’s worries as the company was performing well, had high occupancy rates on its jumbo planes and its American and European routes were turning out to be the real cash cows. However, as the industry-wide global recession began to take root, Air World International was forced to consider sourcing from banks and investment firms to continue its operations without reducing its fare costs (as suggested by its employees).
As with every company that underestimates the crucial input of its employees, Air World International also not only failed to reward its employees on time, but there were no steps taken to recognize employee contributions . The rationale provided at the time in an email by Carolyn was that the company was facing tough competition, and staying afloat was the primary business objective at this time. Consequently, to reduce its debt burden and improve cash flows, the launch of Air World Mini was decided upon, as well as a merger with Blue Sky Airways some time later.
The Human Resource Department began scheduling large numbers of the workforce on a forced leave program, with no details about when they will be called back to full time duty, and, their regular salaries. With news consistently pouring over management changes at the top, employees knew that their job security was under threat. Some of the older employees were asked to consider retirement packages, but again, neither Carolyn nor the Human Resource Department was able to provide them with the basic details of how they will be compensated .
The frustration amongst the employees grew and eventually, there was a strike called by the employees due to the management refusing all increments or details on how appraisals would be conducted.
Importance of Performance Recognition and Appraisals
It was the competence, commitment and dedication of Air World International’s workforce that had enabled the business to reach new heights very quickly. The employees demonstrated Organizational Citizenship Behavior (OCB) by putting in extra hours and performing tasks that were well beyond their stated roles and responsibilities . While there was no written commitment from the management that the exceptional efforts that were being put in day in and day out would be eventually compensated, it was implicitly assumed so by the employees.
The prevailing belief was that once the start-up becomes stable, it would mean higher salaries, bonuses and other incentives. Naturally, employees whose input made more of an impact on the company’s bottom line, or its reputation and image as a quality airline, deserved more prominent recognition and greater monetary compensation than others.
The company refused to restructure the existing Compensation Policies that were in place, which led the employees to announce a strike if the company persisted in its lack of open, honest communication and continued deferral of the promised appraisals that would determine which employees are kept on the payroll and which ones are laid off.
It is understandable that during a time when each dollar seems to be very precious, companies would opt to not compensate employees. However, what most managers and leaders such as Carolyn fail to realize is that employees do not only value material rewards. This implies that commissions or a percentage increase in salary are not the only tools available for companies to express appreciation for good performance. There is another type of reward and recognition system, called ‘intrinsic rewards’ that can be effectively utilized during times when a company lacks the revenues to administer monetary benefits .
Intrinsic Rewards are defined as the intangible, non-monetary rewards that employees consider important for their sense of self-worth. It is these rewards that continue to motivate employees to perform at the highest level, because their actions are being positively reinforced by an output from their employers that creates a sense of achievement amongst them.
One strategy that is frequently utilized in the airline industry and would also have served Air World International well was to institute an ‘Employee of the Month’ Program. The individual or even a group of individuals, who were determined to have outperformed their colleagues in a particular month, would be awarded the title. This would have served two important purposes.
Firstly, the employees would not have felt that their efforts were being neglected and the announcement of the title through an internally generated email, on the company’s website and social media pages as well as within each department would have ensured their continued motivation.
Secondly, in order to determine the winner of this employee recognition program, the company would have had to implement some sort of an appraisal system, which in the given scenario was completely absent. This way, the employees would have been informed of the factors on which their monthly performance would be measured, while the winners would be assured that since their names have made it to the list of outstanding employees, the management would consider whenever future promotions or incentives were being considered .
Since a primary problem that was a major part of the employee’s list of grievances was the lack of information on how the company viewed their performance to date, as in their minds, it would have been an important indicator of which one of them should expect to remain on the roster and which ones should start looking for a new job.
Conclusion and Recommendations
The breakdown of the relationship between Air World International and its employees was a direct result of not valuing the input of a workforce, particularly in a service-oriented organization. The situation would not have worsened to such an extent had Carolyn and the Human Resource Department been more considerate towards understanding and addressing the priority needs of its workforce.
In my opinion, a crucial strategy to keep the employees happy and loyal to the company was that once the business had started doing well, a substantial portion of the profits should have been shared with the employees in the form of increments and other performance based incentives. In this instance, the management’s decision turned out to be the opposite, which is also the starting point of the Human Resource crisis the company had on its hands a few years later .
It was decided to save profits for future expansion at the expense of keeping its people motivated, and this is what triggered the fallout. Perhaps an important lesson to have kept in mind would have been the fact that the organizations that value their employees, and ensure that its people are made aware of how important their daily contributions are in the larger scheme of things, benefit from their continued loyalty, even during times when salaries have to be slashed or payments are delayed.
Therefore, a fair employee recognition system, a key characteristic of which is that it should be based on ‘rewards for good performance’ is an important policy to have for businesses . On the surface, it may seem that the company would have had to spend valuable finances on increasing salaries, however, in the long run, this investment in its own workforce development would have paid dividends for Air World, as the employees would have remained honest and true to the business.
However, the organization’s decision to put performance appraisals and recognition on the backburner as it focused on enhancing its operations and improving its financial position, it caused a human resource crisis that could have been avoided .
References
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Salanova, M. (2005). Linking Organizational Resources and Work Engagement to Employee Performance and Customer Loyalty: The Mediation of Service Climate. Joirnal of Appplied Psychology, 1217-1227.
Steel, P. (2006). Integrating Theories of Motivation. Academy of Management , 889-913.
