Introduction:
With the growing possibilities of work opportunities, employees have multiple jobs to choose from. One of the key influential factor to take up the decision of a job change is compensation. It motivates the employees to fulfil the expected roles and objectives assigned to them. Strategic compensation differs in such a manner that here the employee is not considered just as an overhead. The employee’s salary and related monetary benefits are directly related to the strategies that have been formulated to achieve the company’s crucial objectives that ensure the profitability and sustainability of the firm in the dynamic industry. However, even though several researchers have indicated the need for a compensation strategy, in practicality organisations only see it as an obstacle. Given the fact that these policies need added governance, strict maintenance of records, it is observed as additional expenses which most of the organisations are reluctant to bear. It is generally not seen as a task that creates any kind of value to the organisation but is considered to be a business risk. Compensation strategy cannot be considered as a means to attain quick profits but it must be seen as a practice that will help the organisation stay ahead in the market by having efficient employees in the long-term. As stated by Gerhart and Milkovich (1990) an organisation’s mission, flowchart and productivity are in a certain manner because the management has chosen the specific pattern to be so.
Analysis:
Petroleum Development Oman (PDO) is one of the leading crude oil production companies of the Sultanate. The company is responsible for more than 70% of the production of crude oil and natural gas. The organisation has an operating area of 100000sq.km. and is owned majorly by the Government of Oman (60%), the Shell Group (34%), Total (4%) and Partex (2%). The organisation has a workforce comprising 8000 employees from over 64 countries and approximately 45000 contractors. Some of the key HR initiatives for the employees provided include Housing loan, foreign work opportunities as a part of the deal with Shell, educational support, healthcare facilities for Omani employees. It also offers a health care centre and a recreation centre. The organisation has won several awards over the years. Royal Oman Police Private Sector Award for Road Safety, ADIPEC Award for the Best MENA Oil and Gas HSE Award, Oman Green Awards 2013: The Green Habitat Award and much more.
Considering the case in point the company PDO has not been performing well in the last three consecutive years. This needs to be immediately addressed by the management. After careful analysis of the various affecting factors the management has concluded that the one of the important reasons that are leading to the crisis is the high rate of attrition which is adding to the expenses to the organisation. Upon further critical analysis, it has been found that the compensation is the prime reason that is eventually leading to high employee turnover. Considering this now the company needs to create an efficient compensation strategy that will ensure that the high performing employees are retained and the company’s strategic objective is achieved over time. The first parameter to be considered for a compensation strategy is the detailed plan of the organisation (Lawler, 1990). Only when the company is clear about what it wants to achieve does a carefully planned compensation makes sense. Both the factors need to be aligned and have to be governed simultaneously. Once there is clarity then compensation will evolve as a powerful tool to retain the needed talent which is extremely crucial in such a time of crisis. In PDO, the strategic agenda will involve increasing the profitability by reducing overall costs and increasing the customer base gradually. With one of the focus areas being the high-cost reduction, strategic compensation must include in holding back experienced employees who will be able to contribute immensely to the organisation. With a thorough understanding of the working nature of the firm, these employees will prove to be an asset to the company. It must be noted that the employees can further be motivated, encouraged and the desired behavioural outcomes can be obtained as long as they stay committed to the organisation.
Strategic compensation being different from traditional compensation as a concept and method must be carefully applied to the company PDO. It must not be treated as a mere cost of running the business but must be understood to be an economic value addition which is as crucial as the other human resources function that assists the organisation to have a secure sustained competency (Pfeffer, 1994). As per a research conducted by the Chartered Institute of Personnel and Development (CIPD) conducted in 2007, it was established that larger organisations are rapidly accepting compensation strategy than the smaller companies. In this case company PDO is a large scale organisation which can easily adapt to the requirements of a functioning compensation plan. It was also learnt that companies now are embracing a centralised structure for this plan. With several offices spread across various locations, tracking the performance and creating a suitable compensation plan becomes a challenge. With a centralised system, the policies can be uniformly maintained and tracked.
Designing a compensation strategy:
- Firstly compensation is directly linked to the efforts put in by the employees. The HR department can do a survey and collected data from the employees directly. The data collected must then be further analysed and interpreted. It is not possible that all the employees will admit the fact that the company is paying them well. The data hence needs to consider the behavioural attitudes and employee perception during the course of analysis. The team must also consider the market trend and compare the data alongside. This will give the current compensation plan status.
- The next level of data collection will include the management itself. The top executives will be able to provide their interpretation of the current compensation system. Inputs can be taken for the new plan that is to be designed. The support and agreement of the top management are crucial as it helps the HR team to decide and create a better system than the underlying one. The data collection methods can include primary as well as secondary sources. Rationalists view top managers as the primary source of organisational behaviour (Whittington, 1997). Amongst all these important stakeholders, the role of the managers is immense. It is believed that the managers choose a specific compensation strategy so that they can dictate the course of the organisation’s progress which is the need of the hour for PDO. As advocated by Watkins (2003) the mode of operations chosen by managers is one of the key factors that decides the future of an organisation. The responsibility and accountability are KPIs of the organisation’s performance.
- The last level of stakeholders will include the governing bodies such as tax authorities, compliance firms and related associations. Though this method might prove to be time-consuming but the data might be helpful in formulating the newer plans.
Once the data is collected and analysed, PDO has to understand few concepts before moving to the next stage of creating a compensation strategy. It is important to also understand where the company stands in the competitive job market. There are essentially three categories where the firm can fall into Lead, Meet or Lag.
Lead is a state when the employer is paying a salary package that is above the market standards. This decision might be taken for several reasons. The employer might be perceiving the compensation package as a means to attract skilled employees or retain the ones who are contributing to the growth of the organisation in heavy proportions. Though bigger compensation packages do not always essentially represent quality employees.
Meet the market is a state where most of the firms belong to. Here the compensation packages are designed based on the current trends followed in the industry. The compensation will vary from one industry to another. This practice is the most logical for most of the companies. With a fixed pay that meets the market expectations, the company can then go ahead and set the variable pay based on their ability. Even though PDO falls under this category the company will have to refresh the compensation packages and adjust it as per the current market standards.
Lag is a cause of concern. It is a phase where the compensation does not meet the market expectations. This adds to employee dissatisfaction and might be a reason for high attrition. But firms must realise that high attrition equals to additional expenses that might prove to be taxing in the long run. Given the current scenario, there is a possibility that few sections of PDO might be falling under this category. HR team will have done a thorough market analysis of the current packages and understand which level of employees are underpaid. The compensation has to be quickly rectified so that employee attrition can be controlled to the possible extent.
Mixed market position: This is one of the new approaches which is being widely accepted by the employees (SHRM, n.d.). In this scenario, a section of employees will have a slab of packages where the salary of one employee will differ from the other based on the skills and performance. This also depends on the locations that the firm is operating or the nature of the job itself.
PDO will move to the next stage of strategic compensation analysis where a SWOT analysis is done to understand the current operations of the organisation. The company will have to understand that if employees are quitting stating compensation as a reason then what their expectation in terms of salary is. Once they quit which are the companies they are joining and what kind of hike percentages are they obtaining? Along with this, the company will also have to understand that if there are employees who are working for a long time what are the reasons that are enabling the employees to hold on? What are the kind of benefits that these employees are feeling good about and how the organisation can better these similarly for other employees too? More importantly, the firm will have to take a tough look at the incentive plan created for the benefit of the employees and if this reward system is actually in synchronisation with the employee’s expectations.
Upon collecting the data and analysing the same from different perspectives the HR should then divide the pay into reasonable fixed pay and variable pay sub-brackets. The fixed pay must be modified as per the current industry standards. Variable pay is an important component of the strategic compensation. As put forth by Pfeffer and Sutton (2000) the theoretical research usually neglects the gap that exists between what is expected from a compensation approach, what is designed and what is practised. It does not consider the between the expectations and the prevalent operations. Now HR will need to formulate a strong Pay for Performance system with the support from the senior management. The Pay for Performance methods is found to be key motivators for employees at various levels. It can be used for various levels of workers and set the target based on the skills involved in carrying out the given task assigned to the employee. These methods can be equally challenging as the organisation will have to set aside and create a budget for this. It acts as an additional expense. Given the fact that PDO is financially under-performing the company must be very smart is formulating newer plans. The strategies must be smart enough to motivate the employees and ensure that they are not impacting heavily the company’s expenditure. However, these measures are crucial as they will reduce the high employee turnover and will further encourage in attrition reduction.
Pay for performance measures help in motivating the employees at various strategic levels — individual, group and organisational (UNIBusiness, n.d.). It helps the HR team to identify significant contributions made by various individuals across functions that are key to attain the organisation’s strategic goals. The challenge lies in linking the reward system to job performance. PDO will have to create pay for performance measures for the first three years at least and can then restructure it based on the efficiency of the plan.
Cited from Mathis, R.L. & Jackson, J. H. (2008). SlideShare.
The measures can be divided into two categories:
- Short-term plans that include merit pay, one-time cash reward, bonus, awards and incentives. Individual incentives are one of the most commonly used methods. Here, the incentive amount is directly linked to the amount of work the employee is doing.
Individual Incentive Plans cited from UNIBusiness, n.d.
Individual incentive plans prove to be beneficial not only for employees but also for the employers. When the organisation realises that the employees are channelizing their focus on working towards the rewards it will lead to lesser supervision. The challenge to this approach is to ensure that there is no demotivation for employees who are unable to earn the incentives. It can also lead to friction in the team which will have to be carefully managed by the manager. Handling the team members sensitively will become the sole responsibility of the leaders. It might also refrain the employees from suggesting better production methods with a fear that the production plan might be altered.
- Group incentive plans: In this method the entire team or a specific group is rewarded depending on the results that the group was able to accomplish. Gain-sharing, profit sharing and earnings-at-risk are some of the used methods under this category. These schemes help in bringing teams together and helping the organisation to achieve the goals faster. PDO should focus more on such measures initially.
Teams encourage the achievement of organisational goals and objectives with collective problem solving in the provided environmental performance (Daily & Huang, 2001). In gain sharing strategies the bonus is calculated based on a pre-set formula or it is target oriented where the production of each group is collected and calculated. Based on the results the high performing team is rewarded with cash prizes or group travels and similar incentives. Some of the gain sharing plans are:
1. Scanlon plan: This plan is suitable where incentives are deducted as a ratio between labour costs and sales value of production. As stated by Azzone & Noci (1998) quantifiable output is crucial and stands as the determinant to manufacturing strategies. It also enables the organisation to evaluate the co-relation between eco-efficiency and reward system. Implementation of Scanlon Plan helps in achieving these objectives. The ability to modify the formulas as per the need makes this plan suitable for every industry. PDO must consider this plan seriously and take into account the factors that are needed to implement the same. In this plan employee involvement is more than the other plans mentioned below.
2. Rucker Plan: Here the value of labour to produce the goods is taken into consideration while calculating the incentives. Along with this, a monthly bonus is calculated by considering the value added to production and contribution of the employees. Formula used for this plan is:
Labor Cost-Productivity = Payroll/Value Added
Where the standard will be dependent on previous production numbers from past years. Rucker Plan focuses on the productivity. If it is low then payments will be unable to accommodate incentive and if the productivity is high then it is be offered as bonuses. Incentives are usually provided on a monthly basis as a part of the variables so that the employees are able to distinguish between salary and incentive. Some organisations link the bonus to the employee attendance level also. When an employee achieves certain number is working days an additional amount is credited to their account.
3. Improshare: This is also known as Improved Productivity Sharing Plan. It uses the number of labour hours that is used in the production of final goods. The tool of measurement is the comparison of output to input. The usual productivity expected here is absolute. The advantage of this plan is that it does not several factors that do not fall under the employee’s control such as sales or market fluctuations. To add to the bonus values are not dependent on sales figures. This makes the plan beneficial for both the employee and the employer. Since the plan heavily relies on improvements and productivity values it uses the historical data from the past years. Improshare considers all non-productive figures which make it a good plan for employees.
Other than these the organisation can introduce long-terms incentive plans to the employees.
- Employee Stock Ownership Plans (ESOPs)
- Performance plans (Performance share and performance unit)
- Broad-based Option plans (BBOP)
Feedback:
After designing a compensation strategy PDO must implement it and also keep a track of progress with regular feedback and quantitative methods. The performance of the employees must be carefully examined and compared with the previous data. The same applies to the employee turnover rate. The attrition rates must come down with time and employees must settle down for longer periods of time with no strong intention of leaving the organisation. Only this will indicate the successful implementation of the strategy. If the HR feels that there are few more adjustments needed for variable pay plans then the same must be executed on an immediate basis. This will ensure that there is no fallback in terms of the application of the compensation plan.
Conclusion:
It is crucial that PDO identifies the gaps that are existing in the current payment system by carefully studying the current compensation philosophies. At least one market survey must be conducted to understand where the organisation is positioned in the paid industry. One external market survey will be an ideal choice but it depends on how much the company top management is willing to spend on the same. If the firm is willing that the internal HR team must conduct the survey it must also consider whether the team has the expertise and the spare time to invest in such an option at all. The salary packages will have to be set in specific slots and must be compared to similar profiles of other companies. The observations must be interpreted in terms of analysis and must be presented to the senior management for further discussion. The HR must be sure while classifying the jobs based on job descriptions and designations. Based on the initial level of talks the new salary packages must be concluded. The next step must include considering the organisation’s appraisal process. Based on all the above-stated factors the next big challenge will be to formulate a pay for performance matrix and the ideal method that suits the need of the business. Not to forget after these steps the new compensation strategy must be reviewed, adjusted if required and altered based on the newer situations that the firm observes.
References:
Azzone, G., and Noci, G., 1998. Identifying Effective PMSs for the Deployment of “Green” Manufacturing Strategies. International Journal of Productions & Operations Management 18(4), pp. 308 - 335.
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Daily, B. F., and Huang, S., 2001. Achieving Sustainability through Attention to Human Resource Factors in Environmental Management. International Journal of Operations and Productions Management 21(12), pp. 1539 - 1552.
Gerhart, B. and Milkovich, G.T., 1990. Organisational differences in managerial compensation and firm performance, Academy of Management Journal, 33, pp. 663-691.
Lawler, E., 1990. Strategic compensation: Aligning organisational strategies and compensation systems. San Francisco: Jossey-Bass.
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Pfeffer, J., 1994. Competitive advantage through people. Boston: HBS Press.
Pfeffer, J and Sutton, R.I., 2000. The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action, Boston: HBS Press.
Mathis, R.L. and Jackson, J. H., 2008. Variable Pay and Executive Compensation. SlideShare. Available at: < http://www.slideshare.net/jamalikuka/hrd-24mathis12ech13shvariable-pay-and-executive-compensation> [Accessed 31 March 2016].
Watkins, M., 2003. The First 90 Days: Critical Success Strategies for New Leaders at All Levels. Boston: Harvard Business School Press.
Whittington, R., 1997. What is strategy and does it matter? London: Thomson Business Press.
