FITTING COMPENSATION
Empirical study at a marketing company
Master thesis, MscBA, specialization Human Resource Management University of Groningen, Faculty of Management and Organization
April 27, 2011
WOUT TEN HAVE Student number: 1457454
Jozef Israëlsstraat 11B 9718 GA Groningen tel.: +31 (0)6 14 70 31 57 e-mail: wout_tenhave@hotmail.com
Supervisor/ university P.H. van der Meer
Supervisor/ field of study anonymous
anonymous
Acknowledgment: I would like to thank dr. P. H. van der Meer for the helpful comments on earlier drafts of this thesis and the moments of exchanging thoughts to keep me on the right track with this paper. Also, I would like to thank the company, and her staff, which I investigated, for the support and access to their people and documents.
ABSTRACT
This paper introduces an empirical study at a Dutch marketing company, where the current compensation policy is investigated on its consistency. In order to deliver recommendations for adjustments or changes, organization’s characteristics are also researched. A sample of 39 people and 183 functions was utilized. Linear regression exposed the inconsistency of
compensation based on education, years of employment and relevant experience. Linear mixed regression with repeated measures indicated compensation based on eight compensable factors to be inconsistent with the salary paid over the last five years. Based on the analyses performed, I concluded the compensation system, which the organization handled in the past, to be inconsistent. I recommend this organization to adopt an educational character in
combination with a compensation system based on compensable factors. This character and compensation system would create the best fit with the strategic objectives, and culture of the organization, and the HR strategy and practices.
1. INTRODUCTION
The establishment of a newly introduced organization in an area of the market where it is considered a pioneer, brings about many advantages and opportunities to create and shape the market and to operate on self-created conditions. Environmental forces exist on a low profile, competition usually is not fierce in the period of start-up and the company possesses a significant amount of flexibility to cope with environmental forces.
However, as companies mature, the impact of those forces increases and organizations require to invent manners to ensure the continuity of the company, especially when success is present and the company develops a larger workforce and services offered increase. The measures a company takes, depend highly on the business it operates in and the composition of the workforce. Companies operating in a rapidly changing environment, in a business where information exchange is crucial and loses its novelty the moment it reaches the general public, also necessitate a young and flexible workforce with the eagerness to continuously acquire new information and the adaptability to remain flexible in such an environment.
During this process of maturation management gains awareness of the fact that former organization structures and policies no longer suffice, or at least, those former policies are questioned.
In this study a company operating in the north of the Netherlands is investigated concerning the wage policy. This company operates in the area of marketing, where the environment, information and prevailing truths rapidly change. Employees are the key resource and a lot is invested to keep the employees richly nourished with knowledge. The workforce consists mostly of starters fresh out of college, or participants of a work-learn path. These kind of people are also an important component in the culture this organization intends to preserve, for that they are very eager to learn quickly and effectively and willing to share knowledge in order to achieve the objectives collectively. However, recently management and the Human Resource Department experienced questioning from the workforce with regard to the current wage policy, as to whether this represented a conform-to- market wage policy.
As we hold the equity theory in regard, this represents an interesting motivation for investigating this topic. The equity theory, in relation with compensation systems, holds three primary statements, as described by several theorists (Adams; 1963 & 1965, Patchen; 1961).
First entails the comparison between the contribution to the job and the return to be equitable, second comprehends the comparison of their inputs (skills, education and effort) and their outcomes (compensation, promotion and job status) in relation to those of their co-workers
and external levels. Third point these theorists cite is the situation where a person perceives his or her situation to be inequitable, they are de-motivated, inducing reduced effort, increased dissatisfaction and perhaps disruptive behavior (Milkovich & Newman, 2008). Thus, the equity theory holds the fairness of pay. This fairness demonstrates two types: distributive justice and procedural justice. Distributive justice refers to the perception of an employee whether one perceives the amount of compensation distributed is fair. Procedural justice holds the judgment about the fairness of the procedures handled to determine the amount of rewards employees receive (Milkovich & Newman, 2008).
Especially the third point stated by the authors mentioned is one organizations in general would preferably prevent or avoid. Therefore, this research aims to investigate the wage policy currently in place and applied in the past in order to be able to make statements about its consistency and correctness and introduce recommendations for adjustments or changes to that policy.
Hence, the central research question in this paper is:
What is the current compensation policy of the company investigated, and how does this relate to the strategic objectives of the organization and the Human Resource strategy?
Firstly, I analyzed the consistency of the current compensation policy utilizing years
of employment, education, and relevant experience as determinants for salary. Secondly, I tested consistency for eight different compensable factors. Based on the results of those analyses I provide recommendations for adjustments to the organization strategy, the HR strategy and practices in order to improve the fit among those three components.
This paper enfolds as follows. First, a brief overview of relevant literature on organization strategy, HR strategy and compensation systems is presented, with an emphasis on the establishment of a fit between those factors. Second, the data and research methods are discussed. Third, the results of the analyses are presented and the fourth section presents the discussion and conclusions, with some practical recommendations for the organization concerned.
2.THEORETICAL FRAMEWORK
Firm performance is argued to thrive through the ‘fit’ or ‘match’ between the strategy of an organization and strategies of all its components (Chen & Fu, 2008; Baird & Meshoulam, 1988; Boxall, 1992). A high firm performance is achieved through the ability of a company of fitting or establishing coherence among a set of competitive factors, both internal and external (Danis, 2006). Organizations are in constant contact with their environment, the need to adjust to legal, social, political and economic forces within the environment continuously exists.
Through the interaction with the environment, organizations are forced to align their resources, capabilities and competencies with the opportunities and threats of the environment in order to establish and maintain a competitive advantage (Bourgeois, 1980; Schendel &
Hofer, 1979).
2.1 Organization Strategy
In defining organization strategy, several decades the notion existed, that strategies are deliberate plans conceived in advance of making decisions. Mintzberg (1978) was innovatory in his definition to state strategy as “a pattern in a stream of decisions”. This definition enables the division of strategic decisions into the intended strategy, the former definition of strategy, and realized strategy, “when a sequence of decisions in some area exhibits a consistency over time, a strategy will be considered to have formed” (Mintzberg, 1978).
When taking a more macro perspective on strategy, on the business level, several have divided this into different typologies (Miles & Snow, 1978; Porter, 1980). This paper continues with the typology of Miles & Snow, while this approach has been validated thoroughly through extensive theoretical and empirical examination (Shortell & Zajac, 1990).
This typology captures the central elements of strategic choice, resource based view and dynamic capabilities perspectives. Hambrick (2003) stated that among the numerous strategy classification systems introduced over the past 25 years, the typology of Miles and Snow (1978; 2003) has been the most enduring, most scrutinized and the most used.
Miles and Snow (1978) distinguish three types of business strategies: the defender, analyzer and prospector strategy.
• Defender: Organization that usually does not attempt to operate a wide product or service arena, but searches for economies of scale in areas that are relatively predictable, stable and healthy.
• Analyzer: Can be defined as “second mover” or “fast follower”. Also considered the hybrid or combination strategy (Parnell & Wright, 1993), since they intend to capture the best of the defender and the prospector strategy.
• Prospector: Continually searching for new products, businesses, services, technologies and markets.
2.1.1 Organization Strategy in High-Velocity Environments
As already mentioned above, the company concerned operates in a highly unstable and rapidly changing environment, also defined as being a high-velocity environment.
Implications from research on the multitude of business failures among start-ups in the era of the establishment of the internet led to a slightly different view on strategy (Wirtz, Mathieu &
Schilke, 2007).
Wirtz et al. (2007) argue that organizational strategy for firms operating in high- velocity environments necessitates a modification of existing strategy concepts. They introduce a multidimensional framework containing seven different dimensions, with an empirically validated influence of the construct as a whole, as well as the dimensions individually, on organizational performance.
The dimensions as described by Wirtz and colleagues comprise: product differentiation; distinguishing products or services from those of the competitors through the creation of unique features. Image differentiation is related to the former; the creation of a distinguished image of the organization through psychological, attitudinal positioning. Focus is a dimension that is already well established in economics and refers to the concentration on a certain area of the market, a niche. Pro-activeness is one of the most important dimensions in this framework; it concerns the ongoing search for opportunities in producing as well as products or services and the early pursuit of those opportunities. The activities executed within this dimension should enable an organization to continuously search for and discover competitive advantage, since that is unsustainable in rapidly changing environments.
Replication stands for the knowledge sharing process through the codification of implicit knowledge, which externalizes knowledge. Through replication every employee is aware of and informed on the knowledge available in the organization. The ability to recognize the needs to alter the structure of a firm’s assets, or obtain additional knowledge or information to transform internally or externally, is known as reconfiguration. The last dimension in the framework of Wirtz et al., cooperation, stands for the arrangements or network externalities where an organization obtains access to, enabling organizational learning through sharing of knowledge among partners (in the industry).
This multidimensional framework adds to existing theory on organizational strategy through the notion that organizations operating in rapidly changing environments necessitate a
slightly different view and formulation of ‘strategy’. This obviously has implications for the relating strategies and policies established within a firm, among others: the far more short term sustainability of a strategy, a significantly greater ad hoc approach, demand of more flexibility within the organization to cope with the rapid modifications in the environment.
Moreover, other values are important for compensation and those values tend to change over time.
Miles and Snow (1984) also introduced a model of strategic Human Resource systems, in which their business strategies are related to HR practices. Miles and Snow argue that managers of organizations operating with a different business strategy also adopt distinct HR practices, which is supported by findings of Zahra and Pearce (1990), who found that the emphasis of top managers on HR philosophies differs corresponding the differences in business strategies adopted.
2.2 HR Strategy
Miles and Snow emphasize the importance of congruence between business strategies and HR strategy and practices, but what does this entail? First the concept of strategic Human Resource Management, as defined by Wright and McMahan (1992): “the pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals.” In this strategic Human Resource Management process, HR necessitates to establish the implementation of the chosen strategy by top management and especially ensuring the alignment between the strategy and the HR practices which should fully support the achievement of company goals.
A brief introduction in HR practices, mostly applicable in this company study, follows. There is a wide variety of choices available in the area of HR practices, but most notable are the alignment with identified strategic organization objectives and the alignment between the practices, respectively vertical and horizontal alignment (Delery, 1998; Gerhart, 2007; Wright & Snell, 1998). Through this alignment, HR practices are able to have strategic impacts (Bowen & Ostroff, 2004; Wright & McMahan, 1992).
The HR practices which are most applicable for this company and the remainder of this paper are recruitment and selection, and training and development.
With regard to recruitment and selection, the first component of the value adding role of HR, there exist several components where choices are required to enable alignment.
First of all, the HR department commences with the human resources planning process where forecasting the future demand represents the first step. Based on this forecast goals are set and
action is to be undertaken in the form of downsizing, early retirement programs or the employment of extra personnel, depending on the outcomes of the forecast (Noe, Hollenbeck, Gerhart & Wright, 2006). In the case of demand for extra personnel, the HR department is required to determine which recruitment sources to utilize. Several recruitment sources exist, like referrals, advertisements in newspapers or online, recruitment agencies, and colleges and universities. Crucial consideration here is to select the recruitment sources which match the desired applicants to attract and the image the organization desires to send out.
When having obtained a desired pool of applicants, the organization faces the issue of selecting the proper candidate through the use of a variety of selection methods. These encompass among others: interviews, references and biographical data, and all sorts of tests;
physical and cognitive ability, honesty and drug tests (Noe et al., 2006). Again, these methods necessitate a fit, with characteristics of the job selecting for, the organization and its culture.
Above all, in order to be able to eventually select the most appropriate candidate, the selection methods must be checked for reliability, validity, generalizability, utility, and legality of the procedure and its outcomes.
While the before mentioned procedures enable the entrance of the proper employees, the succeeding act is to develop the abilities of those employees in order to reach organization’s objectives to a maximum. Each organization should carefully gain insight in the manner to best spend the investments in their employees, since there exist many possibilities to shape the training and development of employees. Arguably the most effective manner to construct the continuous development of employees through learning is to create a learning environment or a culture where learning through sharing knowledge and information prevails. This however, should perfectly match the organization and the goals it is striving to achieve.
Another important HR practice, preferably fitting the strategic organization’s objectives and the other HR practices, is the compensation system. The fit or alignment between the organization strategy and the use of the specific compensation systems should improve organizational effectiveness (Gerhart, Wright, McMahan & Snell, 2000; Gomez-Mejia and Balkin, 1992). This holds especially since compensation systems are designed to improve and/ or encourage desirable employee behaviors, where these behaviors are meant to support the organization’s strategy and improve organizational performance.
2.3 Forms of Pay
Compensation is defined in many different manners and the definition that will be handled throughout the remainder of this work is as follows: “Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship” (Milkovich & Newman, 2008). It represents the mean through which organizations evoke and reinforce desired behavior (Boyd & Salamin, 2001; Milkovich
& Newman, 2002). In management and business principles rewards are considered to be one of the most effective practices for acquiring high levels of performance from employees (Delery & Doty, 1996; Huselid, 1995), however Cox, Brown and Reilly (2010) state that organizations may focus too heavily on the effect of financial rewards on employees instead of the effect indirect and non-financial rewards can have. Implicitly Cox and colleagues argue here that companies still focus excessively on the extrinsic component of motivation, while since several years/decades employees value personal development, autonomy and support and affirmation from peers significantly more, known as components of intrinsic motivation (Maccoby, 2010). In this light, Lowe, Milliman, de Cieri and Dowling (2002) state the following: Incentive power, which is embedded in rewards (Bartol & Locke, 2000) relies very much on the extent to which a reward is valued by its recipient.
The definition from Milkovich & Newman (2008) enables a further categorization into
“total compensation”; the transactional returns from an employment relationship, and
“relational returns”, the psychological returns as learning opportunities, status, challenging work and alike. Total compensation is further divided into cash compensation (base pay, merit pay, short-term incentives and long-term incentives) and benefits derived from the employment relationship (income protection, pensions, medical insurance, programs to help balance work and life demands, and allowances).
The categorization as shown above resembles the framework as presented by Rosenstiel (1975). His framework contains five categories, also holding indirect, direct and non-financial rewards, but the latter is further divided into individual, social and incentives provided by the internal organizational environment. Rosenstiel argues that essentially organizations are defined as a system of rewards and incentives, where every single component and characteristic of the company can become an incentive for their employees.
Examples of this kind of incentives as offered by Rosenstiel are: organizational culture, company’s image, (geographic) location of the company, interpersonal relationships, and communication systems.
2.3.1 Direct Financial Compensation
The first category of compensation consists of every form of pay that an employee receives for the work performed, which are provided on a regular and consistent basis.
Direct financial compensation is usually further split up into base pay and variable pay. Base pay consists of the distinction between salary and wage, where, according to Baron and Kreps (1999), salary is paid to those for who it is important or even essential to manage their own time. Wages count for those employees who experience control of their work schedule to a greater extent by management. This implicitly holds, especially for the Netherlands, that professionals are not paid for executed overtime; they are responsible for the realization of their job, the output, and are paid salary for that output, not for the time spend.
Variable pay is tied to productivity or profitability, linked to the performance of an employee, a group of employees or the organization. It consists of the pay in bonuses, commissions and merit pay (Milkovich & Newman, 2008). A bonus is paid for accomplishing specific financial objectives, where a commission is paid out anyhow. This commission is a specific percentage over the performance delivered by an employee. Commission is mostly used in sales functions where no specific quota is used.
Merit increases are periodic adjustments to the base wages based on changes in experience or skill. This is based on past performance, where the height of the increase is compatible with the increase in performance; high performers receive a bigger increase than average performers.
2.3.2 Indirect Financial Compensation
Logically, indirect financial compensation carries all other financial compensation that are not direct wages paid to employees (Rosenbloom, 1996). It can be viewed as all that is part of the social contract with an organization; benefits, income protection, allowances, retirement plans, education, and employee services. In the Netherlands this form of compensation is mainly registered in central labor agreements (CLA, or in Holland: CAO) or arranged by law.
Companies differ significantly in the manner of offering these benefits. This ranges from simply offering pretax salary reductions to a sophisticated range of benefits (Barringer &
Milkovich, 1998), which enables employees to differentiate or personalize their indirect financial compensation.
2.3.3 Non-Financial Compensation
As already mentioned before, non-financial compensation holds recognition and status, employment security, challenging work, and learning opportunities. Those are psychological
returns which an employee can extract from the employment relationship and are intertwined in both the organizational and function design (Milkovich & Newman, 2008). As notified in the introduction of this paper, especially for the company where the study took place this form of compensation holds. This organization values organizational culture, image of the organization, learning opportunities and knowledge sharing and an informal and social manner of communication with employees as extremely important, but this is elaborated later on.
In the following section a number of forms of non-financial compensation will be introduced, these are forms that either are currently utilized, plans to utilize or in my opinion might become useful to utilize in the future.
2.3.3.1 Organizational culture
Culture is defined by many (a.o. Trompenaars, 1995; Triandis, 1995; Hofstede, 1980), but for the remainder of this paper the following definition is utilized: “Shared mental programming which is rooted in values, beliefs, and assumptions held in common by a group of people and which influences how information is processed” (Milkovich & Newman, 2008). This definition is easily translated to organizational culture. Organizational culture is argued to be a non-imitable source of sustained competitive advantage (Barney, 1991), and, as indicated by Rosenstiel (1975), can take the form of incentive for employees.
2.3.3.2 Employee development
Employee development and training are two activities which aim to develop an employee by acquiring knowledge, skills, competences and behavior which enable the increase of productivity. However, a distinction is recognized in the following: where on-the-job training specifically intends to improve effectiveness in the current job, development has a longer- term perspective with an extent to career planning and reviews of personal progress (Warr, 2002).
For the growing population of intrinsically motivated knowledge workers, demand for possibilities of employee development, increases. As Fenwick (2003) points out, the ‘learning organization’ programs, where learning is implemented top-down or tied to performance appraisal. This is counterintuitive in the manner that professionals value autonomy and self- regulation. This demand receives careful recognition by the company concerned and therefore places high value on on-the-job training and development. Employees entering the organization directly receive a number of trainings, not only for their specific function, but as well in the fields of the other departments in order to obtain a better understanding of the
complete company process. Moreover, the possibility exists, for current employees, to attend trainings in order to further develop management or coaching competencies, which are not automatically related to their job.
2.4 Pay Systems
A brief description of the most common pay systems follows, these systems differ in the manner of where they relate compensation to: performance, skills, knowledge and credentials, competencies, and compensable factors.
2.4.1 Pay per performance
After the publication of Edward Lazear’s research at Safelite Glass Corporation in 1995, where Lazear demonstrated that productivity increased with the introduction of performance based pay, the use of compensation based on performance took a great leap.
The key with performance based pay is that this system features important incentive effects, but the congruency with organization’s strategic objectives, HR practices, and relational factors as the external environment, the workforce and the organization’s culture determines the applicability of such a system Lazear (2000). Another condition for performance based pay to succeed is the high measurability of productivity and the low amenability of that performance by employees. Organizations are still better off continuing with compensating per hour, when the benefits for hourly waging (low monitoring costs and higher quality of the output) outweigh the costs (a lower output) (Lazear, 2000).
Jansen, Merchant and Van der Stede (2009) indicated important remarks about pay per performance systems concerning the application of such a system in the Netherlands. Their findings indicate fairly little application of this system in the Netherlands and for the companies that did in fact operate with pay per performance, the effects of the use of incentive compensation on both net profit and pay satisfaction were negative (Jansen et al., 2009). Profound interpretation of these findings Jansen and colleagues were not able to provide, however they presumed the explanation lays in the direction of cultural factors and institutional factors. Within the former, they discuss: purpose of organizations, and location on the dimensions of ‘masculinity’ and ‘long-term orientation’ as introduced by Hofstede (1980), whereas in the latter formalization of terms of employment, tax rates, and experience with incentive systems are treated.
2.4.2 Compensation based on skills, knowledge & credentials
Compensation systems paying on basis of the skill, knowledge and credentials an employee has or acquires during employment differ from pay per performance in the manner that
compensation is not tied to performance. Base wage increases gradually in relation with the display of the ability to execute certain tasks (supported through newly acquired skills or knowledge, or not). These increases are tied to acquisition of four different types of skills:
• Horizontal skills: where an employee broadens his or her skills in terms of tasks belonging to several jobs which enables the employee to perform multiple jobs in an organization (enabling job rotation).
• Vertical skills: the acquisition of skills in the same job, also termed job enrichment.
• Depth skills: a high level of skills in specialized areas relating to one job, also known as specialization.
• Basic skills: when an employee acquires expertise in a specific basic skill.
This system is based on the fact that a better trained or skilled employee is more valuable for the organization (Baron & Kreps,1999).
Douglas Jenkins Jr. and Gupta (1985), and Lawler III and Ledford jr. (1985) identify a number of advantages and disadvantages of the pay for skills system. Firstly, pay for skills improves the flexibility of the workforce, leading to slightly leaner staffing, lower absenteeism and turnover. Greater long-term productivity and higher quality output are also recognized to be advantages of the pay for skills system.
Disadvantages represent increased pay rates, a large investment in training of skills, and the ‘maturity’ problem; the case were all skills are learned. Implicitly, former named authors ascribe this compensation system to lower skilled workers and companies, since skills are assumed to be acquired relatively rapid.
2.4.3 Compensation based on competencies
Directly derived from compensation based on skills, knowledge and credentials the concept of competency-based pay was elaborated. Ledford (1995) argues that competency-based pay can be regarded as a logical step in the evolution of skill-based pay systems. Especially for knowledge workers competencies seem applicable, for that they perceive skills as more basic and applicable for manufacturing workers and employees performing high routine jobs (Ledford, 1995). Competency-based pay is also argued to be of a significant greater assistance in the support of employees’ desire for more emphasis on employee development (Cira &
Benjamin, 1998).
Then how is competency best defined? In this paper the definition as introduced by Ledford (1995) is applied: “demonstrable characteristics of the person, including knowledge,
skills, and behaviors, which enable performance”. In this definition the emphasis is on the
‘characteristics’ of a person, independent of a job or position.
Essential for the establishment of a competency-based pay system is, that an organization requires to identify and classify the behaviors or activities in different levels which collectively contribute to organizational competence (Sanchez, 2004) or the identification of the core competencies for the organization which are needed to achieve competitive advantage (Ledford, 1995). This is logically followed by the construction of appropriate profiles or competency models for the functions. Cofsky (1993) states the next step to be the formulation of the manner of evaluating the progress of employees on the competencies and desired behaviors. Hereafter, the organization necessitates the establishment of a pay structure supporting her goals.
Cofsky (1993) further identifies that the adoption of a competency-based pay system involves more than just the implementation of a new compensation system. For an optimal success of the change, a number of key systems need attention: an appropriate evaluation system, good market data for reference points in setting pay levels, and a highly specific performance measurement system. He further states: “Success of competency-based pay depends not only of a thorough understanding of the compensation strategy itself, but also on the ability to align the strategy with organization’s changing structure, culture and strategic goals.”
The foundation for competency-based pay comprises the inducement of (organizational) learning through training and knowledge sharing, and is argued to thrive well in a learning culture in a flexible organization. Pay exists in the form of an increase in base pay after the acquiring of competencies (Noe et al., 2006). In this case, pay is purely based on this acquisition, where in practice the organization holds the possibility to combine this with other pay structures.
2.4.4 Compensable factors
Compensation systems also contain the possibility to be founded on function profiles. This is elaborated in the following section.
Usually, in the process of establishing a compensation system based on function descriptions, an organization starts with the choice of a job evaluation system. In this job evaluation system the specific compensable factors of every function are registered.
Employees or better; functions are compensated founded on those compensable factors. Some
examples of those compensable factors are: knowledge, complexity, autonomy/
independence, influence and social skills.
After the determination of the compensable factors, an organization commences with the description of the functions, describing for that specific function what specific knowledge or autonomy is necessary or desired. The totality of descriptions of the chosen compensable factors encompasses a function profile.
Thereafter, the possibility to compare functions throughout the organization is produced. Through the application of similar compensable factors for every function, a certain weight can be assigned per function, which is called job evaluation. The analysis and evaluation of the functions enables division of the whole of functions into so-called ‘function groups’.
The next step, and usually the last step in practice, contains the awarding of the function groups or functions to salary scales. When following this structure, function profiles contain the important compensable factors and therefore lend themselves to be logically and clearly linked to appropriate salary scales.
Job evaluation systems exist in many forms and a significant amount of organizations have created such a system (Hay method of the Hay Group, ORBA system from AWVN, and many others). However, a relatively small number of companies elicits to create a job evaluation system customized for their organization. Despite this customization, the trend exists to exchange these customized systems for nationwide acknowledged systems.
Before elaborating on the research methods, a brief recap of the above is presented. This chapter commenced with a description of organization strategy by Mintzberg (1978) as a
“pattern in a stream of decisions”, implicating there are nearly as many strategies as there are organizations. In business and management literature numerous classifications of strategy exist. Additionally, in relation with the environment of the company concerned, the dimensions of Wirtz et al. (2007) described the alternations in strategy for organizations operating in rapidly changing environments. The HR strategy and practices should be aligned with the organization strategy in order to ensure the full support of the former to the latter and contribute to organizational performance. Again, a wide range of practices exist, enabling organizations to arrange those to their own preferences. Another part of the strategic system of an organization is the compensation system. Decisions to be taken here are in what form to remunerate employees (direct, indirect and non-financial compensation) and where to relate this compensation with: performance; skills, knowledge and credentials; competencies or/and
compensable factors. Together, these three strategic sub-systems (along with other sub- systems) should create a strategic fit.
Since the large amount of organization, Human Resource and compensation strategies, allow many combinations of fit, it is impossible to present those here. Therefore, I will present two examples of a, in theory, good and a poor strategic fit.
A company executing a strategy of innovation, where it aims to increase complexity of products and shorten the product life cycle, desires to accomplish product leadership and mass customization and innovation. The HR strategy should therefore be focused on attracting and retaining agile, risk taking and innovative people. Logically, this should be translated into the compensation system, where innovation in products and processes is rewarded and pay should at least be market-based. In this manner, the compensation system rewards the behaviors needed to excel the chosen strategy.
Such a compensation strategy is definitively far less successful for a company which focuses on efficiency through the pursuit of cost-effective solutions and operational excellence. When, in this situation, employees are rewarded for taking risks and innovations, costs will not be cut and efficiency will never be accomplished.
3.RESEARCH METHODS
In this section the research methods are discussed. The research is divided into two separate parts: the first part entails research on organization and HR strategy and practices, the second the statistical analyses to test the compensation system for consistency.
Sample and procedures
The data is collected at a company located in the north of the Netherlands, operating in the marketing branch, currently employing around 100 employees. The sample in this empirical study consisted of all employees who have or had an employment contract at the first of January 2011, at the company studied, for three years and over, with an amount of 43 employees. After filtering out the employees with unusable data; some included missing values and a few having worked in functions not existing anymore at the time of conducting the research, leaving 39 usable subjects. Table 5 presents additional information regarding the sample utilized in this research. The mean of the variable education demonstrates the majority of the sample is in possession of a HBO diploma, with some university degrees, since zero indicates MBO, one an HBO education, and two a university degree. The relevant experience shows a mean of 2.03, indicating the employees in this sample relatively do not have a significant amount of years of experience, which is congruent with the average age being
around 28. The years of employment exhibit also relatively low values, indicating that the majority of the sample recently entered the organization. This also is congruent with the fact that the organization was founded some 10 years ago, and witnessed a considerable growth in personnel since 2008. The subjects are in a variety of functions in the organization, which enables a representative sample.
In regard to collection of the data on the organization strategy, HR strategy and compensation policy a number of sources were used. The company concerned contained no clear formulation of a strategy, therefore statements were gathered through informal interviews with CEO, corporate controller and HR manager, and company documents.
Logically, a clear formulated HR strategy was also absent; this was formulated through informal interviews with the members of the HR department, and company documents, especially documents from Human Resources on procedures of their HR practices. Since the absence of a well structured compensation policy was the cause for this research, I led off with an attempt to discover the implicit compensation policy through a statistical analysis in a dataset containing the gross monthly salary of 39 employees with three independent variables.
The gross monthly salary was collected from a well documented company file, containing all current and former employees with their respective salaries, date and percentage of raise in salary.
This following independent variables were utilized: the relevant experience one had before joining this company (in years rounded up), the education one has enjoyed, the amount of years employed and the function one has or had at the time of measuring. The education an employee has enjoyed was divided into three groups, being: one group with a Dutch education of MBO (Vocational education), one representing HBO (University of Applied Science), and the last containing a University degree. These were selected based on statements by the HR department that they had roughly taken those factors into account in the setting of salary.
This data was further analyzed using the linear regression in order to establish the weights for the following formula: Y = a + b1 + c1 + d1 + ε with ε is N(0,σ2)
Where Y stands for the wage paid on the 1st of January in a specific year, a denotes the constant or the wage-foot, b1 represents the years employed. c1 stands for the relevant experience an employee had before joining the company and d1 represents the education one has enjoyed.
Since the results of this analysis failed to demonstrate a consistency, I initiated a second attempt in order to reveal the implicit compensation policy. Based on the fact that the studied
company recently introduced function profiles, containing, both implicit and explicitly, several viewpoints/ compensable factors. In cooperation with the HR department I determined eight compensable factors, which together best constituted the totality of functions.
Thereafter, again in cooperation with the HR department a simplified job evaluation system was constructed, where after functions received points on the compensable factors through the use of function profiles and information obtained from the informal interviews.
The second dataset also differed from the first, while here I used all salary data from the first dataset, but with every measuring point separate, leading to an analysis of functions with their accompanying salary, as opposed to based on employees.
This dataset contained all salary data of the subjects with the corresponding weights subtracted from the job evaluation model. For this job evaluation model, and as well for this dataset the following compensable factors were utilized: ‘kennis & vaardigheden’ (knowledge
& skills), ‘communicatie’ (communication), ‘complexiteit problematiek’ (complexity of problems), ‘samenwerken’ (collaborate), ‘verantwoordelijkheid’ (responsibility),
‘afbreukrisico’ (risk of destruction), ‘zelfstandigheid’ (independence), and ‘creativiteit’
(creativity). After evaluation of the functions, values for the totality of functions were added, as apparent on the 1st of January of 2011, with a total score. These independent variables were linked with the salary and accompanying functions through the use of a repeated measures analysis in order to express the compensable factors individually into values of currency.
The formula used in the repeated measures analysis is constructed as follows: y = a + ex + fx + gx + hx + ix + jx + kx + lx + zy + ε
Where ex to lx represent the independent variables as defined above and zy models the random effects. z is the design matrix of random effects and subscript y is a vector of random-effects parameters. Dummy variables were used for each measuring point, in order to control the outcomes for variations in time.
Two datasets where utilized, as stated above, these two share the identical source, and the second dataset applies the variety of gross monthly salary per employee as the dependent variable. This holds likewise the reason of the impossibility of combining the two datasets, since those were already combined. The difference encompasses the application of individual employees with their salary at the beginning of each year as dependent variables in one dataset and the separate functions with salary in the other dataset.
4.RESULTS
The purpose of this study was to test the implicit compensation policy of the company investigated for consistency and to create a fit between the organization, Human Resource, and compensation policy. Therefore, the organization strategy and HR strategy and practices are discussed in the proceeding, followed by the results of the analyses on the compensation system.
4.1 Organization strategy
Since the organization concerned operates, as mentioned before, in a rapidly changing environment, explicit and long term strategies are not common. The CEO of this organization mainly defines a strategy for the upcoming one to three years, but always with the thought this could change overnight.
However, at the time of writing, the following strategic objectives are carried out by management of this organization. The CEO acknowledges the relatively strong influence in two or three areas of business, but adds the possibilities and necessity to improve in the other areas. This requires more investment in those areas, where the main issue does not hold the shortage of knowledge, but more the translation of knowledge into new products.
In terms of Miles and Snow (1978), this is to be regarded of as a form of a prospector strategy, with a strong focus on the services which are already offered at the moment. The knowledge necessary to excel in this objective is available, the emphasis lays on an improved application and the retention of this knowledge for the company.
4.1.1 HR Strategy
The HR strategy of this company appears not to be apparent in a explicit formulation of such a strategy. However, some notions extracted from various sources within the company enabled me to present some findings regarding the HR strategy.
First of all, the conservation of the culture is the main factor of importance for the HR department to keep in regard. This is to be achieved through steering in the direction of output management, entailing: taking responsibility for your own tasks and assignments, direct and open communication through short lines in the organization. Also the support of team leaders with coaching, performance appraisal and peer study groups are meant for conserving the culture. Furthermore, the HR department aims to demand and encourage employees to take their own responsibility, since almost the entire workforce consists of personnel with a higher educational degree.
Another remark, which is not a component of the HR strategy, but certainly worth mentioning, is the flow of personnel. A glance at the database of former and current personnel and findings of the HR department enable making the statement that mostly, employees are working for a period of three years at this company. This finding holds especially for employees working at the core departments. In this period of three years, they specialize themselves to a certain level and reach a certain maximum capacity within their function.
After this period employees look to broaden their scope, which mostly implicates a function in the same specialization, but at another company with more tasks and responsibilities. HR and management of this company do not explicitly view this finding as a negative one, since the higher one reaches within the organization, the fewer positions become accessible.
4.1.2 Human Resource policy
This part focuses on the components of the HR policy, which are regarded as important for the remainder of this paper. This in order to achieve a fit between the HR policy and the advice towards compensating employees.
In this company, management and HR desire to establish an environment for their employees where they are able to use their creativity to fulfill the demands of their clients and where employees are constantly nurtured with knowledge and information about developments in the market and their area of specialty. This knowledge and information is to be obtained from colleagues as well as the market itself. In this manner this company stimulates an enormous sharing of knowledge within their employee base. Other forms of knowledge sharing are also used within the company, management even stimulates and emphasizes the importance of the utilization of the intranet, internal and external blogs, twitter, reading of newsletters and RSS feeds.
4.1.2.1 Recruitment & selection
This particular culture of knowledge sharing demands a certain level of curiosity and eagerness, to constantly gather new information and knowledge, from the employees. With regard to recruitment and selection, this characteristic of the culture is the first starting point.
Recruitment and selection is dedicated to acquiring new employees who fit into the culture and possess a certain package of characteristics.
4.1.2.2 Forecast and planning
This company acts in a high-velocity environment where forecasts about future demand in labor are relatively difficult to exercise. Team leaders strive to execute such a forecast, but
these are not actively utilized in the planning and recruitment process. Therefore, this process is carried out on an ad hoc principle.
4.1.2.3 Recruitment
As soon as an employee reports his or her desire to terminate the labor contract (with regard to the set term of notice of one month), HR sets out a vacancy for this job.
Both internal and external recruitment channels are utilized. Internal recruitment channels exist in the form of the output of a vacancy on the intranet and internal blog to attend the workforce of an existing vacancy. Policy regarding applicants which are nominated by current employees holds the assurance that this applicant is invited for a first application interview. In this manner HR is able to obtain additional information about the applicant which is usually unavailable when using an external recruitment channel. The external recruitment channels HR currently utilizes are postings on the external blog, a Dutch job site (www.nationalevacaturebank.nl), via twitter, and the official site of the company. Trough these channels HR intends to attract applicants which are already interested in the company, or the branch the company is acting in. These vacancies contain a specified description of the job characteristics and the desired characteristics of the applicant, to be regarded as a form of pre-selection or possible self-selection.
HR also sets out vacancies for internships at local schools and universities, since these internships are an excellent manner for students to get familiar with the company and its procedures and the company obtains a adequate image of the capabilities of the student. This company employs relatively many interns, about 10 percent of the workforce, which is a widely used manner of attracting new employees.
Overall, it can be stated that this company aims to attract young applicants, mostly students fresh out of school with an appropriate education, who share a joint interest in online marketing, and preferably reside in the north of the country. In recent years however, management increasingly expressed the desire of attracting some more experienced employees in order to obtain a more balanced composition of the existing workforce.
4.1.2.4 Training and development
Since the company concerned aims to build and maintain a workforce which is young, fresh out of school and therefore mostly inexperienced, this combined with the culture of knowledge sharing and eagerness to learn enormously in a relatively short period, training and development of employees is extremely important.
This importance is also recognized by the HR department. First of all, every novel employee receives an extensive period of training when commencing their labor contract.
This period differs in length for every department, but mostly entails two or three weeks with only training modules. After this time, the employees are further introduced into their job policies and procedures through the support of a personal ‘buddy’. This entire period is a costly investment for the company concerned, since new employees are schooled by current employees. Secondly, a yearly budget exists for every department meant for training and development of employees. Since the branch this company resides in, is a fast changing one, it is of vital importance to constantly be up-to-date of recent developments. Furthermore, and related with the before mentioned, employees are encouraged to attend conferences, mostly overseas, of partners where innovations, ought to be introduced in the future, receive attention in the form of presentations and discussions. Mostly, these attendings are exclusively for employees who outstood their fellow colleagues in the past months and possess a longer standing labor relation at the company. In this manner these conferences are some kind of rewards for better performing employees.
4.1.2.5 Compensation policy
With regard to the youthful character of the company, a clear, explicit compensation policy is difficult to differentiate. However, some remarks about some guidelines which HR attempted to pursue regarding wages can be made. Firstly, the first few years after company startup, HR attempted to handle a starting wage for starters of €1800 for people with a higher vocational education and €1900 for employees with an academic degree. This wage would then allow an increase between 4 and 6-8 percent yearly, based on the performance delivered. However, after the company witnessed an enormous growth in both services and workforce, this relatively simple compensation policy needed adjustment to cope with all the challenges this growth brought with it.
4.2 Consistency of current compensation system
By means of statistical analyses I attempted to reveal the implicit compensation policy. For the first analysis I used linear regression with education, relevant experience and years of employment as independent variables. The parameters, standard deviations, sample, the standard errors of the estimate, adjusted R-square and F-value are presented in Table 1. I performed a linear regression for each point of measuring; each 1st of January from 2006 to 2011. This analysis contains a total of 39 employees.
Data shows that for 2006, most variables are significant for p <0.05, except for years of employment. The variables continue to demonstrate this significance through the following measuring points, where education shows to be the exception. Education is only significant in 2006 and 2010. When looking beyond the significance for the variable education, the values demonstrate some remarkable course through the years. For 2006, 2007 and 2009 an HBO education is valued higher than a University degree, with values of 967.42 and 915.21; 390.55 and 348.37; 500.31 and 480.63 for HBO and University, respectively. For 2008, 2010 and 2011 the variable education shows a more logical distribution with 306.38 and 408.12; 510.53 and 552.59; 492.62 and 693.15.
In focusing on the variable ‘years of employment’, one might expect, when utilizing a form of a seniority policy, that this particular variable witnesses an increase in influence on salary. However, although the first values demonstrate an increase with 176.22 for 2006, 320.33 for 2007 and 342.03 for 2008, thereafter values fluctuate from 328.45 in 2009, 195.95 in 2010 to 225.15 in 2011. This fluctuation represents another signal of inconsistency in this compensation policy.
The adjusted R-square of 2006 shows an extremely high value of .912. However, values for succeeding years decrease, from .621 in 2007 to .497 in 2011. This entails the logical decrease of the predictability of the regression line of the real data, when the number of cases increase. Therefore, the decrease of the adjusted R-square is partially explained, however the values in 2009, 2010 and 2011 demonstrate nevertheless to be too unreliable to completely predict the salary of a random employee.
Table 2 shows the values of the parameters for each year, with the increases in percentage. Although the first increase is relatively high and not particularly representative for the real situation (37%), the years after that show an increase of 10, 11, 7 and 7 percent respectively. This figure supports the notion of the HR department that the company concerned, aimed to manage wage policy at a 4-6 % yearly increase, but practice showed a factual increase of wages between 8 and 10 % on a yearly basis. Therefore, the constants of the regression line are possible to demonstrate a relatively precise representation of the reality.
Although the parameters present a fairly consistent part of the compensation policy, the inconsistency of the values for ‘education’, ‘years of employment’, and the adjusted R- square indicate this compensation policy overall to be inconsistent. Therefore, I performed a second analysis, a linear mixed regression with repeated measures analysis. Here, the cases are functions with their accompanying salary at the time of measuring and the compensable
factors functioning as independent variables. The estimates and standard errors are presented in Table 3. The sample contains 183 functions.
Firstly, the data present three variables with a significant relationship: ‘kennis en vaardigheden’, ‘complexiteit problematiek’, and ‘verantwoordelijkheid’. Secondly, some differences are noticed in the values assigned to the compensable factors before executing the job evaluation and the values presented in table 3, which together represent the importance of each specific compensable factor. Most compensable factors demonstrate a similar value, except for ‘afbreukrisico’. This specific variable is extremely influential with regard to the sustainability and competitive advantage of this organization, however a value of 9.24 not accords in any manner with that importance. Finally, and most importantly, in the case of applying a compensation system based on compensable factors, each of these factors requires a positive influence on salary, since these are all considered to contribute positively to the competitive advantage of the organization as a whole. Therefore, it is even more striking that four variables point out to contain a negative impact on salary. This accounts for ‘kennis en vaardigheden’ ( -39.01), ‘communicatie’ (-26.98), ‘verantwoordelijkheid’ (-54.97), and
‘zelfstandigheid’ (-20.51). More noteworthy since two of those four variables represent the group of variables which turn out to have the most important impact on the salary of an employee. Especially the negative values of those four variables, with the low value for
‘afbreukrisico’, denote this compensation policy as well to be inconsistent.
Table 4 exhibits the means, standard deviations and Pearson correlation between gross monthly salary and the total score of the functions as a result of the job evaluation. Means for salary and total score present a value of 2796.92 and 139.23 respectively, where these correlate for .721 significant at p = 0.01. This indicates a reasonably high correspondence between salary and total score, implying an increase in wages when employees move up on the promotional ladder.
5.DISCUSSION AND CONCLUSION
This empirical study aimed to investigate the implicitly handled compensation policy, through utilizing two statistical analyses in an attempt to test this compensation policy for its consistency. Internal alignment with organization strategy and HR strategy and practices is also considered, in order to assess a strategic fit.
The organization strategy appeared, partly due to the environment, to lack a long-term perspective. Most notable statements regarding the strategic objectives are the focus on two or
three areas of business, and the necessity to improve in the other areas. Knowledge to accomplish these objectives is available, but does not yet evolve into new products. The strategic objectives present are best defined as a form of prospector strategy, combined with a focus on current services, and pro-activeness in the search for new opportunities and realizing those opportunities. Replication of knowledge also represents a key component in achieving organization’s goals. Also important is the preservation of the culture of knowledge sharing.
This holds a strategic objective with regard to the viability of the company and the sustainability of the competitive advantage.
The before mentioned influences the HR strategy and its practices. The totality of HR practices serves to support the strategic objective of preserving the organization’s culture in a significant manner. This commences with the recruitment and selection process, where HR seeks to employ starters, who are eager to learn and develop themselves quickly, usually with a pre-existing interest for the area of business the company operates in. The HR department accordingly utilizes recruitment channels which are appropriate for this target group.
Nowadays, the majority of starters actively seeks employment through internships via schools and universities, and actively operates the internet in search of vacancies. In the selection process applicants are assessed on their eagerness, ambition in their profession and personal development, and sense of responsibility. All of these characteristics are necessary and desirable, and increase the possibility of a successful integration in the organization’s culture.
Newly hired employees thereafter receive an intensive period of training and continue to be guided by colleagues for six to twelve months. Additionally, a budget for every department especially meant for training and development is in place. There are, however, some remarks to be made in that, clear career paths and job perspectives for newly entered employees, currently, cannot be supplied by HR. Reasonably evident, this is a consequence of the absence of a well formulated direction and character of the organization. Moreover, presently, the HR department not yet fully utilizes the possibilities of the recruitment channels.
Due to the absence of an explicit compensation system at this company, two statistical analyses were executed in an attempt to discover an implicit compensation system. Firstly, when a compensation system where the education, years of employment and the relevant experience before employment determine the height of salary, is applied some characteristics determine its consistency. Results demonstrate that the values of education not only fluctuate throughout the years, the possession of a higher education is also rewarded differently. Where in the first years of the dataset a lower education is better rewarded, in the latter years results show the expected distribution of salary; the higher the education, the higher the salary.
Furthermore, the impact of years of employment on salary is expected to increase gradually each year, which is not consistent with the outcomes, where these values fluctuate.
Results of the second analysis neither accord with a consistent compensation system based on compensable factors. In this analysis the following variables were utilized: knowledge and skills, communication, complexity of problems, collaborate, responsibility, risk of destruction, independence, and creativity. First remark is the extremely low value of the variable ‘risk of destruction’, which does not agree with the importance of that particular variable. But most importantly, the variables: knowledge and skills, communication, complexity of problems, and independence demonstrate a negative influence on salary. Since a compensation system based on compensable factor is meant to reward the desirable factors, in order to induce behavior from its employees, the appearance of negative impacts is impossible.
All together, this causes the current compensation system to be inconsistent.
Therefore, I will deliver recommendations for a compensation system which will be consistent to a greater extent, and which matches the strategy of the organization and the HR department. Consequently, recommendations towards those strategies are also required.
Though, in order for any compensation system to achieve its objectives, it should be congruent with a clear formulated organization strategy, and a clear character of the company.
Hence this initiates with recommendations regarding the strategy and character of the organization, followed by the compatible HR practices, concluded with recommendations concerning the compensation system.
Firstly and most importantly, this company requires to determine what kind of company it desires to be, particularly the character of the company. This decision is, in fact, facilitated by existing characteristics like: characteristics of the services offered, organization structure, perceived turnover, and characteristics of the employees. As already mentioned before, employees usually require a period of roughly three years to specialize in a service offered at this organization. The organization structure is relatively flat, though offers few employees the opportunity to promote to managing positions. This fact combined with the eagerness of employees to learn and develop personally rapidly, creates a situation where these employees leave the company after a period of two to three years and seek employment in a job with a broader range of tasks.
Based on those characteristics I recommend this organization to function as an educational institute and manage the organization accordingly. This character fits the
organization strategy, since a constant influx of young starters with a common interest in marketing, creates a fresh flow of insights of procedures, services, and the market. This could induce the increase of innovations. The replication of knowledge is automatically covered, since new employees enroll in training periods, and those periods could stimulate the sharing of knowledge in the rest of their stay at the company. A pro-active attitude of both organization and HR department is necessary, in order to constantly seek and acquire new talent. The focus on current services is a task for the employees which represent the core of the organization for a considerable period.
Regarding the organizational structure, remarks and desires have already been identified. Foremost to be able to retain the open and informal character of the organizational culture, a flat, organic organizational structure with growth within functions and short communication lines is essential.
With retention and execution of the current strategic objectives of the organization, combined with a focus on the educational character of the company, the HR department could and should alter and improve their HR practices. The strategic objectives remain similar to the current situation: preserving a strong and open organizational culture with the focus on knowledge sharing, and attracting young, eager talent to fit into that culture, which is constantly learning and discovering opportunities. With the adoption of an educational character, HR requires to stress the learning opportunities within this organization, as being the perfect preparation for a well-funded career in marketing into a job with a broader range of tasks. This holds especially in the recruitment process, where moreover, the application of social media like facebook, twitter and linkedin.com add to fully exploit the possibilities of current opportunities in recruitment channels. Logically, training and development obtains a central location in the organization, with an additional attractiveness of the organization for young starters.
The choice for an educational character of the organization obviously has implications for the compensation system. Although a compensation system based on competencies appears to represent a useful option based on theory, however, this organization introduced competencies in the function profiles with an additive function instead of a fundamental function. This system also requires a highly specific performance measurement system, which is unattainable for this organization, given that the quality of the services delivered is highly subjective. Since the fundament of the function profiles entails compensable factors, which contain a clear influence on the competitive advantage of this organization, such a compensation system thrives better. Even more so, since vital components as innovation and
