Remuneration Strategy in STAR Company - Example

Name Tutor Course Date Remuneration Strategy Proposal Compensation programs have been in the recent past an afterthought for most organizations. Now than never before, there is an increased pressure on companies to act appropriately by establishing remuneration strategy that are unique and which differentiate them among rival groups or companies particularly in the current business environment characterized by constant changes as a result of globalization, mergers, and talent shortages among other forces (Westacott, 2010:225). Remuneration is a significant component for most organization and constitutes one of the largest single operating expenses for both service and manufacturing firms thus receive a lot of attention. Unfortunately, most companies have always directed their efforts to controlling remuneration as a specific operating cost, instead of taking it as an effective tool for managing human resources towards achieving the organization’s goals. In addition, not many firms have clear philosophy for what it is they want their pay systems to achieve (O’Neill, 2011:103). Coming up with an effective remuneration strategy requires some degree of clear definition, thorough organization diagnosis as well as well structured design for human resource management. This paper seeks to give some guidelines as a beginning of this process with a special case study of Star’s industries in Australia, a manufacturer, wholesaler and retailer of quality windows and doors for residential and commercial premises. To this end, it intends to offer a remuneration strategy proposal for the company. This paper starts with an introduction followed by conceptualization of the key term. The rest of the body will seek to find answer to the questions outlined below: 1. The current state of Star's remuneration strategy. 2. The gap between the current external practices and the internal practices at STAR Industries. 3. A recommendation for a new remuneration strategy for 2 positions in STAR industries (for each position show how you would base pay plus benefits to create a competitive salary/package. 4. What are the implications of FBT on this proposal? 5. How does this support the organization’s performance management system and strategic objectives? 6. Describe the mechanisms you will put in place to regularly monitor and review; a) the legislation applicable b) stakeholder satisfaction c) required level of competitiveness d)compliance with organizational policies Conceptualization of a Remuneration Strategy This can be understood as simply about linking payment to the organization performance and which is believed to be unique or characteristic feature of the organization. The term namely revolved around various key areas namely work evaluation, planning and implementation of payment structures, designing of integrated performance management schemes, formulation of bonus and other incentives among other things in meeting the organizations goals. Remuneration Strategy is often geared towards a competitive package intended to attract or draw, encourage as well as talented staff within the organization. Current state of Star's remuneration strategy The STAR Company has been operating for about thirty years since its establishment in the 60s in Western Australia in the 1960s. Over the period of its operations in both Western Australia and eastern states, the industry decided to open another manufacturing plant in NSW in order to improve or better service its market. With its operations more focused on the eastern Australian market, the STAR relocated its business headquarters to Sydney (star website, March, 2012). Despite this progress, the current Star remuneration strategy is wanting or inadequate. As a result, there has been an increased turnover rate as illustrated in the minutes of top STAR management where a turn over report was tabled for deliberations, giving reasons for the high trend of People leaving the company for “greener pastures” over the past few years, it was acknowledged that in deed turn over has remarkably increased during the last one year particularly in the marketing and distribution departments. This could be attributed to the existing payment system. In fact, from the minutes it was observed it’s been long since the STAR Company carried out salary increament above the normal CP adjustment. The current salary cost is also very low. The salary/revenue ratio stands at only 18.9 percent for the last four years (see table 1). Table 1: Profit and Loss Statement Category $(millions) % of sales Notes Sales Revenue 60.96     Cost of Goods Sold         Materials (18.52) 30%     Salaries - Factory (7.53) 12% Operations and Manufacturing divisions   Salaries - Sales (1.91) 3% Sales division   Factory overhead (10.59) 17%   Total Cost of Goods Sold (38.55) 63%   Gross Profit 22.41 37%   Operating Expenses         Salaries - Admin (2.1) 3% CEO plus HR, Finance and Admin, Marketing divisions   Marketing (1.52) 3%     Occupancy (4.57) 8%     General (3.46) 6%   Total Operating Expenses 11.66 19%   R&D Expenses (2.16) 4%   Restructuring expenses (0.49) 1%   Operating Profit 8.1 13%   Interest Expense (1.06) 2%   Other Income 0.64 1%   Profit/Loss 7.68 13%   Income tax (2.11)     Profit after tax (5.57) 9%   Salary/Revenue ratio 18.90% (Modified from STAR industries website) Source:http://online.cit.edu.au/toolboxes/human_resources/shared/intranet/documents.htm# accessed on 5th March, 2012: 4.07am In terms of its job evaluation policy, Star industry employs the “point method’ of evaluation to adjust the wages-rate attached to a particular position. This approach entails a list or group of compensable factors identified as determining the worth of jobs. Some of his factors may include skills, responsibilities, effort as well as the working condition. Although Star Company finds this method as suitable for its remuneration, it is associated with various shortcomings among these is the fact that the method itself is time-consuming especially in establishing initial grade tables. Again, this method is subjective in nature since the pay for corresponding each factor is based on skewed judgments. In addition, the standard or basis used in establishing the pay for each of the factor may have inherent biases that would eventually affect certain groups of employees especially the minorities. Looking at the current Salary scheme, it is evidenced that STAR Company has a payment system based on seniority. Currently, management positions in the organization are classified or grouped with reference to levels of responsibility and authority in the firm which are labeled as Level one, Level two and level three. Unfortunately, this is an inferior system compared to a performance or result-based salary scheme. The gap between the current external practices and the internal practices at STAR Industries Before exploring the existing gap between the external and internal practices in Star industries, it is important to understand the meaning of these two terms. External practices in this context can be understood to mean how the organization relates or interacts with non employees for instance consumers, suppliers, vendors and partners. In other words, external practices involve all other stakeholders. On the other hand, Internal Practices constitute mainly the internal environment that affects employee relationships, interactions as well as their undertakings which is vital to the organization’s success. These practices comprise of the structure of the organization, job or work titles, recruitment and selection, human resource development, performance evaluation, communication among other things. Having defined the main concepts, I will embark on highlighting the gaps in the STAR industry. The first missing link is lack of involvement of stakeholder in the management of the Industry. There are no structures that clearly accommodate the participation of all stakeholder or shareholder in various issues that concern the organization. This can for instance explain the lack of a comprehensive and accepted remuneration system in the company. There is an urgent need for potential shareholders to give their take to any proposed changes intended to streamline the organization’s operation. Besides this, there is clearly a lack of consistency between state operations which in one way or another has affected the company. A case in point is the existing government regulations or labour legislations particularly Industrial Relations Act 1979 (the IR Act) and the Minimum Conditions of Employment Act 1993 (the MCE Act) which are not really well suited to arresting gender discrimination in terms of pay equity or wages (Todd and Eveline, 2004:5). Apart from the shortcomings mentioned in aforementioned legislation, there is also inconsistency in the role Union organizations, considered also as component of external practices. A good example is the Australian union movement which has been over the years a male dominated institution and has always sought to protect men’s jobs and their corresponding pay rates, (Pocock 1997). As a result we have seen a reflection of gender gap in terms of payment system in most companies including STAR industry. Looking keenly at the organization internal practices, it is clear that there is no any framework or guidelines for both collection and maintenance of information relating to human resources or employees. There is a limited capacity to track and locate information when required. Due to the diligence of previous HR staff, the company has continued to collect comprehensive and detailed records on staff, training, performance appraisals and the like, although difficulties exist with keeping those records up-to-date. Again, the system is not automated or centrally managed, and gaining access to information is often difficult and time-consuming. There is also a missing link in terms of Employees' sense of fairness regarding their pay in the company which could be attributed to inconsistency in internally communication which is not an open and thus workers may believe they are denied an opportunity to participate in this decision. Another gap in terms of the organization’s internal practices is linked to recruitment, selection and remuneration schemes. There is clearly a gender gap which in part can be attributed to weaknesses of labour legislation explained in the preceding paragraphs but also on the side of the company itself. According to information from the company’s website, it is stated that STAR industry is committed to making sure Policy Statement recruitment and selection of new employees at all times conform to ‘best practice’ standards and comply with relevant legislative and regulatory requirements including activities such as recruitment and selection methods, outsourcing, advertising, notification of selection outcomes and feedback to all candidates, and remuneration offers (STAR website, accessed on 7th March,2012). Nonetheless, there is a gap in terms of the existing modalities put in place to make sure there is no gender discrimination in terms of recruitment as well as payment. Despite the fact that that the organization has indicated its commitment to Equal Employment Opportunity (EEO) where all activities related to recruitment and selection are free of direct and indirect discrimination and harassment, this is not consistent to its current practice. Looking at the human resource department, you will find that this is not consistent as the first two senior positions, the CEO and Human resources officer, are dominated by males. Women have only been relegated the position of assistant human resource officers. Besides, there is generally a gender gap in terms of payment in Australian companies and the STAR industry is no exception. According to Watson, a considerable size of gender pay gap has persisted to this day. The scholar also observed that women managers received on average approximately 27 per cent less than the males (Grimshaw, Whitehouse and Zetlin, 2001). A more recent survey revealed that females especially in the Western Australia labour market (which is the major site of STAR industry) are, on average, paid less compared to males and even less than women elsewhere in Australia. The survey revealed that In the February 2004 quarter alone, Western Australian women employed on a fulltime basis got, on average, 22.6% less relative to their male counterpart while at a national level the corresponding gender wage gap was about 15.2% (Todd and Eveline, 2004:4). To close this gap there is an urgent need to adopt a multi-dimensional approach in terms of formulation of both recruitment as well as payment scheme. To this end, all organization including STAR industry need to undertake gender pay equity audits, based in a fashion of Equal Pay approach and be able to give out action plans to close this gap. Payment is based on Seniority and Skills as observed earlier. This is an indication of absence of extrinsic rewards such as performance-related payment system which is believed to actually motivate employees to better performance. Again, the current payment system has failed to align to the overall management objectives such as recognizing unit performance or attracting and retaining capable or experienced and talented staff as indicated by the increased turn over rates in the company. In addition, there is an inadequate criterion to measure performance, or that which are not easily be understood, communicated and accepted. A recommendation for a new remuneration strategy for 2 positions in STAR industries (for each position show how you would base pay plus benefits to create a competitive salary/package) In recommending for a new remuneration strategy, various factors will be considered the first one being the current payment scheme for management position in the company. According to the information from the STAR industry website, the management structure consist of three major levels namely level 1,level 2 and level 3. Currently, the base salary for level 1 managers range from (LL) $74,000 to (UL) $104,000, level 2, (LL) $74,000 to (UL) $104,000 and level 3 is (LL) $55,000 to (UL) $63,000 (STAR web). The second consideration and recommendation is linked to bonuses as well as commission. Again this is intended to attract a more competitive remuneration strategy in the organization. Both positions are to be given a yearly bonuses and which should also be reviewed annually. Again, depending on the levels, the bonuses range from $1,000 to $10,000 p.a. The new remuneration strategy will also factor in commissions since the current managers working in the company working both in the marketing and manufacturing operate on commission based system which is calculated by taking Net sale percentage realized over a period of some Budgeted sales target. In addition, the proposed remuneration system will also consider FBT discussed in details in the next paragraph. What are the implications of FBT on this proposal? A fringe benefit may be simply understood as any form of employee remuneration other than salary and wages or other payments which are subject to income tax for instance termination payments, superannuation among others. FBT is normally given on some benefits workers provide to their organizations or their employers. Currently, FBT stands at around 45percent. The positions are liable to car benefits. The resultant benefits would take either of the two forms. The first one is the Statutory Formula Method mainly derived from the taxable value of the car varying from the total distance travelled by the car during the FBT year. The second method is the operating Cost in which the taxable value of the car fringe benefit is equivalent to the percentage of the total costs of operating the car during the FBT year in respect to this, there is need to produce the log book for verification. How does this support the organization’s performance management system and strategic objectives? The system proposed would be very significant in various ways for instance; workers or staffs joining the higher-level posts are likely to receive some higher fringe benefits as an attractive strategy to work in the organization. In the long run, this can encourage retention, recognize special needs of an organization as a result of good feedback and achieve both financial and non-financial objectives of the organization while at the same time foster a value for shareholders or consumers. Describe the mechanisms you will put in place to regularly monitor and review a) The legislation applicable. Legislation can be simply defined as written and approved laws or acts. In the context of this study, there need therefore to have a constant review of range statements against implementation of proposed strategy. This include a review of all pertinent legislation across all levels of government that impacts significantly on the organization , particularly Equal Employment Opportunity (EEO) , anti-discrimination , industrial relations as well as the relevant industry codes of practice. b) Stakeholder satisfaction Stakeholders comprise of the people who have some kind of interest in the organization’s actions, products and service rendered for instance, employees of all levels, consumers, shareholders or government, board of management among others. Various methods can be used to monitor and review Stakeholders satisfaction. Some of these methods are but limited to relational mechanism, Performance Metrics and Measurements, as well as Balance score card. Relational Mechanism is build upon the fundamental premise is that the assessment or appraisal of an organization should go beyond the traditional or previous methods and be supplemented with measures relating some degree of consumer’s satisfaction. This can also go along with formulating systems that encourage feedback. On the other hand, the idea behind Performance Metrics is that is that all stakeholder expectations must have one or more quantifiable metrics that can be tracked over time, so that the effect of performance improvement programs can be measured. The main assumption is that the organization would have gathered some information or data related to measures of performance appropriate to the satisfaction attribute for instance stakeholder’s survey (Haes and Grembergen, 2004:4). The best way to conduct this is by putting in place two managerial instruments or tools that organize or bring together both primary and secondary procedures, linked to stakeholder satisfaction, so that it is possible to indentify and articulate win–win or trade-off situations. Balance score card mechanism mainly indentifies the linkages between the company’s operations, customers’ values or worth, stakeholder’s satisfaction among other things. The main argument behind this method is this method accommodates such measures like customer approval, internal processes and the ability to encourage innovation. Consequently, the findings realized from this new perspective should be translated to achieving the future financial results and drive the organization toward its strategic goals while maintaining or keeping a balance among all these perspectives (Haes and Grembergen, 2004:6). c) Required level of competitiveness. One way to monitor and review whether the required level of competitiveness is adhered to is to have a review committee who will among other things give report on the effect of implementing the proposed change within the organization for instance adoption of a new remuneration scheme. Another way of doing this is by monitoring or review turnover rate as well as considering the company’s ability to attract and retain talent personnel. Still, Stakeholders (employees, customers) orientation and preferences can be important indicator of the organization’s competiveness. Another way of ensuring a required level of competiveness is by considering the balance between cash and shares as well as having a system that provides a significant portion of the total compensation at risk, tied both to annual and long-term financial performance of the Company as well as enhancing the shareholder value. d) Compliance with organizational policies The key objective of any remuneration scheme of proposal is often designed and implemented in line with practice, policies and processes needed in realizing the organization's core objectives. Consequently there is need to review some of the organization practices, philosophy and key values to see if they correspond to the proposed payment scheme. The other way of aligning to the organization’s goals and objectives is to make used of performance indicators that will for instance align the interest of say new employees with those of corresponding shareholders as well as those of the organization. This strategy or mechanism will go along way in ensuring that proposed changes in remuneration is seen not only as fair but also appropriate for the job. Some potential performance methods could involve, shareholder return, profit measures, incomes from share, individual performance and so forth. In addition, there is also a need to design a system that assesses the flow Remuneration proposal with the business strategy and at the same time be integrated with other human resources management approaches (Horváthová and Mikušová, 2011: 950). A good communication system can also play a key role in assessing the compliance of the proposed changes with the organization’s policies. This should be designed in a way that accommodates or give each and every employee a chance to air their views, to give and receive feedback on the implementation of the proposed remuneration strategy. This can also help identify loopholes while also assisting in the formulation of appropriate solutions. Works Cited Chris Westacott, Remuneration Management” Backer and Mykenzie Australian Master Human resource guide 2010 8th Edition, Australia: CCH Australian Limited, 2011. Damian Grimshaw, Gillian Whitehouse and Di Zetlin, Changing Pay Systems, Occupational Concentration and the Gender Pay Gap: Evidence from Australia and the UK, Industrial Relations Journal, Vol.32, Issue 3, pages 209–229, 2001 Graham L. O’Neill (2011) Framework for Developing a Total Reward Strategy Asia Pacific journal of human resources, 33(2):102-117, 2011 http://toolboxes.flexiblelearning.net.au/demosites/series5/506/shared/intranet/documents.htm http://www.ilo.org/public/english/dialogue/actemp/downloads/publications/srspaysy.pdf-accesses on 7th March 2012: 10.38 pm Ian Watson, Decomposing the Gender Pay Gap in the Australian Managerial Labour Market, Australian Journal of Labour Economics Vol.13 (1) 1: 49 – 79, 2010 Petra Horváthová, Marie Mikušová, Modern System of Employees´ Remuneration and its Use by Organizations in one of Czech Republic Regions, World Academy of Science, Engineering and Technology 73 2011:950-953, 2011. Pocock, B. (ed), Strife: Sex and Politics in Labour Unions, Allen and Unwin, Sydney, 1997. Steven De Haes and Wim Van Grembergen, IT Governance and Its Mechanisms, inform at ion s y s t e m s c o n t r o l Jo u r n a l, vo l u m e 1 , 2004. Trish Todd and Joan Eveline, Report on the Review of the Gender Pay Gap in Western Australia School of Economics and Commerce, the University of Western Australia, 2004 Read More