Is There Such a Thing as a Perfect Remuneration and Performance Management System - Coursework Example

Perfect Remuneration and Performance Management System (Student Name) (Date) Is there such a thing as a perfect remuneration and performance management system? (Students Name) Introduction Most companies in the old economy were centered on a robust financial capital and strong infrastructure. The shift slowly moved towards a focus on technology know-how. The emerging economy stresses on knowledge, investment in human capital is now at the centre of the business world and today, most companies have changed their focus from physical assets to knowledge and information i.e. intellectual capital. “The effective management of human and intellectual capital poses new challenges in the organisation for leadership and managerial capabilities” (Rennie, 2003). The same article states that successful companies shape and mould their culture to fit their overall vision. Human Resource Management activities can be utilised effectively to ‘reinforce certain ideas, values and behaviours and discouraging others’. People are the lifeblood of organisations. A company’s workforce represents one of its most potent and valuable resources. This, in turn means that managing a workforce effectively is an extremely critical element in enhancing and sustaining organisational performance. Dealing with people and managing them, becomes one of the most difficult aspects of organisational management as it translates into understanding the needs of people who differ from each other both psychologically and physically. The core elements of personnel management include Employee Resourcing, Strategy and Organisation, Employee Relations, Employee Development, Reward Management and Employment and personnel management. In a nutshell, Human Resource Management is basically intended to increase the value of an employee. This paper aims to analyse whether there is anything that can be classified as the perfect remuneration or a perfect performance management system. We will first look at the elements that would make up a perfect remuneration and performance management system and whether such a system can be designed. We will then look at whether there exists the perfect remuneration and performance management system and also highlight the fact that the system utilised by one company may not be necessarily suitable for another company. For the purpose of this paper, we will analyse the kind of remuneration and performance management system that is followed in health organisations. All this will allow us to come to a conclusion on whether there is such a thing as a perfect remuneration or performance management system. Definition of the Perfect Remuneration System and Performance Remuneration refers to the monetary value of the compensation received by an employee in return for the performance of their contracted duties and responsibilities (Mackay, 1997). This could also include rewards, which covers remuneration along with other intangible and tangible value gains by employees. While remuneration involves the compensation (actual salary, commissions, direct benefits and wages) and incentives (gain sharing and bonuses); rewards also include indirect benefits such as travel opportunities, development opportunities, study time etc. Remuneration and Rewards could be either performance based or skills based. Within these two categorisations, the approach can be either team based or individual based. Compensation is termed as ‘performance based’ when remuneration directly links an individual/team’s achievement or non –achievement measured against the performance of the company or similar pre-determined outcomes. This could either be providing a base pay along with bonuses or other one-off type rewards. The Skill and Performance Review Cycle Courtesy: Local Government and Shires Associations of NSW, Salary System Guide (2004) An employee’s performance may either be achieved or not. A rating scale may also be used where an employee’s performance is assessed against each performance objective and given a corresponding rating – possibly ranging from 1 (excellent) to 4 (unsatisfactory). Does the Perfect Remuneration and Performance Management System exist A Performance-based Rewards and remuneration approach is essentially aligned with an organisation’s corporate direction, mission, values and operating culture. It is essential that rewards and remuneration is tailor-made and must be in a sense unequal and built-in to different categories of staff. There is no such thing as one size fits all. If one were to refer to the fourteen management principles laid down by Henry Fayol (1841-1924), the section on remuneration states that ‘compensation is a motivation factor that moves human beings to work’. Fayol has declared also that there is no perfect remuneration as ‘there are different things that motivates different people’. (Oyedele, 2009). It is hence imperative that managers realize that many factors such as experience, educational qualifications, training etc. can affect an employee’s performance. Remuneration schemes are more often than not aligned with the company’s objectives. Companies, even if they are working in the same industry, need not necessarily have the same objectives and this automatically means that the remuneration system of two companies need not be the same. In addition to the different kinds of remuneration and performance management systems employed by two different kinds of industries, and even companies within the same sector, there are also different kinds of remuneration systems that will be utilised between different departments in the same company. For instance, the research and development division of a biotechnology company comprises scientists at various levels of seniority. Since research and development is dependent on a lot of external factors, scientists are paid a fixed remuneration and there is a performance management system that is relevant to their job profile. On the other hand, in the same biotechnology firm, there usually is a different remuneration followed for the marketing and sales personnel. A percentage of the salary of marketing and sales professionals is usually based on whether they have met with the marketing and sales targets chalked out at the beginning of the quarter/financial year. This, again, reiterates the point that remuneration and performance management systems are not the same everywhere. In 2005, the Reward Management Symposium was organized jointly by e-reward and CIPD (Armstrong et all. 2005). This symposium came to the conclusion that HR management practices are rarely structured around what would impel good organisational outcomes and what would deter organisational progress. The report on the Symposium states, “Employees experience HR policies through the way their manager interprets them, and the skill he or she brings to the task. Problems with understanding, conviction, capability and consistency were raised, and it was a more or less universal opinion that line managers need more training and support if they are to carry out their HR responsibilities, such as performance management, appraisal or recognition, effectively.” Basically, it is the front-line managers who are responsible for implementing the HR policies laid down by any organisation. Whether the perfect remuneration and performance management system really exists, thus, depends on the front line managers and any organisations HR policies. In my opinion, there is just no way one can set in place a complete and foolproof blueprint that can be used for all organisations. Many times firms and companies are forced to revamp their remuneration and performance management strategies to meet with evolving business needs and market developments. Elements of the Perfect Remuneration and Performance Management System Looking at the various components in arriving upon the Perfect Remuneration and Performance Management System, the following points need to be covered. A salary system should be market competitive, simple to administer, fair and equitable, affordable, provide equal opportunity, flexible, supported by training, related to the acquisition and use of skills and performance and able to provide security to employees. From a performance point of view, it is imperative that the following key measurements are analysed. First, one must look at the achievement of goals (both work programme objectives) and financial targets (savings through efficient and improved processes and systems). Next, one must assess the effectiveness and efficiency of the employee – what has the impact of the employee’s contribution been? Have there been any marked and significant changes to the company’s topline and bottom-line or the specific departments’ progress? One must also see if there has been any innovation and improved productivity. In many companies, the remuneration system is made up of the following three elements – remuneration, performance-based bonus and results based bonus. This ensures that employees remain committed to corporate objectives and help staff achieve direct participation in corporate success (GEA Group, 2009). Three key steps must be followed when designing an effective approach to remuneration – Analysis, Benchmarking and Implementation. At the analysis stage the following queries need to be addressed – what kind of organisation are you (private/government/not-for-profit etc); what is the business orientation – is it process driven, product-centric, service-oriented, network-dependent, time-driven or functional; break up the different processes that exist within the business; how does the business measure its success; are there any factors that could affect employees from working towards the companies prescribed business goals; does the company have a vision or touchstone that needs to be followed when chalking out its work culture; are there any processes in place to measure success, etc. The next stage that one needs incorporate into the ideal remuneration system is that of ‘benchmarking’. Here one must do a thorough analysis of the structures of remuneration followed by other businesses in the same space. This will allow an organisation to save time, resources, cash and credibility. One must keep in mind that remuneration is directly linked to the satisfaction of employees in an organisation. The next step is the actual implementation of the processes that are chalked out. It should be done in a clearly defined timeframe. A performance management system must not be used as an opportunity for managers to find fault with their subordinates and rap them over their knuckles. The ideal performance system will set the right tone and must be used as a positive tool to assess performance at a set point in time. Managers and their subordinates must use this opportunity to collaborate and look at ways to address developmental needs such as growth opportunities or improvements that can be made. It needs to be a supportive, constructive and open discussion on an employee’s strengths and weaknesses. Employees must be able to see the value in participating in a company’s performance system and this can be done through focusing on positive outcomes that include transfers and promotions, training and development opportunities and higher salary, more benefits and maybe even flexible working hours, if the need exists. A good performance management system will have a defined structure that clearly describes the performance indicators, looks at the correct and appropriate parameters for measurement and also ensures that all relevant information is gathered from all sources. Another point to keep in mind is to make sure that all points discussed during the remuneration and performance management system are followed through and implemented. Issues of Remuneration and Performance Management Systems There are many debates that highlight the usefulness and effectiveness of performance bonuses or salary at risk. Many feel that bonuses are ways of rewarding superior performance but do not necessarily translate to increasing and driving performance. Performance is defined as the ‘record of outcomes produced on a specified job function, activity, or behavior during a specified time period’. The fact is that human achievements and performance is an intricate phenomenon that needs to be assessed on both the outcome aspects and process. If an appraisal system is to be credible, it must be a two-way process and many believe that what will make a performance development review better is when the relationship between the manager and executive are good. Unfortunately many individuals consider the performance management system in organisations as a threatening and frightening process as there are managers who use this opportunity to intimidate their subordinates. The Perfect Remuneration and Performance Management System Cannot be Standardised A well-thought out, comprehensive remuneration system that defines the salary scales, salary augmentation, bonus systems, job classifications has a strong positive influence on an employees performance (compu.Finder, 2009). Reward and recognition is a motivating factor that, if used effectively can shape the performance of people and workgroups. For remuneration and reward to be effective, a well-meaning employer must address the following points. Employees must perceive that all rewards and recognition is fair. If the same person is recognised time and time again, other employees are less likely to improve their performance (Chevalier, 2007). It is now clear that the role of an effective and efficient remuneration system that motivates employees is an integral part of an organisations’ success. For this reason, attention must be paid to customising the remuneration and performance management system to assess individual contribution. In other words, a subjective approach is absolutely essential. Decisions of line managers must be based on equitable principals. It is thus my belief that while a remuneration and performance system cannot be standardized, it is essential that guidelines be followed in order to ensure transparency and accountability in the process. If one were to take the example of law firms, one can see that even within a single industry, the remuneration and performance management system varies and hence cannot be generalised or standardised. Earlier, in the United States, partner remuneration used to be very basic, in that the longer a lawyer stayed with a firm and exhibited loyalty, the better their rewards were (Lofthouse, 2006). This method of course, meant that there were no incentives to work more. Remuneration simply increased with an employee’s length of service! Then, at the other end of the spectrum, law firms increasingly began to encourage employees to get more business and this reflected an increase in remuneration. This policy is also referred to as the ‘eat what you kill’ policy but again encourages aggressive competition and does not emphasise the development of the law firm as a whole. So law firms do look at finding middle ground – a system that can incentivise partners while at the same time does not fuel internal rivalry and unhealthy competition. Here again one must keep in mind, that what works in one firm can prove to be absolutely disastrous to another. Some firms are focused on what a partner can bring to the table in terms of individual billing; others also tend to reward lawyers who demonstrate leadership qualities and management skills. Factors like new client acquisition, financial management, relationship management, inter-personal skills and communication have taken on added importance in the overall performance review of a lawyer. For instance Mourant du Feu & Jeune, an offshore firm follows a model that is in line with corporate remuneration and appraisal. Here the partners receive a salary and also incentive remuneration in terms if cash and shares. In addition, the firm has two incentive plans – a short term (12 month) plan aligned to achieving individual goals and also a long term (3 year cycle) plan based on achieving business objectives. Performance is assessed by way of a balanced scorecard arrived at after an online 360 degree review – where the employees are rated by managers, clients and sometimes even subordinates. This means that in addition to just meeting individual targets, employees must also focus on aspects such as internal management and client relationships. On the other hand Cobbetts utilises a modified lock up system where a remuneration committee comprising the Managing Partner, the chairman and three elected partners handles the profit allocation. They believe that this system ensures transparency and believe in getting the agreement of the equity partners to ensure that there is no disappointment. In order to further reinforce my point of view, let us now look at the process for remuneration and performance management system that is followed by health care organisations. This will make it clear that there is no ‘perfect remuneration system’ in existence and more importantly there is no standard compensation system that can be used for all organisation. Remuneration and Performance Management in Health Organisations There are three different types of remuneration packages according to the LegCo Panel on Health Services – Remuneration of Hospital Authority Staff (2005). First, there is a cash allowance package, then a fixed flexi allowance package and finally a monthly allowance package. Cash Allowance Package: This package comprises of a basic salary, core benefits and cash allowance. The basic salary is payable in arrears month on month and is in line with the pay scales determined by the Hospital Administration and is appropriate to the job. Core benefits would cover components such as medical and dental benefits, leave, housing benefits, if any such as Home Loan Interest Subsidy system, a retirement benefit such as provident funds and even death and disability benefits. In addition to the basic salary, a cash allowance may be expressed as a percentage to the basic salary. Fixed Flexi Allowance Package Since January 1997, the Hospital Authority staff split the cash allowance percentage as both the fixed and flexi-allowance. Monthly Allowance package The Secretary of Health and Welfare established a committee to study the cost comparability of the Hospital Authorities and civil service packages. After this, the Hospital Authorities were asked to work out a revised funding arrangement for staff appointed after a cut-off date. This means that the remuneration is adjusted annually in line with the rates prevalent in civil service. If one were to look at the Performance Management System employed by the New South Wales (NSW) Department of Health, one will see that a performance agreement has been developed. This lays down four items – strategic objectives and performance context, organisational performance measures, personal performance measures and review and continuing development program. The policy clearly chalks out the job responsibilities and accountability criteria for the chief executive, the second/third tier health executives, senior executives and even the executives. The policy clearly states that the performance assessment must be transparent and should take into account all factors that are beyond the health executive’s control that have directly or indirectly hindered his/her meeting his/her targets. Basically, the performance assessment must give due credit to the ‘value added’ by personal performance. The Performance Assessment Rating is also defined. 5 – Achievement is consistent and significantly exceeds the position requirements and established expectations 4 – Achievement in most cases (generally) exceeds the position requirements and established expectations 3 – Achievement is, without significant exception, met and sometimes exceeds the position requirements and the established expectations 2 – Most expectations are met and basic and fundamental position requirements are discharged adequately 1 – One or more of the basic and fundamental requirements are not met according to the position requirements. There is a great deal of difference if one were to look at the Remuneration and Performance Management employed by the Department of Health, Victoria. Conclusion In conclusion, we can see that there is no such thing as the ‘perfect remuneration and performance management system’. If such a thing did exist there is no doubt in my mind that all companies would have used the same evaluating criteria. Since this is not the case, one can deduce that all performance management and remuneration systems must be tailor-made and customised according to the specific needs of the staff. It is essential that every organisation arrives upon the perfect remuneration system that would be suitable for them. One thing that we must keep in mind with regard to Human Resources policies is that while systems and methodology may be laid down, the ground realities are very different. Hence what would work in one context, will not necessarily work in another. References Armstrong Michael, Thompson Paul, Brown Duncan and Cotton Charles, (2005) ‘Reward Management’, Report. Chevalier Roger (2007), ‘A Manager’s Guide to Improving Workplace Performance’, p 67. Amacom. Paperback. Book Compu.Finder, 2009, Viewed October 19, 2009, http://theumanage.com/en/plansdecours/remuneration.php. Webpage. GEA Group 2009, Executive and Senior Management Remuneration System, viewed October 19, 2009, < http://www.geagroup.com/en/karriere/verguetungssystem.html>. Webpage. LegCo Panel On Health Services (2005), ‘Remuneration of Hospital Authority Staff’ viewed on October 19, 2009, . report. Local Government & Shires Associations of NSW – Salary System Guide (2004). < Viewed on October 19, 2009, http://www.lgsa.org.au/resources/documents/salary_system_guide_301105.pdf. Webpage. Lofthouse, Tina, (2006), Managing Partner,Cover Story: Just Rewards, Volume 9, Issue 6. Viewed on October 20, 2009, < http://www.mpmagazine.com/xq/asp/sid.0/articleid.64ED845E-75BF-400F-920E-1EE61B5085BB/eTitle.Cover_story_Just_rewards/qx/display.htm>. Webpage. Mackay Paul (1997), ‘Which Remuneration and Rewards System will Work Best For Us’, p. 3-6. Report. Oyedele, Olufemi, SciTopics, Research Summaries by Experts, (2009). Viewed on October 20, 2009. http://www.scitopics.com/How_to_become_a_great_manager.html. Webpage. Rennie H. Wendy (2003), ‘The Role of Human Resource Management and The Human Resource Professional in the New Economy, p. 11. Report. Read More