Экономические науки/6

Экономические науки/6. Маркетинг и менеджмент

Islamgaliyev Ayan

Almaty Management University, Kazakhstan

Compensation Policy And Total Rewards As A Tool Of Human Resource Management

An organization’s success lies in a motivated workforce as highly motivated employees strive to produce at the highest possible level and exert greater effort than employees who are not motivated. Daft and Marcic (2007) also believe that employee motivation, organizational performance, and profits are interconnected and cannot be separated [1]. The most talented and innovative employees are not solely motivated by financial rewards such as money, but seek satisfaction from their work.

According to Shields (2007), reward management is not solely concerned with financial rewards. It is also concerned with non- financial rewards such as recognition, communication, work environment, training and career development. The financial rewards range from base pay, pay for performance, pay for skills and competencies, and indirect financial rewards such as benefits. Individuals are motivated by different factors, but employers usually use money as a strategy for retaining employees [2, p.30].

Archer (2009) notes that the transition from personnel management to human resources management has increased awareness of the importance of human resources in the success of the organization. Archer (2009) maintains that employees are equally critical to the overall business success as are technology and other physical resources. The skills, knowledge, attributes, and brainpower that employees possess make the organization have a sustained competitive advantage over other organizations [3].

Employers face challenges of choosing rewards that respond to individual needs and improving the profits and financials of the organization. Tschohi (2009) states that globally, the economy is in a dismal state and companies are downsizing and freezing salaries in order to survive. Tschohi (2009) further suggests alternative remuneration strategies, which are less costly such as employee recognition, better career programs, improved organizational communication, and job enrichment programs [4].

Armstrong and Murlis (2004) believe that organizations should implement remuneration systems that encompass both financial and non-financial aspects as this would ensure the satisfaction of different employees’ needs, thus, increasing levels of employee commitment and performance. Non-financial remuneration systems include factors such as recognition, promotion, increased responsibilities, and personal growth [5, p.23]. These endeavors are aimed at motivating employees through satisfaction of their esteemed needs and accomplishing organizational goals as the success of the organization is linked to human capital.

Organizational success is measured by the steady increase of shareholders wealth, profits, sales, return on investment, and increased market share. Up to seventy-five percent of market value is embedded in intangible assets, most notably ‘human capital’ or employees. Imperfect knowledge of the value of these individuals and unsatisfactory methods of remuneration allows talent to ebb away (Baron, 2003) [7]. Pienaar (2007) postulates that the link between people and profits is well established. Organizations that treat employees like people have higher rates of productivity and lower rates of turnover. He further maintains that high employee turnover is costly. Organizations will have to replace the people who have been lost, together with loss of knowledge, experience and customer relationships [7, p.21].

Shareholders desire increased growth in their investment each year and to continually produce higher returns, necessitating to having a motivated workforce who will perform at higher levels. To do this on a continuous basis requires reward and remuneration systems that are most applicable in the motivation and retention of employees [7, p.22].

Swanepoel, Erasmus, Van Wyk and Schenk (2003) discuss various internal and external forces that influence the compensation design such as economy, union, and government [8, p.494].

Among all kinds of budgets in an organization, remuneration cost remains a part of great importance. With the speedy update of the modern world, however, the traditional remuneration management has been facing great challenges both in public and private sectors under the current economic and business circumstance, and then come a lot of problems which can affect the performance of an organization and even cause existential threats. Survey has demonstrated that the cash reward which was paid most attention to is not as important as in the past. Based on a 2002 survey of 1,500 employees (of all ages) conducted by Nelson Motivation, Inc., San Diego, California, the ranks of employee motivators in descending order are as follows: a learning activity, flexible working hours, verbal praise, increased authority, autonomy, time with their manager, time off from work, public praise, choice of assignment and written praise . What is noteworthy is that the cash reward ranks 15th in importance (Reynolds, 2005) [9, p.20]. In recent years, some other reward-related glossaries also spring up as the progress of new-fashioned market economics, for example, salary management, salary administration, payment (or pay) management, compensation management, reward management etc.

Modern Rewards Management appears and develops in the context of managing transformation; it not simply acknowledges and redounds upon what the members have contributed to the organization, in fact, it’s a specific action scheme of company strategic objective and values outlook conversion. To some extent, Modern Rewards Management breaks through the categories of “Money” and substance, which indicates that indirect income and some no-monetary compensation have been playing parts of increasing importance in Reward Structure Design. Generally, Modern Rewards Management is carried out through Total Reward Management which matches with the work ethic and pursuit of the present employees, and it is an important reflection of emphasizing the relationship between enjoyment of reward elements and engagement.

However, the development and implementation of a TR system cannot happen overnight; what is required is a long-term commitment to a holistic approach to managing and engaging the workforce (Kao and Kantor, 2004; Buchenroth, 2006) [10]. Furthermore, TR is not a panacea, since like other reward systems, it may also fail to motivate employees as a result of a lack of strategic consideration in its management (Crowe, 2002) [7, p.52]. In addition, there is no one-size-fits-all model in this respect, and each organization needs a tailor-made system to address its particular needs, with effective implementation being the key to its success (Thompson, 2002) [8, p.11]. Moreover, some employers still do not agree on whether a TR approach has been appropriate for their organizations since they consider it to be too broad, which in itself causes confusion. The question of intrinsic rewards also presents a challenge to these employers, since the evidence is that their employees care in the main, about extrinsic rewards (Giancola, 2008).

The notion of TR clearly then, does not fit easily in all organizations and with all types of employee, and bearing this in mind, the question presents itself as to how readily it will transfer to the developing country context, since the concept originated in the West where different imperatives prevail in the work environment.

A large number of scientific studies has pointed out that employees, referred to as the ‘Human Capital’ of a company, play a fundamental role in the survival and success of an organization by providing a competitive advantage (Hatch and Dyer, 2004). The Human Capital reflects the overall knowledge, experience and competencies the staff of an organization possesses. These assets are intangible and firm-specific, which makes them not easily imitable by concurrent companies and therefore a source for potential long-term competitive advantages (Afiouni, 2007). The Resource-Based View (RBV), an influential movement within strategic management, seeks to explain the origin of this sustainable competitive advantage. The theory proposes that a firm should obtain resources that are ‘Valuable’, ‘Rare’, ‘Inimitable’ and ‘Non-substitutable’. Possessing these so called VRIN-characteristics gives companies the ability to generate a competitive advantage and consequently reach a higher performance level (Barney and Clark, 2007) [6, p.377].

Since people are a company’s most vital asset, a top three priority on the HR agenda remains attracting, motivating and retaining talent (Caye et al., 2007) . In the upcoming decades, this HR-activity will become of even greater importance due to the worldwide demographic shift, encompassing the massive ageing and retirement of the working population. This mass-retirement of the so called baby boomers will lead to great loss of knowledge, expertise and talent (DeLong, 2004), eventually resulting in a (second) global war for talent between organizations (Gardner, 2002). An extensive survey, conducted by ManpowerGroup (2011) on nearly 40,000 employers across 39 countries, found that 34% of the employers experiences difficulties filling positions due to a lack of available talent.

Apart from this talent war, the huge costs arising from employee turnover makes the attraction and retention of core employees a critical challenge for companies. ‘Turnover’ refers to “the actual movement of organizational members across the boundary of an organization” (Hemdi and Nasurdin, 2005). Despite its importance, the full costs associated with turnover are widely unknown and often underrated due to the hidden costs of productivity loss, customer dissatisfaction, low staff morale, etc. (Blum and Tremarco, 2008) [4, p. 45].

An essential tool for organizations to motivate and retain their workforce and to attract new employees is, next to providing a favorable work-life balance, constructing a good and equitable compensation system. Like Shields (2007) stated: “Compensation is the most critical issue when it comes to attracting and keeping talent.” [2, p. 172]

Employee compensation plays a key role because it is at the heart of the employment relationship, being of critical importance to both employees and employers. From the organization's perspective, perhaps no other set of decisions are as visible or as consequential for the success or failure of an organization. From a cost perspective alone, effective management of employee compensation is critical, given that it often represents the single largest cost incurred by an organization, typically accounting for 10- 50% of total operating costs, and as much as 90% of such costs in some labor-intensive (e.g., service) organizations.

Of course, cost is only one part of the picture. It is also necessary to evaluate the employee contributions the organization receives in exchange. Thus, a second reason for studying compensation from the organization's perspective is to assess its impact on a wide range of employee attitudes and behaviors, and ultimately, the effectiveness of the organization and its units. Compensation may directly influence key outcomes like job satisfaction, attraction, retention, performance, flexibility, cooperation, skill acquisition and so forth.

To the individual employee, compensation decisions also have important consequences. Salaries and wages represent the main sources of income for most people, and may also be taken as key indicators of a person's social standing or success in life. Benefits, such as health care and pensions, are also important determinants of well being and financial security among employees and their dependents. Not surprisingly then, employees have sought to influence such decisions in a variety of ways, including through unions, supporting government regulation of compensation decisions, and through the courts. Therefore, it is important to understand how individuals are affected by (and react to) different compensation decisions.

"Compensation" in dictionaries treated as reimbursement and reward. The Kazakhstan economic literature and in practice most often used first meaning of the word - reimbursement. In foreign sources compensation include all payments made by the employer to employee, regardless of their forms: monetary, material, in the form of services or benefits.

For a proper understanding and use of the category of "compensation", it is necessary to understand the correlation between the concept of "compensation", "reward" and "wages", which are closely related, but not the same.

In English, compensation means something that counterbalances, offsets, or makes up for something else. However, if we look at the origin of the word in different languages, we get a sense of the richness of the meaning, which combines entitlement, return, and reward.

In China, the traditional characters for the word “compensation” are based on the symbols for logs and water; compensation provides necessities in life. In the recent past, the state owned all enterprises and compensation was treated as an entitlement. In today’s China, compensation takes on a more subtle meaning. A new word, dai yu, is used. It refers to haw you are being treated – your wages, benefits, training opportunities, and so on. When people talk about compensation, they ask each other about the dai yu in their companies. Rather than assuming that everyone is entitled to the same treatment, the meaning of compensation now includes abrader sense of returns as well as entitlement.

“Compensation” in Japanese is kyuyo, which is made up of two separate characters (kyu and yo), both meaning “giving something”. Kyu is an honorific used to indicate that the person doing the giving is someone of high rank, such as a feudal lord, an emperor, or a similar leader. Traditionally, compensation is thought of as something given by one’s superior. Today, business consultants in Japan try to substitute the word hou-syu, which means “reward” and has no associations with notions of superiors. The many allowances that are part of Japanese compensation systems translate as teate, which means “taking care of something.” Teate is regarded as compensation that takes care of employees’ financial needs. This concept is consistent with the family, housing, and commuting allowances that are still used in many Japanese companies.

Compensation in the treatment of American and European scientists in labor economics and motivation - is only part of the general system of remuneration received by the employee from the employer.

The term "compensation" in the treatment of not only "reimbursement", but also "reward" is increasingly being used in Kazakhstan companies. On the one hand, this is due to the study of foreign experience in the field of compensation management. On the other hand, the modern system of labor stimulation characterized by a variety of rewards, among them, along with compensation, which is included in wages and other payments that aren’t included are used. These social benefits, expenses of the organization on the development of human capital, funded from the profits of the organization, as well as compensation due to employment, the list of which may be much wider than the statutory limits.

In practice, in many Kazakhstan organizations compensation that is not included in the wage, form the concept of "social package". But not all payments are included in the “social package” have a social character, if strictly come from the word "social". So, at the moment, some Kazakhstan companies in order to designate the totality of payments in a different form using a broader concept, borrowed from American and European practice management, namely "compensation package."

Compensation package of each company is formed on the basis of financial capacity, degree of understanding of leadership and its role in the owner motivation of labor activity staff. These contrasting ideas about compensation-multiple meanings (returns, rewards, entitlement) - add richness to the topic. But they can also cause confusion unless everyone is talking about the same thing. So let’s define what means “compensation.”

Most authors divide total compensation into two large groups: the first group includes cash compensation, which is related to the nature of the work performed and to employee functions, the second group includes benefits.

According to Milkovich and Newman (2013), compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. Our focus is the total cash compensation system in organization shown in figure 1.

Figure 1 - Total Returns for Work

Figure 1 shows the variety of return people receive from work. They are categorized as total compensation and relational returns. The relational returns (learning opportunities, status, challenging work, and so on) are psychological. Total compensation returns are more transactional. They include pay received directly as cash (e.g., base, merit, incentives, cost-of-living adjustments) and indirectly as benefits (e.g., pensions, medical insurance, programs to help balance work and life demands) . Each of these elements has cash value to the employee and organization. So pay comes in different forms, and programs to pay people can be designed in a wide variety of ways.

The functions and purposes of each elements of Total Returns Model suggested by Milkovich and Newman (2013) shown in table 1. So as given above in the table 1 compensation elements play the main three functions: to attract, to retain and to motivate employees.

Functions of compensation system. The first function is attraction, implemented in attracting for the organization of staff and development of functional, occupational structure of human resources of an organization able to effectively carry out activities in accordance with organization's charter .

Table 1 - Total Compensation Framework

Element	Functionality	Purpose
Base Salary	Reflects the value of the role, skills, competencies and subsequent performance of the incumbent	Attraction, Retention: (for higher payers) Rewarding consistent achievement of job and personal objectives that are linked to business plan
Short Term Incentive	Reflects the achievement and exceeding of business plan	Attraction and Motivation
Long Term Incentive	Rewards long-term achievement of strategic development plans	Attraction, Retention and Motivation: Rewarding achievement on a three or more year business cycle basis
Retirement Plan, Benefits and Perquisites	Creates financial security Defends against competition	Retention Rewarding achievement of annual business plan and individual objectives
Source: Reprinted from Total Compensation for Successful Retention (p.8) by Hay Group, 2012.

The second function is to formation of motivation among employees of the organization, ensuring high labor activity staff in achieving the goals and tasks of the business. This feature is implemented through the creation and use of systems of remuneration and compensation packages structures capable adequately compensate for the investments made in the formation and development of human capital with regard to the efficiency of its use.

The third function is developing. Compensation package of organization should be focused on the development of human capital. Modern information society and technology, high competition between companies requires high demands on the quality of the workforce and its constant development. With universal access to sources of information, modern technology and money capital, the only long-term competitive advantage can only be human capital. Therefore, part of compensation packages should be directed to the development of human capital.

The fourth function is social. In the structure of the compensation package should be fees associated with protection, preservation, enhancement, treatment, rehabilitation worker health, aid for worker or his family members, who are in a difficult financial situation. These payments must provide the employee maintaining his health in an efficient and competitive condition. Especially in the framework of this feature, you must allocate compensation aimed at financing of human life since the end of work. This group includes pension benefits payments, financial assistance in kind and cash, gifts for holidays, anniversaries, funding for treatment, prosthetics, rest in sanatoriums.

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