hrm imt-12

Internation HRM - Amit Saxena

Human Resource Management Strategy

By Amit Saxena

Organization’s Env Context

Internal•Structure•Culture•Resources

Societal Environme

nt

Task Environme

nt

Economic Forces

Technological Forces

Socio Cultural

Loliticallegal

Communities

Suppliers

Competitors

Trade Association

s

Shareholders

Customers

Creditors

Government

Employees

The Strategic View of Human Resources

Employees are human assets that increase in value to the organization and the marketplace when investments of appropriate policies and programs are applied.

Effective organizations recognize that their employees do have value, much as same as the organization’s physical and capital assets have value.

Employees are a valuable source of sustainable competitive advantage.

Sources of Employee Value

Technical Knowledge Markets, Processes, Customers, Environment

Ability to Learn and Grow Openness to new ideas Acquisition of knowledge and skills

Decision Making Capabilities Motivation Commitment Teamwork

Interpersonal skills, Leadership ability


The Meaning of “Strategy” A critical factor that affects Firm

Performance A factor that contributes to Competitive

Advantage in markets Having a long-term focus Plans that involve the top executives

and/or board of directors of the firm A general framework that provides a

perspective for selecting specific policies and procedures

Strategic Management

Strategic Decision A decision may be identified as strategic if is

Rare : The Decisions are that one of the Many Consequential : The outcome of the decision

requires Management Support and Commitment. The resulting actions require high investment in time and emotion

Directive : These actions help the organization to meet it’s Goals and Objectives

The action helps the organization to develop specific Core Competencies which will help the organization to place itself favorably over the competition

Strategic Management – The Need

In today's highly competitive business environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track.

Objectives of Firm Profits Sustained Growth and Evolution Product

Quality Range Innovation

Market Leadership Customer base Customer loyalty Customer satisfaction Customer service

Market Share Brand Image Values Contribution towards Society

Valuation of Human Assets Implications for Individuals and

Organizations Determination of compensation

Internal and external equity for employees in return for their contributions to the organization.

Organization placement of resources and returns on employee development are aligned and well-matched.

Advancement opportunities Developing current employees creates motivation and

permits promotion from within. Development of retention strategies

Effective means of retaining valuable employees allows for the recapture of the invested costs of their development.

Investment Orientation

The Investment-Oriented Organization

Organizational Characteristics Sees people as central to its

mission/strategy. Has a mission statement and strategic

objectives that espouse the value of human assets in achieving goals.

Has a management philosophy that encourages the development and retention of human assets and does not treat or regard human assets in the same ways as physical assets.


Why is HR critical to firm performance?

25% of Indian GDP is coming from Service Firms

Service is delivered by people. Low quality HR leads to low quality

customer service. In the 21st century effective knowledge

management translates into competitive advantage and profits.

Knowledge comes from a firm’s people. People are behind any organization


What is unique about Human Resource Management?

HR is multidisciplinary: It applies the disciplines of Economics (wages, markets, resources), Psychology (motivation, satisfaction), Sociology (organization structure, culture) and Law (min. wage, labor contracts, EEOC)

HR is embedded within the work of all managers, and most individual contributors due to the need of managing people (subordinates, peers and superiors) as well as teams to get things done.

HR Strategy: Strategic Fit

Training Rewards

Corporate Strategy

Business Strategy

HR Strategy

HR System

(Performance Mgmt.)

HR Strategy: HR System Internal Fit

Performance Management System

HR StrategyGoal Setting

Performance Measurement

Coaching

Rewards

Appeal

Performance Evaluation

HR Strategy: Context of HR System

1. The “Five Factors” Influencing the HR System

External Environment Social: social values, roles, trends, etc. Political: political forces, changes. Ex. Bush

presidency and its agenda for Social Security.

Legal: laws, court decisions, regulatory rules.

Economic: product, labor, capital, factor markets.


2. The Workforce Demographics


3. Organization Culture Weak vs. Strong culture “Type” of culture


4. Organization Strategy What are a firm’s distinctive

competencies? What is the basis that competitive strategy

be sustained? What are a firm’s strategic objectives? Compare corporate and Business

strategies.


5. Technology of Production & Organization of Work Physical layout/employee proximity Required employee skills Ease of monitoring employees’ input

Major Factors Affecting HRM

StrategicStrategicHRMHRM

TechnologicalTechnologicalAdvancementAdvancement

DemographicsDemographicsand Diversityand Diversity

GlobalizationGlobalization

Strategic HRM - Definition

Strategic human resource management has been defined as ‘the linking of human resources with strategic goals and objectives in order to improve business performance and develop organizational culture that foster innovation and flexibility’

Strategic HR means accepting the HR function as a strategic partner in the formulation of the company’s strategies as well as in the implementation of those strategies through HR activities such as recruiting, selecting, training and rewarding personnel.

HR Strategies refers to specific HR courses of action the company plans to pursue to achieve it’s aims

Technology and HRM

Technology Challenges for HRM

Workforce Demographic Changes The “Graying” of the Workforce Negative Aspects of Older Workers

Perceived resistance to change by older workers. Increased health-care costs for senior workers Blocking advancement opportunities for younger

workers Higher wage and salary costs for senior workers

Positive Aspects of Older Workers As productive or more productive than younger

workers Have more organizational loyalty than younger

workers Possess broader industry knowledge and

professional networks

Workforce Demographic Changes Baby Boomers (1945–1962)

In excess supply in middle management ranks HR challenge is to manage “plateaued” workers

Baby Busters (1963–mid-1970s) Are career bottlenecked by the Boomers Who have skills in high demand are doing and will do

well Generation “X”ers (late 1970s–early 1980s)

Have life-long exposure to technology and constant change

Seek self-control, independence, personal growth, creativity

Are not focused on job security or long-term employment.

New Employee/Workplace Dynamics Emphasis on the Management of Professionals

Establishment of separate career tracks Technical/Professional, Managerial /Administrative

Use of project teams Less Employee Loyalty, More Loyal to Self

Staying with employers for shorter periods; demanding more meaningful work and involvement in organizational decisions

Increased Personal and Family Dynamic Effects More single-parent families, dual-career couples, and

domestic partners Increased Nontraditional Work Relationships

Part-time, consulting, and temporary employment flexibility

Outsourcing and entrepreneurial opportunities

Strategic Management Strategic Human Resource Management

Involves aligning initiatives involving how people are managed with the organizational mission and objectives.

Strategic Management Process Determining what needs to be done (how) to achieve

corporate objectives over a three- to five year time span.

Examining the organization and the competitive environment.

Establishing a strategic (optimal) “fit” between the organization and its environment that engenders success.

Reviewing and revising the strategic plan as necessary.

Models of Strategy Industrial Organization (O/I) Model

The external environment is the primary determinant of organizational strategy rather than the internal decisions of its managers.

The environment presents threats and opportunities.

All competing organizations control or have equal access to resources.

Resources are highly mobile between firms. Organizational success is achieved by offering

goods and services at lower costs than competitors or by differentiating products such that they bring premium prices.

Models of Strategy (cont’d)

Resource-Based View (RBV) An organization’s resources and capabilities, not external environmental conditions, should be the basis for strategic decisions.

Competitive advantage is gained through the acquisition and value of organizational resources.

Organizations can identify, locate and acquire key valuable resources.

Resources are not highly mobile across organizations and once acquired are retained.

Valuable resources are costly to imitate and non-substitutable.

Strategic Management Process

The Mission Statement

Corporate Strategies: Growth Benefits

Gaining economies of scale in operations and functions

Enhancing competitive position vis-à-vis industry competitors

Providing opportunities for employee professional development and advancement

HR Issues Planning for new hiring Alerting current employees Ensuring quality and

performance standards are maintained

Internal Methods Penetration of existing

markets Developing new markets Developing new

products or services for existing or new markets

External Methods Acquiring other

organizations Vertical integration

HR Issues Merging organizations Dismissing redundant

employees

Corporate Strategies (cont’d) Stability

Maintaining the status quo due to limited environmental opportunities for gaining competitive advantage.

Few employees will have opportunities for advancement.

Critical that management identify key employees and develop specific HR retention strategies to keep them.

Turnaround or Retrenchment Downsizing or streamlining the organization in a cost-

cutting attempt to adjust to the competitive environment.

Few opportunities and many environmental threats. Important to develop HR practices to manage the

“survivors.”

Business Unit Strategies: Cost Leadership

Increases in efficiency and cutting of costs; then passing the savings to the consumer.

Assumes price elasticity in demand for products or services is high; small change in price will cause large increase in demand.

Assumes that customers are more price sensitive than brand loyal.

HR strategy focuses on short-term performance measures of results and promoting efficiency through job specialization and cross-training.

Business Unit Strategies: Differentiation

Attempting to distinguish organizational products or services from other competitors or creating the perception of a difference in order to demand a premium price from consumers.

Organization offers employees incentives and compensation for creativity.

HR strategy focuses on external hiring of unique individuals and on retaining creative employees.

Business Unit Strategies: Focus Business attempts to satisfy the needs of

only a particular group or narrow segment of the market.

Strategic intent is to gain consumer loyalty of neglected groups of consumers.

Strategic HR issue is ensuring employee awareness of uniqueness of market segment. Thorough employee training and a focus on

customer satisfaction are critical factors. Hiring members of the target segment who are

empathetic to customer in the target segment.

Business Unit Strategies: Logics of Control

EXHIBIT 3-3: DYER AND HOLDER’S TYPOLOGY OF STRATEGIES (cont’d)

Business Unit Strategies: Logics of Control (cont’d)

Benefits of a Strategic Approach to HR

Facilitates the development of a high-quality workforce through its focus on the types of people and skills needed.

Facilitates cost-effective utilization of labor, particularly in service industries where labor is generally the greatest cost.

Facilitates the planning and assessment of environmental uncertainty and the adaptation of the organization to the external forces that impact the organization.

The Five P’s Model of SHRM Philosophy

Statements of how the organization values and treats employees; essentially the culture of the organization.

Policies Expressions of shared values and guidelines for

action on employee-related business issues. Programs

Coordinated and strategized approaches to initiate, disseminate, and sustain strategic organizational change efforts necessitated by strategic business needs.

The Five P’s Model of SHRM

Practices HR practices that motivate behaviors that

allow individuals to assume roles consistent with the organization’s strategic objectives.

Processes The continuum of participation by all

employees in the specific activities of to facilitate the formulation and implementation of other activities.


Evolving Strategic Role of HRM

Strategic Human Resource Management

Involves the development of a consistent, aligned collection of practices, programs, and policies to facilitate the achievement of the organization’s strategic objectives.

Requires abandoning the mindset and practices of “personnel management” and focusing on strategic issues than operational issues.

Integration of all HR programs within a larger framework, facilitating the organization’s mission and its objectives.

Roles assumed by HR Function

Traditional HR versus Strategic HR

Barriers to Strategic HR

HR and Organizational Excellence

HR can help deliver organizational excellence by: Becoming a partner with senior and line

managers in strategy execution. Becoming expert in the way work is organized,

delivering administrative efficiency to ensure that costs are reduced while quality is maintained.

Becoming a champion for employees, representing their concerns to senior management and working to increase employee contributions.

Becoming an agent of continuous transformation by shaping processes and organizational culture.

Five Critical Business Challenges

Globalization

Profitability through Growth

Technology

Intellectual Capital

Change, Change, and More Change

HR as Strategy Execution Partner

HR is responsible for defining an organizational structure as the model for the company’s way of doing business.

HR must be accountable for conducting an organizational audit.

HR is to identify methods to renovate part of the organizational architecture.

HR must take stock of its own work and set clear priorities.

HR and Organizational Culture

HR can help bring about a cultural change by: Defining and clarifying the concept of

cultural change. Articulating why cultural change is central

to business success. Defining a process for assessing the current

culture and the desired new culture, as well as measuring the gap between the two.

Identifying alternative approaches to creating culture change.

Four Changes for the Line

How senior operating management can create an environment in which HR becomes focused on outcomes instead of activities: Communicate to the organization that the

“soft stuff” matters. Explicitly define the deliverables from HR,

and hold HR accountable for results. Invest in innovative HR practices. Upgrade HR professionals.

Human Capital Management

To become effective human capital managers, HR mangers must develop competencies in: Knowledge of the business. Human resource functional expertise. The management of change.

New Functional Role for HR

HR must focus on business level outcomes rather than HR level inputs.

HR must become a strategic core competency rather than a market follower.

Strategic competencies are more important than functional competencies.

The most important missing element in the HR function expertise is a systems perspective.

Organization Culture Questionnaire

Topics to be included in the questionnaire: How is performance defined, measured and

rewarded in the organization? How are information and resources

allocated and managed in the organization? What is the operational philosophy of the

organization with regard to risk-taking, leadership, and concern for overall results?

Does the organization regard its human resources as costs or assets?

Analyzing Dysfunctional Cultures

Which components of the culture are misaligned?

What priorities should be assigned each of the gaps between what the culture is and what people feel that it should be?

What resources are needed and how should they be used to change the culture?

How should the change effort be managed and who does what?

What role should HR strategy play in signaling, making and reinforcing the necessary changes?


Compensation

The Importance of Compensation Impacts an employer’s ability to attract and

retain employees. Ensure optimal levels of employee

performance in meeting the organization’s strategic objectives.

Compensation’s components Direct compensation in the form of wages or salary

Base pay (hourly, weekly, and monthly) Incentives (sales bonuses and or commissions)

Indirect compensation in the form of benefits Legally required benefits (e.g., Social Security) Optional (e.g., group health benefits)

Equity Theory

Internal equity Fairness of pay differentials between

different jobs in the organization can be established by job ranking, job classification, point systems and factor comparisons.

External equity Fairness of organizational compensation

levels relative to external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.

Equity Theory (cont’d) Individual Equity

Fairness about pay differentials among individuals who hold the same job in the organization is established by using:

Seniority-based pay systems that reward longevity with the organization.

Merit-based pay systems that reward employee performance.

Incentive plans that allow employees to receive part of their compensation based on their job performance.

Skills-based pay systems where compensation is based on employees possessing skills that the firm values.

Team-based pay plans that encourage cooperation and flexibility in employees.

Equity Theory (cont’d)

Job Evaluation: Point System Method

Five Levels of the Compensable Factor “Technical Skills”

Job Evaluation Methods

Legal Issues in Compensation Title VII of Civil Rights Act of 1964

Protects workers rights to fair treatment. Equal Pay Act of 1963

Requires equal pay for equal work. Comparable Worth

Argues that standards of equal pay for equal work should be replaced with the doctrine of equal pay for equal value.

Objective, measurable data to support an assessment of the value of different jobs is lacking.

There is no basis in current law for the arguments of comparable worth.

Legal Issues in Compensation Fair Labor Standards Act of 1938 Regulates the

minimum wage Sets overtime policy

(time and one-half after forty hours)

Establishes exempt classes for managers and other professional employees.

Key Strategic Issues in Compensation

Determining compensation relative to the market.

Striking a balance between fixed and variable compensation.

Deciding whether or not to utilize team-based versus individual pay.

Creating the appropriate mix of financial and non-financial compensation.

Developing a cost-effective compensation program that results in high performance.

Compensating Teams

Reasons for tailoring compensation to individuals: Motivation comes from within the individual

as opposed to the group. The development of skills and behaviors is

an individual undertaking. Fairness in dealing with teams does not

mean equal pay for all. Team compensation is not a payoff but a

means of nurturing behavior that benefits the team.


Employee Seperation

Employee Separation Reasons for employee separations:

Pressures on firms to remain competitive and efficient

Decline in employee commitment to individual employers

The importance of managing separations: Transitions of employees out of the firm go

smoothly. Continuing operations of the firm are not disrupted. Important professional relationships are not

damaged. Types of separations

Reductions-in-force, turnover, and retirements

Reductions-in-Force (RIFs) Causes of reductions:

Restructuring as a result of mergers and acquisitions

Attempts to make the organization more cost competitive

Adjustments to declining business environment conditions

Reasons for reductions: Inefficiency in operations Lack of adaptability in the marketplace A weakened competitive position in the industry

Methods for dealing with reductions: Continuance pay and outplacement programs

Reductions-in-Force (RIFs) Worker Adjustment Retraining and

Notification Act (WARN) of 1989: Requires employers with more than 100

employees to provide affected employees with a minimum of sixty days written notice of any facility closings or large-scale layoffs of 50 or more employees.

WARN does no apply to governmental agencies. Exceptions to WARN:

“faltering company” “unforeseeable circumstance” natural disaster “temporary facility”

EXHIBIT 13-1: STRATEGIES FOR MANAGING EMPLOYEE SURPLUSES AND AVOIDING LAYOFFS

Workforce Management Strategies

Turnover Involuntary turnover

Employees who are asked to leave the organization for cause (e.g., poor performance) or due to circumstances that cause a reduction-in-force.

Voluntary turnover Employees who leave an organization on their

own initiative. “Beneficial” turnover

When low performing employees depart and/or when new higher performing employees are promoted or hired as replacements.

Outcomes of Managed Turnover and Retention

Retirement Age Discrimination Act of 1967

Prohibits an employer from setting a mandatory retirement age except in certain occupations such as airline pilots.

Retirement Creates advancement opportunities for younger

employees and reduces payroll costs. Can cause a loss of vital accumulated historical

knowledge of the organization, its industry and the marketplace.

Employers can offer part-time and consulting work to older workers to ease the transition to retirement.

Holding on to High Performers:A Strategic Approach to Retention

Major turnover trends: Increasing turnover rates are having a

significant impact on organizational success. The costs associated with turnover, especially

that of high performers, continues to escalate. Why companies fail to address the

turnover issue: A pervasive belief that high turnover is

inevitable in a strong economy. The failure of companies to develop effective

strategies for managing employee turnover.

Holding on to High Performers:A Strategic Approach to Retention

Strategically managing retention involves: Selection and orientation of individuals who

possess the skills needed to succeed and also fit with the organization.

Training and career management to provide employees with growth and learning opportunities.

Offering motivation and compensation packages that provide customized non-financial performance incentives and financial rewards for individual employees.

Designing retention strategies that reflect the organization’s particular situational factors and its goals.

Retirement of Older Workers: Issues and Policies

Arguments for mandatory retirement Assumes that job performance and age become negatively correlated after a worker reaches a certain age.

Enables “retirement with dignity” and allows for dismissal without a cause other than age.

Minimizes need to monitor and assess older worker performance.

Justifies compensation sequencing schemes that underpay younger workers and overpay older workers.

Assumes older workers are less trainable or adaptable.

Serves the need for organizational planning and renewal.

Retirement of Older Workers: Issues and Policies

Implications for organizational retirement policy development: Monitor retirement policies such that they meet the requirements of relevant legislation.

Undertake human resource planning to insure that levels of required skills are maintained and not unduly depleted by retirement programs and policies.

Develop age-neutral policies to ensure effective access to and utilization of older workers.

Create flexible work and retirement arrangements that met the needs of older workers and the organization.

New Thinking for the New Millennium

Strategic approaches to may compensation (pay) systems more responsive: Pay the person for individual worth (knowledge,

skills and competencies) rather than for the value of a job they perform.

Reward excellence through a pay for performance compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational objectives.

Individualize the pay system to give employees choices in how they are rewarded and what reward they receive.

Outsourcing

What is Outsourcing? Outsourcing is a strategic decision to give a

task or activity to an independent contractor who determines how best to do the task or activity.

The firm and the independent contractor become partners and may establish a long-term relationship.

Examples of outsourced activities: IT, HR, Legal services, Manufacturing, R & D.

Note: Outsourcing transactions are done in the market.

Outsourcing Advantages

Better quality people and knowledge may be applied to an activity or task by the outsourcing firm.

Reduction in administrative costs may be possible when certain tasks are outsourced.

Outsourcing certain activities and employees that do not fit with company culture may be used to preserve a strong culture or employee morale.

Outsourcing Disadvantages

Outsourcing may lead to loss of control of certain activities which may be a problem on time sensitive projects for example.

Outsourcing an activity may result in loss of the opportunity to gain knowledge and information that may have general application to other key processes and activities.

Work SystemDesign

Insource the Work

Outsource theWork

The Decision to Outsource

Contingent employees:temps, consultants

IndependentContractor

High

Low

Str

ateg

ic I

mp

orta

nce

Str

ateg

ic I

mp

orta

nce

Low High

InterdependenceInterdependence

Insource

Outsource

???

Contingentemployees

When and how to outsource activities (Baron &

Kreps, 1999)

Outsourcing: Considerations(Baron &

Kreps, 1999)

Does learning from this activity spill over to an important “core” activity?

Can the outsourcing relationship be reversed and the work brought back inside when conditions change?

Can the outsource supplier adjust more quickly to changing labor or market demands than we can?

Do we have a strong clan-like culture that would be weakened with employees who have different values or interests (such as IT employees)?

Outsourcing: Considerations (Baron & Kreps, 1999)

Outsourcing may not be appropriate when:

1. The task is a core activity critical to strategy or technology.

2. Task is highly interdependent with core activity due to technology or work design.

3. Task requires great deal of firm specific human capital or access to proprietary information.

4. Tasks where the employees work in close proximity to regular, core employees and are similar socially to them.

Outsourcing: Considerations (Baron & Kreps, 1999)

Strategic Reward Systems I: Pay for Performance

Financial Rewards – Compensation1. Base Salary2. Pay Incentives3. Employee Benefits

Reward Systems consist of the following elements:

Reward Systems consist of the following elements:

Non-financial Rewards

1. Intrinsic Rewards – centers on the work itself2. Praise, recognition, time off and other rewards given to the employee by peers or superiors.

Strategic Reward Systems I: Pay for PerformanceReward Systems in most cases

should be consistent with other HR systems.

The Reward System is a key driver of: HR Strategy Business Strategy Organization Culture

Strategic Reward Systems I: Need for Consistency with Other HR Systems

Culture

Performance Management

Employment

Training

Labor Relation

s

Rewards

Overtime pay rules incontract

Sign-on BonusMerit Pay

Merit pay reinforces performance culture

Skill-based pay

Strategic Reward Systems I

Critical Thinking Question:1. Should pay policies “lead” or “lag” the

development of other HR systems?

Theoretical Models of Pay and Performance: Equity theory (Adams, 1963)Assumptions: People develop beliefs about what is a

fair reward for one’s job contribution - an exchange

People compare their exchanges with their employer to exchanges with others-insiders and outsiders called referents

If an employee believes his treatment is inequitable, compared to others, he or she will be motivated to do something about it -- that is, seek justice.

Theoretical Models of Pay and Performance: Equity theory (Adams, 1963)Is/Os versus Ir/Or

O = Outcomes: the type and amount ofrewards received

I = Inputs: employee’s contribution toemployer

R = Referent: comparison person S = Subject: the employee who is

judgingthe fairness of the

exchange

Equity Theory – Exchange Scenarios

Case 1: Equity -- pay allocation is perceived to be to be fair - motivation is sustained

Case 2: Inequity (Underpayment) -- Employee is motivated to seek justice. Work motivation is disrupted.

Case 3: Inequity (Overpayment) -- Could be problem. Inefficient. In other cultures employees lose face.

Consequences of Inequity

The employee is motivated to have an equitable exchange with the employer.

To reduce inequity, employee may… Reduce inputs (reduce effort) Try to influence manager to increase

outcomes (complain, file grievance, etc.) Try to influence co-workers’ inputs (criticize

others outcomes or inputs) Withdraw emotionally - or physically

(engage in absenteeism, tardiness, or quit)

Equity Theory Implications There is tension between internal and

external pay equity: Decide where to place the emphasis. Example: “In and out” versus “lifelong” employment system

Let employees know who their pay referents are in the pay system: identify pay competitors and internal pay comparators.

Strive for consistent pay allocations Monitor internal pay structure and position

in the labor market for consistency.

Agency Theory

Agency theory is a theory of governance in the workplace.

It tries to solve the problem of separation of ownership (atomistic shareholders) and control (professional executives and non-owners)

It also tries to solve conflicts of interest between managers and employees with delegated responsibilities.

Agency Theory

1. Principals = owners or managers who delegate responsibilities

2. Agents = managers or employees who manage firm assets for owners or other principals.

3. Information asymmetry = managers or other agents have greater access to strategic information than principals, who are not willing to bear the cost of directly monitoring the agents due to steep agency costs.

Agency Theory

4. Risk Preferences – principals are risk neutral and willing to bear greater risks than agents because their asset wealth is more likely to be diversified between corporate assets and other equities/investments. Agents are more risk averse than principals, because most of their wealth is concentrated in the firm and received in the form of pay and opportunities for promotion.

Agency Theory

5. Moral Hazard – agent is tempted (and some cases succeeds) in taking advantage of information asymmetry with principal and act opportunistically (defined as making decisions not aligned with principal’s interests) and use the firm resources to maximize wealth of the agent (often at the expense of the principal).

Agency Theory

6. Agency Contract – provides solution to moral hazard/agency problem, by establishing “rules of the game” to control agent opportunism – agent’s performance will be judged by outcomes (often financial benchmarks) not behaviors (which require direct supervision of agent’s actions). These outcomes will reflect principal’s goals and risk preferences.

Agency Theory

7. Incentive alignment – the agency contract will specify a compensation plan that aligns the interests of the principal and agent. This agency contract will be a type of pay for performance plan. Meeting or exceeding pre-agreed upon financial or non-financial outcomes triggers various forms of compensation (individual or group-based) for the agent. Some agency costs are borne by the principal in the form of financial incentives for the agent.

Tournament Theory

1. Tournaments are competitions between peers to achieve a promotion to a higher rank along with the pay and perks that go with it.

2. Tournaments are likely to result in a “winner take all” outcome.

3. Managers who enter the tournament must forego other alternatives (such as jobs with other firms, start own business, receive more pay with an alternative opportunity) to compete in the tournament.

Tournament Theory

4. A high pay differential (such as the CEO receiving much greater pay than any subordinates) attracts more “players” to the tournament.

5. Players must “invest” (work long hours, accept less pay, show loyalty to their boss) to enter the tournament – firm captures value from these players, more than what it gives up to the “winner” for the prize.

Controversies that Surround Pay for Performance Plans

1. Single Mindedness – “you get what you pay for” – no more, no less. The activities that are rewarded get done, to the exclusion of other activities that are not rewarded. Example: The dysfunctional behaviors that are observed when a sales representative is put on straight commission.


2. Control – externalities can control the outcomes, positive or negative. There can be windfall affects (the bull market improving the stock value of all stock options) or negative externalities (a bear market or recession that lowers the value of all stocks). Employee performance results may be magnified or diluted by these effects.


3. Measurement error – some measures can be “gamed” or manipulated and may not reflect “true” performance. Sales reps can withhold sales and report it in a different period so they are not penalized by a cap on sales commissions. Managers can use “creative accounting” measures to report greater profits than were actually experienced by the firm.


4. Inflexibility – managers or employees may resist change of the basis of compensation because they are comfortable with current basis for pay and want to avoid risk of taking reduction in earnings in new system.


5. Misalignment of incentives – if pay emphasis is on a goal that is no longer relevant, that goal will continue to be emphasized until the pay system places emphasis on a different objective.

For example, managers may emphasize short-term goals, even if long-term goals are more relevant, until the pay system recognizes long-term goals to a greater extent than short-term goals. The reward mix for complex jobs with several goals must reflect the relative value of attaining the mix of goals.


6. Line of Sight problem - division performance and corporate performance should be reflected in the pay system. If division performance and corporate performance are closely linked than both division and corporate performance should contribute incentives to the managers’ pay for performance plan. If division performance is independent of corporate performance, then the emphasis should be on rewards for meeting division goals.

Some Suggestions for More Effective Pay For Performance Plans

Pay and Performance should be Loosely Coupled – this gives managers more flexibility to make changes when new situations arise. Example: a formula with a bonus based on a moving average of a 3-year historical performance period. A 3-year period smoothes out performance over a longer cycle.

It is Necessary to Nurture the Belief that Performance Makes a Difference – there are important cultural values that are supported with pay for performance even if the accuracy of the performance metrics and the fairness of the pay allocations fall short of an ideal situation. Abandoning pay for performance may be more problematic than having an imperfect pay system.


Pay for Performance systems should be designed to fit each firm’s unique situation – imitation of other firm’s plans should be avoided


Six Myths about Pay (Pfeffer, 1998)

1. Labor rates and labor costs are the same thing.2. Labor costs can be reduced by lowering labor

rates.3. Labor costs are a significant portion of total costs.4. Low labor costs are a potent source of competitive

advantage.5. The most effective way to work productively is

through individual incentive compensation.6. People work primarily for money.

Critical Thinking Questions

1. Sears Roebuck Auto Center paid its auto mechanics a commission based on the volume of services sold to each customer. This basis of pay resulted in law suits filed against Sears by angry customers who claimed they were over-charged for services they did not need. Sears was forced to pay millions of dollars of penalties to these customers which hurt its reputation. Pfeffer believes that Sears’ mistake was that it should have realized that individual pay incentives are dysfunctional. Do you agree with this conclusion?

Critical Thinking Questions

2. Charles Schwab, the discount broker, does not use commissions as pay incentives for its brokers, bucking financial services industry pay practices. Why do you think Schwab did this?

3. Do you think that the point of view of the author (of the “6 Myths of Pay”) would work at a Wall Street investment bank such as Morgan Stanley?

4. The author of the “6 Myths of Pay” article prefers group-based pay for performance rather than individual pay for performance plans. What is the reason behind this? Do you agree?

Strategic Reward Systems II: Design and Strategic Choice Issues

Basic goals of a compensation system

Attract employees Retain employees Motivate employees Compliance with pay laws Administrative simplicity Cost effectiveness


Critical Thinking Questions1. Which goals would be most critical for

a technology company such as Visionary Design Systems?

2. Which goals would be most critical for a non-profit company?


Design Issues Job-based vs. Individual-based pay

design Fixed vs. Variable pay Internal vs. External pay equity

emphasis Performance vs. Membership as basis

for rewards


Design Issues Egalitarian vs. Elitist allocation of perks

& rewards Market position of base salaries:

Meet the market Lead the market Lag the market

Monetary vs. non-monetary reward emphasis


Administration Framework Open Pay vs. Pay Secrecy Centralized vs. Decentralized pay

administration


Critical Thinking Questions:1. Why do most private firms choose to

have a pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system where employee participation is a strong element of corporate culture?

2. Should a manager receive higher pay than the subordinates that she/he supervises?


Critical Thinking Questions:3. What are the strategic advantages of

paying below the market for pay? Can a firm sustain this pay choice?

4. Why would a firm decide to pay above the market? Is this choice open to all firms in an industry or sector?


Choosing the Basis for Pay1. Job-based pay: assumes jobs can be

standardized according to duties/responsibilities The job is priced in the open market as a

commodity Performance differences between

competent employees are assumed to be small

A “star” would reflect value inherent in the job role


Choosing the Basis for Pay2. Skill or Competence-based Pay

Assumes the individual is the source of value, rather than the job

Specific skill blocks and competences that an employee brings or develops is recognized with higher pay

A “star” would reflect a highly competent individual such as a top engineer or computer programmer


Choosing the Basis for Pay3. Seniority

Basis of pay is employee’s experience on the job or firm

Assumes more experienced employees are more competent

Seniority is valued in certain societies (Asian), occupational groups (unionized trades), and corporate cultures


Choosing the Basis for Pay3. Seniority (continued)

Seniority is easier to measure (objectivity) and administer fairly, than most alternatives as a rule for pay allocation.

Seniority influences many benefits: retirement plan vesting, allocations for vacation, sick leave, offices, parking spaces, and other privileges.

Strategic Reward Systems II: Design and Strategic Choice IssuesChoosing the Basis for Pay4. Time or output as the basis of payTime based pay: wage or salary

Time treats pay as a fixed costOutput/Performance based pay: commission,

piece rate, bonus, stock options, stock ownership, profit sharing Output/performance treats pay as a variable

cost.Most employees receive a mix of time and output

based pay. The key is to manage this pay mix so that it contributes to firm performance.


Critical Thinking Questions:1. What are the advantages of putting all

employees, both hourly wage employees, and professional exempt (from overtime) employees into the same pay system as an “all salary workforce” policy? What administrative challenges does this policy present?


International HRM

The International Imperative

Why organizations expand internationally: To capture enhanced market opportunities

that foreign countries may present. To achieve economies of scale in production

and administration by expanding the scope and volume of operations to international markets.

Keeping up with industry leaders may require that an organization enter foreign markets.

Acquiring ownership of a foreign-based organization or subsidiary.

How International and Domestic HRM Differ

International HRM requires: Managing a broader range of functional

areas. Becoming more involved in employees’

personal lives. Setting up several different HRM systems

for different geographic locations. Dealing with more complex external

constituencies Participating in international assignments

that have heightened exposure to personal risk.

International Expansion

Strategies for expanding internationally: Exporting locally produced goods to the host

country. Subcontracting or licensing the production

of certain goods or services to a foreign partner.

Entering into a joint venture with a foreign partner.

Setting up operations (making a direct investment) in the form of a foreign branch or subsidiary.

Strategic HR Issues in International Assignments

Approaches to sending employees abroad: Administrative approach involves merely

assisting the employee destined for an international assignment with paperwork and minor logistics

Tactical approach involves managing the “risk or failure” factor of overseas assignment by providing paperwork assistance and a modest amount of training.

Strategic approach involves extensive support and coordination of the international assignment and a strategized repatriation program at the end of the assignment.

Strategic HR Issues in International Assignments

Determining Expatriate Compensation

Balance sheet method Expatriate salary is based on home country pay and

additional expenses associated with relocation and the assignment are accounted for, plus hardship and incentives to determine the overall reimbursement and compensation level.

Higher-of-home-or-host method Employee’s salary at home is adjusted upward to

account for a higher cost of living in the host country.

Localization approach Employee’s salary is converted to the host country’s

equivalent when the employee is on permanent assignment.

Setting Strategic HR Standards

Repatriation

hrm imt-12

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