Determinants of pay and benefit structure in a privatized company

Compensation and Benefit

Mr. Imran ul Haq

AGRI-BI-CON 1

Table of Contents
ABSTRACT ............................................................................................................................ 4 CHAPTER NO 1 .................................................................................................................... 5 Introduction..................................................................................................................... 5 Relevance to National Needs and Current Research: ..................................................... 6 Areas of Application: ....................................................................................................... 6 CHAPTER 2: LITERATURE REVIEW ....................................................................................... 7 Salary Definition .............................................................................................................. 7 Base Salaries .................................................................................................................... 7 Wages and Salary Add-Ons ............................................................................................. 7 Incentive Payments ......................................................................................................... 7 Benefits and Services ...................................................................................................... 8 HR Architecture: .............................................................................................................. 8 HR Architecture for the Differentiated Workforce ......................................................... 8 Corporate Culture ........................................................................................................... 8 Mindset and Culture ....................................................................................................... 9 Extending the HR Architecture: Relational Archetypes and Value Creation .................... 10 The Logic Of The New Pay Systems Revisited In The Light Of Experimental And Behavioral Economics ....................................................................................................... 11 Employees relegate job satisfaction to Second place behind pay and benefits as rising cost of living bites, says CIPD employee Outlook survey ................................................. 12 Compensation in Pakistan ................................................................................................ 14 Compensation constraints ......................................................................................... 14 Overall Compensation ............................................................................................... 16

AGRI-BI-CON 2

Table of Figures
No table of figures entries found.

AGRI-BI-CON 3

ABSTRACT
This research investigates the pay determining process, compensation and benefits practices of a semi-government organization. Further, we investigate the following: 1) The entire cycle for last two years forecasting of salary increase, bonus, and its implementation; 2) Different type of employee workforce groups in the company; 3) The salary progression process of the company; The factors which aid in pay determination.

AGRI-BI-CON 4

CHAPTER NO 1
Introduction
This study is about the HR architecture and the determinants of pay and benefit of a company named Agri-Bi-Con. The government of Pakistan has privatized it in mid1990s. This study explores and understands the complex issues of employees and their salaries. Broadly, there are two types of employment in the company. The first types of employees are transferred from the government to company at the time of privatization of the company. They still have terms and conditions similar to government employees of Pakistan. The second types of employees are hired by the company on contract. They are governed by the company rules and regulations. This study starts with the detailed analysis of employment types and what are the differences of these employments. After that the different types of pay structures are studied and in the end, the pay determinants of salaries are discussed. There are following major objectives of the study: 1. Understand why and how does the existing pay and benefits system work for different employee segments at Agri-Bi-Con Company. 2. Understand the drivers for change in pay pry practices were over the last decade in the company. 3. Understand the forces have hindered the change in pay and benefit packages and why. This study will provide a document for understanding the specific nature of employee compensation and benefits in Pakistan and help to understand the variables in determining pays. The other national and private organizations may go through the similar phase as government of Pakistan is planning to privatize some other government department. They can learn from the experiences of the sample organization in this context. The major advantages of this study are hereunder: 1. Understanding changes in environments and implication for organizations privatized from the government. 2. Understanding the perceptions of multiple stakeholders of the company: employers and employees.

AGRI-BI-CON 5

3. Determining the different relationships with coworkers salaries and understanding the variables when there are different types of employments of the company.

Relevance to National Needs and Current Research:

The company is managing compensation and benefits in semi-private organization and competing with the private sector is a national-level problem in Pakistan. This study is significant as it assesses the issues which emerged in newly privatized organizations of Pakistan. The government is planning to privatize some of its government departments for enhancing the quantity and quality of goods and services alongside the reduction of corruption. This topic is specific to Pakistani environment on which some data exists due to lack of research trends in Pakistan. Therefore, it is under researched in HR literature, which is limited in Pakistani context.

Areas of Application:
Broadly, this study falls under the Human Resource Management of the company which covers the type of employees, their employment terms and conditions and employees compensation. This study starts with the understanding of different HR architectures of the company converted from the government sector. Mostly, the architecture in this company is accidental or derived from the short terms needs of the organization instead of detailed planning.

AGRI-BI-CON 6

CHAPTER 2: LITERATURE REVIEW

The literature review has been divided into following components 1. Salary Definition 2. HR Architecture

Salary Definition
Salary or pay is most commonly used word for the fixed amount of money or compensation paid an employee in return for worked performed. Pay is paid to employees on the monthly or bi-monthly or weekly basis other than daily wage employees. Compensation includes pays and other benefits mostly committed to employees in return of worked performed. Compensation has different parts and the major parts of compensation are Base salary, Salary add-ons, Incentive programs both short terms and long terms, and employee benefits and services.

Base Salaries
Based salary is fixed amount of money committed to an employee by an employer in return for employment job. It does not include benefits or bonuses. Its administration and determination is considered as the most important part of compensation. The majority of lifestyle of the employees is based on this base salary; the kind and quality of food, clothing, housing, and transportation. The powerful influences on the lifestyles of wage earners and their dependents underscore the importance of job and the pay received by employees for performing the job.

Wages and Salary Add-Ons

The salary and Add-ones are the pay for overtime work, shift differentials, premium pay for working on weekends and holidays. Some employees perform specific jobs in certain kinds of companies; these add-one are permanent.

Incentive Payments
Possibly the oldest part of the compensation package is payment for a specified output or enhance output. These incentive payments enhance the output of manufacturing organization or increase sales.

AGRI-BI-CON 7

Benefits and Services

The indirect and non-cash compensation are considered as benefits. Some are mandatory benefits and others are industry specific. The mandatory benefits are Employee Old Age Benefit, Social Security. The industry specific benefits are health insurance, life insurance, pension, gratuity, leave encashment, and medical etc. This is part of the compensation also includes time off with pay, when employment is suspended or terminated, pay when unable to work because of accident or sickness. These payments are in consideration of past services or expected services of the employees.

HR Architecture:
HR architecture is the designing and construction of organization in term of positions and the reporting lines, Job roles of of the organization. This Architecture is with regards to specific, industry or culture.

HR Architecture for the Differentiated Workforce

Workforce differentiation means that in an organization, there could be different types of employees. These employees could be different in terms of job status, or it could be based on the strategy of the business. A firms workforce strategy and its workforce are as differentiated as its business strategy. Developing a differentiated workforce requires that the HR management policies and practices a firm adopts be differentiated as well, not just by business strategy but more important by strategic capability the bundle of information, technology and people needed to execute strategy. It requires a clear understanding of why change is necessary, how to change and an action plan to ensure that it happens.

Corporate Culture
All firms have culture. Sometimes firms actively choose and manage their culture, at other times, it seems as though the culture chooses the firm and the workforce is just along for the ride. Managers need to ensure that they develop a corporate culture by design, not by accident. In a culture of accountability everyone in the firm focuses on executing the strategy, helping each other improve, and holding each other accountable for the outcome. In the global business environment, successful strategy execution requires consistently higher level of performance and much higher level of internal and external differentiation.
AGRI-BI-CON 8

Mindset and Culture

The organizations are divided into two major categories in respect of mindset and culture of the organization. These categories are Firm X- Employer of Choice and Firm YEmployee of Choice. Firm X Employer of Choice Firm X is considered as the employer of choice and they try to hire the best employees for all positions for the business. Once they hire an employee, they try to make sure that they are committed to the firm and retained within the organization. The salary and benefits of these companies are relatively higher. They care for the employees and work for their growth. The employees also know the firms value and their importance. Firm Y Employee of Choice Firm Y hires the very best employees for strategic positions that create wealth for the firm. They do whatever is necessary to attract, grow and develop employees in these roles. The leaders in these firms create stretch expectations for these employees and inspect their performance rigorously, extremely candidly, honestly and accurately. Culture of firm X is much more common and significantly less effective than that of firm Y. Y-type firms are more likely to consistently and effectively execute their strategies in large part because they have open and honest conversation with the workforce. From Corporate Culture to Workforce Philosophy A comparison of firms X and Y highlights the importance of workforce mind-set and culture in strategy execution and firm success. Developing mind-set and culture accountability involves two steps. The first is to develop a workforce philosophy that outlines the firms expectations. The second is to develop a unique differentiated system of HR management policies and practices to translate the workforce philosophy into strategy execution. Lockheed Martins Workforce Philosophy Challenging Environment Lockheed Martins goal is to be the solution provider of choice. This requires talent superiority, despite critical skill shortages in the available labor market and extra ordinary teaming with internal and external partners in providing customer focused solutions.
AGRI-BI-CON 9

Strategic Focus We must establish strategies that address the changing global environment and diversified customer needs in current, adjacent and emerging markets. Business decision must balance short-term results with long term gains, which require the workforce to have the skill and ability to meet current and future customer needs. Delivering Customer Success We must view all business activities from the customers perspective, ensuring our customers success. In order to achieve this, we must cultivate enduring, strategic customer relationships and help them shape the future. Workforce Differentiation and Diversity An inclusive workplace values diversity of thoughts to provide unique customer focused solutions. Our future success will require workforce agility as never before; thus cross organizational development and assignments will be necessary to ensure our competitiveness. Leadership Accountability Full spectrum leaders are accountable for their workforce. This requires communicating business strategies, creating a high performance, clarifying performance expectations and assessing each employees performance relative to these expectations. In doing so, leaders will make our workforce philosophy a reality. The Role of HR We must recognize that our business success is increasingly more dependent upon strategic talent to provide the solutions necessary to meet customer expectations in an ever changing environment. HRs primary responsibility is to partner with leadership in the advocacy and delivery of strategic talent for our customer. The workforce is the deliverable of HR.

Extending the HR Architecture: Relational Archetypes and Value Creation

Recent Human Capital research theories refer the resource-based, knowledge-based, value creation, and competitive advantages. (Reference Hitt, Bierman, Shimizu, and Kichhar, 2001; Wernerfelt, 1984). The people embodied know-how of employees is
AGRI-BI-CON 10

the foundation of a firms core capabilities and is fundamental to the development of its value proposition. (Reference People embodied Know-how Parahald, 1983:242). There are three main things about the employees; first, employee contributions are different. Second, there could be multiple HR Configurations depending upon the nature of employee's contributions, and third, value creation and strategic positioning are derived from the combinations of human capital. HR architectural point of view the retention of knowledgeable human capital is equally important in the induction of new knowledgeable workforce. (Ref: Grant, 1996; Kogut & Zander, 1992; Nonaka & Takuchi, 1995; Spender, 1996). Research is needed that transcends the individual quadrants of the framework and focuses on balancing the complexity and dynamics of the entire HR architecture. (Refer Lepak and Snell 1999; 45).

The Logic Of The New Pay Systems Revisited In The Light Of Experimental And Behavioral Economics
The trends in the pay scales have been shifting from the seniority based progression to performance-based salary increases. There are two types of performance bases salary increase one is the lump sum bonus, and the other is the permanent salary increase. The design of the new pay scales system is varied in different countries. The goals of the new pay system are to increase the efficiency, because employees are motivated by the link between the pay and performance, and to increase the opportunity to recruit and retain qualified employees when pay is variable and individualized. The new pay scales have been criticized due to problems with performance appraisals, lack of adequate funding and poor implementation. Sometimes, there is a gap of effort and the expected outcome, and they feel that they are not rewarded what they deserved, it has been elaborated in Expectancy Theory (Vroom, 1964, 2005; Pearce and Perry, 1983). The fairness of pay supplements is more related to the perception of employees. It is most of the times seen negatively. The new pay system does not achieve the results due to experimental and behavioral economics. They must be considered while designing the pay system.

AGRI-BI-CON 11

Employees relegate job satisfaction to Second place behind pay and benefits as rising cost of living bites, says CIPD employee Outlook survey

A desire to increase pay and benefits has become the number one reason why employees want to change jobs, overtaking improving job satisfaction in the Chartered Institute of Personnel and Developments (CIPD) Employee Outlook survey, as the economic downturn continues to erode peoples standard of living.

The survey of 2,000 employees finds more than half of workers (54%) say their top reason for wanting to change job is to increase their salary and benefits, with improving job satisfaction cited second most commonly (42%). This is a reversal from last year when 61% cited job satisfaction and 48% said improving pay and benefits. The trends are uniform across all sectors.

Other findings that highlight increased financial pressure include: 36% of employees report their standard of living has worsened over the previous six months, compared to 29% saying this was the case in summer 2010 Just 7% report an improvement in living standards, a fall from 10% a year ago Almost a fifth (18%) of employees say they run out of money at the end of the week or month either always or most of the time One in five (18%) say keeping up with bills and financial commitments is a constant struggle, while one in 10 (8%) are falling behind with bills or credit commitments Ben Willmott, senior public policy adviser, CIPD, said: The survey shows the ongoing impact of the economic downturn in the workplace. Employees are feeling the squeeze as a result of pay freezes or low pay settlements that fail to keep up with inflation. Besides being more likely to want to leave for more pay elsewhere, workers with financial difficulties are also more likely to report being under stress at work and are
AGRI-BI-CON 12

typically less satisfied with their jobs. Prolonged exposure to stress is associated with absence from work, higher levels of accidents and higher incidence of mental ill health. It is, therefore, in employers interests to support employees in tough times through ensuring line managers are equipped with effective people management skills and by providing advice and support on debt management and financial planning. The Governments Money Advice Service can provide support for employers in this respect. Employers should also focus on communicating the value of their total reward package to employees. For example, public sector employers should highlight the enduring advantages of remaining in the public sector, such as better pensions, greater flexible working opportunities, better occupational sick pay, and access to occupational health services. The survey finds that job satisfaction, which is calculated through subtracting those that are dissatisfied from those that are satisfied is broadly similar to last quarter (+35 from +34 last quarter). Job satisfaction in the public sector has fallen to +30 from +38 and in the voluntary sector to +39 from +44. There has been a slight increase in job satisfaction in the private sector to +34 from +33. For the first time, the survey provides a new overall employee engagement score, which is calculated by clustering a number of wider measures of engagement together (including job satisfaction, understanding of organisational purpose, willingness to go the extra mile). At +10 this more rounded score is unsurprisingly lower than that of job satisfaction and provides a good measure of individuals engagement with organisations currently. Against this measure, public sector workers are by far the most disengaged (12), with voluntary sector workers by far the most engaged (+33), followed by private sector employees (+13). Low levels of job satisfaction and engagement in the public sector are likely to be influenced by rising levels of job insecurity, with over a third of public sector employees (35%) thinking it likely they could lose their jobs compared to 30% last quarter. Voluntary sector workers are marginally more pessimistic about their job security, with 28% saying it is likely they could lose their jobs, up from 27%. In all 19% of private sector employees think it likely they could lose their jobs, unchanged from last quarter. Ben Willmott continued: The heightened level of uncertainty around job security in the current economic climate puts an even greater importance on the extent to which
AGRI-BI-CON 13

employers communicate and consult with staff. There is no such thing as over communicating and employers can help prevent rumour and anxiety by providing regular updates on business challenges or proposed changes that will impact employees. Just as importantly consultation with staff needs to be genuine which means taking account of employees views before and not after decisions are made. (Reference: job.aspx) http://www.cipd.co.uk/pressoffice/press-releases/employees-relegate-

Compensation in Pakistan

Compensation constraints Every organizational function and activity needs money to run and manage properly. Availability of adequate financial allocation is needed for development and improvement purposes. This is also true for HR. Continuous development and improvement in HR are as important as those in the business activities of an organization. Compensation budget normally has two parts first, identify the expected Human Resources Headcount and second, the cost of human resources to make it part of overall financial budget. Compensation budget must cover every important head of expenses, whether present or future, and even for seemingly insignificant items. Employee-related costs often comprise the greatest share of corporate operating expenses. It is no surprise that executive management focuses on controlling employee expenses in every way possible. At divisional and departmental levels, however, managers must make hiring and compensation decisions that will help their units to meet objectives: hiring the right people for the right jobs, compensating them fairly, helping them to become rapidly productive, and retaining them as long as possible. Human Resources Management (HRM) administers the headcount and compensation planning process. It makes sure managers adhere to corporate hiring and compensation policies. HR seeks forward visibility to hiring decisions so that it can source the best talent. It analyzes employee trendslike attrition so that the corporation can make decisions to help retain top talent. Consequently, executive management, finance, and

AGRI-BI-CON 14

HRM are looking for tools and disciplines to manage headcount and compensation planning so that business unit decisions are aligned with corporate objectives. Planning helps corporations to manage cross-enterprise employee headcount, compensation, and benefit costs to align departmental decisions with corporate objectives. Headcount and Compensation is linked by business drivers to various process areas in a corporation. Enterprise headcount plans are dependent on a number of business drivers. For instance, sales forecast trends can have immediate impact on headcount in sales, marketing, and operations. Similarly if product failure rates are higher than expected, additional hotline support and on-site field service staff might be required. Resource planning for product development and production also directly impacts headcount. In turn, headcount can be a driver for operational plans in other functions. IT spendinglike the number of computers or networks to purchase and deployis directly tied to headcount, which in turn drives IT helpdesk plans for staffing, infrastructure, and training. Employee compensation is a driver of employee productivity. Merit increases tied to individual, team, divisional, and corporate performance objectives can have a significant impact on enterprise performance. The key outputs of the process are headcount plans and compensation plans. All activity centers within the organization develop plans that include headcount. During the year, updated forecasts are periodically created, providing an opportunity to revise headcount and compensation plans. The process typically starts by updating existing employee status. Some employees may take a leave of absence, transfer to other departments, and or be terminated. The next step is to update the new-hire headcount forecast based on current business conditions. During headcount planning, managers must comply with established HR policies. Headcount and Compensation Planning is a collaborative effort to align departmental staffing requirements with corporate objectives: Corporate management typically tries to control headcount-related expenses, while divisional managers try to make headcount and compensation decisions that optimize departmental efficiency and productivity. HR ensures compliance with corporate policies. As they update existing employee status, staff managers must be aware of leave-of-absence, interdepartmental transfer, and severance policies. After adjusting the status of existing employees, staff managers update new-hire plans. Business conditions may dictate an increase or decrease in headcount projections or a shift in new-hire timing. Human Resource Management (HRM) systems are useful for managing current and historical employee information in a secure, scalable manner, but not so useful for managing forward-looking employee information: How many new hires will departments plan to hire over the next 12 months by role, grade, and compensation rate? If revenue
AGRI-BI-CON 15

projections run ahead of the annual plan, for example, headcount in sales and customer service should increase proportionally. Overall Compensation When the organization will have forecasted its staffing requirements and their respective grades in headcount planning then next step is to calculate the cost of human resources to implement organizational plans. Total compensations which will have to be provided to the employees in return of their services are forecasted in advance. Generally this calculation requires the consideration of the following major items: Overhead cost consists upon many items in which main are Payroll, including Salary, Overtime, Allowances, Employees provident fund, Bonus, Increment, and Recruitment Cost. The cost includes the Training Cost, Welfare Cost. The overall compensation will be based on the overall objective and business target of the organization for the coming year. If there is no such specific objective or target, the overall compensation could be based on the current year one, with 20-30% increase. (www.strategic-human-resource.com)

AGRI-BI-CON 16