Establishing a new pay structure to improve employee engagement at Kim Quy Limited Liability company

FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION ---***--- GRADUATION THESIS Major: International Business Administration ESTABLISHING A PAY STRUCTURE TO IMPROVE EMPLOYEE ENG

FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION

-*** -

GRADUATION THESIS Major: International Business Administration

ESTABLISHING A PAY STRUCTURE TO IMPROVE EMPLOYEE ENGAGEMENT AT KIM QUY LIMITED

LIABILITY COMPANY

Student name: Chu Quốc Công Student code: 1112250015 Class: A13-CLC QTKD Intake: K50

Supervisor: Dr Nguyễn Thế Anh

Hanoi, May 2015

Table of Contents

ACKNOWLEDGEMENT i

ABSTRACT ii

LIST OF ABBREVIATION iii

LIST OF TABLE AND FIGURE iv

CHAPTER 1: INTRODUCTION 1

1.1 Research background: 1

1.2 Research objectives 2

1.3 Research questions 3

1.4 Scope of research 3

1.5 Structure of the thesis: 4

CHAPTER 2: LITERATURE REVIEW 5

2.1 Overview 5

2.2 Definitions of a pay structure 5

2.3 The role of pay structure 7

2.3.1 Improving employee engagement and attracting talents 7

2.3.2 Motivating and boosting individual and group performance 7

2.4 Factors affecting pay structure 8

2.4.1 Legal requirements 9

2.4.2 Market forces 10

2.4.3 Organizational goal 10

2.5 Types of pay 12

2.5.1 Pay for individual performance 12

2.5.2 Pay for group performance 15

2.5.3 Pay for organizational performance 16

2.6 Establishing a pay structure 20

2.6.1 Building up a Job structure 21

2.6.2 Determining Pay-level 25

2.7 Requirements of a good pay structure 29

CHAPTER 3: METHODOLOGY 31

3.1 Research methodology 31

3.2 Selecting sample 32

3.3 Instrumentation 32

3.3.1 Survey and questionnaire 32

3.3.2 Observation 33

3.3.3 Unstructured interviewing 34

3.4 Data collection 35

3.5 Method of analysis 36

CHAPTER 4: DATA ANALYSIS 37

4.1 Overview of Kim Quy Limited Liability Company 37

4.1.1 General information 37

4.1.2 The organizational structure 37

4.1.3 Business characteristics 39

4.1.4 Financial statement of Kim Quy in 2013 and 2014 40

4.1.5 Human resource at Kim Quy Limited Liability Company 40

4.2 Designing a pay structure at Kim Quy Limited Liability Company 42

4.2.1 Establishing a job structure 42

4.2.2 Determining pay-level 43

4.3 Assessments 48

4.4 Analyzing data 49

4.4.1 The impact pay structure on employees’ satisfaction 49

4.4.2 Impact of pay structure on employees’ thoughts and actions 51

CHAPTER 5: RECOMMENDATION AND CONCLUSION 53

5.1 Recommendation 53

5.1.1 Recommendations to motivate employees 53

5.1.2 Recommendation to improve the quality of pay structure 54

5.2 Conclusion 58

5.3 Limitation of the thesis 59

REFERENCE 60

Appendix 1: The first part of the survey 62

Appendix 2: The second part of the survey 63

Appendix 3: Kim Quy’s financial statement in 2013 and 2014 64

Appendix 4: Kim Quy’s classifying standards for recruiting employees 65

ACKNOWLEDGEMENT

This graduation thesis is the result of thirteen weeks of research and writing during the spring of 2015 It has been an interesting and learning experience In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process

First and foremost, special mentions and grateful thanks must go to Dr Nguyen The Anh, my supervisor at Hanoi Foreign Trade University With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis I could not have been able to complete this thesis without his positive suggestions and guidance

Secondly, I want to thank all the managers and staffs of Kim Quy Company, for their cooperation that helped and inspired me in writing

Thirdly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis

My appreciation is to my family and my friends for their supports and encouragements

Gratefulness is to the readers also, whose feedback will help much in improving the thesis

Hanoi, April 2013

Chu Quoc Cong

ABSTRACT

The purpose of the thesis is to evaluate the pay structure and discuss the impact of this system to the thoughts and actions of employees at Kim Quy Limited Liability Company After clarifying the insights of the problem, the thesis will aim at generating solutions for the current issues at Kim Quy Limited Liability Company which are seasonal labors and employee engagement

The method of research in the thesis is examining survey and questionnaire to find out the causes of the problems From that point of view, the researcher can give out suggestions and recommendations for the firm to adjust their pay structure

The graduation project represents the research on pay structure of Kim Quy Limited Liability Company from 2013 to 2014 The result of this work may help boosting the quality of the employees as well as company’s profit, it also broadens researcher’s mind about human resource management and the impact of human resource management to small and medium entrepreneurs

LIST OF ABBREVIATION

ESOP: Employee stock ownership plan

Kim Quy Co., Ltd: Kim Quy Limited Liability Company

LIST OF TABLE AND FIGURE

TABLE

2.1 Evaluating three jobs with four compensable factors 22

4.2 Salary for director, head and vice head of a department 44

FIGURE

4.5 Impact of pay structure on employees’ thought and actions 51

CHAPTER 1: INTRODUCTION

1.1 Research background:

Nowadays, “pay structure” is probably not a brand new term to indicate the compensation each entrepreneur giving to their employees Although this term seems familiar to corporate and the function it provides is obviously clear, pay structures may

be established in different ways, for example, salaries and wages may be represented in several forms such as cash, bonus, coupon payment, etc Whichever including in, the insight of the term and the final purpose it heading to obviously relate to paying worker fairly and appropriately at the right time and right place in a right way

Simple as it may seem to be, some entrepreneurs have failed to compensate employees exactly what they deserve The consequences of this non-compliance action lead to a fact that seasonal labor and low employee commitment are real struggles for many entrepreneurs in Vietnam One organization basically cannot survive without a human resource management department, human resource is regarded as the blood streaming through a healthy body to feed organs With small and medium entrepreneurs like Kim Quy, this issue has never been underestimated, because with them, labor is a priceless resource at a time when automatic machine is far beyond their financial situation When the demands of employees are not satisfied or they cannot make their ends meet, there is a high probability of turnover In human resources context, turnover is the act

of replacing an employee with a new employee Partings between organizations and employees consist of retirements, deaths, interagency transfers, and resignations High turnover often means that employees are dissatisfied with their jobs, especially when it

is relatively easy to find a new one It can also indicate unsafe or unhealthy conditions,

or that too few employees give satisfactory performance due to unrealistic expectations, inappropriate processes or tools, or poor candidate screening The lack of career opportunities and challenges, dissatisfaction with the job-scope or conflict with the management has been cited as predictors of high turnover In contrast, low turnover indicates that none of the above is true: employees are satisfied, healthy and safe, and

their performance is satisfactory to the employer However, the predictors of low turnover may sometimes differ than those of high turnover Aside from the fore-mentioned career opportunities, salary, corporate culture, management's recognition, and a comfortable workplace seem to impact employees' decision to stay with their employer

When accounting for the costs of turnover, there are both direct and indirect costs that the company has to suffer Direct costs relate to the leaving costs, replacement costs and transitions costs, and indirect costs relate to the loss of production, reduced performance levels, unnecessary overtime and low morale The true cost of turnover is going to depend on a number of variables including ease or difficulty in filling the position and the nature of the job itself

The problem of turnover rate and seasonal labors implicate that its consequences are beyond imagination and the resource of human will never be recovered once lost so that every firm must take good cares of employees’ life to avoid brain-drain and retain their talented workers In order to fulfill this mission, pay structure should be a great concern by both leaders and managers of Kim Quy Company Therefore, I chose the topic “Establishing a new pay structure to improve employee engagement at Kim Quy Limited Liability company” as graduation thesis topic in the hope that some findings and recommendations from the study could be a reference to help further developing a successful pay structure for this entrepreneur

The main and most important issue appeared at Kim Quy is the employee engagement which is regarded as seasonal labors Because this poses a deadly threat in forming a capable and trustworthy line-up of employees, there must be changes in the company’s policy to erase damages After a long and struggling period of searching for solutions, the board of director found that there had to be something wrong with their compensation system and they should have established a new pay structure for the company

The research aims to generate solutions for Kim Quy case in term of pay structure In detail, the research’s process includes following steps:

1.3 Research questions

The key question of the study is: “How to use pay structure as a tool to increase performance at Kim Quy Limited Liability Company?” To answer this research question, it is necessary to answer the following sub questions:

i What is a pay structure?

ii How does the pay structure work at Kim Quy Company?

1.4 Scope of research

This study focus on how to establish a pay structure at Kim Quy Limited Liability Company by analyzing the term “pay structure” in order to improve the employee engagement here The period of time the research is conducted is from 2014-2015 Data is taken from the source of data published in 2013 and 2014 at Kim Quy Limited Liability Company

The procedure of the research is qualitative method, in which the data is taken and analyzed to give the final conclusion on whether the pay structure in the organization is good or not

1.5 Structure of the thesis:

There are 5 chapters in the thesis:

Chapter 1: Introduction

It identifies the statement of aims and objectives with clear indication of the issues, problems and hypothesis being considered

Chapter 2: Literature review

Definitions, forming factors and impacts of pay structure can be found in this chapter A description of the layers of pay structure is also provided to help the readers get a sound understanding of pay structure

Chapter 3: Methodology

This chapter presents the research methods The manifestations are seen from different perspectives, ranging from visible to invisible manifestations

Chapter 4: Data analysis

This chapter describes how the data is collected, processed and analyzed to give out the final result

Chapter 5: Recommendation and Conclusion

The conclusion should be a brief resume of the investigation design and results and an overall, personal evaluation of the whole study It also includes some implications, assessments and recommendations about the pay structure of the company

CHAPTER 2: LITERATURE REVIEW

2.1 Overview

This chapter covers background knowledge about the study There are six main parts in this chapter: the concepts of pay structure, the role of pay structure, factors affecting pay structure, types of pay, the way an entrepreneur establish a pay structure and requirements of a good pay structure

2.2 Definitions of a pay structure

If someone was asked: “Why do you work for a certain company instead of one another?” the possible answer might at first be the reasonable salary, welfare or the high position this organization offers All these elements relate to the same issue which

is compensation, the benefits employees want to get after they contribute to achieve the common goal for the firm As far as you know, every organization represents their compensation system throughout a pay structure So what is a pay structure? And why does it remain a decisive role in recent business?

According to Raymond Noe, in the book The fundamentals of human resource

and pay-level decisions” This definition means pay structure is a system in which an organization uses to decide the compensation employees get through their contribution and the essence of the work In this clause, it is a common knowledge that a job structure is a layout that defines what a particular career entails; the structure has well defined job descriptions of a particular job, responsibilities, qualifications, and salary structure and performance matrix Obviously, different companies have different job structures for different positions If job structure is the base for deciding the compensation, pay-level decision is the final gate in which the head of a company arranges and agrees on payment for their employees Without one of these two factors,

a pay structure cannot be established

From the other point of view, Hollenbeck stated another detailed definition “A pay structure is a collection of pay grades, levels or bands, linking related jobs within a hierarchy or series that provides a framework for the implementation of reward strategies and policies within an organization” A company needs pay grades, levels of band or linking related jobs for all its positions so that people know where they fall within the organization A pay structure also helps answer questions about who's who, what each person's role is, and why people are compensated differently It also helps human resources personnel to fairly administer any given pay philosophy Specifically, the definition by Hollenbeck listed out a lot of minor ones including pay grades, levels

or bands, linking related jobs within a hierarchy or series As things change every day, the lists of these things may endure so that the definition of Hollenbeck is detailed but never be complete On the other hand, pay structure and pay-level decision are 2 basically determinants in which we can develop sub-determinants of pay structure, for instance, pay-level decisions include pay rates, pay ranges, pay policy line, etc

With a different approach, the third definition about pay structure which belongs to Erisa Ojimba, Director of Human Resources at Autodesk described a pay structure from a spectacular aspect She stated that “A company's pay structure is the method of administering its pay philosophy” This is a short but detailed and easy to understand definition The clause stated that pay structure is the tool for a company to build up compensation system In addition to that, pay philosophy is regarded as the method or exactly the strategy that the company wants to apply to their compensation system For example, a company allows payment to worker for a limited number of days and it is a philosophy in which the company applies to support their labors with days off To be honest, her clause seems to be rather too general as it only describes what a pay structure is but neglect to informing how it is constructed At that point, the definition

by Raymond Noe completely overwhelmed het statement because Raymond’s definition not only expresses what a pay structure consists of but also the process to establish a pay structure with 2 main steps which are building up job structure and determining pay-level decision

In comparing these three definitions, the first definition seems to be more trustworthy, formal and widely used Obviously, the definition of Raymond Noe is more reliable than the others as it was taken from the Human Resource Management manual Due to these reasons, the thesis will choose the definition of Raymond Noe as the standard definition: “A pay structure is the pay policy resulting from job structure and pay-level decisions”

2.3 The role of pay structure

2.3.1 Improving employee engagement and attracting talents

An organization needs talented and skilled individuals to build a successful business Because these talented people are highly sought after, an attractive pay structure is often the key to bring in the best candidates on board It is a common knowledge that a fair compensation system is among one of the most effective ways in retaining and motivating employees

When an organization is made up of people who is skilled and motivated, business thrives Furthermore, salary structures provide a framework for fair and consistent pay policies, they help monitor and control the implemented pay practices and demonstrate possible pay opportunities to the employees Implementing good salary structures is critical for any company Another issue relating to pay structure is that a compensation system proves itself appropriate with a firm will help reduce the retention rate as a matter of fact

2.3.2 Motivating and boosting individual and group performance

There are two main theories of how to reward employees by Nancy Katz, N.R which is presented at the “Do Rewards Make a Difference?” session at the Academy of Management Conference She promoted a healthy balance between individual achievement and team success: the impact of hybrid reward systems, characterized the theories as two opposing camps The first camp advocates rewarding individual performance, through plans such as commissions-sales schemes and merit-based-pay

The claim is that this will increase employees’ energy, drive, risk taking, and task identification The disadvantages of rewarding individual performance are that employees will cooperate less, that high performers may be resented by others in the corporation, and that low performers may try to undermine top performers

The second camp believes that organizations should reward team performance, without regard for individual accomplishment This reward system is thought to bring the advantages of increased helping and cooperation, sharing of information and resources, and mutual-respect among employees The disadvantages of team-based reward schemes are that they create a lack of drive that low performers are “free riders,” and that high performers may withdraw or become tough cops

Katz sought to identify reward schemes that achieve the best of both worlds These hybrid pay systems would reward individual and team performance, promoting excellence at both levels Katz suggested two possible hybrid reward systems The first system features a base rate of pay for individual performance that increases when the group reaches a target level of performance In this reward system, individuals have a clear pay-for-performance incentive and their rate of pay increases when the group as a whole does well In the second hybrid, the pay for performance rate also increases when a target is reached Under this reward system, however, every team member must reach a target level of performance before the higher pay rate kicks in In contrast with the first hybrid, this reward system clearly incentivizes the better performers to aid poorer performers Only when the poorest performer reaches the target does the higher pay rate kick in

2.4 Factors affecting pay structure

According to the book the fundamental of Human resource management by Raymond Noe, on forming a pay structure, there are several factors in which affect the way it functions Whether it is internal or external forces, managers should consider it seriously before establishing a complete compensation system Based on the common knowledge, there are 3 main factors in which a firm’s pay structure is reliant on:

Figure 2.1 The forming factors of a pay structure

Source: A Noe, 2011

2.4.1 Legal requirements

In Vietnam or any other country all over the world, legal business is regarded as the first and most essential target as without legal actions, business is nothing but untrustworthiness and frauds

2.4.1.1 Equal employment opportunity

Under the laws governing Equal Employment Opportunity, employers may not base differences in pay on an employee’s age, sex, race, or other protected status Any differences in pay must instead be tied to such business-related considerations as job responsibilities or performance The goal is for employers to provide equal pay for equal work Job descriptions, job structures, and pay structures can help organizations demonstrate that they are upholding these laws

2.4.1.2 Overtime pay

Under the Vietnamese Civil Code 2005, employees should be paid for overtime work

at higher rate than the normal rate It may create a huge change on how a person receives his/her salary as the amount of overtime hour may be flexible depending on his/her decision

Pay structures

Legal requiremens

Market forces

Organization

al goal

2.4.2 Market forces

Market forces are an important factor to decide how a firm pays their employees A firm can only pay their employees under the condition that the cost of labor does not exceed an appropriate number with them Organizations must keep costs low enough that they can sell their products profitably, yet they must be able to attract workers in a competitive labor market Decisions about how to respond to the economic forces of product markets and labor markets limit an organization’s choices about pay structure

2.4.2.1 Product market

To succeed in their product markets, organizations must be able to sell their goods and services at a quantity and price that will bring them a sufficient profit They may try to win customers by being superior in a number of areas, including quality, customer service, and price An important influence on price is the cost to produce the goods and services for sale And of course the cost of labor, which is reliant on company’s pay structure, is a significant part of an organization’s costs

2.4.2.2 Labor market

Workers prefer higher-paying jobs and avoid employers that offer less money for the same type of job In this way, competition for labor establishes the minimum an organization must pay to hire an employee for a particular job If an organization pays less than the minimum, employees will look for jobs with other organizations Therefore, the labor market has huge impact on how an organization compensates their employees

2.4.3 Organizational goal

Organizational goal affects pay structure through the company policy on deciding the quality of the workforce, the current financial position and the fairness between employees

Figure 2.2: How organizational goal affects a pay structure

Source: A Noe, 2011

Organizational goal affects a pay structure through the quality of company’s workforce because if a firm chooses to employs high quality workforce, they are meant to pay higher Therefore, the quality of the workforce is absolutely a factor affecting pay structure

In addition to that a firm decides their pay structure based on their financial situation, they will not pay what they cannot afford In addition to that, a company should base

on the cost-control policy of themselves in order to decide their pay policy

Finally, a good pay structure which has highest percentage of achieving the organizational goal is probably a structure that remains the fairness of benefit between employees and It makes sense that the more one contributes, the more he gets

Organizational goal

Quality of the workforce Financial situation Fairness between employees

Pay structure

2.5 Types of pay

2.5.1 Pay for individual performance

2.5.1.1 Based on the essence of work and employees ‘ability

2.5.1.1.1 Job-based pay

According to the book the fundamental of human resource management “Job-based pay is a pay structure in which employees are paid based on their contribution to the work” This is the traditional and most widely used paying type in nowadays business This type is pretty common due to the fairness it creates, no one can disapprove a pay structure that remains equality at all

This emphasis on jobs has some limitations First of all, the precise definition of a job’s responsibilities can contribute to an attitude that some activities “are not in my job description”, at the expense of flexibility innovation, quality, and customer service Also, the job structure’s focus on higher pay for higher status can work against an effort at empowerment Organizations may avoid change because it requires repeating the time-consuming process of creating job descriptions and related paperwork Another change-related problem is that when the organization needs a new set of knowledge, skills, and abilities, the existing pay structure may be rewarding the wrong behaviors Finally, a pay structure that rewards employees for winning promotions may discourage them from gaining valuable experience through lateral career moves

2.5.1.1.2 Skill-based pay

stated that “Skill-based pay systems are pay structures that set pay according to the employees’ level of skill or knowledge and what they are capable of doing” Skill-based pay is important for those firms with special tasks requiring high-skill worker in which not others can performance as well as at organizations where changing technology requires employees to continually widen and deepen their knowledge Skill-based pay also supports efforts to empower employees and enrich jobs because it

encourages employees to enrich their knowledge so they can make decisions in many areas In this way, skill-based pay helps organizations become more flexible and innovative More generally, skill-based pay can encourage a climate of learning and adaptability and give employees a broader view of how the organization functions These changes should help employees use their knowledge and ideas more productively

2.5.1.1.3 Performance-based pay (Merit pay)

Merit pay is a term that describes pay structure which is established based on the performance of employees, most frequently in the context of educational reform or government civil service reform It provides bonuses for workers who perform their jobs effectively One example of Merit pay is teaching area in which the quality of the work can easily be measured The pros can be gained are that it leads to better educational outcomes, helps low-performing schools attract teachers and increases the teacher retention rates However, it may affect the teacher morale, increase the competition between teachers, waste time and money for merit pay plans and sometimes do harm to student achievements

2.5.1.1.4 Experience-based pay

The term experience-based pay is used to describe a pay structure in which employees receive the salary reliant on the period of time they worked in an organization This kind of pay is rare and only appears in special area, Vietnam is one of those countries

in which people sometimes regard the experience employees tend to perform better than those who with less experience Therefore, the one with better work experience will get higher salary Basically, this is only correct in some circumstances, in order to evaluate people in common, we should base on different criteria to get a deeper understanding about one’s ability

2.5.1.2 Based on the reward form

2.5.1.2.1 Salaries and Wages

Many sales employees receive a fixed amount of hourly compensation called a wage or

a fixed amount of monthly compensation, known as a salary Salaried workers are paid

a fixed amount of money per month based on an annual salary regardless of how many hours they actually work

2.5.1.2.2 Fringe Benefits

Fringe benefits describe non-cash form of compensation, such as health insurance benefits, access to a company vehicle and health club memberships Sales employees often receive certain fringe benefits as compensation along with normal cash pay 2.5.1.2.3 Commissions

While most workers receive wages or salaries, sales employees also commonly receive pay in the form of commissions Commissions are payments that sales workers receive based on the amount of product that they sold

2.5.1.2.4 Bonuses

Bonuses are special awards of cash that employers sometimes give to workers for exemplary performance If sales employees perform especially well during a certain moth or year, they may receive bonus pay at the end of that month or year

2.5.1.2.5 Considerations

Sales employees can receive a mixture of different types of compensation For instance, a single sales person might get a salary, fringe benefits, commissions and bonuses Some sales workers do not receive commissions, while others do not receive salaries and rely entirely upon making sales commissions for cash income

2.5.1.3 Based on the payment method

2.5.1.3.1 Direct payment

This is the most simple and widely used method throughout the history in which the employers pay the employees by cash, coins, etc in-hand, usually at the beginning or the end of paying period in which may be weekly, monthly, quarterly or annually The advantages of this method include the openness of the pay structure, delay avoiding and availability for everyone

2.5.1.3.2 Paying through credit card or bank transfer

Employees will receive salaries through the credit card, debit card, etc This method seems to be convenient for those who own a bank account However, it sometimes causes trouble for employees due to the limitation post number at the paying day or the holiday Despite that fact, paying through credit card proves itself a safety and modern method by far

2.5.2 Pay for group performance

Employers may address the drawbacks of individual incentives by including group incentives in the organization’s compensation plan To win group incentives, employees must cooperate and share knowledge so that the entire group can meet its performance targets Common group incentives include gain sharing, bonuses, and team awards

2.5.2.1 Gain sharing

Organizations that want employees to focus on efficiency may adopt a gain sharing program, which measures increases in productivity and effectiveness and distributes a portion of each gain to employees Gain sharing addresses the challenge of identifying appropriate performance measures for complex jobs Even for simpler jobs, setting acceptable standards and measuring performance can be complicated Gain sharing frees employees to determine how to improve their own and their group’s performance

It also broadens employees’ focus beyond their individual interests But in contrast to

profit sharing, discussed later, it keeps the performance measures within a range of activity that most employees believe they can influence

2.5.2.2 Group Bonuses and Team Awards

In contrast to gain sharing plans, which typically reward the performance of all employees at a facility, bonuses for group performance tend to be for smaller work groups Bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output Team awards are similar to group bonuses, but they are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or even meeting deadlines Both types of incentives have the advantage that they encourage group or team members to cooperates so that they can achieve their goal However, depending on the reward system, competition among individuals may be replaced by competition among groups Competition may be healthy in some situations, as when groups try to outdo one another in satisfying customers On the downside, competition may also prevent necessary cooperation among groups To avoid this, the organization should carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other objectives, such as quality, customer service, and ethical behavior 2.5.3 Pay for organizational performance

Two important ways organizations measure their performance are in terms of their profits and their stock price In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay Stock is the owners’ investment in a corporation; when the stock price

is rising, the value of that investment is growing Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures

The expectation is that employees will focus on what is best for the organization These organization-level incentives can motivate employees to align their activities

with the organization’s goals At the same time, linking incentives to the organization’s profits or stock price exposes employees to a high degree of risk Profits and stock price can soar very high very fast, but they can also fall The result is a great deal of uncertainty about the amount of incentive pay each employee will receive in each period Therefore, these kinds of incentive pay are likely to be most effective in organizations that emphasize growth and innovation, which tend to need employees who thrive in a risk-taking environment

2.5.3.1 Profit sharing

Under profit sharing, payments are a percentage of the organization’s profits and do not become part of the employees’ base salary The formula for computing and dividing the profit-sharing bonus is included in the union contract Organizations use profit sharing for a number of reasons It may encourage employees to think more like owners, taking a broad view of what they need to do in order to make the organization more effective They are more likely to cooperate and less likely to focus on narrow self-interests Also, profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to rely as much on layoffs to reduce costs

Employees also may feel that small profit-sharing checks are unfair because they have little control over profits If profit sharing is offered to all employees but most employees think only management decisions about products, price, and marketing have much impact on profits, they will conclude that there is little connection between their actions and their rewards In that case, profit-sharing plans will have little impact on employee behavior This problem is even greater when employees have to wait months before profits are distributed The time lag between high-performance behavior and financial rewards is simply too long to be motivating

An organization setting up a profit-sharing plan should consider what to do if profits fall If the economy slows and profit-sharing payments disappear along with profits,

employees may become discouraged or angry Management communicated with employees frankly about the company’s appreciation of their efforts and the difficulty

of the economic environment, in which construction has been hit especially hard The hope is that employees’ recognition of the role the economy plays in cyclical industries such as construction will enable them to see the compensation as fair, even if they are disappointed in the year’s results

Given the limitations of profit-sharing plans, one strategy is to use them as a component of a pay system that includes other kinds of pay more directly linked to individual behavior This increases employees’ commitment to organizational goals while addressing concerns about fairness

2.5.3.2 Stock ownership

While profit-sharing plans are intended to encourage employees to “think like owners,”

a stock ownership plan actually makes employees part owners of the organization Like profit sharing, employee ownership is intended as a way to encourage employees to focus on the success of the organization as a whole The drawbacks of stock ownership

as a form of incentive pay are similar to those of profit sharing Specifically, it may not have a strong effect on individuals’ motivation Employees may not see a strong link between their actions and the company’s stock price, especially in larger organizations The link between pay and performance is even harder to appreciate because the financial benefits mostly come when the stock is sold, typically when the employee leaves the organization Ownership programs usually take the form of stock options or employee stock ownership plans

2.5.3.2.1 Stock option

One way to distribute stock to employees is to grant them stock options or the right to buy a certain number of shares of stock at a specified price Some studies suggest that organizations perform better when a large percentage of top and middle managers are eligible for long-term incentives such as stock options This evidence is consistent with the idea of encouraging employees to think like owners It is not clear whether these

findings would hold up for lower-level employees They may see much less opportunity to influence the company’s performance in the stock market

Recent scandals have drawn attention to another challenge of using stock options as incentive pay As with other performance measures, employees may focus so much on stock price that they lose sight of other goals, including ethical behavior Ideally, managers would bring about an increase in stock price by adding value in terms of efficiency, innovation, and customer satisfaction But there are other, unethical ways to increase stock price by tricking investors into thinking the organization is more valuable and more profitable than it actually is Hiding losses and inflating the recorded value of revenues are just two of the ways some companies have boosted stock prices, enriching managers until these misdeeds come to light Also, officials at some companies have been charged with “backdating” options granted to executives This practice involves changing the date and/or price in the original option agreement

so that the option holder can buy stock at a bargain price for making the backdated option profitable or more profitable At the same time, backdating eliminates or reduces the incentive to improve the stock’s performance If backdating of options is kept secret, those who do it may be guilty of falsifying financial statements, which is unethical and may be illegal

2.5.3.2.2 Employee Stock Ownership Plans

While stock options are most often used with top management, a broader arrangement

is the employee stock ownership plan In an employee stock owner ship plan, the organization distributes shares of stock to its employees by placing the stock into a trust managed on the employees’ behalf Employees receive regular reports on the value of their stock, and when they leave the organization, they may sell the stock to the organization or on the open market

ESOPs raise a number of issues On the negative side, they carry a significant risk for employees Problems with the company’s performance therefore can take away significant value from the employee stock owner ship plan Many companies set up

Employee Stock Ownership Plans to hold retirement funds, so these risks directly affect employees’ retirement income Adding to the risk, funds in an employee stock owner ship plan are not guaranteed by the Pension Benefit Guarantee Corporation Sometimes employees use an employee stock owner ship plan to buy their company when it is experiencing financial problems; this is a highly risky investment

However, Employee Stock Ownership Plans can be attractive to employers Along with tax and financing advantages, Employee Stock Ownership Plans give employers a way

to build pride in and commitment to the organization Employees have a right to participate in votes by shareholders This means employees participate somewhat in corporate-level decision making Still, the overall level of participation in decisions appears to vary significantly among organizations with Employee Stock Ownership Plans Some research suggests that the benefits of Employee Stock Ownership Plans are greatest when employee participation is greatest

2.6 Establishing a pay structure

Establishing a pay structure is not a simple task with each firm, in order to complete a pay structure in use, there must be 2 steps to take:

Figure 2.3 Steps in establishing a pay structure

Source: A Noe, 2011

Building up a job structure and determining pay-level bear a close relationship in which only after defining the jobs that you will be able to set the pay level for the job This is because compensation is calculated based on contribution and contribution is reliant on the nature of the work Obviously, different job evaluations lead to various levels of pay For instance, the first job requires an accountant with 2 years past experience at the same position, good at dealing with financial statement, able to utilize

Building up a job

structure

Determining

pay-level

special software in accounting… will receive a different pay level with a second job for

a sewing workers with the requirements of being hard working and obedient In the case, the job descriptions of these two jobs are a necessary criterion to assess how a firm can set up the pay level for them

2.6.1 Building up a Job structure

There are two steps in which a job structure is set up: job evaluation and determining key jobs While job evaluation is the primary step to define a job, the secondary step is

to classify jobs into key jobs and non-key jobs which are two groups with different characteristics to form a pay level

Figure 2.4 Steps in building up a job structure

Source: A Noe, 2011

2.6.1.1 Job evaluation

“Job evaluation is an administrative procedure for measuring the relative internal worth

of the organization’s jobs” This statement expresses that the job evaluation takes responsibility for defining all the jobs inside the firm It may answer questions like: What is the goal of this job? How the job is arranged? What it takes to finish this job? Who is suitable for this kind of job? , etc

In order to evaluate jobs, employer should identify compensable factors or criteria of the jobs which are the elements defining characteristics of the job, for example:

Building up a job structure

Job evaluation

Determining key jobs

experience requirement, skill requirement, education requirement, complexity, total time the job consumes, etc Those criteria have the quantitative relationship with how a firm set up the compensation for a job, the more the job demands like skill, profession,

experience,…the higher the salary

Table 2.1 Evaluating three jobs with four compensable factors

Source: Collected by the writers

The table 2.1 represents the evaluation of three jobs with four compensable factors in a sewing firm Experience, skill and education are three major requirements while the last factor measures the complexity level of three jobs The higher the total point, the more the firm has to pay their employees with that job

There are primarily three methods of job evaluation: ranking, classification, factor comparison method or point method While many variations of these methods exist in practice, the three basic approaches are described here

Ranking method is perhaps the simplest method of job evaluation According to this method, jobs are arranged from highest to lowest, in order of their value or merit to the organization Jobs can also be arranged according to the relative difficulty in performing them The jobs are examined as a whole rather than on the basis of important factors in the job; the job at the top of the list has the highest value and obviously the job at the bottom of the list will have the lowest value Jobs are usually ranked in each department and then the department rankings are combined to develop

an organizational ranking The variation in payment of salaries depends on the

variation of the nature of the job performed by the employees The ranking method is simple to understand and practice and it is best suited for a small organization Its simplicity however works to its disadvantage in big organizations because rankings are difficult to develop in a large, complex organization Moreover, this kind of ranking is highly subjective in nature and may offend many employees Therefore, a more scientific and fruitful way of job evaluation is called for

The second method which may be used is classification method According to classification method, a predetermined number of job groups or job classes are established and jobs are assigned to these classifications This method places groups of jobs into job classes or job grades Separate classes may include office, clerical, managerial, personnel, etc

The job grading method is less subjective when compared to the earlier ranking method The system is very easy to understand and acceptable to almost all employees without hesitation One strong point in favor of the method is that it takes into account all the factors that a job comprises This system can be effectively used for a variety of jobs The weaknesses of the Grading method are that even when the requirements of different jobs differ, they may be combined into a single category, depending on the status a job carries Moreover, it is difficult to write all-inclusive descriptions of a grade Additionally, the method oversimplifies sharp differences between different jobs and different grades Finally, when individual job descriptions and grade descriptions do not match well, the evaluators have the tendency to classify the job using their subjective judgments

Factor comparison method or Point method is widely used and is considered to be one

of the reliable and systematic approaches for job evaluation in mid and large size organizations Hence, jobs are expressed in terms of key factors Points are assigned to each factor after prioritizing each factor in order of importance The points are summed

up to determine the wage rate for the job Jobs with similar point totals are placed in similar pay grades

2.6.1.2 Defining key jobs

After evaluating all the possible jobs within an organization, the firm will own detailed information to create a job structure about the relative value each jobs provide The organization may limit its pay survey to jobs evaluated as key jobs According to Raymond Noe in the Fundamental of Human resource management “Key jobs are jobs that have relatively stable content and are common among many organizations” Stable content and common among organizations are two special criteria on deciding a key job As far as it is concerned, stable content means that the workload and job description often remain unchanged throughout the working career while the last criterion means that the job must be essential for many companies especially for companies in the same area

For example, accountant is a key job because almost all companies own this common job so that the company can rely on other company’s pay level on the accountant or through survey data about what people earn in these jobs to determine the salary for the job In contrast, Foreman is not a key job because this job only appears at the factories which follow shift-work system

Organizations can make the process of creating a pay structure more practical by defining key jobs Research for creating the pay structure is limited to the key jobs that play a significant role in the organization Pay for the key jobs can be based on survey data, and pay for the organization’s other jobs can be based on the organization’s job structure A job with a higher evaluation score than a particular key job would receive higher pay than that key job

2.6.2 Determining Pay-level

At the beginning of this chapter, the researcher mentioned about the definition of pay structure which states that pay structure reflects decisions about how much to pay and the relative value of each job After building up the job structure, organization can determine their pay level based on a combination of pay rates, pay ranges, pay grades pay differentials and compa-ratio A firm’s pay structure should express what it comprehends about market forces, as well as its goals and the relative contribution of each job to achieving the goals By balancing this external and internal information, the organization’s goal is to set levels of pay that employees will consider equitable and motivating Organizations typically apply the information by establishing some combination of pay rates, pay grades, and pay ranges…

Figure 2.5 Determinants of pay-level decision

Source: A Noe, 2011

2.6.2.1 Pay Rates

According to the book the Fundamental of Human Resource Management by Raymond Noe, pay rates are defined as “The pay in terms of a rate per hour, commonly called an hourly wage; a rate of pay for each unit produced, known as a piecework rate; or a rate

of pay per month or year”

Pay rates are an important measure to draw a pay policy line According to the book

graphed line showing the mathematical relationship between job evaluation points and

Pay-level Decision

Pay Rates Pay Grades Pay Ranges Differentials Pay Compa-ratio

pay rate” The vertical axis shows a range of possible pay rates, and the horizontal axis measures the points from the job evaluation The analyst plots points according to the job evaluation and pay rate for each key job Finally, the analyst fits a line, called a pay policy line, to the points plotted

Figure 2.6 A pay policy line

Source: Collected by the writer

Figure 2.4 shows a pay policy line which indicates how a company can predict salary

of a random employee After using regression model to get a linear line, the company can predict salaries of any employees within their job evaluation point For example, an employee with 100 evaluation point will get a salary level of about 3 million VND a month and an employee with 400 evaluation point surely gets 6 million VND each month

Job evaluation point

A pay policy line

edition, “Pay grades are sets of jobs having similar worth or content, grouped together

to establish rates of pay” For instance, a company may group sewing workers with 102 evaluation point and an employee responsible for odd jobs with 140 evaluation point in the same grades because they are at the same level of pay A drawback of pay grades is that grouping jobs will result in rates of pay for individual jobs that do not precisely match the levels specified by the market and the organization’s job structure For example, an accountant and a sewing worker with the same evaluation point may be grouped together Although market rate of pay for an accountant are always higher than sewing worker and the accountant gets more evaluation point But for the simplicity’s sake, the company group 2 employees together This leads to the fact that the organization may pay less for the accountant and pay more for the sewing worker which is not an equal circumstance

2.6.2.3 Pay Ranges

In some cases, a firm might want the flexibility in determining compensation for individual jobs They want to be able to pay the most valuable employees the highest amounts and to give rewards for performance Flexibility also helps the organization balance conflicting information from market surveys and job evaluations Therefore, pay structure usually includes a pay range for each job or pay grade According to the

a set of possible pay rates defined by a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade” In other words, the organization establishes a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade Employees holding the same job may receive somewhat different pay, depending on where their pay falls within the range

2.6.2.4 Pay Differential

In some situations organizations adjust pay to reflect differences in working conditions

or labor markets For example, an organization may pay extra to employees who work the night shift, because night hours are less desirable for most workers Similarly, organizations may pay extra to employees in locations where living expenses are higher These adjustments are called pay differentials

2.6.2.5 Compa-ratio

Most of the time the human resource department is responsible for establishing the organization’s pay structure but building a structure is not the end of the organization’s decisions about pay structure, the structure represents the organization’s policy, but what the organization actually does may be different As part of its management responsibility, the HR department therefore should compare actual pay to the pay structure, making sure that policies and practices match

A common way to do this is to measure a compa-ratio, the ratio of average pay to the midpoint of the pay range Assuming that the pay structure is well planned to support the organization’s goals, the compa-ratios should be close to 1 A compa-ratio greater than 1 suggests that the organization is paying more than planned for human resources and may have difficulty keeping costs under control A compa-ratio less than 1 suggests that the organization is underpaying for human resources relative to its target and may have difficulty attracting and keeping qualified employees When compa-ratios are more or less than 1, the numbers signal a need for the HR department to work with managers to identify whether to adjust the pay structure or the organization’s pay practices The compa-ratios may indicate that the pay structure no longer reflects market rates of pay

For example, a range of 5 employees with similar task receive salaries as follow: Employee 1: 2.4 million VND

Employee 2: 2.3 million VND

Employee 3: 3 million VND

Employee 4: 2.9 million VND

Employee 5: 2.8 million VND

The midpoint of the range is 2.7 million VND

The compa-ratio should be:

(2.4 + 2.3 + 3 + 2.9 + 2.8) ÷ 5

2.7 Requirements of a good pay structure

An ideal compensation system will have positive impact on the efficiency and results produced by employees In addition to that, it will encourage the employees to perform better and achieve the standards fixed and enhance the process of job evaluation as well as help setting up an ideal job evaluation Holding a realistic pay structure, the set standards would be more achievable

Such a system should be well defined, it must additionally be applied to all the levels

of the organization as a general system so that the whole firm can work harmoniously

In order to be well-maintained in the long term, the system should be arranged simply and flexibly so that every employee would be able to compute his own compensation receivable On the other hand, a good pay structure should be easy to implement and remain its function as avoiding exploitation of workers

A well-managed pay structure might raise the morale, efficiency and cooperation among the workers because justice and fairness would provide satisfaction to the workers Such system would help management in complying with the various labor acts and solve disputes between the employee union and management Rather than that, the compensation system can motivate and encouragement those who perform better

and provide opportunities for those who wish to excel A sound pay structure brings peace in the relationship of employer and employees It aims at creating a healthy competition among them and encourages employees to work hard and efficiently By far, the system should provide growth and advancement opportunities to the deserving employees With sounding success from compensating talents, the company policy can make an effort to attract high-quality employees

The perfect pay structure provides platform for happy and satisfied workforce Thanks

to that, the labor turnover will be minimized and the organization enjoys the stability Recently, the organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job In the future orientation, the business organization can think of expansion and growth if it has the support of skillful, talented and happy workforce In conclusion, the sound pay structure is a hallmark of organization’s success and prosperity A demanding compensation system surviving all these criteria stands a good chance to dominate the labor market with high-quality employees