Human Resources - External Competitiveness A-Level Coursework

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Human Resources - External Competitiveness and Internal Equity in an Effective Compensation Program

A market-based compensation program uses "market reality" and multiple surveys to assess the values assigned to skill sets rather than traditional job descriptions. Organizations can achieve balanced compensation systems through concerted external and internal equity measures. Starbucks is an example of a successfully balanced compensation system while McDonald's is a clear failure in that area.

Discuss what is meant by a market-based compensation program.

A market-based compensation program focuses on "market reality" rather than mere internal job evaluations. Using surveys of wages and salaries to gauge external equity, the market-based compensation program uses multiple survey sources interested in external market value placed on skill sets rather than on internal job descriptions (Byars & Rue, n.d., p. 61). Reliance on market surveys can be problematic, as a job that the organization is attempting to evaluate may not exactly match the skill sets being evaluated through market data: a job may include one, two or more skill sets that do not exactly match market data. Here, the employer must repeatedly evaluate and sift data while examining the content of a job and giving it an approximate value based on information gleaned from existing market data (Anonymous, 2002). At least one primary motive of market-based compensation is strong employee commitment to the company by encouraging employees' justified perception that their compensation is fair, logical and consistent with market valuation of their skills sets (Byars & Rue, n.d., p. 61).

b. Explain how an organization can balance external competitiveness with internal equity to achieve a successful market-based compensation program. Be specific.

Organizations can balance external competitiveness with internal equity for a successful market-based compensation program by setting the organization's pay ranges through combining two different methods ensuring external and internal equity. External equity is achieved by pricing different jobs through surveys gauging market valuation of the skill sets incorporated in those jobs. Again, organizations are often forced to approximate a job because market data does not perfectly match the job being evaluated: the job may be "bigger" or "smaller" than the skill sets or their combinations priced in the market (Anonymous, 2002). Consequently, the organization is forced to make an educated guess about a job's value based on the admittedly mismatched market data available.

The organization also seeks to achieve internal equity by ascertaining the comparative worth of jobs to the specific organization (Byars & Rue, n.d., p. 7). Comparative worth of jobs for the organization is often ascertained through four basic job characteristics: "skill, effort, responsibility, and working conditions" (Anonymous, 2002). Using these 4 characteristics, organizations can theoretically place all the organizations' jobs side-by-side, assigning point values to the amounts of each characteristic needed in each job. After assigning point totals to each job according to those characteristics, jobs are placed in a hierarchy according to their point totals. Then, pay ranges are assigned to each place in the hierarchy (Anonymous, 2002).

A very forward-thinking approach to internal equity that moves beyond the-point assignment system is the alignment of employees as "human capital" to the strategies of the organization. This is ideally accomplished through a seven-fold approach to employees/strategy focusing on:

pay for performance; linkage to other organizational change levers; measurable competencies; incentives matched to corporate culture; clear and simple group incentives; widespread communication; and recognition for the work itself (Hale & Bailey, 1998).

"Pay for performance" is intent on tying adequate compensation to the performance of job duties that are linked to critical goals of the organization; the better the performance, the higher the compensation (Hale & Bailey, 1998). "Linkage to other organizational change levers" involves far more than salary; rather, it obviously links, fosters and rewards by clearly identifying the organization's objectives, recognizing employee performance, fostering the development of employee careers and furnishing stimulating opportunities for employees (Hale & Bailey, 1998). All these aspects help strengthen an organization's human assets and employee loyalty to the organization. "Measurable competencies" means that an organization identifies and rewards particular skills, abilities and behaviors in employees that further the organization's goals (Hale & Bailey, 1998). "Incentives matched to corporate culture" essentially means that an organization puts its money where its mouth is, literally rewarding employees monetarily and otherwise according to what the organization claims it values (Hale & Bailey, 1998). "Clear and simple group incentives" are rewards that are understandable to employees, easily measurable and (usually) frequently awarded in order to stimulate employee productivity and loyalty (Hale & Bailey, 1998). "Widespread communication" means clearly, consistently making the company's goals, culture and rewards systems understood by employees, as well as seeking employee feedback that might enhance the company's goals, culture and rewards systems (Hale & Bailey, 1998). Finally, "recognition for the work itself" means obviously appreciating good employee performance, as that recognition tends to be highly valued by employees (Hale & Bailey, 1998). By using both external and internal equity systems, an organization is able to take advantage of each system's benefits and achieve a reasonable balance.

c. Illustrate with actual examples of employers achieving this balance. Also, provide examples of organizations failing to achieve one or both and illustrate what might result.

There are some clear examples of both successful and unsuccessful market-based compensation systems. Starbucks is a clear example of a relatively successful system, following a performance management system focusing on two functions: management decisions about

"pay increases, promotions, transfers, assignments, reductions in force or other administrative HR actions" (Pulakos, 2004, p. 3); and the development of its employees by "training, job experiences, mentoring and other developmental activities that employees will engage in to develop their capabilities" (Pulakos, 2004, p. 3). Starbucks' managerial decision-making provides salaries (Hammers, 2011), bonuses, some free products and in-store discounts, benefits such as health insurance, 401k plans and stock options commensurate with or superior to market values (Starbucks Corporation, 2013). Starbucks also focuses on employee development: deeming its employees "partners" in something bigger than themselves while providing exceptional products and services to customers; sabbaticals; recognition programs; financial assistance for education in the forms of textbooks, tuition and technology (Starbucks Corporation, 2013). Employees are also encouraged to give in-depth feedback through "Partner Voice Surveys" (Evans & Hansen, 2010, p. 7) and employee/partner appraisals for career advancement, salaries and bonuses dependent on employee personality traits, behavior and job performance (Evans & Hansen, 2010, p. 7). Starbucks regularly uses 360 Feedback Performance Appraisal using direct reports, employees ("partners"), coworkers, managers and customers (Starbucks Corporation, 2013; Lepsinger & Lucia, 1997). Finally, Starbucks has an established Human Rights Policy monitoring conditions for employees and customers from the most minute instances to global instances and employees are encouraged to confront and report any poor working conditions or human rights violations (Starbucks Corporation, 2013). In sum, while falling somewhat short of the ideal, Starbucks obviously strives to achieve a balance of internal and external equity in its compensation system.

Several organizations are strong contenders for "greatest failure" but McDonald's was catapulted into first place by its unintentionally hilarious suggested monthly budget for its employees. According to Bloomberg.com, a McDonald's employee working in Illinois is paid $8.25 per hour (minimum wage) and, though he has worked at McDonald's for more than 20 years, he still is not given a 40-hour work week by the company (Patton, 2012). In addition, the pay gaps between workers and management are outrageous and have doubled in the past 10 years (Patton, 2012). For example, this worker would have to work 1 million hours in order to earn McDonalds' CEO's yearly salary (Patton, 2012), Furthermore, when workers have attempted to start a union for better work conditions and pay, they have been fired (Patton, 2012). Finally, in a thinly-veiled effort to compel its underpaid workers to purchase pre-paid Visa cards, McDonald's partnered with Visa to provide a web site to encourage "practical money skills" for McDonald's workers. This web site provides a sample budget with a first job, a second job, no payment of heating bills and otherwise unrealistic expenses noted here:

(Visa and McDonald's Corporations, 2014).

As the budget is subjected to public ridicule for its condescending and unrealistic statements, it keeps changing: McDonald's apparently does not care to give its employees usable information; rather, McDonald's is interested in having its employees purchase pre-paid Visa cards from its partner. Leaving aside reported McDonald's advice that workers return their Christmas gifts, obtain food stamps and sell personal possession to make ends meet, McDonald's has financially flourished during the Recession on the backs of its underemployed, underpaid employees (Patton, 2012). Consequently, while McDonald's earns a great deal of money for itself and its shareholders, the company is an abject failure in market-based compensation systems based in external and internal equity.

3. Conclusion

A market-based compensation program focuses on "market reality" using multiple survey sources about skill sets rather than on internal job descriptions. Organizations can balance external competitiveness with internal equity for a successful market-based compensation program by setting the organization's pay ranges through combining two different methods ensuring external… [END OF PREVIEW]

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