Case Study Of The Payroll Cost Management Essay
In the organization, payroll cost is the capital that spends for the employees for their services. The costs of payroll are including the basic payroll distribution for employees, the preparation of the payroll and employee’s incentives. Others costs that involved are the benefit for the employee such as medical services and insurance plan, sales commission and bonus pay. (Wisegeek, 2011)
1.2 Factors Affecting Payroll Cost Cut
The first factor that affect payroll is Intrinsic Value of the career. Every career has own value with the responsibility and the skills that required in order for the employees to perform. Besides that, the impact of the career will make differentiation on the employee payroll. In the organization, when the impact of the career is high and important for the organization in running operation, the payroll rate will become high.
The second factor is the External Relativities whereby the payroll cost in the organization will affected by the market rates that set. Besides that, the organization needs to follow the policy which is the payroll level, the number of employee required and the employee quality that organization needs.
The third factor is the Employee Value. The values that need by the organization are the performance and working contribution, management skills, working experience and the potential. The employee that able to bring the values will be the good points in setting employee payroll.
The fourth factor is the Financial Situation in the Organization. The organization must afford to pay for the employee payroll cost and the budget cannot be over. Besides that, the affordability should be the guideline for paying pay.
The last factor that affects organization payroll cost is the Trade Union Enforcement on the employee’s payroll. The trade unions may determine the pay rates in the organization due to the market inflation and market rates by the relative bargaining power. (Armstrong, 2007)
1.3 Conceptual Theory
Classical Economic Theory
In this theory, the employee payroll prices are determined by the supply and demand of the product in the organization. This means that when the supply is more than the demand, the payroll prices will decrease and when the demand is more than the supply, the payroll prices will be increased.
Human Capital Theory
This theory is focusing on the employees that have skills that can help or brings to the organization. The skills are including the education, working experience and training. The employee who has more skills can bring productive capital to the organization.
The Labour Theory of Value
In this theory, the amount of employees can determine the value of goods and services. The price of the payroll is not set by the market place, but is the content of labour. Moreover, the theory can helps in creating job evaluation procedures as this method is focus on the content of employees rather than market rate.
1.4 Reward Policy
Reward policy is a set of guidelines for the organization in making decision. The policy can give the organization about the idea of managing the reward and the strategic to run when face any reward issues. The policy can be used to deal with when the organization wants to determine the levels of rewards, achieving the equal pay between employees, decision making on the pay rates and use for the employee job evaluation. (Armstrong, 2007)
1.5 Types of pay system
The first pay system is Performance Related Pay system. This pay system is to increase the employee basic pay based on their performance in the organization. It is suitable for the performance oriented based organization which is measure the employee’s performance objectively to use.
The second pay system is Competence Related Pay System whereby the employees pay is increased due to the level of competences in the organization. This system is suitable to implement when the competence is the importance element in the organization and existing of complete competency framework. The advantage is the competence on the employees can be encouraged.
The next pay system is Contribution-Related Pay whereby the organization increase the employees pay based on their competence level and performance on handle works. The system is not only focus on what the employee does but how they perform.
The fourth pay system is Skill-Based Pay whereby the organization pay the employees based on the skills provided. The employees are encouraged and been rewarded on the skills provided.
2.0 Company Dividend
The founder of Wal-Mart is Sam Walton and the main purpose is to provide the affordable product and services to the customer. Wal-Mart now has expanded to become the world largest retailer. The divisions of Wal-Mart are including supercenters, neighborhood market, discount center and Sam Club. (Walmart, 2007)
2.1.2 Purpose of Reducing Payroll Cost
The main goal of Wal-Mart is to save people money in order to help them to save better. With this goal, Wal-Mart is offering the best quality of product at low prices to the customers. (Walmartstores, 2011)
In order to provide low cost, Wal-Mart has to make sure that the organization operation cost is low as the cost has become the important element for the organization to success and compete with same industry competitors. The costs of Wal-Mart are including the rent, property tax, employee’s pay roll and administration fees. The employee’s pay roll cost is one of the highest costs as Wal-Mart has more than 1 million employees globally. Therefore, Wal-Mart must always focus in minimizing these costs as the number of employee has increased due to the expansion of the business. By reduced the cost, the organization is only able to provide customers with low price. (Walmart, 2007)
2.1.3 Strategy Taken For Payroll Cost Reduction
In Wal-Mart, the organization has used many methods to manage the payroll costs. The first method is budget the payroll cost whereby the budget plan can help the management to keep a balance on the employees with the affordable fund. The management of each store must able to maintain the employee payroll cost below the budget. However, maintaining the payroll cost budget sometimes is difficult for the management in the long run operation. The management has to find out the suitable method to solve the problems. The solution that can used to overcome the over budget problem is transferring the employees to other stores. One of the example in Wal-Mart is the Newport Store Manager who is exceeded the budget by 0.1% due to his lack of ability to manage the budget. To solve the problem, the store manager has to transfer the employees to another store in Poplar Bluff. The other that Wal-Mart uses to budget payroll cost is the zero-dollar-overtime budget whereby the employees are not encouraged to do over-time. This is because the organization believes that the employees have strength limit in working and the normal working hour is enough for them to work.
The second method is information technology investment. The organization has invested the information systems in the operational process. (Walmart, 2007)One of the new systems that Walt-Mart just implemented is the paperless payroll system. The traditional payment method will be replaced by the use of payroll card. The payroll cards allow the Walt-Mart employees to withdraw the payroll payment and use for online purchasing. (payreceive, 2011)
The motivation theory that Wal-Mart can implement is Hierarchy of Needs Theory. Wal-Mart is fulfilling the esteem needs of the employees whereby the organization is giving recognition to all of the employees that they are family members rather than an employee in the organization view. Besides that, the organization is fulfilling the employee self-actualization by running internal promotion. (Armstrong, 2007)
Wal-Mart can implement Human Capital Theory in order to recruit more employees that have skills. Wal-Mart has developing many different learning programs for the employees to learn in order to prepare them to be a leader. By attending the programs, the employees are able to handle the management operations and able to get the internal promotion with good performance. Indirectly, this can bring more advantage to the organization.
The pay system that can use by the organization is Performance Related Pay system which is the employees payroll will be paid based on the performance. The advantages are the organization can motivate the employee by money and delivers the message that employee performance is important element in the organization. (Armstrong, 2007)
1.4 Result of Payroll Cost Reduction
By introduction the paperless payroll system, the organization can save 250,000 pounds of paper for the paychecks and save over a million ringgit on the administration fees.(Payreceive, 2011)
FedEx is the logistic organization which provides transportation, e-commerce and business service to the customers and organizations globally. FedEx has more than 270 thousand employees and contractors in order to provide the services in safety and professional standard to the customers. (Fedex, 2011)
Building the rewarding relationships with employees and partners is one of the missions of FedEx organization. (Fedex, 2011)
2.2.2 Purpose of Reducing Payroll Cost
FedEx organization need to reduce payroll cost due to the recession that happened had affected the organization operation. The fall in the economic growth lead to the recession and the low growth in the economic will lead to unemployment increased. (economicshelp, 2011)
FedEx is the organization that based on the economic activity which servicing the customers and businesses by providing transportation services. FedEx is able to transport over 3 million packages per day and the transportation fee is the main income for the organization. The fall in economic lead to the business transaction quantity declined and affects the organization operation. Due to the economic recession, FedEx has faced loses which is 6%decrease in the revenue and 91%decrease in the profit. The reason for the profit decreased percentage is high because of the organization need to run the normal operations which the plane must remain to fly due to the organization promises to the customers. The fixed costs such as employee’s payroll in organization are high and the business volume is low, and then leads to profit decreased. (jodyfinch, 2011)
2.2.3 Strategy Taken For Payroll Cost Reduction
In 2009, the recession that happen had bring serious impact on the organization. In order to solve the problems, the organization had come out with different solutions in different stages. Besides that, the shareholders contribution was also stopped for a moment and the bonuses programs also affected. In the middle stage, FedEx had started to reduce the part time employees working hour and cut down the usage of aircrafts. (jodyfinch, 2011)
In the next stage, the organization had implemented the hiring freeze that no vacancy hiring open for the moment and also decided to cut down the employee’s amount by 900 workers. (Anderson, A. 2009) In the final stage, the FedEx had decided to cut down 1,000 jobs in FedEx organization globally and 500 jobs in the Memphis. The organization will give the laid off employees advance notice about the job and counseling on the career. (Bizjournals, 2009)
The organization can use the Herzberg’s Two-factor Model to motivate the employees as the factors in the model can help to giving-rise to the job satisfaction and can create employees satisfaction in doing works.
The organization can use the Classical Economic Theory to pay the employees where by the employee’s payroll prices are followed by the supply and demand. The employees payroll will be high when the demand more than supply.
The pay system that can use is Contribution-Related Pay whereby the employees pay can be paid by referring to their competence land performance level.
2.2.4 Result of Payroll Cost Reduction
The amount of payroll cost that FedEx can reduce is 1billion dollar with the employees layoff, 5% pay cut on the employees payroll, 7-10% payroll cut on the management executives and 20% on the directors. (Bizjournals, 2009)
Bridge stone is the largest tire and rubber manufacture organization in worldwide and is world No. 1 brand. The organization is found by Shojiro Ishibashi and headquarter located in Tokyo, Japan. The organization has 56 subsidiaries in 28countries worldwide. (Bridgestone, 2011)
2.3.2 Purpose of Reducing Payroll Cost
In 2008, the global recession that happened had impact the currency exchange worldwide. The financial crisis had lead to the poor results in tires demand and Bridgestone is suffering with the currency between the Yen and the Dollar. The bad currency exchange rate had lead to the organization lost 45billion yen in the operating profit and the increasing in the material and oil price also had impact the organization operational cost. Bridgestone has predicted that another 71 percent which is 3billion yen of profit will be declined in the following year.
2.3.3 Strategy Taken For Payroll Cost Reduction
In order to solve the problem, Bridgestone division organization which is located in the America had layoff around 90 employees and shut down some of the manufacture operation as well. Besides that, the bad economic factor also effects other division to cut 543 jobs at other places as well.Besides cutting down the jobs, one of the payroll cost cut that implemented by the organization is changing the employees travel expense protocol. The employees are given a American Express cards when they went to other division to work. In order to save money, the organization canceled the usage of express cards and the employees must use own money to pay for the expenses during the working trip. The employees can claim back the expenses but it needs 4 weeks for the claiming procedure. By this method, the employees may spend less due to the expenses have to pay on own first. (jodyfinch, 2011)
The motivation theory that Bridgestone can use to motivate the employees is the Equity Theory whereby the organization can treat the employees equally and this will help in motivating them. The organization can create a equitable reward system in motivating the employees.
The Labour Theory of Value can use in creating and evaluating the pay level whereby the value of goods and services can be determined by the employees. The content that employees have will be the important element.
The pay system that Bridgestone can use is Skill-Based Pay whereby the pays is based on the skills that employees provided.
2.3.4 Result of Payroll Cost Reduction
The related expenses were decreased by 3.1 billion yen to 19.9 billion yen and the foreign currency exchange loss decreased by 19.8 billion to 3.3 billion yen. (stepstonesolution, 2010)
3.0 Current trend of the organization
The current method that most of the organization uses to pay the employees and to cut down costs is through the Variable Pay Program which is reward the employees by based on the performance. The increasing in the compensation budget in the reward program can helps the employers to motivate the employees and to retain them. In order for the employees to get increase in the pay or compensation, the employees must meet their performance goals that set by the organization.
In Europe, there are more than 90% organizations are offering the variable pay plan whereby the variable pay budgets are expected to increase up to 12.5 % in 2010. Besides that, the organizations in the Latin America has also implementing the high value in the performance based program which is the budget is a 17.5 percent of the payroll. Moreover, there are more than 80 percent of organizations in worldwide are offering the performance-related pay system to the employees which is 3%of payroll whereby the percentage is slightly up from 12.7percent in previous year. For the organizations that in Asia Pacific region, most of them are increasing the employee’s salary due to the high inflation rates. For example, employee salary in China is increasing from 4.7 % to 6.8% in 2010, Japan employee’s salary is increasing up to 2.1%percent and the employee’s salary in Indonesia increase 8.8 % based on 2009. This show that the organization starting to use variable pay program which is performance-based pay in rewarding the employees based on their strong performance and to lower the overhead costs. (Bridgestone, 2009)
Performance-related pay is a pay system that the employer reward the employees based on the working performance in the organization. The organization use this system is to do employee recruitment, retaining the employees and to motivate them. The employees believe that their performance and working ability will be rewarded properly by achieving the organization reward goals. Besides that, this can also help the employer in creating more commitment and high quality employees. Moreover, this pay system can help the organization to earn more value by paying the money, advertising the core values of the organization and also can help in weakening the union power. (Wragg et al,2004)
One of the theories that can be applied in the performance-based pay system is the Equity Theory. The theory states that there should be a balance of the inputs or outcomes relationship between the employees. This theory is also focus on giving the equality to the employees based on the inputs that employees give. The inputs may include the performance, the experience and the efforts. When the employees feel that they are rewarded equally or greater, the employees will work hard and this also can help the organization to retain the good quality employees and achieving more efficient result. By implementing this theory, a fair and equally reward system can be provided to the employees. (Koontz and Weihrich, 2007)
In order to provide a equal and fair performance-based pay system to the employees, the organization can use the Job Evaluation to evaluate the value of the employees. The job evaluation can help the organization to produce the related information for designing the equitable pay or reward structure, establishing the value of the job and can helps the organization to meet the ethical and legal equal pay. (Armstrong et al,2003)
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