Factors influencing the various Compensation Packages

The main purpose of this project is to describe about compensation packages and factors influencing in this packages. And also discuss the impact of staff turnover and the employee absenteeism ratio which effecting the organisational productivity.

Bangladesh is a developing country. According to UNDP’s Human Development Report 2007/2008 Bangladesh’s rank is 140th out of 177 countries. In Bangladesh, 40% of total population lives below the poverty line. In other report of Bangladesh Garments Manufacturer and Exporters Association (BGMEA), 2007 it shows that garments sector provides maximum export (76%) of total export in Bangladesh and 1.7% of total population of Bangladesh is working in Garments industries. Ready made garments exports mainly are doing in the European market & US market. The ratios of exports are 49% to European Market, 33% to the US market & rest (18%) to other countries. In a report shows that due to a strong demand for skilled labour combined with insufficient wage and discontinuity of payment, dissatisfaction of job, bad attitude in job etc. there is high level of migration of workers between factory to factory, and the average turnover is around 20% and absenteeism ratio is also increasing.

Methodology: – Secondary data is the main source of data of this project. I collected information from internet, journal about Bangladesh labour issue, some local magazine and newspaper, and books of human resource management. This project is based on exploratory research. I share my personal experience in based on my previous work.

Literature Review: According to Bratton (2007) “Reward refers to all of the monetary, non-monetary and psychological payments that an organization provides for its employees in exchange for the work they perform.” So, reward can be wages, pay, money, recognition, compensation, psychological contact, promotion, etc. according to Human capital centre tool box series rewards can be anything which is receiving something in exchange for services or actions.

However, the worker is getting return from their employer for the work done, can be describe as rewards and rewards is used for various terms or purpose. Earlier reward used only as the term ‘payment’ (Torrington & et al, 2005) but currently it find as being too narrow in extent people do not accept only financial form as a reward on the return of their work, they like to take non-monetary and recognitions for their work (Bratton & Gold, 2007). And I used ‘compensation’ the term as motivational factor. The term ‘compensation’ is broadly used in the American literature alternative to reward (Torrington & et al, 2008; Armstrong, 1998 cited on Bratton & Gold, 2007).

Moreover, the design of reward systems depends on two factors i.e. economic and social factors. Nowadays managers are forced to improve labour productivity and the quality of the products and services based on the local consumer tastes and different local markets. A better social environment between management and other employees of the organization and employee believe and organizational loyalty, all work to the concept of ‘high-commitment-high-performance’ work coordination’s reward which positively helps to improve the performance of the firm (Paauew, 2004 cited on Bratton & Gold 2007). Kessler (2001) identified reward role as performance-related pay which plays vital system within the workforce. Paauwe (2004) state that reward management can be interrupt by the social and psychological factors and reward is a significantly essential in lead to system of impartial distribution. And helps to decision making by creating a employee’s conception of equality and reliance (Boselie et al, 2001). Due to problematic nature of pay system Brown (1989) describes that the reasonable management of compensation is necessary for the involvement of the adequate management, it is not prerequisite to be satisfy. (Bratton & Gold, 2007)

Furthermore, Bird and Beechler (1995) cited in Briscoe & Schuller (2008) established that employee performance (e.g. morale and turnover rate) in firms that successfully adopted the strategic fit concept was significantly better than in firms that did not do so. Although managerial performance (e.g. profit margin and sales) was also better, the difference was not significant. The concept of “fit” refers mainly to the close linkage of HRM strategies and business strategies in ways that will help retain and motivate employees. Yes it is very good point retain and motivation of employee, as because every organisation aim is finding way to keep there employees. Motivation is one of them; it can be two type’s money and appraising employee. In most of the case money is main motivational factor for the employee especially in Bangladesh. The reason why money is the main factor then we can see from table 1 about the monthly income of average employee is low and there life status is not much standard based on there income and expenses. So they always looking for better opportunity when ever they got good offer from other company they migrate or switch the company.

Main body:

Compensation System Analysis: Saiyadain (2006) describes that ‘I am only marking my time in this organization till I get a better paying job…[4]’ Financial compensation represents a part of total reward system in an organization. Even though for the overall satisfaction of the employees money still plays a significant, more constant and more difficult role. The major responsibilities of HR managers are to give compensation or pay employees for their work and increasing structures of compensation packages. As because a good pay packages helps the organization for talent hiring and retaining employees for long time that necessary for the high productivity (Saiyadain 2006).

Determining Compensation: According to Saiyadain (2006) to set the compensation structure is the most complicated and time consuming activity of HR manager. This decision is depends on a numbers of variables which are discussed as bellows:

Trade Union: Trade union is one of the important variable in determining the levels of compensation because they always pushing organization and force to pay better compensation for the employees.

Hiring and retain talent: Better pay structure works significant role in the organization to attract and retain talent employee. A good compensation system helps to influence a great number of applicants where organization may get the opportunity to select the best candidate among them.

Region-cum-industry basis compensation: In Bangladesh context organization has to determine compensation structure based on the region-cum-industry. Organization cannot afford to pay less than region-cum-industry due to chance to lose the employees for their better opportunity. And on the other hand organization they are not allowed to give high compensation because the pressure of the other organization.

Job security: Some times employees are looking for good reputed organization where jobs are more secured. And they are not giving preferences which are providing high compensation but hire-fire is the regularly happened in the organization.

Ability to pay: Ability to pay is also a factor in determining the compensation. Sometimes organization is not affordable to pay high compensation due to the size and profitability of the organization.

The Civil Rights Act 1964 or Equal Pay Act: The civil rights act which is determine the standard minimum wages of the employee based on living expenses and life status. This law also covers not to discriminate man or woman in the workplace who are doing same values and equivalent job.

Methods for Determining Compensation: Saiyadain (2006) describes there are two broadly uses methods for determining compensation such as salary survey and job evaluation. These are discusses as follows:

1. Salary survey: HR manager can determine compensation by conducting a survey in similar industries for similar positions. It is quick and less expensive way to determine compensation. This survey could be done at two levels such as organizational and professional levels. In the organizational level the HRM department responsibility to undertake a study to find out equivalent compensation package in the similar industries. They can collect data from different source for example checking with HR managers of similar industries, collect information about compensation packages from newspaper advertisement and electronic media including websites for related jobs in similar industries. In addition HR department also can arrange a formal salary survey to determine compensation. However organization can determine compensation with the help of professional consultants who are expert in this sector. They use variety of technique to suggest compensation package (Saiyadain 2006).

2. Job Evaluation: Bloom (1998) cited on Torrington et al. (2002) describes ‘job evaluation is a systematic process designed to aid an establishment in establishing differentials across jobs within a single employer… The culmination of this appraisal process is a hierarchy of jobs denoting their relative complexity and value to the organization’. This method is the way to build up a connection between the employee contribution and compensation for this contribution. It is a good method to evaluate employee skills and also helps to show the best performance in a job. Job evaluation is the best way to observe the outcomes of skills, capabilities, measures the responsibilities and work environment which is closely related to the best performance. Basically it does not set the value of job but it gives foundation for it. And this is a performance appraisal technique which helps to improve the job descriptions and requirement (Saiyadain 2006). According to Saiyadain (2006) there are four methods of job evaluation. These are ranking method, job classification, point system and Factor comparison system. These methods are discusses as below:

Ranking method: This method is the simplest method of job evaluation. In this method the whole job is being categories based on the difficulty level. For example in garments industries employer segments operator in 4 different levels such as Tr. Operator, Jr. operator, operator and Sr. operator. They categories based on the skills and experience but there is not specific way to indicate the performance levels. It is only showing the difficulty levels of the jobs.

Job Classification: This method is identifies the classes, categories and grades of job. This is a grading systems of job for example in garments industries there are some operation which are important for making garments but normally anybody can not do that process with maintaining target. In this method it classified or grades the operation such as ‘A’ grades, ‘B’ grades, and ‘C’ grades operation and performance ranges such as above 80% is very good, 60% – 79% good, 40% – 59% average and below 40% is poor. This is the good method of classify operator’s grades.

Point System: It is a most practical method of job evaluation as because operator in garments industries may have variety of skills. Each segmented operations are important in the garment industry with 100% target and this is important for the company productivity. One operator can do several good categories operation with 100% target or some average operations with 100% target but on the other hand one can do several good categories operation but only can give the 60% – 80% target in that case point system is the best way to evaluate operator’s performance and influence to improve their performance.

Factor Comparison System: This is a complicated and expensive method due to it required consultation of professionals and specialists for judgment and assessment of jobs. In this method it compared the money value of one factor in one job with the money value of the same factor in other job. This is a more suitable method because it is structured based on the well-known compensation systems (Saiyadain 2006).

Labour turnover analysis: Some consultants, academics and management gurus states that ‘There are no longer any jobs for life…[3]’ Torrington et al. (2002) argued about the impact of staff turnover rates is depends on the organization to organisaiton. In some organization is successful in business with high turnover rates which are impractical to function in other sector due to the different in operation and difficult to replace skill workers. For example in some chains of fast food restaurants are generally managing business and become successful with turnover rates in excess of 300 percent that means standard occupancy for each employee is only four months (Ritzer 1996; Cappelli 2000). On the other hand, in a professional service organization where personal relation is more important between employees and clients to organizational success, it is badly hampered to the organization if the turnover rates are excess of 10 percent.

Bevan (1991) cited on Bratton & Gold (2007) indicates several causes for high staff turnover. He identified that pay in not only the reason for staff turnover and there are some other factors works on that issue. They are follows:

Employee expectation: The employee’s expectations are not matching with the job such as bonus, benefits, holidays and etc (Torrington et al 2002). That factors causes dissatisfaction of job. It is more likely happened with the new employee’s of the organization.

A lack of attention: Employee’s are found that managers are not giving attention to them and they are not providing supporting training to develop themselves. For that reason they are not well perform in the job.

Work environment: Work environment is not friendly with the employee such as lack of freedom in work, limited responsibility, no challenging environment and there are no innovative works within the organization.

Appraisal system: Some organization doesn’t have the proffer evaluation systems. So employees are disappointing with the unfair promotion and worried about the development opportunities system.

Management system: Due to unskilled management and their unfair treatment with the employees and lack of knowledge of how to motivate employee. Gregg and Wadsworth (1999) cited in Torrington et al. (2002) demonstrate in their study of 870,000 workers starting new jobs in 1992 out of that 17 per cent had left within three months and 42 per cent within 12 months.

The above discussion of all issues are the main reasons rather than pay issues which depends on the employees, management, the work environment and organizational systems what welcomes staff turnover rates in the organization.

Saiyadain (2006) point out that ‘I changed my previous job to this because it pays well…[4]’. So pay is the crucial issues for quitting job. According to Torrington et al. (2002) there is some argument in the retentions literature about raising pay levels reduces staff turnover. In one side some researcher found that usually, employers who offer the most attractive reward packages to the employees have lower turnover rates than those who pay poorly (Gomez-Mejia and Balkin 1992), for that reason many organization uses pay rates as their major weapon in retaining employee (Cappelli 2000; IRS 2000a; IRS 2000b cited on Torrington et al. 2002). On other research based on questionnaire suggests that pay is a good deal and less important than other factors in a decision to quit one’s job (Bevan et al. 1997; Hiltrop 1999 cited on Torrington et al. 2002). In a study Sturges and Guest (1999) cited on Torrington et al. (2002) point out that in the field of graduate employment pay rising is not vital factors for quitting job that only resulting greater job satisfactions but they wants more challenges and innovation within the job roles.

In addition, a result of research cited on Torrington et al. (2002) appears to verify the views of Herzberg (1996) where he indicates pay as ‘hygiene factor’ rather than a motivator. Therefore it shows as a cause of dissatisfaction at work, other than not of positive job satisfaction. People who are not get paid well by the employer they automatically motivated to leave the job but if they satisfy about their pay, the additional benefits do not effect to change their mind to quit job.

Absenteeism analysis: In everyday life employees need a little extra effort to come to work in an emergency. A little little problem makes a tremendous impact on work attendance such as problem with bicycle, a drizzle, a small tiff with spouse and several such types of incident. But it depends on satisfaction or dissatisfaction of work and for the dissatisfied worker these minor problems becomes the major issues for missing from work on the other hand for the satisfied worker is totally irrelevant. However, it causes extra cost to cover this situation. An organization has to recruit extra manpower or retaining large number of manpower as they required due to the increasing rates of the fact of absenteeism. Bhatia and Valecha (1978) cited on Saiyadain (2006) defines that organization has to retain extra 10 per cent workforce of the total workforce.

However, there are several definition of absenteeism are available and most of them are describes ‘absenteeism as absence from work when one is expected to work’. Absence from work could be happened several reasons such as inability or unwillingness to come to the works. Any absence with prior notice or approval did not count as absenteeism only unexpected sickness or injury is counted as absent.

Moreover, According to Sinha and Nair (1965) cited on Saiyadain (2006) study on absenteeism shows that the lower job satisfaction is causes the higher rates of absenteeism. They classified their research based on respondents in two groups as low absentee and high absentee group. Their result also points out that low absence groups are more satisfy with their job than the high absence group.

Case analysis: Pacific Jeans Ltd. is one of the leading garment industries in Bangladesh. They are working with world renowned buyers like GAP, H&M, NEXT, Lee, Wrangler etc. This company introduced modern technology with high-tech machine which is ensured high quality product and increases there production upto 20% annually. Up to year 2004 they use to set compensation packages without any job evaluation process. They only were taking the recommendation from manager to determine compensation of the employee. But that was not fair system and it was badly affected to the employee. Due to that unfair system operators turnover and absenteeism ratio was surprisingly increases where company loosing there productivity and efficiency. For finding the solution of that company introduces a new team whose duty is to find out the problem and give the best solution for that.

However, this team introduces operator ranking method of job evaluation like Tr. operator, Jr. operator, operator and Sr. operator where any have chance to go any categories with showing high performance. They also introduce process or operation classification method like ‘A’ ‘B’ ‘C’ grades based on the difficulty of the operation. Therefore every operator was motivated himself to do good grades operation which helps him/her to promote themselves.

Moreover, the team finds out the solution about the new operator recruitment process which helps to select the best and necessary operator the team. They taking cycle time (cycle time is observed time of a process how long it takes to complete the operation) of operation (at least 10 cycle) with the help of stop watch which the operator knows best and calculate the capacity of the new operator with giving 10% – 20% allowance (for example bobbin change, needle broken, thread cut etc.) based on the operation categories (see appendix I). Based on his/her capacity and doing which grades operation it can easily identify the ranking of operator and determine the compensation package. It is fair judgments system for the operator. So far that is best and fair way to evaluate the operator. As a result of fair evaluation system and compensation packages operators are motivated to do best performance and reduces the absenteeism and turnover rates that lead to high job satisfaction to the employees.

Conclusion: Compensation is a crucial issue for the employee. If an employee is not well compensated for his contribution then s/he is not happy in his job. So it guides employees to increases absenteeism and turnover. There is a proverb that money is sweater than honey. Every body in any organization is work for survival for the fittest especially in the developing country or poor country. From the analysis of compensation system it could see that how fair judgment effecting employee mind and motivate the employee turn into satisfaction or dissatisfaction of job. Human Resource Management is playing a vital role in an organization to change all the factors by taking some necessary steps about employee motivation. Finally it can say that good compensation packages for employee works as motivational factors in an organization while it reduces absenteeism and turnover rates in an organization on the other hand it also helps to increases company productivity.