Assignment 2 Final CBM

SCM-009432 (MBA- General Management) ��

Executive Summary

This is a report prepared by Senior Human Resource Manager of ABC Oil & Gas Engineering Sdn. Bhd on reviewing, analyzing and developing a strategic compensation policy that is aligned to support the company’s dynamic business strategy to meet the organization objective and business goals and provide a competitive advantage for ABC in oil and gas industry. The first part of the report will provide background of ABC Company and its corporate and business objectives. Briefly, ABC Company is involved in oil and gas industry and listed in main board with workforce around 400 employees of different pay grades. In this section, the report analyzed nature and purpose of compensation benefits and practices in contemporary organization. In general, several HR and compensation objectives are outlined. Next, the report proposed several strategic options available in developing and designing compensation system and policy that meet competitive pressures and employee expectation. Relevant theories are used accordingly to propose and analyzed strategic compensation options which include internal alignment, financial compensation, base pay structure, non financial compensation and legislation in macro economic point of view. In addition, the report will analyze the influences that might impact compensation choices and outcomes. The report also analyzes advantages and disadvantages of having a pay mix policy in a typical pay scenario. The report concluded with summary and recommendations on the proposed compensation benefits and policies.


Table of Contents

Executive Summary 1

Table of Contents 2

1.0 Introduction of Case Study 3

2.0 Answer Question 1 7 3.0 Answer Question 2 8

4.0 Answer Question 3 12 5.0 Answer Question 4 12

6.0 Conclusion and Recommendations 14

List of References 15

Appendix 1 16


2.0 Introduction of Case Study

This is a report prepared by Doris, Human Resource Manager of Consolidated Plastics Bhd a

family owned company that has just been listed in the 2nd Board of the KLSE, on reviewing,

analyzing and developing a strategic compensation and benefits proposal that is aligned to

support the company’s dynamic business strategy to meet the organization objective and

business goals and provide a competitive advantage for the organization.

Steven Lee is the Managing Director and controlling shareholder of Consolidated Plastics

Berhad who also holds the responsibility for the organization’s compensation and benefits

function. Steven Lee’s practice in managing the compensation structure is based on aligning

employees pay to market rate and did not implement a well structured compensation system.

Doris is shocked by the absence of a well structured system and finds little justification to

rationalize the existing salaries paid to staff. There are instances of senior employees being

paid less than newly recruited junior employees. Job responsibilities and functions appear to

bear little relationship to the pay accorded to these jobs. The merit pay increases of some top

performers are small compared to that given to other employees whose performance is

significantly lower.

Having done a wages and salary survey on market pay rates of equivalent jobs in the

manufacturing industry in Malaysia, Doris has made several recommendation for the

introduction of job descriptions and a well structured job evaluation system that is internally

consistent and reflects the principals of equity and transparency in the salary determination

process.

When her recommendations were presented by the auditors at the next board of directors’

meeting, Steven Lee angrily objects to these recommendations, accusing Doris of being a

bureaucrat more suited for the public sector organization. He states that valuable time will be

wasted on such non-productive time wasting activities. His comment is that “ Job evaluation

and internally consistent pay structures are burdensome to companies. Instead it is best align

pay to market rates”


Doris now has the daunting task of presenting her rationale for the recommendation in such a

way that both the board of directors and Steven Lee will be convinced of its relevance and

usefulness to the company.

3.0 Answer Question 1

In order to establish internally consistent pay structure, employees must believe that all jobs

are paid what they are "worth." In other words, employees must be confident that the

company pay rates reflect the overall importance of each person's job to the success of the

organization and this is done by having a transparent pay structure. For pay rates to be

internally consistent, an organization must first determine the overall importance of each job

and the purpose of having the job in the organization. This is determined by having job

description.

Job description is written statements that provide the basis for why jobs exist. They need

constant updating since they only reflect the characteristics of the jobs at a certain point in

time. (Armstrong & Murlis 2004) In addition, the process of determining the worth of one’s

job in comparison to other jobs in the organization is done systematically via job evaluation.

Job evaluation process allows the design and establishment of a fair and equitable salary

determination on the basis the relative worth of the job and the attributes of the jobholder

needed in terms of skills, knowledge, responsibilities and difficulty of the job. In other words,

job evaluation is a mechanism for determining the grade level of each position in the

organization, on the basis of clearly established criteria, and for ensuring that positions with

the same level of responsibilities and accountabilities are graded at the same level. Job

evaluation judgments must be accurate and fair, as the pay, bonuses and benefits each

employee receives is so heavily influenced by them. Job evaluation is also used to compare

internal pay levels against external market rates.


With job description documented and a systematic job evaluation process, it serves as a basis

for pay determination process. For example, the person who performs the job which are risky

and exposed to hazardous working environment should be compensated more due to high risk

compares to a job which is office-based. In addition, a job which requires special problem

solving skills is paid more due to scarcity of such skilled workforce in the market.

By having a job evaluation system together with a well documented job description across the

organization, the pay structure system can be fair, equitable, uniformed, internally consistent

and transparent to employees of the organization.

The main principal and objectives of having job descriptions is to identify and spell out the

responsibilities of a specific job including information about working conditions, tools,

equipment used, knowledge and skills needed, and relationships with other positions in the

organization. With job descriptions properly design and documented, it provides a framework

to clearly communicate the organization direction, mission, business strategy and goals to

employee and help to align the employee direction to organization.

Employee job descriptions are based on information obtained through job analysis. Job

analysis is a process of identifying the main duties and responsibilities within a job function

and the knowledge and skills required by the employee that facilitates high job performance

of the job and its contribution towards corporate objectives. (Perkins & White 2009). In

other words, job evaluation is a systematic process of determining and analyzing pay grade of

different jobs in order to decide the appropriate compensation to offer and increases

employee compliance.

Effective job evaluation process is depending on the detailed job description documentation

and upon a comprehensive job analysis performed either via interviews, observations or

getting feedback from client and suppliers. One of the recommended techniques in job

evaluation is job ranking. Job ranking is one of the simplest and effective way to administer

by comparing and ranking the job in order of their importance, worth and value to the

organization. The 'worth' of a job is usually based on judgements of skill, effort (physical and

mental), responsibility (supervisory and fiscal) and working conditions.


Another recommended technique of job evaluation for Consolidated Plastic Berhad is job

classification. Using this method, a predetermined number of job classes are established and

jobs are assigned to these classifications. This method places groups of jobs into job classes

or job grades which may include office, clerical, managerial, personnel and production

workers.

In addition, Point Factor Analysis (PFA) is widely used as an effective method for job

evaluation to provide equity and transparency in the pay structure and effective in meeting

compensation goals. By using this method, jobs are expressed and broken down into key

factors such as skills required, job complexity and responsibility or accountability with each

factor being given a weight and points in the order of importance. Job with similar points

totals are placed in similar pay grades. Point values are assigned to all factors in a systematic

way, eliminating bias at every stage.

Given the principals in designing and implementation of job evaluation above, the techniques

is however not fully objective and scientific especially for determining the relative worth of

managerial jobs. This is because executive skills cannot be measured in quantitative terms. In

addition, in order for job descriptions and job evaluation to be effective, there must be

alignment of the process and techniques to compensation, business and organization goals.

The alignment must supports work flow and communicated to employee of a fair, equal,

consistent and transparent pay structure system.



In responds to Steven Lee’s comments, Doris should acknowledge that the well structured

compensation system is commonly used in public sector organization. However, it is

currently adapted and implemented in many private organizations to achieve consistency and

cost effective pay structure and compensation system. A well designed and structured

compensation system that match external market rates will motivate employees on the

organization’s transparency in rewarding employees, thus collectively achieving organization

strategies, goals and mission.

Having aligned the compensation system with HR and organization strategy, company will

grow organically, business operations will runs smoothly without high turnover and human

capital can be invested for organization long term growth. Doris should justify that having

designed a job evaluation and description system, jobs are well specified, measured and

rewarded against the expectation and uniformed standards.

This is in contrast with Steven Lee’s practice which is based purely on alignment to market

rates without a proper system in place. Such practice does not conform to a standardized,

uniformed process to evaluate and determine the pay structure. In addition, Steven Lee’s

practice has no basis and rationale to justify the compensation system for employees. The

process implemented is not effective and efficient and therefore has resulted inconsistency in

compensation system for various job positions, skills required, knowledge, experience staff

and top performers.

SCM-009432 (MBA- General Management) �

In addition, Doris should further explain that Consolidate Plastic Berhad is a public listed

company in KLSE whereby all financial statements and operating expenditure must be

reported to public and shareholders. The report specifically prepared by the human resource

for submission to KLSE must be accountable, audited and reliable to avoid and discrepancy

and actions taken to the company due to abuse and fraud. Further to this, Steven as a

Managing Director representing the shareholders and public should change the current

practice and implement a HR and compensation system which is transparent, consistent and

uniformed to deliver high performance employees for the organization.

Therefore, Doris should state that a change is needed in the design and implementation of

compensation and HR system. Doris should also state that HR and compensation objective is

to align and support organization and business objectives which is:

• Recruitment and selection of best qualified candidate via tests and interview.

• Reward packages on salary, benefits, incentives and bonuses to attract, retain and

motivate qualified workers of different pay grades and position.

• Performance Management and Appraisal Program to encourage, evaluate and

maintain employee productivity, quality and capabilities to support company and

business objectives.

• Continuous training and development to upgrade skill sets of qualified staff to

maximize productivity, creativity and as part of intrinsic rewards to staff.

• Equal treatment and employment opportunities regardless of gender, age and race.

• To ensure cost effectiveness of the compensation budget.

• To influence workforce attitudes and work related behaviors that develops potential to

meet future challenges.

• Ensure compliance with statutory requirements and collective agreements, if any.

• To be administered effectively and efficiently.

• To encourage turnover of those not essential to long term goals.

Further to this, Doris should justify that a well designed compensation system will motivate

and influence the way in which employees perform their job functions, so that their efforts

are aligned with the organization mission, goals & philosophy and business needs, whereby

maximizing profits and promoting company’s organic growth. Apart from that, a well

SCM-009432 (MBA- General Management) �

designed compensation and benefit system will also attract talent and qualified worker, retain

performing and achieving staff and at the same time motivate staff morale and loyalty to the

organization for organization’s long term growth.


In designing an effective job evaluated pay structure, it is necessary to conduct wages and

salary survey on market pay rates in order to achieve both the goals of internal and external

equity. Salary survey will also provide synergy between both internal and external pay rates

and provide fairness, equity, transparent and consistent pay structure to employees.

In addition, salary surveys will ensure a market driven pay structure and compensation

system which include a range of data on base pay, bonuses, short term and long incentives,

benefits and total earnings for the employers to decide strategically for a competitive

compensation plan. Besides that, salary survey data is an important tool in employee

negotiations and whenever there are questions about the proper differential between two jobs.

The main objectives of having a salary survey on market pay rates are:

• To gather information regarding the industry standards

• To know more about the market rate i.e. compensation offered by the competitors

• To design a fair and consistent compensation system

• To design and implement cost effective and competitive reward strategies

• To benchmark the compensation strategies against external market

With salary survey, employers not only paying employees fairly and effectively, they will

avoid over or under paying the employees. This will attract and retain quality and talented

staff and at the same time manage organization operation cost effectively. The tailored

compensation package (Berger 2008) for Consolidated Plastics Berhad should be pay with


market match, in order able to attract, retain employee and at the same time contain labour

cost and reduce pay dissatisfaction among employees in the organization.

On top of that, consistently comparing the company’s salary structure to market pay rate is an

effective strategy by ensuring limited resources are appropriately utilized to recruiting and

retaining talent worker.

Apart from that, by having salary survey against the market rate, various compensation data

on job’s skills, experience, exposure and risks, positions and responsibilities can be collected,

statistically compared and benchmarked in the specific industry or region prior designing an

effective and accurate job pay structure for an organization. This will ensure that the pay

grades and ranges are determined accordingly for each job requirements.

Kleiman and Taylor (2010) posit that to become externally competitive in today's business

environment, organizations must take into consideration what other organizations in their

sector industry are paying employees prior to making a decision regarding just how

competitive they want to be with pay rates.

In order to maintain and retain qualified and talented staff, it is therefore important for the

organization to always perform salary survey against market rate for certain benchmarked

jobs. By having a salary survey periodically updated, it will keep the salary structures up to

date compared to external market and therefore maintain the organization’s competitiveness

in compensation and HR strategies.



The best practice used by organizations in using pay grades to sustain competitive edge

entails conducting a salary survey to learn the pay rates offered by a company's competitors

for certain benchmark jobs (Kleiman and Taylor, 2010). Based on the above statement, it can

be derived that developing pay grades with ranges of minimum to maximum is crucial for

organization to offer flexibility to deal with pressures from external markets and differences

among various firms in the same industry or region.

In designing an effective pay grade, salary survey of market rates are important and it can be

classified to nature of jobs, skills required, responsibilities and duties of particular job. Pay

grades will allow compensating differences in quality and qualifications among individuals

applying for the job at the entry point. In addition, pay grades will allow compensating

differences in the productivity or value of the quality variations and allow for differences in

the mix of pay forms or other compensation packages.

By having a pay range, two or more rates are paid to the employees in the same job to

recognize individual performance differences with pay, meeting employee’s expectation that

their pay will increase over time even in the same job and at the same time motivate and

encourage long serving employees to remain loyal in the organization.

On top of that, having develop pay grades, grades enhances an organization’s ability to move

people among jobs and encourage staff to work across functional boundaries and range of

tasks that have been designed for them based on respective job description. Staff are

motivated to have multi skills and adaptable to multi tasking work. This will increase the


organization’s competitive advantage in the market and maintain operating cost at minimum,

by not having to hire new staff to undertake specific tasks.

In the case of Consolidated Plastics Berhad, it is recommended that the organization

implement a broad banding pay grade. Broad banding pay involves collapsing salary grades

into few bands each with sizable range whereby one minimum and one maximum.

By having broad banding based pay, an organization with have flexibility control whereby

having the advantage of flexibility to relocate and expose employees to cross functional tasks

without increasing labor cost significantly. This however provides certain guidelines to the

salary limits and suitable for managers with freedom to manage pay.

In a large organization like Consolidated Plastics Berhad, having a broad banding based pay

will motivate staff especially in the middle management to handle cross functional

boundaries, developing multi skills and effectively manage the work process and hence

efficiently manage the operation and human resource expenditure. For example, a Production

Planning Manager (PPM) job and Production Manager (PM) job is almost similar in work

descriptions whereby PPM are more focused in planning and forecasting production

requirements and raw materials whereby PM are more focused in output quantities of

production, quality and production processes. By having PPM and PM job merged as one,

this will ensure organization does not have high fixed costs but at the same time increase the

efficiency oft work required. This however subject to the workload of the organization and

the complexity of the production requirement.

On the other hand, it is critical that the company establish a fair pay grade policy relative to

the market (i.e., what competitors pay for similar jobs) because "If pay rates are set too low,

the organization is likely to experience recruitment and turnover problems and If pay rates are

set too high, however, the organization is likely to experience budget problems that

ultimately may lead to higher prices, pay freezes, and layoffs. (Kleiman and Taylor,2010)

However, some companies such as General Electric (GE) offer higher pay grade levels above

the market rate and are referred to as market leaders (Kleiman and Taylor, 2010). The

strategy is to attract and retain the "cream of the crop" in different fields of study to utilize


their intellectual, knowledge, skills, and experience to sustain competitive edge in the

industry. There are also small and medium sized companies that pay below the market rate

but adopt compensation systems that link pay to productivity or profits in order to retain and

attract employees. These companies understand the importance of employee stability to

organizational performance.

Pay grade levels should be viewed by employees and potential applicants to be fair and

equitable within the internal environment. The organization should ensure that the

methodology used to determine pay grade levels is reliable and fair to attract and retain

employees which invariably leads to positive outcomes such as increased productivity,

performance, profitability, business operations stability, and competitive advantage.


7.0 Conclusion and Recommendations


List of References

Kleiman, L & Taylor, S., (2010). Employee Compensation: Encyclopedia for Business (2nd

ed.). McGraw-Hill/Irwin

Lance Berger and Dorothy Berger (2008). The Compensation Handbook. McGraw-Hill

Michael Armstrong and Helen Murlis (2007). Reward Management: A Handbook of

Remuneration Strategy and Practice. Kogan Page

Perkins S.J. & White G. (2009) Employee Reward. Alternatives, Consequences and Contexts.

CIPD London.


Appendix 1 – Case

Steven Lee is the Managing Director and controlling shareholder of Consolidated Plastics Berhad, a family owned company, that has just been listed in the 2nd Board of the KLSE. Steven also holds the responsibility for the company’s compensation and benefits function. Of late much pressure has been put upon Steven by the company’s internal auditors to hand over this responsibility to Doris Chan, the newly appointed HR manager, who is also an experienced compensation and benefits manager. The auditors have indicated that her first task is to ‘clean up’ the compensation and benefits administration system. Doris is shocked by the absence of a well structured system and finds little justification to rationalize the existing salaries paid to staff. There are instances of senior employees being paid less than newly recruited junior employees. Job responsibilities and functions appear to bear little relationship to the pay accorded to these jobs. The merit pay increases of some top performers are small compared to that given to other employees whose performance is significantly lower. Having done a wages and salary survey on market pay rates of equivalent jobs in the manufacturing industry in Malaysia, Doris has made several recommendation for the introduction of job descriptions and a well structured job evaluation system that is internally consistent and reflects the principals of equity and transparency in the salary determination process. When her recommendations were presented by the auditors at the next board of directors’ meeting, Steven Lee angrily objects to these recommendations, accusing Doris of being a bureaucrat more suited for the public sector organization. He states that valuable time will be wasted on such non-productive time wasting activities. His comment is that “ Job evaluation and internally consistent pay structures are burdensome to companies. Instead it is best align pay to market rates” Doris now has the daunting task of presenting her rationale for the recommendation in such a way that both the board of directors and Steven Lee will be convinced of its relevance and usefulness to the company. Questions 1. How can you justify the use of job descriptions and job evaluations to establish internally consistent pay structures? What principals would you adopt in its design and implementation to ensure its effectiveness in meeting compensation goals?


2. How would you respond to Steven Lee’s comments to justify your recommendations? 3. Why did Doris deem it necessary to conduct a wages and salary survey on market pay rates when her goal was to recommend the introduction of a job evaluated pay structure instead? 4. How would you respond to the view that pay grades will limit a company’s ability to achieve competitive advantage?

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Assignment 2 Final CBM

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