Managing human capital

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  • 1. Managing Human Capital Table of Contents Page no. 1. Executive Summary 1 2. Introduction 2 3. Reward structure 3 4. Performance appraisal 4 5. Compensation and Benefits 4 6. The Law and Compensation 5 7. Merit pay plan 6 8. Merit pay plans in practice 7 9. Discussion and debate 7 10. Examples of Merit Pay 7 11. Successes and Failures of Merit Pay Plans 9 12. Personal Point of View 10 13. Guidelines for Merit Pay Plans 10 14. Conclusion 11 15. References 12 16. Bibliography 13
  • 2. Managing Human Capital Executive Summary Human capital is the only living breathing capital in an organization that has a thought of its own. Managing these human capitals or employee or staff as commonly referred is a great challenge. Recruiting, motivating, compensating all the activities of Human Resource Management (HRM) has significant impact on how the employee responds to the policies introduced by the organization. The purpose of this report was to discuss and debate with supplementary study of the factors influencing and contradicting on the part of any management to award employees with merit issues. Due to lack of data regarding the merit pay plan and its success all recommendations were made based on assumptions found from critics who argued in support and against the merit pay plan. Further assessments derived from various studies on success and failure rate and example of organizations applying merit pay plan in practice. Studies suggest that it is hard to say whether awarding employees on merit issue will positively reinforce and motivate towards optimum output as there are certain factors to be considered and clarified before initiating such concept in to practice. First of all, there is no standard way to evaluate merit. Moreover the evaluations made by management may differ with the employee’s perception. Individualistic mentality may roam the cubicles of each employee as they become self-cantered about proving they are the best. Then again fixing and regulating the pay increase in proper manner is not as easy at it sounds. Taking all these in account still merit pay plan has proven to be successful for many esteemed and renowned organizations. A simple Guideline acknowledgement helped such organizations to initiate merit pay plans and rip the seeds of success. In this report some guidelines are given in support of initiating merit pay plans for employees on any part of management. The report was limited to time constraints and access of data. My apologies for any mistakes arising from lack of depth study and sheer inexperience, despite all the efforts made to make it authentic as possible.
  • 3. Managing Human Capital Introduction Human capital is the total value of human resources to the organization. Also sometimes referred to as intellectual capital, it is composed of the people in the organization and what capabilities they have and can utilize in their jobs. Managing human capital or commonly known as Human Resource Management(HRM) is a formal management system concerned with staffing the organization, training and development, maintaining high performance, total rewards, employee relations, labor-management environments and so beyond to ensure the effective and efficient use of human talent to accomplish the organizational goals. In a seed wrap the key words representing HRM are: • Achieving success through people • Getting the right people with the right skills for the right job • Enhancing motivation and commitment through performance appraisal and reinforcements • Creating the perfect productive and harmonious work environment. In order to enhance the efficiency and effectiveness of the efforts of even the most skilled and capable employees HRM must ensure proper motivation is provided. It must be made sure that desired actions are positively reinforced through rewards and wrong ones are punished. But it’s hard to select the best method of reward as the employees wants and desires differ from one another. For an employer to decide on a perfect reward plan to motivate all the employees as whole is a great challenge. Performance appraisal is one of the ways to evaluate an employee’s work. Every employee expects a paycheck or compensation in return for the service or labor s/he spends. Unless the effort is rewarded through proper motivating compensation the performance
  • 4. Managing Human Capital tend to decrease. The most obvious reward employees receive from work is pay. Rewards may also be in the form of promotions, desirable work, assignments, and a host of other recognition. Reward structure Rewards are positive feedback and provide reinforcement, or encouragement, for the employee to work harder in the future. The three most typical dichotomies are: intrinsic versus extrinsic rewards, financial versus nonfinancial rewards, and performance-based versus membership- based rewards. A structure of rewards is shown in a chart to simplify and exhibit the three most typical dichotomies for a better understanding of the features and relative differences.
  • 5. Managing Human Capital (A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management, Singapore: John Wiley & sons (Asia) pte ltd.) Performance appraisal Performance appraisal is the single most important management tool in a sophisticated well- managed organization. No other management process has as much influence over individuals’ careers and work lives. Properly utilized, performance appraisal is the most powerful instrument that organizations have to mobilize the energy of every employee of the enterprise toward the achievement of strategic goals. Used well, performance appraisal can focus every person’s
  • 6. Managing Human Capital attention on the company’s mission, vision, and values. But used poorly, the procedure quickly becomes the butt of jokes and the target of Dilbert lampoons. [Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York: AMACOM] Compensation and Benefits Once employee performance has been measured, it must be linked to compensation programs. Unlike traditional compensation programs that provide “cost-of-living” or other across-the-board pay increases, the greatest challenge is to develop and implement more performance-oriented reward programs. Some of the most common compensation programs are- • ESOP- Employee Share Ownership Plan is an equity based, deferred and defined compensation/ benefit plan that allows employees become owners of shares of the company they work for. • Gain sharing- a team approach where all the employees of a site, operation or project receive some financial gain through higher levels of performance or performance improvement. It is a management system for organizations to motivate employees through rewards. • Profit Sharing- an incentive based compensation plan that awards eligible employees a percentage of company’s pre-tax profits, weighted by the employees base salary an given on an annual basis. • Scanlon Plan- A team incentive program focused on the cooperation between management and employees through sharing problems, goals, and ideas on sharing cost savings and productivity gains. • Annual Bonus- A distribution of profit as declared bonus given by the company on an annual percentage rate which is added to the unit price of the fund on a daily basis. The rate may change on an annual basis or even more frequently.
  • 7. Managing Human Capital • Performance based pay plans-The label pay for performance covers a broad spectrum of compensation systems that can be clustered under two general categories: merit pay plans and variable pay plans, which include both individual and group incentive plans. The Law and Compensation Over the past thirty years numerous laws and regulations have been enacted at national, state, and local levels. Every year these regulations have been expanded due to regulatory actions and judicial decisions. As a result, in case of compensating an employee there are certain legal considerations and laws that are mandated through government legislation that are to be strictly maintained Fair Labor Standards Act of 1938 (FLSA) • Equal Pay Act (EPA) Passed in 1963, the Equal Pay Act amended the FLSA, requiring that males and females performing the same work be paid the same wages. • Civil Rights Act of 1964 • Employee Retirement Income Security Act (ERISA) • Internal Revenue Code (IRC) Merit pay plan Merit pay plan is one of the performance-based reward programmes. Although often used as a substitute to cost-of-living raises still it has its own unique turfs and criticisms. It is one popular and almost universally most, widely used incentive system.
  • 8. Managing Human Capital An incentive plan resulting in increase in pay annually or periodically; implemented on an organizational wide basis such plans grants employees equal opportunity considerations, regardless of funding source. The merit increase program can be implemented when funds are designated for that purpose by the organization's administration, dependent upon the availability of funds and other constraints. . Arguments In Support of Merit pay Arguments Against Merit pay • Allows the employer to differentiate • No proper way to measure merit pay given to high performers • Allows a differentiation between • The pay is subjective individual and company performance • Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems) Merit pay plans in practice The most issue regarding merit pay is the merit pay plan for teachers initiated by Barak Obama the president of United States. More or less discussions and debate took place about how merit could be administered. A gist of all that is given here Discussion and debate
  • 9. Managing Human Capital The new emphasis on performance appraisal and merit pay calls for a thorough examination of their effectiveness. Pay for Performance Is the best resource to date on the issues of whether these concepts work and how they can be applied most effectively in the workplace. Propositions had been put to the test at universities, one group modifying the way merit pays are allocated and the other constructing a parley for an administration proposal to adjust any salary raises that aren't based on merit or performance issues. Issues are quite complex. Persistently, they find administrations intent on making strategic use of merit pay on basic salary, often the issue of employee conflict as they don't partially disagree with the administration's priorities. But such disputes can also crater staff members against each other, high-performing departments which are higher-paid fighting against those with smaller budgets, higher-achieving employees against "dead wood," rapidly expanding or on growing disciplines versus those that are stagnating or declining. Besides, a common agreement about what exactly "merit" or "performance," or "incentive pay" plans entail is still a concept vaguely defined.( http://www.mackinac.org/9801) Examples of Merit Pay 1. In Maryland. Towson University, tensions bubbled the surface as faculty, over the past two years, hashed out an alternative plan to the current method of doling out merit raises based at the department level. But for now, at least, faculty members and the administration seem to have come to a negotiation that they can more or less live with, at least for a two-year trial period.( http://www.mackinac.org/9801) 2. Meanwhile at Temple University, the administration is attempting to switch entirely to "pay per performance" raises that would not take cost-of-living increases or other factors into account -- a change the faculty union vigorously opposes.( http://www.mackinac.org/ 9801) Historically, resistance to merit pay resulted in few highly criticized trial programs. However, in recent, many states around the nation, in districts large and small; rural, urban and suburban, have begun implementing awards on merit issues. Even if only a
  • 10. Managing Human Capital few scrupulous studies of merit-pay programs have been conducted, research has begun to suggest that well-designed merit pay plans can lead to better student achievement.( http://www.mackinac.org/9801) 3. The Achievement Challenge Pilot Project, instituted in the Little Rock public schools from 2004-2007, was a merit-pay plan tying bonuses for school personnel solely to students progress on standardized tests. (http://www.mackinac.org/9801) 4. An evaluation program led by Marcus Winters and Gary Ritter of the University of Arkansas mentioned that the students of ACPP schools had somewhat large and statistically significant gains in math and language arts compared to students in nonparticipating district schools. Nevertheless, critics of merit pay suggest teachers may begin to compete, rather than collaborate, and avoid working with traditionally low- performing students, the ACPP evaluation found no evidence of these problems.( http://www.mackinac.org/9801) 5. Additional programs, such as the Teacher Advancement Program, merge merit pay with other rewards. TAP was initiated by the Milken Family Foundation, and the program is currently being implemented in over 180 schools in 13 states nationwide.() http://www.mackinac.org/9801) 6. Another prominent plan containing elements of merit pay is "ProComp,the Denver Professional Compensation System. Akin to Chicago’s REAL, ProComp was adopted with support from the local teachers union such as the Denver Classroom Teachers Association. Though the plan started as a pilot project in 1999 and then expanded to allow all Denver Public Schools teachers to participate in 200 Denver voters also approved a $25million tax initiative to help finance ProComp in November 2005. (http:// www.mackinac.org/9801)
  • 11. Managing Human Capital Successes and Failures of Merit Pay Plans As merit pay has grown more than popular, it is becoming apparent that these plans have both succeeded and failed. One study of employers found that despite the fact that 61% of the companies have variable pay plans; almost half of them did not achieve their performance targets for the year. But to avoid negative employee reactions, many of those companies paid out 85% of the incentives anyway. The good news from the study is that over half of the merit pay plans achieved their performance objectives. Executive-focused merit pay plans tend to be viewed as more successful than those used with lower-level, non management employees. The responses of employees are crucial to how merit pay plans carry out. It is interesting that in a study of over 2,000 workers from a variety of companies, most respondents said they want performance rewards included in their base pay, rather than as one-time payments. Also, the employees strongly preferred individual rewards over team or organization incentives. These studies and others highlight the fact that neither of the polar extremes—the view that incentives do not work versus the view that incentives are a panacea—appears to be the case. Also, the enthusiasm that many employers and managers have for merit pay plans is not matched by many workers. The key to success seems to be to combine incentives with employee participation in the process. In summary, it appears that merit pay plans are successful under certain circumstances. A number of factors affect the success of merit pay plans. The next section discusses the guidelines for establishing successful merit pay plans. Personal Point of View It’s hard to say the impact and the response of any part of management to award employees with merit issues. Although merit pay plan has certainly proven to be successful in many organizations but to maintain a suitable condition for merit pay plans to function orderly depends on the management itself. There is no confusion that merit pay plan was introduced to encourage employees to show best performance and merits. The one who performs or shows most merit
  • 12. Managing Human Capital gets an pay increase. I would it is a good idea. But before initiating such concept the employees and management should well educated about the term performance based pay and variable pay. Like everything it also has its ups and downs. Certain things are to be considered while initiating merit pay plans. One of the biggest pitfalls is that there is no standard measuring tool of merit. Usually supervisors are the ones who do the evaluation. So biasness or inappropriate evaluation sometimes may lead to employee-manager or employee-employee conflict. The evaluation done by the organization may seem unfair to the employee. Guidelines for Merit Pay Plans Providing merit pay through incentive systems can be complex and can take many forms. However, certain general guidelines are useful in establishing and maintaining successful merit pay systems. o Recognize organizational culture and resources o Make merit pay plans understandable o Keep incentive plans current o Link the merit pay to desired performance o Recognize individual differences o Identify merit pay separately from base pay Conclusion The evidence on the effects of pay for performance, pieced together from research, theory, clinical studies, and surveys of practice, suggests that, in certain circumstances, variable pay
  • 13. Managing Human Capital plans produce positive effects on individual job performance. The evidence is insufficient, however, to determine conclusively whether merit pay can enhance individual performance or to allow making comparative statements about merit and variable pay plans. On the basis of analogy from studies and theories on variable pay plans, I would conclude that merit pay can have positive effects on individual as well as organizational job performance. But all these effects can be attenuated by the facts that, merit plans, pay increases are not always clearly linked to employee performance, performance evaluation agreement exists, and increases are not always viewed as wise decision. Nonetheless, it is believable that the direction of effects is toward enhanced performance. References Book
  • 14. Managing Human Capital 1. A. Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management, Singapore: John Wiley & sons (Asia) pte ltd. 2. Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York: AMACOM 3. John McManus, Leadership: Project and Human Capital Management, Burlington: Butterworth-Heinemann 4. Noe, Human Resource Management, Delhi: Darling Kindersley (India) pvt. Ltd. Internet 1. Examples of Merit Pay http://www.mackinac.org/9801 2. Pay for Performance: Evaluating Performance Appraisal and Merit Pay (1991) http://www.nap.edu/openbook.php?isbn=0309044278&page=77 3. Debate: Merit pay for teachers http://debatepedia.idebate.org/en/index.php/Debate:_Merit_pay_for_te achers
  • 15. Managing Human Capital Bibliography Book 1. A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management,8th edition, Singapore: John Wiley & sons (Asia) pte ltd., p-275 2. Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York: AMACOM,p-1 Internet 1. Examples of Merit Pay http://www.mackinac.org/9801 2. Pay for Performance: Evaluating Performance Appraisal and Merit Pay (1991) http://www.nap.edu/openbook.php?isbn=0309044278&page=77 3. Debate: Merit pay for teachers http://debatepedia.idebate.org/en/index.php/Debate:_Merit_pay_for_te achers