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Managing Human Capital

MBA1 ‘C’

Table of Contents
Table of Contents..............................................................1
1. INTRODUCTION..............................................................2
2. LITERATURE REVIEW .....................................................2
2.1 Financial Rewards ............................................................3
Non-Financial Rewards..........................................................13
4. REFERENCES...............................................................16

Managing Human Capital
MBA1 ‘C’

An organisation can be efficient only if they will be able to
utilize the resources that they have with them appropriately. The
resources usually include infrastructure, workforce and capital, all of
which are inter dependable but the most important among them is
the work force. Labour can be considered as one of the most
important resource so as to maintain or utilize the other resource
like infrastructure and capital. Any organisation that will be
successful to persist their employees will do well. Hence it is
important on the part of the organisation to handle the human
resource effectively. The employees that are a part of the
organisation will have the qualities that are demanded by their job
description. Some of the employees might have high levels of skill
that is required for their job or might even have a lot of experience
in that field. Each person gets paid differently depending on their
levels of skills and experiences. Reward policy is a prerequisite for
strategic management of pay and benefits.

Managers have always been interested in making

arrangements for the better performer to be paid more than the
average performer. To support this there are a lot of schemes
currently available that are working towards the objective. “The
objectives of a policy towards payment could be described as ‘ to
remain competitive for labour whilst rewarding good performance
and adopting a position on pay which controls costs and is felt to be
fair by all employees’”(Tyson & York, 2000). This paper will focus
mainly on employees and what are the different ways employers
use to manage them and retain them within an organisation.


Pay and job security are the important factors that employee
consider when they are looking for jobs. Employees usually prefer to
work with an organisation that provides to them different types of

Managing Human Capital
MBA1 ‘C’
pays and benefits. They even desire rewards that could bring about
improvement of their status in the society. Rewards can be of two

• Financial Rewards

• Non-Financial Rewards

2.1 Financial Rewards

Financial rewards consist of the payment methods that can be
achieved by the various assessments carried out in the
organization. Some forms of financial rewards are discussed below.

Base pay: Base pay is the amount of money given to a particular

employee for working in a specific position of employment in an
organisation for specific period of time.

Example 1: Mitchells & Butlers chairman will get a pay rise by 75

per cent up to 300,000 pounds.

Performance-based pay/ Competence based pay: These pays

are considered to be additional and add more value to the base pay
an employee is set to get. The employees can get these pays if they
have performed well enough to fulfill or satisfy a certain goal
designed by the organisation. These pays are given to show
recognition and to imply the kinds of actions and attitudes that the
organisation wishes to reward for their employees. Competence
based rewarding system uses improvements in competence or any
job related skills as criteria for increasing the pay.

Advantages of Performance-based pay/ Competence based pay-

1. During time of low inflation, the only possibility for increases

in pay is through productivity improvement.

2. If rewards can be linked to objectives, it will help the

employees to drive towards the objectives.

Managing Human Capital
MBA1 ‘C’
3. Since there is clarity about rewards for obtaining the
objectives, all the staff can participate and try to achieve the
objective thus increasing their productivity level for the

Disadvantages of Performance-based pay/ Competence based pay-

1. This type of payment does not motivate employees.

2. Initially there might be improvements, but there are chances

that there might be diminishing marginal utility to the

3. Objectives can change very quickly, so it cannot be used as a

criterion for performance reviews during the end of the year.

Example 2: Luxottica Retail is the home of LensCrafters,

Sunglass Hut, Watch Station and Watch world follows
Performance based pay system. “Take notice, performance pays.
Those who perform their best will receive higher raises” is what
is found in their ‘Base Pay Program’ brochure. (Franke 2004, p.

Example 3: Procter & Gamble Co. one of the America’s top

fortune 500 companies uses competency based pay system so as
to obtain more productivity level from their staff. (Berger &
Berger, p. 145)

Example 4: Burger King provides its staff with competence

related pays in order to increase the efficiency of work.(Shields
2007, p.244)

Variable Pay: Variable pay is an “add-on” to a competitive

base pay. This means there is no risk for employees in loosing
any base pay they are adhered to. Instead it is an upside
potential for them. Variable pay is truly a win-win opportunity for
the company as well as for its employees. Awarding variable pay

Managing Human Capital
MBA1 ‘C’
can be through profit sharing, bonuses, incentive schemes,
holiday bonus and deferred compensation.

Profit Sharing: The systems in which the payout is a function of

some measures of profits or profitability. The determinant for this
particular variable pay system can be accounted profits,
operating profits, return on assets and investments. Absolute
profits maybe shared from the very first value received or from
the threshold value and the profitability measure may apply to a
company, division or any other organizational entity. Profit
sharing payments are usually made only if the company has
been in profit for a specific period of time. Profit sharing is
generally calculated at the end of the business year only after
the profitability result of the organisation is evaluated.

Advantages of Profit sharing-

1. It has a positive impact and sends a message to the

employees so that they work together as a team so that the
profits can be maximized.

2. All the employees are made to attain the same set of goals
and are rewarded equally thus decreasing the sense of
competition between the employees.

Disadvantages of Profit sharing-

1. The main disadvantage of this payment scheme is that the

employees will not be able to see their own work and
actions that they put forward when attaining the goals of
the organisation and increasing the overall profit of the

2. The true essence of Profit sharing is motivation but it will

merely remain as an entitlement that employees would

Managing Human Capital
MBA1 ‘C’
3. Regardless of the contribution and effort offered by the
employee, they would be just receiving their profit sharing
money. (Torrington, Hall & Taylor 2002)

Example 5: TESCO PLC uses profit sharing schemes and the

company has to allocate money in millions to pay its employees
based on this scheme. In one report of Evening Standard, it was
written that a total of 106 million pounds has been allocated to
reward the staff of Tesco who had invested in the profit sharing
scheme for their contribution in doubling the company’s profit.

Example 6: Profit sharing scheme followed by HP, awarded above

228 million dollars to its employees around the world in 1996.

Example 7: Motorola distributes approximately 3 million dollars to

its employees through profit sharing scheme.

Employee Stock Ownership Plans: An Employee Stock ownership

plan (ESOP) is designed to give the employees significant stock
ownership in the employers. An adoption of ESOP would mean that
the employees would have a share ownership of their own
corporation. This scheme provides the employees of an organisation
with an option in buying of shares of their company at a reduced
price. Therefore the employees will have no obligation to buy the
shares of the company. (Mathis & Jackson 2008)

Advantages of Employee Stock Ownership Plan-

1. Major advantage of this scheme is that the organisation can

receive favorable tax treatment on the earnings for use in the

2. It gives employees a piece of action so that they can share in

the growth and the profitability of their organisation. This
would make the employee to be more focused and productive
on the organisations’ earnings.

Managing Human Capital
MBA1 ‘C’
Disadvantages of Employee Stock Ownership Plan-

1. This type of sharing scheme can also mean that the

employees both their salary and retirement plans will totally
depend on the performance of their employers in the market.

2. It poses a major threat to those employees who are about to

retire, as their value of pension will be dependent on how well
the organisation is doing.

Example 8: Hy-Vee is an employee owned group of retail

supermarkets located in the Midwest of United States. This company
provides ESOP to their employees and is running successfully.
Employees are enjoying their share of the organisation and are
contributing to its success. (Mathis & Jackson 2008, p. 404)

Example 9: United Airlines also exercises ESOP schemes. This

scheme made the unions of the company demand for increase in
their pay. This was agreed but only for a short term. The employees
were locked in their stock scheme due to which the company landed
in an eventual bankruptcy.

Example 10: Infosys technologies employees earn in millions with

the ESOP scheme in place.

Gain Sharing: “Gain sharing systems in which the payout

represents a share of the financial gains associated with
improvements in the group or organizational performance measures
for long term. Commonly used criterions include costs, productivity,
material and supplies utilization, quality, timeliness or
responsiveness, safety, environmental compliance, attendance and
customer satisfaction. The foundation for these criterions is the
current performance, past performance or any improvements over
the current performance.” (Belchers 1996, p. 11)

Advantages of Gain sharing-

Managing Human Capital
MBA1 ‘C’
1. The long-term aspect will provide steady earnings.

2. Employee participation helps to overcome the ‘them and us’

attitudes and helps to build trust within the employees.

3. This scheme can also prove to encourage employees to be

better problem solvers.

Disadvantages of Gain sharing-

1. Individual employees contribution may go unnoticed and

might not be reflected when working within large teams. So
the employees who work very hard might get fewer amounts
when compared to their effort they put.

2. Complex schemes might prove to be difficult for the

employees to understand that scheme and difficult for the
employers to explain.

3. Gain sharing requires ongoing management and must be

reviewed regularly to ensure that the effectiveness will be

Example 11: NUMMI provides a number of gain sharing schemes.

For employees at NUMMI, pay is attached to increases in
productivity and to performance based on productivity and
indicators to the quality of cars they produce. The presence of
NUMMI unions implies that the gain sharing system would stay for a
long term thus help the employees to motivate in sharing their
ideas and enforce high efforts within the factory. (Levine 1995, p.

Example 12: Mill Steel drives production with gain sharing plan.
Unionized production workers of Mill Steel Company have been able
to increase their earnings due to gain sharing plan. (Franke 2004, p.

Example 13: A pharmaceutical plant in Lincolnton, N.C., obtained

Managing Human Capital
MBA1 ‘C’
competitive edge by following the gain sharing measures and
employees received $825 by the end of first quarter.

Scanlon Plan: This scheme is a combination of suggestion plan and

a collective incentive scheme. The suggestion plan was a part of the
system for drawing ideas from the workforce about improvements
that could be jointly achieved by the management and union. It
operates a bonus depending on reductions achieved by the workers
in labour costs compared with the revenue obtained from the sales.
These rewards come from employee involvement in improving the
productivity and reducing costs for the organisation.

Advantages of Scanlon Plan-

1. It will help in developing a cooperative team culture in the

organisation as these plans help in solving problems as a

2. Team incentives reduce the trend of jealousness and

complaints amongst team members.

Disadvantages of Scanlon Plan-

1. There is high tendency that individual team members may

feel that their effort is more than the other members and they
contribute more towards the team success.

2. Complexity of the payout formulas may become hard for the

employees to understand.

Example 14: The first Scanlon plan had been adopted by the
Timber Roots MTD back in 1930s. Since they have put this plan in
action, Timber Roots employees have generated above 200 plant
improvement suggestions and thus their productivity level has
increased to a greater extent.

Merit Plans: Merit pay plans are links an increase in base pay to
how successfully an employee performs his or her job. The merit

Managing Human Capital
MBA1 ‘C’
increases are usually given if the employee has been successful in
attaining some standard goals that have been set by the
organisation. A meaningful merit increase will catch the attention of
the top performers that will help in the organizational progress.
(Bohlander & Snell, p.461-462)

Advantages of Merit Plans-

1. These plans help in boosting the employees confidence and

will have trust in performance appraisal

2. It helps in encouraging the employees to work harder for the


Disadvantages of Merit Plans-

1. Amount of money given may appear to be inadequate for the

performance put in by the employee

2. These plans may cause a lack of honesty and cooperation

between management and employees.

3. Merit pay plans may create feelings of pay inequity.

Example 15: Compsat Technology Inc provides its employees with

merit pay plans. They pay their employees more money based on
their quality of performance and good attitudes. (Franke 2004, p.

Example 16: British Gas in 1994 increased the merit pay plans
from 11% to 75% for the directors who earned more than 200,000
pounds. (Price 2007, p. 479)

Example 17: A survey report by Dowling & Richardson (1997)

suggests that British NHS managers have been satisfied with the
use of merit pay schemes and it has had a positive motivational

Annual Bonus: These are gratuitous payment by the employer that

Managing Human Capital
MBA1 ‘C’
is not directly earned by the employee. These payments have no
entitlement to the employees pay as a result of contract of
employment and cannot be expected in return for a specific
performance. These payments are done only after going through
the effort presented by the employee on a yearly basis. (Reda,
Reifler, Thatcher 2005)

Advantages of Annual Bonus-

1. The bonuses provided by the organisation can be a positive

factor for the employees to earn more money and would
motivate the employees to strive for it.

2. Employees can enjoy their bonus and feel satisfied with their
role of job.

Disadvantages of Annual Bonus-

1. The employees may tend to get uncertain if they would

receive their bonus for the performance of their job.

2. If the company is not doing well enough then the annual

bonus that was promised could be terminated.

Example 18: Plante & Moran are providing their employees with
bonuses relating to their competencies and on the result
measures. Performance on goals, like getting a job done in
particular time is used to drive annual bonuses to their
employees (Franke 2004, p. 157)

Example 19: At Nixon Uniform Service & Medical Wear, the

employees are given an opportunity to increase their earnings
through various bonus programs. Some of the bonus programs
include MICOMP, PROCOMP, Lead Trader, Quality Bonus and
Safety Bonus. With these bonuses a good employee can earn
between 500 to 10,000 dollars annually. (Franke 2004, p. 158)

Example 20: Marks & Spencer will be distributing an annual

Managing Human Capital
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bonus pot of 80 million pounds within its employees as the result
of excellent performance in the company’s plan.

Example 21: British Telecom Staff are benefiting from one of

Britain’s biggest bonus schemes and company has distributed
around 22million pounds among its staff.

Incentive Pay: Incentive pay plans are typically based on pre-

established performance goals. These are good ways of
supporting the strategic plans of the company. Well-executed
incentive plans demand effective communication of those goals
and monitoring the progress on a regular basis. This allows even
the employees to keep record of their own performance and help
them to improve their potentials.

Advantages of Incentive Pay-

1. Incentives help employees in keeping the focus to attain

certain performance targets.

2. Incentives are directly related to operating performance. If

these performance qualities are met then the incentives
are paid, else it is not.

Disadvantages of Incentive Pay-

1. Employees may feel that their production standards are not set

2. Incentive plans may create a sense of competition between the

workers. It may also cause distort between the management and

Example 22: Comforce Health Care of Orange County believes in

developing a large variety of performance based incentive schemes
and commission structures. Their policy is not to provide employees
with large sum of money instead they will provide somebody with
the opportunity to earn a large commission based on achieving

Managing Human Capital
MBA1 ‘C’
certain goals. (Franke 2004, p. 155)

Example 23: Agilysys Inc is following incentive schemes rigorously.

They have high percentage of people having the incentives
opportunities. They believe in attracting people who are more
confident to work as they are risk-takers and drive themselves hard
for results. (Franke 2004, p. 155)

Example 24: General Electrics have offered their employees with

cash incentives ranging about $750 for quitting smoking in 2008.
Due to this incentive success, it plans to go tobacco-free by 2011.

Non-Financial Rewards
Non-financial rewards imply to advantages employee gets in
their work place that can be in the form of Achievement,
Recognition, Influence and personal growth.

Achievement: It can be regarded as a measure put forward by the

management to distinguish employees based on their efficiency.

Example 25: Devon Partnership NHS Trust provides employees

with wide variety of achievement awards as a way to celebrate the
staffs hard work.

Example 26: Orkut Buyukkoten, a software engineer at Google had

his achievement when the social networking site that he developed
for Google was named after him.

Recognition: Employers use this approach to let their staff know

how well they have worked or obtained their objectives. Recognition
can be attained either by promotion, job enlargement and different
forms of status or appreciation symbols.

Example 27: Conwy Council has revised its schemes to recognize

and reward employees. They have introduced Customer Service
award, Manager of the year and the winners will be presented with
a certificate and a trophy.

Managing Human Capital
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Example 28: Dell Computers have recognition programs that are
voluntary. They recognize the Dell employees who actively support
their local community. Dell honors such employees.

Perks/Vouchers: Employers can provide perks to employees based

on their effort and efficiency. A few forms include providing
employees with gift vouchers, arranging a dinner in a well-known
restaurant, paid holidays, free air miles, cafeteria benefits,
healthcare, dental benefits etc.

Example 29: Google employees enjoy the perks such as free meals
in their cafeteria, on-site doctors, dry cleaners and gym facilities.
The googlers also get perks for referring an employee who is
planning to leave Google.

Example 30: The cabin crew of BA was stripped off from their
travel perks due to the continued strikes during the Easter weekend.

At the end of the day even saying a simple “Thank You” could make
the employee feel happy and positive about his work.


According to my view, it is important for the organisation to

award employees with merit issues. For an organisation to be
successful and become a leader in the market, it has to make sure
that the employees are satisfied and motivated to work towards the
organisation’s goals. To assure this, the employees should be
treated as an asset for the organisation and one of the means to
achieve this is by ensuring that the employees get awarded and
recognized for their effort and performance. The factors that the
management should consider in order to provide employees with
merit issues include the following.

Managing Human Capital
MBA1 ‘C’
 Individual performance

The company should monitor their employee’s performance

based on sincerity, quick grasp of knowledge, learning ability
and other skills.

 Education and Experience

Based on individual employees’ qualification and experience

level, they should be given benefits that would possibly
motivate them

 Individual Potential

Management should look for people who are dynamic and

contribute to the organisation success. The employees should
have the potential to gain better position in the organisation
and remain loyal to the organisation.

 Budget of organisation

Every organisation invests heavily for training their staffs to

the organisation’s standards, so that they can increase and
maintain their profitability.

 Change Management

When the company is undergoing change management

processes, it is likely that there would be many changes to
which employees would resist. In order to bring the level of
resistance down, employees can be provided with
materialistic incentives.

Managing Human Capital
MBA1 ‘C’


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Managing Human Capital
MBA1 ‘C’
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14. Scanlon Plan example, Retrieved on 29th March 2010,

15. General Electric to go tobacco-free in 2011: Work sites

to be tobacco-free, Retrieved on 29th March 2010,

16. 25 Secret Perks of Google Employees, Retrieved

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on 30 t h March 2010,

17. ESOP example, Retrieved on 29th March 2010,

18. Marks & Spencer Annual benefit, Retrieved on 5th April


19. HP Profit Sharing, Retrieved on 31st March 2010,