Remuneration Systems

1)      Introduction

Employment relations have been receiving increasing attention in many organizations. This is because many organizations have realized that in order for businesses to perform, the relationship between employees and employers is an important consideration.

A remuneration system refers to a payments and benefits package offered for employees to ensure employee satisfaction and morale. Relationship between employees and employers are compensated by their remuneration package whereby; employees see rewards or compensation as an exchange for their services rendered to the organization or as a reward for a job well done. The remuneration package has over time come to be recognized as an important component of employment relations in many organizations.

In the past, relationship between employer and employee was led by the assumption that employers were free to treat employees in whichever way they deemed fit and employees were hence free to either work or leave. There were few laws available to safeguard the interests of the employees and at times of manipulation, shabby treatment and unfair practices, employees did not have a platform to voice their protests.

Hence, employees often sought the help of labor unions to voice their concerns, with most of the time negotiating with employers on pay structure or conditions at work. But with time employees have begun to realize their rights and a major issue that inflicts the stability of the relations between employee and employer are the well-being of the employees. Especially when employees feel that they are underpaid. This creates friction and a rift between the employees and the employer, thus attenuating the impact of human resource practices and affecting the image of the organization It is for this reason that many companies all over the world begun to pay attention to the relationship between their remuneration systems and employment relations and productivity. The main objective of this research was to examine the relationship between the remuneration systems and employment relations and the impacts that the employment relations have on the organizations.

2)      Literature Review

A remuneration system refers to cash or non-cash supplements which are regarded as adding value to the employees total pay package (Elizabeth 1992). Many researchers have found out that there is a direct relationship between the remuneration system and employment relations.

The Human Resources development working group for example outlines different kinds of remuneration packages. One of the most extensively used remuneration systems by small and medium enterprises is the performance-based remuneration system. This system ensures that an increase in employee remuneration is backed by an increase in performance.

a)      What is the relationship between remuneration systems and employment relations?

A performance based remuneration study was carried out by APEC economics in Korea, Malaysia, the Philippines and Chinese Taipei. Prior to the study other forms of remuneration systems like the High Performance work systems where in place in the target organizations. The constant variables in this study included the basic wage of the employees and the productivity improvement and profitability.

The study of two firms showed that once the use of the Performance based remuneration system was introduced the changes were vast. This system also improved employee relations as there was increased morale towards the work and a sense of commitment and dedication. Pay for performance became an acceptable normal practice. In addition, multi-tasking to reduce unwarranted recruitment of staff was initiated.
The positive impact of implementing performance-based remuneration systems revealed the shared cooperation of employers and employees. Through this system feelings of ownership and responsibility were acquired and rewards were real and reflective of performance. Thus each individual found ways to support and contribute to improvement, ultimately leading to better quality for all. This system is an indication that employee relations rely is influenced by the remuneration system.

Business performance was also affected by the performance based remuneration system. Some firms showed that profits had doubled within two to three years and were more after the three year period. Productivity of the employees also doubled with the expansion of sales and the expansion of sales and the reduction in the sales costs

b)     How does a remuneration system affect business performance?

In another study Companies with implemented profit-sharing/gain-sharing programs were chosen as the study's focus, and Porter strategy vision was utilized. Financial and non-financial value drivers measured firm performance. The 79 companies of the sample were medium and large-sized firms, from the industrial sector, and located in the Brazilian state of Sao Paulo. The analysis of the study data indicated a statistically significant relationship between profit-sharing/gain-sharing programs, and value drivers. The performance of the non-financial value drivers is the most favorably influenced by the implementation of profit-sharing/gain-sharing programs, and productivity is the most highly influenced of all the value drivers evaluated in this study. In spite of the fact that the descriptive analysis showed a relationship between profit-sharing/gain-sharing programs, organizational strategy, and value drivers, it was not possible to find statistically significant evidence to confirm the existence of such a relationship.

Profit-sharing/gain-sharing programs are the variable remuneration modality most utilized by Brazilian companies, which is regulated by the Federal Law # 10,101 of December 19, 2000.

Business literature makes a distinction between profit-sharing and gain-sharing programs. With profit-sharing, the remuneration is extracted from the profit generated by a company over a period of time, whereas with gain-sharing the remuneration is dependent on the accomplishments of performance goals. Profit-sharing is the payment provided by a company to its employees regarding "the distribution of positive results obtained by the company" (Martins, 2000, p. 49).

Gain-sharing programs align a parcel of employee remuneration with the accomplishment of organizational or team performance goals (Berger and Berger, 2000).

c)      How do corporations determine the pay level within a remuneration system?

To establish a scientific and effective sales force compensation system is not easy, in fact, sales management personnel remuneration issue is an important issue, but also a problem.  There is no common, fixed form of sales compensation system. This is because there are different types of sales force, different types of enterprises, different types of markets, there are different types of remuneration systems. There however must be specific conditions in order to design an effective reward system and to meet the needs of different types of salespeople.

However when determining the pay levels, no matter what type of sales staff, decided to use what kind of reward system the following points must be kept in mind.

To determine the remuneration levels of the principles and considerations one needs to do the following things;

I. The enterprise features. In considering the remuneration system, we must first understand the characteristics of enterprise products, industry sales methods, cost structures, as well as the future direction and other factors.

II. The enterprise business strategies and objectives. Remuneration in the preparation or adjustment should be considered enterprise-level business objectives and priorities. For example: the pursuit of a reasonable business profits? Increase in fast-growing company? Time is appropriate?

III. Financial and cost factors. Current remuneration is reasonable? Too high? Too low? Enterprises can afford?

IV. Administrative considerations. Remuneration standards for calculation method is easy to understand, easy to count? Declare or how to adjust the boot? What misunderstanding or resistance to do?

V. Management considerations. The current remuneration for the absorption of newcomers is attractive enough? Base salary is important? Guarantee that the cost of living expenses? Be able to retain good talents?

VI. Other factors considered. The need for high returns can be attractive? Corporate reputation can attract people to join it? The development of new customers with special payment of special remuneration do? The provision of market intelligence is to be a special reward?

There are various remuneration system types. These include:

A.    Pure salary system.

 Regardless of whether the number of sales staff in sales, may be within a certain amount of working hours to obtain a fixed reward, the so-called 'timing system'. Such pay systems are used for clerical and back-office sales, or for the sale of the collective efforts of the work. The system's advantages are: easy to understand and easy to compute; sales income can be protected in order to give a sense of security; when there is a new adjustment in some areas, when necessary, can reduce the hostility. The system's weaknesses are: lack of encouragement, cannot continue to increase the results; the compensation amount, there are thin when the work is excellent and generous person who is suspected of working poor.

B.     Pure commission system
The reward system is tied to a certain period the sales results of the work or directly linked to sales volume, that is given to the commission by a certain percentage. This thrust is to give sales staff to encourage; its essence is a kind of bonus system. The type of reward system for the enterprise market products that just need to quickly develop new markets, hiring sales staff to develop type used, or sales staff as 'marketing-based' staff used, it can maximize their sales staff enthusiasm. Calculation is based on commission sales amount (such as gross income or net income); its calculation can be based on the total sales volume, you can exceed the quota-based sales, a number of percentage or quota. Another difficult formula is based on sales staff to determine the activities or the performance of this method more fair, but difficult to implement pay commission rate can be fixed, it can be progressive (that is, the greater the sales , the higher the commission rate, the rate can be reduced, that is, the greater sales volume, the lower the ratio). Commission rate should also be taken into account the nature of products, customers, regional characteristics, namely, single-size, gross volume, and changes in business conditions.

The system's advantages are: the rich incentives; sales staff can get higher remuneration; control the cost of sales easier. The system's weaknesses are: fluctuations in the case of a sale is not easy to adapt (such as seasonal fluctuations and cyclic fluctuations); sales income of less stable; increase in the management of man-made difficulties.

C. Salary plus commission system
 Salary plus commission to reconcile the pure salary system and the lack of both pure commission system. Salary plus commission system is based on unit sales or the percentage of total sales less the amount of expenses, weekly pay, together with the salary, or accumulated to pay for year-end at the end. This remuneration system for the enterprise's products have entered the growth stage, sales are more stable, regardless of sales by the sales personnel or by professional sales personnel can also consider the use of such a compensation system. The system's advantage is that with the bonus system is similar to both a steady income, but also available with the increased sales commissions. The disadvantage is that commissions are too few incentives little effect.

D. Salary plus bonus system

The sales staff in addition to time and receive a certain salary, it can also receive many bonuses. When the enterprise's products have entered the mature stage, the market need for maintenance and management of the enterprise sales force employed mostly managerial personnel may consider using this system of remuneration. The system has the advantage of encouraging the sale of a number of staff involved in sales management also cater to the work of the disadvantage of not attaching importance to the number of sales.

E. Salary plus commission plus bonus system
The remuneration system taking into account the above-mentioned three methods, the use of commissions and bonuses to increase effectiveness. The system combines the advantages of the above-mentioned three methods, in enterprise products into the growth, maturity, sales staff as 'pioneering' or 'managed' it may consider the use of such remuneration system. Only in the use of such a reward system must take into account the administrative and management factors. The system has the advantage of a stable income, management can effectively control the sale of human shortcoming is that the implementation of this system will require more relevant records and reports, thereby increasing management costs.

F. Special award system
In particular outside the award system is to provide compensation incentives, that is, to give an extra reward. The incentive money is divided into two kinds of incentives and non-money awards. Money incentives, including a direct increase in salary or commission or indirect benefits (such as holiday pay, insurance system, pension system, etc.). There are many ways of non-money awards, such as: competition for sales through the marketing of a certain honor, such as credit, for award medals and souvenirs. The system has the advantage of encouraging a wider powerful, often slow-moving products to promote sales, disadvantage is not enough incentive standards-based, reliable, easily lead to unfairness among the sales staff and management of distress.

How do you choose reward system?

The choice of what companies pay system? Enterprises in the market according to the different situations in which to select the compensation system. For example, when companies open up markets in the run-in period, they generally employ more 'pioneering' sales staff remuneration system at this time many will choose to 'commission system', in order to maximize sales force to stimulate market development; when the company's products have entered the mature stage , maintenance and management of market needs, the firm will employ more than 'managed' sales staff, at this time of the remuneration system will be used more 'salary plus bonus system'.

Companies can also produce products according to enterprises needed to decide on what type of compensation system. When firms belonging to industrial goods produced or industrial supplies, the sales methods used by many as 'push' the main, most sales staff to meet directly with the end-users, when it is particularly important after-sales service, so the choice reward system could be considered 'salary plus commission system' or 'salary plus commission plus bonus system', which not only can improve the sales force selling the enthusiasm, but also can improve the quality of after-sales service; when the enterprise products are daily necessities, or consumer goods, the Most sales of such products is large, the high turnover rate, flow speed, sales staff will no longer be used in order to 'push' marketing-based, more professional sales approach is to use this time to consider options' pure commission system 'or' salary plus commission system '.

In addition, enterprises should also pay attention to the different systems enable enterprises to obtain the marginal income factors. From an economic management point of view, each method of payment of one dollar generated by every dollar of marginal revenue must be equal to the marginal cost of compensation, if the prize money to pay one dollar increase in income of more than one dollar reduction in salaries of the lower income, the proportion of bonuses increase

d) What is the relationship between employee relations and business performance?

Based on the study done on the performance based remuneration system; this system is an indication that employee relations rely is influenced by the remuneration system.

Business performance was also affected by the performance based remuneration system. Some firms showed that profits had doubled within two to three years and were more after the three year period. Productivity of the employees also doubled with the expansion of sales and the expansion of sales and the reduction in the sales costs

3) Research Methodology

There are three kinds of research methods. These include the methods of correlation, experimental and descriptive (Walliman & Baiche, 2001).

Descriptive method:

For the purpose of this research, a descriptive method was implemented. To illustrate, Creswell (1994) states that the descriptive method of research involves the method of gathering information about the present existing condition. The purpose of employing this method is to describe the nature of the current situation of reward system and employment relations in organizations as it exists at the time of the study and to explore the causes of relevant issues or phenomenon.

A study of three organisations was done. Each of the organisations had a salary payments system and no benefits paid to the employees. The employees were unhappy because no matter how hard they worked or how many sales they made that brought profits to the organisation; the employees would only receive a basic standard salary and no benefits or bonuses. The employees were disgruntled by their employers and inasmuch as they were working for the organisations, most of them spent their time on the internet looking for greener pastures or when they went to the field to make the sales they spoke to the clients more about being offered positions in the companies they were selling goods and services to rather than on focusing on their jobs. This led to a drop in the company sales.

Case study method:

A Case study method was also be done on past researches or studies to gather information on the past relationship between employees and employers and its reward management.

4) Presentation and Discussion of Research Findings

Of the three companies that was studied a performance based remuneration system was introduced in one while a system that included the payment of bonuses based on the annual profits was introduced in the other. The third company was left as it was without the introduction of a new system of remuneration.

The three companies' performance and employee relations were then observed for a period of two three months. It was noted that of the two companies that had a new form of remuneration system introduced, the employee morale increased. Form the questionnaires that were filled in by the employees so as to determine why their morale has increased we found out that the employees morale had increased because they knew that if they worked hard they would benefit from their hard work by receiving bonuses.

The company that had a performance based remuneration system introduced had a higher increase in sales compared to that company that opted to pay its employees a bonus based on the profit margins.

We found out that the performance based remuneration system was more successful because the employees knew that they would be rewarded for their individual effort hence they worked hard so as to ensure they had the highest sales.

The profit based remuneration system caused some employees to be discouraged because they felt as if their colleagues who did not work as hard would also benefit from the hard work of the most committed persons.

The company that did not introduce a new form of remuneration system did not experience any improvement in sales and employee relations. As a matter of fact there was a decrease in the sales because most of the employees opted to leave the company while employee relations deteriorated because most of the employees were overworked when their colleagues left the organisation.

The companies that introduced the new form of remuneration also experience a high amount of applications as many people wanted to come and work there.

A remuneration system can really affect employee relations. And as seen in this study, employee relations then affect the employee performance. This means that a good remuneration system will mean better employee relations, better employee performance, higher sales hence higher profits.

It is therefore of paramount importance that all serious companies keep a remuneration system that ensure that all of these things are possible. A company can ensure it stays up to date with the latest remuneration packages by keeping an eye on the newspaper job advertisements and the benefits stated, consulting with employer/employee associations or undertaking a salary survey.