Evaluation of the Effectiveness of Remuneration Practices in IBM - Research Paper Example

Introduction IBM is the world’s largest information technology company specializing both in hardware and software. They are the world leaders in invention, development and manufacture of computer systems, software, storage systems and microelectronics. They offer professional solutions, services and consulting to their customers worldwide. The company has approximately 329,000 employees and operates business in 170 countries around the globe (IBM, 2009). Being a multinational, they have to take into account the macro-economic factors prevalent in each individual country. They have to abide by the rules and legislation, for instance, heavy taxation in the UK leads to weakness on the price factor. In the countries where they operate, the economic environment is conducive to growth and the GDP is stable which provides a good market for IBM products and services. The service industry in the world has contributed nearly 73.4% of the GDP in 2006 which suggests that high value added service market is mature around the globe (IBM, 2009). The number of users of internet is growing globally in most countries with developing world catching up very fast. As the education level has increased, the proliferation of internet has made people turn to computer and computer related products, thereby signaling growth for IBM. In 2006, there were 6,064,860 Internet hosts, which demonstrate the pace at which technology is advancing and being accepted by people. This indicates higher growth opportunities while competition also increases. IBM is a globally integrated company and it has access to best capabilities, knowledge and asset from wherever they reside in the world. They keep changing their business model radically and shift its value proposition to keep competitors at bay. All these make it important that attracting and developing individuals is critical to IBM’s success (Schmidt, 2005). Current Remuneration Practices On an annual basis, IBM reviews and announces its remuneration and compensation package which is designed to deliver market-based, performance-driven pay in all segments (Portfolio, 2009). The underlying core philosophy on remuneration is based on two factors – to reward their employees for individual performance and to differentiate strongly among employees who contribute to the overall success of the firm. The remuneration is based on the job role and every role in the company is eligible for a performance bonus. Employee compensation at IBM is the single biggest investment which is closely linked to its revenue and growth profit (AFL-CIO, 2007). They also deliver their compensation in a way that shows their commitment to pay competitively and reward the top performers. This has prompted them to make important changes to their employee pay programs. IBM’s remuneration or the total compensation package comprises of a base salary, an annual employee salary program (ESP), growth-driven profit sharing (GDP), incentives and awards (IBM, 2003). While certain changes may be made to adapt to local conditions in different countries, the basic remuneration package of its employees comprises of these components. IBM invests in competitive pay that reflects business performance and individual contribution (AFL-CIO, 2007). The have changed their remuneration strategy to foster growth although at the core, IBM has always shared its wealth with its people. They conduct annual salary surveys to ensure that the salaries are competitive with compensation outside IBM for comparable positions (IBM, 2003). They ensure that employees are paid competitively through Market-Based Adjustments (MBAs). This program helps to increase the base salary of the employees in eligible job roles and countries where pay is lagging behind the market rates (AFL-CIO, 2007). Their major change is in the employee bonus program which reflects their overall focus on profitable growth. The GPD effectively replaces the performance bonus program. It is meant to return a portion of the company’s revenue to their people who help drive that growth. This is applicable to those IBM employees that are not on sales and services incentive plans. They have also shifted their focus to incentives rather than base pay (AFL-CIO, 2007). Apart from the market-based adjustments, they also reward the top performers in all jobs and markets. They offer performance linked incentives and compensation to reward the contributions of global team members that have helped in achieving the corporate objectives like revenue and market share growth (IBM, 2003). This serves to recognize employees whose contributions for the year is much ahead of their peers. This is determined based on an employee’s relative contribution to their team and business success. For example, in IBM Austin, the employees earn extra $50 every time they serve an ad hoc quality-improvement team. In addition, at the end of the year the best projects are selected and three teams get $15000 to be shared among the team members (Sisco, 1992). This strategy has resulted in increasing efficiency, reducing cycle times and having fewer defects. They also offer cash rewards in recognition of the significant achievement of the employees as individuals and as team members. IBM also has sales and service incentives for top contributors which direct IBM’s pay investment towards those who deliver the best results. In 1996, IBM increased its cash compensation to its employees by 8% through lucrative incentives tied to divisional performance (WSJ, 1996). This was a step towards adjusting the cash compensation levels that meet or exceed competitors’. IBM has always practiced the philosophy of sharing its wealth with its people. In 1995, when they exceeded the objectives set by the Executive Compensation and Management Resources Committee, they rewarded their employees with above-target incentive payouts (Hausman, 1995). Most employees received from 2 to 11 percent bonuses during this period. IBM is the employer of choice in South Africa as some of their best practices differ severely from competitors (Dingle, 2006). These include their ‘work-life balance’ and ‘flexibility programmes’ employees have the choice to decide from where they want to work because these days people can work remotely. This helps the women as they are empowered today while they still have to fulfill the dual responsibility of home and work place. If a women employee wants to extend her standard maternity leave of six months and want to work from home, this has been permitted with the income scaled down depending on the work that she can put in. To ensure that no abuse of the flexible approach takes place, IBM has a performance-based remuneration policy. They reward good performance and do not have any standard salary increases. Currently the first-level managers have influence over employee bonus payouts and incentives which was previously fixed payments regardless of performance (Portfolio, 2009). All high performing employees are also eligible for stock options and employee stock purchases. Evaluation of the effectiveness of current practices IBM’s Total Compensation package demonstrates its commitment to its employees, and a significant investment towards attracting and retaining talent in the company. Their incentives are meant to enforce a culture of consistently high performance and their base pay and incentives to employees are the best in the industry. They take into account the local conditions in different regions in deciding the pay structure. IBM has been flexible in their employee approach in South Africa to retain talent and also because of skill shortages in the country. However, lack of skilled workers in South Africa increases the employees’ bargaining power in terms of salary and company bonuses (Potstada, 2005). Their strategy to reward teams for individual assignments serves to motivate the employees but the greater reward is the psychic reward – which is beyond what monetary remuneration can guarantee (Sisco, 1992). IBM has moved away from the traditional merit system and they add gain-sharing plans, team incentives, skill-based bonuses and profit-sharing plans. When an organization sends the messages that cooperation and team work is all-important, it must also back up its stand with recognition and rewards. IBM’s remuneration strategy is totally linked to its profits and gains and they believe in sharing their gains with the employees who are responsible for the profits. However, the traditional approach of financial benefits to motivate employees is no more applicable. The work environment has to be conducive to motivate the employees and motivation influence behaviour rather than output (Wiley, 1997). Goal setting theory is also no more applicable in today’s turbulent business environments because goals too may need to be modified radically as the situation changes. Besides, goal-setting would require performance appraisal and all of these are no more practical today. A survey revealed that employees can be motivated by appreciation, good wages and interesting work. Today work is no more a means of survival but as a means of self-development and self-expression. This theory is in alignment with Hertzberg’s Motivation-Hygiene Theory which states that an individual is motivated by his own inherent need to succeed at a challenging task. IBM has been responding to the employees’ need for recognition by rewarding the top performers in all jobs and markets. They also ensure that their remuneration policy takes into account the needs of their employees in different markets, and flexible working or work-life balance is an attempt towards fulfillment of this objective. IBM’s philosophy to reward and recognize talent is an innovative solution necessary in today’s challenging environment (O’Neill, 2001). Pay and pay-based incentives can be matched by competitors and IBM needs to differentiate itself. Their investment in employee compensation demonstrates their understanding of the needs and wants of their employees. There is no best practice as far as remuneration is concerned and it has to be continuously modified and aligned with the company’s business objectives, business environment, competitors and employees’ needs. IBM has been reviewing its remuneration policy on an annual basis. It has hence very effectively devised its own rewards and incentives plans as a part of the total compensation package which is also based on the IBM’s culture and values. As O’Neill suggests, IBM maximizes the return on this investment with three specific objectives – support corporate philosophy, reinforce short-, medium- and long-tem business goals and it also provides a basis to evaluate the effectiveness of the program. IBM has also revised its performance bonus program which according to O’Neill is the right approach. Incentives should be separate from performance bonus. Reward programs serve as incentives to employees which may fetch results in the forthcoming years. This is in recognition of their efforts, helps to build future capability and recognize current contribution. Their GDP bonus program, on the other hand, returns to the employees a part of the profits for which they are responsible. Managing team performance is a major issue and measuring individual performance of the team members becomes confusing (O’Neill, 2001). Besides, the performance appraisal system does not provide any incentive to exceed the set standard. When absolute standards are set the importance of continuous improvement is reduced. This is the reason why IBM rewards its team members with a token amount and then annually the best teams are rewarded separately. Individual appraisal would not have the same productivity as this team rewards program. Money and job security are the greatest motivators. Since pay is a strong motivator an effective compensation program is critical to retaining talent. Public recognition boosts self-esteem and is a much greater reward than monetary compensation. Job security also relates to their physical, mental and familial wellbeing. Job security is associated with job loss. IBM employees have been feeling insecure with job cuts, pay cuts and no increase in base pay (Thibodeau, 2008). They are also being denied overtime beyond 40 hours per week. IBM argues that if they pay overtime in addition to the base pay, they would become uncompetitive in the industry. However, the employees express their grievances because the incentives (such as insurance and disability) are calculated on the base pay and there has already been a cut in the base pay. The company has also been accused of debanding or demoting the employees into jobs with lower pay scales (Alliance@IBM, n.d.). Recommendations for improvement Globalization may be influencing the pay cut decisions and it is quite likely that IBM’s competitors would follow IBM strategy in pay cuts as they are the world leaders in their field. Hence the strategy and approach that IBM adopts should be something that cannot be duplicated by its competitors. When they recognize the top performers, it may serve to de-motivate the low performers and they develop a feeling of insecurity. Job insecurity can affect motivation and consequently performance and productivity. When IBM recruits an individual it is expected that they would be high performers as their recruitment process is stringent. Despite this, if there are low performers, it indicates drawback in the recruitment and selection system. This suggests that the recruitment system should be augmented so that every employee finds a P-O fit in his job role. Low performers in an organization also indicate that managers may be ineffective in bringing out the potential of the subordinates. Hence there should be accountability for managers and executives and their compensation should be linked to their subordinates’ performance. This would enhance the importance of team work where an individual is not important. The focus should be on achieving the organizational goals and not to pursue personal goals. Besides, the first-level managers have influence over employee bonus and financial rewards but the competency level of such managers is debatable. Only managers that have worked with the employees for over one year should be eligible to make such assessments. Besides, personal biases can creep in and hence to avoid this, team performance should be discussed as a group and then decision taken. IBM should pay attention to the grievances of its employees and have direct interactions instead of any forum. This would serve to hold back the information from the competitors who would be only too willing to take advantage on such situations. While currently pay cuts are rampant in the industry, IBM should honour overtime. They can call it by any other term – could be special allowance or night allowance but such an allowance would serve to compensate for the pay cut for the time being till the market situation improves. Conclusion IBM considers team as all-important and low performers should not be assessed based on individual managers’ perception. This would differentiate IBM from its competitors and boost the morale of its employees. Currently the employees fear job loss to the developing world which has to be removed through assurance of this type. While their core philosophy of investment in employee compensation is valued, personal and regional biases should not be permitted. Their philosophy to differentiate strongly among the top performers and others needs attention. They should have a platform where its global employees can air their grievances because very often the voice of the employees is not allowed to reach the top management. IBM should bring into practice a system where the managers and executives are assessed and such a system would only enhance the image of the company. If they have top performers at the managerial level, an organization can be assured of strong performers even at the lower levels. The line managers are the ones that interact with and motivate the employees and hence focus should be on the managers’ compensation and assessment. 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