Assignment 2 Henderson Printing Case StudyCompensation

Assignment 2: Henderson Printing Case Study

Compensation – HUMR-1017

Manpinder Singh Sodhi

Student number: #0320367

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Introduction: The best advice that can be provided to a business owner by a Compensation consultant can be considered as “There is no one best compensation system that will work equally and effectively in all organizations” (Long/Singh, p. 3). A compensation system that is successful in one firm might fail at another firm and understanding this point is an essential precondition to successful compensation design. To build an effective Compensation system we use the following “Road map to effective compensation system” which is as follows:

1) Understand your organization and people: The first step in creating an effective compensation is to understand the organizational context within which it will operate.

The reward system is just one part of total organizational system, and each part must fit with and support other parts. Membership behaviour, task behaviour and citizenship behaviour should be understood in this step.

2) Formulate your reward and compensation strategy: We take this step to determine the mix of compensation components to include in your system and total level of compensation to provide, relative to other employers.

We need to consider to what extent intrinsic versus extrinsic rewards can be used in this context.

3) Determine your compensation values: After establishing compensation strategy we establish the processes for determining actual dollar value for jobs and for individual employees. Compensation system will identify the mix of compensation components that will elicit that behaviour in most effective and efficient way.

4) Design your performance pay and indirect pay plans: We try to do determine that how much compensation should be offered using the levels of lag, lead or match.

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5) Implement, manage, evaluate and adapt the compensation system: Key issues here include procedures for implementing the system, communicating information about the system, dealing with compensation problems, budgeting and controlling compensation costs.

Case Study Summary: Henderson printing (Long/Singh, p. 480) is a small-to medium sized firm that manufactures account books, ledgers, and various types of record books that are used in business. George Henderson is a very benevolent and hardworking owner who is handling his medium-sized business single-handedly. About 80 people are employed with the firm, mostly working in production and supervisors without clear responsibilities. There are several salespeople who travel throughout Atlantic region; most of them are relatives of George or his wife. There is no specialist in this business to handle accounting, marketing, human resources or production. George is the only reliable person to answer any question so everyone goes after him to seek solutions and sometimes this annoys him. George spent most of his time in assuring product quality as he believes in providing high-durable products to his clients and high level of customer service. He even go out of the way to fit the needs of the clients which results in extra time and cost to accommodate those changes for short period of time. George belongs to a working class family so he knows the hardships of his parents while growing up. That is why he is a very generous employer who cares about his employees very much.

Analysis of the existing compensation system as a structural variable at Henderson Printing: Being one of the most important structural variables, the existing pay system is not equitable, shambolic, rigid and ineffective at Henderson Printing. Particularly, there are the following drawbacks of the system:

• There is no formal pay system.

• Everybody has a different pay rate.

• CEO has never had a formal salary increase for the whole company.

• Salary raises are provided based on CEO’s mood and how well he knows the employee; the raise is even provided if the company has lost a client.

• CEO provides merit bonuses based on his intuition (increases are hire for those with cheerful attitude or well known by CEO, long-term employees tend to receive much higher bonuses than new employees).

• CEO believes that if a person has been with the firm longer, the person must be more productive.

Though CEO’s compensation system is based on his good intentions to help employees, distributive justice is lacking at the company. Most probably, employees have perceived inequity if they know about salary levels and occasional compensation increases of their colleagues. There is no proper equity system as the appraisals; benefits and incentives to employees are not fair being based on personal judgment of the owner. Staff benefits are not influenced by performance of the company.

Analysis of other structural variables:

There are also a lot of problem with other structural variables. Particularly,

• Responsibilities of production supervisors are not clearly spelled out due to which supervisors often contradict one another.

• There is no system for scheduling production.

• CEO is the only person who knows how to solve production problems.

• Most of salespeople are CEO’s or his wife’s relatives.

• CEO is responsible for accounting, marketing, HR and production without being trained in three first mentioned areas and without interest in them.

• Nobody is able to make decisions except CEO.

• New employees seem to turn over a lot.

• High production cost and high prices became an issue for the company recently.

Thus, the organizational structure (coordination and departmentation) is poor, decision making and leadership is concentrated in the hands of the owner. There is a management bias to production and customer service focus without enough attention to HR, marketing and accounting functions.

Before implementation of a new reward system, changes to job design must be performed. Further, coordination and departmentation mechanisms should be applied to ensure that the work of individual employees fits together such that the overall task is accomplished. Decision making and leadership structure to be modified to avoid concentration in one’s hands.

As the company is sales driven, most of marketing function should be outsourced to a Marketing Agency with SMM being responsible for communication with the agency. As the company will have a moderate turnover (as will be seen further from the proposed compensation system) a recruiter will be needed to provide appropriate flow of candidates to close available vacancies.

After reorganization stage the company will have the following organizational structure:

Level 0: CEO

Level 1: Production & Quality Manager (PQM), Sales & Marketing Manager (SMM), Financial Manager (FM), HR Manager (HRM);

Level 2: Shift supervisors (reporting to PQM);

Level 3: Production workers (reporting to shift supervisors), Accountant (reporting to FM), Recruiter (reporting to HRM) and Sales representatives (reporting to SMM).

Analysis of contextual variables:

To implement a new more effective reward system it is important to analyse contextual variables affecting Henderson Printing that will determine the most effective managerial strategy for this organization.

The company works in a stable complex environment. The company produces a wide range of printed products, the technology is not changing quickly, the demand for the product is stable, and legislation does not change often. For this environment structure classical or human relationship approach can be effective.

Based on the company’s philosophy to produce high-quality product dominating a narrow product for a relatively narrow client segment with the best possible price/quality trade-off, the company uses a defender business strategy according to Miles and Snow Typology of Corporate (Business) Strategy. For this business strategy classical managerial strategy is effective. According to Porter’s typology, Henderson Printing is a focused differentiator who offers their products to a relatively narrow client segment believing “in making a high-quality product that will stand up to many years of use”. Human Relations managerial strategy is the best choice in this case.

As the technology is long-linked in the company, based on Thompson’s typology of Technology, classical approach might be effective for this company. From another side, the company uses routine technology, based on Perrow’s typology of Technology. In this case, Classical or Human Relationship managerial strategy could work. Finally, according to Woodward’s typology, the company operates with unit/small batch technology.

Henderson Printing has a small-to-medium size. A company of this size could apply any managerial strategy to be successful.

The company operates in a region with relatively good economic circumstances. To perform high-quality production the company needs moderately skilled workforce. In this case Human Relationship managerial strategy will work most effectively.

The owner’s belief is to be “benevolent” employer taking care of employees, together with analysed contextual variables implies necessity to transit from Classical Managerial Strategy to Human Relations Managerial Strategy. In the new system job design will allow more social contact. The organization will have a strict, formalized pyramidal hierarchy emphasizing accountability, vertical coordination by supervisors and departmentation by function with use of some team work. The control will have external nature through use of social or peer pressure, rules, some extrinsic rewards. Communication will be conducted both formally and informally. Decisions will be made by senior staff and will be communicated to personnel by the means “need to get staff to buy in”. Finally, reward system will include mainly extrinsic economic rewards unrelated to performance for production staff and related to performance for sales staff, liberal fringe benefits (indirect pay), loyalty rewards and social rewards.

Formulating the Compensation Strategy: Following are the steps that will be followed to formulate the Compensation strategy for Henderson printing.

Step 1. Define the required behaviour:

As soon as a suitable managerial strategy has been chosen an effective compensation strategy can be formulated. For Human Relationships organization high membership, adequate task and some citizenship behaviour is required. Higher task behaviour is required for sales staff who work remotely with minimum supervisory control.

The goal of membership behaviour will be to increase attraction and retention of production staff and reduce new employee turnover.

Generated task behaviour will improve efficiencies, production timing around for customized orders and increase sales volumes.

Finally, citizenship behaviour will insure clear communication, increased communication and teamwork, more engage employees, and conducted regular performance reviews.

Step 2. Define the role of compensation:

The role of the new compensation strategy will be to stabilize financial situation at the company, retain employees, engage and satisfy employees by increasing morale and pay equity, increase communication and productivity. The profit of the company should be increased by 5% in the first year and 15% in the second year after implementation of the new compensation strategy.

A common goal to produce printing materials of the highest quality might be used as an intrinsic reward for employees at Henderson Printing. Development of technical ladders and seniority levels after implementation of appraisal system will keep work interesting decreasing turnover and increasing motivation. Moreover, an opportunity to receive on-job training from more experienced staff in one hand and an opportunity to develop training and supervisory skills for those who will train in the other hand will provide intrinsic rewards for production staff. Providing introductory training for sales staff will also increase their intrinsic motivation. On the top of that, hiring employees who possess ability to develop necessary skills and then train them with the help of more senior staff instead of hiring experienced personnel will allow the company to pay lower salary for hired employees.

As there are no intrinsic or extrinsic reward for production line staff other than compensation and some intrinsic motivators mentioned above, the only way to motivate is through pay. As the cost of turnover are low, there is no need to offer compensation beyond the minimum level sufficient to attract a sufficient stream of applicants. The compensation system will not be used to stimulate task behaviour. That will be done directly by the technology and the supervisor.

Contrarily, the compensation system will be a useful mechanism to stimulate task behaviour for sales personnel. Particularly, performance pay will be a valuable mechanism to produce task behaviour for remotely working staff.

For managerial staff, there are a number of intrinsic rewards: organizational restructure phase helping the company to exit red line, production of best quality printing materials, educating fresh personnel. During such an important phase of restructure in the company attraction of strong managers is a prerequisite for success. Consequently, the role of compensation system will be to attract high-calibre, committed executives.

Steps 3 and 4. Determine the Compensation Mix and Level:

A hybrid compensation policy should be chosen for Henderson Printing. Particularly, different compensation strategy will be chosen for different levels of personnel mentioned above; also, sales representatives will have a different from production staff compensation structure as higher task behaviour is required for sales staff that works remotely with minimal supervisory control.

Production staff and shift supervisors:

The base pay will be determined by Market Pricing and will lag the market by 10%.

Proportion of Total Pay

1. Base Pay 65%

• Market Pricing 65%

2. Performance Pay 20%

• Group Performance Pay

i. Goal Sharing 10%

• Organization Performance Pay

ii. Profit Sharing 10%

3. Indirect Pay 15%

• Mandatory benefits 8%

• Pension Plan: Group RRSP 2%

• Health & Life Insurance 3%

• Other benefits 2%

Sales staff:

The base pay will be determined by Market Pricing and will match the market

Proportion of Total Pay

1. Base Pay 50%

• Market Pricing 50%

2. Performance Pay 35%

• Individual Performance Pay

i. Commissions 15%

• Group Performance Pay

ii. Goal Sharing 10%

• Organization Performance Pay

i. Profit Sharing 10%

3. Indirect Pay 15%

• Mandatory benefits 8%

• Pension Plan: Group RRSP 2%

• Health & Life Insurance 3%

• Other benefits (company car, mobile phone cost, etc) 2%

Management staff: The base pay will be determined by Job Evaluation and will lead the market by 10%.

Proportion of Total Pay

1. Base Pay 60%

• Job evaluation 60%

2. Performance Pay 25%

• Group Performance Pay

i. Goal Sharing 10%

• Organization Performance Pay

ii. Profit Sharing 15%

3. Indirect Pay 15%

• Mandatory benefits 8%

• Pension Plan: Group RRSP 2%

• Health & Life Insurance 3%

• Other benefits (company car, mobile phone cost, supplemental executive retirement plan, etc) 2%

For Production & Quality Manager and his team the following group performance indicators could be incorporated: on-time delivery, production cycle time, percent of defected materials and time of new product introduction.

For Sales Manager and his team the following group performance indicators could be incorporated: market share, customer satisfaction, revenue volumes or growth, customer growth and retention, account penetration.

For HR Manager the following performance indicators could be incorporated: employee satisfaction, turnover rate, total recruitment costs, rate of progress on developmental plans.

Finally, for Financial Manager, the following performance indicators could be incorporated: budget-to-actual expenses, liquidity ratios, cash flow and working capital.

Administrative Details:

• Employees will be paid bi-weekly through direct deposit.

• Pay raises will be determined through performance reviews conducted semi-annually.

• Benefits will be administered through insurance company.

• Payroll will be outsourced.

Steps 5. Evaluating a Proposed Compensation System:

The system should be affordable, meet Payment Standards Act and Human Rights Legislation requirements and insure attraction of employees. Having more data about Henderson Printing would allow us to evaluate the proposed compensation system. Though, we only know current annual sales of the organization.

References:

• Long, R. J. (2014). Strategic compensation in Canada (5th Edition). Toronto, Ontario: Nelson.

• Long, R.J. /Singh, P.S. (2018). Strategic compensation in Canada (6th Edition). Toronto, Ontario: Nelson.

• Human Resource Management. (2016, March 22). Retrieved May 10th, 2019, from