CHAPTER 2: THEORETICAL AND CONCEPTUAL FRAMEWORK
2.5 Remuneration Drivers
2.5.1 Performance-related Pay Drivers
Performance-related pay drivers refer to remuneration decisions to adjust remuneration based on individual, team, corporate performance or a combination thereof. These are listed and discussed next.
2.5.1.1 Company Performance
Employees are generally hired to implement strategic objectives and carry out activities that increase shareholder value. Typically, this is done by increasing profits. For employ- ees to perform exceptionally, they should be exceptionally compensated to do so. It is gen- erally accepted in many corporations and in the literature that excessive remuneration packages for employees warrant being paid, as long as a positive relationship exist between compensation levels and organisational performance. The above is supported by Carr and Valinezhad (1994: 85) who contend that employees should be rewarded accordingly for maximizing shareholders return or profit as this is not only contributing to own “well- being, but also to the welfare of society,” at large.
2.5.1.2 Merit Pay (i.e. performance-based fixed pay increment)
Performance-based fixed pay increment refers to an increase in an employee‟s remunera- tion based on the outcome of an annual evaluation of an employee‟s performance against pre-agreed performance targets. It is premised on such motivational theories as expectancy theory, goal-setting theory, equity theory and agency theory, amongst others, which advo- cate that the achievement of target results should lead to automatic payment of an agreed and meaningful reward (Perkins and White, 2008:164). The level of individual employee performance achieved during the particular review period usually determines the progres- sion increase that an employee will get. Due to the emphasis on real value added, employ- ees who do not perform at an adequate level do not progress within the scale or receive re- duced salary adjustments.
Page | 47 The system is credited by both Lawler (2000) and Armstrong (2002) for its strong motiva- tional effect on the individual employee and concur that it has the potential to create a highly motivated workforce, reward and retain high performers and help remove poor per- formers from the organisation given the zero or reduced pay increases which they receive in lieu of their poor performance.
The system has however come under heavy criticism from both the academic literature and industry alike, expounded upon elsewhere in this chapter. The major problems as identified by Perkins and White, 2008: 165-169, revolve around the three major operational issues:
the setting of appropriate performance measures; the evaluation of performance as well as the linking of performance appraisal outcomes to pay. Perhaps the biggest risk for this sys- tem is costs associated with pay drift which usually result from instances where all manag- ers choose to award high performance ratings given the research evidence to the effect that line managers are often reluctant to award low ratings for fear of antagonising staff. It thus goes without saying that the basis for any performance-based pay is an effective perfor- mance management system, (discussed elsewhere in this chapter), required to overcome these challenges.
Furthermore, although the performance-based pay approach has heavily been criticised, there continue to be nonetheless a strong shift among employers to implementation of in- dividual performance-based pay, albeit with variations to ensure more transparency and manageability (Bratton and Gold, 2007).
2.5.1.3 Commission Schemes
Commission schemes are designed to maximise individual and/or team performance in a specific area. These schemes are frequently found in the sales and marketing space and typically reward individuals or teams as a direct percentage of sales volumes, net sales, margin profit achieved or some other sales related variables (Bratton and Gold, 2007).
Page | 48 Commission schemes vary from company to company but in theory commissions are most frequently calculated on sales turnover achieved by individual sales staff or the work team / business unit as a whole compared against a predetermined target.
2.5.1.4 Productivity-Based Pay
Productivity-related remuneration forms an integral component of any organisation‟s re- muneration policy (Armstrong and Murlis, 2007). It usually involves payment of additional remuneration to employees for increasing productivity beyond set targets. According to Bussin (2003), staff realise that productivity implies producing more with less resources coupled to a commensurate formula for determining remuneration payable for meeting cer- tain productivity targets.
2.5.1.5 Share Options
Share options have been identified as another factor that drives employees‟ remuneration and are an outright grant of shares by a company to an employee without any payment by the employee or for only a nominal payment. The employee can, after a limited period of time, get the real shares without paying money for it or paying very little for it and get the partial property rights of the company, subject to specified contractual provisions. This amounts to concrete income for the employee (Bratton and Gold, 2007).
Share Options have proved to be one of the more popular strategies to not only lure talent, but keeping them also. They have thus been used for years to tie employee‟s performance to the shareholder‟s interests and help companies attract and retain and result in long-term oriented employees (P-E Corporate Services, 2009).
These rights are not available immediately, the employee needs to fulfil their side of the bargain, or provide services over a specified period of time called the service period. Thus share options depends on performance appraisal and shares may be awarded based on prin- ciples of equal / proportionate opportunity i.e. when they are tied in as percentage of annu- al salary or based on the principle of open opportunity where each participant can make his
Page | 49 own opportunities through performance. The income thereof can only come from future shares price rise (Bratton and Gold, 2007).
Although the usual rationale given for shares option grants to employees is to align em- ployees' interests with the interests of shareholders, many widely publicized corporate scandals have proven that this is not always the case. Because of the "bad apples" in cor- porate leadership, there has been a shift in trends with companies moving away from an emphasis on shares options to compensation that connects with the long-term growth of the company (Bratton and Gold, 2007).
Despite the popularity of share options, there are several flaws with equity-based compen- sation (Gao and Shrieves; 2002). We shall, however, not dwell into those as the Namibian Port Authority, which is the focus of this study is not a listed organisation resulting in the implementation of share options within the Authority not being an option at this stage.