Table of Contents
- List of figures
- 1. Introduction
- 1.1 Background
- 1.2 Rationale for research
- 1.3 Aims and Objectives of the research
- 1.4 Organization of the study
- 2. Literature review
- 2.1 Reward strategy
- 2.2 Extrinsic and intrinsic rewards
- 2.3 The move to the concept of total rewards
- 2.4 Employment relationship
- 2.5 Job satisfaction and rewards
- 2.6 Job involvement and rewards
- 2.7 Reward system aligned with firm strategy
- 2.8 Joint Reward System in New product Development
- 2.9 Stock options
- 2.10 Summary of literature review
- 3. Research Methodology
- 3.1 Focused problem
- 3.2 Research Framework
- 3.3 Research philosophy
- 3.4 Qualitative/quantitative methods
- 3.5 Research Design
- 3.6 The research onion
- 3.7 Methodology
- 3.8 Data collection
- 3.9 Data analysis
- 4. Findings and analysis
- 4.1 IBM
- 4.2 Cash compensation
- 4.3 Performance-based-pay
- 4.4 Incentives through training and development
- 4.5 Extrinsic/intrinsic rewards
- 4.6 Total rewards
- 4.7 Team work and rewards
- 4.8 Stock options
- 4.9 Salary increase program
- 5. Conclusion and recommendations
- 5.1 Conclusion
- 5.2 Recommendations for further research
- 5.3 Limitations of the research
List of Figures
- Figure I Total Rewards
- Figure 2 Employment Relationship
- Figure 3 Research Onion
Reward policies in the past were made on ad hoc basis but the same practice is no more practical in the current business environment. The remuneration package has evolved and the companies challenge the existing assumptions. With the aim to understand the reward model of success in today’s turbulent business environment, the objectives of the research were to review the current literature on the reward practices, to understand how IBM manages its reward strategy and whether they take into account the changing relationship in the company while designing the reward strategy.
The objectives of the research were achieved through a qualitative approach of the available secondary data. No fresh primary data was collected due to certain time and budgetary constraints. Since plenty of data is available, this was segregated and important and relevant data used for the study. Literature on the reward polices and practices were collected mainly from academic journals from reliable sources such as Emerald, ProQuest and EBSCO. Data on the company and its policies and practices mostly came from company website or from search through reliable search engines.
The study could collect data based on the research objectives. The reward practices and policies are all based on employee involvement, employee engagement and to maximize performance. The study found that companies have started recognizing the value of human capital and are willing to make investments in training and development. The study revealed the difference between intrinsic and extrinsic rewards, the concept of total rewards and the importance of employment relationships in determining the reward strategy.
The study concludes that a company must consider the changing business environment while designing the reward strategy. Extrinsic rewards are very important but only up to a certain extent. People today seek challenges and hence individual needs and lifestyles have to be considered when rewarding. IBM very efficiently manages its reward strategy and takes its changing relationship into account. They recognize top performers and reward them suitably. However, in teams they do not give importance to individuals. It is the team that is rewarded and this motivates every member of the team irrespective of their contribution. The reward strategy has to be in alignment with the overall corporate strategy, which can enhance performance. Employee involvement is essential to keep their interest sustained in the job because this alone can enhance productivity. Thus, a balance of extrinsic and intrinsic rewards is the success model of the reward strategy. The reward strategy would depend on the organization and its overall strategy.
In today’s competitive business environment rewards have become a mechanism to influence and encourage workers to enhance productivity and maximize returns. The rewards were initially instituted to attract, retain and motivate the staff (CIPD 2009). Earlier salary attracted employees to an organization, benefits helped to retain talent and bonus and incentive schemes were meant to motivate them. It was also believed over a decade ago that if the rewards and recognition process is informed to the employees, it provides a clear statement to all concerned of the organizational values and the commitment to employee involvement (London and Higgot 1997). However, rewards and recognition do not work for several reasons. Rewards and recognition system offer long-term benefits which seldom work, according to the authors. Besides, they can lead to internal competition, they undermine
Employee reward pertains to how the people are asrewarded in accordance to their contribution and their value to the organization (Armstrong, 2004). This includes both financial (fixed and variable pay) and non-financial rewards (recognition, praise, responsibility, personal growth). According to CIPD (2009) non-financial rewards might include opportunities for learning and development, as well as ‘voice’ and quality of working life. Recognition has been found to be top motivator of employee performance (London and Higgot 1997). Hence, motivation is not necessarily an intrinsic property of human nature. Recognition acts as a fuel to keep the employee going and he knows he is not fighting a mountain (Patton 2009). Employee rewards leads to enhanced staff loyalty, increased productivity and innovation.
Rewards include the employee benefits and the combination of the three – financial, non-financial and the benefits – comprises of the employee reward system (Armstrong, 2004). The reward system is based on the strategies, policies, plans and processes that the organization follows. Companies use financial and non-financial rewards to motivate people. Financial rewards no longer carry much weight as they are not considered the best incentive to stimulate idea generation. However, intrinsic motivation has been found to be more important in encouraging non-routine behaviour than extrinsic rewards (De Jong and Hartog 2007). Material rewards may be helpful to some extent but support and recognition from the seniors is essential. Nevertheless, rewards offered by an organization have a powerful impact on the employees’ attitudes towards the job and the company they work for (O’Driscoll and Randall 1999).
1.2 Rationale for Research
Reward policies in the past were made on ad hoc basis, especially when companies faced difficulties in the labour market or when they wanted to settle some awkward negotiations with the employees (Stredwick 2000). Very few companies have a clear statement and rationale behind their reward program. They are not sure what they expect from such a strategy. The remuneration programme keeps evolving but without taking into account how each individual element of remuneration (base pay, incentives, benefits, superannuation etc) fit within the total package. Such plans are often independent of the overall business strategy, the company’s work culture and values (O’Neill 2001). Rewards policies gradually have become out of line with the overall business strategies. The performance-related-pay has a built-in conflict because it focuses on rewarding the achievements of individuals whereas the HR policies lay emphasis on team building skills. Things have changed in recent years when organizations realize that a reward strategy has to be in place. Rewards need to retain flexibility. Rewards should not be fixed but contingent upon performance. This is why even the pay is being spilt into fixed and variable pay and is becoming contingent upon performance.
Companies are trying to challenge the existing assumptions about rewards. They are moving away from the traditional pattern of rewards based on tenure of work in the organization or based on performance. However, globalization and the changed market place make it imperative for the HR managers to evaluate the assumptions of the reward system. IBM is a global company having presence in over 170 countries. Such transnational companies have to take into account multiple settings including where the company is headquartered, the host countries where it has its offices or where it has subsidiaries and associates (CIPD 2009). It is also likely that cultural differences affect the effort-reward relationship. Political and legal structures may also impact the nature, value and how the rewards are implemented, and viewed by employees. The concept of rewards has undergone change and workers are attracted to an organization by a whole range of financial and non-financial rewards. These too keep changing based on their personal circumstances (CIPD 2009).
While the staff turnover in the IT companies is known to be high, IBM has been able to attract, retain and motivate the best talents in the industry. The motivation from the study arose from a desire to understand the reward system at IBM. It was to understand if their reward system takes into account the changing relationships between the various actors in the employment relationship. There is no ‘best practice’ in the area of rewards. The HR personnel have to look at the overall business needs and to identify how rewards strategies can assist in guiding and changing employee behaviours.
1.3 Aims and Objectives of the Research
Since companies are trying to challenge the assumptions on rewards and they have been making reward policies on an ad hoc basis, the research question is: What is the reward model that IBM – an MNC – follows? Thus, the objective of the research is:
- To review the current literature on the different theories on which the reward system is based.
- To review the current reward system practiced at IBM at its different global locations.
- To understand if IBM takes into account the changing relationship within the company.
1.4 Organization of the Study
1.4.1 Introduction Chapter 1
This chapter sets the background and the context of the study. It provides the motivation and the rationale for to understand the reward system in the changed business environment. The chapter also presents the research question along with the research aims and objectives. It also presents the organization of the study and briefly explains the chapter and its contents.
1.4.2 Literature Review Chapter II
This chapter reviews the available literature on the subject of study based on which the framework for the research is developed. Review of past studies would help to gain insight into the rewards policies that firms have been practicing and whether they attained success.
1.4.3 Research Methodology Chapter III
This chapter discusses the research philosophy and presents the research design in alignment with research objectives stated in the first chapter.
1.4.4 Findings and Analysis Chapter IV
The data collected is presented in this chapter. Data collection is totally based on secondary search. Findings and analysis has been conducted simultaneously to avoid repetition. Since there was no primary data, this was considered a better approach.
1.4.5 Conclusion and Recommendation
Based on the findings, the conclusions are summarized. This chapter also suggests areas for future research and details the limitations of the study.
Literature review demarcates what has been done from what needs to be done. It also highlights the theories relevant to employee rewards, the practices and the outcome. At the outset, the chapter discusses certain definition, before going into how companies formulate their reward strategies.
2.1 Reward Strategy
A reward strategy should be such established that it clarifies the aims of the various reward elements, integrates them in a coherent way and informs the employees what they can expect to receive and why. Unless it is communicated in the right way, it may lead to doubts in the minds of the employee and he may tend to form his own opinion on what the organization was trying to achieve (CIPD 2009). The strategy has to be executed to derive benefits from it and this requires that the managers are equipped to handle the reward strategy.
A reward strategy should directly support and promote the company’s philosophy and values (O’Neill 2001). It should reinforce company’s short- medium- and long-term business goals and objectives. The strategy should form the basis enabling the company to carry out an evaluation of its effectiveness and the return on investment of the reward programme. The reward programme should be so clear that it is able to communicate to the employees what the company expects.
Thus, it implies that the reward strategy offers two-fold benefits – to inform and motivate the employees and to promote the company’s philosophy and values.
2.2 Extrinsic and Intrinsic Rewards
Intrinsic rewards are a part of the job – challenge, variety and autonomy, according to O’Driscoll and Randall (1999) and an individual receives these internally as a result of his involvement in activities enhance feelings of self competence, satisfaction and responsibility (Buch and Tolentino 2006), personal and professional growth (Mahaney and Lederer 2006). They also include status, recognition, praise from superiors, personal satisfaction and feelings of self-esteem. Intrinsic rewards come through employee involvement and also include development and use of new skills and competencies, increased level of responsibility, use of discretion at work and control over work. Employee involvement gives them a feeling of pride in their job, they enjoy their job and they believe that their contribution to the success of the project is vital. Such rewards lead to job satisfaction and motivate them to produce better.
Extrinsic rewards comprise of elements such as pay and fringe benefits, promotion or advancement oppurtunities within the organization, the social climate and the physical working conditions (O’Driscoll and Randall 1999). Extrinsic rewards can also include profit sharing, gain sharing, employment security (Allen and Kilmann 2001), and payments and compensatory time off (Mahaney and Lederer 2006). Extrinsic rewards are thus that an employee receives from the organization as a result of his performance. Buch and Tolentino further divide the extrinsic rewards as direct and indirect. Direct rewards include recognition from management and small tokens of appreciation like key chains or movie tickets. Indirect rewards include enhanced job security, new oppurtunities for promotion, and better performance appraisals. Intrinsic rewards lead to higher job involvement while extrinsic rewards lead to continuance commitment to the organization (O’Driscoll and Randall 1999). If the extrinsic rewards are offered and fulfilled, it serves to motivate the employees but if they fail to receive these rewards, they are disappointed.
Herzberg’s rewards and motivation theory further explains this axiom. While the hygiene factors, according to Herzberg demotivate when inadequate, there are motivators that sustain the effort. Herzberg maintains that financial rewards, if inadequate, can demotivate but beyond a certain limit, money is a hygiene factor and does not motivate (Bassett-Jones and Lloyd 2005). This implies that dissatisfaction is the result of absence of factors that give satisfaction. Employees are dissatisfied when they are unhappy with the financial reward and the working conditions, but at the same time, if the satisfaction levels with these variables increase, it does not necessarily mean job satisfaction. This ultimately implies that any form of extrinsic rewards makes a difference only up to a certain extent. The true rewards are the intrinsic rewards that benefit both the employer and the employee.
2.3 The Move to the Concept of Total Rewards
Total rewards is a holistic approach to the reward system. It describes a reward strategy that encompasses additional components learning and development, and the work environment within the total package of benefits. It is aimed at giving the employees a voice in the operation, thereby benefiting the employer with a committed employee. Based on this, the total reward thus, has been depicted in the figure I below:
Source: CIPD 2009a
Total rewards has wide-reaching implications both for the employer and the employee. It can help the HR to align its HR and business strategies in line with the employee needs. However, this concept is not new although the terminology may be new. Many firms have been implementing such holistic concepts which encompass both financial and non-financial rewards.
Total rewards adopts a contingency approach and can be tailored to suit the organization’s needs and environment. The rewards can be integrated with other HR policies and practices. This practice of rewarding is driven by business needs and focuses on rewarding the business needs, employee behaviour that best fit with the strategy and goals pursued by the company. It recognizes that people are central to the success of any organization and a key source of competitive advantage. In order to be able to meet the employees’ needs, their lifestyle and stage of life, they are offered a choice of rewards. According to a survey by CIPD, about half of the employers have adopted the total rewards approach although most are from the large private sector. A table containing the percentage of organizations that have adopted the total rewards approach is presented in Appendix A.
Total rewards is just another name for what has existed for a long time. It includes factors that have been considered as extrinsic rewards by several authors. This scheme has certain benefits such as easier recruitment of better-quality staff, reduced wastage from staff turnover, better business performance and enhanced reputation of the organization. However, there are certain limitations in adopting a total reward approach. There is no ready solution applicable to all companies and it has to be tailored to suit individual circumstances. Developing an appropriate program could have complications and risks. Thus, taking the helps of a consultant is advisable. Since the benefit schemes are flexible, debates are likely to arise between personal needs and work-related needs. The managers too find it easier to integrate the financial rewards than the non-financial rewards. The line manager’s role becomes very vital because they are the ones that interact with the workers and best equipped to know and understand the needs.
Total rewards is a simple but difficult approach to put into practice. This is because individuals differ in their needs and wants, in their attitudes and responses and aligning them with the corporate goals and strategy is a challenge.
2.4 Employment Relationship
Poster and Scanella (2001) suggest how a total rewards strategy can help employers achieve their desired workforce. An ideal employment relationship is when the goals of the employer and the employee are aligned. The employment relationship, according to the authors has four major factors as per the figure below:
Figure 2 Employment Relationship
Source: Poster and Scanella (2001)
The performance of the employee is affected if he does not like or enjoy the work. This refers to job involvement discussed by O’Driscoll and Randall who contend the intrinsic motivation such as a challenging job is essential. Poster and Scanella (2001) contend that not all employees look for challenge and if the goals are too aggressive, they may even shy away from the company. Career progression, an extrinsic motivation is the primary factor that workers look for when they week new employment. They seek acquisition of new skills, training, mentoring and other ways in which employment relationship will develop their career. Culture covers several dimensions like the physical office space (which too has been considered as extrinsic reward by O’Driscoll and Randall). All of the cultural dimensions mentioned by Poster and Scanella such as work life balance and the degree of individual autonomy come under extrinsic rewards according to O’Driscoll and Randall. Total rewards include salary, incentives, deferred compensation, retirement benefits, and health and welfare benefits. These are basically the financial benefits or rewards as mentioned by Armstrong, which are not the most important motivators today. Even though Poster and Scanella call these financial rewards as total rewards, they however do mention that if an employee is satisfied with the other components of the employment relationship, he would not leave the organization even if he was dissatisfied with the total rewards component. Thus, this study too confirms that financial benefits are not the prime factor that is rewarding to the employee. In fact, no amount of money will hold to the company if they are not satisfied with any of the other components of the employment relationship.
2.5 Job Satisfaction and Rewards
Kalleberg (1997) empirically examined the relationship between job satisfaction and work values and job rewards associated with six dimensions of work – intrinsic, convenience, financial relations with co-workers, career oppurtunities and adequacy of resources. The study had two major objectives. The first was the link between job satisfaction and work values and the study concluded that how an employee values the work has significant impact on job satisfaction that he derives. The second objective was to find a link between job satisfactions that influence workers’ attainment of job rewards. The focus of the paper was job satisfaction and not rewards and here, only the conclusions connected to rewards have been reviewed. How an individual evaluates his position and the job characteristics is important. When the dimensions of work are different valued, they are rewarding for the worker. Each individual will determine the characteristics of the job independently and this would also depend on the type of rewards that are available. Moreover, it is not the objective characteristics of the job but how they are experienced by the worker, which leads to work value and job satisfaction. The study also found a link between job satisfaction and the attainment of rewards, thus adding to the different theories on rewards.
2.6 Job Involvement and Rewards
Job involvement has become of great importance as human value is recognized in the international work environment. A study of the perceived organisational support and satisfaction with rewards was undertaken with samples of four dairy co-operatives in Ireland and New Zealand. This was meant to explain job involvement and two forms of commitment – affective and continuance commitment. The authors, O’Driscoll and Randall (1999) explain the employee commitment to the job and the organization, emphasizing that the way an organization treats its employees has great influence on their attitude towards the job and the organization itself. The motivation for the study was thus to explore the linkage between employee perception of rewards and the support they receive from the organization. The research instrument – survey questionnaire contained exploratory questions on organizational commitment, job involvement, perceptions of organizational support and satisfaction with intrinsic and extrinsic rewards. The study concluded that perceived organizational support and satisfaction with rewards can bring about greater job involvement and affective commitment. Moreover, intrinsic rewards are more important than the extrinsic rewards. This implies that the worker must find the job challenging and interesting for him to derive satisfaction and involve himself. It also undermines the importance of fringe benefits, physical working conditions and other forms of material rewards. However, reward satisfaction does not lead to continuance commitment. Perceived support from the organization leads to greater level of employee involvement. However, the response rate of the study was quite low and most respondents were from the non-managerial segment.
2.7 Reward System Aligned with Firm Strategy
Allen and Kilmann (2001) studied the impact of the rewards practices on the relationship between an organizational strategy based on the principles of total quality management (TQM) and perceptions of firm performance. Hence their three-dimensional model includes the firm strategy, the reward system and the firm performance. The authors have rightly considered firm performance against the industry competitors and not merely on the expected or targeted performance of the firm. At the same time, a firm may also like to measure its performance based on certain criteria, which also has been taken into account in measuring overall firm performance. Extrinsic rewards that they included in the study were profit sharing, gain sharing, employment security, and comp time. The extrinsic rewards had a positive effect while the intrinsic rewards did not show any significant relationship. This is in contrast to the previous studies that have found intrinsic rewards to be more significant than extrinsic rewards. Reward practices must complement its TQM strategy and this can lead to higher levels of firm performance. This demonstrates that the type of reward practices employed by an organization plays an important role in achieving the TQM targets and enhanced firm performance. The traditional rewards system has limited benefits as it is usually based on individual accomplishments and is no more effective in today’s highly volatile business environment. This system is not followed by the team-based, knowledge-oriented and quality-focused organizations. Overall, the authors emphasize that the reward system should be in alignment with the firm strategy. Data was collected through questionnaire administered on 100 graduate students who were either currently employed or had left their jobs in the past six months to pursue full time study. This was meant to get the current information and practices with organizations but their survey sample was confined to students that limited work experience. Students may have come from diverse industries but this has not been mentioned in the paper. Nevertheless, the study confirms that only extrinsic rewards influence firm performance and not the intrinsic rewards.
2.8 Joint Reward System in New Product Development
Firm performance can include several dimensions and being able to successfully handle new product development (NPD) is also an attribute of firm performance. In today’s business environment it is has become important to encourage knowledge sharing among the NPD members. Chang, Yeh and Yeh (2007) studied the impact that rewards can make in influencing knowledge sharing among the NPD members. All firms have transcended the individual reward system and the dynamics have shifted to team-based and cross-cultural management. In such cases, the authors find that joint reward system (JRS) can be a more effective mechanism. The authors undertook to study the effect of the JRS on knowledge sharing among cross-functional NPD members and NPD performance, because there were no tests done on this issue. However, it is not merely the rewards and incentives that influence knowledge sharing. Individual motivation to hold back knowledge or to share with others, influences knowledge sharing. Again, rewards may encourage one to share knowledge but the fairness with which the rewards are instituted, also play a role. Their model of testing thus included a procedural view (participation of reward decision and reward contingent on NPD phases) and a monetary view (risk-free to participate and over-reward incentive). The respondents were only from Taiwan but from different sectors and included a total of 233 valid respondents. Since it was from three different sectors and considering the size of the respondents, the conclusions drawn can be relied upon. Besides, no other study on JRS in NPD had been tested prior to this study. The study found that when the managers encourage risk-taking like an entrepreneur would, the team members are willing to share knowledge. JRS measured by risk-free to participants not only encourages knowledge-sharing but also NPD performance. When rewards are offered, the NPD members become risk-aversive but over-rewarding does not fetch any enhanced performance or motivation to share knowledge. This study offers a significant contribution to the study of joint rewards system and team-based projects, which is a common practice today.
2.9 Stock Options
Stock options, one of the deferred compensation plans, have an influence over the employee attitudes like increased satisfaction, organizational commitment and reduced intention to quit. They are also used as an attractive recruitment tool. Stock options create a sense of psychological contract between the organization and the employee. Based on these assumptions, Selvarajan, Ramamoorthy, Flood and Rowley (2006) presented a causal model of the influence of stock options on psychological contract and employee attitudes. This study was based on data collected through a survey of 98 employees from one single large financial services firm. The results were contrary to the hypothesis and any previous studies on the subject. This study found that employee stock option plans have a positive influence on commitment and tenure intent. Employees who had stock options felt their expectations were met by the organization as compared to employees that did not have stock options. Hence, this suggests that employee ownership of stocks creates a sense of psychological ownership among the employees which makes them feel a degree of control over the course of the organization. However, as stock prices decline, the sense of ownership reduces. When this happens, the stock option does not have a positive impact on equity perception and attitudes like organizational commitment and employee turnover. This study collected data from a single organization and hence the results may not be the same if data is collected from a range of sectors. The attitude of employees may also differ depending on their age and managerial level. Those that understand the value of stocks on a long-term basis, may not be negatively impacted when the stock prices decrease.
2.10 Summary of Literature Review
The literature review has brought out certain models and policies of rewards practiced by different organizations.
- The reward strategy offers two-fold benefits – to inform and motivate the employees and to promote the company’s philosophy and values.
- The true rewards are the intrinsic rewards that benefit both the employer and the employee.
- Total rewards is a simple and holistic concept but difficult to practice because individuals differ in their needs and wants, in their attitudes and responses and aligning them with the corporate goals and strategy is a challenge.
- Depending on the type of rewards available, employees determine the characteristics of the job independently. Thus job satisfaction depends upon the type of rewards attained.
- When people are satisfied with rewards, it can lead to greater job involvement and affective commitment.
- The reward system should be in alignment with the firm strategy.
- Over-rewarding does not fetch any enhanced performance or the motivation to share knowledge.
- Stock option as a reward policy has been known to create a sense of psychological ownership among the employees but as the stock prices decline the sense of ownership reduces.
3. Research Methodology
3.1 Focused Problem
Research involves collecting data through different means to establish a theory and/or to improve decision making (Hair et al 2003:208). This research is a credible and systematic enquiry and is totally based on secondary research. After an extensive literature review of theories and practices on the subject of rewards, data on IBM has been collected through different means. Search has been made on popular search engines such as Google and Yahoo! And academic journals too have been referred to. However, most data has come from websites other than the sites of the company. This study was not meant to identify gaps in the literature and collect primary data. It was meant to study the reward strategy and gain an insight into the business model being followed by IBM.
The turnover in the IT industry is high but IBM has staff that it has been able to retain. The purpose of the research is to understand how a global giant such as IBM can attract, retain and keep the motivation of the staff sustained year after year based on their reward strategy. It is believed that rewards encompass a whole range of pay and benefits and make a difference to employee attitude. This would help to understand the IBM strategy of success.
3.2 Research Framework
A reward model is essential as it offers benefits both to the employer and the employee. The framework for the study would be based on the literature review that suggests that the right reward model should lead to greater job involvement and job satisfaction. This implies that intrinsic rewards are preferred to extrinsic rewards. Besides, over-rewarding does not fetch any extra benefits.
3.3 Research Philosophy
Research methodology is the procedural framework within which the research is conducted. There are a variety of research approaches but the approach should be in alignment with the purpose of the research. It would also depend upon the subject, the time, and the budget available for the research.
Arguments can be evaluated in two different ways. Arguments have definite roles and purposes and an argument is assessed based on the purpose in mind. Arguments serve to provide very useful information in a certain setting but if the setting changes, an abstract approach is also possible. In such a situation, the answer would be derived from the set of circumstances. In this case, the subject of research is employee rewards and the aim of the research is to understand the reward model of success in today’s turbulent business environment. Arguments, according to Rips (2001) can be evaluated in two qualitatively different ways – in terms of their deductive correctness or in terms of inductive strength. This particular research would be in inductive or a qualitative study purely based on secondary research with the social exchange theory as the framework.
3.4 Qualitative/Quantitative Methods
According to Amaratunga et al. (2002) the research strategy should be chosen as a function of the research situation. Each strategy has its own advantages and disadvantages. The quantitative research method requires independence of the observer from the subject being observed. Hypotheses have to be formulated in advance and the outcome can be either ‘valid’ or ‘invalid’. The outcome of the research can be reduced to the simplest terms which help in analysis but this method focuses on figures and numbers.
The qualitative method, on the hand, has the potential to deal with complexity. Moreover, the data collection time and process can change as the research evolves. In this method, the control is in the hands of the researcher and it is easy to navigate and operate the research. The focus here is on natural situations, on words and it requires prolonged contact with the field of study.
3.5 Research Design
Knox (n.d.) suggests that there should be a relationship between the research philosophy and the research method so that the researcher can take an informed decision about the research approach. The researcher can also be prepared about the constraints that may affect the research. This is an exploratory research without any fresh data being collected. It is purely based on secondary research.
3.6 The Research Onion
Saunders and Lewis refer to the research process as research ‘onion’ (Knox, 2004). The second layer within the ‘onion’ refers to the subject of the research approach that generates from the research philosophy. The research ‘onion’ is shown below which demonstrates the different layers in the research process:
Figure 3 Research Onion
Source: Knox (2004).
3.7 Research Methodology
A case study approach has been adopted for this study as it helps to explain the how and whys of the situations necessary for the research. It helps to understand what causes the situation and how it can be overcome. In this research it would help to understand what factors were responsible for the reward strategy adopted by IBM.
3.8 Data Collection Method
Data collection for any research can either through primary sources or secondary sources. The data collection for this study is only through secondary sources.
Data for this research is based on secondary research, purely on literature review, a qualitative approach, and the findings of the data about the company under study – IBM. Based on the literature review of the theories and practices on the subject of employee rewards, the framework has been defined. The framework for the study is that the right reward model should lead to greater job involvement and job satisfaction. Through data collected, it would be possible to evaluate to what extent IBM could succeed in greater employee involvement and what was the strategy employed by them towards meeting this objective.
Another reason for secondary research is that firms may not be willing to provide their confidential data on the subject of rewards. While some data may be available through websites and journals, collection of primary data is not considered practical. It could also give rise to ethical concerns. Managers may not be permitted by their superiors to part with confidential data. Managers may be incompetent to give the right data and moreover, if managers are coerced into disseminating information, it is likely they do not present the right picture.
Yet another reason for secondary search is that different view points are available on a subject. In primary data collection, results obtained from one particular study would have to be relied upon. In this case, different authors and researchers may present their own findings.
3.9 Data Analysis
In the qualitative method research, a lot of unstructured data is generated that can be tedious in dealings and arranging. Amaratunga et al. cite three steps in data analysis – data reduction, data display and conclusions drawing and verification. Segregating literature from the vast amount of literature available, itself is the process of data reduction. This starts at the early stage in the research process. Data is then systematically displayed which helps the researcher to draw valid conclusions and take appropriate decisions (Weerd-Nederhof 2001). Through data display, certain patterns are observed that help in conclusion drawing and verification.
Findings and Analysis
IBM, the world’s information 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 rules, regulations and the macro-economic factors prevalent in each country that they operate.
IBM initially had an employee-focused approach which, when they faced insolvency, shifted to a customer-centric approach. However, IBM now realizes that human capital is the greatest asset and the internal customers’ satisfaction can bring them external customer satisfaction (Potstada 2005). IBM now focuses on employee participation not only in direct employee related matters but also before making strategic changes. As discussed in Chapter II, employee involvement enhances the feelings of self-esteem leading to greater commitment and job satisfaction. This enables the company to drive change as they are able to gain the support of the employees. They are thus able to relate their actions to the core values. Through employee involvement, IBM is able to align the reward system with the firm strategy and enhance firm performance. This is the three dimensional model demonstrated by Allen and Kilmann.
IBM is a globally integrated company and they have access to the capabilities, knowledge and asset wherever they have a presence (Schmidt 2005). Since their business model keeps changing as the situation demands, they need to attract and develop individuals to meet these challenges. Hence, designing the right rewards strategy is critical to the success of IBM. Allen and Kilmann have emphasized that the reward system should be in alignment with the business strategy and this is precisely what IBM strives for. To keep competitors at bay, they need to keep shifting their value proposition and for this they need competent employees. Designing the right strategy fulfils one of the dimensions of the social exchange theory – relationship is based on reciprocation. The company needs to sustain competitive advantage and to achieve this, they have to suitably reward the staff.
4.2 Cash Compensation
IBM has shifted their focus to incentives rather than base pay (AFL-CIO 2007). IBM is committed to competitive pay and they target a portion of the salary investment toward new Market-Based Adjustments (MBAs) which ensures that the employees are paid competitively. However, the same job families do not qualify for MBA every year. This is because it believes that the value diminishes if the same employee receives the same reward every year and he would seek some other form of reward. This implies that if the human behaviour results in a reward, his actions are directed towards more rewards (not necessarily job involvement) but the more rewards he receives, the value diminishes. He then seeks alternative forms of rewards or from different sources. This hence does not ensure greater job involvement. This is thus against the literature findings that suggested that when people are satisfied with rewards, it can lead to greater job involvement and affective commitment. IBM believes that over-rewarding does not does not fetch any enhanced performance or the motivation to share knowledge, which is one of the findings of the literature reviewed.
IBM realizes that monetary revenue has limited attraction and hence their reward strategy is different. Their compensation objectives are pay for performance, pay competitively, and differentiate strongly among the deserving (Amler, 2005). Basically their compensation programs are simple and flexible so that the control is kept at the first line manager level. Their total rewards package comprises of various elements as follows:
Source: Amler (2005)
This compensation program ensures consistency and fairness throughout the enterprise but the responsibility lies with the managers to ensure that employees are classified correctly. The compensation program is also used for benchmarking to determine the base pay ranges (Amler, 2005).
4.3 Performance Based-Pay
When the business performance exceeds the plan and employees perform at the highest level, the earnings oppurtunity are the highest. As far as the performance bonus program is concerned, the performance bonus oppurtunity is 2-8 percent of eligible annual earnings (IBM, 2010). IBM’s core philosophy on total rewards is to reward their employees for individual performance. They would like to reciprocate equitably based on individual contribution (IBM 2003). They hence, 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. This serves as an extrinsic reward to the employees.
This is the reason that IBM offers 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 is their strategy to recognize employees for individual unique contribution – an employee’s relative contribution to the team and business success (AFL-CIO 2007). They also offer cash rewards for significant achievement of the employees as individuals and as team members. Thus, in this case, the extrinsic rewards have greater importance and significance.
IBM strongly believes in being fair in its compensation and hence they conduct annual reviews and announce their remuneration and compensation package. IBM’s annual reviews are designed to deliver market-based, performance-driven pay in all segments, thereby being fair to the employees (Portfolio 2009). Their new bonus programme is designed to return a portion of the revenue and growth back to the employees that are responsible for the growth (AFL-CIO 2007). They try to deal with each employee individually.
The compensation package that IBM offers, is closely linked to its revenue and growth profit (AFL-CIO 2007). IBM always shares its wealth with the people. Their competitive pay reflects business performance and individual contribution.
4.4 Incentives Through Training and Development
IBM has a highly skilled workforce and it also invests in building considerable intellectual capital. It also invests a huge amount in training and enhancing the skills of its employees constantly (Potstada 2005). With marginal increase in costs, they are able to maximize their gains. It is not merely the financial costs that IBM invests in, but they also invest time and effort into building good and adaptable workforce practices. For instance, they offer flexible working hours and also wherever possible, home working facilities. The costs here need not always be financial costs and could also mean time and energy invested in the relation.
IBM’s total rewards program drives a culture of high performance. Their rewards and recognition are based on high performance both as individuals and as team and is not based on tenure of working at the firm. This serves to motivate the people and provide job satisfaction. It is cost effective to train and retain the existing staff than to invest in hiring new ones. Besides, today the incentives are skills development and internal advancement oppurtunities. This is a mutual benefit – the existing staff looks for skills development and the company benefits by retaining the existing staff even if they have to invest in their development. When a company shows that it is keen to keep its staff updated, the employees become valuable and valued (IBM 2007). There is no coercion from either side and both enjoy a relationship of mutual benefit. The employees too understand that staying with the company is a good way of advancing their careers, earning professional certification and building skills. IBM too reaps benefits when it invests in its existing workforce. Companies that boost the morale of their employees through skill development and training, get higher returns on their investment. In fact, such strategies keep costs under control because recruitment afresh and training people has much higher costs. The very purpose of a reward strategy is to communicate to the employees what the company expects in return, which is one of the findings in the literature on rewards.
4.5 Extrinsic/Intrinsic Rewards
IBM does offer cash compensation in several ways – base salary, annual salary that is again offered in two ways (as MBAs and Top Contributor awards), growth-driven profit-sharing and awards (IBM 2003). This is necessary because money is the greatest motivator and despite all the claims that they have shifted their focus from the base pay to incentives, cash continues to be the prime motivator. These are the direct financial rewards that the company offers its employees.
In addition, IBM also offers indirect financial benefits such as pension plans, vacation and holidays, business travel insurance and short-term disability insurance (IBM 2010). Since IBM has a diverse workforce, they also offer flexible benefits to suit individual needs and lifestyle. These include supplemental health, dental long-term disability and life insurance plans. As far as health benefits are concerned, they can be customized to suit individual and family health needs. They offer a choice of three IBM Medical Plan options and various health maintenance organizations (IBM, 2010).
IBM also offers stock option plan under which the IBM employees may purchase IBM Corporation stock at a 5% discount over the prevailing market rate on the day (IBM 2003). This is allowed up to an extent of 10% of his salary and the investment is deducted through payrolls.
Overall, IBM focuses more on the intrinsic rewards than the extrinsic rewards. They understand the monetary rewards have limited value. They have moved away from the traditional merit system. They have now included in their assessments qualities such as gain-sharing plans, team incentives, skill-based bonuses and profit-sharing plans (SISCO 1992). 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.
4.6 Total Rewards
IBM has been practicing total rewards strategy which yields the greatest return for every dollar spent. They try to maximize the employee productivity through different schemes such as flexible working hours, work-life balance, career advancement and training oppurtunities. How an employee perceives of the total rewards system is what matters. If the employee is satisfied, the company has achieved its goal and hence the total reward strategy can be said to be successful.
At IBM UK, 73% of its 20,000 workforce has participated in the voluntary benefit scheme. This is considered to be a phenomenal figure because the average take-up for a blue-chip company is about 50 percent (Asperity 2010). IBM uses the latest technology, has a robust communication system and offers a wide range of perks. They can enroll for employee-funded perks such as child-care vouchers or bike-for-work. Employees also receive employer-funded benefits such as private medical insurance. In Korea, they also offer support of 50% of the interest for housing loans, apart from refunding certain amount of money spent on education of children (IBM Korea, 2010).
IBM also provides extrinsic rewards through another unique channel. They offer their employees discounts on online shopping. IBM has tied up specific retailers and when the IBM shop online they are entitled to 5-10% discount with these retailers. The employees can even purchase the discounted retail vouchers which enables them to make a direct saving on their purchases. Some schemes also offer cash back and hence on an annual basis, the employees receive savings.
The whole idea of such extrinsic rewards is to enhance employee engagement and satisfaction. In designing such strategies, the company takes into account the needs, their lifestyles and their convenience, so that it fits into their requirements. IBM has also set up a twitter page to inform their employees of the numerous rewards and schemes. Daily alerts are provided when new providers are added to the schemes. Social networking sites are very popular and it enables IBM to target different employees to suit individual needs and lifestyles. Thus, they believe in satisfaction of every individual employee.
The total rewards package demonstrates IBM’s commitment to its employees. This is a significant step towards attracting and retaining talent in the company. They are following a holistic concept by giving equal weightage to intrinsic and extrinsic rewards. Money is the basic motivator and up to a certain level, money is the main criterion as well. IBM ensures it meets this expectation because only after this an individual can actually devote himself to work. However, after a certain limit, money is not the incentive and the individual looks for other ways of deriving satisfaction. But when IBM tried to redefine the base pay by making them eligible for overtime while making a 15% base salary adjustment, online protests were registered (Thibodeau 2008). This base pay cut would be offset by overtime, IBM tried to convince the workers. This led to the employees feeling insecure with job cuts and pay cuts. Insecurity is an extrinsic reward without which the individual cannot focus on the job role. Job security is associated with job loss and relates to their physical, mental and familial wellbeing. If the base pay is cut it also affects the insurance and host of other benefits. This upsets the employees, which implies that extrinsic rewards are of prime importance.
4.7 Team Work and Rewards
IBM recognizes individual contribution as well as team work. The pay and pay-based incentives can be duplicated by competitors and hence to differentiate themselves, they recognize individual as well as team work. It has its own reward and incentives plan which is based on its corporate culture and values. IBM does not combine incentives and bonus and this according to O’Neill is the right approach. Managing team performance is delicate issue because it is difficult to measure individual contribution in team projects (O’Neill 2001). When absolute standards are set the importance of continuous improvement is reduced. This possibly is the reason that IBM rewards its team members with a token amount and then annually the best teams are rewarded separately. This works better than individual appraisal and incentives to all team members separately. Sisco (1992) confirms that traditional reward systems do not encourage the breadth of experience upon which the team-based work structures rely. With the old system of rewards, employees stay within the narrow focus. It can even lead to conflicts within the team and hamper any ongoing projects.
4.8 Stock Options
IBM provides stock options but this has never been the right strategy to attract and retain talent. There are numerous examples of companies that have suffered with such incentives. During a down-turn when the stock prices fall, the employees feel demotivated and may even feel that they have been cheated, or falsely attracted. For some time it may give a sense of ownership but that is only till the company stock prices are more than what they have invested. No amount of explanations that this reaps benefit in the long-term, can help to pacify an employee, when the stock prices are down. The immediate calculations of the net loss demotivate the employees. Hence, IBM should use this incentive with caution.
While IBM follows the total rewards approach in its employment relation, they have to pursue a strategy which cannot be duplicated by their competitors. IBM recognizes top performers but this can demotivate the low performers. It is expected that IBM would not in the first place recruit under-performers but when they classify some as ‘top performers’, it implies there are low performers. These set of employees may feel undervalued and hence IBM must have some plans to sustain their commitment and interest. If need be, these employees could be provided with further training and development of skills. Another analysis could be that their recruitment process is not stringent because if their recruitment process was perfect, they would not have low performers in the first place. They may need to review their recruitment strategy and ensure that they have employees that are in tune with the corporate goals and strategy.
Having low performers in the organization can also imply that the managers are unable to bring the best out of some employees. Hence, as assessment of the managers also becomes essential. If managerial rewards are associated with the performance of their team, perhaps the result could be different. This could reinforce and encourage the managers to foster team spirit and communicate that in a team, the individual is not important.
This explains how IBM-global incentives model is based on a combination of both overall IBM and local business success. This model changed the IBM culture from one of entitlement to one based on improving business-unit performance all over the world (Zingheim & Schuster, 2001). These incentives drive how effectively the business goals are translated. Since everyone is on incentives, it becomes critical that everyone achieves success. This gives a feeling of ownership to the employees, which is an intrinsic reward, better than any extrinsic reward. This reward system has helped them to develop and cultivate global talent. Global talent is able to integrate into the local environment to apply advance business tactics and develop a team of local workers. They are thus able to achieve a global workforce of high performers.
4.9 Salary Increase Program
Their salary increase program is deployed in two ways – the funding is determined by the corporate and the planning is managed by the business units (Amler, 2005). Such a strategy ensures fair increase in salary because the local managers are in the best position to determine the increase. The corporate keeps the funding within its own jurisdiction because that is a corporate strategy. They take into account the external market data to determine how much funding is required for each job family to remain competitive. Guidelines are determined and given to the business units that have the discretion to use discretion based upon affordability. Each manager in the business unit is given an allocation for his department. Allocation is again determined by the job family requirement and the employee’s position in the range. Managers are guided to focus on the top performers and also determine which employees should not be granted an increase as they may already be receiving competitive pay. The same procedure is followed to determine the performance bonus. The key factors that are responsible for the success of the compensation and the reward program are management and employee communications. Since the line managers are involved in the entire process, fairness and equity is ensured. Moreover for major compensation changes, the senior management is involved.
Thus, as time has evolved, situations have changed. IBM has suitably responded to the changed circumstances while also taking into account the regional and national differences. They have considered the employment relations at each separate level. They have taken into account the changing relationship within the company. This has prompted them to alter their reward system from time to time. They are considered the employer of choice and this they have earned through the strategic changes they bring about in their total reward system.
Conclusion and Recommendations
The reward system has undergone a change as the business environment has changed. The traditional reward system is not applicable any more. With the motivation to understand the success model of the reward system used by IBM, this study was undertaken. The aims and objectives of the study were highlighted in Chapter I which also set the background of the study.
The method of study was secondary data after an extensive literature review of the theories and practices of the rewards implemented. All the three objectives of the study have been met with. The first objective was to review the current literature on the different theories on which the reward system is based. This has been adequately done in the literature review section. Employee rewards have been discussed and it has been found that while the extrinsic and monetary rewards are necessary, after a certain stage, employees seek other rewards such as satisfaction, pride, self-esteem and growth in the organization. They look for challenging oppurtunities and career progression. Nevertheless, extrinsic rewards and monetary incentives cannot be overlooked. However, over-rewarding does not fetch any additional benefits.
The second objective was to review the current reward system at IBM and the third objective was to understand if IBM takes into account the changing relationship within the company. Both these objectives have been discussed and analyzed together in chapter IV. The study concludes that the reward strategy at IBM continually undergoes change as the situation demands. They take into account various factors such as the regional and national requirements when designing the compensation. While the funding strategy is done at the corporate level, the planning is left to the business units and the managers who are in direct and regular touch with the workforce, thereby ensuring fair and equitable pay. The reward system has to communicate to the employees what the company expects in return. Hence, the reward model of success would be one that ensures that equitable and just exchange takes place between the employer and the employee. At the same time, the company has to consider the changing relationship at each stage.
An employment relationship has to be kept in mind when designing the reward strategic. IBM recognizes that if a person does not enjoy work, he would not be involved, which affects performance. This is an intrinsic reward and hence the job role should be challenging to sustain the interest of the employee. The job must provide the employee with oppurtunities for career progression. This implies that training and development of skills should be on an ongoing basis, which serves as an extrinsic reward. The cultural dimensions also cover the extrinsic rewards like work life balance and flexibility at work. If an employee is satisfied with these dimensions, monetary compensation would not be the reason for him to reconsider or leave the job. Thus, the reward strategy should be in line with the total rewards concept and that is the model of success that firms such as IBM have been able to achieve. Complaints and dissatisfaction among some employees will always be there because no two individuals are same; their ideas and expectations differ and it is not possible to satisfy all the people all the time.
It is expected that the data collected and the analysis at the end would add to the existing knowledge.
5.2 Recommendations for Further Research
The final aim of the research was to understand the reward model of success in today’s turbulent business environment. To achieve this aim, literature review of the reward policies and practices was undertaken. Literature review brought out different aspects which impact the decision of rewards. It has highlighted how changed environment has forced the reward system to change over time. This section can be better organized by focusing on one particular dimension of rewards, for instance, the value of rewards at the level of the first tier managers or at some other level.
The second objective was to review the current reward system practiced at IBM. This has been done through the available data, both from the IBM website and other data available through journals and internet. IBM follows a distinctive reward strategy that differentiates it from its competitors. This process too could be enhanced if primary data would have been collected from IBM or a comparative study of two organizations conducted on their policies during turbulent times. When the going is good, sharing wealth is natural. How the company reacts or responds to market changes and how this impacts the reward system, is what can be looked into.
The third objective of the research was to determine if IBM takes into account the changing relationship within the company. This has been determined but only through secondary data. Primary data collected directly from the employees and then corroborated with what the management has to say, could reveal the true picture. The data that has been collected may have been written by people with a bias against the company or by supporters of the company. Hence, an unbiased study could yield different results.
Overall, to understand the reward model of success in today’s turbulent business environment, a study comprising of two firms from two different sectors, both of which have faced downsizing, should be studied. This could reveal a more realistic picture of how organizations manage relationships while still maintaining a successful reward strategy.
5.3 Limitations of the Research
There is no unique research method and each method has its own difficulties or advantages as discussed in Chapter II. Secondary data was considered appropriate for the research because of certain constraints and perhaps primary data could bring deeper insights on the subject. This is quite likely because issues evolve over time and the mind set of the people also changes.
Accordingly the outcome of this research is based on the research of other people or on data hosted by the company on its website. Articles from reliable sources have been considered and hence it is expected that data used is valid and reliable. Validity is an important part of the research and all precautions have been taken to ensure the validity and reliability of data interpreted. This has been ensured because multiple sources came up with the same results.
The aims laid out in Chapter I has been achieved and the findings and analysis chapter has not been segregated. This makes it easier to discuss the findings simultaneously. There are no ethical concerns as the data used for the study is freely available. Wherever necessary, sources have been cited.
The research process could be further streamlined by segregating the opinions and data from the company website and those from external sources. This could possibly bring to light biases in opinions. A chronological arrangement of literature could demonstrate how things have changed over time and if there is a pattern that could help in further research. However, despite constraints and limitations, the study has been able to achieve the aim of understanding the reward model of success.
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Percentage of organisations
manufacturing and production
private sector services
|By size (no. of employees):
Source: CIPD 2009a