Performance-Based Pay for Executives

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Table of Contents

Introduction
Strategic reward system
Conclusion
Reference List

Introduction

Background

The contemporary reward system for top management is mostly performance based, also known as pay for performance. The idea behind this reward system is that through the recognition of performance by the executives, their interest merges those of the shareholders of the company hence bridging the principal-agent gap. This reward system is American-based and has attracted a lot of debate from human resource scholars as well as from other relevant stakeholders.

This paper is a research report prepared by business analysts (BA) who have been instructed to conduct research for a client company and write a report regarding McDonald’s (the client) foreign direct investment project in China, which is the largest emerging economy. Based on the fact that the provision of professional HRM consultancy was part of the contract, there were instructions to conduct a research and give recommendation in terms of a report on whether McDonald’s should use performance based pay for executives in the new venture in China.

McDonald’s Corporation is the largest fast food restaurant in the world. The giant chain has continuously expanded internationally for a long period of time opening stores in different countries across the globe. In China, rivalry among competitors is severe and hence this food chain is facing a lot of competition from other established chain stores. In this country, Colonel Sanders and Mao have more popularity than McDonald’s which makes the competition here very severe.

This explains why McDonald’s need to invest in good strategies when opening their venture in China. The company projects that by the year 2013, it will have added more than 700 outlets to the 1300 that are already in existence (Jie, 2008).

Despite the normal challenges, McDonald’s is not lagging behind in its quest for expansion bearing in mind that the chain is opening new restaurants at a high rate. The motive behind McDonald’s venture in China is the desire to maintain its worldwide market position as the biggest fast food chain. The company plans to add its presence in China by ensuring that it operates 1500 to 2000 fast food outlets. It is alleged that half of these new stores will actually be drive-through outlets.

The giant burger chain is also said to be planning on remodeling over 80% of its stores in China by the end of 2012 to be able to offer the latest menu that is more health-conscious. For McDonald’s, China is one of its strong regions as far as growth opportunities are concerned. Majority of its restaurants that have been open for a period of at least one year have recorded a 12.7 % rise as compared to 5.3% in the US. The stores in China are estimated to be around 1100.

Aim

This report is predestined on evaluating the effectiveness of performance based pay, also known as pay for performance for executives. It lays its focus on determining whether performance based pay for executives at McDonald’s China project is worth being implemented or not.

Scope

The report focuses on various views that have been raised by different scholars in regard to the use of performance based pay for employees at different levels. This paper evaluates the pros and the cons of performance based pay. It explains the strategic reward system in details and gives the reasons as to why it should be used for the McDonald’s project in China as a way of motivating the executives for increased performance.

Besides this, the report also examines the extent to which the reward system will not breach local corporate governance laws within China in addition to a detailed explanation of the structure and details of the reward system.

Strategic reward system

Strategic reward system has two basic elements; financial rewards and non-financial rewards. The financial rewards consists of pay incentives, base salary and employee benefits. On the other hand, the non-financial rewards include intrinsic rewards that are work-based and other rewards such as recognition, praise and time offs. In the performance-based pay, pay is treated as a variable cost (Towse & Louis, 2010).

Many employees get a mixture of output-based and time-based pay and the best thing is to manage this kind of mixture of pay to be able to be in line with the performance of the firm. This explains why the performance-based pay is ideal. According to the research conducted, it was also noted that the reward systems should also go hand in hand with an organization’s business strategy, human resource strategy and the organization culture (Sean et al, 2008).

Strategic reward management systems are put in place for a number of reasons that includes attracting executives, retaining executives, motivating the performance of the executives and contributing to the organizational culture. It also includes promotion of skills, development of knowledge, reinforcing and defining structure, encouraging cost effectiveness and simplifying the administrative tasks (Sean et al, 2008). Some of these objectives are explained in details below.

Attracting and Retaining Executives

Attracting and retaining talented executives remains an issue of primary concern for most organizations. This is very important especially during economic expansion period that may be characterized by tight labor markets. During these times, organizations struggle to fill vacant positions and to hold on to the already trained executives. For example, in China, McDonald’s faces stiff competition from other fast food companies which calls for elaborate human resource measures to ensure that the company does not lose its trained employees to competitors.

During times of recessions or in this case where 50% of the executives must be expatriates and the other 50% local people, the organization must develop a good strategy to attract the best executives from China. A strategic reward management system is a good way of ensuring that this is achieved. According to Sean et al, (2008), talented workers will always aspire to join organizations where there is recognition for the hard work and performance is rewarded (Sean et al, 2008). This is the reason as to why McDonald’s China needs to be prepared for this and to position itself right in the market (Towse & Louis, 2010).

Motivation of Executives

A good strategic reward management system should be designed well to ensure the executives are well motivated in their line of duty. The importance of a reward system has been captured by various theorists, with all theorists seeming to base their argument on the importance of a good reward system in determining the level of motivation in a company (Nankervis et al, 2011).

Promotion of Knowledge Development and Skill

In accordance with the proponents of the best-fit perspective, performance-based pay is said to reward the executives for their knowledge and skills in an indirect manner because the rewarded performance comes as a result of skills and knowledge. In return, this assists in the development of these two important factors among the executives and this usually has a positive influence on the employees (Sean et al, 2008).

Contribution to Organizational Culture

Organization culture basically refers to the way things are conducted in a particular organization. Typically, organization culture refers to the established attitudes, habits and generally accepted behavior within the organization (Nankervis et al, 2011). Organization culture determines the nature of relationships that exists within an organization which further aids the performance of a company. It has also been established that organizational culture is a major factor that hampers or aids organizational change.

Through the reward strategy, the organizational beliefs, values and attitudes among the executives are reinforced in the most important areas such as quality, performance, innovation and team work. Such behaviors by the executives become dominant behavioral patterns within the organization leading to perceptions regarding what the company stands for, believes in and values (Nankervis et al, 2011).

Controversies Surrounding Performance-Based Pay and Possible Solutions

There are a number of controversies surrounding performance-based pay. One of the controversies is the single mindedness based on the notion that one gets what he or she pays for. This leads to job activities done being remunerated and those that have not been done are not remunerated. This practice is common with sales representative who are paid according to the sales they make (Gary et al, 2010).

Another critical issue is that of control since the outcomes or the performance of a given firm may be controlled by the external factors either negatively or positively. For example, a bull market will pick up the stock value while a bear market drops the value of all stocks. Due to this kind of control, the performance of the employee can be influenced negatively by the effects (Gary et al, 2010).

When it comes to performance-based pay, elaborate measurements have to be taken into account. This will allow an effective reward system that recognizes the level of output from an employee to be put in place. Some of the measures can be tampered with or manipulated to serve one’s own interests.

For example, a sales representative can withhold sales only to report it in a different day or time especially when it involves some kind of friction. In this regard, creative accounting methods may be used by some managers to overestimate the actual profits made by the firm (Nankervis et al, 2011). Therefore, honesty becomes an issue of paramount importance performance based remuneration because some unscrupulous managers may deliberately manipulate the results to ensure that their pay check is high (Hutchings, 2005).

Controversies also arise in regard to misalignment of incentives. For example, if the emphasis of pay is on an irrelevant objective, the objective will be pushed continuously until when the pay system will lead to the right or different objective (Gratz, 2008). For instance, short-term goals may be put into consideration than long-term goals even though the long-term goals maybe more important unless a better pay is introduced for the long-term goals (Gary et al, 2010).

Having looked at the controversies surrounding the concept of performance based pay, it is evident that there are some pertinent issues that an organization that wants to adopt this form of payment must address. One thing that should be acknowledged is that performance-based pay for executives will induce the need to show results in order to earn, which exposes an organization to unethical management approaches (Garner et al, 2011).

An organization that seeks to adopt this form of remuneration must be prepared to put in place excellent measures that will countercheck the work approaches to ensure that results are not manipulated by the managers for their own benefit. (Nankervis et al, 2011). It is also very important to note that different firms are diverse and the performance based system should be tailored to meet the needs of a specific organization (Gary et al, 2010).

Effects of Local Labor Regulations on Strategic Reward Management

According to Teri (2010), the massive movement of people from rural regions to urban regions and employment of expatriates in different companies in China has led to the realization by the government that human resource needs some protection.

This research noted a mass movement of people from rural areas to urban centers where better infrastructure as well as accessibility to work is easier. According to the Chinese Ministry of Agriculture, 94 million workers migrated from rural to urban centers in 2002, which is an increase from the previous years. Therefore, this has led to an increased population of workers in the urban centers that enable proper selection of workforce that need to be motivated through performance based pay.

This migration has been brought about by proper working environment as well as better systems of services that are offered to urbanites. In China, rural population is treated as foreigners, a fact that has further enhanced the influx of human capital in cities. Before 1980s, it was almost impossible for an alien, whether an expatriate or an immigrant to work in China due to the restricted movement that was allowed on such people.

However, the government has brought economic reforms that have tried to integrate both the aliens and the local populations in the places thus improving the working environment. Conducive working environment is an important precondition for the establishment of an effective performance based pay system (Mancini and Gross, 1996). This creates a greater workforce at the company’s disposal to select from and ensure proper incentives are offered for motivational purposes.

Another major issue of concern for performance based pay system in China is the issue of traditions of the country. Though the government has tried to regulate conditions at the working places and the terms of payment, migrants have been on the receiving end due to ethnocentrism that is exhibited by the Chinese people.

It was noted that the Chinese government has ensured that all employees enjoy necessary job related benefits such as health cover, job training among others through the enactment of a more worker friendly labor laws. Through the Ministry of Labor, new regulations offer legal protection to migrant workers especially the expatriates in the international companies (Mahmudur, 2011).

Chinese labor laws also allow a mix of foreign expatriates with local talent as this is seen as a measure that would improve the work forces in China. This will ensure that the 50-50 mix of employees of the McDonald’s in China will be in accordance with the law and will ensure performance based payment to the executive will be managed well.

In 1990, the standardization of social security benefits of the expatriates and other migrant workers with those of the local workers was incorporated into the social protection system and the destination region (Mahmudur, 2011). In addition, the state of migrant workers was improved in 2000 when domestic laws that related to migration of workers into the country were reformed. In fact, the civil registration system was reformed while charges that were levied from immigrants were abolished.

This enables a company like McDonald’s to employ 50% of expatriates as restrictions that would have barred them from doing these were lifted. This means that the desire to have 50 percent expatriates as part of the management team will be achieved, they would be able to bring in expertise in the company and hence set production target through performance based pay.

According to Sean et al, (2008), many of the expatriates recently are being integrated to the community as they are staying in the cities for a longer period, getting married, settling down and starting families to a point of getting their relatives to come and stay with them. This proves that local labor regulations are favorable to the expatriates and the entire worker population at large. Therefore, the company will be able to plan its reward based remuneration system in compliance with local labor regulations

Effects of Corporate Governance on Strategic Reward Management in China

Corporate Social Responsibility (CSR) in China has been brought about by the laws put in place by Chinese legislators in 1990 (Li-Wen, 2010). During this time, employees had a lot of influence in corporate governance decisions. This made it hard for companies to manage their strategic reward systems.

The Chinese socialist ideology contributed much to this. In addition, it was noted that the workers had a lot of influence in the corporate governance as CSR was a political thing that was out initially to unite workers as they created a strong political group (Mancini and Gross, 2005). Therefore, this influenced much corporate policy direction and would have hindered the company to pay people in accordance to their performance. At this time, the workers had a lot of influence in determining their wages, benefits and bonuses.

However, this was corrected through institution of law that separated employees from political influence making corporate governance a separate entity. However, the law that was put in place in 2006 about how the corporate governance should protect the employees does not offer a full mandate of employees to influence the corporate governance, but to be involved in carrying out corporate governance with company’s directors (Rodríguez-Garavito, 2011).

The law does not restrict the company on how to offer its incentives to their employees. However, it is clear on some specific incentives such as bonuses and overtime allowance. It is also clear that a third of the board of governance should comprise employees who will be involved in setting up wages in the company (Seak and Enderwick, 2008). This means that in case the company agrees on strategic reward management with the selected employees and abide by the local labor laws and regulations, there cannot be any hindrances towards pay by performance initiatives.

As most of the companies in China have embraced CSR, McDonald’s will not be an exception. The company must ensure that it embraces the socioeconomic and political systems as they influence their goal of strategic reward management. The adoption of elaborate corporate social responsibility based initiatives further calls for a balance in a performance based pay system so that the remuneration of the management do not make it hard for an organization to commit its funds to the CSR activities (Stalley, 2009).

Conclusion

From this paper, it is evident that legal and political issues are among the factors that may affect business operations in any country. Therefore, they should be taken with a lot of care to ensure that they are adhered to. For McDonald’s to ensure that it succeeds in its performance based system, it is required to ensure that it complies strictly with the country’s law. The company must also operate in full knowledge of the country’s labor laws especially due to the level of strictness adopted by the government towards its labor laws.

The scope of the paper may not be very expansive, but it has managed to bring together different views from different writers in regard to performance-based pay for executives. There are a few challenges based on the fact that different writers have diverse opinions in regard to the issue of performance-based pay.

It is worth being implemented in organizations due to its strengths. Suggestions have also been offered on how to make this kind of remuneration system more reliable. In this case, this report concludes that settling for the pay for performance is the best option for the project of McDonald’s in China.

Reference List

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Gratz, D., B. 2009, ‘The Problem with Performance Pay’. Educational Leadership Journal. 67(3). pp. 76-79.

Hutchings, K. 2005. ‘Koalas in the land of the Pandas: Reviewing Australian Expatriates China.’ The International Journal of Human Resource Management. 16(4) Pp. 553-566.

Jie, L., 2008, McDonald’s growing in China. Viewed September 16, 2011 <http://www.chinadaily.com.cn/business/2008-09/08/content_7007412.htm>

Li-Wen, L., 2010. Corporate Social Responsibility in China: Window Dressing or Structural Change? Berkeley Journal of International Law. 28 (1), p.64-100.

Mahmudur, R., 2011. Meta-regulation Approach of Law: A Potential Legal Strategy to Develop Socially Responsible Business Self-regulation in Least Developed Common Law Countries. Common Law World Review. 40 (2), Pp.174-206.

Mancini, L., and Gross, A., 1996. Strategies for Successfully Recruiting Staff for China. International HR Journal.2 (3), Pp.6.

Nankervis, A., Compton, R., Baird, M. & Coffey, J. 2011, Human Resource Management: Strategy and Practice, 7^th Ed. Cengage Learning, South Melbourne.

Rodríguez-Garavito, C., 2011. Ethnicity.gov: Global Governance, Indigenous Peoples, and the Right to Prior Consultation in Social Minefields. Indiana Journal of Global Legal Studies.18 (1). Pp. 263-305.

Seak, N & Enderwick, P. 2008. ‘The management of New Zealand Expatriates in China’, The International Journal of Human Resource Management, 19(7). Pp. 1298- 1313.

Sean, Y., Ya, A., James, M., Steven, T., and Marc, L., B. 2008. Getting Real Performance Out of Pay-for-Performance. Milbank Quarterly, 86 (3). Pp. 435-457.

Stalley, P., 2009. Can Trade Green China? Participation in the global economy and the environmental performance of Chinese firms. Journal of Contemporary China. 18 (61), Pp.567-590.

Teri, C., 2010. Labor Standards and Labor Market Flexibility in East Asia. Studies in Comparative International Development. 45(2),Pp.225-249.

Towse, A. and Louis, G., 2010. ‘Can’t Get No Satisfaction? Will Pay for Performance Help?’ PharmacoEconomics Journal. 28(2). Pp. 93-102.

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