The company 2TW manufactures and sells products overall Europe and is organised into dozens of strategic business units (SBUs). SBU managers, who report to regional directors, have for more years been paid bonuses on total SBU sales generated. This has led to a fast growth in overall turnover but 2TW has experienced declining profitability over the past few years, and the Chief Executive fears a loss of control over SBU operations. As a result, six months ago 2TW's Chief Executive used management consultants to conduct a whole organisational review. The management consultants have now reported that:
- inadequate quality control systems exist within the company, which has led to differing operating efficiencies between SBUs;
- there are significant numbers of returned goods which needs replacement or reworking;
- current incentives for SBU managers are inappropriate given 2TW's declining profitability.
Discuss the factors that should be taken into account by the HR department when redesigning the remuneration and reward package for SBU managers.
Appropriateness of basic pay as part of the remuneration and reward package
Redesign of the package will require to balance basic and performance related pay in an appropriate way. The basic pay element should recognise factors such as:
- the size of the SBU,
- the relative contribution of the SBU to the company as a whole, and
- the responsibility, past experience and particular skills and competences demanded of the individual manager by the nature of the SBU.
A need to address recruitment and retention
The overall reward package will require to address not only internal targets of quality and profitability but also marketplace levels of reward for same work. If not, there might be problems of both recruitment and retention of good managers. As 2TW operates across the continent, local pay rates might be vary enormously between countries in which the SBUs are situated, meaning that basic pay levels will require to be varied to reflect these conditions.
Ability of package to influence behaviour
The entire employment relationship is built on a 'wage-effort bargain'. Rewards must be commensurate with effort and attainment. Consistent with expectancy motivation theory, if bonuses are relatively small they might not change behaviour. Similarly, if they are complex to achieve, they might not motivate managers.