Incentive Pay in Chinese Small Manufacturing Enterprises

Introduction

The paper deals with the task of design of a program that structures incentive pay and links it to a China manufacturing Small and Medium Enterprises – SME’s organizational strategies and effectiveness.

Role and Importance of HR

Becker (2003) has pointed out that measuring HR’s performance is an increasingly important concern for HR professionals, senior line managers and CEOs. The challenge of HR measurement becomes particularly salient when the CEO and senior management team ask HR to justify its contribution to the organization. To respond to this challenge, HR professionals have routinely relied on benchmarked comparisons of cost and other efficiency-based performance outcomes associated with activities of the HR function. But a reliance on these types of benchmarking measures not only fails to measure HR’s important contributions to firm success, it also can encourage an approach to human capital management that is counterproductive. The author points out that HR professionals should judge their performance relative to their firm’s own strategy rather than the HR efficiency of other organizations. While managing the HR function efficiently is important, focusing on cost reduction as the primary measure of HR’s performance will ultimately result in HR being managed like a commodity, rather than a strategic asset. In contrast, research of more than 2,000 firms over more than a decade has shown consistently that managing a firm’s workforce effectively can increase shareholder value by 10 percent to 20 percent.

Becker (2003) argues that strategic performance measurement for HR requires a new perspective as well as new measures. This strategic approach to HR performance measurement is not as simple as benchmarking, because it requires a different measurement process, summarized in the following steps (Becker, 2003):

• Step 1: Clearly define business strategy. We believe that it is important to distinguish between strategy formulation and strategy execution. The focus on execution, assumes that an organization has consensus about its strategy and can describe and communicate it clearly to its workers. Having a strategy in this form is the precursor for defining the drivers of successful strategy execution (Becker, 2003).
• Step 2: Draw a map describing the causal flow of strategy execution. A strategy map takes what tends to be an externally focused vision in Step 1 and links it to an internal roadmap that show how an organization plans to convert various assets into desired outcomes (Becker, 2003).
• Step 3: Link HR architecture to the strategy map. This is the most important step in transforming HR to a strategic asset and is what distinguishes strategic performance measurement from benchmarking. The term “HR deliverable” is just shorthand for the outcomes of the HR architecture that directly drive successful strategy execution. How the organization chooses to define HR deliverables will reflect what role line managers and HR professionals will play in managing people as a strategic asset (Becker, 2003).

The distinction between measuring HR performance based on the ability to deliver a workforce capable of executing strategy and HR benchmarking. One might expect to see benchmarking metrics such as cost per hour of training, recruiting cost per sales position, HR support staff per sales position or maybe sales compensation divided by sales revenue. The problem is that benchmarking measures of this kind don’t reflect whether HR is ultimately delivering strategic performance. They may say something about the administration of the HR function, but that should not be the focus of HR performance measures designed to capture HR’s contribution to organizational success (Becker, 2003).

Diversity and Organisation performance

Holmes (2005) has mentioned the results of a survey conducted by Fortune magazine and the Society for Human Resource Management and he reports that more than 75% of surveyed organizations have engaged in some type of diversity activity or initiative. The activities included diversity recruitment, training and education, community outreach, or diversity-related career development and more organizations emphasize diversity as a core element in their business practices. But the author argues that very few of these initiatives have had a substantial impact on overall performance. One reason for this lack of success was the failure to connect diversity programs to organizational performance systems and processes such as strategic planning, performance management, compensation, and human resource development. This author has identified five steps that must be taken to systematically connect a diversity initiative to organizational performance and they are Clarify the benefits of the diversity program; Identify SMART goals; Develop action plans; Define performance expectations and Evaluate impact on performance.

HR Practices in SME firms

Kotey (2004) has defined SME as firms that have a total income of below $10 million while according to the Australian Bureau of Statistics a firm is small if it employs less than 20 workers and medium if it employs up to 199 employees, regardless of the industry sector in which it operates. The income criteria may be a bit high when speaking of Chinese SMEs since 10 million $ is a very large amount in China, but the criteria for number of employees can be accepted. The author has framed a number of hypotheses to find out how SMEs HRM performed in the industry to create a link with the organisations strategic objectives.

Research from the author has pointed out the following points: A greater variety of formal recruitment sources such as newspaper advertisements is employed with firm growth; Screening of candidates is intensified through the use of multiple selection methods as firm size increases; Responsibility for training and performance appraisal of operational staff shifts from the owner-manager to middle management with firm growth; Development of managerial staff is given greater attention as the firm grows; Documentation of human resource policies and procedures increase with firm size; The application of formal HRM practices at the managerial level lags behind that at the operational level in small firms but the differences are minimised with firm growth.

We can thus assume that the design of a program that structures incentive pay and links it to a China manufacturing SME’s organizational strategies and effectiveness would have to follow the above hypotheses.

Impact of HR Management – Case Study of Vietnam

China and Vietnam have many things common and one of them is the transition from a centrally planned economy to a market economy. Both the nations have moved away from a communist controlled regime to a free and capitalist market and this has resulted in excellent growth for the countries. A case study on Vietnam has been examined in this section and it can be applied on the Chinese context (King-Kauanui, 2006).

Economic Reforms and the growth of the entrepreneur

King-Kauanui (2006) has explored how the economic reforms have been introduced, and the country has gradually transferred from a “command” economy to a market economy. This transformation has occurred in both the public and private sectors. The state has recognized private enterprises as an integral part of a “multi-sector” economy and has passed laws promoting the development of such enterprises. This has lead to an increase in the number of formal private enterprises identified as a main engine of the economy in the medium term. Cargill, a U.S.-based company operating animal feed manufacturing plants in Vietnam, stated that the ability of private companies in Vietnam to enter into private, enforceable contracts with others “demonstrates that Vietnam has indeed moved on beyond the old days’ central control to a new era of competition based on the operation of a free market. The above case is equally true in the case of the Chinese private sector that has grown tremendously in the past decade.

In an analysis of IBM employees, Hofstede and Bond (1988) identified four cultural dimensions: power distance, individualism-collectivism, masculinity-femininity and uncertainty avoidance. The authors found that a number of Asian countries scored high on power distance or the acceptance of unequal distributions of power, high on collectivism or the forging of strong group identities, and in the middle on masculinity-femininity, or the values of assertiveness and competitiveness compared to nurturing values. Uncertainty avoidance or how comfortable individuals feel in unstructured situations, was determined to be a uniquely Western concept while values of persistence, order, status, thrift, saving face, respect for tradition, steadiness and stability were considered to be uniquely Eastern. Comparing the organizational culture of firms in China, Japan, Hong Kong, India, Vietnam, and Thailand on a number of performance variables, Deshpande et al. (2004) found that there were significant differences across the countries based on history and culture. However, the authors found that performance was more dependent on the type of organizational culture than on the country of origin. For example, more entrepreneurial and competitive firms performed better than bureaucratic and consensual firms across all countries. Comparing these Asian firms to a previous study of firms in five industrialized countries showed that competitiveness is more important than innovativeness in Asia, while the opposite is true for the industrialized nations. In the Asian study, Vietnam had the most bureaucratic strong emphasis on regulations and formal structures business culture of the six Asian countries, but this culture fared better than consensual organizational structures (emphasizing loyalty, tradition and internal maintenance) in terms of performance indicators (King-Kauanui, 2006).

Three Hypothesis for the Vietnam firms and linking to Chinese firms

King-Kauanui (2006) framed and tested three hypotheses to create an understanding of how appraisal, firm performance and in turn incentive pay are interlinked. The authors set out to find the linking between Relationship between training and firm performance; Relationships between performance appraisal and firm performance and Incentive compensation. The hypotheses tested were: A positive relationship exists between training and SME performance in Vietnamese manufacturing SMEs; A positive relationship exists between the use of performance appraisal systems and SME performance in Vietnamese manufacturing SMEs and A positive relationship exists between incentive compensation and SME performance in Vietnamese manufacturing SMEs.

Using a survey instrument showed that all the three hypotheses held true and since we have already stated that Vietnam and China have the same cultural roots, the findings of the research would form the basis to design a program that structures incentive pay and links it to a China manufacturing SME’s organizational strategies and effectiveness.

Recommendations and Design of the program

From the studies and research done in the above sections, the design of a program that structures incentive pay and links it to a China manufacturing SME’s organizational strategies and effectiveness can be structured by creating a relationship between training and firm performance; relationships between performance appraisal and firm performance and Incentive compensation. There would be a positive impact for training on firm performance show training to be important in enhancing competitive advantage, improving quality of output, facilitating firm growth, and improving profitability. Training enhances all dimensions of firm performance, i.e., quality of product, development of products, employee relations, and growth in sales, profitability and market share. In addition, training is seen as a useful means of coping with changes fostered by technological innovation, market competition, organizational structuring, and demographic shifts. Performance appraisal plays a role in improving company operations, increasing efficiency eliminating defects, increasing product reliability, and productivity and improving overall organization performance. Four appraisal variables – frequency of informal appraisals, use of objective criteria, use of subjective criteria, and utilization of appraisal results were positively correlated with firm performance. Linking performance appraisals to compensation has shown increased firm profitability and a well-run, professional appraisal system could significantly improve employee performance and firm profitability. Relationships between incentive compensation systems and firm performance suggest that incentive compensation contributes to increased product quality, greater acceptance of changes and improved firm performance (King-Kauanui, 2006).

References

Becker, B. & Huselid, M. (2003). Measuring HR? HR Magazine, 48 (12), 56-62.

Holmes, T. A. (2005). How to connect diversity to performance. Performance Improvement, 44(5), 13-17.

King-Kauanui, S., Ngoc, S. D., & Ashley-Cotleur, C. (2006). Impact of Human Resource Management: SME performance in Vietnam. Journal of Developmental Entrepreneurship, 11(1), 79-95.

Kotey, B., & Sheridan, A. (2004). Changing HRM practices with firm growth. Journal of Small Business and Enterprise Development, 11(4), 474-485.