Compensation practices and plan effectiveness compensation and benefits review

390489 mlall et al.Compensation & Benefits Review

CBR43110.1177/0886368710390489Ra

COMPENSATION/Saudi Arabia

Compensation Practices and Plan Effectiveness in Saudi Arabia

Compensation & Benefits Review 43(1) 52­–60 © 2011 SAGE Publications Reprints and permission: http://www. sagepub.com/journalsPermissions.nav DOI: 10.1177/0886368710390489 http://cbr.sagepub.com

Sunil Ramlall, Faculty, Kaplan University School of Business and Management, Khalid Maimani, Professor, King Abdulaziz University, and Abdulhameed Diab, Chair of Business Administration Department, Associate Professor, King Abdulaziz University

Abstract This article identifies current compensation practices in Saudi Arabia, relates these practices to the local culture and compares the results with practices in the United States. The authors collected data from 130 human resources professionals. This study provided concrete insights about employees’ views of compensation systems and highly useful information about compensation practices for organizations across the world with business interests in Saudi Arabia and other Arab nations.

Keywords strategic compensation, international compensation strategies, compensation in Saudi Arabia, HR strategy Human resource (HR) management practices in general1,2 and compensation systems in particular1,3,4 have been shown to be highly related to organizational performance.

Given the quest of organizations across the world to compete more effectively in the global economy, there is an urgent need to review current compensation practices in various economies and to determine how the practices align with enhancing organizations’ competitiveness.

Consistently, research findings are supportive of congruency notions that suggest that the effectiveness of the compensation system is partly a function of the fit between pay strategies and organizational strategies.5 The purpose of this article includes identifying current compensation practices in Saudi Arabia, relating the practices to the local culture and comparing the results to practices in the United States.

With the continuous changes in the global economy, Saudi Arabian organizations, like others around the world, continue to search for strategies that will foster higher levels of competitiveness and enable organizations to gain sustainable competitive advantages. Many authors6-8 have articulated the need for changes in HR management practices around the world. As these authors have highlighted, changes in the global economy continue to have a profound impact on the nature and structure of the labor markets, forcing organizations to assess the effectiveness of the respective HR practices.

The research documented here examined and analyzed compensation practices in Saudi Arabia, compared current practices and the extent to which HR professionals think the current practices should be used in driving firm performance and compared current compensation practices in Saudi Arabia with those in the United States. The findings not only provide a vital understanding of the effectiveness of current practices but also provide critical insights as to how local organizations can become more competitive through compensation strategies. As Lawler notes9, pay is a promising and largely untapped source of competitive advantage, because it can reinforce behaviors that best serve a company’s business strategy and thereby improve performance and profitability.

Furthermore, an awareness of the gap between current practices and what the practices should be enables firms to design compensation philosophies and strategies that will maximize employees’ motivations to engage in behaviors consistent with organizational strategies.10 In addition, this study’s findings provided valuable information to researchers and practitioners around the world, especially those with an interest and market in Saudi Arabia.

As observed by Datta, Guthrie and Wright,11 there has been growing interest in the degree to which HR systems contribute to organizational effectiveness, yet limited research attention has been paid to the contextual conditions that moderate the efficacy of these practices.Gomez-Mejia12 Corresponding Author: Sunil Ramlall, 13807 Crosscroft Place, Rosemount, MN 55068, USA Email: sramlall@kaplan.edu

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Ramlall et al. highlighted that research findings generally support the notion that a firm’s compensation strategies make a greater contribution to firm performance.

In general, firms are continuing to internationalize their operations to gain larger market share through available international markets, forming partnerships and ventures with organizations in different countries and even seeking qualified labor from the international market.13 The internationalization of operations is typically motivated by a desire to exploit unique assets in overseas markets, to gain access to lower cost or higher quality inputs (labor, raw materials, intermediate goods, specialized skills, etc.), to build scale economies and other efficiencies and to preempt competitors that may seek similar advantages in strategic markets.14,15 According to Lowe et al. three factors make effective HR management critical in the quest for global competitiveness: increased emphasis on multinational trade and the growth of foreign subsidiaries, expansion of the international workforce (bringing increased capabilities) and the traditional factors of production.16 In addition, it is argued that HR management capabilities serve to attract, retain, motivate, develop and use human capital in a firm.17-19 With the move toward Free Trade Area of the Americas and becoming more vibrant competitors arises the critical issue of compensation. Compensation as defined by Geringer and Frayne20 includes the monetary and nonmonetary and direct and indirect forms of compensation that an organization exchanges for the contributions of its employees’ performance and personal contributions.

In examining the national or regional models of compensation, national borders significantly define contextual features, such as national economic, demographic and cultural conditions, and must be considered when developing compensation systems that align with organizational, national and regional strategies.21 As Hofstede22 explains, “most of a country’s inhabitants share a national character” (p. 89).

Furthermore, it is commonly believed that compensation and reward systems, because of their social and economic significance, portray and reinforce cultural norms.23 Nevertheless, Bloom and Milkovich21 explain that organizations developed their own social norms and that the compensation practices and systems of these companies are related to their own social norms. In addition, firms can structure compensation policies that are consistent with the firm’s culture and simultaneously attract, motivate and retain employees who fit with the organization.

After years of poor economic management, many countries are experiencing a process of structural reform that places them on the path to a superior economic performance.25 Change, as described by Lawler,26 should be facilitated through the use of pay systems, given that changes in an organization’s pay system usually have high impact and high visibility. Therefore, this article

addresses current compensation practices in Saudi Arabia and compares responses with what the practices should be in enabling organizations to compete more effectively in the global economy. Many research findings have found the direct relationships between specific HR strategies such as compensation systems and labor productivity.27,28 An effective compensation system can lead to organizational competitiveness, higher levels of profitability and productivity and higher levels of employee motivation. It can help attract qualified applicants, retain skilled employees and maintain workforce stability.29-32 With the knowledge of the outcomes of effective compensation practices, and given the aspiration of Saudi Arabian organizations to achieve such outcomes, the compensation practices and the congruence to the organizational and regional initiatives are reviewed and analyzed.

Method The sample comprised primarily HR leaders in the selected Saudi Arabian organizations. The surveys were sent via e-mail and/or hand delivered and included an explanation of the purpose of the research and briefly explained the value of the participants’ input. A total of 130 surveys were returned.

The survey was developed using a modified version of an instrument29,33 that was originally used to identify the relationships between various compensation practices and organizational outcomes including firm performance.

In addition, multiple open-ended questions were asked as a means of gathering participants’ perspectives on the role of compensation in achieving the strategic business objectives of the organization and what role HR played in the decision-making process for deciding compensation practices. The open-ended questions sought input on the impact of culture, national laws and the role of unions in compensation practices at the respective organizations.

The questions inquired about the extent to which 1. compensation is aligned to business strategies, 2. the importance and effectiveness of benefits as part of the total compensation, 3. pay incentives are important, 4. the compensation practices are competitive compared with other organizations, 5. variable compensation is an integral part of the total compensation, 6. pay raises and level of compensation are based on performance, 7. long-term performance is valued over shortterm performance and 8. compensation practices help achieve the organization’s goals and objectives.

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Compensation & Benefits Review 43(1)

4.00 3.50 3.00 2.50 2.00 1.50 1.00 .50 .00

Base Salary Base Salary Benefits Benefits are Importance - is High - 1b Importance - Generous 1a 2a - 2b

Incentive Importance - 3a

Incentives as a Component of Total Comp - 3b

Figure 1. Pay package design practices

These questions reveal current practices (“now”) and the extent to which the practices should be changed in driving firm performance (“should be”). Where applicable, results from these Saudi Arabian companies were compared with responses from U.S. firms as identified in a previous study.16 The survey instrument was pretested by HR executives in Saudi Arabia with responsibility for compensation to ensure that the relevant questions were being asked and the instrument was clear and easy to follow. Furthermore, all questions were developed from relevant articles found from an exhaustive literature review.

Results The results compared the current compensation practices in Saudi Arabia and the desired type and level of practices viewed to be necessary in enhancing firm competitiveness. Results are also compared with practices in the United States through the findings of Lowe et al.16 and other studies.

Pay Package Design and Market Positioning This category examined (a) the relative importance of the base salary as an important component of the total compensation package, (b) relevance of base salary to other forms of pay, (c) the relative important importance of benefits of the total pay package, (d) current nature of the benefits package, (e) whether pay incentives are an important part of the compensation strategy and (f) whether pay incentives are designed to provide a significant of an employee’s total compensation.

Salary. Participants were asked to rate their view of the relative importance of base salary as an important component of total compensation. The average score was 3.54.

Figure 1 provides a graphical summary of the pay package design practices based on current practices.

Quite notable is the average of 3.54 for Question 1a.

Respondents indicated that their companies’ philosophy on base pay enables their organizations to be competitive in this area and, furthermore, that there is high emphasis on base pay. This is especially interesting given that participants stated that there is more of a need to focus on incentive compensation as a means of driving firm performance.

Currently, incentive compensation is reported at 2.72 and 2.82, respectively, for questions relating to the importance of incentive compensation and incentives as a significant source of total compensation.

Benefits. It is quite evident that organizations in the Saudi Arabia feel that their benefits are a critical part of their total compensation. The mean score for the question as to whether benefits are an important part of total pay package was 3.78. Even though this was a high score, respondents did not view benefits as being extremely generous. The mean score for current view of the benefits package being generous was 2.82.

Incentives. Compared with data collected by a U.S. study16 and as indicated in Figure 2, Saudi Arabian organizations view incentive compensation in a relatively similar manner to organizations in the United States.

Similar to American organizations, Saudi Arabian organizations view incentive compensation as a significant way to foster higher levels of productivity and think that incentive compensation should be used more extensively within organizations. The mean score for the question as to whether pay incentives are an important

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Ramlall et al.

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

USA Saudi Arabia

Incentives are Incentives are ImportantImportantCurrent Should be

Incentives as a Perentage of Total Comp.Current

Incentives as a Perentage of Total Comp.Should be

Figure 2. Incentive compensation: Views and practices within Saudi Arabia and the United States

part of compensation strategy was 2.72 for current practices.

Pay Policy Choices This category examined multiple perspectives of the compensation philosophy and practices, the role of employees in formulating compensation strategies and the factors that most significantly affect the respective strategies decided on by the organization. As explained by Milkovich and Newman,34 pay systems translate the organization’s strategy into practice to achieve the desired organizational objectives. Table 1 provides a summary of the mean scores of current practices among the organizations participating in the study.

Risk sharing. Respondents to the survey clearly indicated that pay is not strongly tied to group or organizational performance. Furthermore, with scores of 2.61 for the view on current practices and 2.32 as to how organizations in the Saudi Arabia viewed this issue, there is not a clear urgency in having at-risk compensation. As reported by Lowe et al.,16 current state of practice was rated at 2.46 and 4.00 for should be. Based on Hofstede’s22 research on cultural dimensions, Saudi Arabian cultures, as exemplified by the report on Saudi Arabia, are much more collective as compared with the United States. Hence, one would expect more of an emphasis being placed on organizational and group performance versus an emphasis on individual performance in a more collectivist culture.

In this case, Saudi Arabian organizations had lower mean scores than the U.S. firms for the question on whether an employee’s earnings are contingent on group or organization performance.

Internal consistency in pay relationships. Except for internal pay equity, participants of the study seem relatively satisfied with the measures taken to ensure relative equity

within the respective organizations. Nevertheless, the perception exists that organizations still need to give additional attention to ensure there is internal equity among departments and positions with relatively equal importance to the organization.

Pay for performance. There was not a strong indication for a more direct linkage between pay and performance.

With scores in the median of the range, there appears a comfort level in not changing current practices. Based on the study conducted by Lowe et al.,16 the U.S. scores were 2.42 and 4.22 for “is now” and “should be,” respectively.

It must be noted that there is significant difference in the power distance and uncertainty avoidance indexes measured by Hofstede.22 As can be easily inferred by some studies,10,22 collective cultures such as those in Saudi Arabia have historically emphasized seniority rather than individual performance.

The results from this study show a shift and willingness from employees to be paid based on their performance rather than merely seniority.

Pay participation. Employees stated that there is little input by the general employee population in the decision on designing and implementing a compensation strategy.

It is typically an autocratic process with senior management deciding how employees should be rewarded.

Employees clearly indicated a preference and a desire to be included in the decision-making process or at least be able to share thoughts on features of the reward system.

Pay Effectiveness Compensation is a powerful way to attract, motivate and retain employees as a means to furthering an organization’s strategic goals.25,34 Furthermore, compensation is a critical strategy that reinforces the behaviors, attitudes and skills necessary to achieve organizational capability.35

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Compensation & Benefits Review 43(1)

Table 1. Pay Policy Choices Pay Policy Choices

Mean

Risk sharing Pay is at least partially tied to group or organization Performance—5a Compensation system is designed to facilitate partial variable pay—5b Employees should take some risks with pay—5c Internal consistency in pay relationships Internal pay equity is important—6a Efforts are made to maintain internal equity—6b Internal equity is priority over external equity—6c Pay secrecy Pay is kept secret from employees—7a Formal policies in place to discourage divulging pay information—7b Does not disclose administrative procedures on pay systems—7c Pay for performance Strong commitment to merit pay—8a Pay increases tied to performance—8b Seniority not tied to pay decisions—8c Pay decentralization Pay policy is not centralized—9a Human resource staff in each business unit has flexibility to develop compensation—9b Minimum interference from headquarters on pay decisions—9c Egalitarian pay Compensation system reflects low hierarchy—10a Special pay packages and privileges are offered—10b Pay system is as egalitarian as possible—10c Pay participation Employee input is considered by top management—11a Many different groups of employees have input—11b Pay decisions are autocratic—11c Job-based pay Have a job-based system—12a Have a skill-based system—12b Job is more important than incumbent’s ability—12c Long-term pay Pay system has a futuristic orientation—13a Pay system rewards for short-term accomplishments—13b

2.63 2.61 2.32

2.88 2.69 2.88

3.35 2.85 2.82

2.54 2.63 2.78

2.68 2.13 2.61

3.27 3.41 2.82

2.18 2.44 3.15

2.78 2.45 2.63

2.48 2.47

With Saudi Arabia facing intense competitive challenges in the global economy, one component of this study sought to determine how effective the compensation systems of Saudi Arabian organizations are in enhancing organizational competitiveness.

In responding to the question asking if their organizations’ pay policies and practices are highly effective,

managers and other employees responded with a mean score of 2.69. One can easily infer that employees are convinced that their current compensation practices are not highly effective and desire significant changes to the current compensation system.

Similarly, the response on current compensation practices does not give shareholders “their money’s worth,” as indicated through mean scores of 2.75 for current practices.

From a strategic and even ethical perspective, employees feel that there is more to be done to maximize the interest of shareholders and other stakeholder groups. Employees also felt that the current pay practices did not appear to enjoy widespread acceptability among the workforce.

Table 2 provides a detailed summary of the mean scores of all questions asked in the survey.

On the critical question as to whether pay policies and practices greatly contribute to retention, attraction and motivation of employees, the response clearly indicated that the current compensation system is ineffective in achieving the intended outcomes. Given the harsh reality of compensation systems being a core strategy in attracting, motivating and retaining employees, and also the significant percentage of an organization’s expenditure on labor cost, this information provides compelling insights for Saudi Arabia organization on the nature of current compensation systems.

Many scholars have explained the necessity of effective compensation systems in enabling organizations to be successful.25,28,29 Similar to the findings of Von Glinow, Drost and Teagarden36 on global HR best practices, employees in Saudi Arabia viewed benefits, an emphasis on individual performance and a reduced emphasis on seniority as ways of enhancing the effectiveness of the compensation system.

Discussion and Conclusion In their efforts to becoming more competitive in the global economy, Saudi Arabian organizations continuously seek ways to enhance organizational effectiveness. This study provides concrete insights about employees’ views of compensation systems and also provides highly useful information about compensation practices for organizations across the world with business interests in Saudi Arabia and other Arab nations.

Clearly, because Saudi Arabian culture is viewed as more collective, one would have expected more of an emphasis on organizational or team outcomes versus individual performance and rewards as being strategies to creating more effective reward systems. There is some desire from employees to have their rewards linked to individual performance.

The biggest influence that local cultures have on compensation philosophy is in terms of pay for performance.

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Table 2. Overall Results Sorted by Difference: Descriptive Statistics

1a 1b 2a 2b 3a 3b 4a 4b 5a 5b 5c 6a 6b 6c 7a 7b 7c 8a 8b 8c 9a 9b 9c 10a 10b 10c 11a 11b 11c 12a

The base salary is an important part of the total compensation package.

The base salary is high relative to other forms of pay that an employee may receive in this organization.

The benefits are an important part of the total pay package.

The employee benefits package is very generous compared with what it could be.

Pay incentives such as a bonus or profit sharing are an important part of the compensation strategy in this organization.

Pay incentives are designed to provide a significant amount of an employee’s total earnings in this organization.

Preferred position of organization’s salary levels with respect to competitors.

Preferred position of organization’s benefits level with respect to competitors.

In this organization, a portion of an employee’s earnings is contingent on group or organization performance goals being achieved.

We designed our compensation system so that a portion of our compensation cost is variable.

We believe that employees should be risk takers with some of their pay.

Internal pay equity is an important goal of our pay system.

We try hard to achieve comparable pay relationships across different parts of the organization.

In our organization we give a higher priority to internal pay equity than we do to external market factors.

We keep pay information secret from the employees.

We have formal policies that discourage employees from divulging their pay to coworkers.

Our organization does not openly disclose the administrative procedures on how pay levels and pay raises are established.

We have a strong commitment to a merit pay system.

In this organization pay raises are determined mainly by an employee’s job performance. There is a large pay spread between low performers and high performers in a given job.

An employee’s seniority does not enter into pay decisions.

Pay policy is not centralized in this organization.

The personnel staff in each business unit has freedom to develop its own compensation programs.

There is a minimum of interference from corporate headquarters with respect to pay decisions made by line managers.

Our compensation system reflects a low degree of hierarchy. In other words, we try to give a minimum of perks.

We offer special pay packages and privileges as status symbols to the higher echelons in the organization.

We try to make our pay system as egalitarian as possible. There are very few perks or specific rewards available to any “elite” groups of employees.

Employees’ feelings and preferences for various pay forms (e.g., bonus vs. profit sharing) are taken very seriously by top management.

Many different kinds of employees (individual contributors, managers, personnel) have a say on pay policies.

Pay decisions in this organization are made on an autocratic basis. We tend to “follow the book” very closely.Very few employees have any input into pay decisions.

We have a job-based pay system. That is, factors within the job are key determinants of the amount of pay.

N

Minimum

Maximum

M

SD

130 130

1 1

5 5

3.54 2.84

1.307 1.193

130 130

1 1

5 5

3.78 2.82

1.209 1.186

130

1

5

2.72

1.330

130

1

5

2.82

1.267

130

1

5

3.12

1.179

130

1

5

3.17

1.169

130

1

5

2.63

1.301

130

1

5

2.61

1.242

130 130 130

1 1 1

5 5 5

2.32 2.88 2.69

1.331 1.294 1.263

130

1

5

2.88

1.205

130 130

1 1

5 5

3.35 2.85

1.374 1.426

130

1

5

2.82

1.493

130 130

1 1

5 5

2.54 2.63

1.289 1.365

130 130 130

1 1 1

5 5 5

2.78 2.68 2.13

1.520 1.580 1.235

130

1

5

2.61

1.439

130

1

5

3.27

1.579

130

1

5

3.41

1.434

130

1

5

2.82

1.368

130

1

5

2.18

1.267

130

1

5

2.44

1.220

130

1

5

3.15

1.409

130

1

5

2.78

1.325

(continued)

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Compensation & Benefits Review 43(1)

Table 2. (continued)

12b 12c 13a 13b 13c 14a 14b 14c 14d 14e

We have a skills-based pay system. That is, individuals are rewarded in part on their mastery of job skills.

The job is a more important factor than an incumbent’s ability or performance in the determination of pay rates in this organization.

The pay system in this organization has a futuristic orientation. It focuses employees’ attention on long-term (2 or more years) goals.

The pay system in this organization rewards employees for short-term accomplishments during a fixed time period.

Our pay policies recognize that long-term results are more important than short-term results.

Our pay policies and practices are highly effective.

Management is very happy with the way the compensation system contributes to the achievement of overall organizational goals.

All things considered, the compensation strategies used in our organization truly give shareholders “their money’s worth.”

Our pay policies and practices appear to enjoy widespread acceptability among employees.

Our pay policies and practices greatly contribute to the retention, attraction and motivation of employees.

Valid N (listwise)

One of the observations was that some organizations are trying to move toward a pay for performance system, but culturally, many of the Saudi markets are not used to this or ready to make progress in this respect. Saudi Arabia is a low-risk and low change–tolerant culture. New projects will be carefully analyzed to assure that whatever risk they represent is thoroughly understood and addressed.

For change to take hold, the idea needs to be perceived as good for the group and be accepted by the group.

Intercultural sensitivity is important given Saudi Arabia’s attitude toward risk, which is dramatically impacted by the negative ramifications of failure on both the individual and the group.

Stockholders, society in general, managers and employees all have a deep interest in compensation. Although the perspectives may differ among the respective stakeholder groups, the relative importance is extremely high. For example, from a society perspective, pay can be viewed as a measure of justice in ensuring men and women are paid on a relatively equal scale. Stockholders can view pay as a means to maximize investments in the company. Managers may view pay as a major labor cost and hence use pay to influence behaviors and attitudes that will achieve organizational outcomes. Employees may view pay as a reward or even an entitlement for work performed in the organization.

As Milkovich and Newman34 state, the objectives of compensation systems are to “translate the strategy into practice to foster efficiency, fairness, and compliance” (p. 15).

Based on responses in this study, Saudi organizations are

N

Minimum

Maximum

M

SD

130

1

5

2.45

1.135

130

1

5

2.63

1.295

130

1

5

2.48

1.240

130

1

5

2.47

1.426

130

1

5

2.73

1.287

130 130

1 1

5 5

2.69 2.73

1.269 1.275

130

1

5

2.75

1.337

130

1

5

2.73

1.293

130

1

5

2.45

1.264

130

far from maximizing the investment in their pay systems.

There is a clear gap in aligning the pay systems to achieve the behaviors and skills that enable their respective organizations to be more competitive in the global economy.

Participants strongly indicated that the compensation systems are not providing a full return on their investment and are generally failing to attract, motivate and retain employees.

Saudi Arabia has a relatively high uncertainty avoidance score,22 thus prompting the opinion that changes aligning rewards to performance might be a bit of a challenge but are nonetheless possible. To create more competitive organizations, greater emphasis should be placed on the alignment of the compensation systems with employee and firm performance. In addition, organizations have to be able to measure the effectiveness of their compensation strategies and make necessary changes. The results provided by managers and employees within Saudi Arabian organizations are profound and provide new knowledge on the level of effectiveness and direct feedback and recommendations on strategies for enhancing the effectiveness of compensation practices.

Declaration of Conflicting Interests The author(s) declared no potential conflicts of interests with respect to the authorship and/or publication of this article.

Funding The author(s) received no financial support for the research and/or authorship of this article.

Ramlall et al.

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Compensation & Benefits Review 43(1) Bios Sunil Ramlall is a faculty member at the Kaplan University School of Business and Management. Prior to Kaplan, he taught at Hamline University and the University of St. Thomas. His PhD is from the University of Minnesota. His research focuses on international human resources, positive organizational behavior and the impact of layoffs on employees.

Khalid Maimani is a professor in the College of Economics & Administration, King Abdulaziz University, Saudi Arabia.

Abdulhameed Diab is chair of the Business Administration Department and associate professor, Department of Business Administration, Faculty of Economics, King Abdulaziz University, Saudi Arabia.