Assignment 2 - Maine Bank Case Study - ANON PDF

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HRM4416 Reward Management

MAINE BANK (MB) CASE STUDY

Word Count – 3,012

5th December 2017

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Table of Contents 1. Executive Summary........................................................................................................................2 2. Introduction....................................................................................................................................3 3. Financial Rewards...........................................................................................................................4 4. Common Issues...............................................................................................................................6 4.1. Pay Structure..............................................................................................................................6 4.2. Annual Appraisal.........................................................................................................................8 4.3. Pension Scheme..........................................................................................................................8 5. Specific Issues.................................................................................................................................8 5.1. Brexit..........................................................................................................................................8 5.2. High turnover.............................................................................................................................8 5.3. Profitability.................................................................................................................................9 5.4. Retention....................................................................................................................................9 5.5. Shortage of Staf.........................................................................................................................9 5.6. Job Security................................................................................................................................9 5.7. Equal Pay..................................................................................................................................10 6. Graduate Development Scheme...................................................................................................10 7. Best practice of similar organizations.............................................................................10 8. Recommendations........................................................................................................................11 9. Implementation............................................................................................................................11 10. References....................................................................................................................................14 11. Appendix.......................................................................................................................................16

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Executive Summary This report analyzes the key issues faced by Maine Bank’s UK subsidiary which has a total of 5,000 employees spread through various locations in the UK. Some of the major concerns include decline in profits, impact of Brexit, perceived lack of performance culture & low employee morale identified in a recent attitude survey. The objective of this report is to examine the specific concerns within each business & department of the subsidiary and as a Reward Manager; identify Financial Reward strategies that would contribute to the Board of MB’s decision of reducing costs by 10%; improving performance culture & profitability; and help attract, retain and motivate employees. The report would also cover the Brexit concern and advise on the best possible move for the investment banking division.

Introduction The changing economy and employee expectations have afected all industries including the Banking industry. Organizations need to adapt to these changes and expectations to maintain competitiveness 2

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and profitability (Brown, 2014). One of the banks that impacted by these changes is Maine Bank UK subsidiary which has 5 major departments: Retail Banking, Business Banking, Corporate Banking, Investment Banking & Central Support Functions which include Marketing, Finance & Compliance, Human Resources, Information Technology & Call Center departments. This report covers the aspects of Financial Rewards that would contribute to overcoming the key issues faced within each department. This includes the recent decline in profits which is linked to the perceived lack of performance culture and low employee morale. Overall the organization needs to cut down costs to improve profitability. Another major issue is the impact of Brexit as 70% of the Investment Banking department business is with companies in the European Union and after UK leaves the EU it would become difficult to freely conduct their business. The report will also cover a few best practices of organizations within the same industry in terms of Financial rewards and Brexit plans. The report will conclude with recommendations and implementation plan for the suggested financial reward strategies.

Financial Rewards According to Armstrong (2015), a reward strategy is aligning the reward policies and practices with the overall organization and human resource strategies; ensuring that they fit the organizational culture and environment. It is also “providing a set of goals and declaration of intent as to what the organisation wants to reward, and how critical reward issues will be addressed”. (Armstrong, 2015) 3

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To create a successful reward strategy, it is important to ensure the following:   

alignment with the business strategy, delivers an appropriate return on investment and drives required employee behavior – in MB’s case drive performance and morale. (Rose, 2014)

All rewards that have a monetary value and add up to the total remuneration are financial rewards (Fixed & Variable Reward). As identified in the (Armstrong, 2011) Willis Towers Watson Total Rewards model (Figure 1) they include: base pay, contingent pay, cash bonuses, long term incentives, shares, profit sharing, and benefits such as pensions, health insurance, and holidays.

Rewards can be divided into two components – intrinsic & extrinsic. Intrinsic rewards are things that lead to the feeling of personal achievement, profession growth and sense of accomplishment. Extrinsic rewards are tangible rewards such increase in basic pay, bonus, performance related pay and other benefits (Thomas, 2009). The aim for MB UK is to influence employee behaviours with extrinsic rewards. 4

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The link between performance and reward is like a vicious cycle as shown in Figure 2 – when an organization has a well-placed reward strategy the employees would feel more engaged which leads to increased performance and therefore high profits. However, if there is no suitable reward strategy, the employees are less engaged which lowers the performance and therefore leads to low profits or even losses. (Ferner & Almond, 2013) One of MB’s objectives is to increase the performance culture within the bank and the link between performance and rewards illustrates that this can be achieved with a suitable financial reward strategy.

Employee motivation plays a key role in determining the performance of an organization; motivated employees have high performance which is why there is a link between motivation and rewards. To explain the link; Maslow’s Hierarchy of needs model for motivation can be used. This model suggests that people’s needs comprise of 5 levels arranged in a hierarchy; Physiological, Safety, Social, Self-esteem & Self Actualization. Maslow’s idea was that individual’s need to achieve one level before moving on to the next; however, it is argued that this theory fails to consider that individuals may prioritize their needs diferently and it does not apply to all cultures (Cowling & Mailer, 1998). However, this theory can be applied to reward strategy – Figure 3 shows the adaptation of Maslow’s Hierarchy with organizational rewards that contribute to employee motivation at each level.

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With the help of the Hierarchy of needs model it becomes easier to identify the diferent requirements of diferent employees. For example, many employees in MB are worried about cost cutting and are insecure about their jobs. The second level is about safety which organizations can provide by having a proper redundancy pay to compensate them if they do lose their jobs. Applying this model to MB shows that employees in lower grades would be motivated by higher financial rewards to enable them to fulfil their physiological needs while employees in the higher grades would focus more on self-actualization needs.

Common Issues There are a few concerns that MB UK faces within the organization as a whole; the pay structure, appraisal & pension scheme need to be reviewed for cost efectiveness.

Pay Structure MB UK has a narrow-graded structure (Figure 4) considering that there are 20 grades within the organization defined based on job evaluation (Armstrong, 2005). Using job evaluation can promote fairness within an organization but it can be a costly process and it is less suited for knowledge workers; for example, IT staf. According to (Armstrong, 2015) this structure is mainly used by the public sector, is simple to administer, the organization has control over new starter pay and is popular with employees because of frequent grade increases; however, it is an inflexible structure and as we can see from the case study most of the employees have reached the top of the salary scale maxima and it would be costly to promote them to a higher grade.

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MB UK would require an analysis of its pay structure – by benchmarking employees’ reward packages against the banking industry in UK, for a clear view of how they compare to the competition. Using market rates could help cut costs and improve profitability as it allows comparison between current reward packages which will show target areas for cost savings or pay increase to retain staf (Lin, 2016). The recommended pay structure would be Job Family; since MB is in the banking industry and is divided into retail, business, corporate & investment banking. The pay levels difer between job families in accordance with the market rate levels. This type of structure is mainly used by large private sector organizations and is particularly useful for staf that is in short supply for example the Marketing, Finance & Compliance and the IT staf in MB UK (Figure 5). However, this structure could cause difficulty in maintaining equity between families which would result in equal pay challenges and difficulty in moving staf across departments (Armstrong, 2015).

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Annual Appraisal MB would also have to review its merit pay which is based on annual appraisal ratings. Currently the annual appraisal is held once a year where employees are told their rating, salary increase and future objectives; this suggests that managers needs to focus on decoupling pay from development. Appraisals can be held twice a year – once for salary review and one for employee development so it improves discussions between the employee and managers which allows future targets/objectives to be clearer (Lim, Wang & Lee, 2017). The current appraisal system is a box ticking exercise so to make it more efective MB could introduce the balanced scorecard system to manage performance which will lead to a rise in individual’s behavioral measures and compliance with the risk management procedures.

Pension Scheme MB is currently under Defined Benefit pension scheme which is when income on retirement is guaranteed by the organization; this is a costly scheme which is why many organizations choose to close them in the recent years. MB needs to close the scheme for all new employees and stop future accruals and promote employee contributions which will cause a gradual transition to defined contribution scheme which is less costly. (Stoltzfus, 2017)

Specific Issues Some issues are faced just by specific departments within MB UK; concerns over Brexit, turnover, profitability, shortage of staf, job security, retention & equal pay.

Brexit The Investment Banking Department They have 70% of clients within the EU and it would be difficult to continue trade from London after Brexit. Most investment banking firms are looking to subsidize to another country in the EU – this can be a very costly decision for MB UK if they must set up an entirely new office or subsidiary in another country (Reuters, 2017). Since MB America also has EU subsidiaries in Dublin, Frankfurt and Paris; it would be more cost efective to expand within any of these locations. The pay structure of the employees moving to these cities would be diferent compared to the local staf. A Host Based system for pay would be appropriate as it has a link to local pay and it is fair to local staf, it also costs lower compared to home based system. (Armstrong, Brown & Reilly, 2010)

High turnover Head Office The call center department has the highest turnover overall compared to other departments which can be because of lack of progression within the department. According to the managers the high turnover is because of the competitive salaries outside the organization. Staf does not feel that they have a future within the organization and they see their role as a temporary fill. To retain staf MB could introduce Individual bonuses/ team performance bonuses and to keep staf motivated they could introduce job rotation within the department so the staf gets to switch between telephone selling and doing processing work (Langove & Ahmed, 2017). However, it would be more cost efective to outsource the call center entirely as they hire 300 staf and high turnover means high recruitment costs.

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Staf from other departments have expressed interest in moving to Head Office but because of high house prices it is difficult. MB can assist with providing housing allowances or travel allowance for employees to overcome this issue.

Profitability The retail banking department There has been a decline in profitability due to competition, poor customer service and costs of misselling financial products. Appropriate reward strategies need to be set to avoid mis-selling of products like performance related pay, incentives and bonuses based on customer feedback rather than number of products sold which may lead to staf overlooking the customer needs. Overall the retail department needs to set objectives that are more customer focused so they don’t lose any more customers. (Leihtfuss et al, 2010)

Business banking department Managers are pressurized by the government to lend to small/ medium businesses, but MB expects them not to lend to high-risk businesses by setting up metrics to assess risk. This conflict may be afecting the profitability – MB needs to come up with a strategy that allows Business Banking Managers to be able to take full responsibility for risk assessment while being concerned about profitability. Profit sharing could be one of the methods where business profits would encourage managers to avoid highrisk businesses. (Armstrong, 2015)

Retention The investment banking department They are facing issues with retaining professional staf - Since the staf is mostly hired from other city investment banks it is important to consider the market rate for the investment bankers to provide them with an attractive reward package that includes a competitive basic salary and benefits combination. Successfully retaining these staf would also reduce recruitment costs for the organization. Introducing share schemes and profit sharing would help improve staf loyalty as their remuneration would be linked to the organizations profits which would motivate them to increase performance. (Liu & Li, 2017)

Shortage of Staff The Finance/ Compliance, marketing and IT departments are facing shortage of staf because of pay market pressures and because employees are hired at the top of the salary scale maxima. Introducing Job Family Structure would allow salaries to be more competitive within the market and there would be scope of salary increase for each grade and this could help with retaining the current staf. Outsourcing is another solution if there is shortage – since most of IT is contract staf it would make sense to entirely outsource the department to reduce hiring costs. (Hunter & Saunders, 2005)

Job Security Due to the cost cutting exercise staf in the Retail & Business Banking sector are concerned about their job security; especially the staf from part of the city where unemployment rates are high. According to Perkins & Arvinen (2013); this directly links to low employee morale and they would need assurance from their management if their jobs may be made redundant. Online banking could lead to closure of some retail banking branches and this needs to be communicated to staf once a proper redundancy settlement plan has been set. However, there may be concern because of Brexit and to diminish

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uncertainty employees should be told that investment banking is the only department that will be majorly impacted.

Equal Pay MB’s Retail & Business Banking department has 30% staf who are members of the Banking union and one of the concerns is equal pay. Currently there is no review or audit conducted to manage equal pay; however, the current legislation requires organizations employing over 250 employees to conduct gender pay gap reporting which is why MB would need to conduct Equal Pay audit which will help gain internal equity. (Dougan, 2017)

Graduate Development Scheme Currently MB has a graduate recruitment program that develops graduates to become future managers; however, they are not trained for investment banking. Since the Investment Banking Department will be afected from Brexit it would be worthwhile to recruit graduates for this department, so they could eventually move to the subsidiaries in other countries. As younger employees they would be more interested in benefits such as housing ladder instead of pension schemes. Introducing a flexible rewards would make sense so they can select what benefits are best suitable for them.

Best practice of similar organizations The above discussion focuses on theoretical research however it is important to look at what financial reward strategies and Brexit plans other organizations in the industry have come up with. Goldman Sachs (Sims, 2017)– They have over 6,000 employees currently in the UK and because of UK’s decision to leave the European Union the owners of Goldman Sachs will increase their presence in Germany to be able to continue free trade within the EU. Royal Bank of Scotland (RBS, 2017) – They have broken reward into basic salary and a percentage sum which employees can choose to take as a suitable combination of cash and benefits. Employees can choose from benefits including; Retirement savings scheme, insurance options, everyday shopping vouchers, online discount shopping, RBS shares, charitable giving to support your favorite causes. Lloyds Bank (Lloyds, 2017) – Employees at Lloyd Bank have flexibility to choose the benefits that are suitable to their individual and family needs. They ofer benefits su...