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Effectiveness, Cost and Benefit of Team-Based Compensation System Report

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Updated: Jan 13th, 2019

Team based organizations have made a great impact on management panels of most corporations. The system reduces benefits previously exploited by greedy managers who took them on behalf of workers who do all the work to ensure the company performs optimally (Auchterlonied 81).

Research has indicated that compensation and offering incentives to workers and management personnel can help a challenged company regain its performance (Auchterlonied 81). In my point of view, reorganization of Nelson Company to a team-based company can help improve its effectiveness and cost management.

Problems Associated with Team-based Organization

Various problems are associated with reorganization of a company to a team-based organization. If companies continue using conventional methods in decision making, there will be no progress. In conventional methods of decision making, decisions are made from top to bottom. Such decisions are not realistic since individuals imposing the changes are not in touch with what is on the ground to determine the applicability of the incentives offered (Pizzini 344).

Changes can be done to the top management of a company; but without effective communication channels between workers and management, such proposed changes remain virtual ideas (Pizzini 344). Another problem that might result when using conventional methods of decision making could be schemes used to compensate the Top Management Team (TMT) and disregard other subordinate staff.

Some of the problems encountered during reorganization may include the subordinates not being familiar to the changes imposed in running the company (Wageman 150).

In addition, it might be a problem coming up with mechanisms to ensure there is equitable distribution of opportunities among the new management team. Another incident that might be a problem to the management when initiating team-based compensations could be the nature of the task. It is important to determine how a task is beneficial before considering a group (Wageman 151).

If tasks are not interdependent, they are applicable to individual compensations (Wageman 150). Setting up of group based compensation on tasks that are not interdependent causes massive destruction to the management and running of an organization (Wageman 153). However, Holmstrom and Milgrom suggest that in the case of task interdependent; group incentives could be the best method used to determine appropriate mechanisms of compensation (1991).

In addition to task interdependence, malpractice liability is another challenge to starting a new management system (Pizzini 344). In this case, a company should establish malpractice liability insurance premiums since there might be no chances for the management to establish specific sources of errors. It is inappropriate to victimize an individual in a group while the task was conducted by a whole group, which should be responsible for malpractices committed (Pizzini 344).

The other challenge that might be faced when running a team-based organization is the diversity within the teams (Pizzini 345). Groups may have disparities in their specialization, responsibilities, gender and experience (Pizzini 345). If disparities in specialty are measured, then it is thought that every person in that group has different specialties from one another (Pizzini 345).

In addition, experience disparities could also be there and such disparities are analyzed by determining how long an individual has practiced their profession (Pizzini 346). Major disparities contribute to the negative aspects of group incentives.

Another problem that can be encountered in team-based management is group size; the size of a group determines how effective the management becomes. In addition, productivity of a group should be determined since some groups are not as productive as others. Therefore, the founder of Nelson Company should establish a mechanism to evaluate the importance of a team to the company.

Setting equal goals in the execution of tasks in a team-based organization is a problem associated with team-based organizations. Research shows that sharing responsibilities equally results into a very low rate of productivity (Pizzini 345).

For example, a group of physicians will have low rate of productivity if they equally share the number of patients to attend to in a team-based medical centre (Pizzini 345). Monitoring of groups and their productivity has worked out well in determination of an effective and cost friendly management system.

Issues to be Considered during Reorganization of an Organization

Some studies indicate that there are issues that need to be considered before reorganizing an organization. Introduction of competence in the running of a company is very critical in the reorganization of a company (Timmins 44). Changes in management and introduction of competencies always work to improve performance of a company. Since competencies are introduced before the company is reorganized, they help workers familiarize themselves with them before they are fully installed (Timmins 44).

In addition, it is important to revise performance appraisal systems that evaluate teams as well as individuals. Such reevaluations helps employees focus on competencies such as their behaviors and also encourage discussions that utilize an all round outlook of this exercise. Further, an effective appraisal could turn management into an interactive process which could become beneficial to all parties involved (Timmins 44).

Training and development in an organization is crucial, since the management and the concerned individuals mainly focus on learning than training (Timmins 44). To obtain this, all concerned groups should be encouraged to attend team-building seminars. The seminars are fashioned to face out individualistic traditional training and replace it with team-based ideologies (Timmins 44).

In conjunction with this, selection of internal candidates with desired skills and competences to take care of some of the upcoming positions in the company, should take place (Timmins 46). The process does not involve professionals in the external market to be filled into the positions. This makes the selection very specific on who is picked for the positions.

Another issue that should be taken care of is compensation systems. If systems that were used did not show any concern on the performance of a company, then they should be reviewed. Some systems reward their employees on what they have done not considering how they arrived at the results (Timmins 47). Reorganization and review of compensation systems can boost team performance and ensure effective compensation. To help sensitize workers on the need to be involved in consideration of their rewarding schemes, they should be involved in the processes of reorganization (Timmins 44).

There are other specific factors that should be considered before starting reorganization of the company, it is important to consider the Nelson Company’s performance factor; it is obtained by multiplying the quantitative and qualitative factors of business (Auchterlonied 88). Quantitative factors are made up of key financial goals that are set at the start of a financial year.

While qualitative factors focus on attainment of goals besides financial performance (Auchterlonied 88). Another test to the performance of the business is the team’s performance factor. The management of Nelson Company will set out different groups and request them to come up with different strategies that the company should focus on to attain the desired shift. The groups might later be allocated with the implementation of the desired strategies (Auchterlonied 90).

It is also important to consider individual performance as a factor by establishing goals attained by individuals in all the departments. It acts as a point of reference to determine which department should be considered most for evaluation and reorganization (Irlenbusch and Ruchala 145).

Solutions to the Issues Associated with Reorganization of a Company

To solve the issues attached to management of a team-based organization, the top management should not be paid hefty compensations. The management should be paid according to the returns obtained from their quarters (Carpenter and Sanders 368). It is important to compensate the CEO and the Top Management Team according to their returns.

In some organizations, there are large differences in what is paid to the CEO and the next highest paid member of such organizations. In some cases, the divergence has contributed to an increase in competition amongst top management officials. However, study indicates a negative response towards increase in competition and performance of individuals in such organizations (Hambrick 112).

Some hypotheses assert that convergence of pay among Top Management Team with relation to the CEO’s has effects on the final return of the whole organization. They assert that there are chances for external alignment of pay to the TMT; which could be useful to the performance of a company (Hambrick 112). It is asserted that CEOs’ pay should be proportional to the annual performance of an organization (Carpenter and Sanders 370).

However, it is reported that top management compensation in a team-based organization can cause lack of cooperation from departmental heads since each person will be pulling towards their satisfaction. Cooperation will fail as well as communication; this is fatal to the life of a company.

Internal alignment is another solution to managerial issues concerning salaries; the method is consistent with a company’s financial position as well shareholder’s dividends. In this case, shareholders feel comfortable with what is paid to top management as well as the CEO with regard to the company’s financial position (Wageman 150). This form of compensation to the CEO and the TMT is seen to be considerate on financial constrains the firm is going through.

In contrast to external alignment, internal alignment model creates a sense of ownership among top management, CEO, Employees and shareholders of a company (Wageman 152). Therefore, I advise the founder of Nelson Company to create a sense of equal treatment among the CEOs and the Top Management Team. Such treatment causes rapid positive performance in a firm (Carpenter and Sanders 368).

After all plans are prepared, reorganization should be executed by communicating changes to the leadership team. Implementation is mostly composed of the pay plan, management mechanisms and a detailed breakdown of costs associated with each design options. After information is saturated to the leadership, then the employees are informed of the radical changes. This could touch on implementations in the management of organizations as well as payment plans for workers (Irlenbusch and Ruchala 148).

Benefits of Team-based Management

Team-based organization plan has worked well for many organizations and helped them attain their intended cost of running and at the same time pay and reward its employees adequately. In addition, the reorganization has helped companies gain investor confidence since shareholders feel the management is concerned about the financial position of the company. I am also confident that Nelson Company will experience a random shift that will place it at a position that it can enjoy handsome returns.

However, in the case of team-based organization one should be very careful when combining both personal and group reward (Irlenbusch and Ruchala 145). Research indicates that hybrid rewards involve both personal and group reward. There is a decline in the overall productivity of the group when hybrid compensation model is used. Then it is concluded that in the case of small individual compensations, it undermines the integrity of group rewarding (Irlenbusch and Ruchala 145).

In addition, it is observed that extrinsic compensations and rewards do not always contribute to the final performance of a group or a company. The proponents of the idea argue that in some cases, some events or activities are shown to have intrinsic motivations hence external motivations dilute it (Irlenbusch and Ruchala 147).

In conclusion, team-based management will have a positive impact on the management of the organization as well as to the employees. The process will reduce overhead costs that can be done away with by the management.

The overall reorganization of Nelson Company should start with the top management and trickle down to the grassroots. This is done after sensitization of employees, so they can see the need for such reorganization. Team-based organizations will be a boost to the morale of active workers in any business since they can get a feeling that their hard labor is appreciated.

Works Cited

Auchterlonie, David L. “Team-Based Incentive Compensation is Vital to Successful Operating Turnarounds.” The Journal of Private Equity 1 (2009): 81-88. Print.

Carpenter, Mason A., and Gerard Sanders. “Top Management Team Compensation: The Missing Link Between CEO Pay and Firm Performance?” Strategic Management Journal 23 (2002): 367-375. Print.

Hambrick, Donald C. “Fragmentation and the other Problems CEOs have with their Top Management Teams.” California Management Review 37.3 (1995): 110-127. Print.

Holmstrom, Bengt, and Paul Milgrom. “Multitask Principal-agent Analyses: Incentive Contracts, Asset Ownership, and Job Design.” Journal of Law Economics and Organization 7 (1991): 24-52. Print.

Irlenbusch, Bernd, and Gabriele K. Ruchala. “Relative Rewards Within Team-based Compensation.” Labour Economics 15 (2008): 141-167. Print.

Pizzini, Mina. “Group-Based Compensation in Professional Service Firms: An empirical Anaylysis of Medical Group Practices.” The Accounting Review 85.1 (2010): 343-380. Print.

Timmins, William J. “Team-Based Compensation at Recently Reengineered Zeneca Ag Products.” Employment Relations Today (1995): 43-53. Print.

Wageman, Ruth. “Interdependences and Group Effectiveness.” Administrative Science Quarterly 40 (1995): 145-180. Print.

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