Tourism marketing and human resource management

A conceptual study on human resource compensation practices in Bangladesh

Md Yusuf Hossein Khun, Md Zahid Al Mamun and Azizul Hassan

Introduction

The potential use of skills, knowledge and competencies of employees in an organization would help to improve organizational performance. Certainly, the necessity of strategic human resource management in a business cannot be undermined as human resource management practices and policies influence work, attitudes and performance of employees. Having said that, human resource policies are focused on many essential practices, and in turn can positively impact organizational performance, such as human resource planning, recruitment, selection, training and development, compensation, performance management and employee relations (Khan, 2018). Since gaining independence in 1971 Bangladesh has been progressing gradually towards her drcam of a hunger- and poverty-free society. Until 1990, the government of Bangladesh adopted a socialist economic model. Therefore, the government and policymakers did not prioritize issues such as private sector development, industrialization, globalization, competitiveness and human resource management (HRM).

It is noteworthy that Bangladesh shifted its economic policies from socialism to a free market economy in the early 1990s and achieved commendable economic growth which has an industry contribution to GDP of about 28.5% (ILO, 2013; PwC, 2015). If this growth continues without interruption Bangladesh is predicted to become the world’s 23rd largest economy in terms of Purchasing Power Parity (PPT) by 2050 and has been included by Goldman Sachs in the N-ll countries (Chowdhury and Mahmood, 2012; PwC, 2015). To become a middleincome country by 2021, given the country’s limited natural resources and abundance of human resources, the efficiency and efficacy of HRM practices could be pivotal and driving forces for Bangladesh’s economic development (Absar et al., 2014). The main aspect of the study is to provide an overview of the stature of research conducted so far on HRM and compensation practices in Bangladesh. The present research has four distinct objectives: first, to study the current compensation systems and HRM practices in Bangladesh; second, to accumulate the studies conducted so far on HR compensation practices in context of Bangladesh; third, to identify the research gaps with respect to compensation practices in Bangladesh; and fourth, to recommend some directions for conducting future research on HR compensation practices in context of Bangladesh.

Importance of compensation in achieving organizational competitive advantages

According to McDonald and Smith (1995), companies that manage reward systems successfully outperform companies that do not, with higher profits, better cash flows, stronger stock market preference, productivity gains, higher sales growth per employee and overall better financial performance. Competitiveness has become the norm in these challenging and turbulent times. Noe et al. (2003, p. 4) defines competitiveness as “a company’s ability to maintain and gain market share in its industry”. Achieving competitive advantage has become the rule in a market saturated with players. With competition being a “key element in any analysis of the specific or task environment of the organization,” competitive advantage “refers to something that an organization does extremely well, a core competency that clearly sets it apart from competitors and gives it an advantage over them in the marketplace” (Schermerhorn, 2010, p. 66). How companies are able to attain a certain level of performance and organizational effectiveness becomes a measure of organizational competitiveness. Organizational effectiveness encompasses all measures indicating satisfaction of shareholders’ interests: acceptable returns for stockholders; products or services of value for the customers; equitably compensated human and motivating work for the employees; and environment-friendly and ethical business practices for the society (Noe et al., 2010a). We assume the extremely crucial role of human resources in achieving organizational competitiveness; human resource management has evolved to become one of the strategic means in bringing competitive advantage to a firm (Huselid, 1995 ; Huselid et al., 1997; Noe et al., 2010b) from merely regarding it as an administrative function. Compensation is defined by Mondy (2010, pp. 268-269) as the “total of all rewards provided to employees in return for their services”, the overall purpose of which is to attract, retain and motivate employees. When organizational behaviour modification interventions have been systematically applied over the years using both financial and non-financial rewards, it was found that performance increased by an average of 17% (Luthans and Stajkovic, 1999). It must be noted that employees have different perceptions on various types of rewards in terms of ability to motivate. For instance, nonmonetary rewards significantly influence an employee’s willingness to engage in extra-task performance (Chiang and Birtch, 2008).

A statistically significant and positive relationship was found to govern rewards and motivation, implying that if rewards being offered to employees were to be altered, then there would be a corresponding change in satisfaction and work motivation while the period salary increments, allowances, bonuses, fringe benefits and other compensations on regular and specific periods keep their morale high and make them more motivated (Danish and Usman, 2010).

Another total compensation model being used by more managers and academics alike is total rewards strategy. This model was developed by Milkovich, Newman, and Gerhart (2011) in order to integrate all the elements of rewards that has monetary value, employee learning and development opportunities, quality of the work environment and other employee benefits and privileges.

Figure 12.1 Theoretical compensation system

Source: Milkovich, Newman and Gerhart, 2011.

Organizations would attain significant returns with the appropriate use of the integrated total rewards strategy.

Methodology

This chapter applies the research design methodology based on the review of publications aiming at its analysis from the field of HRM with the use of computer search. Because there is no database or digital warehouse for information, the researchers collected different studies on HRM practices in Bangladesh physically from different libraries, universities, bookstores and corporate offices, and from the web. The authors also used information published by national and international organizations to assess the current situation and future challenges with regard to HRM in Bangladesh. Finally, to collect relevant information of HRM practices in Bangladesh, researchers used different websites of public and private sector organizations. After reviewing the literature, both theoretical and empirical studies were taken into consideration. In total, 37 studies were collected for the review. The following keywords were applied: reward, reward strategy, reward policy, compensation strategy, pay policy, incentives and motivators. By analysing and comparing certain information included in the selected articles from the HR field with the results of an analysis of reward system conducted from the perspective of HRM, significant conclusions were formulated. Due to the wide scope of the reward issues the current chapter is devoted to one main problem: analysis of the selected HRM publications available to the authors referring to the reward problems.

Emerging trends of HRM practices in Bangladesh: a critical assessment

Nowadays, it is proven that the human resource is the most important resource out of the four basic resources of an organization: human capital, physical structure, financial and information resources. Most organizations are family owned and controlled by family members, and HRM activities tend to be viewed as just a company owner’s wish. In reality, with few exceptions most of the private organizations have no proper HR department, hence there is no recognized structure with regards to base pay, rewards, termination policy, recruitment and selection and so on. Researchers have indicated that improved working conditions and better wage rates (rewards) could improve the productivity and profitability of organizations in Bangladesh (Ahmed and Pecrlings, 2009).

With the help from the World Bank, the Bangladesh government formed an agency called Bangladesh Institute of Management (BIM), which offers specialized degrees and diplomas in HRM and related areas. Following in its footsteps, most of the higher educational institutes such as public and private universities in Bangladesh now also offer bachelor of business administration (BBA) and master of business administration (MBA) degrees, with specialization in HRM. In addition to the educational institutions, two professional associations, the Institute of Personnel Management (IPM) and the Bangladesh Society for Human Resource

Management (BSHRM), have been formed by recognized HRM specialists to promote the HRM profession and development of HRM practices in Bangladesh. The contribution of BSHRM is widely recognized by the global HR community', and it has granted membership of Asia Pacific Federation of Human Resource Management (APFHRM) and the World Federation of People Management Association (WFPMA). Therefore, further developments in terms of HRM practices and recognition of HRM professions are expected in the near future.

The lack of comprehensive studies on HRM practices in Bangladesh makes it very difficult to detect overall scenarios, and therefore, recently, as a rare initiative, the Ernst and Young LLP and the Bangladesh Society for Human Resource Management (BSHRM) jointly conducted a survey on HRM practices in Bangladesh with a sample of 1,000 HRM managers from different sectors of the economy. The findings of this survey showed that more than 55% of the organizations do not have any defined employee reward programme. Also 66% of the organizations that represented fast-selling consumer goods, pharmaceutical sectors and telecommunications sectors reported short-term incentive programmes. Nonetheless, about 95% of the organizations do not provide any long-term incentives to retain employees which would be shocking in developed organizations in present time.

The highlights of the survey are presented in Figure 12.2 which could help to understand the present scenario of HRM in Bangladesh.

Figure 12.2 Features of HRM in Bangladesh

Source: The Daily Star, 2014

HRM compensation perspective and practices in Bangladesh

In the field of HRM, the idea that pay policies have a strategic impact has become a major theme within the compensation literature since the mid-1980s, although a limited number of studies have addressed the idea of “strategic” reward systems ( Boyd and Salamin, 2001). The strategic impact of pay policies has received little empirical attention (Montemayor, 1996). This strategic perspective on compensation is based on the fact that organizations differ in pay policies and the belief that matching pay policies to business strategy results in higher organizational performance. Effectiveness in strategy implementation at the corporate level depends significantly on the existence of a match between reward strategies and firms’ strategies (Shaw, 2002). Pay policy is frequently mentioned in strategic compensation theory and includes first, compensation philosophy; second, external competitiveness; third, incentive-base mix; fourth, individual (merit) pay increases; and fifth, pay administration (Montemayor, 1996). Additionally, compensation decisions can be classified into four distinct areas of compensation policy (Gerhart and Milkovich, 1990). The first is the pay-level policy, which determines whether a firm will pay above, meet or pay below the market wage level (Milkovich and Newman, 1990). The second area is how firms make pay differentiation decisions at the individual level; how, for example, pay is related to performance or to organizational tenure. The third is the pay-structure policy, which governs the relationships between pay rendered at the various levels of an organization. Finally, the fourth area, the benefits policy, is the basis for how a firm provides employees with indirect financial compensation (Werner and Tosi, 1995).

Previous studies (see Figure 12.3) of compensation have typically emphasized only one component of pay. Yet, because pay level and pay structure are both essential characteristics of a compensation/reward system, it is important to consider them simultaneously in order to relate pay policy to organizational

Figure 12.3 Compensation model

Source: Milkovich, Newman and Gerhart, 2011

Study on human resource compensation 213 outcomes. Both theory and empirical research suggest that pay level and pay structure are each important for understanding the organization-level implications of pay policy (Bloom and Michel, 2002; Huselid et al., 1997).

The introduction of performance-related pay (PRP) is explicit in private sector organizations, mainly in multinationals and leading local organizations in Bangladesh (Absar et al., 2013). However, public sector organizations are still lagging behind in implementing such practices because of legal complexities. Most public sector organizations still consider seniority as the main criteria for pay and promotion. According to civil service employment regulation, entry-level seniority needs to be maintained throughout the service period. Employees who receive a minimum pass mark in the annual performance evaluation automatically qualify for a pre-specified annual salary increment, as determined in the national pay scale. However, there is no scope to reward any employee by more than this prespecified increment, irrespective of their level of performance. In contrast, private sector organizations are concerned about productivity and employee motivation (Khan, 2013; Mia and Hossain, 2014).

Pay structure in public sector organizations

The Bangladeshi government created the National Pay Commission (NPC) to design the pay structure of public sector organizations and, in 1997, the NPC recommended a 20-grade pay structure for public sector employees, excluding workers in manufacturing organizations. Although the basis of this pay structure in not explicitly clear, the NPC adopted the historical categorization of employees used by the British government (Islington Commission, 1917, cited in Obaidul-lah, 1995). The Islington Commission proposed that there would be four broad categories of employees: Class I (officers/executives), Class II (junior officers), Class III (clerical/secretarial) and Class IV (custodial). For employees of the public sector organizations, the government formed the National Pay Commission (NPC) and the National Wages and Productivity Commission (NWPC) to formulate two separate pay structures. The NPC recommends the pay structure, salary and benefits for employees in the non-manufacturing sectors, while the NWPC recommends the wage structure for those in the manufacturing sector. Both commissions consider four main parameters when recommending wage and salary structures and benefits for employees: (1) the minimum wage should be adequate to provide for the basic needs of a worker’s family, comprising three adult consumption units; (2) industrial wages should be higher than agricultural or rural wages, and the wage of official employees; (3) wages should be linked to productivity; and (4) the ability of the enterprises to pay should be considered. The formation of a separate wage structure for manufacturing workers was justified on the grounds that manufacturing workers at the lower grades perform more demanding manual/physical work than do lower-grade non-manufacturing employees. In addition, manufacturing requires more grades to provide promotional opportunities to the workers because of their limited upward mobility to become supervisors or managers (Sarker, 2006). The latest pay commission,

that is, the Eighth National Pay and Service Commission (NPSC) was formed in June 2014 and the commission submitted its recommendations to the finance ministry in December 2014 (The Dhaka Tribune, 2014). This commission suggested pay raise up to 112.5% for different categories of public sector employees, compared to 94% of 2005 NSPC and 96% of 2009 NSPC. The suggestions for comparatively higher salary increase aim to recruit better qualified talents into public services and to minimize the pay gap between public and private sector employees. It is expected that the recommendations of Eighth NSPC, if implemented properly, will bring significant positive changes in the pay and performance of the employees of public sector organizations.

Pay structures in private sector organizations

The pay structure in large private sector organizations has some similarities with that in public sector organizations. Generally, there is one pay structure for managerial employees and another for non-managerial employees. In the absence of any legal obligations and very low state regulations, management unilaterally designs the pay structure for managerial employees. Almost no local private sector organizations follow any established pay structure for managerial employees. Usually, the head of the organization decides the salary of the managerial employees after discussing the jobs with departmental heads. Non-managerial employees’ pay structure is determined through consultation and bargaining with collective bargaining agents (CBA), depending on the organizational HR policy and CBA management bargaining outcomes (Mia and Hossain, 2014). Therefore, formal private sector pays structures follow two main procedures. Sectors in which collective bargaining is absent, owing to the non-existence of effective trade unions, use minimum wage provisions, while unionized organizations use collective bargaining arrangements at the enterprise level. Owing to the level of private sector development, most local private sector organizations have not yet developed any formal or institutionalized pay structure for their employees. Except for a few large organizations, employees’ pay or salary is determined arbitrarily (c.g. through personalized pay contracts), rather than any formal structure or grade (Chowdhury and Mahmood, 2012). In the absence of any legal or recognized grading system for private sector organizations, management usually divides jobs into job clusters for grading purposes. Local private sector organizations place entry-level jobs in different departments within the same grade (comparable educational background and subsequent practical experience), as well as their corresponding pay scales, if they already have these (Absar and Mahmood, 2010; Khan, 2013). On the other hand, pay and job grades in the private sector depend on individual employee competencies and bargaining with management, but there is no link to employee pay and fringe benefits. Sometimes, the identification of managerial or non-managerial posts depends on the opportunistic behaviour of management. For example, a number of private sector banks and manufacturing organizations have categorized non-managerial jobs as managerial posts to avoid unionization and to control different terms and conditions (Khan, 2013).

Future challenges of HR compensation practices in Bangladesh

As Bangladesh is moving from being a developing economy to an emerging economy, people’s expectations and values are also changing. In the last 20 years, because of globalization and the IT revolution, people are better informed about the world, work and civic facilities of modern life. While previous generations worried about savings and job security, the new generation of employees are more concerned about relationships, work-life balance and meaning in their work. Women are joining the labour market in increasing numbers, and the number of working couples is increasing too. While women professionals are moving towards higher-level employment positions, they face a daunting challenge to maintain work-life balance and career development in traditional Bangladesh society' (ILO, 2013). HR managers arc facing a big challenge in adjusting to diversity management and inclusion issues, as these require changes in employment policies, especially compensation systems, such as those dealing with working hours, health and safety measures, statutory maternity' leave, work-life balance, childcare facilities and so on (Bowden, 2014). As a signatory of International Labour Organization conventions, Bangladesh may need to implement laws and regulations to deal with these emerging trends, which is a daunting task in a traditional, conservative, male-dominated and hierarchical society. The legal context of Bangladesh is viewed by some as a barrier to introducing the latest HRM practices. For example, organizations cannot initiate any pay restructuring or retrenchment without the approval of trade unions. Most public sector organizations are overstaffed and incurring huge operating losses year after year. However, labour laws in Bangladesh make it very complicated for organizations to hire part-time employees or to change an employment contract from a full-time permanent position to a temporary or adjunct position. Such a rigid regulatory environment handicaps HRM managers who need to implement appropriate and effective practices in their organizations (Mahmood, 2008; Sarker, 2006). Many multinationals have been operating in Bangladesh for a long period of time, and their financial performance is better than that of the local competitors. Multinational corporations are role models in developing systematic HRM practices and leading local companies are trying to imitate their practices (Chowdhury and Mahmood, 2012). Therefore, without a proper compensation system organizations would not be able to acquire or retain high-skilled and talented employees to combat competitive challenges for different professions. Though organizations are introducing formal performance appraisal systems, their links with employee compensation systems and promotions are not widely visible. In addition, the global consulting firm’s 2018 Bangladesh Total Remuneration Survey suggests the rise in salary will be 10% in the next year. The study also concludes that a strong and consistent GDP growth of 7% per year over the last three years has led to expanded employment opportunities and consequently competition for talent, which has further led to double digit increments, a positive hiring outlook and the need to manage increasing levels of attrition.

Kwak and Lee (2009) proposed a new strategic compensation model (see Figure 12.4) for the future benefits of the organizations to achieve sustainable

Figure 12.4 Strategic compensation model

Source: Kwak and Lee, 2009

Study on human resource compensation 217 competitive advantages. In this model he mentions internal equity, external equity and employee equity to facilitate administration and performance management, competitive wage policies and practices, influence employees’ work attitudes and behaviour, attract and retain talents, motivate employees and so on.

In studies on rewards and job satisfaction (Galanou et al., 2011; Ghazi et al., 2010) a common premise is that when employees are satisfied, they feel a sense of fulfilment, achievement and joy in their jobs which are considered to be positive factors to employee productivity and creativity as well as organizational profitability. Empirical studies further support the positive relationship between employee benefits and performance which serves as proxy for organizational competitiveness.

In public sector organizations, HRM practices are still centralized and all practices respond to government directives. Private sector organizations are moving towards more strategic HRM practices, which is a positive sign for the future economic development of the country. In both cases, base pay or fixed salary as employee compensation practices are considered to be main motivational factors for employee performance in organizations, which is very old fashioned in modern HRM practices. There is no other way to obtain sustained competitive advantages in HRM without establishing satisfactory compensation systems for employees. With increased openness of the global economy and transnational labour movement, business organizations in Bangladesh soon will face acute shortages of high-skilled talents for different professional areas. Therefore, HR managers need to be proactive to combat this anticipated problem, as the study indicated. Both authors agreed that the findings of the review study could have some implications for HR managers and policy makers in Bangladeshi organizations and other organizations in developing countries.

Conclusion

As a review study, this chapter tried to assess current trends and scenarios and future prospects of HRM compensation practices in Bangladesh. This research found that in Bangladesh, base pay or fixed salary is still the only HRM compensation practice. This is also an important factor of employee motivation. Though both review type and empirical type studies were carried out on all HRM practices, strategic compensation and benefit has been found to be an attractive area of research. Findings show that the relationship between HRM compensation practices and organizational performance have not been carried out in the Bangladesh context. As HRM compensation practices have not been studied extensively in Bangladesh, there arc a number of areas where future studies can be directed: First, in-depth studies may be conducted to evaluate the impact of compensation practices on organizational performance through using descriptive and difference inferential statistics. It will help organizations to plan and produce strategic compensation systems to enhance employee’s performance as well as organizational competitiveness. Second, research may be carried out on the effectiveness of strategic compensation practices in service sector organizations. Theseoutcomes may accelerate service sector organization employee performance to achieve ultimate organizational goals. Third, studies may be undertaken to compare HRM compensation practices with respect to public and private sector organizations in Bangladesh. The results of this study would genuinely help public sector organizations to update their existing compensation policies to cope with current compensation practices around the world. Fourth, case studies may be undertaken on compensation practices of different organizations for thorough analysis. This would certainly trigger the competition level among different organizations in terms of compensation strategy in a positive direction. Fifth, studies can be undertaken to portray compensation and employee motivation in the context of Bangladeshi organizations. This study would be very relevant for both employers and employees because most of the organizations ignored employee motivation, which is really important for employee performance. Sixth and lastly, more research may be carried out on the future trends of compensation strategy of HRM practices extensively in Bangladesh. The world is changing in the blink of an eye with the blessing of ultra-modern technology. Employers and organizations need to collaborate with the dynamic business world to gain sustainable competitive advantages.

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