SCM-009432 (MBA- General Management)

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Executive Summary
This is a report prepared by Senior Human Resource Manager of ABC Oil & Gas
Engineering Sdn. Bhd on reviewing, analyzing and developing a strategic compensation
policy that is aligned to support the companys dynamic business strategy to meet the
organization objective and business goals and provide a competitive advantage for ABC in
oil and gas industry.

The first part of the report will provide background of ABC Company and its corporate and
business objectives. Briefly, ABC Company is involved in oil and gas industry and listed in
main board with workforce around 400 employees of different pay grades.

In this section, the report analyzed nature and purpose of compensation benefits and practices
in contemporary organization. In general, several HR and compensation objectives are
outlined. Next, the report proposed several strategic options available in developing and
designing compensation system and policy that meet competitive pressures and employee
expectation.

Relevant theories are used accordingly to propose and analyzed strategic compensation
options which include internal alignment, financial compensation, base pay structure, non
financial compensation and legislation in macro economic point of view. In addition, the
report will analyze the influences that might impact compensation choices and outcomes. The
report also analyzes advantages and disadvantages of having a pay mix policy in a typical pay
scenario.

The report concluded with summary and recommendations on the proposed compensation
benefits and policies.





















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Table of Contents

Executive Summary 1
Table of Contents 2
List of Figures 3
1.0 Introduction 4
2.0 Company Profile and Background 5
2.1 Corporate and Business Objectives 5
3.0 Nature and Purpose of Compensation & Benefit Policies and Practices 7

4.0 Strategic Options in Designing of Compensation Benefits and Policies 8

5.0 Influences and Impact on Strategic Choices and its Outcomes 12

6.0 Conclusion and Recommendations 14
List of References 15
List of Appendices 16












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List of Figures
Figure 1: Strategic Choices in Compensation 8
Figure 2: Total Compensation Strategies 11
Figure 3: Communicating Compensation Programs 12
Figure 4: Pay Mix Policy Alternatives (Typical Scenario) 13





















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1.0 Introduction
This is a report prepared by Senior Human Resource Manager of ABC Oil & Gas
Engineering Sdn Bhd on reviewing, analyzing and developing a strategic compensation
policy that is aligned to support the companys dynamic business strategy to meet the
organization objective and business goals and provide a competitive advantage for ABC in
oil and gas industry.

Internally, ABC faces issues on high staff turnover problem, insufficient manpower and lack
of trained and skill workforce. Key and experienced staff that had contributed significantly to
the company has been head hunted by competitor companies for better rewards and
compensation packages. As a result, the company has failed to retain, attract the right type of
workforce to support organization business strategy and responding to competitive business
environment.

The report begins outlining ABC company profile, organization and business goals. The
report analyzed nature and purpose of compensation benefits and practices in contemporary
organization. Next, the report proposed several strategic options available in developing and
designing compensation system and policy that meet competitive pressures and employee
expectation. Several strategic options include internal alignment, financial compensation,
base pay structure, non financial compensation and legislation in macro economic point of
view.

In addition, the report will analyze the influences that might impact strategic choices and
outcomes. The report also analyzes advantages and disadvantages of having a pay mix policy.

The report concluded with summary and recommendations on the proposed compensation
benefits and policies.







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2.0 Company Background and Profile

ABC Oil & Gas Engineering Sdn. Bhd. is incorporated on 18 November 2001, and owns
71.22 hectares of land area known as Johor Yard and provides a spacious facility capable of
handling 31,000 metric tones of steel offshore platform fabrication.

Below is ABCs Corporate Facts:
Authorised Capital : RM800,000,000
Paid Up Capital : RM165,898,002
No. of Staff : 400
Corporate Office : KL
Branch : Johor & Terengganu

ABC core business is in fabrication of major steel structures, engineering works and
provision of offshore services for the oil and gas industry. Their major clients are Petronas
Carigali Sdn Bhd, ExxonMobil, Sarawak Shell Berhad, Sabah Shell Petroleum Co., Talisman
Malaysia Ltd. and Hyundai Heavy Industries Co. Ltd (Ramunia, 2005).

ABC is positioned as a key player in the engineering and oil & gas construction industry,
both locally and internationally, namely for fabrication of heavy offshore and onshore
structures and is listed in the main board.

2.1 Corporate and Business Objectives
ABCs primary business objectives are to fulfill stakeholders' expectation by:

meeting company set objectives by double up market shares in five years time.
maximizing share holders profit.
ensuring continuous improvement by providing creative, innovative and customized
solutions for client needs.
attending to customer needs promptly, effectively and efficiently to gain competitive
advantage over the competitors.


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The extensive oil and gas explorations in Malaysia and overseas have provided ABC the
opportunity to provide solutions and services to local and international companies. The
increasing demand of its solutions and services has contributed to the companys continuous
growth (Chetwynd, 2007).

Despite the above, increasing competition from competitors in the industry has also affected
ABCs business performance. In addition, the market forces and current economic instability
has brought upon fluctuations of oil prices and demand. This has cause oil and gas
companies revenue decreases and therefore oil and gas projects and exploration activities
been reduced significantly.

The nature of work in oil and gas industry such as ABC is very demanding and challenging,
however the rewards and profits are lucrative. It is therefore crucial having a talented and
high quality workforce for ABC to remain competitive in the market.




















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3.0 Nature and Purpose of Compensation & Benefit Policies and Practices

Rewards or Compensation Management refers to the design and implementation of policies
and procedures that aim to ensure that rewards are allocated in a manner that is fair, equitable
and consistent with the value system of the company. (Perkins & White 2009)

Compensation systems are designed by HR together with top management personnel in a
company to align with business objectives and goals, whereby maximizing profits and
companys organic growth. In addition, compensation system are designed to motivate,
influence employees of different pay grades, job, role, functions and responsibilities so that
their efforts are aligned with the vision, mission, and business needs and goals of an
organization. A well designed compensation and benefit system will attract talent and
qualified labour, retain performing and achieving staff and at the same time motivate staff
morale and loyal to the organization.

HR objective is to align and support organization and business objectives by designing a
formal program to manage an organizations compensation system. Objectives, goals and
policies of compensation system in alignment with HR objectives in a contemporary
organization:
Recruitment and selection of best qualified candidate via tests and interview.
Reward packages on salary, benefits, incentives and bonuses to attract, retain and
motivate qualified workers of different pay grades and position.
Performance Management and Appraisal Program to encourage, evaluate and
maintain employee productivity, quality and capabilities to support company and
business objectives.
Continuous training and development to upgrade skill sets of qualified staff to
maximize productivity, creativity and as part of intrinsic rewards to staff.
Equal treatment and employment opportunities regardless of gender, age and race.
To ensure cost effectiveness of the compensation budget.

Apart from the above, it is crucial that the nature of compensation system is aligned internally
within an organization, externally competitive with the market and labour forces, recognizes
employee contribution and loyalties, managing and review compensation system and comply
with statutory and legal requirements or government policy as a total compensation system.
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4.0 Strategic Options in Designing of Compensation Benefits and Policies

In designing compensation benefits for ABC Company with different pay grades, there are
five strategic compensation choices which are compensation objectives, internal alignment,
externally competitiveness, employee contributions and management.



Figure 1: Strategic Choices in Compensation
Source: Adapted from Milkovich and Newman (2007)

Figure above depicts strategic choice in compensation system. The principal objectives for
compensation and reward system design are to support and align with organization mission
an objectives and business strategy as well as HR strategies to provide the organization a
competitive edge over competitors and external markets.

Apart from that, another strategic option in designing compensation benefits is internal
alignment and this must support organization structure and work flow. The internal pay
system can be structured to be job-based, competency based or contribution based. (Perkins
& White 2009) Contribution based structure motivates staff to provide value added services
and commitment to the job. Pay can be also structure differently based on working condition
or knowledge and skills individual staff possesses. In an organization like ABC, it is crucial
to reward staff differently whereby the work nature in hazardous and risky environment such
off shore and fabrication of heavy steel and metal in secluded areas. Knowledge and skills
also important in determine pay criteria of staff due to extensive engineering and civil works,
whereby skill sets are limited in the market.
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As a result, the internal structure of ABC has to be tailored coupled and ABC should set
different pay-level policies for different job and skill set. Further to that, the internal structure
of ABC Company has to be designed in a hierarchical structures in opposed to egalitarian
structures. This is due to the fact that, hierarchical design will send a message to all
employees that organization values the differences in work content, individual skills,
contributions and responsibilities undertaken by each staff under different job functions and
pay grades. (Perkins & White 2009) Hierarchical structure are more appropriate in ABC as
job functions, responsibilities and contributions are crucial in an oil and gas industry,
especially for work conducted in off shore. In such structure, high performer will be
motivated to perform regardless of their seniority. This is a typical structure of a traditional
hierarchical pyramid pay grading structure.

Designing a competitive direct compensation package including salary, bonus, incentives is
an important choice in designing compensation benefits. To design a competitive base pay
structure, ABC has to perform job analysis and evaluation of individual staff for pay
determination. Some of the job evaluation techniques are job ranking, job classification,
benchmarking and Point Factor Analysis (PFA) (Armstrong & Murlis 2004). Pay
determination can be either unilateral pay setting by management, individual employee
negotiation or use of Pay Review Body. It is suggested that ABC to implement decentralized
bargaining at organization level and this is based on a competitive pay policy survey
conducted against external market rates. The survey should be done based on relevant market
competitors and salary reports from major recruitment agencies and employee should be
appraised with feedback during performance management program.

In the design, ABC should prepare a compensation program which includes base pay,
incentives and benefits. However the compensation package must not be overly paid against
market rate, meeting the market will be ensuring organization does not have high fixed costs.
In order to ensure a competitive pay policy, the design should include pay policy line and pay
ranges within the pay grades. The pay ranges within pay grades must have minimums,
midpoints and maximums. This will ensure flexibility for ABC to deal with pressures from
external markets and differences in quality, productivity, value and performance of individual
staff. Broad banding in pay grade is not suitable for ABC as recognition via titles or career
progression is more critical in oil and gas engineering organization like ABC.
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Apart from pay structures, ABC is advised to have merit or performance pay progression or
rewarding the employee for growth and contribution to influence and motivate them for their
continuous effort.

On the other hand, one of the strategic choices in designing compensation benefits is to have
a tailor compensation package or boutique pay program. The boutique pay programs consist
of several theories such as compensating differentials, efficiency wage, signaling, reservation
wage and human capital. For ABC, compensating differentials is important as employees are
expected to be in disagreeable working conditions such as off shore activities and necessary
training for machinery and engineering works is expensive. In addition, efficiency wage is an
important criterion for ABC to enable organization share success with employees via bonuses
that vary with profitability. It is therefore suggested that ABC to have a competency based
pay system to reward high performance staff in soft and hard competencies.

Besides that, the tailored compensation package (Berger 2008) for ABC should be pay with
market match, in order able to attract, retain employee and at the same time contain labour
cost and reduce pay dissatisfaction among employees in the organization. Another strategic
option in designing the compensation system based on performance related benefits is to have
a team based rewards scheme. (Armstrong & Murlis 2004) By having team based rewards in
ABC, it will encourage work collaboration and co-operation between employees to meet
collective goals. In the case of ABC, this strategy option is mostly suitable for project basis.

Other extrinsic package to be tailored into total compensation package includes incentives
such as employee stock options scheme, child and elder care services, educational assistance
program, medical, life and insurance plans. Employee stock options reflect high positive
correlation between employee share ownership and company performance. (Pendleton 2008)

Apart from performance based rewards, another strategic compensation option is to
implement pay-mix strategies using non financial compensation such as flexible work options
to accommodate work-life balance, create a supportive social environment at work, employee
recognition and employee involvement program. This compensation strategy is intrinsic in
nature and can be implemented by providing job satisfaction and motivation for employees,
empowering supervisory employee with authority, provide training and induction to
employee for self development and encourages social interaction from other colleagues.
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Figure 2: Total Compensation Strategies
Source: Adapted from Martocchio (2009)

Figure above shows total compensation strategy which highlights extrinsic and intrinsic
rewards as part of the strategic options. Further to that, the compensation system design must
be of equal treatment and employment opportunities regardless of employee gender, age and
race.

Having said above, the design of compensation and benefits policies must comply with
employment legislation (Medill 2007) such as wage and labour hour laws, welfare laws and
other statutory benefits relating to paid leave, employee provident fund and SOCSO.













Total Compensation
Extrinsic Compensation
Core Compensation
Adjustments to Core
Compensation-Seniority,
Merit, Incentive
Legally required Employee
Benefits
Discretionary Employee
Benefits
Intrinsic Compensation
Core Job Characteristics like
Skill variety
Task Identity
Task Significance
Autonomy
Feedback on performance
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5.0 Influences and Impact on Strategic Choices and its Outcomes
One of the influences to strategic compensation implementation is communicating the
compensation policy and benefits to the employees. The components of appraisals,
reviewing, administration and compensation policies have to be communicated to all
audiences depending on the detail and emphasis played by individual audience type as
depicted below. Failure to communicate clearly, precisely to the audience will affect the
implementation process especially in an organization like ABC with the workforce of 400
employees.















Figure 3: Communicating Compensation Programs: An Approach to Providing Information to Employee
Source: Adapted from John A. Rubino

Apart from the above, external factors such as legislation and politics will also influence and
impact the outcome of compensation policies. One typical example is the announcement of
High Income Nation under the Budget 2011. The monthly salary of postmen including
fixed allowances increased to RM1,285 from RM1,035. (Business Times, 2010, November 7)
This has indirectly affected the minimum base pay for the labour workers of different pay
grades. Another major external factor affecting compensation policies will be the 10
th

Malaysia Plan implementation.


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On the other hand, every compensation choice in a pay mix policy has its advantages and
disadvantages to the employee. The compensation package is depicted in the figure below
whereby for a performance-based compensation system, employees are rewarded with higher
bonuses and stock option as part of their financial compensation.
For Work/Life balance-based compensation system, employees are rewarded with higher
benefits in terms of flexible working hours as part of their non-financial compensation.

Figure 4: Pay Mix Policy Alternatives (Typical Scenario)











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6.0 Conclusion and Recommendation

As a conclusion, no single area of human resource management has a greater impact on the
organization than compensation policies. Compensation practices influence an organizations
ability to recruit and retain a qualified workforce and to motivate productive employees.

Compensation and benefits, however, represent one of the highest costs for most
organizations. Therefore, competitive compensation programs must be developed within the
context of the overall business plan. This can be achieved by having pay mix policy which
provides employees financial compensation and also non financial compensation like work/
life balance and employee recognition. Work / life balance is truly a benefit for employee
with family but the compensation package must be tailored accordingly.

Having a reward based on team work is another recommended choice in compensation
policies especially for ABC which indulged in multiple engineering project works on shore
and off shore. This option will encourage employee collaboration and work towards
achieving a common goal with minimum management supervision.

While developing and implementing compensation policies and practice company wide, it is
crucial that the policies been communicated clearly to all employees. Last but not least,
compensation system is affected by external factors and legislation. Therefore, management
and HR and should constantly review, monitor and provide feedback to amend the
compensation policies time to time.











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List of References

Business Times (2010, November, 7), PM s Budget 2011 speech Transformation Towards
A Developed And High-Income Nation

Chetwynd, C. (2007). Bidders line up for FPSO Jubarte deal [Press Release]. Retrieved from
http://www.ramunia.com

John A. Rubino Article first published online: 16 Jan 2007 Aligning personal values and
corporate values: A personal and strategic necessity

Lance Berger and Dorothy Berger (2008). The Compensation Handbook. McGraw-Hill

Michael Armstrong and Helen Murlis (2007). Reward Management: A Handbook of
Remuneration Strategy and Practice. Kogan Page

Martocchio, Joseph J. (2008) Strategic Compensation. Prentice Hall

Milkovich, G.T. & Newman, J.M. (2008) Compensation. McGraw-Hill Irwin.

Medill (2007) Introduction to Employee Benefits Law. West Publishing

Pendleton A. and Robinson, A. (2008) Employee share ownership and productivity: an
interaction-based approach, unpublished paper

Perkins S.J. & White G. (2009) Employee Reward. Alternatives, Consequences and Contexts.
CIPD London.

Ramunia Holdings. (2005). Ramunia Holdings Berhad [Fact Sheet]. Retrieved from
http://www.ramunia.com

Sengupta, S. (2008) The impact of employee share ownership schemes on performance in
unionized and non-unionized workplaces, Industrial Relations Journal, 39(3) pp 170-90


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List of Appendices
Appendix 1 : Different Pay Grades and Site Service Allowance for Oil & Gas Works
























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Appendix 1 : Different Pay Grades and Site Service Allowance for Oil & Gas Works