COMPENSATION AND BENEFITS
This research paper is focused on describing the compensation practices which an organization undertakes, triggered the achievement of competitive advantage of the firm. For an organization to establish a competitive advantage within the global market, the compensation plans developed by the institution should be in line with the strategic actions and policies relating to the same. Along with the achievement of the competitive advantage, compensation practices also happen to create influence over labour productivity, recruitments, and turnover within firms. Therefore this makes it critical regarding how the firms make a thorough analysis of people’s perception relative to the firm’s compensation and how the attitude consequently impacts their behavior.
A significant amount of job contentment among the employees is mainly dependent on the number of compensations fulfilled with proportionate benefits like paid vacations, insurances, pension plans, and sick leaves, the impact towards satisfaction level of the employees as well as their commitment and behavior relates to the same.
American Airlines has been confronted with challenges evolving around the aspects of compensation and benefits after they imposed restrictions on their compensation plans for their employees. After incurrence of massive losses, American Airlines, one of the world recognized largest airlines, cornered the management of the institution to undertake drastic cost-cutting followed by restructuring campaign purposed on the restoration of profitability. The extreme measures taken by the firm resulted in massive job cuts of employees. The policy was invited by random resistance among the employees and later aggravated the volume of losses that were incurred by the firm (Hansen, 2010). Based on the vital role which is played by both the compensation and benefits plans regarding employee satisfaction, productivity and commitment, firms are required to strive to the exploitation of the full potential concerning their human resources by considering sufficient compensation and benefits structures.
During the beginning of 1992, American Airlines was recognized as the largest airline within the western world. The firm recorded tripled revenue generation in the 1980s. It maintained a profit row for seven consecutive years (1983-1989). Due to the Persian Gulf War of 1991 subjected the firm to a recession, and there was a rapid increase in cost when compared to revenue. Within the 1980s American Growth plan reduced the average cost of customer transportation, which was supported by cost reductions such as labor costs. Surprisingly within 1988 and 1991, revenue growth was outdone by a rapid increase in unit cost. Most of the expenses that were incurred by American Airlines relied on labor cost, where the contracts that were dully signed in 1991& 1992 comprising of pilots, mechanics, and ramp workers as well as ticket and reservation agents which impacted to increased labor spending (Andrade, Hernandez,2017). To monitor this, the organization announced significant changes in staff reductions affecting 1250 employees.
Currently, firms are faced with the confrontation of increased competitive pressures, as they are focused on the achievement of more by the usage of fewer resources. Relating to the high rise developed on the emphasis regarding concepts such as innovation, profits, quality, and sales volume, scenarios have been revealed, comprising of tight control measures over employments with significant employment cuts. The concepts towards the management of the human resources efficiently by using fewer staff members have developed over the years, with emphasis shifting towards the functioning of the system of employee compensation with a viewership of the management of the human resource in a better perception. Compensation of employees and granting of benefits performs a critical role since it lies in the central plan of the employment relationship and having a vital significance for the employees and employers. Compensation did to the employees in the form of wages and salaries defines the major source of income for the employees, where the benefits granted to the staff members catering for their health and other security functions. For the employees to have the feeling of being satisfied by their current job and focus on giving the best services to their employers is dependent on the compensation and benefits they receive from the firm (Boardman, Weimer,2017).
American Airlines problem analysis
One of the significant problems countering the organization was the reduction of the operation cost while at the same time, making it easily manageable with the increase in revenue generation. The high value, which was contributing to the rise in operating costs highly comprised of the labor cost. With most of the labor cost being realized from the wages paid to the pilots and co-pilots and required to be managed for effectiveness. Total labor cost attributed to 33% of the operating expenses, where the ratio of the pilots alone constituted an average of 9% total operating costs. Another problem that has been hitting the operation cost of the organization has been the recent rise in the fuel prices with that of the period ranging between august and October 1990 impacting the organization with fuel prices escalating by more than 77%, where for American Airlines any 1% rise in the amount of purchasing a gallon of fuel led to the addition of $ 2million in the costs of the company for the month (Alnuaimi, Jawad,2016). The other more significant problem that was continuing to forge the employee’s relations as a necessity of achievement of the strategy which is premised towards cost reduction as well as the realization of the leading customer service within the industry.
Theories addressing the concept of compensation and benefits
Reinforcement and expectancy theories
The theory of reinforcement projects that the tendency which has a rewarding experience has the likelihood of being repeated. The impacts of remuneration are linked with high employee performance, which is triggered by the monetary rewarding and compensation to perfect the performance of the organization in the future. The main emphasis of the theory is focused on evaluating the significance of an employee’s experiences from the reward.
Similar to the concept of reinforcement theory for the expectancy theory is highly focused on evaluating the linkage between rewards and behavior. Where motivation, according to the theory, is perceived as the product of valence, expectancy, and instrumentality. In most cases, the remuneration systems have posed differences in the impact they impose on the motivational components. Generally, the pay systems vary mostly on the impacts of instrumentality with perceived interdictions between pay and behavior (Scott, 2018). With valence of pay outcomes remaining similar when relating to different payment systems. Expectancy perception is mostly dependent on job design and training compared to the payment systems.
Equity theory
Adam’s equity theory describes the concept of an employee who has a perception of inequity. Their rewards seek out the restoration of equity. The main emphasis that was addressed by the equity concept in the pay structure is the employee’s remuneration. The perception of the employees regarding the treatment they are acquiring from their firms is the key significant aspect they focus on. The perception of good day work for fair pay for the work done creates a sense of equity that is felt by the employees (Shah, 2003).in case employees develop the perception of inequity, it contributes to lower productivity, increased turnover, and higher cases of absenteeism.
Agency theory
The theory is focused on the evaluation of the conflicting goals and interests involving the firm’s stakeholders as well as the methods and ways in which the employee’s remuneration is applicable in the alignment of the identified goals and interests. The major stakeholders within a business unit comprised of the employers and employees where the employers assume the roles of principals, with the employees fitting in the position of agents. Enumeration that is entitled to the employees for services they offer is known as the agency cost. It’s normal and natural that the employees usually have a high expectation of high agency costs, whereas the employers are drafting measures seeking to minimize the costs. Through the agency theory, there is a definition that addresses the mode in which the principle should select out a contracting scheme that aid in the alignment of interests regarding the agents in association with their principal’s interests. Classification of such interests includes behavior-oriented such as merit pay or oriented such as stock options and profit-sharing (Kingston & Weng, 2014). During the first sight, the outcome-oriented contracts may be seen as the obvious solution to the agency problem.as the agency’s profit goes up, rewards are also subjected to increment, with remuneration falling as profits go down.
Solutions
American Airlines Company is required to obtain support from all the stakeholders, specifically its employees and staff, for the implementation of its efficient strategy of cost reduction. Where the contentment of the employees following the strategies approached concerning cost reduction being the highest necessity. The main section to consider cost implied on the salaries and wages, particularly for the pilots and co-pilots (Alnuaimi &Jawad, 2016). Development of proper contracts addressing the concept of wages and salaries for the latter has to be assumed so as all the parties will feel valued by the agreement, thus not subjecting American Airlines to the jeopardy of threats of strikes and increment of wages and salaries.
American Airlines is also expected to make extensive preparations towards facing future occurrences like the unit cost changes, mostly affecting the fuel cost, where the unexpected happenings like the one of 1990 will not affect the operations of the company. The firm is also required to grant satisfaction to unionized and non-unionized staff and employees operating in the entity apart from the pilots and their copilots since they also have the power of hindering the operations of the organization.
Justification
Any company that is focused on achieving its objective of success has to rely on striking a balance between the strategy as well as evaluation of the level of cooperation by its employees towards the strategies imposed. In any case that American airlines want to achieve a reduction of cost for the balancing of its revenue, they should focus on acquiring the support of the employees, which is essential.
Another critical and biggest participant within the operating cost is the labor cost. Therefore when addressing the issue of labour cost, American Airlines is required to perform under control when providing employee satisfaction at the same time considering gaining the support of the employees critically addressing the effects of increased operating costs (Alnuaimi &Jawad, 2016).
It is the obligation of every management of a company to ensure that they are well prepared when it comes to addressing the future and unpredictable occurrences, to minimize the chances of creation of heist. In our study, American Airlines is required to have created the need and requirement of preparing for the circumstances which are unpredictable and likely to happen in the future, affecting the performance of the firm (Singh, 2002).
When addressing the solutions given above, there is a high possibility that the firm will be faced with the following drawbacks
- It has become challenging for companies to provide satisfaction to every employee, with more efforts enforced towards this strategy approach resulting in a reduction of efficiency affecting the leverage of employees (Alnuaimi &Jawad, 2016).
- When talking about forecasting, which is not an exact science and focuses on the prediction of the unknown, it becomes almost impossible for a company to predict every uncertainty they are likely to encounter during the future occurrence along with its conduction of activities.
- In any case, the company is subjected to accepting all the claims and demands raised by the employees. Specifically, the pilots and co-pilots.there will be the development of a negative impression towards American Airlines management. This further increases the probability of such happenings to happen simultaneously(Alnuaimi &Jawad, 2016).
- Sometimes, companies are seen concentrating all their efforts on solving one problem forgetting other functioning, which goes unnoticed. For instance, as American Airlines has concentrated all its efforts towards the reduction of wages and improvement of effectiveness, some other factors which happen to haunt the activities of the firm in the future go out unnoticed and unattended, therefore putting the firm under obligation to a broader view towards the problem.
Therefore as American Airlines is on the race towards addressing the issue of compensation and benefits, they should have banked out that, in case their employees are not contented, their performance will not be 100% reducing the effectiveness of the company at large. Failure to address future uncertainties through predictions is likely to leave the firm as vulnerable to future changes.
References
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Andrade, D., Branco, T., Carvalho, D. D., Gandini, A., & Hernandez, P. (2017). An evaluation of the effectiveness of the criteria to determines the levels of compensation, promotions, and other benefits for the crew members and its effects on airlines, customers, and crew.
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit analysis: concepts and practice. Cambridge University Press.
Alnuaimi, Q. A., Xia, X., & Jawad, F. A. M. (2016). Aviation Risk Management to Comparative Performance in Air China with American Airlines. International Business Research, 9(2), 114-126.
Scott, A. (2018). Expectancy, Goal-Setting, and Reinforcement: Behavioral Theories and their Application in the Workplace. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3480853
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