| Traditionally conceptualized as a continuum, | | | | company performance can emerge. In the typical |
| individualism collectivism approach in the management | | | | agency framework shareholders (who collectively act |
| of remuneration has received considerable attention | | | | as a risk neutral principal) delegate decision making |
| from sociologists and social psychologists [Hofstede | | | | authority to managers (the risk averse agent) whose |
| 1983; Hui and Triandis 1986; Wagner and Moch 1986]. | | | | interests potentially diverge from those of the |
| Due to the recent shift from "collectivism" to | | | | shareholders. This hierarchical structure has an |
| "individualism" approach in remuneration the philosophy | | | | important source of market failure namely that the |
| of reward system in UK has changed. In order to | | | | effort levels of the manager are not directly |
| analyze those changes which took place let's | | | | observable by the principal and so cannot be fully |
| compare "individualism" and "collectivism" approaches in | | | | contracted upon. Moreover, the shareholders and the |
| management. | | | | managers' interests potentially diverge since |
| Individualism refers to a self-orientation, an emphasis on | | | | managerial effort positively affects the output variable |
| self-sufficiency and control, the pursuit of individual | | | | which the shareholder is interested in and hence adds |
| goals that may or may not be consistent with in-group | | | | to the shareholders' payoff, but is costly to the agent |
| goals, a willingness to confront members of the | | | | and so detracts from the managers' interests. |
| in-group to which a person belongs, and a culture | | | | The problem for the principal is to design a contract |
| where people derive pride from their own | | | | such that the expected monitoring costs for the |
| accomplishments. In an individualistic environment, | | | | shareholders are minimized but still induce the |
| people are motivated by self-interest and achievement | | | | executive manager to act in the best interests of the |
| of personal goals. They are hesitant to contribute to | | | | shareholders although now at the executive's own |
| collective action unless their own efforts are | | | | volition (Tirole, 1988, p.78). The contract offered will |
| recognized, preferring instead to benefit from the | | | | depend on the relative risk attitudes of the parties |
| efforts of others. | | | | involved and will also be subject to a participation and |
| Collectivism involves the subordination of personal | | | | incentive constraint. The participation constraint requires |
| interests to the goals of the larger work group, an | | | | that the manager receive at least his fall back outside |
| emphasis on sharing, cooperation, and group harmony, | | | | option. The incentive constraint requires that it is in the |
| a concern with group welfare, and hostility toward | | | | agent's interest to undertake the costly action. The |
| out-group members. Collectivists believe that they are | | | | contract offered typically ties the reward received by |
| an indispensable part of the group, and will readily | | | | the manager to a variable that the principal is |
| contribute without concern for advantage being taken | | | | interested in such as company performance or |
| of them or for whether others are doing their part. | | | | shareholder returns (Gibbons and Murphy, 1990, p.38). |
| They feel personally responsible for the group product | | | | The recent empirical literature has paid much attention |
| and are oriented towards sharing group rewards. | | | | to the notion of relative performance evaluation |
| Individualism -collectivism is a dimension of culture at | | | | (yardstick competition). In essence the output of other |
| both the societal and organizational levels, although | | | | firms provides shareholders with important information |
| most of the research has focused on societal or | | | | about the effort levels of own firm managers. Strong |
| national culture. Thus, Hofstede [1980] has shown that | | | | and Waterson (1987) further entertain the idea that |
| countries such as the United States, Australia, Great | | | | there is a broader range of company specific signals |
| Britain, and Canada demonstrate high scores on his | | | | which also reveal information about managerial effort |
| individualism -collectivism index, while Venezuela, China, | | | | levels. In the case of yardstick competition this was |
| Pakistan, Thailand and Mexico score fairly low. | | | | achieved by observing the outturn of other firms. All |
| Although less researched, individualism -collectivism | | | | information available to shareholders which describes |
| would also appear to be an important dimension of | | | | firm performance potentially reveals underlying effort |
| organizational culture. Wagner and Moch [1986] argue | | | | level of managers. Hence, the shareholder might offer |
| that individualism -collectivism is implicit in organizational | | | | an incentive payment scheme which consists of an |
| science, but has received scant attention. Triandis et al. | | | | alternative signal indicating other observable information |
| [1985, p.340] discuss the need for corporate education | | | | available to shareholders upon which the contract may |
| programs directed at employees who bring a particular | | | | be conditioned. This scheme includes indicators of |
| societal orientation, say individualistic, to an organization | | | | yardstick competition, and also firm specific |
| whose values are more collectivistic. | | | | characteristics. Indeed this provides an important route |
| Individualism and collectivism in the management of | | | | by which product market structures, the risk of |
| remuneration would seem to have both functional and | | | | bankruptcy and so on can potentially influence |
| dysfunctional aspects within an organizational setting. | | | | executive effort, and hence performance, by |
| For instance, individualistic managerial approach may | | | | increasing the information base for incentive contracts. |
| foster development of an individual's self-concept and | | | | As well as providing information to shareholders signals |
| self-confidence. There is also likely to be a greater | | | | may also influence managers outside employment |
| sense of personal responsibility for performance | | | | opportunities. Fama (1980) argues that explicit |
| outcomes, while interpersonal competition may | | | | incentives contracts may be redundant since |
| generate a steady stream of ideas for innovative | | | | managers are disciplined through the managerial labour |
| change. However, there is also likely to be an | | | | market. That is, superior performers are suitably |
| emphasis on personal gain, selfishness, and | | | | rewarded with high wage offers whereas inferior |
| expediency. Further, high levels of personal stress are | | | | performers receive low offers. Holmstrom (1982) |
| a likely by-product of this type of environment, and | | | | augmented this theoretical notion arguing that whilst the |
| interpersonal conflict may be encouraged. | | | | disciplining effect of the managerial labour market is |
| Collectivism managerial approach in compensation | | | | not insubstantial it cannot be regarded as a pure |
| offers the advantage of more harmonious relationships | | | | substitute for efficient contracts (42). In the absence of |
| among individuals. In this type of management, greater | | | | contracts he shows that executive effort falls as the |
| synergies may occur from the combined efforts of | | | | retirement period approaches. The discipline in the |
| people with diverse skills, while individuals may enjoy a | | | | managerial labour market assumes that manager |
| network of social support. Alternatively, there is likely to | | | | improve their outside options by effort, congruent with |
| be a loss of one's self to the group or organizational | | | | maximising shareholder wealth (Gibbons and Murphy, |
| persona, and a greater level of emotional dependence | | | | 1992, p.469). However, it might be possible for outside |
| on the organization. Individuals may have a greater | | | | options to be related to other factors not necessarily |
| tendency to "free ride" on the efforts of others, while | | | | congruent with the interests of shareholders. |
| outcomes may represent compromises among the | | | | Thus, as well as corporate performance acting as a |
| differing interests participating in a task. What remains | | | | signal for managerial effort there are also other |
| unclear are the implications of an emphasis on the | | | | important corporate specific information available to |
| individual versus the group or collective when | | | | shareholders (signals) which are likely to be taken into |
| attempting to foster high performance of employees in | | | | consideration in pay setting. Indeed, signals emanating |
| an organizational setting. | | | | from product market, debt holding, acquisitive behaviour |
| Individualism -collectivism would seem to be one of the | | | | and union presence all potentially reveal information |
| more salient dimensions of culture insofar as | | | | about the extent to which corporate performance is |
| management of remuneration is concerned. In | | | | due to managerial effort. In addition, these company |
| Hofstede's [1980] global study of national cultures, he | | | | specific signals may reveal information about |
| demonstrated a relationship between an emphasis on | | | | managers outside career options which will also be |
| individualism and a country's level of economic | | | | reflected in managerial remuneration. |
| development and wealth. Others researchers identified | | | | All the types of signal considered are important in |
| relationships between individualism and the willingness | | | | shaping pay. Relative performance evaluation or the |
| of employees to violate norms [Verma,1985, p.175] as | | | | use of the performance of other firms is taken into |
| well as their level of achievement motivation [Hofstede | | | | account in determining pay and the coefficient is |
| 1980]. | | | | consistent with relative sales growth being the |
| More fundamentally, perhaps the richest research | | | | appropriate measure of performance used. However, |
| tradition focuses on the psychological traits and | | | | the same result does not appear to apply to |
| sociological characteristics of the "individualistic" | | | | shareholder returns. Reduced union presence results in |
| employee (e.g., Brockhaus [1982]). Implicit in this | | | | higher pay for top executives but heading a subsidiary |
| research is the assumption that the career process is | | | | lowered pay in this period (Gibbons&Murphy, 1990, |
| a highly individualistic pursuit. | | | | p.35). Most surprisingly however, is the result of cash |
| While individualism may help explain the economic | | | | holding and acquisitive behaviour by firms. Lower cash |
| development in the country, it is less clear how | | | | holdings relative to current liabilities raises pay, as does |
| individual approach in management of remuneration in | | | | expansion through take-overs (Gibbon&Murphy, 1990, |
| existing firms is affected by this dimension of culture. | | | | p.39). Firm growth by take-over which results in the |
| For example, the corporate culture may be fairly | | | | firm being cash poor is a strategy for managers which |
| collectivistic, while coexisting in a relatively individualistic | | | | raises pay considerably, despite other evidence which |
| society. However, the relationship may be more | | | | suggests that such behaviour does not enhance firm |
| complicated. | | | | performance. Indeed such a strategy left firms highly |
| Wagner and Moch [1986] suggest that overly | | | | vulnerable to the subsequent recession. This may be |
| individualistic corporate cultures may be inappropriate | | | | explicable if increasing firm size improves managers |
| for contemporary organizations in which highly | | | | outside options. Either way this result raises questions |
| interdependent methods of productions, inventory | | | | about the degree of effective control of top managers |
| management, and matrix structures are employed. | | | | pay and over decision making concerning who controls |
| The individual employee is overly motivated by | | | | and benefits from take-over decisions. |
| self-gain, and can be "bought" by the highest bidder; | | | | Thus, highly individualistic approach to employee |
| whereas, the group or collective cannot. Moreover, the | | | | remuneration produces strong incentives for high |
| corporate setting demands certain political skills and an | | | | performance of employees, but will also result in a |
| ability to work with and through others, which may be | | | | gamesmanship, zero-sum competition, sequestering of |
| inconsistent with a strong individualistic orientation. | | | | information, and the chaotic pursuit of tangential |
| Finally, collectives are viewed as more able to | | | | projects having little strategic fit with the organization's |
| generate a continuous stream of incremental | | | | competencies or overall direction [Maidique 1980]. In the |
| innovations, as opposed to the major breakthroughs | | | | absence of any group or team identification, individuals |
| that periodically come from individuals. | | | | are more likely use organizational resources to satisfy |
| At the same time, others continue to stress the role of | | | | self-interests [Wagner and Moch 1986]. Further, many |
| the individual in corporate culture. Peters [1987] places | | | | tasks can be left incomplete as individuals are unable |
| strong emphasis on the need for organizations to | | | | to obtain cooperation from those having the expertise |
| support radical champions within their ranks. Peters | | | | and resources necessary for implementation of the |
| [1987, p.98] argues that achieving innovation in large | | | | company mission. |
| firms requires that managers find ways to apply the | | | | However, in a strongly collectivist environment group |
| concepts of individual liberty and freedom as the | | | | performance and reward systems can encourage |
| rewards within the corporate walls. Burgelman and | | | | "free-rider" or "social loafing" syndromes on the part of |
| Sayles [1986, p.156] claim that individualism does not | | | | specific individuals. Further, tasks become |
| inherently conflict with big business, and that successful | | | | over-segmented, such that individuals lose sight of the |
| performance of employees is built around the | | | | larger project and concentrate only on their assigned |
| integration of individualism. | | | | duties [Peters, 1987, p.78). Compromise is highly valued, |
| Shift from "collectivism" to "individualism" has greatly | | | | as is acceptance of group norms and roles. The result |
| influenced rewards system in UK. The primary | | | | can be mutually acceptable incremental solutions, as |
| motivation that is used by managers in the system of | | | | opposed to more controversial breakthrough |
| rewards became individual motivation based on rational | | | | innovations. In the final analysis, the collective will work |
| self-seeking behaviour. Certainly, the organisational | | | | to resist significant change, while fostering imitation and |
| behaviour literature for a long time has argued that the | | | | adaptation. |
| motivational needs of individuals in organisations are | | | | Tropman and Morningstar [1989, p. 123] explain, "in a |
| more complex than as represented by neoclassical | | | | firm where unity of interest is the dominant theme, |
| utility-maximising theories. Maslow argued that | | | | emphasis on the creating of some diversity, |
| individuals have a hierarchy of needs, which range | | | | heterogeneity, and internal organizational friction are |
| from physiological needs at the lowest level (such as | | | | necessary to get the supply of new ideas required for |
| food and warmth), through safety needs, love needs, | | | | continual achievement." The highest levels of employee |
| esteem needs, to self-actualisation at the highest level | | | | performance will occur when a fairly balanced amount |
| (1964, p.77). Neoclassical economics tends to | | | | of consideration is given to the needs of the individual |
| emphasise low level needs, whereas the concept of | | | | and the collective. This quasi-balance would seem |
| 'high custodians' is more commensurate with esteem | | | | consistent with Waterman's [1987] concept of |
| and self-actualisation needs important to high income | | | | "directed autonomy." Respect for the individual |
| groups. | | | | combined with personal incentives (financial and |
| According to Maslow perspective, we might expect | | | | non-financial) are necessary to spur employees to tap |
| attitudes and behaviour of employees to be | | | | their creative potential and develop novel concepts on |
| concerned with a 'job well done'. Self-interest becomes | | | | a continual basis. Moreover, individual autonomy and a |
| inter-related with a wider group interest. From doing the | | | | sense of ownership of innovation encourage the |
| job well peer group recognition results (Whyte, 1996, p. | | | | risk-taking and significant persistence required to |
| 143). The inclusion of esteem, pride or group respect in | | | | implement the goals of the company. |
| people's utility functions to the system of rewards is | | | | Rosabeth Kanter, in her book The Changemasters |
| compatible with Gary Becker's more inclusive notion of | | | | [1983], explains (p. 410), "There ate times when |
| utility maximisation (Mitroff, 1988, p.55). Furthermore, | | | | autonomy and individual responsibility, are more |
| Fama notes how the labour market for management | | | | important than participation and team responsibility . . ." |
| may capitalise performance in managerial | | | | At same time, the complexity of many new product |
| remuneration producing a direct incentive for managers | | | | opportunities, combined with technological constraints, |
| to satisfy owners independent of the precise form of | | | | the diversity of markets, governmental restrictions, |
| the ownership (Fama, 1980, p.289). In its simplest terms, | | | | uncontrollable economic developments, and the need |
| effective management has its own rewards in terms | | | | for partnerships with suppliers and distributors suggest |
| of salary and promotion prospects. | | | | a degree of teamwork and well-coordinated task |
| Individualistic approach in management of remuneration | | | | integration are vital for the company success. Thus the |
| stresses financial rewards instead of recognition by | | | | single-minded employee must be adept at crafting |
| peers (which is the primary motivation in collectivistic | | | | coalitions and building teams who feel a strong sense |
| approach). Thus, one of the examples of remuneration | | | | of joint involvement and contribution (Kanter, 1983, p.76). |
| based on individualistic system of rewards is the | | | | The key in establishing rewards for employees is to |
| system of remuneration established for high level | | | | balance the need for individual initiative with the spirit of |
| management and top executives. As the research | | | | cooperation. Individuals are needed to provide the |
| shows, financial motivation and benefits based on | | | | vision, unwavering commitment, and internal |
| individual approaches to each manager did not only | | | | salesmanship without which nothing would be |
| help to enhance performance of managers but | | | | accomplished. The company employees do more than |
| increase profitability of the whole company. | | | | provide functional expertise or perform specific tasks. |
| The principal agent framework has become a widely | | | | They modify and adapt the innovation as new and |
| used theoretical model to explain the remuneration of | | | | unanticipated obstacles arise, all the while being kept on |
| high level management and chief executives (Main, | | | | track and spurred on by the individual champion. And, in |
| 1992, p.156). Such models typically predict that a | | | | the final analysis, it is this amorphous group that takes |
| positive relationship between compensation and | | | | ownership of, and credit for, the end-product. |