Contextual considerations for the case study

As pointed previously, the benefit and success of a PES not only depend on a proper design but also on the context of the application. Therefore, some essential contextual issues, in particular on the labour market and political framework conditions as well as the legal context of the case study are discussed in the following sections.

4.4.1 Labour market and political framework conditions

While most studies on HRM assume that their findings apply universally, a growing body of research shows that there are differences in the way HRM is conducted in different countries (Brewster, 2007). Thus, there is a lack of evidence that there is a common global HRM archetype. Rather, several studies identified a range of framework conditions and regulations of the labour market that lead to different ways in which the impact of HRM on institutions and employees can be understood (Wood et al., 2012). Since this thesis illustrates a case study that was carried out in a German institution, the differences in the way HRM is understood and conducted in Germany and the UK shall be examined more closely.

In research, there are different approaches to explain the variations in the way HRM is conducted. Among the most commonly cited is the “relationship” approach within the varieties of capitalism (VoC). This approach emphasizes the difference of formal political frameworks and institutional features such as labour market institutions or the severity of competition policy (Wood et al., 2012). It distinguishes between two models of capitalism: liberal market economies (LMEs, e.g. the USA or the UK) and coordinated market economies (CMEs, e.g. Germany or Japan). LMEs are characterized by a market

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dominant logic and a strong focus on shareholder value. Thus, in UK organizations, managers are particular sensitive to shareholder´s demands and face high pressure to prioritise short-term shareholder values over employee interests. Also, workers´ councils are rather marginalized (Kang and Moon, 2011). Although this is more so in the US than the UK, the unions play a weaker role in the UK, for instance negotiating the rules governing internal labour markets, compared to unions in Germany. Moreover, there are few legislative restrictions inhibiting employers´ pursuit of enhanced organizational flexibility (Tregaskis and Brewster, 2006). There is also a strong preference for voluntarism considering issues like corporate social responsibility or sustainability (Kang and Moon, 2011). In consequence, this leads to weaker employee rights and low employment security.

In CME´s, on the other hand, organized interests including business associations and workers´ councils play a dominant role. Thus, organizations in CME´s tend to have a stronger focus on stakeholder-value. Hence, managers are not only sensitive to the demands of shareholders but have to balance the interests of all stakeholders. In conclusion, employee rights are stronger and job security is higher than in LMEs. In Germany, stakeholder participation is supported by a formal and legal structure of co- determination where representatives of workers´ councils sit on the board (Kang and Moon, 2011). Further, through the use of secure employment contracts, strong wage levels and employment protection against changes to working conditions, employees are encouraged improve their skills and stay loyal to companies that invest in them (Tregaskis and Brewster, 2006). The GFC brought to light the limitations of the LME- style shareholder value oriented model challenging the USA and UK as archetypes of this model. Although there have been some regulatory reforms, there has been no attempt yet to warrant a path-shifting change (Kang and Moon, 2011). However, there is a growing consensus that there is a need for a more balanced view on stakeholders´ interests and for greater accountability.

4.4.2 Legal considerations

The design and implementation of a PES may also touch legal issues. This applies in particular, if the results of the performance evaluation are used to determine pay or if they are used for decisions about promotion or dismissal. Thus, a sound performance evaluation process will help to avoid legal liability (Smith, 2013). In general, a PES that is fair and acceptable to employees is likely to be also legally sound. The basic principles that underlie the implementation of a PES should therefore include procedures that are known by everyone involved and that are applied in the same way to everyone (Aguinis,

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2009). The table below lists characteristics of a legally sound PES illustrating those principles:

Table 6: characteristics of legally sound PES (modified from (Malos, 1998; Smith, 2013))

There are also several laws that affect the implementation and the execution of a PES. Within the last decades, many countries around the world have passed laws prohibiting discrimination based on race, sex, religion, disability status or sexual orientation. In this context it is essential to distinguish legal from illegal discrimination, since adequate PES´ should be able to discriminate among employees based on their level of performance. If a PES could not do this kind of legal discrimination effectively, it would be rather useless. However, an appropriate PES does not discriminate illegally in terms of like age, sex or ethnicity (Aguinis, 2009).

In the United Kingdom the following laws have been passed to prevent illegal discrimination (Aguinis, 2009):

• Equal Pay Act (1970)

• Sex discrimination Act (1975) • Race Relations Act (1976)

• Disability discrimination Act (1995) • Employment Equality Regulations (2003)

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In Germany, the German General Equal Treatment Act, which aims to prevent or

eliminate discrimination on grounds of racial or ethnic origin, gender, religion or belief, disability, age or sexual identity passed in 2006. The scope of this act also refers to recruitment and selection conditions as well as to employment and working conditions (German Federal Ministry of Justice and Consumer Protection, a):

In addition, the German Works Constitution Act of 2001 addresses operational co- determination. Thus, section 82 enacts the employees´ right to be heard on any matter concerning his person. Furthermore, the employee can request an explanation concerning the calculation of pay or ask for an interview on the assessment of his performance. Section 94 (2) enacts the approval of the works council to the formulation of general assessment criteria (German Federal Ministry of Justice and Consumer Protection, b).

Regarding variable remuneration, an ordinance on the supervisory requirements for German Financial Institutions’ Remuneration Systems was developed in the aftermath of the 2008 financial crisis. The so called “Remuneration Ordinance for Institutions” came to force in 2013. For the requirements to a remuneration system sections 4 and 5 (1) apply in particular.

Section 4: “The remuneration parameters shall be aligned with the strategies and support the achievement of the strategic aims”

Section 5: (1) Remuneration systems are appropriately designed if incentives for the members of the management body and staff to take disproportionately high risks are avoided.

Taken together, these laws urge organizations in Germany to implement performance evaluation systems that treat all employees equally regardless of demographic or ethnic characteristics. Furthermore, all employees have the right to request an explanation of how their remuneration is calculated and how their performance is assessed. Thus, an adequate performance measurement approach should provide clear and accountable information about that. Finally, workers´ council has to agree on the general assessment criteria and therefore should be involved in or at least informed about the process of defining performance dimensions and measures. To calculate remuneration, the remuneration system needs to be properly designed and should be aligned with the organization´s strategy.

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