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REWARD STRATEGY AS A RESOURCE FOR ACHIEVING

COMPETITIVE ADVANTAGE OF CROATIAN


ENTERPRISES
Prof. dr. Lovorka Galeti
Damir Horvat
Graduate School of Economics & Business Zagreb
J. F. Kennedy Square 6, Zagreb 10000, Croatia
lgaletic@efzg.hr
dhorvat@efzg.hr

Abstract:
Ways to achieve competitive advantage on the market are numerous and complex. Can
reward policy be one of them? This paper analyses reward systems in Croatian enterprises and
examines if it influences their competitiveness and work performance. The purpose of this
study was to observe how Croatian enterprises perceive rewarding and how it is implemented.
It also describes what is the difference regarding reward systems concerning the size of an
enterprise, its proficiency and ownership structure. The main part presents results of empirical
research which was conducted in great number of Croatian enterprises, which provide
evidences that reward system in Croatian enterprises still has lot of space for growth and
further improvements.

Introduction
There are already well known and numerous methods in which enterprise can try to create
competitive advantage in front of their competition. The accent can be put on several aspects:
quality of products or services, price, market share, distribution channels, maintenance of
products or services, discounts programs, original and innovative production etc. But today,
companies are aware of the fact that all these advantages can be achieved only through people
and investments in their education, practical knowledge and their skills. This is why
enterprises are attempting to identify innovative reward strategies that will directly have an
impact on organization performance and its productivity.
Linking competitive advantage with people and their rewarding is an approach based on
several prerequisites: developing philosophy that is focused on people and how they can help
organization; defining strategies to encourage their commitment and motivation at work,
defining policies and program practices that will maximize their value based on the
investment in people.1 Employees should also be involved in defining organization goals
which will increase their trust and loyalty to the organization.
All this is crucial if enterprise wants to build its advantage based on their people, because
with people and through people, it can achieve multiple effects and benefits. We all know that
paradigm Customer is in the first place is no accepted any longer in terms of harsh
1

Appelbaum, S. H., Mackenzie, L. Compensation in the year 2000: pay for performance?, Health Manpower
Management, Vol. 22, No.3, 1996, p.31-39.

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competition and continuous changes in environment. Instead of that, orientation on the


employees and people by saying Our employees are in the first place will have chain of
positive trends and results. These employees will be highly motivated and productive at their
jobs, they will be enthusiastic, creative and they will try to give their best when they feel
enjoyable and useful at their jobs and when they know that enterprises performance is
directly connected with their engagements and contributions. As a result, productivity
(including quality, design, maintenance etc.) will rise and increase customer satisfaction.
Reward policy has a very significant role in achieving better productivity and efficiency of
enterprises. The use of incentive and motivating reward system is not used anymore only as a
mechanism to attract and keep best human resources within the organization, but is
recognized as a very important strategic tool for furthering organizational goals and
organizational performance. There are many techniques to formulate well created reward
policies, such as cash bonuses, stock options, profit sharing etc. This article will examine how
reward system can influence organizational productivity and performance, and how it can
contribute to build its competitive advantage, on the case of Croatian enterprises.

Building competitive advantage through reward system


In today highly competitive business environment, companies desperately seek means how to
achieve competitive advantage in front of competition; keep their market shares and loyalty of
their customers. One of them is identifying innovative and fair reward system that is directly
linked to improving organizational performance and building its competitive advantage. It
ensures that development of different components of pay systems will be directed at
achieving its general and specific goals, which means an increase of working efficiency and
contribution of employees to develop business process and improve business performance.
To what extent can reward strategy be a source to increase competitive advantage of
enterprises? First of all, it has to be created so it can enable achieving goals that reward
system is facing, but also achieving goals that are recognized as enterprises vision of its
existence.2 Those goals must be combined and be integral part of business strategy.
Furthermore, reward system must take into consideration behavior and working contribution
it wants to stimulate within the organization, as part of its culture and organization values.
Also, it must decide whether the accent should be put on fixed salaries or incentive pay plans?
All these aspects, and many others, are essential in shaping competitive advantage of
enterprises, based on its reward system.
Every reward system has two main goals: to improve productivity and to control labor costs.3
These mean having highly educated and motivated human resources and reward their
excellent performances. But to obtain competitive advantage, based on their reward system,
enterprises must use their valuable, rare and hardly imitable resources and implement
strategies that will improve its efficiency and performance. For employees, reward system is
important issue because it is an indication how organization values their commitment and
work within their jobs.
Today it becomes very important to find a way to motivate personal development and high
performance, not inclusively with only material compensations, and in the same time try to
2

Kerrin, M., Oliver, N.: Collective and individual improvement activities: the role of reward systems, Personnel
Review, Vol. 31., No. 3., 2002, p. 320-337
3
Milkovich G.T., Newman J.M.: Compensation, Irwin McGraw-Hill, Boston, New York, 2002, p. 7

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achieve competitive advantage through that matter. It is pretty difficult to combine those two,
especially when we know that managing people is the most tricky and sensitive issue within
any organization. A great success would be when enterprise finds an appropriate and effective
method to fairly and justly reward their people, but to achieve competitive advantage based
on rewarding and motivating their employees is another issue which must be taken very
seriously and comprehensively. Is this possible, in the first place? What would be the ideal
way to formulate reward system to achieve that goal?
Properly designed and managed incentive reward system can be a vehicle for management
communication which will encourage people to ask questions, share data and be ultimately
involved in decision making. This will increase their satisfaction at work and their
appreciation of incentive compensation benefits. Positioning an incentive reward program in
the focus of achieving competitive advantage can be a method of integrating those values
when forming business vision and mission statements that must support that focus.
It is clear that reward strategy must be integral part of human resource strategy and business
strategy in order to contribute to increase of enterprise competitiveness. Like any
organizational system, compensation should support and reinforce the business vision and
organizational strategy. If it does not do so, it will be ineffective at best and counterproductive
at worst. 4 Henderson5 believes that for developing of competitive advantage in a global
economy, the compensation program of the organization must totally support the strategic
plans and actions of the organization. However, to enable the realization of superior strategies
and their aims, reward strategy must be carefully formulated. Chingos6 thinks that one of the
basic characteristic of high-performing companies is formulation and implementation of
compensation strategy. First step is to clearly define expected financial performance, and then
understand key factors of business success. Second part of reward strategy is people who
influence long-term and yearly performance. Third element of reward strategy is motivation
of employees to accomplish expected performance which includes clearly defined salaries and
yearly and long-term incentives.
Many authors emphasize that it is crucial to continually adjust and adapt reward system with
changes in business strategy and organization if it wants to achieve competitive advantage.
Generally, it is considered that success of the alignment of internal change elements as
strategy, operations, human resources and compensation determine the survival and
effectiveness of the business.7 The Change Management Handbook8 describes an example of
a process for establishing a pay strategy and illustrates how pay is aligned with phases of the
business cycle.
In order to achieve adjustment of reward system with high-involving and high-commitment
strategy, lot of enterprises change their entire reward philosophy. Need to adapt rewarding
strategy with business strategy today is primary force to introduce variable pay in many
enterprises. Inevitableness of adapting reward system with strategy and organizational
changes can be concluded from the following statements:
4

Belcher J.G. Jr.: How to design and implement a results oriented variable pay system, AMACOM, American
Management Association, New York, 1996., p.17.
5
Henderson R.I.: Compensation management in a knowledge-based world, Prentice Hall, New Jersey, 2000., p.5
6
Chingos P. T., Marwick P.: Paying for Performance, John Wiley&Sons, Inc., New York, 1997., p. 2
7
Berger L.A., Berger D.R., Editors: The Compensation Handbook, McGraw-Hill, New York, 2000. p. 7
8
Berger L.A., Sikora M.J., Berger D.R.: The Change Management and book: A Road Map to Corporate
Transformation, McGraw-Hill, New York, 1994

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Running through all serious scholarly work on large-scale organizational change is the
notion that you have to change old reward systems to support new practices.9
Compensation is a critical piece of an overall human resource strategy. Because
compensation is both visible and important to employees, a compensation program
designed to communicate and reward strategic goals increases the probability that
employees not only will understand what those goals are but also will achieve them.10
When organizations reorganize and ask individuals to pursue new strategic objectives,
failing to change the reward system can hamper the change.11
The emerging paradigm of the field is based on a strategic orientation where issues of
internal equity and external equity are viewed as secondary to the firms need to use
pay as an essential integrating and signaling mechanism to achieve overarching
business objectives.12

Milkovich and Newman13 consider that two tests determine if a pay strategy is a source of
advantage: 1. Does it add value, and 2. Is it difficult to imitate? Decisions made as part of
reward system increase its value only if they help to attract and keep deficit human resources,
enable control of expenses and motivate employees for further education and improvement of
their performance. It is believed that reward policy and reward strategy are difficult to imitate
if reward system is carefully adjust with business strategy and if there is significant
coordination between rewarding and other human resource activities. Besides, competitive
advantage results from the approach in which reward system is implemented, which also
contributes to difficulty of its imitation.
In the last couple of years, compensation professionals have become key players in helping
their organizations to achieve competitive advantage through innovative pay and incentive
programs tied to strategic organizational goals.14 Traditional reward systems, through which
managers controlled the labor expenses, are being left behind while their place are taking over
new, alternative and flexible reward techniques which are greatly motivating and obliged. In
those new reward techniques, Wallace and Fay15 include performance-based pay, merit
rewards or incentives not tied to base pay, lump-sum bonuses, gain-sharing plans, skill-based
pay, all salaried workforce, profit-sharing plans and cafeteria plans, and believe that those
new and dynamic approaches are essential if through reward system enterprise wants to
contribute to increase of its competitive advantage. Massey16 considers the same and
emphasizes that new reward system presents a big challenge for creators of reward systems
and that it is much more demanding for operational managers because it places pay firmly at
the centre of performance management.

Cole R. E.: Large-Scale Change and the Quality Revolution in Mohraman A. M.: et al. Large Scale
Organization Change, Jossey-Bass, San Francisco, 1990.
10
Milkovich G.T., Broderick R.F.: Developing a Compensation Stategy in Milton L. Rock and L.A. Bolger: The
Compensation Handbook, McGraw-Hill, New York, 1991.
11
Lawler E.E. III: Strategic Pay, Jossey-Bass, San Francisco, 1990.
12
Mejia, L.R.G., Balkin D.B.: Compensation, Organizational Strategy and Firm Performance, South-Western
Publishing Co., Cincinnati, 1992.
13
Milkovich G.T., Newman J.M.: Compensation, Irwin McGraw-Hill, Boston, New York, 2002, p. 41
14
Chingos P.T., Marwick P.: Paying for Performance, John Wiley&Sons, Inc., New York, 1997., p. 1
15
Walace M. J. Jr., Fay C.H.: Compensation Theory and Practice, PWS-Kent Publishing, Boston, 1988.
16
Massey C.: Strategic Reward systems pay systems and structures, in book: Strategic Reward Systems edit by
Thorpe R. And Homan G., Pearson Education, London, 2000., p159

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Orientation toward flexibility in reward systems more and more requires transparency of
strategy and reward policy, where it is necessarily to clearly reflect relations between:17
- pay level and the organizations success (or otherwise)
- pay focus and general strategic policy objectives
- risk-sharing between the organization and the employee
- pay level and individual effort.
In this way, flexible pay systems can stand for connection between contribution and
competency of employees and business plans. Reward system can not be discussed isolated
from others, but it has to be closely related with business strategy, organizational and
individual competence, performance management and flexible working. Flexible pay will
not of itself produce benefits but used as an integral part of a bigger package of performance
improvement measures it can help create the high performing organization.18 For that reason,
Massey highlights that flexible rewarding is suitable only for flexible organizations (which
already are flexible and for those who want to become), while within bureaucratic and
hierarchical organizations, that system is simply not compatible.19
In attempt to put flexible rewarding in function of achieving competitive advantage,
enterprises in Germany, Japan and China initiated radical changes in their reward systems.
Same trend is present in USA and Great Britain, where a shift from jobs-based to peoplebased systems is currently taking place.20 In order to find out whether Croatian enterprises
develop flexible reward systems and determine if they and how much they contribute to
achieving its competitive advantage, we conducted empirical research, and the results it
carried out will be presented in this article.

Methodology of research
The study was conducted during the first three months of 2004 in the Republic of Croatia.
The sample included 110 Croatian enterprises. The aim of the sample covers manufacturing,
service and trading enterprises. It was attempted to cover small, medium and large firms
proportionally. The study questionnaire included, in addition to basic information about the
firm, 25 questions in the areas of strategy, reward management and competitive advantage.
Most questions were of a closed nature with opportunities to choose one or more responses
while some were formulated as open questions with complete freedom of response.
Within 60 days, 35 fulfilled questionnaires were received which means that questionnaire
return rate was 30%. Considering the imperfect conditions, this sample can be considered
relatively representative. All the questionnaires were filled in by the top managers in the firms
and, in some cases, by their closest associates.
For the purposes of this study we identified three groups of enterprises according to the
number of employees. The first group, which was labeled small enterprises, consists of
firms which have more than 20 and fewer than 100 employees; the second group, firms with
17

Sparrow P.: International reward management in book White G., Druker J.: Reward Management, Routledge,
London, 2000., p. 197.
18
Massey C.: Strategic Reward systems flexible pay, in book: Strategic Reward Systems edit by Thorpe R.
And Homan G., Pearson Education, London, 2000., p. 177.
19
Massey C.: Strategic Reward systems flexible pay, in book: Strategic Reward Systems edit by Thorpe R.
And Homan G., Pearson Education, London, 2000., p. 176.
20
Sparrow P.R., Marchington, M.: Human Resource Management: the New Agenda, Pitman, London, 1998.

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between 100 and 500 employees, was labeled medium enterprises; and the third group,
firms with more than 500 employees, was labeled large enterprises. Of the questionnaires
returned, 9 were from enterprises with less than 100 employees (25,8%), 13 from enterprises
with between 100 and 500 employees (37,1%) and 13 from enterprises employing more than
500 employees (37,1%).

Analysis of the results


According to many conducted analysis, salary is one of the most important motives that can
give employees an incentive to put more effort and work more efficiently. In our research we
were interested to find out how do Croatian managers perceive the reward system as a
motivation factor. Because of this reason, in our questionnaire we listed some motivators
which can influence work behavior. The way in which managers rated their importance can be
seen in Table 1.
The amount of base salary is for 80% of the analyzed enterprises an extremely important or
important motivation factor for efficient work, whereas the variable part of the reward was
rated as important and important to some extent in 82,85% companies. It was a bit of surprise
that Croatian mangers prefer the base salary as a stimulatory factor, compared to variable part
of the compensation that has been only in one occasion graded as extremely important.
Besides the base salary, good employee relationships were rated as a very important
motivation factor, followed by good and fair managers, the possibility of promotion, work
challenges, the possibility of creative contributions etc.
Table 1.: Motivators for greater commitment and employee efficiency

a) Amount of base
salary
b) Variable pay
c) Alternative
stimulatory reward
d) Good working
conditions
e) Good and fair
managers
f) Possibility of
promotion
g) Possibility of
further education
h) Possibility of
creative contribut.
i) Work challenge
j) Good employee
relations

Extremely
important
n
%

11

31,43%

17

2,86%

Somehow
important
n
%

Little
important
n
%

48,57%

17,11%

25,71%

20

57,14%

8,57%

5,71%

14,29%

18

51,43%

20%

17

17,14%

Important

Meaningless
n

0%

2,86%

8,57%

5,71%

11,43%

20%

11,43%

22,86%

8,57%

2,86%

48,57%

17,14%

11,43%

2,86%

15

42,86%

10

28,57%

8,57%

2,86%

14,29%

22,86%

11

31,43%

25,71%

5,71%

11,43%

18

51,43%

25,71%

8,57%

2,86%

14,29%

18

51,43%

22,86%

11,43%

0%

12

34,29%

16

45,71%

17,14%

0%

2,86%

In the previous chapter, it was concluded that formulation of a reward strategy represents the
first step in achieving competitive advantage based on reward system. Most of questioned
enterprises satisfied this first condition of gaining competitive advantage, due to the fact that
42,85% of them already formulated the reward strategy, and what is most important, this

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strategy represents the part of the human resource strategy, and the part of the overall
enterprises strategic plans. 16 companies, or 45,71%, partially formulated the reward strategy
through formulating human resource strategy, but not it details, while 11,42% companies do
not have a reward strategy at all. (Table 2)
If we look at the existence of the reward strategy, regarding the size of the enterprise, it is
evident that it is formulated in greater number of larger enterprises, than it is in the small and
medium enterprises. Small companies in 22 % cases do not have a reward strategy at all,
which is much more often than in the large and medium enterprises. It could have been
expected considering the fact that small enterprises very often do not have any formal reward
structure at all.
Table 2.: Has the enterprise formulated a reward strategy?
Enterprise
Reward
strategy formulated
Yes
Partly
No
Total

Total

Small

Medium

Large

15
16
4
35

42,85%
45,71%
11,42%
100%

3
4
2
9

33,33%
44,44%
22,22%
100%

5
7
1
13

38,46%
53,85%
7,69%
100%

7
5
1
13

53,84%
38,46%
7,69%
100%

The analysis of the reward system formulation, according to the enterprises ownership type,
has shown that enterprises in foreign ownership in 83,3% cases already have formulated
reward strategy, while enterprises with domestic owners only in 21,7% cases can say that they
have developed reward strategy. At the same time, it is encouraging that 65,2% of companies
with domestic ownership have partially formulated reward strategy through the program of
the human resource strategy.
It is also interesting to point out the difference in formulating reward strategy in the relation
with the profitability of the Croatian enterprises. Companies that operate in above average
profitable sectors of the Croatian economy, in a great percentage (84,6%) have formulated
reward strategy. This strategy is also an integral part of the overall business strategy.
Enterprises that operate in the average profitable Croatian economys sectors, in most cases
have partially formulated reward strategy - 77,7% i.e. 66,67% (see Table 3). It is obvious that
enterprises operating in very profitable sectors (above average) have less operational
problems, but they are also more aware of the need to formulate strategies, including the
reward strategy needed to achieve the competitive advantage.
Table 3: The formulation of the reward system strategy with the respect to the
profitability of the sector the enterprise belongs to
Profitability of
sector
Reward
strategy formulated
Yes
Partly
No
Total

Above
average

Low
profitability

Below average

1
2
1
4

25%
50%
50%
100%

2
6
1
9

22,22%
66,66%
11,11%
100%

1
7
1
9

11,11%
77,77%
11,11%
100%

11
1
1
13

84,62%
7,69%
7,69%
100%

Average

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The reward strategy is implemented through the reward policy. It assures that the
development of different components of the reward system lead to achieving the
organizations overall and particular goals. The reward policy has to take into account several
main areas such as: the amount of salary, the part of salary that depends upon performance,
the influence of the salary market policy, the fairness, the salary structure, control and
communication21. It can be a surprise that only 54,28% of enterprises have structured and
clearly formulated reward policy, while 17,14% of them do not have any formal reward
system at all. This refers not only to small, but also to medium and large enterprises, that in
15,38% cases do not have a formulated reward policy. (Table 4)
Table 4: Is there a clearly defined reward policy in the enterprise?
Enterprise
Reward
strategy formulated
Yes
No
Partly
Total

Total

Small

Medium

Large

19
6
10
35

54,28%
17,14%
28,57%
100%

6
2
1
9

66,66%
22,22%
11,11%
100%

5
2
6
13

38,46%
15,38%
46,15%
100%

8
2
3
13

61,53%
15,38%
23,07%
100%

Just like in the preceding case, it is proved that enterprises in the foreign ownership have a
more developed awareness about the importance of formulation of the reward policy, and in
these enterprises it exists in 75% cases. The questioned enterprises in the domestic ownership
formulated the reward policy only in 43,47% cases. The same situation can be found if we
analyze the existence of the reward policy considering the profitability of the sector in which
a enterprise operates. Even 76,92% of enterprises in the above average profitable sectors of
the Croatian economy have formulated reward policy, but it is a surprise that it is also
formulated in 50% of the enterprises that operate in the low profitable sectors.
With the existing reward policy, enterprises try to give an incentive to different aspects of
work behavior and work performance of all employees. Each manager had to choose some of
the offered answers according to the goals wished to be achieved through the reward policy.
In most cases (77,14%) enterprises want to influence the employees performance, but they
also want to improve quality (40%), responsibility (34,28%) and loyalty to the enterprise
(22,85%). Analyzing the given answers, regarding the size of the enterprise, we can see that
there are no big differences between work behavior that small, medium, and large enterprises
want to achieve with their reward system. It is only prominent the desire of small enterprises
to incentive responsibility, in 66,6% cases, and the different relationship of small, medium
and large enterprises considering the improvement of the employees performance. (Table 5)

21

Galeti, L., Pavi. I.: Upravljanje plaama, RRIF, Zagreb, 1996, p. 7

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Table 5: The type of behavior and contribution that want to be achieved by the
reward system
Total

Enterprise
Type of behavior
a) improving employee performance
b) quality improvement
c) respecting the deadlines
d) work attendance
e) enterprise loyalty
f) increasing responsibility
g) no goals

n
27
14
7
3
8
12
1

Large

%
77,14%
40%
20%
8,5%
22,85%
34,28%
2,85%

n
10
7
3
1
2
4
0

%
76,92%
53,84%
33,33%
7,69%
15,38%
30,76%
0%

Medium
n
12
4
1
2
5
3
1

%
92,3%
30,76%
7,69%
15,38%
38,46%
23,07%
7,69%

Small
n
5
3
3
0
2
6
0

%
55,55%
33,33%
33,33%
0%
22,22%
66,66%
0%

The variable part of the reward can be determined based on measuring the work performance,
based on evaluation, or based on the managers subjective estimate. Of the questioned
enterprises, only 5% have fixed salaries with no variable part. Variable part of the salary is
based in 22,85% of enterprises on individual incentive plans (merit pay), in 54,28% of cases
is based on performance appraisal, and in 40% of enterprises by subjective judgment of
managers. Some enterprises combine different of the above mentioned methods to determine
the variable pay. It is of significance that the merit pay and individual incentive plans are
most used in large enterprises, which is according to the well known fact that pay for
performance is more widespread in larger, rather than in smaller enterprises. It is surprising
that the performance appraisal is more used in medium than in large enterprises, and
subjective managers judgment is again more used in medium sized, rather than small
enterprises.
Table 6: The basis used to determine the variable part of the salary
Enterprise
Determining
variable pay
Not determined
Measuring

individual
incentive plans, merit pay
Evaluation

performance
appraisal
Subjective evaluation - bonuses

Total

Large

Medium

5,71%

7,69%

22,85%

30,76%

19

54,28%

14

40%

Small
n

0%

11,11%

23,07%

11,11%

25,71%

61,53%

22,22%

11,42%

53,84%

33,33%

Considering that performance appraisal is the most used method to determine the variable
pay, we were interested to find out if managers perceive it as desirable and objective. In
62,85% cases managers consider it very appropriate if used properly, although it was best
graded from the managers of the middle sized enterprises (76,92%), and the worst from the
large enterprises managers (46,15%). Four managers or 11,42% consider it inappropriate and
undesirable because it does not assure completely objective performance identification.
22,85% of managers are completely aware of the disadvantages of the performance appraisal,
but they also concluded that it is a much better method than the subjective manager
evaluation.

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Picture 1: Managers attitudes toward performance appraisal


10
8
%

Better than subjective evaluation

Not good

Good if implemented properly

0
large

medium

small

size of enterprises

Besides the variable pay, flexible alternative compensation systems can also lead to
strengthen enterprises competitive advantage. The most used alternative reward systems
worldwide are gainsharing, profitsharing, ESOP and stock options. Due to this fact we wanted
to examine how and to what extent are this systems used in Croatian enterprises.
Unfortunately, none of these reward systems is very commonly used in our enterprises. The
most used are stock options in 17,14% of cases and additional 5,71% of enterprises are
considering their use. Although ESOP recently became very popular in Croatia, due to the
possibility to use it as a technique of privatization, it is used in only 17,14% of the questioned
enterprises, while additional 2,85% of enterprises are considering the possibility of using it.
Gainsharing exists in 14,28% of companies, while a surprisingly small number of enterprises
apply profitsharing. Just one of the questioned enterprises used it in the past, and two are
considering its potential usage.
Table 7: The use of alternative reward systems
Alternative
reward systems
Gainsharing
Profitsharing
ESOP
Stock options

Phase of
implement.

Implemented
n
5
1
6
6

%
14,28%
2,85%
17,14%
17,14%

Considering about
implementation
n
0
2
1
2

%
0%
5,71%
2,85%
5,71%

Not implemented
n
22
22
20
18

%
62,85%
62,85%
57,14%
51,42%

If we look at the use of these systems considering the size of the enterprises, we have to
conclude that larger enterprises here have an advantage. 38,46% of the questioned large
enterprises use ESOP, 30,76% use gainsharing, and 23,07% use stock options. It is interesting
that not even one large enterprises uses profitsharing, though it is used in one small enterprise.
If we analyze application of alternative reward systems regarding the fact if enterprise has
formulated reward policy, it is evident that those systems are far more implemented in
enterprises who formulated reward policy in comparison with the others who did not. 21% of
these enterprises use gainsharing, little bit more than one quarter uses ESOP and stock
options, while only 5,26% implement profitsharing. In group of enterprises which has only
partially formulated reward policy, 10% of them use gainsharing, ESOP and stock options.
(Table 8)

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Table 8.: Application of alternative reward regarding the formulation of reward policy
Expressed in %
Alternative reward
systems
Reward
strategy formulated
Yes
No
Partly

Gainsharing

Profitsharing

ESOP

Stock options

21%
0%
10%

5,26%
0%
0%

26,31%
0
10%

26,31%
0%
10%

Although we have expected that these alternative systems are more implemented in
enterprises in foreign ownership, research showed that there are almost no differences in
application of these systems according to the ownership type. For example, gainsharing is
used in 16,67% of enterprises in foreign ownership and in 13,04% of enterprises in domestic
ownership, while ESOP and stock options are approximately used in 17% of enterprises in
both ownership structures.
In spite of relatively poor implementation of alternative reward systems in questioned
enterprises, we were intrigued with the managers opinions if those systems can influence on
specific areas of business like productivity, efficiency and profit. After analyzing all the
questionnaires, we came up with the conclusion that majority of managers think that
gainsharig and profitsharing have strong impact on productivity, efficiency and profit. On the
other hand, ESOP and stock options have strong influence on commitment with enterprises
goals, strengthening of ownership culture, attracting new employees and keeping experts
within the enterprise. (Table 9) The relevant question is why these systems are used in
Croatian practice so rarely, especially when managers share a positive opinion about their
influence on achieving improved business performance?
Table 9.: Influence of alternative reward systems on specific areas of business,
according to managers opinions
Expressed in %

Influence on specific areas of


business

medium

small

large

medium

small

large

medium

small

Stock options

large

ESOP

small

Profitsharing

medium

Gainsharing

large

Alternative systems

Increase of productivity
Increase of efficiency
Increase of profit
Connection of employees with
enterprises goals
Enforcement of owners
culture
Attracting new people
Keeping experts within the
enterprise

36%

63%

9%

45%

63%

27%

15%

46%

38%

21%

35%

42%

36%

63%

9%

63%

36%

18%

15%

61%

30%

21%

42%

35%

54%

63%

9%

72%

45%

9%

23%

38%

38%

35%

50%

14%

18%

63%

27%

9%

90%

18%

46%

53%

15%

42%

42%

14%

9%

45%

54%

9%

63%

63%

61%

38%

7%

57%

21%

21%

18%

54%

36%

45%

45%

27%

7%

46%

53%

35%

57%

7%

27%

54%

36%

36%

63%

27%

23%

69%

23%

42%

50%

7%

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Considering the fact that the managers are the most important for the success of failure of an
enterprise, we were interested to find out how Croatian managers are treated, while talking
about rewarding. In the world, it is a common practice that majority of top management and
higher levels of managers get their pay based on the managerial contract. Through this
research, we tried to find out in what amount is this practice present in Croatia. According to
the data, in 42,85% of enterprises, compensations based on the managerial contract get only
top managers, in 34,28% of enterprises, salaries based on this model get also middle and top
managers, while in 22,86% of enterprises managerial contract do not exist at all.
There is a slightly difference between small, medium and large enterprises. In other words,
managerial contracts are the least used in small enterprises, but when we consider that small
enterprises are usually run by their owners, this data does not really surprise. When looking at
large enterprises, except for top management level, managerial contracts are also pretty
frequently used for middle levels of management (53,84%), while in the group of medium
enterprises, there is the biggest number of those who managerial contracts consider only for
top management levels. (Table 10)
Table 10.: Levels of management that get compensation based on the managerial
contracts
Enterprise
Compensations based
on managerial contracts
a) only top management
b) only top and middle
management
c) no one
TOTAL

Total

Large

Medium

Small

15

42,85%

30,76%

61,53%

33,33%

12

34,28%

53,84%

30,76%

11,11%

8
35

22,85%
100%

2
13

15,38%
100%

1
13

7,69%
100%

5
9

55,55%
100%

Beside basic pay, managers in world are stimulated by numerous annual and long-term
bonuses, stock options and many other incentives. It is interesting that long-term bonus or
profit gained through stock options can be much bigger than managers basic pay. According
to the results from the research, these systems of incentive rewarding are also used for
managers in Croatian enterprises. The technique that is most frequently used is annual bonus
(in 56,76% of cases), which is unfortunately only a short-term incentive, while long-term
bonuses are not used that much. Only 3,33% of enterprises implement long-term bonuses, and
10% of enterprises apply stock options, which is pretty bad because long-term incentives
stimulate managers to look in the future and make optimal long-term decisions for their
enterprise. Even 30% of managers are not being stimulated for their good work and do not get
any incentive part of their total pay. Situation is pretty similar in large, medium and small
enterprises. It is remarkable that 38,45% of large enterprises do not have any additional
incentives for their managers, while in small enterprises, this percentage is only 14,28%. It
must also be emphasized that long-term bonus is used in only one small enterprise. (Table 11)

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Table 11.: Additional incentives for managers


Enterprise
Managers
incentives and rewards
a) no additional incentives
b) annual bonus
c) long-term bonus
d) stock options
TOTAL

Total

Large

Medium

Small

9
17
1
3
30

30%
56,67%
3,33%
10%
100%

5
7
0
1
13

38,46%
53,84%
0%
7,69
100%

3
6
0
1
10

30%
60%
0%
10%
100%

1
4
1
1
7

14,28%
57,14%
14,28%
14,28
100%

Implementation of additional incentives for managers is slightly different when we look from
the perspective of the ownership structure of an enterprise. While in 38,88% of enterprises in
domestic ownership additional stimulations for managers are not being used at all, that is the
case in only 16,67% of enterprises in foreign ownership. Situation is very similar when
looking at annual bonuses. They are used in 75% of enterprises in foreign ownership and in
44,44% of enterprises in domestic ownership. However, data that long-term bonus is not used
in any enterprise in foreign enterprise is very surprising, as well as the fact that the stock
options are used in only 8,33% of those enterprises.
We were interested in managers opinion if reward policy influences the competitive
advantage of their enterprises. Only 40% of questioned managers think that reward system in
great and greater percentage influence the competitive advantage of their enterprise. In the
same time, 60% of managers are convinced that this influence is insignificant or none. From
the perspective of the size of the enterprises, answers are almost the same. It is apparent that
managers in small enterprises are the most convinced (in 55,55% of cases) that reward system
in their enterprise strongly influence its competitiveness. (Table 12)
Table 12.: Does reward system influence enterprises competitiveness?
Enterprise
Influence on
competitiveness
a) no
b) in some amount
c) greatly
d) tremendously
TOTAL

Total

Large

Medium

Small

8
13
10
4
35

22,85%
37,14%
28,57%
11,42%
100%

3
4
4
2
13

23,07%
30,76%
30,76%
15,38%
100%

3
7
13
0
13

23,07%
53,84%
23,07%
0%
100%

2
2
3
2
9

22,22%
22,22%
33,33%
22,22
100%

Starting with an assumption that only hardly imitable reward system and those who create an
added value can contribute to competitive capabilities, we wanted to find out more about
reward systems of the enterprises in this research, looking from these two perspectives.
Majority of managers (60% of them) believe that reward system in their enterprise is not hard
to imitate, but also 68,57% of them claim that it also contributes to creating of added value in
the same time. Speaking of that, not even one large enterprise think that it has reward system
which is hardly to imitate, while even 84,61% is convinced that it is very easy to imitate.
30,76% of medium and 22,22% of small enterprises have reward systems which are difficult
to imitate because of their specifics and ways of implementation. Concerning creating of an
added value, managers of medium enterprises are in 53,84% convinced that their reward
systems have a positive influence for creating the added value, while this percentage is much
higher with small (77,77%) and large (76,02%) enterprises. (Table 13)
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Table 13.: Is reward system difficult to imitate and does it create an added value?
Expressed in %

Hard to
imitate

Creates
added value

Hard to
imitate

Creates
added value

Small

Creates
added value

Medium

Hard to
imitate

Total

Large

Creates
added value

a) yes
b) no
c) no answer

Total

Hard to
imitate

Enterprise

17,14%

68,57%

0%

76,92%

30,76%

53,84%

22,22%

77,77%

60%

8,57%

84,61%

7,69%

30,76%

15,38%

66,66%

11,11%

22,85%

22,85%

15,38%

15,38%

38,46%

30,76%

11,11%

11,11%

100%

100%

100%

100%

100%

100%

100%

100%

Conclusion
Analysis of the research results showed that majority of Croatian enterprises can not be
satisfied with their reward systems and their reward policies. In spite of the fact that most of
them have their reward strategy completely or partly developed, those systems are slow and
not flexible enough with insufficient variable elements.
The majority of managers (77,14%) want to influence through reward system the employees
performance and their work productivity, but also the quality improvement, increase of
responsibility and commitment to enterprise. Incentives which are being used to achieve those
goals are mostly classic systems of variable rewarding: individual pay plans, performance
appraisal and single bonuses given according to managers subjective evaluation. Flexible
alternative reward systems like gainsharing, profitsharig, ESOP and stock options are being
used very rarely and only in specific situations.
It is interesting that there are no big differences in certain aspects of reward policy concerning
the size of an enterprise. The fact is that enterprises in foreign ownership and enterprises that
belong to above average profitable activities in comparison with the average of Croatian
economy, have frequently formulated strategy and reward policy. They also use flexible
single and group incentives to reward their employees more often than others.
Do reward systems formulated like this can contribute to increase the competitive advantage
of their enterprises? According to managers opinions, reward system has influence on
increase of competitive advantage in 40% of cases. That corresponds to the percentage of
enterprises who have:
- formulated reward strategy as an integral part of business strategy and human resource
strategy,
- completely developed and elaborated reward policy and
- used flexible systems for rewarding their employees and their managers.
Although 68% of top managers questioned in the research believe that their reward systems
contribute to creation of an added value, only 17% of them stress out that their reward
policies are difficult to imitate. That means that majority of them did not succeed to formulate

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unique, exclusive and recognizable reward system which could contribute to enlargement of
their competitive advantage.
We can conclude that reward policy does not contribute to increase of competitive advantage
in Croatian enterprises: in the percentage it could do it and in the number of enterprises that
consider the reward policy as a technique to achieve better competitive position. There are
three main reasons for it:
1. Reward systems in Croatian enterprises are mostly based on classic methods and
techniques, while flexible systems of single, group and alternative variable rewarding,
which can strongly influence on increase of productivity, efficiency and competitive
advantage, are being used very rarely.
2. Reward strategy and policy in the majority of enterprises are not specifically
synchronized with business strategy and other human resource activities. The mutual
coordination, as well as the way in which reward system is implemented, disable
imitation of reward system by other enterprises which contributes to increase of the
competitive advantage.
3. Rewards of top and higher middle managers, who are the most important for enterprise
development and its competitive advantage, are not tied enough with their results and
performances, neither is long-term variable component in their compensations
emphasized enough.
But, concerning the fact that enterprises in domestic ownership, regarding reward systems, do
not differ so much and keep behind from enterprises in foreign ownership, we have reasons to
believe that reward strategies in Croatian enterprises are on the good way of right
implementation which can contribute to multiple positive trends in their performance and
productivity.

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