Individualism and collectivism

                                                                                         

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