1 2 MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMICS UNIVERSITY NGUYEN THI HONG THAM THE INFLUENCE OF ORGANIZATIONAL CULTURES ON INCENTIVE SYSTEMS IN VIETNAMESE ENTERPRISES SPECIALTY: BUSINESS MANAGEMENT CODE: 62.34.01.02 ADMINISTRATION AND BUSINESS DISSERTATION SUMMARY HANOI, 2014 3 INTRODUCTION a. The rationale for studying Researches into the relationship between cultures and incentives have exposed a significant gap and there are not many studies considering directly this relationship. Studies that focus on the impact of cultures on incentive systems mostly examines the influence of national culture on the difference in incentives of organizations in different countries and mainly study of the value perspective. Therefore, this dissertation will test the influence of organizational culture, specially department cultures on incentive systems applied for these sections in Vietnamese enterprises. This is an issue not answered clearly in previous studies. b. The purpose of this study The general purpose of this dissertation is to research of the relationship between the organizational culture and the incentive system. The study will answer the questions whether the organizational culture has significant influences on the incentive system, including frequency of incentive use, parity or equity allocation principle, the base to allocate and the way to pay incentives or not. c. The research subject and scope The research issue is the effect of the organizational culture (specially the section culture) on the incentive system applied in the department in enterprises . Study scope: Enterprises in Hanoi and provinces that are 4 next to Hanoi. The survey was implemented from November, 2012 to April, 2013. d. New findings in the dissertation Different from many previous researches, this research investigates differences in the relationship between organizational culture and incentive system within one country, Vietnam. The findings in this thesis reveals that organizational culture has significant influence on incentive system, including the incentive frequency, the principle, the base and the way to allocate bonus. These are new findings that are not answered clearly in previous studies. In particularly, in employee – oriented organization, the frequency of bonus is higher, the parity allocation principle and the group – based bonus is used more largely while in less employee – oriented organization, individual – based bonus is used more highly. To the tight or loose control dimension, the investigation results indicate that in tight control units, the equity allocation principle and individual – based bonus is used more largely. Another new finding, contrast with the result of Western researches and the qualitative study, is that in less employee – oriented units, bonus is paid secretly is more popularly. On the practical perspective, firstly, the findings in this study help predict reward system applied in an organization when understanding its culture. Secondly, the findings also help managers comprehend the relationship between organizational culture and the incentive system. Therefore, they are able to design, fulfill and change incentive plans to have better results. 5 CHAPTER 1: THEORETICAL BASIS AND LITERATURE REVIEW 1.1. Theoretical basis 1.1.1. Culture and organizational culture 1.1.1.1. Culture Culture is specially difficult to define. Asif (2011) indicated that “culture is one of two or three words that is the most complicated in English”. Generally, researchers have agreed that culture refers to belief and value, expressed in practice, in behavior and other things, shared by the members of an organization or a nation. However, besides the common agreement, authors shows a lot of different opinion about culture. 1.1.1.2 Organizational culture According to Hofstede et al (1990), organizational culture appeared in academic studies in the United State in 1979 and it is quite recent appearance. Up to now, organizational culture definition become a controversial definition in both theory and practice. It continuously shows different development trends in academics and new definitions to understand this concept develop endlessly. Although there are various views, scholars are becoming more consensus. While most researchers have agreed that organizational culture includes artifacts, shared value, belief and underlying assumptions, their viewpoints about each part are clearly different. Some authors emphasize the value perspective of organizational culture. On the contrast, other scholars highlight the artifact aspect of organizational culture. Many remaining authors are 6 in the middle of two above viewpoints. Researchers also do not have agreement about the dimension to assess organizational culture. According to the findings of Hofstede et al (1990), the difference in organizational cultures among companies mainly to be observed and evaluated by 6 dimensions, including process versus result orientation organizational culture, employee versus job orientation organizational culture, parochial versus professional organizational culture, open or closed system organizational culture, loose control versus tight control organizational culture and normative versus pragmatic organizational culture. 1.1.1.3. The departmental culture Hofstede et al (1990) found that organizational culture could be studied at whole organizational level or lower levels, such as the department or unit level depends on its cultural homogeneity. These authors found that many organizations included sections that have different cultures and jobs with different culture. This is confirmed in some researches of Hofstede after that. In addition, Martin (2002) found that the subculture in enterprises appeared because of difference in the jobs and functions. Moreover, according to Schein (2004), if an organization become successful, it was sure that it would create lower units and start creating their culture basing on their own leaders. Besides, other authors also supplied evidences on difference in culture among departments and units. In addition, Reiman et al (2005) studied organizational culture of the maintenance units in two nuclear power factories and Kunda (2006) researched into the culture of the engineering unit in an 7 advanced technology company. These are evidences of using department level to be a research unit in organizational culture studies. Therefore, the author decides to choose examination units are department in enterprises. 1.1.2 Compensation system and incentive 1.1.2.1 Compensation system Many researchers on compensation have agreed that compensation oftend includes salary, benefits and bonus, share options. 1.1.2.2 Incentives Incentives is an important tool to promote managers to reach the objectives of organization. Anthony and Govindarajan (2003) indicated that incentive plans include two parts: short term plans and long term incentive plans. The short term incentive plans include the total bonus pool, carryovers and deferred compensation. Long term incentive plans comprise stock options, phantom share, stock appreciation right, performance shares and performance units. Incentive can be based on the contribution or the working time. It also can be based on the individual result or the group result. Moreover, it is allocated equally or equitably. 1.2 Literature review on the effect of organizational cultures on incentive systems in enterprises 1.2.1 The influence of the organizational culture on management in enterprises 8 Pheysey (1993) found that organizational culture had relationship with various perspectives of enterprise management. In particularly, this author indicated clearly the relationship between organizational culture and the management aspects, such as change, control, organizational design, job design, motivation, decision making, group behavior, leadership and management, and organization development. Culture is emphasized because it impacts on many other things that is showed in the dissertation. 1.2.2 The influence of organizational cultures on incentive systems in enterprises 1.2.2.1 Domestic literature review In Vietnam, researches of the impact of culture on management in generally and on salary, reward in particularly are quite new. There are few studies that considered this issue. Most studies focused on considering each subject separately, such as the culture or the organizational culture or salary or reward. Some authors investigated the effect of culture on compensation issue in our country. For example, Thuc Anh (2010) found that although Vietnamese culture stressed power distance, the Vietnamese wanted the “equality” in compensation. The too big difference in compensation is unacceptable to Vietnamese staffs. Huy and Thang (2012) examined the effect of national culture (Vietnam) on compensation practices applied in enterprises, then they proposed some hints to help Vietnamese enterprises to design a suitable reward system to culture value of Vietnamese labor, therefore it helps strengthen the effectiveness of paying salary in enterprises. 9 1.2.2.2. International literature review Recently, there is an increasing interest in testing the relationship between culture and parts of the management control system, such as performance measure system or incentives. The most remarkable research on the influence of organizational culture on incentives system is made by Bento and Ferreira (1990). These authors used the qualitative method, explored the influence of organizational culture on incentive system at an university in the United State. Researches on the effect of organizational culture on incentive system only examined the impact of the value aspect (not practice perspective) organizational culture on incentive system. However, the practice side is more important and effective to investigate organizational culture. Therefore, the dissertation will examine the impact of the practice aspect of organizational culture on the incentive system. 1.3 The research model Control variables Demographics of respondents: Job title, age, sex, number of year working for the company, education level Firm characteristics: working unit, business sector, legal form of organization, company size, company age and ownership Organizational culture Process versus result orientation Employee versus job orientation Parochial versus professional Open or closed system Loose control versus tight control Normative versus pragmatic Incentive system Level of incentives Incentive allocation principles Group-based or individual-based The way to pay incentive 10 Figure 1.5: The theoretical model (Source: The author synthesized and proposed) Some hypotheses are proposed from literature review: H1: In result-oriented units, incentives is more likely to used highly than in process-oriented units H2a: In employee-oriented units, incentive frequency is likely to be higher than in job-oriented units H2b: In employee-oriented units, the parity principle for allocating incentives is more likely to be used broadly than in job- oriented units. H2c: In employee-oriented units, group-based incentives are more likely to be used largely than in job-oriented units H2d: In job-oriented units, individual-based incentive is more likely to be used largely than in employee-oriented units H2e: In employee-oriented units, the secret payment is more likely to be used popularly than in job-oriented units H3a: In tight control units, the equity rule for allocating incentive is more likely to be used commonly than in loose control units H3b: In tight control units, individual-based incentive is more likely to be used universally than in loose control units Three other practice dimensions, including parochial versus professional, open or closed system, and normative versus pragmatic organizational culture have not been considered to produce hypotheses because the author have not found any relationship between these variables and various aspects of incentive system from literature review 11 Conclusion of chapter 1 Chapter 1 has systematized various different views of researchers about organizational culture and incentive. Then, the dissertation has given the accepted definition of two concepts. In addition, chapter 1 has introduced literature review, proposed the research model and hypotheses on the influence of organizational cultures on incentive systems in Vietnam enterprises. 12 CHAPTER 2: CASE STUDY OF THE INFLUENCE OF ORGANIZATIONAL CULTURES ON INCENTIVE SYSTEMS IN DEPARTMENTS OF TWO ENTERPRISES Studying organizational culture is not an easy job. Bento and Ferreira (1990) found that understanding how culture affect on compensation policies requires “a period of immersion in that culture and intensive use of the insider information”. So the author has chosen to study insightly two enterprises producing carton package in the northern region to see whether enterprises in the same industry has differently organizational culture or not and their incentive system are significantly different or not. The author had chosen two cases that are two enterprises in the same industry to eliminate the influence of the outside factors on the incentive system. In addition, based on the results of previous researches, enterprises that belongs to different legal forms has not similar organizational culture. Therefore, two enterprises were chosen. One of them was a private company (An Duy company) and the another had been a state – owned company that is equitized recently (Ban Mai enterprise). So two cases are anticipated to be significantly different in organizational culture, then the author will examine whether incentive practices in two enterprises are different following the predictions given basing literature review or not. At An Duy company, the author interviewed the chief accountant, the vice manager and the assistant of the business division. At Ban Mai enterprise, the vice manager of business division and the chief accountant were interviewed. The interviews were planned about time, place and were direct contacts. Each 13 interview lasts from 1.5 to 3 hours. The information of interviews was taken note and was typed within 24 hours. The interviews were implemented with an interview guide including open questions developed basing organizational culture scales of Hofstede et al (1990) and incentive system scales borrowed from the research of Segalla et al (2006), Mahoney and Thorn (2006) and Goktan and Saatcioglu(2011). The interview guide and the detail information of interviewees are showed in the appendix of the dissertation. 2.1. Case A: An Duy corporation This part presents the general information of the company, the divisional culture and the incentive system applied in the divisions of the company 2.2 Case B: Ban Mai enterprise This part presents the general information of the enterprise, the divisional culture and the incentive system applied in the divisions of the enterprise. 2.3 Some hypotheses were supported H’1: In result-oriented units, incentives is more likely to used highly than in process-oriented units H’2: In result-oriented units, the equity rule for allocating incentive is more likely to be used commonly than in loose control units H’3: In employee-oriented units, the parity principle for allocating incentives is more likely to be used broadly than in job- oriented units. 14 Table 2.1: The comparison of organizational cultures and incentive systems at two enterprises An Duy company Ban Mai enterprise Difference note The business department –The culture - Result-oriented culture - Job-oriented culture - Professional culture - Open system culture - Loose control culture - Pragmatic culture - Process-oriented culture - Employee-oriented culture - Parochial culture - Open system culture - Tight control culture - Pragmatic culture, less clearly - Quite clear - Quite clear - Little - Quite similar - Quite clear - Little The business department –The incentive system - Revenue bonus monthly for each individual who has completed his duty. The percentage of bonus per compensation was dramatically higher than other divisions in the company. - Publicly - Revenue bonus monthly with the same percentage for all indirect staffs (working in office) if the enterprise get the bigger revenue than planed. The difference in the percentage of bonus per compensation among divisions that work in office was lower - Secretly - Significantly different in the parity or equity allocation principles. - Difference in the allocation basis: individual/ enterprise results. - Differently Accounting department –The culture - Process-oriented culture - Employee-oriented culture - Parochial culture - Open system culture - Tight control culture - Pragmatic culture more strongly -Process-oriented culture clearly - Employee-oriented culture - Parochial culture - Open system culture - Tight control culture - Pragmatic culture - Little - Little - Quite similar - Similar - Similar - Little The accounting department -The incentive system - Only be rewarded once per year before Tet holiday if the company made profit in the previous year. Each staff received a bonus that was equal to his monthly salary. The manager got 1.5 monthly salary. - Publicly - Bonus monthly with the same percentage for all indirect staffs (working in office) if the enterprise get the bigger revenue than planed. Having incentive based on the result of a year and on holiday occasions. - Secretly - Significantly different in the incentive frequency - Difference in the percentage of bonus per compensation - Different in the way to pay (Source: the author synthesized) 15 H’4: In employee-oriented units, the secret payment is more likely to be used popularly than in job-oriented units H’5: In employee-oriented units, group-based incentives are more likely to be used largely than in job-oriented units H’6: In loose control orientation units, incentives is more likely to used highly than in tight control orientation units For other hypotheses on the influence of organizational culture on incentive system, that are indicated in the chapter 1, the result of the qualitative research has not provided evidence to support. CONCLUSION OF CHAPTER 2 This chapter has reported the result of the qualitative study carried out at two enterprises that producing carton packages in the northern region of Vietnam. The result reveals that some hypotheses shown in the chapter 1 were supported. Therefore, the quantitative study stage using questionnaires with bigger sample was followed. 16 CHAPTER 3: THE SURVEY STUDY OF THE INFLUENCE OF ORGANIZATIONAL CULTURES ON INCENTIVE SYSTEMS IN VIETNAMESE ENTERPRISES 3.1 The research method The study sample was chosen from enterprises that belonged to all legal forms in Hanoi and neighboring provinces. The questionnaires were used to explore 150 enterprises that were chosen following different standards to try assure the representative requirement. The scales were borrowed from the previous researches. 3.2 The study result The coding and data entering were implemented following the instruction of using SPSS software. The data was checked by using the frequency table. After that, analyzing factor and checking scale reliability were applied. EFA model was used to check scale reliability. When the scales were found reliable, the regression analysis were done to examine hypotheses. 3.2.1 Sample description statistics The sample size was 150 enterprises. This meant the research could collect 300 answer sheets. However, in fact, only 230 answer sheets were collected. After excluding the answer sheets lacking the important information or the respondents were not suitable, 216 answer sheets were used to analyze data. 3.2.2 Checking the scale reliability The primary statistical techniques used to analyze data in 17 this study included factor analysis, checking scale reliability and multivariate hierarchical regression analysis. The eigenvalue-based method was used to identify the number of factors. After that, the factors with “eigenvalue > 1” were kept. The result of factor analysis revealed that for practice perspectives of the organizational culture, seven factors were created rather six factors as expected from Hofstede (1990). Among 7 factors, only 2 factors gained reliability with Cronbach’s alpha were 0.7 and 0.67. 3.2.3 The result of correlation analysis, regression and testing hypotheses Hypothesis H1 were not tested because the result of the scale reliability analysis to the process versus result oriented organization culture dimension was too low. This is similar to analysis result of other Vietnamese authors (Thuc Anh and Minh Hang, 2009). H2a: The result of the regression analysis exposed that the full model was significant (Adjusted R square .25, F: 5.006, p<.001). The employee oriented organization culture variable had significantly positive relationship with the incentive frequency (.153, p<.05). It is consistent with hypothesis 2a. H2b: The result of the regression analysis showed that the full model was significant (Adjusted R square .05, F: 1.752, p<.1). The employee oriented organization culture variable had significantly positive relationship with parity allocation (.17, p<.05). It is consistent with hypothesis 2b. H2c: The result of the regression analysis presented that the full model was significant (Adjusted R square .121, F: 2.912, p<.01). The employee oriented organization culture variable had 18 significantly positive relationship with group-based incentives (.217, p<.01). It is consistent with hypothesis 2c. H2d: The full model was significant (Adjusted R square .064, F: 1.973, p<.05). The employee oriented organization culture variable had significantly negative relationship with individual-based incentives ( 157, p<.05). It is consistent with hypothesis 2d. H3a: The result of the regression analysis indicated that the full model was significant (Adjusted R square .087, F: 2.346, p<.01). The loose vs. tight control oriented organization culture variable had significantly positive relationship with equity principle for allocating incentives (.241, p<.01). It is consistent with hypothesis 3a. H3b: The result of the regression analysis directed that the full model was significant (Adjusted R square .067, F: 2.01, p<.05). The loose vs. tight control oriented organization culture variable had significantly positive relationship with the individual-based incentive (.15, p<.1). It is consistent with hypothesis 3b. For the hypotheses supported in the qualitative study, H’1 and H’2 were not tested because the scales were not reliable. H’3 and H’5 were supported. In addition, the results of the quantitative data analysis indicated that the testing outcome of H’4 hypothesis was contrast with the expectation shown in chapter 1 and the H’6 hypothesis was not supported. 19 Table 3.13: Results of Regression Analysis for Each Dependent Variable ( Standardized coefficients are shown Significance levels: +p<.1. *p<.05. **p<.01 ***p<.001 ) Variables Incentive frequency (H2a) Parity/equity allocation rule (H2b, H3a) Individual/group incentive (H2c, H2d, H3b) Control Model Full Model Full Model Full Model Full Model Full Model Full Model Controls Job title .122 .104 235 ** .095 236 ** .026 043 Age 265 * 280 * .128 .022 .296 ** 100 072 Sex .026 .033 017 .070 020 .090 .111 Number of year working for current company .156 .174 029 .047 033 .070 .059 Education level 181 * 179 * 082 .158 * 052 .168 * .185 * Working units 378 *** -387 *** 063 088 021 .026 .065 Business sector .207 * .204 * 029 .111 .129 .138 + .147 + Legal form 060 062 125 .019 192 * 100 084 Company size .141 .115 094 058 194 * 011 064 Company age 005 .004 220 * 027 .081 107 131 Ownership .027 .056 034 040 .058 -020 021 Independent Variables Employee orientation .153 * .017 * .217 ** 157 * Loose/tight control orientation .241 ** .150 + F 4.983 *** 5.006 *** 1.752 + 2.346 ** 2.912 ** 1.973 * 2.010* Adjusted R 2 .233 .25 .051 .087 .121 .064 .067 Number of observations 145 145 169 170 168 172 170 THE THIRD CHAPTER CONCLUSION Based on the hypotheses shown in the chapter 1 and some results supporting a few hypotheses in the qualitative study stage in the chapter 2, the chapter 3 of the dissertation has implemented the survey study of the influence of organizational cultures on incentive systems with the bigger sample, 150 enterprises in Hanoi and neighboring provinces. The sample selection considered various standards, such as the enterprise size, business sector, company age, legal form and ownership. The analysis result indicated that most hypotheses presented in the chapter 1 were supported, excluding H1 hypothesis was not tested because the scale was not reliable and the one result was contrast with the hypothesis shown, H2e. This demonstrated that the division culture affect dramatically on various perspectives of the reward system applied in that divisions, such as the reward frequency, the reward allocation principles, the base for allocation, group or individual based, and the way to pay, secretly or publicly. These are new findings that the dissertation help to clarify the relationship between the organizational culture and the reward system that is interested by many researchers and managers. [...]... Restructuring corporate compensation in Vietnam to overcome difficulties, Journal of economics and development, volume 193 (II), July, pp 21-25 6 Nguyen Thi Huong and Nguyen Thi Hong Tham (2013), The influence of organizational cultures on incentive systems – Case of Vietnamese enterprises, International conference: Knowledge management in the transition economy of Vietnam, Hanoi, 8/2013, pp 273-290 ... all Vietnamese enterprises but the study sample is only selected from enterprises located in Hanoi and neighboring provinces because of the resource shortage Therefore, this is the limitation of the dissertation although many prior studies in this field that were implemented by other authors also share the sample limitation similar to this dissertation In addition, in current conditions, Vietnam is... incentive forms in corporations: The international experience and the Vietnamese practice, Journal of economics and development, July (II), pp 40-43 4 Nguyen Thi Hong Tham (2012), The influence of incentive practice on customer relationship management in enterprises, national conference proceedings “C R M: Theory and practice in Vietnam”, National Economics University publishing, Hanoi, pp 148 - 155 5... the enforcement of implementing legal rules to intensify the belief to each other among Vietnamese people in generally and managers in particularly This helps to make advantages to apply effectively various forms of incentives that are popular in developed countries but have not been applied effectively in Vietnam, such as carryovers and deferred compensation, to get the benefit of applying these kind... the first stage of the market economy development, the time of opening its door is not long so many factors are not created like in developed countries The incentive forms are evidences So when the Vietnamese economy become more developed and enterprises are integrated more, it is sure that the incentive types will become diversified and the study subject will be bigger These are opportunities for future... the questions: what culture an organization has will fit are borrowed from earlier studies, so they were not completely the situation that salary is bigger or benefits are used more suitable to the Vietnamese context The second limitation of this Furthermore, the findings are supported in the qualitative stage but research is that the study uses some single item measures to are not tested in the quantitative... countries, this research investigated organizational culture and the incentive system to have better results changes in the differences in organizational cultures and incentive systems in a country, Vietnam The findings in this research reveal that 4.3 Some suggestions to managers organizational cultures have significant influences on incentive Firstly, managers should assure the fitness between the systems, . that although Vietnamese culture stressed power distance, the Vietnamese wanted the “equality” in compensation. The too big difference in compensation is unacceptable to Vietnamese staffs. Huy. culture (Vietnam) on compensation practices applied in enterprises, then they proposed some hints to help Vietnamese enterprises to design a suitable reward system to culture value of Vietnamese. practice in Vietnam”, National Economics University publishing, Hanoi, pp. 148 - 155. 5. Nguyen Thi Huong và Nguyen Thi Hong Tham (2013), Restructuring corporate compensation in Vietnam to overcome