1. Compensation And Reward Management Module 2 Reenu Treasa Ancy R Shajahan

2. Performance linked Compensations Performance Management – a process which is designed to improve the organization team and individual performance -it is shared/ participative process, an integrating process - based on agreements on accountability, measurement and review, feedbacks, development and improvements on continuous basis.

3. Concerned with creating a culture in which organisational and individual learning, and development is a continuous process. Performance linked reward system is based on – nature of business, type of technology; attitude of unions and human resource strategy of the organisation

4. Reduce labour cost and motivate performance. Employees performance depends on mainly three factors : Skill, Knowledge and Motivation: Employees performance = f (SKM) – S - skill & ability to perform task – K -knowledge of facts, rules, principles, and procedures – M -motivation to perform

5. Performance Measure – “If you cannot measure you cannot improve” – Profitability gets measured on return on investment return on sale return on total capital net income by total assets – Employee performance Quantity of output Quality of output Timeliness of output Presence at work Cooperativeness – Provide evidence of whether or not the intended result has been achieved – Basis of generating feedback information

6. Performance appraisal Process of evaluating how well employees perform their jobs when compared to a set of standards, and then communicating that information to those employees. Also called employee rating, employee evaluation, performance review, performance evaluation, and results appraisal.

7. Link between rewards employees hope to receive and their productivity. Productivity Performance appraisal Rewards Pay raises should be given for performance accomplishments rather than for seniority

9. Variable Pay Variable performance linked pay or contingent pay Traditionally known as Incentives Variable Pay is compensation linked to individual, team, and organisational performance.

10. Financially measurable reward paid to an individual based on his/her overall performance. Consists of payment related to individual performance, contribution, competence or skill to the team or organisational performance Variable pay plans attempt to provide tangible rewards to employees for performance beyond normal expectations.

11. Types Of Variable Pay Individual – To reward the effort and performance of individuals Piece rate Sales commissions Bonuses Special recognitions (trips, merchandise) Safety awards Attendance bonuses

12. Team/Group – To rewards an entire work group or team for its performance, – Cooperation among the members usually increases Gainsharing Quality improvement Cost reduction

13. Organisational - wide – To reward people based on the performance results of the entire organisation. Profit sharing Employee stock options Executive stock options Deferred compensation

14. Employers adopt variable pay incentives in order to – link individual performance to business goals – reward superior performance. – Improving productivity or increasing employee retention.

15. Factors Affecting Successful Variable Pay Plans Sufficient financial resources available Consistent with organisation culture Clearly separated from base pay Clearly communicated Performance results linked to payouts Current, updated plans Measurable performance Clear, understandable plan details Results in desired behaviours Linked to organisational objectives

16. Prerequisites of a Variable Pay Plan Competitive fixed/base salary Transparent and simple Linked to business objectives Agreed targets - challenging and realistic

17. Catalyst to Variable Pay Plan Identify Corporative Objectives: CEO/Functional Head should constantly display their commitment to the variable pay plan and this must he perceived by employees. Ascertain Employee Readiness: Assignment based on survey of all employees in company will decide whether they are ready or not for the introduction of a variable pay plan.

18. Communicate Scheme Details: To ensure the smooth functioning of the scheme, it is crucial that every employee understands why variable pay has been introduced and how the scheme functions. Invest in Implementation: Company should have a realistic idea as to how much time, money and effort will be needed to design and implement the scheme. Monitor & Review Scheme: Periodic reviews help in fine-tuning a Variable Pay Plan to organisation’s ever changing needs.

19. Fixed Pay vs. Variable Pay Fixed PayVariable Pay Day to day responsibilities and ongoing performance Long-term contribution Special objectives and results “Above and Beyond” expected contributions Fixed Pay = Market + Inflation + Potential + Performance Rankings Variable Pay = Results/Target achieved only

20. Forms and Types of Performance Linked Reward Scheme/Contingent Pay Merit pay or Individual performance related pay Skill based pay Shop floor incentive and bonus schemes Team rewards Team/ Organization based schemes. – Annual bonus – Gainsharing – Goal sharing – Profit sharing – Economic value added/ market value added ` – Share options/ Stock options Other cash payment.

21. Merit pay or Individual performance related pay It involves the following steps: – The determination of result-oriented merit rating procedures, – The identification of job factors and their relative importance, – The formulation of a scale of reward, and – The communication of the basis of monetary reward.

22. Skill Based Pay Two forms - Conventional job slotting or a progression related to skills – Skill based job slotting : unskilled, semiskilled and skilled by reference to their training, qualifications and experience. – Skill based pay progression: links a progression to the acquisition of skills.

23. Shop Floor Incentive and Bonus Schemes The pay or part of the pay received by the employee to the number of items they produce or processes, the time they take to do a certain amount of work and/or some other aspects of their performance. – Individual Piecework a uniform price is paid per unit of production pay is directly proportionate to results a fallback rate or minimum earning level easy to operate, simple to understand enable employers to estimate and control manufacturing cost effectively

24. – Work Measure Scheme Job or its component task is timed and the incentive payment is related to performance above the standard time allowed for the job. Amount of incentive pay received depends on the difference between the actual time taken to perform the task and the standard time allowed. Incentive payments are made when performance exceeds the standard. – Measure Day Work The pay of employees is fixed on the understanding that they will maintain a specified level of performance, but pay does not fluctuate in the short-term with their performance

25. Team Rewards “Teamwork is the fuel that allows common people to attain uncommon results” – Enhances productivity – Improves quality – Aids recruiting and retention of employees – Improves employees morale – Ties earnings to team performance

26. Distributing Team Incentives – Same size reward for each team member: ln this approach, all team members receive the same payout, regardless of job levels, current pay, or seniority. – Different size rewards for each team member: Using this approach, employers vary individual rewards based upon such factors as contribution to learn results, current pay, years of experience, and skill levels of jobs performed.

27. Conditions for Successful Team Incentives

28. Four types of teams: – Parallel teams supplement the regular organisation structure and perform problem solving and work improvement tasks - examples, quality circles, survey feedback teams, etc – Work teams are responsible for producing a product or providing a service and are self-contained, identifiable, work units that control the processes involved in transforming inputs into measurable outputs. Eg: assembly line teams – Project team involves a diverse group of knowledge workers, such as, design engineers, process engineers, programmers and marketing manager who are brought together to conduct projects for new product development etc. – Management team are a team of well-trained managers.

29. Approaches to Team Rewards Individual bonusesMisfit Team pay for performance Individualists Individuals Collectivists Work Independent interdependent

30. Total quality management a systematic way of guaranteeing that all activities within an organisation happen the way they have been planned in order to meet the deemed needs of customers and clients – quality measure standard of quality (zero defects) terms of Waste delivery to time

31. Just in Time Material or parts are generated in the exact quantity required and just at the time they are needed. A series of manufacturing units, each delivering to one another in succession stages of production. The amount delivered by each unit to the next unit is exactly what the latter needs for the next product period (usually one day). Based on performance in relation to the critical success factor of JIT - like productivity, deliver); quality, flexibility, and teamwork.

32. Cellular Manufacturing The logical arrangement of numerically controlled equipment into groups or clusters of machine to process families of parts. Processing parts in a manufacturing cell includes completing as much of the workplace processing as possible within the cell before moving it to the next sequential processing, assembly or stock holding station Cells are staffed by teams of interdependent and multi-skill workers. Team members are given the maximum opportunity to monitor them their own performance and take action to improve it, and are rewarded accordingly

33. Team/Organisation Based Schemes 1. Annual bonus – Concept of bonus payment to workers originated in India during the First World War in the cotton textile industry in Mumbai and Ahmedabad in 1917. – When the practice was discontinued in 1923, there was a general strike and the Government of Maharashtra appointed a committee headed by Sir Normal McLeod, the then Chief justice of Bombay High Court to consider the nature and basis of payment of bonus in the cotton textile industry of Mumbai.

34. The committee observed that the cotton mills working in 1923 as compared to the situation in 1917, did not justify any payment of bonus. Thus a link between profits and bonus was established in early 1920s. During Second World War, the payment of bonus resumed and continued till 1945. Workers has the right in the increased profits made without whose labour and cooperation the profits can not have been made. Wages must be fixed on the basis of normal conditions

35. Profit is considered as a precondition for bonus Tata Iron and Steel Company, Indian Iron and Steel Company, Bharat Tin Plate Company and Buckingham and Carnatic Mills - have adopted voluntarily profit sharing bonuses.

36. 2. Gainsharing Formula based organisation or factory wide bonus plan which provides for employees to share in the financial gains made by a company as a result of its improved performance. Gainsharing differs from profit sharing – Under gainsharing, rewards are based on a productivity measure rather than profits. The goal is to link pay to performance outcomes that employees can control. – Gainsharing plans usually distribute any bonus payments with greater frequency (eg, monthly or quarterly, annually). – Gainsharing plans distribute payment during the current payment rather than deferring them as profit sharing plans often do.

37. Results Of Gainsharing Plans Coordination, teamwork, and sharing of knowledge are enhanced at lower levels. Social needs are recognized via participation and reinforcing group behavior Attention is focused on cost savings, not just quantity of production. Acceptance of change due to technology, market and new method is greater because higher efficiency leads to bonuses. Attitudinal change occurs among workers, and they demand more efficient management, better planning, and good performance from their co-workers. Employees produce ideas as well as effort.

38. Gainsharing pays bonus even when the organisation is not earning profits. Concept of gainsharing is based on simple measurable improvement. Eg: reduction of cost per unit. Gainsharing is a group incentive scheme where a team or a group together is involved in increasing productivity, quality or customer service.

39. Gainsharing Formulas Scanlon plan – Measures labour costs as a proportion of total sales – This plan calculates gains based on standard cost reduction – A standard ratio will trigger distribution of savings to a pre-established formula.

40. Rucker Plan – Based on employment cost – Measures labour costs against sales less the cost of materials and supplies (i.e. value added) Improshare – based on an established standard, which defines the expected hours required to produce an acceptable level of output. – The standard is derived from work measurement. – Any savings resulting from an increase in output in fewer than expected hours are shared between the organisation and employees by means of a pre-established formula.

41. Value Added – Calculated by deducing expenditures on material and other purchased services from the income derived from sales of product. – Wealth created by people in the business.

42. Why organisations introduce gainsharing? Creating team spirit, Breaking down organisational barriers, Increasing the flow of innovative ideas from employees, Improving commitment and educating employees in business economics. As a change agent Increased competition - national and global or declining productivity

43. 3. Goalsharing Popular when the business environment is rapidly changing and the company wants to market a particular kind of performance improvement for a limited period of time. Goalsharing plans seek to leverage an organisation’s business strategy by measuring performance on key strategic objectives

44. Standards and measures are set on an annual basis and are not necessarily based on historic performance or what was measured and rewarded in past years. They are more likely to be based on measures of what it takes to implement a strategic plan and to be successful in the current business environment. Typically, goalsharing plans establish three, four, or more goals in areas such as quality, customer satisfaction, delivery time, cost, and sometimes profitability

45. They then tie specific bonus amounts to achieving one or more levels of performance on each of these measures. The plans typically last for a year, at the end of the year a different set of measures and standards may be established as part of a “new” plan, or the old plan may continue. Easy to explain, so they can be used effectively by an organisation that is undergoing change Goalsharing plans can pay bonuses for things that typically are not measured in dollars ( Eg, quality, customer satisfaction, on time delivery )

46. 4. Profit Sharing Paying employees a share of the net profit in addition to their wages or salary lt is payment of a dividend or a sum based on basic wage or salary grade or seniority Profit sharing is a plan under which an employer pays to eligible employees, additional to their normal remuneration, a special sum in form of cash or shares in the company related to profits of the business.

47. Objectives of Profit Sharing To encourage employees to identify themselves more closely with the company by developing a common concern for its progress. To stimulate a greater interest among employees in the affairs of the company as a whole. To encourage better co-operation between the management and the employees. To recognize that the employees have a moral right to share in the profit they have helped to produce.

48. Basic requirements for profit sharing schemes:- – That the profit sharing reward should bear a direct relation to the effect/ result. – That the payment should follow immediately after the efforts. – That the method of calculation should be simple and transparent.

49. The main types of profit sharing schemes are: – Cash : A proportion of profits is paid in cash direct to employees – Stock: A proportion of profits is paid in shares. – Approved Profit Sharing Share Schemes (PSSS): The company allocates a proportion of profit to a trust fund, which acquires shares in the company on behalf of the employees. – Mixed Schemes: A PSSS scheme is sometimes offered in addition to a cash scheme, or the latter is made available to staff before they are eligible for PSSS shares, or as an alternative to PSSS shares

50. 5.Stock Options Opportunities to buy stock at a set price immediately or sometime in future for a stated period. ESOP = in India after 1990-91 In the year 2000, 10,000 companies which had ESOP covering about 1,00,00,000 employees. Castrol, Global Trust Bank, Godrej-GE, HCL, Infosys Technologies, NIIT, Pentafour, Proctor and Gamble, WIPRO, Zee Network

51. ESOP has becoming popular in view of the following factors: – The shift from industrial to information revolution. Knowledge workers expect say and stake in the organisation in which they work, – Public policy in many countries favour giving employees a share in equity and profits. – In the wake of disinvestments and privatization of public enterprises, employees are offered shares with view to ease their opposition. – This is also considered as an effort as redistribution of wealth.

52. Why Stock Options? Attraction Retention Motivation Financial participation by the employees in the wealth created through joint efforts To garner employees commitment To develop common purpose between employers and employees To promote corporate performance Performance based reward Supplement retirement/ social security benefits

53. 6. Economic Value Added/Market Value Added Measures the difference between the return on a company’s capital and the cost of that capital. EVA is the surplus or deficit that remains after imposing a charge against after tax operative profits for the opportunity cost of equity and debt. EVA is calculated by a combination of three basic factors » net operating profit after taxes, capital and cost of capital. If the EVA is positive, it indicates that the company has created value for shareholders.

54. EVA = Total Market Value less total capital employed. MVA = How much wealth a company has created for its investors Sustained increase in EVA will bring an increase in the market value of a company

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