Role of Appraisal in Rewarding Performance

Compensation precedes and succeeds performance

management and appraisal system. PMS provides the criteria for rewarding performance. Compensation plans, policies and inducements are aligned with performance management. Appraisal helps in rating employees performance which becomes the basis for administering compensation increases.

Incentives
An incentive is an important mechanism that encourages and

motivates managers to achieve organizational objectives. An incentive can be monetary or non-monetary.

Approaches to Rewarding Performance

Individual based Compensation system: It recognizes the performance and

productivity of an employee and rewards for jobs well done. It is suitable for organization with wide array of different jobs. Team based compensation system aims to reward team performance rather than individual performance. It is suitable for organizations with a large number of employees performing similar jobs.

Types of Incentive Plans

Individual Incentive Plan
Halsey Premium Plan: In this a minimum time wage is guaranteed. The

time allowed for completing the job is set from the records of previous performance. The amount of time saved multiplied by the hourly rate forms the sum that is given to the employees. Taylor differential Piece rate system: In this time allowed for completing the job is set. Two rates of wages are determined-higher rate and lower rate of wages. Employees completing their jobs within or before the standard time allotted get higher rate while employees completing their jobs after the standard time allocated get lower rate. if output<standard, 80% of piece wage rate. if output>standard, 120% of piece wage rate.
Bedaux Point Premium Plan: The standard time for each job is fixed. The

emp. who are not able to complete the work within standard time are paid wages at the normal time rate. Those who are able to complete their work earlier are paid bonus equal to the wages for the time saved. Bonus paid to the emp. is 75% of the wages for the time saved. The remaining 25% goes to the supervisor.

 Individual Incentive Plan

Commission System: Sales commission is a form of sales incentive

which provides emp. with a bonus proportionate to the financial values of sales. The commission on sales generated by sales personnel in a given period may be granted in addition to his normal pay or commission may be the only form of sales force compensation. Increasingly commission portion of compensation is getting larger and is estimated to be about 40% of the income of average sales personnel.

Advantages of Individual Incentive Pay Programs They promote relationship between pay and performance. Individual Incentive Pay Programs promote an equitable distribution of compensation within companies. Thus it enables companies to retain the best performers. Employees strive for excellence when they expect to earn incentives. Disadvantages of Individual Incentive Pay Programs Highly efficient workers are not likely to increase their performance beyond their reward compensation. It depends upon comprehensive performance measures to properly grant rewards. It may encourage undesirable workplace behavior. It promotes individualistic culture which does not get valued in some countries.

Group Incentives Plans

Gain Sharing Plan: Under this plan, all employees are paid an agreed upon

bonus irrespective of differences in individual efficiency or output. Scanlon Plan: It includes monetary rewards to employees for productivity improvement. It emphasizes teamwork to reduce costs, suggestion systems that route cost-saving ideas through a labor-management committee that evaluates and acts on accepted suggestions. It is a monetary reward based on productivity improvements to encourage involvement. Profit Sharing: Increased production, increased efficiency and lower costs are the main goals of profit sharing plan. Profit is shared among employees at agreed level. Cash plans pay out profit shares at regular intervals. Deferred plans put the profits to be distributed in the hands of a trustee, and distribution is delayed until some event occurs. This type of plan is most often tied into a retirement system.

Scanlon Plan

Avg Labor Cost per year of a manufacturing Company=$44,000,000 Avg Sales Value of the production (SVOP) per year=$83,000,000 Scanlon Ratio=labor costs/ Sales Value of the production Scanlon Ratio=$44,000,000/$ 83,000,000=0.53 The ratio of 0.53 is the base line. Any improvement are shared with workers In 2006, The Labor Cost per year =$3,100,000 (SVOP) = $7,200,000 Scanlon Ratio=$3,100,000 /$7,200,000 =0.43 Labor costs as per Scanlon Ratio for SVOP of $7,200,000 =0.53* $7,200,000 =$3,816,000 Thus savings are= $ 3,816,000- $3,100,000=$716,000 is available for distribution as a bonus.

Advantages of Group Incentives It is easier to develop performance measures for group incentive plans than they can for individual incentives. Greater group cohesion is associated with group incentives. Disadvantages of Group Incentives Group incentives may lead to employee turnover because of free-rider effect. Group members feel uncomfortable with the fact that other members performance influences their compensation level.

Gainsharing
Purpose To drive performance of an organization by promoting awareness, alignment, teamwork, communication and involvement.
The plan commonly applies to a single facility, site, or stand-alone organization.

Profit Sharing
To share the financial success of the total organization and encourage employee identity with company success.
The plan typically applies organizationwide; companies with multiple sites typically measure organization-wide profitability rather than the performance of a single site. Payout is based on a broad financial measure of the organizations profitability.

Application

Measurement

Payout is based on operational measures (productivity, quality, spending, service), measures that improve the line of site in terms of what employees do and how they are compensated

Funding

Gains and resulting payouts are self-funded based on savings generated by improved performance. Payouts are made only when performance has improved over a historical standard or target.

Payouts are funded through company profits.

Payment Target

Payouts are typically made when there are profits; performance doesnt necessary have to show an improvement.

Gainsharing Payout Frequency Method of Distribution Payout is often monthly or quarterly. Typically employees receive the same % payout or cents per hour bonus.

Profit Sharing Payout is typically annual. The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower level employees. Profit sharing often is viewed as a entitlement or employee benefit. Little impact on behaviors since employees have difficulty linking what they do and their bonus.

Pay for Performance Plan versus Entitlement Impact on Behaviors

Gains are generated only by improved performance over a predetermined base level of performance. Gainsharing reinforces behaviors that promote improved performance.

Employee Stock Ownership Plan(ESOP)

Under ESOP, companies grant employees the right to

purchase shares of company stock. Types of Stock

Incentive Stock Options- Employees purchase the stock in

the future at a predetermined price. The predetermined price equals the stock price at the time employee receives the stock option. Restricted Stock options: The employees do not have ownership control over the disposition of the stock for a predetermined period, often 5-10 yrs.

Employer Benefits for ESOP

It assists in establishing and maintaining a stable, high

performance workforce. It can act as golden handcuffs to retain desired employees. It saves cash for the company since employees are paid in equity. It aligns the interest and financial goals of employees with those of shareholders. The employer might pay lower wages, recognizing the possibility of significantly larger total compensation through stock acquisition opportunities.

Employee Benefits for ESOP

It gives employees equity opportunities with no cash

investment. Employees have a chance to voice their views in the policy making levels of the organization. Limitations Stock Market Fluctuations: It is beyond the control of the employees or their companies. Cost of Options: Often employees are unwilling to pay close to the full cost of options. Not possible in non-stock companies.

Pay Mix Varies Within the Structure

Fringe Benefits
Fringe Benefits are those benefits which are provided

by an employer to or for the benefit of an employee and which are not in the form of wages, salaries and time related payments Benefits and services are indirect compensation because they are usually extended as a condition of employment and not directly related to performance.

Types of Fringe Benefits

Statutory Benefits: These are those benefits which an

organization is legally required to provide to its employees. Voluntary Benefits: These benefits an organization provides of its own free will and volition.

Statutory benefits
Compensation benefits: In case of accidents in industrial

establishments resulting into temporary, partial or total disablement, the employee or his legal heir shall be eligible to compensation as per provisions of Workmens Compensation Act, 1923. Insurance benefits: Employees working in industrial establishment and drawing wages upto Rs10,000 per month shall be provided insurance benefits under provisions of Employee State Insurance Act, 1948. In this employee contributes @1.75% of wages and employer contributes @4.75% of wages. PF benefits: Employees working in industrial establishment and drawing wages upto Rs 6,500 per month shall be provided PF benefits . In this employee and employer contribute @ 12 % of wages. Out of the 12 % contribution by the employer, 8.33% goes to employees pension fund.

Statutory benefits
Gratuity Benefits: Employees working in industrial establishment

shall be provided with gratuity benefits who have worked for not less than 5 yrs. Gratuity = (Wages last drawn *15 * Service Period)/26 Welfare benefits: First Aid, Canteen, Rest rooms, Creches, Welfare Officer

Voluntary Benefits
Medical Assistance: Hospitals, Medical Insurance. Accident Insurance: Group accident policies. Consumer Societies Loans and advances Housing Educational assistance Transport

Pay-Mix Policy Alternatives

Performance - Driven Market Match

Benefits 17%
Options 16% Bonus 17% Base 50%

Benefits 20% Options 4% Bonus 6% Base 70%

Work - Life Balance

Security (Commitment)

Benefits 30% Base 50% Options 10% Bonus 10%

Benefits 20%

Base 80%

Flex Plan/Cafeteria-Style Plans

Cafeteria plans or flex plans that offer extensive lists of benefit options in

exchange for a fixed amount to spend have grown more popular. Flex plans provide a means for organizations to identify employee benefit preferences and for employees to show clearly which benefits mean most to them. Employees are individually allotted a fixed amount to spend on purchasing benefit options, which allows organizations to better manage benefits and, in turn, costs. The outcomes of a cafeteria plans are desirable as they are known to reduce absenteeism and turnover.

Executive Compensation
Executive Compensation: It refers to short-term and

long-term financial and non-financial rewards given to top ranking executives under a contractual, legal mandate. Principle of Executive Compensation:
Attracting and retaining talents Upholding shareholder interests: Executive compensation

should be linked with performance and profitability of the organization.

Agency Theory
Ownership of a firm is distributed amongst thousands

of shareholders of joint stock companies. The relationship between an executive(agent) and shareholder(owner) signifies an agency relationship. Under agency theory, shareholders delegate control to top executives to represent their interests. Top executives do not share the same interests as the shareholders. The shareholders objective is to protect the companys competitive interests and they use compensation to align executives interest with shareholders interest.

Executive Compensation in India

Name Company Designation Compensation (Rs in Lakhs) 2,451 1,267 Mukesh Ambani Sunil Mittal Reliance Industries Bharti Airtel CMD CMD

Naveen Jindal

Jindal Steel and Power

Tata Motors L&T

Ex VC and MD

1,354

Chairman CMD

52.45 584

Source: Business India, November, 2006

Components of a Executive Compensation Plan

Base Salary

Short-term performance bonuses

Stock Compensation Long term performance bonuses

Severance packages
Wide variety of benefits and perquisites

Components of a Executive Compensation Plan

Base Pay: It is the fixed element of the annual cash

compensation. It depends upon the pay structures i.e. pay grades and ranges. Annual Base Pay is relatively a small part of CEOs compensation. Performance Bonus: To augment the base salaries of executives, bonus have ranged from 50% of base pay to 10 times base pay. The factors determining bonus are: company profits, financial condition of the company, business conditions and future prospects. Stock Compensation: Company stock shares are the main form of executives deferred compensation. Companies design executive stock compensation plans to promote an executives sense of ownership of the company.

 Long term Performance Bonus: These are cash payments

similar to the short-term bonus awards provided to corporate executives. The major difference is that the receipt of the award is 2 yrs or more into the future. The receipt of the award is based on multi year achievement of established performance related goals. Severance Pay: Many executive compensation plans include features designed to keep the involved individual in the company. A major part of severance package may be an employment contract which may include pension, life and medical insurance, widows pension, severance payments like golden parachutes.

 Perquisites: Company provided car, Chauffeured Cars, Spouse

travel, Use of Company plane, Club membership, Home entertainment allowance, Medical expense reimbursement, Low cost loan, Special living accommodation etc.

Key players in setting Executive Compensation

Executive Compensation Consultants-They propose

several recommendations for alternate pay packages. Board of Directors (BOD) They have approximately 15 members. They include CEO and top executives of other successful companies, distinguished community leaders, well regarded professionals. Compensation Committee- BOD within and outside the company make up a companys compensation committee. Outside members are included to minimize conflict of interests.

Ethical Considerations: Is Executive compensation Fair

Attract and retain top talent
Income disparities between executives and other

employees. Lay offs borne by workers and not executives International competitiveness

CONCLUSION