HUMAN RESOURCE
MANAGEMENT
TERM-3
Instructor- Kirti Mishra
Our Discussion Today
Compensation and Incentives
Variable pay and elements of successful pay-for-
performance plans.
Types of individual incentives
Group/team variable pay
Organizational incentive plans
Executive compensation
Case Discussion: Culture and compensation:
Considering performance and variable pay at SRF
Limited
Take home Activity: Allocating Merit Raises
VARIABLE PAY
• Variable pay is compensation linked to individual, group/team, and/or
organizational performance.
• Variable pay plans attempt to provide tangible rewards, traditionally known as
incentives, to employees for performance beyond normal expectations.
• The philosophical foundation of incentives rests on these basic
assumptions:
Some jobs contribute more to organizational success than others.
Some people perform better and are more productive than others.
Employees who perform better should receive more compensation.
Many employees’ total compensation should be tied directly to performance
and results (SALES)
WHY link pay to performance?
Link strategic business goals and employee performance
Enhance organizational results and reward employees financially for their
contributions
Recognize different levels of employee performance through different rewards
Achieve HR objectives, such as increasing retention, reducing turnover,
recognizing training, and rewarding safety.
7
DEVELOPING Successful Pay-for-Performance
Plans
FIT: Plan should fit ADMINISTRATION:
APPROPRIATENES
with organizational Is the plan
S: Reward
strategies and administered
appropriate actions
culture. properly?
A variable pay plan
The success of any There should be a direct includes several
incentive pay program relationship between their performance criteria.
relies on its consistency efforts and rewards. Develop clear,
with the culture of the understandable plans and
organization. continually communicate.
Make sure that what is being Use realistic performance
For example, if an rewarded is clearly linked to measures.
organization is autocratic and what is needed. Keep the plans current and
adheres to traditional rules Use of multiple measures linked to organizational
and procedures, an incentive helps to ensure that important objectives.
system that rewards flexibility performance dimensions are Identify variable pay
and teamwork is likely to fail. not omitted. incentives separately from
base pay
Metrics for Evaluating Variable Pay Plans
MEASURING THE SUCCESS OF VARIABLE PAY PLAN
• ORGANIZATIONAL PERFROMANCE
• Actual change vs. planned change
• Revenue growth
• Return on investment
• Average employee productivity change
• SALES PROGRAMS
• Increase in market share
• Customer acquisition rate
• Growth of existing customer sales
• Customer satisfaction
• HR RELATED
• Employee satisfaction
• Turnover costs
• Absenteeism cost
• Workers’ compensatory claims
• Accident rates
Individual Group/Team Organizational
CATEGORIES OF VARIABLE PAY
Group team resultsThe system of Profit sharing
Piece-rate systems:Straight piece-rate
system. Pay system in which wages are sharing with employees greater- profit sharing distributes some portion of
determined by multiplying the number of than-expected gains in profits organizational profits to employees (yearly
units produced by the piece rate for one or deferred)
unit (OUTPUT NUMBER)
and/or productivity is
A differential piece-rate system pays gainsharing (teamsharing or
employees one piece-rate wage for units goalsharing).
produced up to a standard output and a
higher piece-rate wage for units produced
over the standard
e.g Universities (research and teaching)
Bonuses: Bonus: One-time payment that CHALLENGES: Employee stock plans
does not become part of the employee’s Stock options plan Plan gives employees
base pay. 1. Same-size reward for each the right to purchase a fixed number of
“Spot” Bonuses A unique type of bonus member shares of company stock at a specified
used is a “spot” bonus, so called
because it can be awarded at any time. 2. Different-size reward for each
price for a limited period of time.
member. Employee stock ownership plan (ESOP)
Plan designed to give employees
Special incentive programs significant stock ownership in their
(Performance awards, Recognition awards
employers.
& Service awards)
Sales compensation
Salary Only
Straight Commission
Salary-Plus-Commission or Bonuses
EXAMPLE: SALARY
OF A CRICKET PLAYER
INDIVIDUAL ACTIVITY
INCENTIVE PROGRAM AT Dunder Mifflin
Paper Company
Andy/Andrew must double the growth from last quarter (4%)
So he has implemented a points system in order to get the
office to work harder (INCENTIVES). Let’s see how this goes!
https://www.youtube.com/watch?v=lQYzT49hyKo
The Good, the bad and the ugly? (Fit, appropriateness and
administration)
EXECUTIVE
COMPENSATION (CXO)
An executive typically is someone in
the top two levels of an organization,
such as Chief Executive Officer,
(CEO), President, Senior Vice
President, Chief Operating Officer,
Executive Vice President, Chief
Financial Officer, or Senior HR
Executive.
• Executives should be rewarded if
the organization grows in
profitability and value over a
period of years.
• Variable pay distributed through
different types of incentives is a
significant part of executive
compensation components.
CRITICISM: Ethical
concerns
CEO compensation has grown 940% since 1978
Typical worker compensation has risen only 12% during
that time.
By Lawrence Mishel and Julia Wolfe • August 14, 2019
Source: https://www.epi.org/publication/ceo-compensation-
2018/
CEOs made 287 times more money last year than their
workers did.
Source:
https://www.vox.com/policy-and-politics/2019/6/26/1874430
4/ceo-pay-ratio-disclosure-2018
https://www.cnbc.com/2019/08/16/ceos-see-pay-grow-1000perc
ent-and-now-make-278-times-the-average-worker.html
RBI issues new compensation norms
for PVT bank CEO remuneration
• The Reserve Bank of India (RBI) has told private banks to raise the
variable portion of remuneration to at least half of the total for their chief
executives and whole-time directors so that top management rewards
reflect the 'pay for performance' principles.
• RBI said that at higher levels of responsibility, the proportion of
variable pay should be higher.
"a substantial proportion of compensation i.e., at least 50%, should be variable
and paid on the basis of individual, business-unit and firm-wide measures that
adequately measure performance”.
• https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-issues-new-compensation-norms-for-pvt-bank-ceo-remuneration/vid
eoshow/71915419.cms?from=mdr
Case Discussion: Culture
and Compensation at SRF
Limited
DESCRIPTION:
Key Players: SRF, Chairman (Arun Bharat Ram) and the
Managing Directors (Ashish and Kartik), Company:
Conglomerate, Industry Competitiveness
Key External and Internal Challenges: Global
Commoditization, Growth of Indian Economy and Chinese
Competition and High attrition rate.
Solution: Hired consultants
Strategic Recommendations: Use BCG Matrix
(Textile is cash cow), Divest from packaging,
Specialty chemicals niche market and enter
energy business.
Evaluate the
existing
payment
practices and
policies at SRF
19
What are the HR policy
recommendations made
by the consultant?
20
What is Arun’s perspective? Do
you agree with him?
• What are Arun’s Apprehensions? Do you
agree with him?
• He says that consultants have made
“ruthless” HR policy recommendations.
Why? Do you agree?
21
What is Ashish’s perspective? Do you
agree with him?
Performance based pay would
disrupt employee focused
culture. Do you agree?
What is Kartik’s perspective? Do you
agree with him?
22
What would you
do if you were
the Managing
Director?
23
KEY TAKEAWAYS
• Variable pay, also called
incentives, is compensation that
can be linked to individual,
group/team, and/or organizational
performance.
• Effective variable pay plans fit
both business strategies and
organizational cultures,
appropriately award actions, and
are administered properly.
• Piece-rate and bonus plans are
the most commonly used
individual incentives.
Sources/Suggested Readings
• Spearman, C. 1904. 'General intelligence,' objectively
determined and measured. The American Journal of
Psychology, 15(2): 201-293.
• Lowman, R. L. 2004. Donald O. Clifton (1924-2003).
American Psychologist, 59(3): 180-180.
• Yeung, R. 2008. Successful interviewing and recruitment.
London; Philadelphia: Kogan Page.
