Compensation and employee behaviour Part II

Compensation and Employee Behaviour: Part II

Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)

Professor

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Payment by Result (PBR)PBR incentive schemes are:➢Individual time saving – incentive paid for time

saved in performing a task ➢Measured Day work – a fixed amount paid for

predetermined & agreed level of working ➢Group and plant-wide incentives - employees in

plant/organisation share bonus linked to output ➢Commission - a Bonus paid linked to sales,

reward pre-determined or percentage of total sales

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Disadvantages of PBR schemes Operational inefficiencies affect incentive Quality of work may be put on the line to

achieve high levels of outputs Quality of working life may start to diminish,

de-motivating employees Obscurity of payment arrangement,

employees unable to comprehend their incentive schemes properly

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Plant/Enterprise Based SchemesFocus on whole of organisation It comprises schemes like Gain-sharing and

Productivity bonus. PRP Individuals receive incentive as

percentage increase to basic salary linked to performance

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Modern Pay Schemes

Share option schemes permit companies to grant share to directors and employees in tax- effective manner

They are given opportunity to buy shares in their companies at a future date, but at the current price

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Types of shares schemes Employee share ownership plan (ESOP) - an

employee benefit trust linked to share participation scheme.

Trust receives contributions from company or borrows money and then buys shares in company and allocate to employees

All employee share schemesExecutive share incentive scheme

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AdvantagesThese are common and these are well

understood by executive /employee and shareholders

In some tax regimes, these enjoyed significant tax advantage

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These are often unsuitable for well established companies

These tend to use up shares more quickly than other types of scheme, creating dilution difficulties for smaller capital base company

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Disadvantages

Cash-Based awards Most common profit-sharing arrangement - to

pay employees cash bonus Paid as a proportion of annual profits

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AdvantagesIncreases identification with the firm,Recognises that everyone contributes to

creating profit.

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DisadvantageDoes not provide an individual incentiveAmounts distributed are taken for granted

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Individual Performance Related PayIndividuals receive incentive as increases to

basic pay or cash bonuses, linked to performance

Scope provided for a joined pay progression within the pay bracket

High level of achievement may be rewarded by cash bonuses that are not consolidated

Individuals are eligible for such bonuses when they have reached top of pay bracket and completely progressed along their learning curve

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Advantagesacts as a monitorencourages and supports desired behaviourdelivers message that performance,

competence and skill importantprovides means for defining and agreeing

performance and competence expectation can reinforce the organisation valuecan help to achieve culture change

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Problems with Individual Performance Related Pay

Extent to which IPRP motivates questionableRequirements for success difficult to achieveMoney by itself not result in motivationCannot be assumed that money motivate

everyone equallyFinancial rewards may motivate them who

receive it but it may also de-motivate those who haven’t

IPRP can create more dissatisfaction than satisfaction if they are perceived to be unfair

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Problems with Individual Performance Related Pay

Depends on the existence of accurate and reliable methods of measuring performance

Employees can be suspicious and may fear that performance standards will be raised continuously

IPRP decisions depend on judgement of managers, in absence of reliable criteria could be unfair

IPRP is based on assumption that performance completely under control of individuals but it can be affected by system in which they work

IPRP proved difficult to manage

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Rewarding Team Performance Aim of team incentive :- to reinforce behaviours that lead and sustain

effective teamwork- to encourage group endeavour and cooperation,

rather than to concentrate only on individual performance

- Research showed that most common method of providing team pay was to distribute bonus to team members.

- Design for team pay will be contingent on requirements and circumstances of organisation, and these will always differ 16

Advantages of team payTeam pay can: ➢Encourage team-working and co-operative behaviour

➢Act as a lever for cultural change in the direction of quality and customer focus

➢Enhance flexible working within teams and encourage multi-skilling

➢Provides an incentive for group collectively to improve performance and team process

➢Encourage less effective performers to improve in order to meet standards

➢Serve as a means of developing self-managed or directed teams.

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Disadvantages of team pay

Effectiveness depends on well defined teams, difficult to identify and they need to be motivated by a purely financial reward

Team pay may seem inappropriate to individuals whose feelings of self-worth could be diminished

Distinguishing what individual team would be rewarded may be difficult to identify

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Merit Pay

These programs assume that employees’ compensation over time should be determined, at least in part, by differences in job performance

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Who participates?Merit pay programs most often introduced in

private sector ‘for profit’ of the economy rather than in public sector organisations

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Elements of Merit PayManagers rely on objective as well as

subjective performance indicators to determine whether an employee will receive a merit increase and the amount of increase warranted

Employees must know that their efforts in meeting production quotas or quality standards will lead to pay raises

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Elements of Merit Pay

Companies that use merit programs must ensure that the funds needed to fulfil these promises to compensate employees are available

Organisations should make adjustments to base pay according to changes in the cost of living or inflation before awarding merit pay raise

Effective performance appraisals drive effective merit pay programs

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Thank you