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  • 1. LESSON: 27Pay for performance (PFP):Learning Objectives: 1. Understand the determinants of PFP systems. 2. Identify the critical variables related to the selection of the most appropriate PFP system. 3. To know the different kinds of Pay incentives.Do you know the concept ‘ Pay for Performance’?Now let us study what it is…The PFP system put more employees pay at risk and do indeed loosen the relationshipbetween assignments and pay levels. The term PFP is a little mix leading since manyincentive systems now award something other than pay for desired performance.Objective: • To understand the determinants of effective PFP systems. • Identify the critical variables related to the selection of the most appropriate PFP system. • Review the evidence on the effectiveness of different PFP system. • Determine the relative advantages and disadvantages of the various PFP systems.Can anybody tell what could be the determinants of Effective PFP systems? 1. Worker value outcomes (Money and Prices) 2. Outcome is valued relatively to other rewards. 3. Desired performance must be measurable. 4. Worker must be able to control rate a output. 5. Worker must be capable of increasing output. 6. Worker must believe that capability to increase exists. 7. Worker must believe that increased output will result in receiving a reward. 8. Size of reward to sufficient to stimulate increased effort.
  • 2. 9. Performance measures must be compatible with strategic goals for short and long terms. Could anybody guess what are the problems in PFP programmes? Some studies indicate that the majority of employees question the integrity of their PFP system. There are many potential problems with PFP system. They are as follows: • Poor perceived connection between performance and pay. • The level of performance pay is too low relative to basic pay. The cost of more highly motivating programmes may be prohibitive. • Lack of objective, countable results for most jobs, requiring the use of performance rating. • Faulty performance appraisals systems, with poor cooperation from managers, leniency bias in the appraisal and the systems change. • Union resistance to such systems and to change in general. • Poor connection between PFP outcomes and corporate performance measures.How do you select a PFP system?In designing a PFP system three major questions should be asked. 1. Who should be included in PFP system? 2. How will performance be measured? 3. Which incentives will be used? 1. Who should be included in PFP system: In general all goups should be included in a PFP system; with one critical condition i.e. The PFp system should be developed with specific groups and conditions in mind. Many companies have different PFP systems for various classes of employees. Some companies have reward system that are compatible with the culture that attempts to minimize the distance between people at different levels in the organizational hierarchy.
  • 3. 2. How will performance be measured: Performance can measured on the basis of different organizational policies. We will discuss these methods in the later half of this unit. 3. Which incentive will be used: Incentives are used on the basis of Merit-Pay plans. They are 1. Use a bonus system in which merit pay is not tied to basic salary. 2. Maintain a bonus ranging from 0 to 20% for lower pay levels and from 0 to 40% for higher pay levels. 3. Take performance appraisal seriously. Hold raters accountable for the appraisal and provide training. 4. Focus on key organizational factors that affect the pay system. Information systems and job design must be compatible with the performance measurement system. 5. Include group and team performance in evaluation. evaluate team performance wherever appropriate and base part of individual part of merit pay on the team evaluation. 6. Consider special awards separately from and annual merit merit allocation that recognizes.PAY INCENTIVESNow friends, we shall discuss about various pay incentives which will be provided bydifferent organization, before that can any one tell, What are the different types of incentiveswhich are given to employees.An Incentive or Reward can be anything that attracts a employee’s attention, stimulates himto work; Other words it can define as “an incentive scheme is a plan or programme tomotivate individual or group performance.In other terms, incentives are also called as ‘payments by results’.Incentives are paid in addition to wages and salaries. Incentives depend upon productivity,sales, profit, or cost reduction efforts.Now, let us also see the different incentive schemes.There are: (i) Individual incentive schemes, (ii) Group incentive programs and (iii) otherincentive schemes.
  • 4. Individual incentives are applicable to specific employee performance. Where a given taskdemands group effort for completion, incentives are paid to the group as a whole. Theamount is later divided among group members on an equitable basis and other incentiveschemes such as...Fringe Benefits: These include such employee benefits as provident fund, gratuity, medicalcare, hospitalization, accident relief, health and group insurance, canteen, uniform, recreationand the like.Perquisites:These are allowed to executives and include company car, club membership, paid holidays,furnished house, stock opinion schemes and the like. Perquisites are offered to retaincompetent executives.Non-monetary benefits:These include challenging job responsibilities, recognition of merit, growth prospects,competent supervision, comfortable working conditions, job sharing, and flextime.Rewards:People join organizations expecting rewards. Firms distribute money and other benefits inexchange for the employee’s availability, competencies and behaviours.Types of Rewards: 1. Membership and seniority-based rewards: Benefits an employee receives depend on firm which he or she joins. An MBA taking up a job in Wipro or Infosys gets more benefits than the boy or girls who joins a state government undertaking. In the same firm, a senior employee receives more benefits than his or her junior employee. Advancement, pay raises, retirement benefits and perquisites depend on seniority of an employee. 2. Job Status-based Rewards: Every firm rewards employees for the status of the jobs they are holding. Firms use job evaluation system, which helps establish differentials in status of jobs. Status differentials are used as the basis for establishing salary/wages differentials. Jobs that require more skill and effort have more responsibility and have difficulty working conditions would have more value and consequently would be place in higher pay grades. Firms that do not use job evaluation system still reward job status based on pay survey information about the labour market. A supervisor will receive higher rewards than a purchasing assistant as the job of the former enjoys better status than a letter. It has move value to the organisation (calculated by the job evaluation system or pay survey) and therefore employees in that job receive more status-based rewards in the orgn. High status jobholders are also rewarded with more perquisites.This incentive programme usually provides monetary rewards, but may also include avariety of non-monetary rewards or prizes.
  • 5. Features of incentive plan: • These incentive plans usually consist of both monetary and non-monetary elements. • The timing, accuracy and frequency of incentives are the basis of a successful incentive plans. • These plans should be properly communicated to employees. So this will encourage individual performance, provide feedback and encourage redirection.TYPES OF REWARDS/INCENTIVES We have seen what is an incentive, now we will discuss what are the types of incentivesprovided by the organizations,An incentive or reward can be anything that attracts a employee’s attention, stimulates him towork; Other words it can define as “an incentive scheme is a plan or programme to motivatean individual or group performance.This incentive programme usually provides monetary rewards, but may also include a varietyof non-monetary rewards or prizes.The Rewards are classified into two:* Direct compensation* Indirect compensation* Direct Compensation: - It includes the basic salary or wage that the individual is entitledfor his job; this include overtime work, holiday premium, bonuses based on performance etc.* -*Indirect Compensation: It includes protection programmes; pay for time not worked,services and perquisites. But these are maintenance factors rather than reward.Incentive (Structure of incentives)
  • 6. INTRENSIC EXTRINSIC • Participation in Decision Direct Indirect Non financial making Compensation Compensation Compensation • Greater job freedom and • Basic wage or • Protection • Preferred direction salary programme furniture • More responsibility • Overtime and • Pay for time not • Preferred • More interest in work holiday worked lunch hours • Opportunities for premiums • Services • Assigned personal work • Performance perquisites parking space • Diversity of activities sharing • Business • Stock option cards • Own secretarySummary: The PFP system must support the competitive strategy and values of theorganisation. It the strategy emphasizes entrepreneurial activity and independent effort,individual PFP system become increasingly important and effective. Incentive systems mustbe compatible with organizational values. Openness and trust are necessary if employees areto accept the standards and believe in the equity of the rewards.The bottom line remains that for any PFP system to work, rewards valued by the workermust be clearly linked to outcomes valued by internal and, most important, externalcustomers. Virtually all the research on high performance work systems supports the viewthat proper PFP systems can help to create and sustain a competitive advantage when thefocus is on organisations that follow academic guidelines for development and maintenance,PFP systems look a winner.Article--1FOR FURTHER READING: September 2003: Aon Consulting
  • 7. Compensation ArticlePaying for Performance: Easier Said Than Done"Pay-for-performance" is typically one of the top goals of nearly every organization. What mostemployers are thinking of when they talk about pay-for-performance is a base salary program that trulydifferentiates awards based on performance. However, the vast majority of organizations and theiremployees are dissatisfied with the programs that purport to provide performance-based rewards. Why isthis so and what factors are key to a successful program? 1. Little agreement or common language exists within the organization regarding what is meant by pay-for-performance. Many equate it with what is known as merit pay, or the differential distribution of base salary increases based on individual annual performance. Others consider any variable ("incentive") pay program to fit within this definition. While either of these definitions may relate to pay-for-performance, only when the organization agrees on a common understanding of the purposes and processes associated with pay-for-performance is there any hope of developing and implementing an effective design. 2. Organizational leaders are often unable to reach consensus on how such a program will help support organizational performance or help managers better lead and develop their people. The best programs are treated as organizational effectiveness tools and not as administrative procedures that have to be carried out because "HR said so."3. Most performance-based reward processes are based on performance management processes that areflawed, irrelevant, or administrative in nature, and whose primary purpose is to determine salaryincreases. A successful performance management process must help communicate and build individualand organizational value, should not be experienced as burdensome, and requires well-trained managers.In addition, the program must strongly differentiate the amount of increase and/or the level of paybetween average and extraordinary performers. If, in economically stressful times, salary increase moneyis lacking, mechanisms of incentives, spot bonuses, and non-cash recognition become even moreimportant4. Often compensation programs––pay-for-performance included––are viewed as fully formed solutions(e.g., put in a new performance management process, attach a merit pay "matrix," and, voilá, you havean effective program). Or design a new incentive plan with the right metrics, and you will have both thedesired performance and associated rewards. In truth, the effectiveness of a compensation program ismore dependent on the following factors than on the specific design:.Up-front alignment processes––which ensure that any new designs support the business objectives andcultural values of the organization and, to the extent possible, incorporate management and employeeinput. Effectiveness and speed of the implementation––the extent to which affected employees understandthe compensation program and buy into it, managers are properly trained, and the new processes fitwith the organizations administrative and technology systems.5. Pay-for-performance is often viewed in a piecemeal fashion. An effective performance managementprocess must be viewed holistically––as more than a mechanism to deliver pay increases. As such, itrequires ongoing communication, feedback, and true developmental action planning, as opposed to aonce-a-year required meeting.If you translate pay-for-performance into making your heaviest investment of resources (money andtime) in your top performing/ contributing people and/or your high potentials, it is clear that the totalreward offering —both the tangibles and intangibles––defines the ability of an employer to attract,
  • 8. reward, and retain its key people. Compensation can be a potent tool for retaining important contributorsbut only in the context of an integrated total reward package that supports a winning business strategy.In summary, pay-for-performance programs will thrive only within a true performance culture that issupported by across-the-board organizational commitment. Such a commitment requires inculcation ofeveryone in the culture, a clear and fully understood definition of what performance means, and anemphasis on performance not only within HR processes but also strategically and operationally––all ofwhich are supported by effective, ongoing management training and employee development.####Aon Consulting FORUM September 2003Article: 2Meyners pays for performance Abstract:Meyners & Co. had to successfully increase employees commitment to the firms overallmarketing and revenue growth goals. To accomplish this the firm designed andimplemented a pay-for-performance system in July 2002. The new compensationprogram includes a yearly salary increase that reflects a cost-of-living adjustment(COLA) and three bonus pools. It calls for the firm to evaluate employee performance inthree areas: core values, core competencies and meeting goals. Early indications arethat the individualized evaluation process is a motivating employee. For core-valueassessments, Meyners uses a peer-to-peer input that results in a thorough, well-rounded evaluation. For meeting goals, each employee and supervisor creates a win-winagreement that includes specific performance numbers or other measures to meet. Forfirms thinking about undertaking a similar effort, professionals at Meyners say to keep The following pointers in mind: 1. Prepare to take time. 2. Frequentcommunication is paramount. 3. Have adequate administrative support.It was no small feat for Meyners and Co.s leadership to offer employees nonstop support andguidance while both management and staff refined the firms core values and worked outwhat behaviors demonstrating them would consist of at different levels of the workplacehierarchy. As productive as the process was, it was only the foundation. Next, Meyners hadto successfully increase employees commitment to the firms overall marketing and revenue-growth goals. To accomplish this firm designed and implemented a pay-for-performancesystem in July 2002. The new compensation program includes a yearly salary increase that reflects a cost-of-living adjustment (COLA) and three bonus pools. It calls for the firm to evaluateemployee performance in three areas: core values (workplace behavior), core competencies(business skills) and meeting goals (performance-measures win-win agreements). Earlyindications are that the individualized evaluation process is a motivating employee. Janet
  • 9. McHard, CPA and manager in the litigation and business valuation services department, saysthe new system helps underscore what the firm values. If you contribute, not only will yourefforts be recognized, but also "youll be compensated for having worked hard to meet thosegoals," says McHard. "This system puts my job destiny in my hands. It removes theuncertainty of: If I do a good job, will anyone know? From my perspective, thats the coolestthing about it." Heres how it worksEVALUATING EMPLOYEE BEHAVIORMeynerss core values-which employees across the board had developed, defined andadopted-clarify the firms goals, standards of etiquette and many other aspects of day-to-daywork. Those values-collaboration; commitment to maintain self, team, firm and customerbalance; commitment to quality and responsive customer service; commitment to the greatergood; continuous and never-ending improvement; creativity; fun; innovation; integrity;mutual respect, honesty and trust; profitability and risk taking-represent the organizationsbehavioral and interactive norms. The firms new performance evaluation System measureshow staff members live up to them as they work with peers, managers and subordinates.For core-value assessments, which take place during an employees anniversary month,Meyners uses "360-degree" feedback. The process includes peer-to-peer input that results ina thorough, well-rounded evaluation. It works this way: To evaluate a staff member (thesubject), his or her supervisor selects four individuals who regularly work with that person,who has a say in which four are chosen. Each subject selects two additional evaluators, onewho work inside his or her department and one from another section. Using a form thatdescribes what living a particular core value consists of at that persons level in the firm, thesix people "grade" the staff member. For instance, for the value "commitment to maintainself, team, firm and customer balance," a level-one-employee action would be: "Takesappropriate time away from work (including lunch, vacation, breaks) as needed."Each evaluator then rates how successfully the subject has lived the value by checking one ofthree ratings: "Needs mentoring" (individual is not meeting expectations); "lives the corevalue" (he or she is meeting expectations) or "role model" (he or she has clearly andconsistently surpassed expectations). The results are tabulated and electronically scored. Toencourage candor, subjects and supervisors do not see individual evaluators ratings butinstead see a summary of the results in each area. The human resources clerk coordinates theprocess and maintains and files the evaluation records.Employees receive a core-values bonus based on the percentage of possible points they earnon the evaluation. For example, someone who earns 70 points out of a total of 100 possiblepoints gets 70% of $1,000 (the predetermined maximum), or a bonus of $700. The executivecommittee sets the baseline bonus, which is linked to the employees staff level, years withthe firm and responsibilities. Employees feel they get credit for a range of professionalinteractions under the new system (see exhibit 1, page 43).
  • 10. TECHNICAL AND BUSINESS SKILLSTo help Meyners focus on its profitability goals, consultant Coral Rice of the GrowthPartnership (TGP)-who has worked on the firms growth program from the beginning-usedinformation collected in an earlier phase to develop a list of general categories for corecompetencies. Those competencies represent the specific job-related skills employees need to"get results now and develop the firms ability to get better results in the future," she says.The general categories are• Client development.• Client management.• Business management.• Technical expertise and work quality.• Personal participation and professional development.• Leading and developing others.• Administration.At all levels, the first step for each department was to determine its core competencies forevery position. To do this, staff members revised their job descriptions and listed specifictasks associated with every competency according to the categories. The core competenciesfor comparable jobs managing, for example-are very similar, but they differ based on specificdepartments and other duties.Each department chose its own approach to the process of expressing the competencies foreach of its positions. Janet McHard was on the management team in the litigation andbusiness valuation department and helped develop the competencies for the positions ofprincipal, director, manager, senior accountant and staff accountant. "In each area wedeveloped performance-based competencies or core criteria" and listed 6 to 10 bullet pointsfor each position, McHard says.As an example of how the client-development competency differs according to employeelevel,* For senior managers (level three), the competency is: "Take a leadership role in firmwidemarketing efforts."* For senior staff (level two), the competency is: "Develop prospective client relationships asskills allow" (see exhibit 2, at left).* For staff (level one), the competency is: "Recognize prospective client relationships andseek ways to develop them."Steve Comeau, JD, director of litigation and valuation services, says that while the process ofdefining competencies and job duties for each position took more than six weeks of drafts,meetings and discussions with everyone in the department, the time was well spent. Theprocess not only clarified what the firm expected individuals to do, but it was "helpful ingetting the group on the same page," says Comeau. He believes that having everything down
  • 11. on paper simplifies the process of determining promotion eligibility and helps with recruitingand hiring people.The core-competencies evaluation process is similar to a traditional supervisor-employeeperformance review. On the employees anniversary, the supervisor completes jobperformance forms that will be the basis of the evaluation. Supervisors rate employees on thesix-part scale: "Far above expectations," "Above expectations," "Meets expectations,""Below expectations," "Far below expectations" and "Not applicable." Employees receive acore-competencies bonus based on the percentage of possible points they earn on theevaluation multiplied by the employees predetermined bonus (bonus x percentage), just asthey receive for their core-values evaluation. As part of the annual core-competencies review,the employee and supervisor discuss the individuals development plan, which includes goalsfor professional development, such as earning a special certification, and pinpoints skills tostrengthen or develop, such as writing and public speaking.HITTING THE NUMBERS OR WIN-WIN AGREEMENTSCore competencies are specific skills and duties employees must be able to perform well tomeet the firms profitability goals, says Rice. Each employee and supervisor creates a win-win agreement that includes specific performance numbers or other measures to meet.Tailored to each individual, the win-win agreement is "the product of the consensus ofmanagement and the employee," Comeau says. "Its a way to make personal and professionalgrowth part of daily and long-term activity," he saysFor example, a competency to "participate in departmental strategic objective teams," mightresult in a "win-win" goal with a measurable element such as: "Participate in the (name ofteam) with 90% attendance." Another example: For the competency "pursue/accomplishprofessional certification," a win-win agreement goal might be: "Obtain CVA certification nolater than 12/31/03."The goals in win-win agreements may be similar for people in comparable roles, but theactual numbers or measures likely will differ. Many targets will be tied directly to theprofitability of the firm and have to do with generating income. The supervisor and theemployee specify the measures and numbers based on what each thinks is possible.Partners and managers have win-win agreements that deal directly with the firms financialperformance as well as department and individual goals. For instance, a partner may agree tobring in a certain dollar amount of business in his department. Or a staff accountant mayagree to take a set number of courses toward a certification by a certain date. This increasesthe employees professional capabilities as well as those the firm has to offer clients.If the firm shows a profit at the end of the calendar year, employees who achieve 75% of thetotal possible points available in the win-win agreement are eligible for a bonus. Eachdepartment determines profitability goals during the annual budget process based on theirbillable hours, revenue goals and anticipated expenses.The partners who make up the executive committee approve the departmental budgets inNovember to coincide with the start of the profitability bonus year, which runs from
  • 12. November through October. In December the executive committee meets to allocate theprofits among all the stakeholders. The committee determines a gross allocation for eachdepartment. How well a department met its profitability goals determines how much of theprofits it will be allocated. The department heads use agreed-on organizational criteria andtheir own judgment to allocate that profit to the employees.LIGHT AT THE END OF THE TUNNELAlthough the hard numbers for measuring the effects of the new pay and evaluation systemarent in yet, Meynerss litigation services partner Thomas Burrage, CPA, says it hasimproved morale and increased commitment to the firms goals. The overhaul of itscompensation and performance process-sensitive issues for employees-will continue torequire time, effort and patience on the part of the entire firm as it plays out.For firms thinking about undertaking a similar effort, professionals at Meyners say to keepthe following pointers in mind.Prepare to take time. Meyners has invested a substantial amount of time to define values,core competencies and goals as well as to analyze and describe exactly what is expected ofemployees. Burrage says the firm has spent "thousands of hours" in meetings to come upwith the core values, define the job descriptions and explain each part of the process to staff.Because the performance evaluation system is well defined and staff members understandwhat is expected of them, "ultimately, the process is going to be automatic and simple touse," says Comeau.Frequent communication is paramount. Instituting a new pay-for-performance system hasrequired constant communication because the change involves peoples money-and extendsinto every aspect of work life. "Until you understand the process and the system, it appearscomplex," says McHard, so we keep answering the questions that come up. Meyners hasdone this through FAQ sheets, posters and meeting after meeting. Under the old system,salary increases were "some percentage" of an employees salary, says a Meyners documentexplaining the new three-part pay-for-performance plan. "While the increase was intended toreflect past performance, it often was difficult to assess performance accurately andconsistently throughout the firm."Employees are particularly sensitive when it comes to salary, says Burrage. "Any time youmodify someones compensation system, you have to work hard to reassure them you arenttaking anything away," he says.Have adequate administrative support. Because many more people are involved in givingevaluations-especially of core-values performance-and because each employee gets threeevaluations-core values, core competencies and the win-win agreement-there is a great dealof work involved to keep track of evaluation dates, distribute and tabulate the various formsand calculate the bonuses. The firm has hired a human resources clerk who does this andattends to other compensation and payroll duties involving the new pay-for-performanceprocess. Prior to the new process, a senior administrative professional had handled manysuch duties, but Meyners created a new position to handle the growing amount of HR-related
  • 13. work as the company grew. The firm uses an HR computer program to process theevaluations.Develop measurement systems. The firm would like to measure many things-such as thenumber of referrals shared between departments-but it has found the most important things tomeasure have been the various goals outlined in win-win agreements. "You need to have thesystems in place to measure the things you hold people accountable for," says Comeau (see"Accountability by Numbers,"THE PAYOFFComeau believes the new pay-for-performance system sends a strong message to employeesthat the firm cares about them as well as profits. "The new system takes a global approach togiving incentives for behavior. Its not just about dollars," says Comeau. "The processidentifies behavior that not only helps us make money but also evolve as a firm-and get betterprofessionally and personally at every level," he says. "Its about the future as well as thepresent."For the next stage of the firms development, says Burrage, Meyners will determine specificmarketing strategies and train staff to carry out duties to support and reach the firms businessgoals.