Your SlideShare is downloading. ×
TCS - Reward System - Detailed Report
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

TCS - Reward System - Detailed Report


Published on

This report is my term group project. It talks about the hr policies in TCS, then mainly on compensation structure. It covers the reward and award system. TCS follows Performance Appraisal of Balance …

This report is my term group project. It talks about the hr policies in TCS, then mainly on compensation structure. It covers the reward and award system. TCS follows Performance Appraisal of Balance Scorecard and Compensation structure based on EVA model. Award Process also covered over here.

Published in: Business

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. REWARD SYSTEM IN TCS Submitted to DR. PARMESWAR NAYAK Submitted by Aashima Gulati 11DM003 Neeraj Nayan Choubey 11DM086 Vinita Bansal 11DM193 Siva Shanmuga Priya N S 11EMPDM204BIMTECH Date:Greater Noida 01/09/2012
  • 2. ACKNOWLEDGEMENTThe success of this project depends largely on the encouragement and guidelines of ourProfessors and the team work of all the members. We take this opportunity to expressour gratitude to the people who have been instrumental in the successful completion ofthis project.We would like to show our greatest appreciation to Dr. Parmeswar Nayak, for hisencouragement and guidance to materialize this project successfully.The supportive behaviour exhibited by all the team members is worth mentioning. 1
  • 3. TABLE OF CONTENTS Title Page Acknowledgement 1 Table of Contents 2 Executive Summary 31. Company Profile 42. Literature Review 63. HR Policies and Information 154. Critical Analysis of EVA in TCS 295. A Comparative Analysis 316. Recommendations 33 Appendix – I - Abbreviations 34 References 35 2
  • 4. EXECUTIVE SUMMARYIn a competitive business climate, more business owners are looking at improvements inquality while reducing costs. Meanwhile, a strong economy has resulted in a tight jobmarket. So while small businesses need to get more from their employees, theiremployees are looking for more out of the businesses. Employee rewards andrecognition programs are one method of motivating employees to change work habitsand key behaviors to benefit a small business. But first, we will look into managing thecompensation aspect.The objective of this paper is to discuss the rewards and recognition policies and theprocess involved with reference to Tata Consultancy Services and its comparativeanalysis with other players in the industry. This report also brings out the flaws in thepresent system as well as suggests measures to overcome them.TCS follows a model which is far ahead of other traditional system, which is EconomicValue Added (EVA). It is not just any reward structure, but an integrated managementprocess aimed at achieving long term goals, instead short term. It makes sure that theunit performs in a sustainable and increasing manner. So in the same way everyindividual employee would be able to improve his/her performance considerably. 3
  • 5. CHAPTER 1 COMPANY PROFILETATA CONSULTANCY SERVICES (TCS)Tata Consultancy Services Limited (TCS) is a global IT services, business solutions andoutsourcing company which was founded in 1968 by F.C. Kohli, who was its firstGeneral Manager. It is headquartered in Mumbai. It is a subsidiary of the Tata Group inIndia. One of TCS first assignments was to provide punch card services to a sisterconcern, Tata Steel (TISCO). It later bagged the countrys first software project, theInter-Branch Reconciliation System (IBRS) for the Central Bank of India. It is thelargest technology service company in Asia based on its record of outstanding service,collaborative partnerships, innovation, and corporate responsibility. Their missionreflects the Tata Groups longstanding commitment to provide excellence as well as tohelp customers achieve their business objectives by providing innovative, best-in-classconsulting, IT solutions and services, and to actively engage all stakeholders in aproductive, collaborative, and mutually beneficial relationship.TCS ability to deliver high-quality services and solutions is unmatched. They are theworld’s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMIand P-CMM. They use the most rigorous assessment methodology - SCAMPISM and 6Sigma.It is largest IT employer in India, having 142 offices across 47 countries with totalmanpower strength of 2, 38,583 employees as of March 2012. It generates around 30 percent of Indias IT exports and provides services to wide range of segments like banking& financial services, energy, resources & utilities, government, telecom, media &information services, etc. TCS has over 143,000 of the worlds best trained ITconsultants in 42 countries. Revenues for the fiscal year ending 31 March, 2011 were tothe order of $6 billion. 4
  • 6. Global View of TCS  Its home country is India.  The key foreign subsidiaries include TCS Australia, TCS China, TCS Brazil, TCS Mexico, TCS USA, TCS UK and TCS Thailand.  Regional offices are at South Africa, Canada, Germany, France, Hong Kong, Singapore, UAE, Uruguay, Chile and Argentina. • Listed on NYSE, BSE and NSE.  Revenue of $10.17 billion expected by FY 2014-15.  Gross addition of 19,000 employees.  Employee Utilization Rate (excluding trainees) is 80.6 %.  Employee Utilization Rate (including trainees) is 71.3 %..Leadership Team• S. Ramadorai, Chief Executive Officer and Managing Director• N. Chandrasekaran, Chief Operating Officer and Executive Director• S. Mahalingam, Chief Financial Officer and Executive Director• Phiroz A Vandrevala, Executive Director and Head, Global Corporate AffairsOrganizational Change• In the last 8 years, TCS has twice seen a rising in its top brass. S. Ramadorai has beenleading TCS since 2004. Due to his sharp acumen, he put TCS on the growth path.During this period it has evolved from a $2 billion to a $6 billion dollar company.• Change in guard during October 2009 when N.Chandrasekharan would be replaced asCEO of the company. The current CEO would be elevated to the post of executive vice-chairman.• This change of guard is likely going to result in TCS entering the Fortune 500 list by2013-2014 with revenue of around $11 billion. This phase of TCS under a newleadership will script a new chapter in the success story of Indian IT industry. 5
  • 7. CHAPTER 2 LITERATURE REVIEWEMPLOYEE REWARD AND RECOGNITION SYSTEMSIn a competitive business climate, more business owners are looking at improvements in qualitywhile reducing costs. Meanwhile, a strong economy has resulted in a tight job market. So whilesmall businesses need to get more from their employees, their employees are looking for moreout of the businesses. Employee rewards and recognition programs are one method ofmotivating employees to change work habits and key behaviors to benefit a small business. Butfirst, we will look into managing the compensation aspect.COMPENSATION MANAGEMENTTraditional PM has mainly been financial measuring ratios such as ROI (Return onInvestment), RI (Residual Income) and EPS (Earnings per Share). These metrics accountfor the costs associated with capital and help firms spot areas in which capital is beinginvested unprofitably. Although these financial data have the advantage of being preciseand objective, the limitations are far greater, making them less applicable in todayscompetitive market. Organizations that have adopted the traditional PM, haveexperienced great difficulty in trying to fit the measures with increasing new businessenvironment and current competitive realities.While the traditional financial metrics are value-based, they are nonetheless laggingindicators. They offer little help for forward-looking investments, where future earningsand capital requirements are largely unknown investments such as new productintroductions and capital or new market entry. This will lead to narrow short-termdecision-making based on bottom-line financial results.On the other hand, most of the criticism of traditional PM stems from their failure tomeasure and monitor multiple dimensions of performance, by concentrating almostexclusively on financial measure. They solely concentrate on minimizing costs andincreasing labor efficiency while neglecting other operational performance measuressuch as quality, responsiveness and flexibility. Therefore, focusing on financials to the 6
  • 8. extent of excluding all other factors can produce distortions such as low cost and highmargin production unnecessarily.Moreover, most companies motivate their workers through reward systems. Rewardscan be financial such as cash payments, bonuses or share options and non-financial suchas promotion. Traditionally, employees are rewarded with bonuses at the end of the year,once a specific target has been achieved. However, this reward system causes short-termism as employees are seen to narrow down their focus by just targeting therewarded goal. They may not take other factors, such as quality and service intoconsideration. Hence, leading businesses most often run without a long-term vision.To take lessons out of the drawbacks of traditional PM system, now-a-days theorganizations have started looking at the bigger picture which holds other aspects, notonly minimizing costs but also increasing labor efficiency. So, they need a system whichcould cover multiple dimensions in the process.REWARDS VS. RECOGNITIONAlthough these terms are often used interchangeably, reward and recognition systems should beconsidered separately. Employee reward systems refer to programs set up by a company toreward performance and motivate employees on individual and/or group levels. They arenormally considered separate from salary but may be monetary in nature or otherwise have acost to the company. While previously considered the domain of large companies, smallbusinesses have also begun employing them as a tool to lure top employees in a competitive jobmarket as well as to increase employee performance.As noted earlier, although employee recognition programs are often combined with rewardprograms, they retain a different purpose altogether. They are intended to provide psychologicalrewards a financial benefit. Although many elements of designing and maintaining reward andrecognition systems are the same, it is useful to keep this difference in mind, especially forsmall business owners interested in motivating staffs while keeping costs low. 7
  • 9. DIFFERENTIATING REWARDS FROM MERIT PAY AND THEPERFORMANCE APPRAISALIn designing a reward program, a small business owner needs to separate the salary or merit paysystem from the reward system. Financial rewards, especially those given on a regular basissuch as bonuses, profit sharing, etc., should be tied to an employees or a groupsaccomplishments and should be considered "pay at risk" in order to distance them from salary.By doing so, a manager can avoid a sense of entitlement on the part of the employee and ensurethat the reward emphasizes excellence or achievement rather than basic competency.Merit pay increases, as a result, are not part of an employee reward system. Normally, they arean increase for inflation with additional percentages separating employees by competency. Theyare not particularly motivating since the distinction that is usually made between a goodemployee and an average one is relatively small. In addition, they increase the fixed costs of acompany as opposed to variable pay increases, such as bonuses, which have to be "re-earned"each year. Finally, in many small businesses teamwork is a crucial element of a successfulemployees job. Merit increases generally review an individuals job performance, withoutadequately taking into account the performance within the context of the group or business.DESIGNING A REWARD PROGRAMThe key characteristics of developing a reward program are as follows:  Identification of company or group goals that the reward program will support.  Identification of the desired employee performance or behaviors that will reinforce the companys goals.  Determination of key measurements of the performance or behavior, based on the individual or groups previous achievements.  Determination of appropriate rewards.  Communication of program to employees.Reward systems are concerned with two major issues: performance and rewards. Performanceincludes defining and evaluating performance and providing employees with feedback. Rewardsinclude bonus, salary increases, promotions, stock awards, and perquisites. 8
  • 10. Large corporations with several different businesses may have multiple reward systems. Andwhile they may share some fundamental philosophies and values, they may differ according tothe particular business setting, competitive situation, and product life cycle. Thus, multiplereward systems can support multiple cultures within one organization.These components will be designed, developed and maintained on the basis of reward strategiesand policies which are created within the context of the organizations between strategies,culture and environment:1. Improve Organizational Effectiveness: Support the attainment of the organizations mission,strategies, and help to achieve sustainable, competitive advantage.2. Support and Change Culture: Under pin and as necessary help to change the organizationalculture as expressed through its values for performance innovation, risks taking, quality,flexibility and team working.3. Achieve Integration: Be an integrated part of the management process of theorganization. This involves playing a key role in a mutually reinforcing and coherent range ofpersonal policies and process.4. Manageable: It helps to manage the undue administrative burdens imposed on managers andmembers of the personnal department.5. Motivate Employees: Motivate employees to achieve high levels of quality performance.6. Increased Commitment: Enhance the commitment of employees to the organization that willa) want to remain members of it, b) develop a strong belief in and acceptance of the values andgoals of the organization; and c) be ready and willing to exert considerable effort on its behalf.7. Fairness and Equity: Reward assesses people fairly and consistently according to theircontribution and values to the organization.8. Improved Skills: The employees can upgrade competence and encourage personaldevelopment.9. Improved Quality: Help to achieve continuous improvement in levels of quality andcustomer service.10. Develop team working: An effective award system improves co-operation and effectiveteam working at all level. 9
  • 11. PERFORMANCE MANGEMENT, REWARDS AND AWARDSPerformance management is the systematic process by which an organization involves itsemployees, as individuals and members of a group, in improving organizational effectiveness inthe accomplishment of agency mission and goals. Employee performance management includes:  Planning work and setting expectations,  Continually monitor performance,  Developing the capacity to perform,  Periodically rating performance in a summarized fashion, and  Rewarding good performance.Performance appraisals and rewards are designed to show recognition to employees. Those whoexemplify outstanding abilities in the workplace are celebrated through an appraisal and rewardsystem. Managers may offer employee praise in a one-on-one setting, such as a performanceevaluation, or in a group setting among peers. Archer North, a company that designs anddevelops employee performance appraisal and corporate evaluation systems, says that socialrecognition is powerful and is an effective forum for showing value in employees.Employee recognition programs boost the morale of employees and positively change the healthof a organization. By instituting performance appraisal and reward systems, an employer lets itsworkers know that their hard work pays off and is appreciated.Reward system is a part of performance appraisal. When an employee do performance appraisalhe uses reward system to appreciate the work done by the employee. Every company has itsown reward system which has to be linked with its performance appraisal method. Rewardsystems are concerned with two major issues: performance and rewards. Performance includesdefining and evaluating performance and providing employees with feedback. Rewards includebonus, salary increases, promotions, stock awards, and perquisites. 10
  • 12. TYPES OF REWARDSBesides verbal appreciation, tokens of appreciation, rewards (award trophies, framedcertificates, special parking spaces, gift cards, pens or a free day off.) etc. are generally given toemployees.When employers praise their employees’ performance it is a positive experience for both themanager and the employee. Appraisal enhances motivation, keeps employees goal-oriented andmorale high. With high morale and a feeling of worth, employees will want to exceed in theworkplace.Various categories of rewards that are given and can be given are:Basic Pay: Pay is an essential factor which is closely related to job satisfaction and motivation.Although pay may not be a reward as this is a static amount which an employee will be paidevery month, it will be considered as a reward if similar worker is paid less.Additional Hours Rewards: This is similar to that of overtime. However, it is paid toemployees if they put in an extra hour of work for working at unsocial hours or for workinglong hours on top of overtime hours.Commission: Many organizations pay commission to sales staff based on the sales that theyhave generated. The commission is based on the number of successful sales and the totalbusiness revenue that they have made. This is a popular method of incentive.Bonuses: Bonuses will be paid to employees who meet their targets and objectives. This isaimed at employees to improve their performance and to work harder.Performance Related Pay: This is typically paid to employees who have met or exceeded theirtargets and objectives. This method of reward can be measured at either team or departmentlevel.Profits Related Pay: Profits related pay is associated with if an organization is incurring aprofit situation. If the organization is getting more than the expected profits, then employeesreceive an addition amount of money that has been defined as a variable component of thesalary.Payment by Results: This is very similar to that of profit related pay. This reward is based onthe number of sales and total revenue generated by the organization.Piece Rate Reward: Piece rate reward is directly related to output. The employees get paid onthe number of pieces that they have produced. These pieces will be closely inspected to makesure that quality standards are being met. 11
  • 13. Recognition: Employees will not always be motivated by monetary value alone. They dorequire recognition to be motivated and to perform well in their work.Job Enrichment: This is a common type of recognition that is aimed at employees to getmotivated. Job enrichment allows more challenging tasks to be included in the tasksperformed by the employee.Job Rotation: Unlike job enrichment, job rotation refers to shifting employees betweendifferent functions. This will give them more experience and a sense of achievement.Teamwork: Teamwork is also considered as recognition. Creating teamwork between teammembers will improve performance at work. Social relationships at work are essential for anyorganization.Empowerment: Empowerment refers to when employees are given authority to make certaindecisions. This decision making authority is restricted only to the day to day tasks.Training: Many organizations place a greater emphasis on training. This is considered asrecognition for employees. Training could vary from on the job training to personaldevelopment training.Awards: This again is an important type of recognition that is given to employees who performbetter. Organizations have introduced award systems such as best performer of the month etc,and all these will lead employees to perform better.Rewards are basically the methods to extrinsically motivate employees. These awards can beMONETARY or NON MONETARY. Some of the commonly given awards in variousorganizations are:  Service AwardsEach year that an employee commits to an employer, he offers great advantages to the businessor organization. Employees gain more knowledge of their position and responsibilities overtime, and the company does not have to set aside time and money hiring and training newemployees. Employers often reward employees who remain committed with a recognition pinor a certificate acknowledging the number of years of continuous service. Awards are oftengiven for one year, five years, 10 years and 20 years or more. Employers may further rewardlong-term employees with an extra gift such as a watch or a special desk set, typically engravedwith the employees name and the date they received the honour. 12
  • 14.  Employee of the MonthSome workers will consider being designated Employee of the Month a great honor. This awardis commonly given to the one employee each month who has given exceptional service, hadperfect attendance and gone the extra mile for the company to ensure all customers are given theservice they expect. These employees are often recognized during monthly staff meetings with aplaque or certificate recognizing their efforts. A designated parking space is another good idea,and displaying the plaque where customers can see it adds to the honor. Employers should takecare in choosing employees in a manner that shows no favoritism. If others perceive thatemployees are chosen unfairly, the award can be counterproductive.  Attendance AwardsCompanies depend on employees to be punctual and perform tasks to their potential so that thework load can be evenly distributed. Employees who strive to be at work during everyscheduled shift and never come in late deserve to be recognized in a special way. Perfectattendance awards can be given in the form of a certificate, plaque or even as a cash bonus.Sometimes employers will give employees with perfect attendance a day off with pay or a giftcertificate to a local restaurant in appreciation for their commitment to the company.  Safety AwardsSafety awards are a great way for employers to recognize employees or teams for theircontinued adherence to safety guidelines. This kind is typically awarded when an employee or agroup files no incident or accident reports over a given period of time, such as a month or year.These acknowledgments are often expressed in terms of the man (or woman) hours since theteam last experienced an injury. Cash bonuses or gifts such as tickets to popular local eventsmake great safety awards.  Company AdvancementThe ultimate reward that every employee tends to strive for is company advancement.Employees generally work hard to earn recognition in an attempt to be promoted to a higherposition within the company or receive an annual raise in pay. Employers should choosecandidates for advancement carefully, avoiding favoritism and ensuring that the most reliableand skilled employees are advanced to higher positions.  Special Operating Unit AwardIndividual bureaus may establish award programs which are appropriate to their particularinterests in recognizing certain groups of employees. There are a large variety of programs,ranging from recognition for scientific accomplishments to employee of the year. These awardprograms can be cash or non-monetary. 13
  • 15.  Cash-in-Your-Account Award A small cash award designed to recognize employees for going the extra mile in getting the jobdone. These awards do not recognize overall performance, but rather specific instances ofexemplary performance. Awards range from $50 to $500, in $50 increments.  Suggestion AwardUnder the Suggestion Program, employees are granted an award for formal suggestions whichhave been evaluated and adopted. The amount of the award is determined by the amount oftangible and intangible benefits of the idea.  On-the-Spot AwardA small award which is granted as a means to recognize employees for those day-to-day effortswhich contribute "in a special way" to get the job done.  Certificates of AppreciationCertificates granted to employees or non-employees who have made outstanding contributionsor who have performed significant services to the Department.  External Awards Awards sponsored by other agencies and non-Government organizations given to corporateemployees. 14
  • 16. CHAPTER 3 HR POLICIES AND INFORMATIONTCS has developed an unbreakable bond with sound HR practices in an environmentthat defies traditional roles and responsibilities. The company views its employees asassets, which has to be utilized efficiently. The TCS senior management constantlykeeps track of the vast intellectual assets, their skill sets, the status of projects on whichthey are working, and the number of people available for being placed in other projects.TCS determines its manpower requirements based on inputs from senior consultants,who provide information on changes in technology and the potential demand for new ITskills in the immediate future. This enables the HR department to plan and schedulerecruitment and training programs.Figure 1 illustrates the role of HR, which evidently is that of a facilitator. So whether itis recruitment or even career development, HR is the catalyst which initiates andinstitutionalizes processes. To manage all the functions for over 140000 employees is aHerculean task but the smoothness of operations is intriguing. The HR structure, whichallows flexibility and empowerment, is the solution.TCS takes care of every aspect of Human Resource Management, from recruitment totraining and career development. The company combines its aim of recruiting softwareengineers with the broader objective of improving educational standards in India. Thecompany also frequently engages in reforming course curriculum and teaching methodsfor partnering institutes.TCS is well-recognized in the industry for its emphasis on employee training. Sinceabout one and a half decades, the company has a fully functioning training center inThiruvananthapuram, Kerala, to impart IT skills in the latest technology to its newrecruits. TCS spends about 6-7% of its total annual sales on training.In addition to training, TCS also believes in grooming its employees into consultants andmanagers. In their first couple of years at the company, employees are put to work ondifferent technological platforms and applications. This is important for TCS astechnologies and customer needs and preferences change without foreboding. Theorganization consciously does not try to develop its employees as specialists, as it knewthat they would become useless once their area of specialization becomes obsolete. This 15
  • 17. approach was different from that of many other IT companies, who stressedspecialization of their workforce.The success of HR policies at TCS is reflected in the fact that its annual employee attrition ratewas 12.6% for FY 2010-11, which is one of the lowest in the industry. The attrition rates inother IT companies stood at 17.5% during the same period. Of its employees, 28% are womenwhile foreign nationals from 62 different countries, constituted 9.1% of its total employee base.In 2010, Dataquest, one of the leading technology publications in India ranked TCS first in itslist of Top 20 employers in India. 16
  • 18. In this paper, we are analyzing the reward structure of TCS, which is one of the resultsof the Performance Management System.PERFORMANCE MANAGEMENT SYSTEM AT TCSPerformance management system actually operates when the whole system is designedcarefully and it has been conveyed properly to employees in the same way. TCS followsan effective PMS system.The goal setting process for employees’ is done in a manner that it enables employeesto realize about their contribution to the organizations better performance. It would be avery difficult task for multi- national company which has lakhs of employees in itsorganization. Then when it comes down to Performance Appraisal (PA), they arefollowing Balanced Scorecard system to evaluate their employees. Then theCompensation is based on EVA Model, which will be explained in this paper at thelatter part.PERFORMANCE APPRAISALTCS conducts appraisals twice a year. • At the end of the year • At the end of a project.Appraisals are based on Balanced Scorecard, which tracks the achievement ofemployees on the basis of targets at four levels:  Financial Perspective  Internal Perspective  Customer Perspective  Learning and Growth 17
  • 19. BALANCED SCORECARD Customer: Financial Perspective: To achieve our vision, how should To succeed financially, how we appear to our customers? should we appear to our shareholders? VISION & STRATEGY Learning and Growth: Internal Business Process: To achieve our vision, how will To satisfy our shareholders we sustain our ability to change and customers, what business and improve? processes must we excel at?Financial perspective quantifies the employee’s contribution in terms of revenuegrowth, cost reduction, improved asset utilization and so on.Customer perspective looks at the differentiating value proposition offered by theemployee.Internal perspective refers to the employee’s contribution in creating and sustainingvalueLearning and growth are self-explanatory. The weight given to each attribute is basedon the function the employee performs. 18
  • 20. When every of this aspect is communicated and understood well, the following four aretaken care during the goal setting process. They are:  Objectives  KPIs/ Measures  Targets  InitiativesThe appraisal is done mainly based on the aforesaid four aspects. Individualperformance is based on these. Based on their individual achievements, employees arerated on a scale of one to five (five = “Extra-ordinary”). If employees get a low rating(less than 2) in two consecutive appraisals, the warning flags go up. If the poorperformer continues getting low scores then the exit option may be considered. Over theyears TCS has found the pattern that leads to the maximum decline in performance. Ifemployees work for more than two years on the same project, typically either theirperformance dips or they leave the organization. To avoid that, TCS shuffles itsemployees between projects every 18 months or so. “Performance drops if motivationdrops”. Employee utilization rate in TCS is about 76% that is highest in theCOMPENSATION MANAGEMENT IN TCSTCS follows a model which is far ahead of other traditional system, which is EconomicValue Added (EVA). It is not just any reward structure, but an integrated managementprocess aimed at achieving long term goals, instead short term. It makes sure that theunit performs in a sustainable and increasing manner. So in the same way everyindividual employee would be able to improve his/her performance considerably.ECONOMIC VALUE ADDED (EVA) MODELEVA model was developed by a New York Consulting firm, Stern Steward & Co in1982 to promote value-maximizing behavior in corporate managers. It is a single, value-based measure that was intended to evaluate business strategies, capital projects and tomaximize long-term shareholders wealth. Value that has been created or destroyed bythe firm during the period can be measured by comparing profits with the cost of capitalused to produce them. 19
  • 21. Therefore, managers can decide to withdraw value-destructive activities and invest inprojects that are critical to shareholders wealth. This will lead to an increase in themarket value of the company. However, activities that do not increase shareholdersvalue might be critical to customers satisfaction or social responsibility.EVA and Reward System: EVA sets managerial performance target and links it toreward systems. The single goal of maximizing shareholder value helps to overcome thetraditional measure problem, where different measures are used for different purposeswith inconsistent standards and goal. Rewards will be given to managers who are able toturn investors money and capital into profits efficiently. Researchers have found thatmanagers are more likely to respond to EVA incentives when making financial,operational and investing decision (Biddle, Gary, Managerial finance 1998), allowingthem to be motivated to behave like owners. However this behavior might lead to somemanagers pursuing their own goal and shareholder value at the expense of customersatisfaction.It focuses on end results, instead means that allowed managers to have discretion andfree range creativity, avoiding any potential dysfunctional short-term behavior. Rewardssuch as bonuses from the attainment of EVA target level are usually paid fully at the endof 3 years. This is because workers performance is monitored and will only be rewardedwhen this target is maintained consistently. Hence, this leads to generation of long-termshareholders wealth.4 Ms OF EVAStern Stewart describes four main applications of EVA with four words beginning withthe letter M.MEASUREMENTEVA is the most accurate measure of corporate performance over any given period.Fortune magazine has called it "todays hottest financial idea," and Peter Drucker rightlyobserved in the Harvard Business Review that EVA is a measure of "total factorproductivity" whose growing popularity reflects the new demands of the informationage. 20
  • 22. MANAGEMENT SYSTEMWhile simply measuring EVA can give companies a better focus on how they areperforming, its true value comes in using it as the foundation for a comprehensivefinancial management system that encompasses all the policies, procedures, methodsand measures that guide operations and strategy. The EVA system covers the full rangeof managerial decisions, including strategic planning, allocating capital, pricingacquisitions or divestitures, setting annual goals-even day-to-day operating decisions. Inall cases, the goal of increasing EVA is paramount.MOTIVATIONTo instill both the sense of urgency and the long-term perspective of an owner, SternStewart designs cash bonus plans that cause managers to think like and act like ownersbecause they are paid like owners. Indeed, basing incentive compensation onimprovements in EVA is the source of the greatest power in the EVA system. Under anEVA bonus plan, the only way managers can make more money for they is by creatingeven greater value for shareholders. This makes it possible to have bonus plans with noupside limits. In fact, under EVA the greater the bonus for managers, the happiershareholders will be.MINDSETWhen implemented in its totality, the EVA financial management and incentivecompensation system transforms a corporate culture. By putting all financial andoperating functions on the same basis, the EVA system effectively provides a commonlanguage for employees across all corporate functions. EVA facilitates communicationand cooperation among divisions and departments, it links strategic planning with theoperating divisions, and it eliminates much of the mistrust that typically exists betweenoperations and finance. The EVA framework is, in effect, a system of internal corporategovernance that automatically guides all managers and employees and propels them towork for the best interests of the owners. The EVA system also facilitates decentralizeddecision making because it holds managers responsible for-and rewards them for-delivering value. 21
  • 23. Some Companies that have used EVA Name Timeframe Use of EVA The Coca-Cola Early Focused business managers on increasing Co. 1980s shareholder value Used EVA as the lead indicator of a performance AT&T Corp. 1994 measurement system that included "people value added" and "customer value added" Conducted a study with Stern Stewart that indicated IBM 1999 that outsourcing IT often led to short-term increases in EVA Tied EVA measure to senior managers bonus and Herman Miller Inc. Late 1990s compensation systemEVA CONCEPT OF PROFITABILITYEVA is based on the concept that a successful firm should earn at least its cost of capital.Firms that earn higher returns than financing costs benefit shareholders and account forincreased shareholder value. In its simplest form, EVA can be expressed as thefollowing equation:EVA = Net Operating Profit After Tax (NOPAT) - Cost of CapitalAs stated above, EVA is measured as NOPAT less a firms cost of capital. NOPAT isobtained by adding interest expense after tax back to net income after-taxes, becauseinterest is considered a capital charge for EVA. Interest expense will be included as partof capital charges in the after-tax cost of debt calculation. Other items that may requireadjustment depend on company-specific activities.While the above adjustments are common in EVA calculations, according to SternStewart, those items to be considered for adjustment should be based on the followingcriteria. 22
  • 24. STRATEGIES FOR INCREASING EVA  Increase the return on existing projects (improve operating performance)  Invest in new projects that have a return greater than the cost of capital  Use less capital to achieve the same return  Reduce the cost of capital  Liquidate capital or curtail further investment in sub-standard operations where inadequate returns are being earnedCOMPENSATION MANAGEMENT - EVA MODEL IN TCSTCS compensation management system is based on the EVA model. It is the basis forgiving incentives to employees and the bonus declared is a part of improved EVAachieved. With the implementation of Economic Value Added (EVA)-basedcompensation, the salary of employees comprised of two parts:  Fixed  VariableFixed pay comprised of wages and pension while the variable part of the salary has thecomponents like bonus, profit sharing and stock options. This was arrived afterconsidering business unit EVA, corporate EVA, and also individual performance EVA.EVA is calculated as net operating profit after taxes minus a charge of the opportunitycost of the capital invested. The variable component in the salary structure of anindividual also depends on the rating that he receives on a scale of 1-5.Variable pay can be equal to the fixed portion of the salary, providing the cell has shownthat kind of EVA growth. It was not just compensation, the process aimed at employeesto also have got a feeling of ownership for their own unit, and its performance. Eachemployee is made to feel as if they are running their business. They had to think likeentrepreneurs and know the cost attached to their business and how will they add valueto the investment.TCS adopted EVA in 1999, when the company had a staff of around 15000, working atseveral locations across the world. Through the EVA model, TCS aimed at creatingeconomic value by concentrating on long term continuous improvement. EVA measuredoperating and financial performance of the organization through BSC and thecompensation of all employees was linked to it. TCS went in for the EVA as during that 23
  • 25. time, the company was not a public limited company and hence didn’t have a stockoption plan. There were several people who played an important role in the success ofthe organization, who needed to be recognized. As there was no wealth sharingmechanism in place, EVA was adopted to focus on continuous improvement rather thanshort term goals and also to motivate employees. It was designed to construct a definedincentive system, which would reward on the basis of profitability.In 1996, TCS was organized into a three dimensional model with the first dimensioncomprising of industry practices, which included engineering, transportation andtelecom; the second dimension comprising of service practices like e-business,outsourcing, technology consulting; while global and regional operating areas formedthe third dimension. A business unit could be a part of a service, a practice, ageographical unit or a combination of all the three. Every unit was considered to be arevenue center and had its own EVA target.The units that did not fall under the purview of any of these were corporate offices andresearch & development, the costs of which were divided among all the units. ThroughEVA-linked compensation, employees could claim stakes at three EVA levels. They are  At the organization level  At the business unit level  At the individual levelThe individual was informed how he or she could contribute to the EVA enhancement atall three levels.  Organizational EVA: Employees can come to know the company’s performance by the public medium, which are authenticated.  Unit EVA: Employees will be able to get the details of their unit’s performance from the company’s reports.  Individual EVA: It is based on the appraisal process, which is done by the senior. Unlike other methods, in EVA model, the employee is initially intimated about the key drivers by which he/she can contribute or add value to the organization’s and unit’s performance. It will be measured accurately. 24
  • 26. EVA was controlled by revenues, capital and costs, and an individual could contribute inany or all of these areas at all the three levels. The benefits of EVA were realized acrossall levels in the organization. Employees became aware of their responsibilities and theirshare in increasing the EVA of the unit and organization. All the units could determinehow they had fared against the targets.The bonus banks also helped in sustaining performance from the individuals, with closerelationship between pay and performance. There was an increased sense of belongingamong the employees and the employees were motivated to increase their contributionas they were also equally benefited by the increase in EVA. EVA was not just aperformance metric but an integrated management process aimed at achieving long termgoals.OTHER DECISIONS OF TCS BASED ON EVA 1. RETRENCHMENT During the first quarter of the financial year 2005-06, about 500 employees whose performance was not up to the mark after the second annual appraisal were asked to leave. By the end of the financial year, this number went up to 600. The employees who were asked to leave were mostly those with 2-3 years of experience and did not include trainees because they had less than a year’s experience. HR experts believed that this decision was based on the implementation of the EVA based model for assessing employees contributions, at the company. The first two year cycle of EVA had just been completed when the retrenchment decision was taken. It seemed to be a routine exercise carried out bi-annually to weed out non-performers. 2. TRAINING & DEVELOPMENT In this process if an employee gets a grade of 2 or below during the first appraisal cycle, the company puts the employee on a performance improvement plan that includes additional training and assignments on new projects. At the end of the second appraisal if the employee’s ratings do not improve to a grade better than 2, the employee is asked to resign. 25
  • 27. ACHIEVEMENT OF TCS AFTER IMPLEMENTING THE REWARDSYSTEM OF EVAThe company declared total revenues of US$ 2.24 billion and net profit of US$ 0.51billion. TCS had been the first Indian IT company to achieve the US$ 1 billion revenuemilestone in the fiscal 2002-03. It continued its success story when it became the firstIndian IT company to earn revenues of more than US$2 billion per annum.ADVANTAGES OF EVA REWARD MODELEVA is more than just performance measurement system and it is also marketed as amotivational, compensation-based management system that facilitates economic activityand accountability at all levels in the firm.  Transparency: EVA model gives a transparency, in a way that employees can’t blame the employer for errors in performance appraisal process as it usually happens with most of the organizations. The drivers are given clearly.  Internal Communication: when the employees are more aware about their roles and responsibilities the usually start taking care of every other thing which are needed for the correct flow of information that’s how within a unit the internal communication increases considerably.  Decentralization: When the process is transparent enough the decision making process became more decentralized and the errors in decision making are considerably avoided.  Motivation: Employees are highly motivated to increase their contribution, because they could directly relate their contribution to the organizations achievement. The pride of contributing to organization’s achievement motivates the employee.  Monitoring Deviations: Not only the individual employees, but the whole unit will be motoring their own performance in order to maintain their levels up. So 26
  • 28. obviously they could easily find out when they deviate from the fixed objectives and they can measure how far they moved out from the goals. Then they can get into track in short time.  Integration: EVA is not just a performance metric but an integrated management process aimed at achieving long term goals, instead short term. It makes sure that the unit performs in a sustainable and increasing manner. So the same way every individual employee would be able to improve his/her performance considerably.  Covers all Aspects: EVA model actually covers all aspects of a business cycle varies from billing time, response time, wastage measures to sales of a particular software in a particular unit.RECOGNITION AT TCS 1. PROJECT MILESTONE PARTIES: These are informal gatherings where efficient and cost-effective execution of projects by employees is recognized It is arranged when TCS acquires a long term project. When an employee works in a project for long time, usually the passion and the involvement decrease over time. To avoid that during and also after successful completion of projects this is organized. This encourages others to follow the set example as well. 2. RECOGNITION OF STAR PERFORMERS/ HIGH FLIERS: This is done by the senior management to recognize and felicitate some outstanding talent within the company. The following is an example, and it explains which all small aspects are taken care of. It is taken from the LinkedIn profile of an employee of TCS: “Star Performer - TCS Gems Tata Consultancy Services January 2012 I was awarded Star Performer for my contribution towards executing projects on time as well as training the new joiners on Excel. I also did process improvement by developing excel macros which helped in reducing process time by 2 hours and minimizing the error rate.” 27
  • 29. 3. NOMINATION TO COVET TRAINING PROGRAMMES: Employees are encouraged to undergo training programs related to their technical areas of expertise as well as related to some casual interests.4. BEST PROJECT AWARD: This is given generally on a yearly basis to promote a spirit of healthy internal competition among workgroups as well as to foster team-work within the groups.5. BEST PIP AWARD: The primary purpose of instituting such awards is to encourage newer and faster ways of doing a task or set of tasks (innovation) as well as an improved manner of meeting project deadlines.6. BEST AUDITOR AWARD: This award is basically given to acknowledge active participation of employees in critically analyzing a situation or a process.7. SPOT AWARDS: These awards are given or announced, as the name suggests, right at the time a superior is witness to an employee or a group performing a job commendably.8. RECOMMENDATIONS FOR NEW TECHNOLOGY ASSIGNMENTS/ KEY POSITIONS: Generally a superior or a group of superiors recommend better or key assignments, considering an employee’s developmental potential and smooth career progression.9. PERFORMANCE-BASED ANNUAL INCREMENTS: This is generally given along with a felicitation spoken about in point 2.10. EARLY CONFIRMATION FOR NEW EMPLOYEES: In this case, the probation period for outstanding new employees is reduced, thereby facilitating a quicker absorption into the organization.11. LONG SERVICE AWARDS: Some pecuniary rewards along with citations are given to those employees completing 5, 10, 15 and 20 years of service to the company. This can also be viewed as a one-time loyalty bonus.12. EVA-BASED INCREMENTS: As seen in point 9, the salaries itself of employees are revised on the basis of their past annual performance.13. ON THE SPOT RECOGNITION: As seen in point 7, this guarantees immediate recognition of good performance by employees. In all these awards given by TCS, there are other GEM POINTS given to employees, which could be redeemed for several other products offered in their portal. 28
  • 30. CHAPTER 4CRITICAL ANALYSIS OF EVA IN TCS EVA concentrated mainly on return on investment, due to which the growth of TCS was restricted in other aspects. Implementation of EVA is difficult. In 2003, TCS caused uproar in the IT industry when it reduced the variable salaries of employees by 10% when it restructured the employees’ salary structure. The reduction in the variable salary resulted in an overall reduction of monthly take-home salary for most of its employees. When every other step an employee takes reflected on his salary, then usually they tend to avoid taking risk. Thus, the innovation will not happen at any place or process because of the fear of its results. Employees may focus on immediate results which diminish the rate of innovation. EVA is based on financial accounting methods that can be manipulated by managers. Given the emphasis of EVA on improving business-unit performance, it does not encourage collaborative relationship between business unit managers. This in the long term may gradually result in non-communication between some of TCS business units. Salary adjustments. At the beginning of every quarter, the company will project the future EVA realization and the advance payment to be made to employees as their salary’s variable part. In the next quarter, appropriate adjustments in variable pay will be made either upwards or downwards as per the real value realized. So it gives rise to instability after some time. During February and March generally, TCS people were likely to have their pay cheques lesser by Rs. 10,000, because of rupee appreciation. 29
  • 31.  Fear amidst IT workforce. Employees started fearing that other IT companies would take a cue from the TCS initiative and make such salary pruning a regular practice to show inflated profits in future. The affected parties would mostly be US and Indian employees. Fear among TCS employees. When the retrenchment was done during the FY 2005-06 based on performance ratings, the measurements or drivers were based on the EVA model. As a result, the employees of TCS are driven by “Fear Factor” rather than “Motivation Factor”. No ESOPs are given. Employee Stock Options entitle the employees to own a part shareholding of the company. This helps in retaining them for the long term and builds up loyalty among the employees. 30
  • 32. CHAPTER 5 COMPARATIVE ANALYSISCOGNIZANTThe reward system in Cognizant is similar to that in TCS. Based on the individual and groupperformance various awards are given to the employees. These are:CATEGORIZATION OF INDIVIUAL REWARDS: 1. Star Award 2. Guiding Star Award 3. Road less Travelled 4. Business Enablers 5. Associate of the year 6. eknowvator 7. Dronacharya award 8. Above and Beyond 9. Smart Techie 10. Biz Whiz 11. KudosCATEGORIZATION OF TEAM REWARDS:  Dream Team  Project of the YearThe difference lies in the reward given. The Cognizant employees mostly get the cash prizeswhile the TCS employees get only the reward points which they can redeem against somegoodies.KPMGThe reward system of KPMG contributes to the company’s competitive profile in the market,retains best performers and reduces their turnover, increases the motivation of employees andreinforces company’s reputation as an employer of choice in order to attract high caliberexecutives. 31
  • 33. Other than the reward system they were also providing the benefit of ESOPs to the employees.The company believes that this develops a feeling of ownership which can have positive resultsfor both the company and the employee.INFOSYSThe basis for giving rewards in Infosys is through 360 degree performance appraisal system.To motivate contributions to and the use of the Knowledge Management (KM) system amongemployees, Infosys created a reward system based on “knowledge currency units” (KCUs).When employees wrote a document and contributed it to KM, they received KCUs based onratings from others who had benefited. For a few years, KCUs could be converted to money, butInfosys later discontinued the practice so that employees were not conditioned to believe theydeserved a “biscuit” every time they did something good. KCUs remained a psychic reward andlooked good on performance reviews. The annual excellence award system was also in place.Other than the rewards, even Infosys was focusing on providing ESOPs to the employees.According to them, the ESOPs are:  Highly profitable reward system  Method of generating wealth  Offers emotional and financial ownership to employees  Performance management tool for attracting and retaining talent.Infosys is using performance based approach to give stocks to their employees and uses this asan effective tool to enhance the performance of employees. 32
  • 34. CHAPTER 6 RECOMMENDATIONS Fear Factor should be removed: There should be a clear communication process amongst employees to remove the fear of retrenchment and should motivate them to improve their performance. Motivate Employees: Employees need a positive reinforcement method to get motivated instead of some punishing activities at one go. ESOPs: TCS should also implement ESOP options for its valued, long serving and best performing employees to retain them. This increases their commitment towards the organization. Points System to Monetary System: TCS can also include monetary amounts in place of GEM points, or it could be a combination of both. This would benefit those who are not interested in buying anything from the company portal and can utilize it for some better purpose. Motivate Employees to “Innovate”: TCS should motivate the employees to innovate by encouraging them apart from monetary value which is related to salary. TCS can arrange seminars or send eligible employees to conferences for bringing out their innovative talents. Employees’ Welfare: When we compare with other top IT companies, TCS should learn certain aspects of employee welfare from them. The sudden “pay cuts” and “retrenchment decisions” should be reconsidered before implementing them straight-away. Improve the Employer “Brand Name”: In a competitive market wherein there are equally popular and efficient major players in both domestic and global areas, TCS should focus on improving its brand equity in order to attract top talent. 33
  • 35. LIST OF ABBREVIATIONSS. No. Abbreviation Expansion Page 1. TCS Tata Consultancy Services 2 2. CMMI Capability Maturity Model Integration 9 3. P - CMM People Capability Maturity Model 9 4. IT Information Technology 9 5. USA United states of America 9 6. UK United Kingdom 12 7. UAE United Arab Emirates 14 8. NYSE New York stock Exchange 15 9. BSE Bombay stock Exchange 15 10. NSE National Stock Exchange 15 11. Q4 Quarter 4 15 12. CEO Chief Executive Officer 16 13. PMS Performance Management System 16 14. HR Human Resources 16 15. FY Financial Year 18 16. PA Performance Appraisal 20 17. EVA Economic Value Added 20 18. KPI Key Performance Indicator 21 19. INR Indian Rupees 22 34
  • 37. BIBLIOGRAPHYBerry J. (2003). Economic Value Added. Computer world.McLaren J. (2003). A Sterner Test. Financial Management.Taub S. (2003). MVPs of MVA. CFO.King J. (2002). Metrics for the Book. Computerworld.Paulo S. (2002) Is EVA Fiction? An Academic Comment. Corporate Finance."EVA® Clients Outperform the Market and Their Peers" (2002). EVAluation."How to Structure Incentive Plans that Work" (2002). EVAluation.Aggarwal R. (2001). Using Economic Profit to assess performance: A metric for Modern firms.Business Horizons.Ray R. (2001). EVA: Theory, Evidence, A Missing Link. Review of Business."EVAluating M&As – How to avoid overpaying" (2001). EVAluation.Shand D. (2000). Economic Value Added. Computerworld.Kudla R. J. (2000). Making EVA Work. Corporate Finance.Prober L. M. (2000). EVA: A Better Financial Reporting Tool. CPA Journal."Case study: NIIT, Paying for value" (2000). Business India Intelligence. 36