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TCS - Reward System - Detailed Report

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TCS - Reward System - Detailed Report

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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.

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.

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TCS - Reward System - Detailed Report

  1. 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 11EMPDM204 BIMTECH Date: Greater Noida 01/09/2012
  2. 2. ACKNOWLEDGEMENT The success of this project depends largely on the encouragement and guidelines of our Professors and the team work of all the members. We take this opportunity to express our gratitude to the people who have been instrumental in the successful completion of this project. We would like to show our greatest appreciation to Dr. Parmeswar Nayak, for his encouragement and guidance to materialize this project successfully. The supportive behaviour exhibited by all the team members is worth mentioning. 1
  3. 3. TABLE OF CONTENTS Title Page Acknowledgement 1 Table of Contents 2 Executive Summary 3 1. Company Profile 4 2. Literature Review 6 3. HR Policies and Information 15 4. Critical Analysis of EVA in TCS 29 5. A Comparative Analysis 31 6. Recommendations 33 Appendix – I - Abbreviations 34 References 35 2
  4. 4. EXECUTIVE SUMMARY In a competitive business climate, more business owners are looking at improvements in quality while reducing costs. Meanwhile, a strong economy has resulted in a tight job market. So while small businesses need to get more from their employees, their employees are looking for more out of the businesses. Employee rewards and recognition programs are one method of motivating employees to change work habits and key behaviors to benefit a small business. But first, we will look into managing the compensation aspect. The objective of this paper is to discuss the rewards and recognition policies and the process involved with reference to Tata Consultancy Services and its comparative analysis with other players in the industry. This report also brings out the flaws in the present system as well as suggests measures to overcome them. TCS follows a model which is far ahead of other traditional system, which is Economic Value Added (EVA). It is not just any reward structure, 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 in the same way every individual employee would be able to improve his/her performance considerably. 3
  5. 5. CHAPTER 1 COMPANY PROFILE TATA CONSULTANCY SERVICES (TCS) Tata Consultancy Services Limited (TCS) is a global IT services, business solutions and outsourcing company which was founded in 1968 by F.C. Kohli, who was its first General Manager. It is headquartered in Mumbai. It is a subsidiary of the Tata Group in India. One of TCS' first assignments was to provide punch card services to a sister concern, Tata Steel (TISCO). It later bagged the country's first software project, the Inter-Branch Reconciliation System (IBRS) for the Central Bank of India. It is the largest technology service company in Asia based on its record of outstanding service, collaborative partnerships, innovation, and corporate responsibility. Their mission reflects the Tata Group's longstanding commitment to provide excellence as well as to help customers achieve their business objectives by providing innovative, best-in-class consulting, IT solutions and services, and to actively engage all stakeholders in a productive, collaborative, and mutually beneficial relationship. TCS' ability to deliver high-quality services and solutions is unmatched. They are the world’s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMI and P-CMM. They use the most rigorous assessment methodology - SCAMPISM and 6 Sigma. It is largest IT employer in India, having 142 offices across 47 countries with total manpower strength of 2, 38,583 employees as of March 2012. It generates around 30 per cent of India's 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 world's best trained IT consultants in 42 countries. Revenues for the fiscal year ending 31 March, 2011 were to the order of $6 billion. 4
  6. 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 Affairs Organizational Change • In the last 8 years, TCS has twice seen a rising in its top brass. S. Ramadorai has been leading 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 as CEO 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 by 2013-2014 with revenue of around $11 billion. This phase of TCS under a new leadership will script a new chapter in the success story of Indian IT industry. 5
  7. 7. CHAPTER 2 LITERATURE REVIEW EMPLOYEE REWARD AND RECOGNITION SYSTEMS In a competitive business climate, more business owners are looking at improvements in quality while reducing costs. Meanwhile, a strong economy has resulted in a tight job market. So while small businesses need to get more from their employees, their employees are looking for more out of the businesses. Employee rewards and recognition programs are one method of motivating employees to change work habits and key behaviors to benefit a small business. But first, we will look into managing the compensation aspect. COMPENSATION MANAGEMENT Traditional PM has mainly been financial measuring ratios such as ROI (Return on Investment), RI (Residual Income) and EPS (Earnings per Share). These metrics account for the costs associated with capital and help firms spot areas in which capital is being invested unprofitably. Although these financial data have the advantage of being precise and objective, the limitations are far greater, making them less applicable in today's competitive market. Organizations that have adopted the traditional PM, have experienced great difficulty in trying to fit the measures with increasing new business environment and current competitive realities. While the traditional financial metrics are value-based, they are nonetheless lagging indicators. They offer little help for forward-looking investments, where future earnings and capital requirements are largely unknown investments such as new product introductions and capital or new market entry. This will lead to narrow short-term decision-making based on bottom-line financial results. On the other hand, most of the criticism of traditional PM stems from their failure to measure and monitor multiple dimensions of performance, by concentrating almost exclusively on financial measure. They solely concentrate on minimizing costs and increasing labor efficiency while neglecting other operational performance measures such as quality, responsiveness and flexibility. Therefore, focusing on financials to the 6
  8. 8. extent of excluding all other factors can produce distortions such as low cost and high margin production unnecessarily. Moreover, most companies motivate their workers through reward systems. Rewards can be financial such as cash payments, bonuses or share options and non-financial such as 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 the 'rewarded' goal. They may not take other factors, such as quality and service into consideration. 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 the organizations have started looking at the bigger picture which holds other aspects, not only minimizing costs but also increasing labor efficiency. So, they need a system which could cover multiple dimensions in the process. REWARDS VS. RECOGNITION Although these terms are often used interchangeably, reward and recognition systems should be considered separately. Employee reward systems refer to programs set up by a company to reward performance and motivate employees on individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or otherwise have a cost to the company. While previously considered the domain of large companies, small businesses have also begun employing them as a tool to lure top employees in a competitive job market as well as to increase employee performance. As noted earlier, although employee recognition programs are often combined with reward programs, they retain a different purpose altogether. They are intended to provide psychological rewards a financial benefit. Although many elements of designing and maintaining reward and recognition systems are the same, it is useful to keep this difference in mind, especially for small business owners interested in motivating staffs while keeping costs low. 7
  9. 9. DIFFERENTIATING REWARDS FROM MERIT PAY AND THE PERFORMANCE APPRAISAL In designing a reward program, a small business owner needs to separate the salary or merit pay system from the reward system. Financial rewards, especially those given on a regular basis such as bonuses, profit sharing, etc., should be tied to an employee's or a group's accomplishments 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 ensure that 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 are an increase for inflation with additional percentages separating employees by competency. They are not particularly motivating since the distinction that is usually made between a good employee and an average one is relatively small. In addition, they increase the fixed costs of a company 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 successful employee's job. Merit increases generally review an individual's job performance, without adequately taking into account the performance within the context of the group or business. DESIGNING A REWARD PROGRAM The 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 company's goals.  Determination of key measurements of the performance or behavior, based on the individual or group's previous achievements.  Determination of appropriate rewards.  Communication of program to employees. Reward systems are concerned with two major issues: performance and rewards. Performance includes defining and evaluating performance and providing employees with feedback. Rewards include bonus, salary increases, promotions, stock awards, and perquisites. 8
  10. 10. Large corporations with several different businesses may have multiple reward systems. And while they may share some fundamental philosophies and values, they may differ according to the particular business setting, competitive situation, and product life cycle. Thus, multiple reward systems can support multiple cultures within one organization. These components will be designed, developed and maintained on the basis of reward strategies and policies which are created within the context of the organizations between strategies, culture and environment: 1. Improve Organizational Effectiveness: Support the attainment of the organization's mission, strategies, and help to achieve sustainable, competitive advantage. 2. Support and Change Culture: Under pin and as necessary help to change the 'organizational culture' 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 the organization. This involves playing a key role in a mutually reinforcing and coherent range of personal policies and process. 4. Manageable: It helps to manage the undue administrative burdens imposed on managers and members 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 will a) want to remain members of it, b) develop a strong belief in and acceptance of the values and goals 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 their contribution and values to the organization. 8. Improved Skills: The employees can upgrade competence and encourage personal development. 9. Improved Quality: Help to achieve continuous improvement in levels of quality and customer service. 10. Develop team working: An effective award system improves co-operation and effective team working at all level. 9
  11. 11. PERFORMANCE MANGEMENT, REWARDS AND AWARDS Performance management is the systematic process by which an organization involves its employees, as individuals and members of a group, in improving organizational effectiveness in the 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 who exemplify outstanding abilities in the workplace are celebrated through an appraisal and reward system. Managers may offer employee praise in a one-on-one setting, such as a performance evaluation, or in a group setting among peers. Archer North, a company that designs and develops employee performance appraisal and corporate evaluation systems, says that social recognition is powerful and is an effective forum for showing value in employees. Employee recognition programs boost the morale of employees and positively change the health of a organization. By instituting performance appraisal and reward systems, an employer lets its workers know that their hard work pays off and is appreciated. Reward system is a part of performance appraisal. When an employee do performance appraisal he uses reward system to appreciate the work done by the employee. Every company has its own reward system which has to be linked with its performance appraisal method. Reward systems are concerned with two major issues: performance and rewards. Performance includes defining and evaluating performance and providing employees with feedback. Rewards include bonus, salary increases, promotions, stock awards, and perquisites. 10
  12. 12. TYPES OF REWARDS Besides verbal appreciation, tokens of appreciation, rewards (award trophies, framed certificates, special parking spaces, gift cards, pens or a free day off.) etc. are generally given to employees. When employers praise their employees’ performance it is a positive experience for both the manager and the employee. Appraisal enhances motivation, keeps employees goal-oriented and morale high. With high morale and a feeling of worth, employees will want to exceed in the workplace. 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 paid every month, it will be considered as a reward if similar worker is paid less. Additional Hour's Rewards: This is similar to that of overtime. However, it is paid to employees if they put in an extra hour of work for working at unsocial hours or for working long hours on top of overtime hours. Commission: Many organizations pay commission to sales staff based on the sales that they have generated. The commission is based on the number of successful sales and the total business 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 is aimed at employees to improve their performance and to work harder. Performance Related Pay: This is typically paid to employees who have met or exceeded their targets and objectives. This method of reward can be measured at either team or department level. Profits Related Pay: Profits related pay is associated with if an organization is incurring a profit situation. If the organization is getting more than the expected profits, then employees receive an addition amount of money that has been defined as a variable component of the salary. Payment by Results: This is very similar to that of profit related pay. This reward is based on the 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 on the number of 'pieces'' that they have produced. These pieces will be closely inspected to make sure that quality standards are being met. 11
  13. 13. Recognition: Employees will not always be motivated by monetary value alone. They do require 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 get motivated. Job enrichment allows more challenging tasks to be included in the day-to.day tasks performed by the employee. Job Rotation: Unlike job enrichment, job rotation refers to shifting employees between different functions. This will give them more experience and a sense of achievement. Teamwork: Teamwork is also considered as recognition. Creating teamwork between team members will improve performance at work. Social relationships at work are essential for any organization. Empowerment: Empowerment refers to when employees are given authority to make certain decisions. 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 as recognition for employees. Training could vary from on the job training to personal development training. Awards: This again is an important type of recognition that is given to employees who perform better. 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 be MONETARY or NON MONETARY. Some of the commonly given awards in various organizations are:  Service Awards Each year that an employee commits to an employer, he offers great advantages to the business or organization. Employees gain more knowledge of their position and responsibilities over time, and the company does not have to set aside time and money hiring and training new employees. Employers often reward employees who remain committed with a recognition pin or a certificate acknowledging the number of years of continuous service. Awards are often given for one year, five years, 10 years and 20 years or more. Employers may further reward long-term employees with an extra gift such as a watch or a special desk set, typically engraved with the employee's name and the date they received the honour. 12
  14. 14.  Employee of the Month Some workers will consider being designated Employee of the Month a great honor. This award is commonly given to the one employee each month who has given exceptional service, had perfect attendance and gone the extra mile for the company to ensure all customers are given the service they expect. These employees are often recognized during monthly staff meetings with a plaque 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 take care in choosing employees in a manner that shows no favoritism. If others perceive that employees are chosen unfairly, the award can be counterproductive.  Attendance Awards Companies depend on employees to be punctual and perform tasks to their potential so that the work load can be evenly distributed. Employees who strive to be at work during every scheduled shift and never come in late deserve to be recognized in a special way. Perfect attendance 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 gift certificate to a local restaurant in appreciation for their commitment to the company.  Safety Awards Safety awards are a great way for employers to recognize employees or teams for their continued adherence to safety guidelines. This kind is typically awarded when an employee or a group 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 the team last experienced an injury. Cash bonuses or gifts such as tickets to popular local events make great safety awards.  Company Advancement The 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 higher position within the company or receive an annual raise in pay. Employers should choose candidates for advancement carefully, avoiding favoritism and ensuring that the most reliable and skilled employees are advanced to higher positions.  Special Operating Unit Award Individual bureaus may establish award programs which are appropriate to their particular interests 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 award programs can be cash or non-monetary. 13
  15. 15.  Cash-in-Your-Account Award A small cash award designed to recognize employees for going the extra mile in getting the job done. These awards do not recognize overall performance, but rather specific instances of exemplary performance. Awards range from $50 to $500, in $50 increments.  Suggestion Award Under the Suggestion Program, employees are granted an award for formal suggestions which have been evaluated and adopted. The amount of the award is determined by the amount of tangible and intangible benefits of the idea.  On-the-Spot Award A small award which is granted as a means to recognize employees for those day-to-day efforts which contribute "in a special way" to get the job done.  Certificates of Appreciation Certificates granted to employees or non-employees who have made outstanding contributions or who have performed significant services to the Department.  External Awards Awards sponsored by other agencies and non-Government organizations given to corporate employees. 14
  16. 16. CHAPTER 3 HR POLICIES AND INFORMATION TCS has developed an unbreakable bond with sound HR practices in an environment that defies traditional roles and responsibilities. The company views its employees as assets, which has to be utilized efficiently. The TCS senior management constantly keeps track of the vast intellectual assets, their skill sets, the status of projects on which they 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 IT skills in the immediate future. This enables the HR department to plan and schedule recruitment and training programs. Figure 1 illustrates the role of HR, which evidently is that of a facilitator. So whether it is recruitment or even career development, HR is the catalyst which initiates and institutionalizes processes. To manage all the functions for over 140000 employees is a Herculean task but the smoothness of operations is intriguing. The HR structure, which allows flexibility and empowerment, is the solution. TCS takes care of every aspect of Human Resource Management, from recruitment to training and career development. The company combines its aim of recruiting software engineers with the broader objective of improving educational standards in India. The company also frequently engages in reforming course curriculum and teaching methods for partnering institutes. TCS is well-recognized in the industry for its emphasis on employee training. Since about one and a half decades, the company has a fully functioning training center in Thiruvananthapuram, Kerala, to impart IT skills in the latest technology to its new recruits. 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 and managers. In their first couple of years at the company, employees are put to work on different technological platforms and applications. This is important for TCS as technologies and customer needs and preferences change without foreboding. The organization consciously does not try to develop its employees as specialists, as it knew that they would become useless once their area of specialization becomes obsolete. This 15
  17. 17. approach was different from that of many other IT companies, who stressed specialization of their workforce. The success of HR policies at TCS is reflected in the fact that its annual employee attrition rate was 12.6% for FY 2010-11, which is one of the lowest in the industry. The attrition rates in other IT companies stood at 17.5% during the same period. Of its employees, 28% are women while 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 its list of Top 20 employers in India. 16
  18. 18. In this paper, we are analyzing the reward structure of TCS, which is one of the results of the Performance Management System. PERFORMANCE MANAGEMENT SYSTEM AT TCS Performance management system actually operates when the whole system is designed carefully and it has been conveyed properly to employees in the same way. TCS follows an effective PMS system. The goal setting process for employees’ is done in a manner that it enables employees to realize about their contribution to the organizations better performance. It would be a very difficult task for multi- national company which has lakhs of employees in its organization. Then when it comes down to Performance Appraisal (PA), they are following Balanced Scorecard system to evaluate their employees. Then the Compensation is based on EVA Model, which will be explained in this paper at the latter part. PERFORMANCE APPRAISAL TCS 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 of employees on the basis of targets at four levels:  Financial Perspective  Internal Perspective  Customer Perspective  Learning and Growth 17
  19. 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 revenue growth, cost reduction, improved asset utilization and so on. Customer perspective looks at the differentiating value proposition offered by the employee. Internal perspective refers to the employee’s contribution in creating and sustaining value Learning and growth are self-explanatory. The weight given to each attribute is based on the function the employee performs. 18
  20. 20. When every of this aspect is communicated and understood well, the following four are taken care during the goal setting process. They are:  Objectives  KPIs/ Measures  Targets  Initiatives The appraisal is done mainly based on the aforesaid four aspects. Individual performance is based on these. Based on their individual achievements, employees are rated 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 poor performer continues getting low scores then the exit option may be considered. Over the years TCS has found the pattern that leads to the maximum decline in performance. If employees work for more than two years on the same project, typically either their performance dips or they leave the organization. To avoid that, TCS shuffles its employees between projects every 18 months or so. “Performance drops if motivation drops”. Employee utilization rate in TCS is about 76% that is highest in the COMPENSATION MANAGEMENT IN TCS TCS follows a model which is far ahead of other traditional system, which is Economic Value Added (EVA). It is not just any reward structure, 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 in the same way every individual employee would be able to improve his/her performance considerably. ECONOMIC VALUE ADDED (EVA) MODEL EVA model was developed by a New York Consulting firm, Stern Steward & Co in 1982 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 to maximize long-term shareholders wealth. Value that has been created or destroyed by the firm during the period can be measured by comparing profits with the cost of capital used to produce them. 19
  21. 21. Therefore, managers can decide to withdraw value-destructive activities and invest in projects that are critical to shareholder's wealth. This will lead to an increase in the market value of the company. However, activities that do not increase shareholders value might be critical to customer's satisfaction or social responsibility. EVA and Reward System: EVA sets managerial performance target and links it to reward systems. The single goal of maximizing shareholder value helps to overcome the traditional measure problem, where different measures are used for different purposes with inconsistent standards and goal. Rewards will be given to managers who are able to turn investor's money and capital into profits efficiently. Researchers have found that managers are more likely to respond to EVA incentives when making financial, operational and investing decision (Biddle, Gary, Managerial finance 1998), allowing them to be motivated to behave like owners. However this behavior might lead to some managers pursuing their own goal and shareholder value at the expense of customer satisfaction. It focuses on end results, instead means that allowed managers to have discretion and free range creativity, avoiding any potential dysfunctional short-term behavior. Rewards such as bonuses from the attainment of EVA target level are usually paid fully at the end of 3 years. This is because workers' performance is monitored and will only be rewarded when this target is maintained consistently. Hence, this leads to generation of long-term shareholders' wealth. 4 Ms OF EVA Stern Stewart describes four main applications of EVA with four words beginning with the letter M. MEASUREMENT EVA is the most accurate measure of corporate performance over any given period. Fortune magazine has called it "today's hottest financial idea," and Peter Drucker rightly observed in the Harvard Business Review that EVA is a measure of "total factor productivity" whose growing popularity reflects the new demands of the information age. 20
  22. 22. MANAGEMENT SYSTEM While simply measuring EVA can give companies a better focus on how they are performing, its true value comes in using it as the foundation for a comprehensive financial management system that encompasses all the policies, procedures, methods and measures that guide operations and strategy. The EVA system covers the full range of managerial decisions, including strategic planning, allocating capital, pricing acquisitions or divestitures, setting annual goals-even day-to-day operating decisions. In all cases, the goal of increasing EVA is paramount. MOTIVATION To instill both the sense of urgency and the long-term perspective of an owner, Stern Stewart designs cash bonus plans that cause managers to think like and act like owners because they are paid like owners. Indeed, basing incentive compensation on improvements in EVA is the source of the greatest power in the EVA system. Under an EVA bonus plan, the only way managers can make more money for they is by creating even greater value for shareholders. This makes it possible to have bonus plans with no upside limits. In fact, under EVA the greater the bonus for managers, the happier shareholders will be. MINDSET When implemented in its totality, the EVA financial management and incentive compensation system transforms a corporate culture. By putting all financial and operating functions on the same basis, the EVA system effectively provides a common language for employees across all corporate functions. EVA facilitates communication and cooperation among divisions and departments, it links strategic planning with the operating divisions, and it eliminates much of the mistrust that typically exists between operations and finance. The EVA framework is, in effect, a system of internal corporate governance that automatically guides all managers and employees and propels them to work for the best interests of the owners. The EVA system also facilitates decentralized decision making because it holds managers responsible for-and rewards them for- delivering value. 21
  23. 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 system EVA CONCEPT OF PROFITABILITY EVA 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 for increased shareholder value. In its simplest form, EVA can be expressed as the following equation: EVA = Net Operating Profit After Tax (NOPAT) - Cost of Capital As stated above, EVA is measured as NOPAT less a firm's cost of capital. NOPAT is obtained by adding interest expense after tax back to net income after-taxes, because interest is considered a capital charge for EVA. Interest expense will be included as part of capital charges in the after-tax cost of debt calculation. Other items that may require adjustment depend on company-specific activities. While the above adjustments are common in EVA calculations, according to Stern Stewart, those items to be considered for adjustment should be based on the following criteria. 22
  24. 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 earned COMPENSATION MANAGEMENT - EVA MODEL IN TCS TCS' compensation management system is based on the EVA model. It is the basis for giving incentives to employees and the bonus declared is a part of improved EVA achieved. With the implementation of Economic Value Added (EVA)-based compensation, the salary of employees comprised of two parts:  Fixed  Variable Fixed pay comprised of wages and pension while the variable part of the salary has the components like bonus, profit sharing and stock options. This was arrived after considering business unit EVA, corporate EVA, and also individual performance EVA. EVA is calculated as net operating profit after taxes minus a charge of the opportunity cost of the capital invested. The variable component in the salary structure of an individual 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 shown that kind of EVA growth. It was not just compensation, the process aimed at employees to also have got a feeling of ownership for their own unit, and its performance. Each employee is made to feel as if they are running their business. They had to think like entrepreneurs and know the cost attached to their business and how will they add value to the investment. TCS adopted EVA in 1999, when the company had a staff of around 15000, working at several locations across the world. Through the EVA model, TCS aimed at creating economic value by concentrating on long term continuous improvement. EVA measured operating and financial performance of the organization through BSC and the compensation of all employees was linked to it. TCS went in for the EVA as during that 23
  25. 25. time, the company was not a public limited company and hence didn’t have a stock option plan. There were several people who played an important role in the success of the organization, who needed to be recognized. As there was no wealth sharing mechanism in place, EVA was adopted to focus on continuous improvement rather than short term goals and also to motivate employees. It was designed to construct a defined incentive system, which would reward on the basis of profitability. In 1996, TCS was organized into a three dimensional model with the first dimension comprising of industry practices, which included engineering, transportation and telecom; the second dimension comprising of service practices like e-business, outsourcing, technology consulting; while global and regional operating areas formed the third dimension. A business unit could be a part of a service, a practice, a geographical unit or a combination of all the three. Every unit was considered to be a revenue center and had its own EVA target. The units that did not fall under the purview of any of these were corporate offices and research & development, the costs of which were divided among all the units. Through EVA-linked compensation, employees could claim stakes at three EVA levels. They are  At the organization level  At the business unit level  At the individual level The individual was informed how he or she could contribute to the EVA enhancement at all 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. 26. EVA was controlled by revenues, capital and costs, and an individual could contribute in any or all of these areas at all the three levels. The benefits of EVA were realized across all levels in the organization. Employees became aware of their responsibilities and their share in increasing the EVA of the unit and organization. All the units could determine how they had fared against the targets. The bonus banks also helped in sustaining performance from the individuals, with close relationship between pay and performance. There was an increased sense of belonging among the employees and the employees were motivated to increase their contribution as they were also equally benefited by the increase in EVA. EVA was not just a performance metric but an integrated management process aimed at achieving long term goals. 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. 27. ACHIEVEMENT OF TCS AFTER IMPLEMENTING THE REWARD SYSTEM OF EVA The company declared total revenues of US$ 2.24 billion and net profit of US$ 0.51 billion. TCS had been the first Indian IT company to achieve the US$ 1 billion revenue milestone in the fiscal 2002-03. It continued its success story when it became the first Indian IT company to earn revenues of more than US$2 billion per annum. ADVANTAGES OF EVA REWARD MODEL EVA is more than just performance measurement system and it is also marketed as a motivational, compensation-based management system that facilitates economic activity and 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. 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. 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. 30. CHAPTER 4 CRITICAL 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. 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. 32. CHAPTER 5 COMPARATIVE ANALYSIS COGNIZANT The reward system in Cognizant is similar to that in TCS. Based on the individual and group performance 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. Kudos CATEGORIZATION OF TEAM REWARDS:  Dream Team  Project of the Year The difference lies in the reward given. The Cognizant employees mostly get the cash prizes while the TCS employees get only the reward points which they can redeem against some goodies. KPMG The 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 and reinforces company’s reputation as an employer of choice in order to attract high caliber executives. 31
  33. 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 results for both the company and the employee. INFOSYS The 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 among employees, 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 on ratings from others who had benefited. For a few years, KCUs could be converted to money, but Infosys later discontinued the practice so that employees were not conditioned to believe they deserved a “biscuit” every time they did something good. KCUs remained a psychic reward and looked 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 as an effective tool to enhance the performance of employees. 32
  34. 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. 35. LIST OF ABBREVIATIONS S. 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
  36. 36. REFERENCES WEBSITES http://www.slideshare.net/sanmankulkarni/final-infosys http://researchdocs.cox.smu.edu/slocum/corpculture%20with%20Kerr.pdf http://www.kpmg.com/gr/en/whatwedo/advisory/performance-technology/people-services/hr- strategy/reward-systems/pages/default.aspx http://www.inc.com/encyclopedia/employee-reward-and-recognition-systems_pagen_3.html https://mailattachment.googleusercontent.com/attachment/u/0/?ui=2&ik=6b165d9b4f&view=att &th=1397694bf5ecb553&attid=0.2&disp=inline&realattid=f_h6hkn4eu1&safe=1&zw&saduie =AG9B_P4RR9dnyuCQ1jfveq8Zs_u&sadet=1346355369898&sads=PwTXuiT7aEs2iarWXWh TQCj51Aw http://www.slideshare.net/hsamseyla.access/151-quick-ideas-to-recognize-and-reward- employees http://www.slideshare.net/tomdaly/employee-rewards-programs-the-formula-for-successful- rewards http://www.emeraldinsight.com/journals.htm?issn=00483486&volume=33&issue=2&articleid= 879386&show=html http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/RewardsatMicrosoft.aspx http://en.allexperts.com/q/Human-Resources-2866/2008/4/Reward-Management.htm http://www.scholarpedia.org/article/Reward http://www.indianmba.com/Occasional_Papers/OP94/op94.html 35
  37. 37. BIBLIOGRAPHY Berry 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

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