Management Consulting/MS-22


What are the objectives, psychological bases, and important consideration in designing reward system of an organization? Critically evaluate these with and organizational example of reward system you are familiar with or known to you. Give brief and relevant details of the organization you are referring to.

What are the objectives, psychological bases, and important consideration in designing reward system of an organization? Critically evaluate these with an organizational example of reward system you are familiar with or known to you. Give brief and relevant details of the organization you are referring to.
What motivates an employee to work better? people in his workplace? an awesome manager? employee’s nature of job?

Well, these could just be one of the reasons, but employee compensation always tops the list.

What is employee compensation?

effective compensation planning To be precise, Compensation is what an employee gets in return to his contribution to the organization.  The term compensation includes pay, incentives, and benefits offered by the employers for hiring the services of employees. Compensation planning plays an important role in any HR department’s efforts to obtain, maintain and retain an effective workforce. Compensation planning follows a set of objectives.

The most important objective of any pay system is fairness and equity. The term equity has three dimensions:
1.Internal equity: This refers to the pay corresponding to difficulty level of the job assigned to an employee. More difficult jobs should be paid more.
2.External equity: External equity ensures that an employee is compensated equally in comparison to similar jobs in the labor market.
3.Individual equity: Individual equity highlights equal pay for equal jobs, i.e. each individual pay is fair in comparison to others doing the same/similar job.

The ultimate goal of compensation planning is to reward and encourage employees to do well in their jobs. Some of the objectives of are sought to be achieved through effective compensation planning like:
1.Entice the employees: Compensation should be high enough to attract the best talent in an organization. If an organization wants the service of a competent employee, then the salaries must be high enough to motivate them to apply and join you.
2.Retain the best talent: An employee would leave an organization if compensation levels fall. So, it is essential to have a proper compensation panning to retain the best talents.
3.Ensure equity: Pay should always be equal the worth of the job of an employee. Employees doing similar jobs should be paid equally and likewise, more qualified employees should be paid better.
4.Reward new ideas and behaviors: Pay should reward an employee’s loyalty, commitment towards work, his experience, the amount of risk the job holds and the initiatives taken. When companies fail to reward such contributions, employees will fall apart.
5.Cost control: Hiring cost should never be too high. The compensation planning should ensure that workers are neither overpaid nor underpaid.
6.Compliance: The compensation planning and management should invariably satisfy governmental compliance of minimum wages, bonus, allowances, benefits etc.
Compensation and benefits (is a sub-discipline of human resources, focused on employee compensation and benefits policy-making.
The basic components of employee compensation and benefits
Employee compensation and benefits are divided into four basic categories:
1. Guaranteed pay – a fixed monetary (cash) reward paid by an employer to an employee. The most common form of guaranteed pay is base salary.
2. Variable pay – a non-fixed monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance, or results achieved. The most common forms of variable pay are bonuses and incentives.
3. Benefits – programs an employer uses to supplement employees’ compensation, such as paid time off, medical insurance, company car, and more.
4. Equity-based compensation – stock or pseudo stock programs an employer uses to provide actual or perceived ownership in the company which ties an employee's compensation to the long-term success of the company. The most common examples are stock options.
Guaranteed pay
Guaranteed pay is a fixed monetary (cash) reward.
The basic element of guaranteed pay is base salary which is paid on an hourly, daily, weekly, bi-weekly or monthly rate. Base salary is typically used by employees for ongoing consumption. Many countries dictate the minimum base salary defining a minimum wage. Employees' individual skills and level of experience leave room for differentiating income levels within a job-based pay structure.
In addition to base salary, there are other pay elements which are paid based solely on employee/employer relations, such as salary and seniority allowance.
Variable pay
Variable pay is a non-fixed monetary (cash) reward that is contingent on discretion, performance, or results achieved. There are different types of variable pay plans, such as bonus schemes, sales incentives (commission), overtime pay, and more.
An example where this type of plan is prevalent is how the real estate industry compensates real estate agents. A common variable pay plan might be the sales person receives 50% of every dollar they bring in up to a level of revenue at which they then bump up to 85% for every dollar they bring in going forward. Typically, this type of plan is based on an annual period of time requiring a "resetting" each year back to the starting point of 50%. Sometimes this type of plan is administered so the sales person never resets or falls down to a lower level. It also includes Performance Linked Incentive which is variable and may range from 130% to 0% as per performance of the individual as per his KRA.
There is a wide variety of benefits offered to employees such as Paid Time-Off (PTO), various types of insurance (such as life, medical, dental, and disability), participation in a retirement plan (such as pension or 401(k)), or access to a company car, among others. Some benefits are mandatory which are regulated by the government while others are voluntarily offered to fulfill the need of a specific employee population. Benefit plans are typically not provided in cash but form the basis of an employees' pay package along with base salary and bonus.
"qualified" employee benefit plans must be offered to all employees, while "non-qualified" benefit plans may be offered to a select group such as executives or other highly-paid employees. When implementing a benefit plan, HR Departments must ensure compliance with federal and state regulations. Many states and countries dictate different minimum benefits such as minimum paid time-off, employer’s pension contribution, sick pay, among others.
Equity-based compensation
Equity based compensation is an employer compensation plan using the employer’s shares as employee compensation. The most common form is stock options, yet employers use additional vehicles such as restricted stock, restricted stock units (RSU), employee stock purchase plan (ESPP), and stock appreciation rights (SAR).
The classic objectives of equity based compensation plans are retention, attraction of new hires and aligning employees’ and shareholders’ interests with the long-term success of the company.
Organizational place
In most companies, compensation & benefits (C&B) design and administration falls under the umbrella of human-resources.
HR organizations in large companies are typically divided into three sub-divisions: HR business partners (HRBPs), HR centers of excellence, and HR shared services. C&B is an HR center of excellence, like staffing and organizational development (OD).
Main influencers
Employee compensation and benefits main influencers can be divided into two: internal (company) and external influencers.
The most important internal influencers are the business objectives, labor unions, internal equity (the idea of compensating employees in similar jobs and similar performance in a similar way), organizational culture and organizational structure.
The most important external influencers are the state of the economy, inflation, unemployment rate, the relevant labor market, labor law, tax law, and the relevant industry habits and trends.
Bonus plans
Bonus plans are variable pay plans. They have three classic objectives:
1. Adjust labor cost to financial results – the basic idea is to create a bonus plan where the company is paying more bonuses in ‘good times’ and less (or no) bonuses in ‘bad times’. By having bonus plan budget adjusted according to financial results, the company’s labor cost is automatically reduced when the company isn’t doing so well, while good company performance drives higher bonuses to employees.
2. Drive employee performance – the basic idea is that if an employee knows that his/her bonus depend on the occurrence of a specific event (or paid according to performance, or if a certain goal is achieved), then the employee will do whatever he/she can to secure this event (or improve their performance, or achieve the desired goal). In other words, the bonus is creating an incentive to improve business performance (as defined through the bonus plan).
3. Employee retention – retention is not a primary objective of bonus plans, yet bonuses are thought to bring value with employee retention as well, for three reasons: a) a well designed bonus plan is paying more money to better performers; a competitor offering a competing job-offer to these top performers is likely to face a higher hurdle, given that these employees are already paid higher due to the bonus plan. b) if the bonus is paid annually, employee is less inclined to leave the company before bonus payout; often the reason for leaving (e.g. dispute with the manager, competing job offer) 'goes away' by the time the bonus is paid. the bonus plan 'buy' more time for the company to retain the employee. c) employees paid more are more satisfied with their job (all other things being equal) thus less inclined to leave their employer.
The concept saying bonus plans can improve employee performance is based on the work of Frederic Skinner, perhaps the most influential psychologist of the 20th century. Using the concept of Operant Conditioning, Skinner claimed that an organism (animal, human being) is shaping his/her voluntary behavior based on its extrinsic environmental consequences – i.e. reinforcement or punishment.
This concept captured the heart of many, and indeed most bonus plans nowadays are designed according to it, yet since the late 1940s a growing body of empirical evidence suggested that these if-then rewards do not work in a variety of settings common to the modern workplace. Research even suggested that these type of bonus plans have the potential of damaging employee performance.

To develop a successful compensation strategy you need to take the following steps:
1.Define your compensation philosophy.
2.Link compensation to your overall business strategy.
3.Change the culture and reinforce it with compensation.
4.Reward the behaviours that drive the results.
5.Think total compensation.
6.Measure your return on invested payroll £s.

1. Define your compensation philosophy  

A sound compensation programme begins with a clear, focused compensation philosophy that defines and answers fundamental questions such as:
•What do we want to pay for?
•How do we want to pay for it?
•What is our competitive posture?
•How will we split up the pie?

We recommend developing a total compensation mission statement that clearly specifies the results you want to accomplish, the behaviours necessary to achieve them, what you will pay people for, and how you intend to position your company in the marketplace. This lays the foundation for your entire compensation programme. It serves as a compass and a beacon to guide you through the difficult task of creating and implementing the programme.

Who creates the total compensation mission statement? Depending on the size of the company and the management structure, any or all of the following: board of directors, board of advisors, CEO, top management team and representatives from others in the organisation.

Your pay philosophy should:
•reflect the values and beliefs of the owner/CEO/management team
•reflect the economic realities of your pricing structure and market share
•take into account "softer" issues such as corporate culture, industry standards and your growth strategy
•provide a foundation to make consistent hiring and promotion decisions.

2. Link compensation to your overall business strategy

Most organisations know where they want to go and how to get there. Compensation provides a very effective tool for getting employees to move in the same direction and follow the same path.

For example, suppose a young, growing company wants to increase market share. Its compensation plan needs to reward people for bringing in new customers and clients. In contrast, a more mature company might need a better balance between growth and profit. Accordingly, its compensation plan should equally reward activities that generate growth and profit.

Another company might identify world-class customer service as one of its top strategic objectives. It would need to reward the activities (in all areas of the organisation, not just the customer service department) that lead to outstanding customer service.

If compensation doesn't have a direct connection to corporate goals and objectives, employees will take any direction because they don't know which one to take. Compensation strategy starts with identifying your top strategic objectives, defining what they mean in terms of organisational behaviour, and designing your compensation plan in a way that rewards and recognises those behaviours.

3. Change the culture and reinforce it with compensation

A good compensation strategy alone won't get the results you want. In order to get permanent behaviour change, you must first change the culture and the environment. Then use compensation to reinforce those changes.

If all you do is dangle money in front of people, you get short-term blips in behaviour and then people go right back to the old ways of doing things. You don't get sustained productivity improvements unless you change the culture. That involves identifying the results you want to achieve as an organisation, identifying the behaviours that lead to those results, and then designing a compensation programme to reinforce and reward those behaviours so that they become permanently instilled in the organisation.

Compensation provides a very effective tool to reinforce organisational values. Too often, CEOs talk about values but then don't walk their talk. For example, many companies say they value teamwork but continue to reward individual performance. Or they talk about customer service but reward only financial performance.

Compensation sends powerful messages to your employees about who you are as an organisation, what you value and what skills and results you reward. If you want to instil certain values in the organisational culture, reward them through your compensation programme.

4. Reward the behaviours that drive the results

In order to reward behaviour that drives results, you have to know what creates value in your company. Value gets created in two ways. First, as an organisation you must do the things your customers want, need and desire. This represents the qualitative side of the business. Second, everyone in the company has to help the company to do those things in a profitable manner. This represents the quantitative side of the business. Without both, a company won't survive for the long term.

To get the customer's perspective on value, call your top 20 customers and ask two questions:
•What are we doing now that is creating value for you and makes you feel good about doing business with us?
•What can we do to earn more of your business?

Asking these questions will generate some amazing feedback. It will definitely change your thinking, not just in the compensation arena but in almost every area of your business.

Next, look internally to see who is creating value on the financial side. Every employee must do one of two things (or both): create or support sales (revenue side) or keep expenses to a minimum (expense side). If you find that people aren't doing either one, you have to question whether or not their function should continue to exist.

Between the quantitative and qualitative pieces, you can start to work out where value really gets created in your company. Then you can design a compensation plan that will get the results you want because you have identified the specific behaviours that directly lead to those results.

5. Think total compensation

In today's fiercely competitive labour markets, compensation provides a powerful tool for attracting and retaining quality people. Yet, most employees think of compensation as base pay plus the occasional bonus. They forget – or are never told – that anywhere from 30% to 50% of their total compensation comes from other areas, including:
•profit sharing
•retirement and pension plans
•shares or equity
•incentives and bonuses
•recognition and rewards
•holiday and personal time off
•opportunity income (education reimbursement, professional development programmes, etc.).

If you don't think, talk, market and sell total compensation, you're leaving a lot of money on the table. Talk about compensation frequently and impress upon employees that it includes a lot more than base pay. When comparing compensation for potential employees, always use total compensation, because base pay never tells the whole story.

We recommend providing employees with an annual total compensation statement that lists the complete package of rewards and recognition they receive for working in your organisation.

A total compensation statement surprises employees because the bottom-line number always exceeds what they normally think of as their compensation. You can't afford to lose employees who might get lured away by promises of a bigger base pay. Make sure all your people understand and appreciate the full range of compensation and benefits they enjoy in your company.

Don't stick the compensation statement in the salary slip envelope. Instead, sit down with each employee and say: "I want to show you the full extent of our commitment to you." (Don't say: "Here's what you cost us", because that insults the employee.) Thank them for doing a good job and go over all the costs, answering any questions they may have.

This little meeting will get you two weeks' mileage and then employees will forget about it. The real value comes when competitors try to steal your people. They may offer more £s above the line but not as much below the line. Once your employees become aware of all that you pay them, they start to ask the right questions when other employers come hunting.

6. Measure your return on invested payroll £s

How do you know whether you're getting a good return on your invested compensation £s? The answer is simple: measure it. Yet, far too many companies either ignore or overlook this critical practice.

Most companies don't even measure their return on compensation £s, much less determine whether it is a good one or not. To measure your compensation ROI, decide up front what you want to look at: productivity, bottom-line results, employee turnover, ability to recruit and retain key people, morale, customer service or any number of measures.

Identify the measures that come from your overall business strategy, then define and track them to see whether the return on your compensation £s matches your expectations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Long-term incentive plans are offered to employees by many companies. Incentive plans have benefits, as well as drawbacks. Many companies utilize more than one incentive plan with their employees to respond to different needs. Long-term incentive plans allow employees to focus their performance more on long-term goals by tying employee performance to employee rewards. They are designed to increase employee productivity, morale and loyalty.
1.   Service Incentive
o   One type of long-term incentive plan for employees is the employee service incentive. This incentive rewards employees for years of service with the company. A schedule of awards is created and when employees reach each milestone, a specified reward is given. In most programs of this kind, the rewards increase in value the longer the employee is with the company. This program encourages employee retention and loyalty. This incentive program offers long-term rewards to employees and offers another reason for an employee to stay with the company.
Profit Sharing Plans
o   Profit sharing plans are a common long-term incentive offered to employees. A company specifies in advance a certain percentage of profits they will distribute at the end of a year. This incentive plan encourages employees to work hard and do their jobs efficiently and effectively. The higher the company's profits are for a period, the higher amount of distributable income is available for disbursement to employees. When a company does well, employees know they will receive larger bonuses. Annual bonuses are an incentive that encourages employees to continue working with a company.
Stock Options
o   Stock options are another common long-term incentive program instituted by many corporations. With this incentive program, employees are rewarded by giving them the option of purchasing the corporation's stock at a reduced price. The price is set in advance, and is only offered to employees meeting certain criterion. The price of the stock is usually set low enough that employees normally choose to purchase the stock, knowing that the price will most likely increase. When the price increases, the owner of the stock makes money. This type of incentive directly correlates the employee's performance levels to the reward earned. It also encourages employees to strive for efficient work at the company, because the company's performance is directly tied to the stock price.
Performance Bonus Plans
o   Many companies choose to reward employees based on each employee's annual performance review. Certain objectives must be met in order for the employee to qualify for a bonus. Typically, a scale of rewards is determined in advance, allowing employees to have a goal toward which they may strive. This type of incentive program rewards employees on an individual basis, rather than tying company performance to employee rewards.

The  current  trend  is  one  of  integrated  reward   approach.
Reward system usually mean the financial reward on organization gives its employees in return for their labour. While the term reward system, not only includes material rewards, but also non-material rewards. The components of a reward system consist of financial rewards (basic and performance pay) and employee benefits, which together comprise total remuneration. They also include non-financial rewards (recognition, promotion, praise, achievement responsibility and personal growth) and in many case a system of performance management. Pay arrangements are central to the cultural initiative as they are the most tangible expression of the working relationship between employer and employee.
The  integrated reward  system  includes:
Job evaluation and profiling
•   Defining key performance indicators
•   Analysis and modification of pay levels and structures to reflect both internal and market relativities
•   Designing of performance evaluation processes
•   Structuring of individual, team and corporate performance bonuses
Social climate surveys with focus on remuneration
•   Designing flexible benefits plans
•   Implementation of new reward components in compensation package
•   Implementation and assistance in change communications
•   Training for internal specialists in reward structure planning and maintenance

Performance Based Reward is based on the definition of key performance indicators identified as part of job evaluation, and linking these indicators with reward components. A combination of performance measuring system and additional motivational components delivers an integrated performance-based reward system.
Flexible Benefit Schemes are a modern approach to the management of budgets for staff remuneration. Employee benefits constitute a considerable portion of staff costs, but they are often expended without the desired effect since employees do not perceive the full value of benefits. This system   increases  the   effectiveness and enable better control.
Why reward system is required?
These components will be designed, developed and maintained on the basis of reward strategies and policies which will be created within the context of the organizations between strategies, culture and environment: they will be expected to fulfill the following broad aims;

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. Supportive Managers: Support individual managers in the achievement of their goals.

5. Motivate Employees : Motivate employees to achieve high levels of quality performance.

6. Compete in the Labour Market: Attract and retain high quality people.

7. 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.

8. Fairness and Equity: Reward people fairly and consistently according to their contribution and values to the organization.

9. Improved Skills : Upgrade competence and encourage personal development.

10. Improved Quality: Help to achieve continuous improvement in levels of quality and customer service.

11. Develop team working : Improve co-operation and effective team working at all level.

12. Value for money: Pride value for the money for the organization.

13. Manageable: Be easily manageable so that undue administrative burdens are not imposed on managers and members of the personal department.

14. Controllable: Be easily controllable so that the policies can be implemented consistently and costs can be contained within the budget.
Describe the organisation you are referring to

The  organization, I am  familiar  with  is  a
-a  large  manufacturer/ marketer of  safety products
-the products  are  used  as  [personal  protection safety] [ industrial  safety]
-the products  are  distributed through  the distributors as well as  sold directly
-the  products  are  sold  to various  industries like  mining/fireservices/defence/
as  well  as  to  various  manufacturing  companies.
-the  company employs  about  235  people.
-the  company  has  the following  functional   departments
*finance/ administration
*human resource
*customer  service
*warehousing/  transportation

The  Reward systems focus on positive reinforcement. Positive reinforcement is the most effective tool for encouraging desired behavior because it stimulates people to take actions because they want to because they get something of value (internally or externally) for doing it. An effectively designed and managed reward program can drive an organization's change process by positively reinforcing desired behaviors.
The SMART criteria.
These criteria  used when designing and evaluating programs. Programs should be:
•   Specific. A line of sight should be maintained between rewards and actions.
•   Meaningful. The achievements rewarded should provide an important return on investment to both the performer and the organization.
•   Achievable. The employee's or group's goals should be within the reach of the performers.
•   Reliable. The program should operate according to its principles and purpose.
   *Timely. The recognition/rewards should be provided frequently enough to make performers feel valued for their efforts
Performance Management.  
The process of performance management reflects how the work gets done and creates the environment in which people feel valued for their achievements. The performance management process includes four critical components:
•   Focus on what is important to change or be improved.
•   Measures to determine whether and how much progress is being achieved.
•   Feedback so that performers will know whether and how much progress is being achieved.
•   Reinforcement so that everyone celebrates achievements as they are unfolding.
Indicators of successful performance management include the following:
•   All measures are understood by the employees, who can describe the importance of their activities to the agency. Measures address results and behaviors/processes.
•   A tracking system is used to monitor performance in the areas identified.
•   The performance measures and progress are displayed in a public area.
•   Data on the performance charts is current.
•   The team leaders/managers are actively engaged in coaching staff members and providing assistance to improve performance.
•   Periodic celebrations mark achievements as they are realized. These celebrations are regarded positively by employees.
•   Data indicate performance is improving.

Recommend that organizations:
•   focus on variables critical to success;
•   create timely, chart-oriented feedback;
•   create celebrations that mean something to the performers;
•   use performance reviews as an opportunity to reflect "how we won" and "how we lost" make them as often as necessary to cement the learning;
•   anchor the memory of achievements achievement-oriented firms measure a lot, accomplish milestones frequently, and do much celebrating;
•   don't rely on annual performance appraisals as the sole source of feedback;
•   when designing programs, avoid copying programs used by other organizations; and
•   don't make the design process into the "let's make a form" game.

Approaches of compensation management
There are 3P approach of developing a compensation policy centered on the fundamentals of paying for Position, Person and Performance. Drawing from external market information and internal policies, this program helps establish guidelines for an equitable grading structure, determine capability requirements and creation of short and long-term incentive plans.
The 3P approach to compensation management supports a company’s strategy, mission and objectives. It is highly proactive and fully integrated into a company’s management practices and business strategy. The 3P system ensures that human resources management plays a central role in management decision making and the achievement of business goals.
•   Paying for position
•   Paying for person
•   Paying for performance
Because it is so important to employees, the issue of pay deserves to be clearly addressed. In spite of their hesitance, managers are capable of dealing with this sometimes difficult issue in a professional and effective manner. By keeping the following basic points about pay in mind, they can address virtually any pay-related topic with their employees in a professional and productive manner.
Specificity is Key
Pay is a topic with many different shades and a variety of implications. Whenever approaching the subject, it is important to work out the details beforehand so that specifics can be clearly communicated. For the manager, this means that the increase amount is nailed down before discussing a promotion with an employee. No chance of misunderstanding or false expectations can be permitted. Far too often, managers are apt to discuss generalities. “It will mean a good increase.” What exactly does that mean in terms of the employee’s monthly budget? If care is not taken here, good news can become the source of conflict and resentment.
By the same token, if asked for a raise, the manager should request that the employee suggest a specific number that he believes reflects his value. Once the employee provides that number, the manager can do his homework and decide what, if anything can be done. The employee can then be given a definitive response.
Pay is Relative
What one employee considers a fantastic increase maybe an insult to another? Each individual has a unique set of creativity and competencies. Pay should be based on the performance, position and the competencies/skills the person is having.
Pay is Not Created Equal
Various forms of pay have different purposes. The two most common forms of direct cash compensation in most companies are base pay and bonus. Base pay is the annual salary or hourly wage paid to an employee given the job he holds, While bonus is typically (or at least should be) rewarded based on the achievement of a goal of the organization. Discussions about bonus payments should be as specific as possible. This is the opportunity to point out particular accomplishments that contributed to overall team or company success. Even if the bonus is paid to all employees based on a simple overall company profit target, the manager should use the opportunity to point out specifically how individual employees helped achieve that target.
Distributing bonus checks presents a unique motivational opportunity for a manager. Handing money to an employee while discussing actions and behaviors he would like to see repeated, creates a powerful link between performance and reward. Discussions about base pay increases can be a bit different. Most companies claim to link their annual base pay increases to performance. In reality, however, base pay decisions take into account a variety of factors, including the relative pay of others in the same job, the company’s increase budget, market practices and where the individual falls within his pay range.
Even when performance is a factor, the manager is faced with the difficult task of evaluating an entire year’s worth of activity and then categorizing it according to the percentage increase options allowed by the budget. It becomes very difficult to pinpoint specific employee actions or accomplishments as the reason for the increase.
For these reasons, it’s appropriate for the discussion about base pay increases to be more general and balanced. Both strengths and weaknesses of the employee should be addressed. The actual increase is then based on an overall assessment, as opposed to a link with one or two specific outcomes. Any other factors that impact the increase percent, such as budget or pay range should be openly discussed as well.


-base pay
-cost  of  living  rise
-merit INCREASE , which  is based  on
*performance  against  the KEY  PERFORMANCE  INDICATORS.
*bonus  for  exceptional  performance  with  the  scope of the  job  position


The following tentative guidelines are suggested:

1. A performance pay system should be designed to promote the kind of performance an organization needs. In order to do so
o an analysis should first be made of the objectives and results sought
o the principles/policies and practices needed to obtain the results (e.g. team work) should be established
o these policies and practices should form part of an overall human resource management strategy.
2. Employees should be consulted in the formulation of the plan (to ascertain the type of rewards most likely to have motivational effect), in regard to its operation and distribution of
rewards, and in monitoring the scheme.
3. The criteria for the determination of performance pay should be
o objective
o measurable and measure only what is important
o that it is operated along with an appraisal system which measures performance appropriately
o designed to feed back information to employees, and not only to management
o easily understood
o related to what is controllable, so as to exclude what is beyond the control of employees.

4. The intrinsic reward system should be strengthened if need be, e.g. through
o consultation, communication, participatory systems
o training
o job satisfaction and responsibility
o reorganization of work processes

5. How the performance pay is shared is as important as the quantum, because the manner of sharing affects employees' perceptions as to whether the scheme is equitable.

6. The impact of the scheme also depends on the frequency of the payment. Therefore the reward should follow the performance as soon as possible.

7. The scheme should be given wide publicity within the enterprise.

8. The performance level should be achievable or else the scheme will have no motivational impact.
9. The quantum of pay on account of performance which is placed at risk (i.e. the amount that can be lost due to poor performance) should be carefully determined. At the same time the scheme should be sufficiently flexible to absorb downturns and adequately reward when performance is good


1. Single Mindedness – “you get what you pay for” – no more, no less. The activities that are rewarded get done, to the exclusion of other activities that are not rewarded. Example: The dysfunctional behaviors that are observed when a sales representative is put on straight commission.
2.  Control – externalities can control the outcomes, positive or negative. There can be windfall affects (the bull market improving the stock value of all stock options) or negative externalities (a bear market or recession that lowers the value of all stocks). Employee performance results may be magnified or diluted by these effects.
3.  Measurement error – some measures can be “gamed” or manipulated and may not reflect “true” performance. Sales reps can withhold sales and report it in a different period so they are not penalized by a cap on sales commissions. Managers can use “creative accounting” measures to report greater profits than were actually experienced by the firm.

4. Inflexibility – managers or employees may resist change of the basis of compensation because they are comfortable with current basis for pay and want to avoid risk of taking reduction in earnings in new system.
5. Misalignment of incentives – if pay emphasis is on a goal that is no longer relevant, that goal will continue to be emphasized until the pay system places emphasis on a different objective.
For example,  managers may emphasize short-term goals, even  if long-term goals are more relevant,  until the pay system recognizes long-term  goals to a greater extent than short-term  goals.  The reward mix for complex  jobs with several goals must reflect the  relative value of attaining the mix of  goals.
6. Line of Sight problem - division performance and corporate performance should be reflected in the pay system. If division performance and corporate performance are closely linked than both division and corporate performance should contribute incentives to the managers’ pay for performance plan. If division performance is independent of corporate performance, then the emphasis should be on rewards for meeting division goals.

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Leo Lingham


management consulting process, management consulting career, management development, human resource planning and development, strategic planning in human resources, marketing, careers in management, product management etc


18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc


24 years in management consulting which includes business planning, strategic planning, marketing , product management,
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