Our Recommendations
Accept variable pay incentive plan proposed by consultants but redesign and implement it as follows
Align Incentive Plan With Moral Values Of Firm Offer Customized Incentive Plan Include Non-financial psychological rewards Performance standards must be measurable and mutually agreed upon Balanced mix of short/long term incentives
Early 1990s
14 Job grades 4 broad job grades Annual cost of living+ individual performance & potential based Independent of company's performance Compensation principle unchanged Separate compensation structure for each business unit Job levels reduced to 6 Individualized salary in same grade "Development dialogue based new performance management system
1981
2003
Advantages
Objectivity and transparency in evaluation as ratings from multiple managers included Financial security offered during poor performance years Benchmarking done to market rates every 2 years assuring fairness Performance appraisal aligned with SRFs TQM based approach Aimed at long-term incentive seeking employee loyalty
Drawbacks
System needs to be updated in order to suit present trends such as increasing importance of short term rewards No employee accountability for poor financial performance of SRF Potential to lose employee motivated by shortterm incentives Potential and actual performance parameters measured together in determining the salary, and this leads to subjectivity
Self Actualization
Self Esteem
Social
7.2%
8%
6.6%
7% 6% 5% 4% 3%
80
60 40 20 0
4.5%
4.4%
2%
61
72
82
106
130
1% 0%
2002
Sales
2003
2004
2005
2006
Profit Margin
TQM organizes productive effort by emphasizing team effort, but no acknowledgement of team performance in compensation Performance measurement is not linked to strategic objectives such as increase customer satisfaction, enhance competitiveness
Consequently the total rewards package of employees lacks short and long term incentives, perks that can motivate them to realize SRFs strategic vision
Ratings from multiple managers were combined and an assessment of potential for future performance was prepared
Pay Increase
25% 15% 10%
Average
Good
Outstanding
Guaranteed 2 years salary to surviving spouse and assistance for family in case of employee death
Rising stars given high level management responsibilities, even for multimillion-dollar profit centers
Consultants Recommendation
Introduce variable pay compensation that is linked directly to individual and firm-wide performance
POSITIVE IMPLICATIONS NEGATIVE IMPLICATIONS
Attracts hungry performance oriented Signals moving away from emphasis on employees reduces poaching and moral values of promoting employee welfare identifies high performers (retirement schemes and plan) Loss of trust & loyalty Establishes direct links between employee performance and SRFs achievement of its Widening gap among employees due to strategic objectives variable compensation Dissatisfaction among mediocre employees Lowers fixed wage bill for SRF and decreases operating leverage hedge against Employees might exit if their compensation recession is very negatively affected due to poor financial performance of the firm
EXISTING
Satisfied employees get adequate working conditions and pay No efforts to enrich workers jobs and provide recognition HIGH
CONSULTANTs PLAN
Adds incentive plan to the existing compensation plan Motivates performance oriented employees but does not provide details on non financial rewards
Motivators
LOW
AVERAGE
HIGH
NA
HIGH
NA
Procedural Equity
HIGH
NA
Recommendations
1
Align Incentive Plan With Moral Values Of Firm Create a hybrid plan that maintains SRFs focus on promoting employee welfare and provides financial security to all its employees Current staff costs (4.3% of revenues in 2007) indicate that SRF can maintain its fixed compensation policies while adding a variable pay incentive plan
Recommendations
Offer Customized Incentive Plan
2
Offer a choice to employees so that they can choose between current (low risk) compensation or a variable pay (high risk high return) plan Increase variable pay component for managers/top executives as their performance has a direct bearing on SRFs financial performance, also retain a high fixed component for lower level employees
Recommendations
3
Non-financial psychological rewards should be included Enriching workers jobs and providing training so that employees are capable of handling more challenging tasks
Recommendations
Performance standards are measurable and mutually agreed upon
4
Standards that will be used to judge employee performance must be consistent and measurable (quantifiable)
Supervising managers should decide upon performance metrics after discussion with
employees at the end of each appraisal cycle
Recommendations
Balanced mix of short/long term incentives
5
Multiplier approach must be incorporated for determining annual bonus or pay increase under variable pay system to encourage individual performance
FIRMs PERFORMANCE
Excellent Good 0.9 0.7 Fair 0.8 0.6
INDIVIDUAL PERFORMANCE
Excellent Good
1 0.8
Fair
Poor
0.1
0
0.1
0
0.1
0
Stock based compensation (SRF is a public firm) must be offered to key employees to increase focus on long term performance of the firm