GIMT Session 3

8/3/2019 GIMT Session 3

1/23

Reward & Compensation Strategies,

Skill Based Pay, Broad Banding, Variable Pay, ProfitSharing, ESOP, Executive Compensation.

Training & Development Strategies,

Cross-Cultural Training, Multi-Skilling, SuccessionPlanning, Creating a Learning Organization


2/23

Variable Pay

"a payment system under which money rewards vary with measured

changes in performance according to predetermined rules.

Widely used approach to accelerate employees performance

The salary is divided into two parts: Fixed (credited every month)&

variable (follows as per goals/targets achieved)

Rewards individual worker/team of workers for extraordinary efforts.

Ensures a performance driven work culture in organization and

retain the best /exceptional talent available.

Papori


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Variable Pay: Incentives forPerformance

Variable

Pay Assumptions

Some people perform better

and are more productive than

others

Better performing employees

should receive more

compensation

Some jobs contribute more

to organizational success

than others

Part of compensation should

be tied directly to

performance and results


4/23

134

Types of Variable Pay Plans


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IDEAL RATIO (Fixed:variable) Factors affecting the ratio are levels in the company, skill function,

experience, designation, responsibilities.

As a rule, the hunters i.e. employees engaged in sales activities, usually

have a larger variable than the farmers i.e. employees in execution roles. In

the Indian conditions, for the sales portfolio the ratio of fixed to variable canbe as much as 60:40, while in countries like the US it could be as much

30:70.

For non-sales roles, most companies normally follow an 80:20 ratio

depending on the person meeting his or her objectives.

The thumb rule ensures that the variable pay is directly proportional to the

level or responsibilitiesowing to the contribution an employee is able to

make to the revenues or growth of the organisation.


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Developing Successful Variable PayPlan

Develop clear, understandable plans

that are continually communicated.

Use realistic performance measures.

Keep plans current and linked to

organizational objectives.

Link results to payouts that

recognize differences.

Identify variable pay incentives

separately from base pay.

Successful

Variable Pay

Plans


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Advantages:

Rewards exemplary/outstanding performance

Encourages employees to achieve beyond work

targets.

Helps to integrate individual & organizational goals It helps to differentiates between potential & average

employees

Opportunity to maximise cash flows

Flexible pattern of payment helps to bring down thefixed cost.

Improve customer service/product quality

Increase employee retention/loyalty

Encourage employee teamwork


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Limitations:

Variable pay packages could lead to strife among

performers and non-performers on issues of biases

while measuring performance

Variable pay packages can also make some

employees complacent in the long run.

Variable pay plans should not be allowed to

become entitlement plans.


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PROFIT SHARING Profit-sharing refers to definite arrangements under which workers regularly

receive, in addition to their wages and salaries, a share on some pre-

determined basis, in the profits of the undertaking, the sum allocated to

workers varying with the level of profits.

It is an important class of company-wide schemes.

It is found more often in larger, more profitable firms, multinationals,financial sector enterprises and firms with higher than average skill levels.

It can be summed as a system to distribute a portion of the profits of the

organization to employees.

Primary objectives: Improve productivity

Recruit or retain employees

Improve product/service quality

Improve employee morale


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TYPES OF PROFITSHARING: Cash/Bonus based schemes : involve immediate cash payment out

of profits at the end of the year and, hence, offer the most tangible

incentive to employees over the short term. These schemes are

taxable.

Share-based schemes: involves the possibility of employeesacquiring shares in the company free or on preferential terms. It

provides a more forward-looking and longer-term incentive.

Deferred profit-sharing (DPS): the bonus, whether in cash or in

shares, cannot be realised before a pre-determined period of timehas elapsed, to avoid immediate taxation.


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MERITS:

Bring group of employees to work towards a common goal.

Employee focus on profitability

The cost of the plan varies with the rise & fall of companys

revenues.

It enhances commitment to organizational goals.


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DEMERITS:

The pay of each employee is dependent on cos profitability so no

recognition of individual performances.

The focus is on profitability which can also be at the expense of

quality.

Variability of profits from year to year due to drastic swings in the

earnings.

Disclosure of financial information

Profit results not strongly tied to employee efforts


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ISSUES :

Deffered Profit sharing Plan

Amount of future benefits

Vesting Right

Funding choices

Allocation choices


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GAIN SHARING

It is a group-incentive , pay-for-performance wage system that links financial

rewards for employees to improvements in the performance of the entire

unit.

Programs under which both employees and the organization share the

financial gains according to a predetermined formula that reflects improved

productivity and profitability.

Shared money is realized through increasing revenues/cutting costs.

It is a long run based programme aimed at improved productivity and

profitability .

It offers industry to improve plant performance and boost productivity while

reducing costs attributed to poor quality (waste, spoilage, rejects, customer

returns).


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TYPES OF GAINSHARINGPLANS

Scanlon: It strongly rely on employer improvement. Rewards

come from employee participation in improving productivity

and reducing costs.

Rucker: Shared rewards come from the difference between

labor costs and sales value of production.

Improshare: Greatly emphasises on financial bonus rather

than on employee participation.Gainsharing based on

increases in productivity of the standard hour output of work

teams.


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CRITERIA FOR SUCCESSFULGAINSHARING PLANS

FORMULA

TRAINING


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IncreasingImportanceReasons accountable for GP popularity:

Team Based work Design

Dissatisfaction with other pay-for-performance

systems

Cost Effectiveness


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MERITS: It emphasizes employee involvement and encourages new ideas and

problem solving.

A Gainsharing plan can be tailored to fit company's needs and culture.

Gainsharing plans foster routine communication about the business

conditions, operating performance, and customer service.

Employees are allowed to address quality and productive issues.

Increase cooperation across workers and teams by creating common

goal.

Subject to fewer measurement difficulties than individual- or team-based

incentives.

Easy to formulate bonus calculations and achieve acceptance of plans.


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DEMERITS:

Protects low performers

Criteria used to trigger rewards

Management-labor conflict


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Gainsharing vsprofitsharing

Gainsharing Profit Sharing

Purpose To drive performance of anorganization by promoting awareness,alignment, teamwork, communicationand involvement.

To share the financial success of thetotal organization and encourageemployee identity with companysuccess.

Application applies to a single facility, site, or

stand-alone organization.

applies organization-wide; companies

with multiple sites .It measureorganization-wide profitability ratherthan the performance of a single site.

Measurement Payout is based on operationalmeasures (productivity, quality,spending, service)

Payout is based on a broad financialmeasure of the organizations

profitability.

Funding Gains and resulting payouts are self-funded based on savings generated byimproved performance.

Payouts are funded through companyprofits.

Payment Target Payouts are made only whenperformance has improved over ahistorical standard or target.

Payouts are typically made when thereare profits; performance doesntnecessary have to show animprovement.


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Employee Eligibility Typically all employees at a site areeligible for plan payments.

Some employee groups may beexcluded, such as hourly or unionemployees.

Payout Frequency Payout is often monthly or quarterly.

Many plans have a year-end reservefund to account for deficit periods.

Payout is typically annual.

Form of Payment Payment is cash rather than deferredcompensation.

profit plans were primarily deferredcompensation plans; organization used

profit sharing as a pension plan.

Method of Distribution Typically employees receive the same% payout or cents per hour bonus.

The bonus may be a larger % ofcompensation for higher-level

employees. The % bonus may be lessfor lower level employees.

Plan Design & Development Employees often are involved with thedesign and implementation process.

There is no employee involvement inthe design process.


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Communication A supporting employee involvementand communication system is anintegral element of Gainsharing andhelps drive improvement initiatives.

Since there is little linkage betweenwhat employees do and the bonus,there is an absence of accompanyingemployee involvement initiatives.

Pay for Performance Plan versus

Entitlement

Gains are generated only by improved

performance over a predetermined baselevel of performance. Therefore,Gainsharing is viewed as a pay-for-

performance initiative.

Profit sharing often is viewed as a

entitlement or employee benefit.

Impact on Behaviors Gainsharing reinforces behaviors thatpromote improved performance. Usedas a tool to drive cultural andorganization change.

Many variables determine profitabilityand the bonus amount which is beyondemployee control.

Impact on Attitudes Heightens the level of employeeawareness, helps develop the feeling ofself worth, builds a senses of ownershipand identity to the organization.

Influences the sense of employeeidentity to the organization, particularlyfor smaller organizations.


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THANK YOU

Documents

GIMT Session 3