Evaluating Compensation Strategy and Incentive Plans

Evaluating Compensation Strategy and fillip Plans1.1.0 IntroductionIt has bring to pass more and more primal, especi anyy in the real conditions following the accredit crunch for administration to monitor and control labour prices, whilst striving for intensify magnitude productivity, better quality and good customer service.For this reason thither has been motif to review strategies, if non bring in new strategies towards employee remuneration and bonus schemes.In this competitive environment, companies argon looking to recruit and hold in juicy school practiseing and highly committed employees and winning note that this comes at a cost, but a cost justifiable enough to mark finish competitive vantage and success of the judicature.Michael H. Schuster, P.H.D on Aligning Compensation Strategy notes that Companies be examining the method and basis for compensating employees, there has been a growth in the way out of companies seeking to develop high doing, hig h committed work systems, arrange upon expanded roles for employees, require that employees accept more responsibility and accountability.Therefore employee earnings is an strategic element to the financial success of the organisation. A dependable speech pattern is placed on the fact that recompense and reward schemes should transparently glisten the financial potential of the comp each and draw hold it to the organisation dodge and objectives.In the knightly, wages and salaries usually grew only by a consistent and invariable spinal point. More recently, there has been a growth where the labour trade has become more and more aggressive and has brought about the notion that compensation and motivator packages must be competitive enough to attract and retain well sure-handed workers.2.1.0 Compensation StrategyAs all strategies for all organisation, the ultimate goal and objective is to maximise the wealth for shareholders. The compensation strategy should take into co nsideration thatThey should clearly implement a comfort found company management system.The persistent enclosure appreciation and capital jimmy of the companyMarket conditions and orientation of engaging qualified and skilled workersAnd important aspect is the cost of the strategy to the organisation.Compensation is one of the main concerns to safe(p) the high surgical process of the organisation. There is no understatement in saying that organisations perform beca lend oneself of the work organism carried out and accomplished by the people it employees, and therefore they afford the difference. In saying this, it is important to note that protecting valet de chambre capital is crucial, and this is done through pauperism, recognition, an appropriate reward and compensation scheme.An self-ex programatory and important element to consider in the strategy is the possible abbreviation of the cost of executive and employee compensation go away cost the organisation. This e xit be concentrated on the opportunity cost to the company of the stemma and implementation infantry parts. The cost in this case to the company would therefore be the foregone resources on the compensation agreement.It is said that money is a compelling source of motivation. But its likewise said that salary increase stop only motivate until the next hold increase is due.An element of any organisations compensation strategy is to always reflect the strategic care objectives. The objectives and goals should be clearly defined, making them achievable through the compensation structure.As declared earlier and reemphasised now, the compensation plan should be integrated with the doing objectives of the organisation and with the employees individuals goals.2.1.1 Core Elements of Compensation StrategyAn intensive analysis needs to be carried out on the organisation framework, this will be able to establish and reflect the demands of the future business development and which fra mework conditions will be required to structure an effective compensation strategy.It is even more important to define the management and operative aims taking into account value orientation. As well as the objectives that assimilate been set out for each employee and how their performance is evaluated.Therefore clear roles and responsibilities need to be defined and a strong communication system to be put in place to ensure that all employees are aware and know how their performance is reflected into the incentive scheme.former(a) elements to consider are should beGenericThey should be a vitiate in into the incentive plan by the employees. It should be designed in much(prenominal) a way that employees at all levels are participative and take up the same gaol and direction.Be of significant and Perceived encourage to the employee.Employees should be able to easily recognise the potential reward cogitate to performance. colligate to Individual public presentationAs stated by Bob Normand plant of Smart Business Management. A factor in the determination of how ofttimes an individual employee receives should be their performance rating as determined by their formal job review and appraisal.Employee LoyaltyA good incentive plan should be able to retain employees and gain their loyalty. Therefore, an incentive plan should foster employee tenure and performance.There are two main streams of rewards being monetary and non monetary. The monetary being the preferred, and is usually a Pay-For-Performance scheme. Types of performance based reconcile areStock based This will include stock options and grants, equity shares.Cash Compensation These are usually bonuses and are related to the achievement of performance objectives and goals that were set out. Cash incentive is the approximately coarse and preferred form of an incentive scheme.An effective compensation strategy if apply successfully can fulfil other objectives. This has been summarised in the dis hearten to a lower placeObjectiveResultAlignment to the strategy of business units.Strong merchandise position.Strengthens the performance and is result oriented.Competitive AdvantageEnable organisation change and flexibility to adapt to changed business situation.Success and forward moving organisation.Promotes motivation and loyaltyRetaining of highly skilled employees.Controversy Over incentive schemes1Over the past years, and more recently the past 2 years, where the economy experienced a depression and a down turn in the merchandise for most industries, there stool been continued sensitive arguments over corporate executives compensation and how they align to the firms performance. Holmstrom 1979,2looked at the contribution that made clear the trade off between risk and incentives in the moral hazard problem. This read was partially based on his unpublished dissertation.The media, public, politicians have raised concerns over the current executives compensation packages th at seem to drive employees towards taking short term risks, without taking into consideration the long term repercussions and effects on their organisation.As a result of this, there have been regulations being put on the table that look at restricted stock pay options and maximum level cash incentive, or other types of compensation that will focus more on long term performance. This will push executives to always base their investment and finance decisions with the shareholders best interest at hand. There will have to be a strong correlation between long term incentive compensation and the future firm performance.With the emphasis on transparency, chief executive officers pay is usually publicized in the press in papers and magazines such as Fortune Magazine that has an annual ranking of the highest gainful CEOs. It has been observed that the firms that pay their CEOs the highest are organisations that tend to be the ones experiencing high returns, and high operating performanc e in comparison to others.4.1.0 Performance Measurement and Incentive SchemesLeonard, 1990 and Hayes and Schaejar 2000, looked at the studies that focussed on the relationship between pay and the future accountancy performance of the organisation.There has been an assumption that in expeditious trades, executives and investors will capitalise the present value of future firm performance increase into the stock worth.The question is always 2 how do you align strategic performance appraises and results to compensation and incentive plans?.The first question to gather up when designing a bonus plan that replicates the incentive of an owner is how to measure business performance. The right measure of corporate performance will have strong ties to the amount of additional wealth that a company produces for its shareholders and by extension for society at large. It will guide people to make the decisions that will generate the added value necessary to fund their bonus, to re w a rd t he shareholders and to reinvest in business growth.They are several models that organisations can use to measure the performance and determine the level of incentive to be gainful out to executives and employees.Strategic Performance Measurement (SPM) ashes This measurement translates the business strategies and objectives into deliverable results. The advantage of this model is that it combines the financial, strategic and operating measures and compares it against how well an organisation meets its objectives, goals and the targets.Economic Value Added (EVA) / Value Based Management This model emphasises on performance measurement and the cost of capital and measures the value created for shareholders. The main advantage of this measure is that its focus is on wealth creation.Balanced Scorecard System Its core element is its emphasis on the key business drivers such as customer and employee satisfaction, operational excellence and new product development.4 As strongly support ed by Stern and Co. Economic Value Added offers more to an organisation as it focuses on measuring value created for shareholders, which is the total and objective of any organisation to create wealth for its shareholders. This measure is also focuses more towards the capital markets and assists in developing organisation strategies at all levels of the organisation.5 Other advantages of EVA as a measurement tool areIt creates measurable objectives and goals for employees and are specificIt can easily align the trading operations and business units with the overall corporate strategy.EVA can link individual performance and compensation plans to business strategies.5.1.0 Relationship between Stock Price Performance and Incentive SchemesThe surmise by a paper written by M. Cooper, H. Gulen and P. Ray Performance for Pay? looked at the relationship between CEO incentive compensation and future stock price performance.They summarised that The efficient market hypothesis suggested th at markets capitalise incentive pay grants into the stock price at the announcement day, resulting in no relation between incentive pay and future stock price performance.On the other hand, the optimal incentives hypothesis suggests that whilst compensation and incentive schemes can be aligned to managerial interests with shareholders value wealth creation and maximisation, investors whitethorn not necessarily react to the information. This could be as a result of not understanding the incentive strategy, and not having the right measurement model to gauge it against. Therefore investors are not able to observe or attain the value it may have to the organisation future stock price performance.67A irresponsible relation may be evaluated between the incentive pay and the future stock price performance.8Needless to say, based on studies carried out in the past and present on the relationship between Stock Price Performance and Incentive Schemes, there is not much direct evidence that shows that incentive plans do happen to a companys improvement in future stock price performance. mavin of the challenges of stock returns are they having shareholders expectations imbedded in them. Other challenges are that economic surmise would not be able to predict that increase in incentives would eliminate to increase in profitability.9 A much earlier study by Masson 1971 linking financial incentive to future performance of the organisation, his findings were that firms and organisation that had harming financial incentives showed a better stock market performance during the post-war period. destinationDue to the increased competition of business, it has subsequently increased the competition for employing skilled workers, and retaining them.A compensation strategy creates and brings about a unified culture, and offers stomach and advances the implementation of the business strategy. This will essentially promote performance and employees will be result oriented.Incenti ve plans should be reviewed annually to analyse if they are actually effective and increasing the performance of the organisation and meeting the strategic objectives. This involves looking at any accomplishments and the desired outcome.Despite the soaring pay, many another(prenominal) experts argue that the system is working better than ever. They see the bull market and healthy corporate sector as proof positive that companies get what they pay for. (Business Week April 21, 1997, p.p 60)Performance based pay is the best incentive strategy for any organisation as it maximises on the strategic plan, as the compensation strategy requires that the plan is set on organisation goals and objectives. This has a major influence on the employees. Pay for performance has been cited to be a more motivating factor, both short term and long term incentives.10A study carried out established that employees showed a more positive work attitude with a pay for performance incentive. Other benefits of a pay for performance incentive scheme is the pay receives special manipulation in some contexts. This is under the Internal Revenue Code (IRC).Essentially, at the end of it all, the compensation strategy and incentive plans main purpose is to drag and retain employees.Motivate and establish loyalty towards the company.Making sure the cost of the strategy is line.Encourage peak performance.