HR Era,     Issue # 27,       Dec 1st, 2002

Special Supplement

- by Ashit K. Sarkar

Mr Ashit Sarkar is a very senior & accomplished member of HR fraternity. He has over 47 years experience in ITC & Britannia & consultancy services. Has been member of an ILO committee and traveled the world over.

Mr Sarkar sent us this article for you. December is the time HR Professionals should put on their thinking cap to design the next year's (Appraisal and) Reward Scheme for their company. We are happy to email it as a special supplement to this issue.

You will need to tabulate some of the data presented to understand it. Keep paper & pencil handy.
 

The Context

The after effect of post liberalization era in India has brought in strong competition amongst organisations, which necessitates far greater attention to the manager motivation to attract and/or to retain the high performing Managers.

Recognition and rewarding for performance has been identified as one of the most important prime motivator in all organisations striving for excellence. Other factors and stimulators (including ESOP's, or general review of terms necessary to remain competitive) are not being discussed here in this article, as only Performance Award is being focused here.

Granting promotion as a reward is often no longer possible in today's flatter organisations with lesser number of management levels and clearly defined & approved structures, unless the job enlarges with the upgradation.

With the lifting of the managerial Salary ceilings imposed by the Government earlier, the salary differential expectations for good performance has now become more important, since generally larger salary increases have now become not only feasible, but a general practice, as compared to the past. However, it may be noted that the operative word for satisfaction is the "differential", and not necessarily just the increase!

Traditional Practice: Increments

The earlier practice was generally to give increases to all within a narrow range, with usually a larger increment in the basic salary to the high performing individual, or to give a grade promotion, which attracted higher allowances & benefits.

Any increase in the total salary became the base for the next year, and continued for the rest of the service period. Therefore, a large amount of additional increase had substantial long term cost impact, and was generally restricted with Salary ceilings being operational.

The Approach Now: Increments + Performance Award or Bonus

Difficulties were often experienced with the Basic Salaries of high performers reaching the scale maximum quickly, and the low differentials in the increments not satisfying good performers.

Therefore, once off Performance Award or Bonus is now getting to be one of the more effective methods of a reward for performance - which is visibly substantial, and is a non-recurring cost in future years (unless of course, the future performance levels entitle the individual to such awards).

The large lump sum specific amount is perceived as much more satisfying, often at no extra cost or at a lower total cost to the organisation. At the same time it encourages managers to continue striving for similar or even better awards in the coming years - a very desirable outcome for the organisation. It also focuses the efforts of the managers & teams to the key results required during the year - with the Award amounts being known targets to be achieved!

Change in Appraisal Systems: Agreed Targets, Not Capabilities or Strengths  

Better appraisal systems are now generally being used, which are transparent, and reflect mainly on objectives achieved during the year against agreed targets in advance, rather than mostly on general capabilities and strengths of the individual. The reward methodology, has become more performance and result oriented, rather than reflecting on effort, capability and potential.

With regular review systems, the consequent improved gains to the organisation as a result of meeting such targets in the key result areas are also clearly evident to the performer, and to all others.

Best Solution for Driving Performance of Organisation

A combination of an Award and a better increment is possibly the best solution for the Result Generating managers. For the Average performer, a nominal increase over the inflation, and for Poor performers little or no increase may be considered, resulting in cost savings from the more generous increases to all as in the past, which contribute to the Award costs. With improved organisational results due to better performance levels, there is also more money available for distribution.

Pre-requisites Before Introducing Award System:

However, any Award system requires great care and thought, and also heavily depends on a good appraisal system and other support facilities. They need to be transparent, open and accepted as fair, which provide a reasonably fair opportunity to all to be able to get awards with high performance. This requires balanced allocation of achievable major objectives for each manager individually, and also as a team member.

There could be some awards shared by all for overall performance (e.g. increased profitability or growth), or for all in a function, or section, meeting their general targets or objectives. The rewards must be balanced between the main contributor of the result, and the team members. Without this, overall performance will suffer, as individuals will only pursue their personal objectives, and the team effort is likely to be ignored.

It is important that all managers in the same grade have reasonable opportunity to get similar maximum award amounts with high performance. Since all performances cannot be measured accurately, some degree of judgment will have to be accepted, and to avoid any ad-hocism, contributions towards long-term benefits and immediate results will also have to be balanced. These will need care and review before finalisation of the Awards.

It may also be understood that the Award system has to be lasting - it cannot be changed often or easily, and the amounts are expected to increase with time, and not be reduced!

While the overall increase may be seen in %age - which is an accounting tool, the actual increases should mostly be in "Amounts" - usually same for each sub-group (minor part may be linked to individual gross or salary, only if considered essential). It may be noted that %age based method increases the differentials between individuals, which may not be for performance.

Possible Methodology / Example of a Very Basic Scheme:

Let us work out a possible system in the following imaginary scenario (for one level of managers):

Assume there are 100 Jr. Mgrs., at an Avg. gross Salary of Rs. 10000 p.m.

Perf. Appraisal rates them as: 5% Poor; 75% Avg.; 15% Above Avg. & 5% Outstanding

The Management approves a gross increase @ 12%, including general improvement due to inflation and competitive market, also for the previous year’s performance, & the AWARD costs.

To improve market competitiveness, a minimum compensation improvement of Rs 500 p.m. is considered to be essential, and the inflation has been 8% in the previous year.

A Possible Decision:

To meet the general increase (& be competitive), increase of Rs 500 p.m. (5%) all round - in Grade Allowances - along with possibly grade scale extension may be carried out.

Thereafter, distribute the balance Rs. 700 (7% of Avg. Salary) planned increase as follows:

@ 5% to Avg., @7%+3% to 'Above Avg.'. & @10%+25% to 'Outstanding' performers (the latter %age figure of the increase for 'Above Avg.'. & 'Outstanding' is for only for conversion to Once Off Lump Sum Award, and IS NOT AN ACTUAL INCREASE in the Salary package). The Company may base conversion of the estimated Monthly amount to a Once off Gross payment on a decided multiplier factor (X) - below.

It may be noted that for Avg. Performance, the increase has been more than the inflation by 2%, making it 10%, i.e. Rs 1000 p.m. TOTAL INCREASE for all the Managers in this performance level category (the actual percentage increase for individuals will vary depending on their actual Salaries in relation to the Average Salary for the group).

Implementation of Above Decision:  

The following matrix may help in understanding the above figures, methodology & the outcome:

Levels of Performance:

  Poor

 Average

 Abv. Avg.

 Outstanding

Number of Jr. Managers:

 5

 75

 15

 5

General Grade Allowance Increase (Rs)

 500

 500

 500

 500

Performance Increment / p.m. (Rs)

 NIL

 500

 700

 1000

Monthly Actual Gross Increase (Rs):

 500

 1000

 1200

 1500

Proposed Award on cost basis (per month per capita)

 NIL

 NIL

 300

 2500

(These figures will be converted to Once Off Award as per Note-1 below)

Total Per Capita Gross cost/month Estimate (Rs.)

 500

 1000

 1500

 4000

Gross cost increase/month for the group (Rs.)

 2500

 75000

 22500

 20000

The Gross Cost (total of above four numbers) is Rs 1,20,000, i.e. Average Rs. 1200 per capita - at 12% agreed increase.

Max. Award Amount

 NIL

 NIL

 Rs 300 X

 Rs. 2500 X

Note-1: The saving of the recurring monthly cost budgeted is Rs 17000 per month:  i.e.=(300X15)+(2500X5), or Rs. 17000 per month. It is available for making the AWARD payments totaling Rs.17000 multiplied by factor X)

It may be noted that many of the “Average” performers may actually be eligible to share or get some of the Awards due to their participation or getting results in some of their Key areas, and “Abv. Avg.” & “Outstanding” only getting some or part of the Awards, and not the Maximum Award amounts shown.

Determination of Multiplier Factor (X) :

Conversion of 'limited period regular fixed amount payment' to a once-off immediate lump-sum amount may be done by using the financial method of determining the “present cost” of such recurring amounts, which depends on the interest rate, frequency & the period of payment. For example @ 10% interest rate, the present cost of (i) 25 year, or (ii) 20 year, regular monthly payment of Rs. 100 works out to approx. Rs. 11000 or Rs. 10400, which makes the factor (X) as 110 or 104 respectively for the above situations. At the same time, Lump sum payments affect the cash flow differently to recurring costs. The decision for deciding the above factor (X) can therefore be moderated as considered necessary, using the “present value” formula only as a guide.

Summary:

The above simplified example of valuing recurring and once off payment together to plan for the Salary Review exercise provides a fairly logical standard methodology, but the distribution & amounts etc. obviously will vary from organisation to organisation.

The needs and situation will require many other factors to be included. Further fine-tuning to cover the entire management staff at all levels will be necessary in a logical and acceptable way, including deciding on Team award amounts and eligibility basis for each participant - this is a vital requirement.

Transparency & openness of the reward system, fairness of the appraisal methodology and the help, sensitivity and support from the top management with clearer perception of the aspirations of the managers goes a long way in making the reward philosophy to be a positive motivator in the organisation, along with other factors.

Contributed by Mr Ashit K. Sarkar,

3E, Palmtree Place, 23 Palmgrove Road, Bangalore - 560047 Ph: (080)5540393 E-mail: ashitsarkar@vsnl.com

E-mail: ashitsarkar@vsnl.com, Home Page: http://personal.vsnl.com/ashitsarkar
 

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