PERFORMANCE BASED AWARD SCHEME

by Ashit K. Sarkar

3E, Palmtree Place, 23 Palmgrove Road, Bangalore - 560047 Ph: (080)25540393

E-mail: [email protected]

_____________________________________________________________________________________________

The after effect of post liberalization era in India has brought in strong competition amongst organizations, which necessitates far greater attention to 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 organizations 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 organizations with lesser number of management levels and clearly defined & approved structures, unless the job enlarges with the upgrade. With the lifting of the managerial Salary ceilings imposed by the Government earlier, the salary differential expectations for good performance has now become possible, and more important, since generally larger salary increases have now become 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!

 

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.

 

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 Performance Award amount is perceived as much more satisfying, often at no extra cost or even at a lower total cost to the organization in the long run. At the same time it encourages managers to continue striving for even better awards in the coming years - a very desirable outcome for the organization. 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!

 

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 factors. With regular review systems, the consequent improved gains to the organization as a result of meeting such targets in the key result areas are also clearly evident to the performer, and to all others, and are certainly considered to be more fair and objective.

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

 

ESSENTIAL PRE-REQUISITES BEFORE INTRODUCING AN 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 each manager 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 factors will need care and review before finalization 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! Therefore clear-cut policies have to be framed first.

 

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, and be counter productive.

 

POSSIBLE EXAMPLE OF A VERY BASIC SIMPLIFIED METHODOLOGY:

Let us plan in the following imaginary scenario (for one level of managers):

       

ASSUMPTIONS

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

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

• The Board or the Top Management approves a gross overall cost increase @ 12%, including general improvement due to inflation and towards matching the competitive market, for the previous year's performance, & for any AWARD costs (converted to recurring figure).

• 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 METHODOLOGY:

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

  • Thereafter, distribute the balance Rs. 700 average increase (7% of Avg. Salary) in the following manner:

    @ 5% to Avg., @7% to 'Above Avg.' (+3% towards Award). & @10% to 'Outstanding' performers (+25% towards Award).The latter %age figure of the increase for 'Above Avg.'. & 'Outstanding' is for only for conversion to Once Off Lump Sum Award Amount. It IS NOT AN ACTUAL INCREASE in the Salary package. The basis for computing the Once off Gross amount will be using a multiplier factor (X) as explained 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).

            Those performing poorly have still been granted the general increase of 5% (Rs 500)- which is being given in the Allowances, and not in the Basic Salary

     

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

    HEADINGS (against Performance Ratings )	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) NOTE #	NIL	500	700	1000
    MONTHLY ACTUAL GROSS INCREASE (Rs)	500	1000	1200	1500
    Resulting Monthly Salary Increase %age	5	10	12	15
    Proposed Award($)cost basis/month/capita (Converted to Once Off Award, as explained below)	NIL	NIL	300	2500
    Total Per Capita Gross cost/month Estimate (Rs.)	500	1000	1500	4000
    Gross cost increase/month for the group (Rs.)	2500	75000	22500	20000	@
    Resultant % increase (incl impact of Award)	5	10	15	40
    Max. Award Amount ($) above multiplied by X	NIL	NIL	Rs 300 X	Rs. 1500 X

    (NOTE # : The amount is inclusive of any indirect costs on the Basic Salary increase as well)

    (@: The Total Gross Cost remains at Rs 1,20,000, i.e. at 12% agreed/permitted increase)

    (The maximum Annual Award Amount will be the multiple of the above $ figure by Factor "X", which is no longer a recurring monthly cost. It is: 300X15+1500X5, or Rs. 12000 per month, which is available for making the AWARD payments totaling Rs.12000 multiplied by factor "X")

    (It may be seen that if X is even 100, Abv Avg performers will get a Once Off Award of

    Rs 30000, & Outstanding performers an Award of Rs 1.5 Lakhs each)

     

    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 help in 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. This "fine tuning" (group performance) is an important motivator for overall performance improvement, and recognition of "team effort", and must be built into the Award Scheme design.

     

    Further, actual disbursement amount will be larger in the current year for the Award payments (without future recurring costs) - to generally satisfy the directions of the Board to limit overall costs to 12% annually.

     

    MULTIPLIER FACTOR ("X") DETERMINATION:

     

    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 a (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, Lum 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 very 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 organization to organization. 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 (within overall sanctioned limits) and the eligibility basis for each participant - this is a vital requirement in developing a just and fair rewarding system.

     

    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 organization, along with other factors.

__________________