Culture and Compensation at SRF Limited_E12.pdf

Culture and Compensation: SRF Limited Analysis of Consultant Recommendations Group E12

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

Evolution of SRF’s HR Policy Job disparity among business units Reluctance in transfer among units

Early 1990s 4 broad job grades Annual cost of living+ individual performance & potential based Independent of company's performance

Evaluation: achievement of specific goals+ initiatives Rating inflation with time

1981

14 Job grades

Job levels reduced to 6

Compensation principle unchanged

Individualized salary in same grade

Separate compensation structure for each business unit

"Development dialogue“ based new performance management system

Potential based increases in range of 10-15%

Salary increments for future years Evaluation: “control points”+ by multiple managers + combined rating for performance and potential

2003

SRF’s Current Performance Appraisal and Compensation System Market based salary

Assessed Potential

Individual Performance

Salary

Advantages

Drawbacks

•

Objectivity and transparency in evaluation as ratings from multiple managers included

•

•

System needs to be updated in order to suit present trends such as increasing importance of short term rewards

Financial security offered during poor performance years

•

Benchmarking done to market rates every 2 years assuring fairness

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

•

•

•

Performance appraisal aligned with SRF’s TQM based approach Aimed at long-term incentive seeking employee loyalty

SRF’s HR Values Aligned With Employee Needs Maslow’s Hierarchy of Needs

Self Actualization

Self Esteem

Social

Security & Physiological

SRF’s HR Values

• Every person learns, grows, and experiences fulfillment

• All people are treated with respect and dignity • The community that is SRF is fostered and enhanced • Quality of life is enhanced continuously • All people are treated with fairness

• SRF’s Employee Costs haven’t risen in direct proportion to either sales or profits, implying that SRF’s compensation plan does not incentivize employees to benefit from the rapid growth of company

Thousands

Employee Compensation Has Been Fixed 140 120

9%

7.2%

8%

6.6%

100

8.1% 6.1%

80

• SRF has enough levers to increase employee compensation through performance linked variable pay system

60

4.5%

4.4%

5.1%

5.7% 4.5% 4.3%

7% 6% 5% 4% 3%

40

2%

• SRF’s fixed salary component can be maintained in order to provide minimum financial support to employees in times of poor financial performance

20 0

₹ 61

₹ 72

₹ 82

₹ 106

₹ 130

2002

2003

2004

2005

2006

Sales

Profit Margin

Staff Cost % of Revenues

1% 0%

Performance Measurement Lacks Links To Team Work And Strategic Goals • TQM based approach seems to be focused on measuring individual employee productivity such as “close three new customers”, “introduce two new products”

• TQM organizes productive effort by emphasizing team effort, but no acknowledgement of team performance in compensation

TQM based approach to evaluate each employee within “key result areas”

Ratings from multiple managers were combined and an assessment of potential for future performance was prepared

Commensurate pay increase was determined

• 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 SRF’s strategic vision

Pay Increase 25% 15% 10%

Average

Good

Outstanding

SRF’s Non-financial ‘Psychological’ Awards Must Be Augmented • Current policy rewards loyalty and performance but fails to motivate young employees who are motivated by short term rewards and might take time to be recognized as ‘rising stars’ • SRF needs to introduce formal recognition program, performance feedback mechanisms for motivating employees • SRF must also introduce leadership development programs and motivate young employees to align their personal growth goals with long term strategic goals of the company

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”

Consultant’s 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 SRF’s 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 Plan v/s Consultant’s Plan Comparison Based On Motivation Theory • Consultant’s plan will be successful in SRF because it will bring a performance oriented culture and motivate ‘hungry’ young employees who seek immediate rewards • However, SRF will have to be cautious in adopting a plan focused exclusively on extrinsic financial rewards, thereby ignoring non financial ‘psychological’ rewards critical for intrinsic motivation of employees • The incentive plan should reward employees for long term performance and limit proliferation of short term profit seekers  an EVA based or stock compensation plan might be more effective than a one time bonus

EXISTING

CONSULTANT’s PLAN

Hygiene

AVERAGE

Satisfied employees get adequate working conditions and pay

HIGH

Adds incentive plan to the existing compensation plan

Motivators

LOW

No efforts to enrich workers’ jobs and provide recognition

AVERAGE

Motivates performance oriented employees but does not provide details on non financial rewards

Existing Plan v/s Consultant’s Plan Success Drivers • The success of Consultant’s plan is contingent on how the performance appraisal and rewards distribution system is structured such that it motivates employees •

Employees expect that their efforts will produce performance  training programs to empower employees with skills, job descriptions clearly communicated

EXISTING

CONSULTANT’s PLAN

External Equity

AVERAGE

Benchmarking, Low Attrition

HIGH

Compensation is higher

Internal Equity

HIGH

“Development Dialogue” based evaluation

NA

No information (depends on design of plan)

•

Employees see the instrumentality of their efforts  incentive plans are easy to understand, performance appraisal is in quantitative (objective)

Individual Equity

HIGH

Individualized salary to ensure fair compensation reward

NA

No information (depends on design of plan)

•

Rewards are perceived to be valuable  incentive plan takes individual employee preferences into account and offers choice between consultant’s plan and existing plan for compensation

Procedural Equity

HIGH

Rating by multiple managers for objectivity

NA

No information (depends on design of plan)

Recommendations

Align Incentive Plan With ‘Moral Values’ Of Firm 1

• Create a hybrid plan that maintains SRF’s 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 SRF’s financial performance, also retain a high fixed component for lower level employees

Entry Level Employees 15% Variable

Mid-level Management 40% Variable

Top Management 75% Variable

Recommendations

Non-financial ‘psychological’ rewards should be included 3

• Enriching worker’s jobs and providing training so that employees are capable of handling more challenging tasks

• Flattening hierarchy in order to empower employees by offering them greater responsibilities for driving firm’s performance

• Performance feedback and employee recognition systems implemented in order to satisfy social and self-actualization goals of individuals

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

• Effectiveness of incentive plan must be evaluated periodically and adjusted in order to better align employee performance with firm’s performance

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

INDIVIDUAL PERFORMANCE

FIRM’s PERFORMANCE Excellent

Good

Fair

Excellent

1

0.9

0.8

Good

0.8

0.7

0.6

Fair

0.1

0.1

0.1

Poor

0

0

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