REWARD AND COMPENSATION

MANAGEMENT
Subject Code: BA4019
III Semester
HR Elective
 UNIT IV
PERFORMANCE RELATED COMPENSATION

 Performance management system (PMS)

 Performance objectives - indicators- standards and metric
 Effective performance modeling
 Dimensions of performance
 Competency based pay
 Team Compensation
 Gain Sharing Incentive Plan
 Enterprise Incentive Plan
 Profit Sharing Plan
 ESOPs
Performance management system (PMS)
• Performance Management is a continuous and systematic
approach that ensures the achievement of organizational business
goals by streamlining employee performance and efforts to match
the set goals efficiently. Performance Management builds a
communication system between a Manager and an employee that
occurs throughout the year, in support of accomplishing the
strategic objectives of the organization.
Performance Management Definition: Performance management is
defined as an ongoing process of identifying, measuring, and
developing the performance of the employees in the organization.
Its main objective is to focus on employee performance and direct
their efforts towards achieving the business goal of the
organization.
Usage of PMS
• The competency, skills, and knowledge gaps are also
identified through this process which can be improved by
providing guidance, training, coaching, and mentoring to
employees or teams at different levels and designations.
It optimizes the results through a proper channel and
process which reduces the conflicts and grievances
among teams or employees. Because each individual is
clear about the expectations from his/ her role and puts
their efforts to meet performance standards.
Purpose of Implementing Performance
Management System
Strategic : A performance management system is a tool that
should be aligned with overall organization goals followed
by department goals and individual goals.
Administrative: The performance management system is also
set as the deciding factor for employee promotion,
demotion, salary increment, transfer, and terminations
It enables to identify the performers, non-performers, or
underperformer employees in an organization. It enables
to identify the performers, non-performers, or
underperformer employees in an organization.
It merits the competency and skill level of employees
Purpose of Implementing Performance
Management System
Communication: It is an effective communication channel to inform
employees about their goals, job responsibilities, key deliverables,
and performance standards
A structured method to indicate the key areas of improvement
required by the employee in order to improvise his performance.
It provides the platform to learn and train on skills, and knowledge
for better performance and results.
Developmental: It is the structured method of communicating
positive feedback, improvement areas, and development plans.
The manager can use various methods like training, mentoring,
coaching, etc., and their team members perform better
Purpose of Implementing Performance
Management System
Organizational Maintenance: PMS is the yardstick for measuring
employee, department, and organization achievements
and evaluating the performance gaps through various tools
and techniques. Hence, it maintains the health of the
organization and its performance standards
Documentation: The performance management reviews,
feedback, and forms should be documented and maintained
periodically by every organization. It would enable them to
look forward, set new targets, design developmental needs,
design training and learning programs, and career progression
of employees and for the department. Hence, it helps in
driving the organizational needs to desirable objectives.
Benefits of PMS​
• It supports providing data to find the skills and knowledge gaps of employees in order to
improvise them through training, coaching, and mentoring systems.
• It motivates employees to take on new challenges and innovate through the structure
process.
• It provides new opportunities to employees for their growth and development in their
professional careers
• It defuses the grievances and conflicts among team members through a proper performance
evaluation system.
• It assesses the employee’s performance fairly and accurately against the performance
targets and standards.
• Employees would enable to provide better results because of clarity on their performance
targets.
• Performance management system provides the platform to discuss, develop and design the
individual and department goals through discussion among manager and their subordinates.
• The underperformer can be identified through performance reviews and can raise their skills
levels objectively. It quantifies the learning needs through individual development plans or
performance improvement plans as well.
Performance Objective
What is a Performance Objective?
DEFINITION: A performance objective is a specific end result that
contributes to the success of the unit or organization and that an
employee is expected to accomplish or produce.
Performance objectives provide focus to an employee’s work to
ensure that his or her actions are directed toward achieving
important mission-related outcomes. Performance objectives are
not work activities, task descriptions, or responsibilities listed in a
performance description.
• A work activity is the action that an employee takes when
performing his/her job.
• A performance objective specifies the outcome or end result of a
work activity.
THE FIVE PERFORMANCE OBJECTIVE AND
THEIR FUNCTIONS
Performance Indicators
A performance indicator or key performance
indicator (KPI) is a type of performance
measurement. KPIs evaluate the success of an
organization or of a particular activity (such as
projects, programs, products and other
initiatives) in which it engages.
KPIs refer to a set of quantifiable measurements
used to measure a company’s overall long-
term performance.
Categories of KPIs
Strategic KPIs are usually the most high-level. These
types of KPIs may indicate how a company is doing,
although it doesn't provide much information
beyond a very high-level snapshot. Executives are
most likely to use strategic KPIs,
Operational KPIs are focused on a much tighter
timeframe. These KPIs measure how a company is
doing month-over-month (or even day-over-day) by
analyzing different processes, segments, or
geographical locations.
Categories of KPIs
Functional KPIs hone in on specific departments
or functions within a company. These types of
KPIs may be strategic or operational but
provide greatest value to one specific set of
users.
Leading/Lagging KPIs describe the nature of the
data being analyzed and whether it is signaling
something to come or signaling that
something has already occurred
Types of KPIs
Financial Metrics: Key performance indicators tied to the financials typically focus on
revenue and profit margins.
Financial metrics may be drawn from a company's financial statements.
Examples of financial KPIs include:
• Liquidity Ratios (i.e. current ratio which divides current assets by current liabilities):
These types of KPIs measure how well a company will management short-term debt
obligations based on the short-term assets it has on hand.
• Profitability Ratios (i.e net profit margin): These types of KPIs measure how well a
company is performing in generating sales while keeping expenses low.
• Solvency Ratios (i.e. total debt to total assets ratio): These types of KPIs measure the
long-term financial health of a company by measuring how well a company will be able
to pay long-term debt.
• Turnover Ratios (i.e. inventory turnover): These types of KPIs measure how quickly a
company is able to perform a certain task. For example, inventory turnover measure how
quickly a company can convert an item from inventory to a sale. Companies strive to
increase turnover of activity to generate faster churn of spending cash to later recover
that cash through revenue.
Types of KPIs
Customer Metrics: Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer
retention. These metrics are used by customer service
Examples of customer-centric metrics include:
• Number of New Ticket Requests: This KPI counts customer service requests measures how many new and open issues
customer are having.
• Number of Resolved Tickets: This KPI counts the number of requests that have been successfully taken care of. By
comparing the number of requests to the number of resolutions, a company can assess its success rate in getting
through customer requests.
• Average Resolution Time: This KPI is the average amount of time needed to help a customer with an issue. Companies
may choose to segment average resolution time across different requests (i.e. technical issue requests vs. new account
requests).
• Average Response Time: This KPI is the average amount of time needed for a customer service agent to first connect
with a customer after the customer has submit a request. Though the initial agent may not have the knowledge or
expertise to provide a solution, a company may value decreasing the time a customer is waiting for any help.
• Top Customer Service Agent: This KPI is a combination of any metric above cross-referenced by customer service
representatives. For example, in addition to analyzing company-wide average response time, a company can analyze
who the three fastest responders are and who the three slowest responders are.
• Type of Request: This KPI is a count of the different types of requests. This KPI can help a company better understand
the problems a customer may have (i.e. the company's website gave incorrect or inaccurate direction) that need to be
resolved by the company.
• Customer Satisfaction Rating: This KPI is a vague measurement, though companies may perform surveys or post-
interaction questionnaires to gather additional information on the customer's experience.
Types of KPIs
Process Performance Metrics: Process metrics aim to measure and monitor operational performance
across the organization. These KPIs analyze how tasks are performed and whether there are process,
quality, or performance issues.
Examples of process performance metrics include:
• Production Efficiency: This KPI is often measured as the production time for each stage divided by the
total processing time. A company may strive to spend only 2% of its time soliciting raw materials; if it
discovers it takes 5% of the total process, the company may strive for solicitation improvements.
• Total Cycle Time: This KPI is the total amount of time needed to complete a process from start to
finish. This may be converted to average cycle time if management wishes to analyze a process over a
period of time.
• Throughput: This KPI is the number of units produced divided by the production time per unit. This is
the average amount of items produced in a given amount of time and how fast the manufacturing
process is.
• Error Rate: This KPI is the total number of errors divided by the total number of units produced. A
company striving to reduce waste can better understand the quantity of items that are failing quality
control testing.
• Quality Rate: This KPI focuses on the positive items produced instead of the negative. By dividing the
successful units completed by the total number of units produced, this percentage informs
management a KPI of its success rate in meeting quality standards
Performance Standards
Definition: Performance standards state the expectations
for employee roles and responsibilities as they relate
to the organization’s mission, vision, and values.
Performance standards are written, measurable criteria
against which an employee’s effort is evaluated to
determine the level of functioning.
In other words, a standard constitutes a yardstick against
which to evaluate progress. Performance standards
should be presented to an employee at the beginning
of every rating period.
Performance Standards
Measurement:
• General Measures: Performance standards should be: objective, measurable, realistic, and
stated clearly in writing (or otherwise recorded). The standards should be written in terms of
specific measures that will be used to appraise performance.
General measures used to measure employee performance include the following:
• Quality addresses how well the work is performed. Quality refers to accuracy, appearance,
usefulness, or effectiveness.
• Quantity addresses how much work is produced. A quantity measure can be expressed as a
general result to be achieved.
• Timeliness addresses how quickly, when or by what date the work is produced. The most
common error made in setting timeliness standards is to allow no margin for error. As with
other standards, timeliness standards should be set realistically in view of other performance
requirements and needs of the organization.
• Cost-Effectiveness addresses dollar savings to the [agency] or working within a budget.
Standards that address cost-effectiveness should be based on specific resource levels (money,
personnel, or time) that generally can be documented and measured in [the agency’s] annual
fiscal year budgets. Cost-effectiveness standards may include such aspects of performance as
maintaining or reducing unit costs, reducing the time it takes to produce a product or service,
or reducing waste.
Performance Metrics
Performance metrics are known as numbers and data
representing organizations’ abilities, actions, and
overall quality.
Various forms of performance metrics include profit,
sales, customer happiness, return on investment,
customer reviews, general quality, personal reviews,
along with reputation in marketplaces.
Take note that performance metrics can be various
when they are viewed through many different
industries.
Difference between KPI and performance
metrics
KPI Performance Metrics

KPIs are known as performance metrics

measurable values simply gets the status
showing you how of a business process
effectively you tracked
reach your business
goal

KPIs will track if you Performance metrics

can hit your get processes tracked.
business targets or
objectives
Difference between KPI and performance
metrics
Types of performance metrics for
employees
Performance metrics 1: Work Quality
Work quality metrics are talking about something on the quality
of your employee’s performance.
 Management by objectives
 Subjective appraisal by manager
 Product defects
 Number of errors
 Net promoter score
 360-degreee feedback
 180-degree feedback
 Forced ranking
Types of performance metrics for
employees
Performance metrics 2: Work Quality
When quantity is much easier to check and
manage than quality, there exist many ways to
measure employee performance metrics.
 Number of sales
 Number of units given
 Managing time, first-call resolution or
contact quality
Types of performance metrics for
employees
Performance metrics 3: Work Efficiency
There is a difficulty of both quantitative and
qualitative employee performance metrics are
that they will not say too much.
There should be a balance between quality and
quantity. The balance can be measured
because the metric considers the resources
that are needed to provide your customers
with a specific quality.
Types of performance metrics for
employees
Performance metrics 4: Organization Level
 Revenue each employee
 Profit by per FTE
 Human Capital ROI
 Absenteeism Rate
 Overtime per employee
Effective performance modeling
Plan: Performance Management begins when the
supervisor reviews the employee's position restriction,
communicates competencies, creates goals, and
discusses them with the employee.
Coach: The supervisor provides coaching and feedback
throughout the year to help their employees
successfully reach their goals.
Evaluate: During the evaluation process, the
supervisor may rely on multiple resources, such as the
employee self evaluation, performance notes created
during the year, accolades, and customer feedback to
assess the employee's performance. The supervisor
meets with the employee to discuss the performance
evaluation, explain the ratings, and provide feedback
about strengths and areas for improvement.
Reward: The supervisor recognizes and rewards
performance at year-end and during the year as
merited.
Effective performance modeling
Dimensions of Performance
Performance dimensions indicate broad
categorization of employees' behaviours and
actions, which form the basis of performance
assessment.
For example, strong networking ability is one of
the important performance dimensions of
marketing people to achieve results.
7 Important Dimensions of Performance

1. Result and Output

2. Input
3. Time
4. Focus
5. Quality
6. Cost
7. Output
Competency based pay
What is Competency Based Pay?
Competency based pay is a pay structure in which an
employee is paid for the skills, knowledge and
market relevance he or she possesses and not on
the basis of the job role, years of experience or
position employee is currently holding as per the
previous qualifications or skills.
Competency based pay structure motivates
employees as the employee feels he is being paid
for the worth he/she has.
 Advantages & Disadvantages of
competency based pay
Advantages Disadvantages
1. It helps motivate employees to perform 1. Sometimes competition within the
better and contribute to the company organization can lead to a disjoint in a
team, which affects overall output
2. Since the employees get rewarded for
something they feel they deserve, they 2. In some cases, competency based pay
become loyal to the company can lead to favoritism towards a particular
employee
3. Competency based pay helps push
employees beyond their comfort zone as
they feel they can earn more based on their
competencies

4. Subordinates can also earn more as

compared to seniors based on their
competency levels
Team compensation
Team compensation is a way of rewarding performance in team
settings. That is, individuals are rewarded based on
the performance of the team as opposed to individual
performance. There are different kinds of compensation such as
a portion of base pay, other financial rewards such as gain-
sharing, and non-financial rewards such as movie passes and gift
certificates.
For example, organizations may award teams by recognizing them
for exceeding expectations on the job. Additional examples
include coffee mugs, T-shirts, plaques, TV, DVD Player, vacation
vouchers etc.
Gain Sharing Incentive Plan
Gainsharing (sometimes referred to as Gain
sharing, Gainshare, and Gain share):
Gainsharing is best described as a system of
management in which an organization seeks
higher levels of performance through the
involvement and participation of its people. As
performance improves, employees share
financially in the gain. It is a team approach;
generally all the employees at a site or operation
are included.
Advantages & Disadvantages of Gain
Sharing Incentive Plan
Advantages Disadvantages

•Helps companies achieve sustained •Measures are narrower than organization-

improvement in key performance measures wide profit and therefore gains may be paid
•Rewards only performance improvement even though profits may be down.
•Payouts are self-funded from savings •Requires a participative management style
generated by the plan •Requires that management openly shares
•Aligns employees to organization goals information related to performance
•Fosters a culture of continuous measures
improvement •Employees may question or challenge
•Enhances employee focus and awareness management decisions that may adversely
•Increases the feeling of ownership and impact a gain.
accountability •Increases the level of organizational stress
•Enhances the level of involvement, since everyone has more of a financial stake
teamwork and cooperation in the organization's success
•Supports other performance improvement •Applies best to and a work environment
efforts and helps promote positive change that requires teamwork and collaboration
•Promotes morale, pride, and more positive rather that individual entrepreneurship
attitudes toward the organization •Paid on the basis of group performance
rather than individual merit
Enterprise Incentive Plans
• Enterprise Incentive Plans is a profit sharing
procedure by which an employer pays, or makes
available to all regular employees, in addition to
their base pay, current or deferred sums based
upon the profits of the enterprise.
• Under this scheme incentive are paid to all
organizational members on the basis of
organizational success over the period of time,
usually one year. Example ESOP, stock option,
profit sharing plan etc.
Profit Sharing Plan
What is a Profit Sharing Plan?
A profit-sharing plan is a defined contribution pension plan in which the
workers and employees are allowed to obtain their share in the overall
profit of the organization in such a way that they are encouraged to
contribute more and more to the profit of the organization and
motivates to give their best efforts; thus it is an incentive plan that gives
a variable benefit to the employees based on a certain percentage of
profit.
How Does it Work?
This plan specifies a certain percentage of profits for every particular
employee covered under the plan.
This plan provided quarterly or annual incentives to the employees of the
organization based upon the quarterly and annual returns, respectively.
Types of Profit-Sharing Plans
Cash Plan: The employees covered under this plan are given cash
or stock of the organization or company at the end of every year
or quarter, as the case may be.
Deferred Plans: The profit-sharing is directed into a specific fund
known as the trust fund, which provides the rewards to the
employees at a later date, often on the employees’ retirement.
Accordingly, immediate taxation on the employees’ incomes is
avoided under a deferred plan
Combination Plan: As the name suggests, this plan is a combination
of both the plans mentioned above, which pays a part of the
contribution in cash periodically, and part of the contribution is
deferred into a trust fund to be paid at the time of retirement.
Employee Stock Ownership Plan (ESOP)
An ESOP is a defined contribution employee benefit plan that allows
employees to become owners of stock in the company they work for. It is
an equity based deferred compensation plan.
How does ESOP work?
• The ESOP operates through a trust, setup by the company, that accepts
tax deductible contributions from the company to purchase company
stock.
• The contributions made by the company are distributed to individual
employee accounts within the trust.
• The amount of stock each individual receives may vary according to pre-
established formulas based on salary, service, or position.
• The employees may "cash out" after vesting in the program or when they
leave the company. The amount they may cash out may depend on the
vesting requirements.
Advantages & Disadvantages of ESOP
Advantages Disadvantages
Capital Appreciation. Companies sell Dilution. If the ESOP is used to finance the
some or all of their equity to employees company's growth, the cash flow benefits
and by doing so convert corporate and must be weighed against the rate of
personal taxes into tax-free capital dilution.
appreciation. This allows the owner to sell Fiduciary Liability. The plan committee
100% of his or her company, get money members who administer the plan are
out tax-free and still maintain control of deemed to be fiduciaries, and can be held
the company. liable if they knowingly participate in
Incentive Based Retirement. Provides a improper transactions.
cost-effective plan to motivate employees.
After all, who works harder, owners or
employees?
Advantages & Disadvantages of ESOP
Advantages Disadvantages
Tax Advantages. Enables tax advantaged Liquidity. If the value of the stock
purchasing of stock of a retiring company appreciates substantially, the ESOP and/or
owner. With this purpose, a company the company may not have sufficient
owner may sell their shares to the ESOP funds to repurchase stock, upon
and incur no taxable gain on the sale. A employees' retirement.
company owner can sell all or some of the Stock Performance. If the value of the
company to the employees cost free. company does not increase, the
Owners who sell 30% or more of their employees may feel that the ESOP is less
company to an ESOP are allowed to "roll- attractive than a profit sharing plan. In an
over" the proceeds into other securities extreme case, if the company fails, the
and defer taxation on the gain. employees will lose their benefits to the
Company reduces it's tax liability. A extent that the ESOP is not diversified in
company can reduce its corporate income other investments
taxes and increase its cash flow and net
worth by simply issuing treasury stock or
newly issued stock to its ESOP.