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 SRFs HR Policy

Job disparity among business units Reluctance in transfer among units

Early 1990s
14 Job grades 4 broad job grades Annual cost of living+ individual performance & potential based Independent of company's performance Compensation principle unchanged Separate compensation structure for each business unit Job levels reduced to 6 Individualized salary in same grade "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

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

1981

2003

SRFs Current Performance Appraisal and Compensation System

Market based salary Assessed Potential Individual Performance Salary

Advantages
Objectivity and transparency in evaluation as ratings from multiple managers included Financial security offered during poor performance years Benchmarking done to market rates every 2 years assuring fairness Performance appraisal aligned with SRFs TQM based approach Aimed at long-term incentive seeking employee loyalty

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

SRFs HR Values Aligned With Employee Needs

Maslows Hierarchy of Needs
SRFs HR Values

Self Actualization

Every person learns, grows, and experiences fulfillment

Self Esteem

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

Social

Security & Physiological

Employee Compensation Has Been Fixed

SRFs Employee Costs havent risen in direct proportion to either sales or profits, implying that SRFs compensation plan does not incentivize employees to benefit from the rapid growth of company SRF has enough levers to increase employee compensation through performance linked variable pay system SRFs fixed salary component can be maintained in order to provide minimum financial support to employees in times of poor financial performance
Thousands
140 120 100 9%

7.2%

8%

6.6%

8.1% 6.1% 5.1% 5.7% 4.5% 4.3%

7% 6% 5% 4% 3%

80
60 40 20 0

4.5%

4.4%

2%

61

72

82

106

130

1% 0%

2002
Sales

2003

2004

2005

2006

Profit Margin

Staff Cost % of Revenues

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 based approach to evaluate each employee within key result areas

TQM organizes productive effort by emphasizing team effort, but no acknowledgement of team performance in compensation 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 SRFs strategic vision

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

Commensurate pay increase was determined

Pay Increase
25% 15% 10%

Average

Good

Outstanding

SRFs 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

Consultants 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 SRFs 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 Consultants Plan

Comparison Based On Motivation Theory
Consultants 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
Hygiene AVERAGE

EXISTING
Satisfied employees get adequate working conditions and pay No efforts to enrich workers jobs and provide recognition HIGH

CONSULTANTs PLAN
Adds incentive plan to the existing compensation plan Motivates performance oriented employees but does not provide details on non financial rewards

Motivators

LOW

AVERAGE

Existing Plan v/s Consultants Plan

Success Drivers
The success of Consultants 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 Employees see the instrumentality of their efforts incentive plans are easy to understand, performance appraisal is in quantitative (objective) Rewards are perceived to be valuable incentive plan takes individual employee preferences into account and offers choice between consultants plan and existing plan for compensation
EXISTING External Equity Internal Equity Individual Equity AVERAGE Benchmarking, Low Attrition Development Dialogue based evaluation Individualized salary to ensure fair compensation reward Rating by multiple managers for objectivity CONSULTANTs PLAN HIGH Compensation is higher No information (depends on design of plan) No information (depends on design of plan)

HIGH

NA

HIGH

NA

Procedural Equity

HIGH

NA

No information (depends on design of plan)

Recommendations
1

Align Incentive Plan With Moral Values Of Firm Create a hybrid plan that maintains SRFs 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 SRFs 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
3

Non-financial psychological rewards should be included Enriching workers 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 firms 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 firms 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
FIRMs PERFORMANCE
Excellent Good 0.9 0.7 Fair 0.8 0.6

INDIVIDUAL PERFORMANCE

Excellent Good

1 0.8

Fair
Poor

0.1
0

0.1
0

0.1
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