Culture and Compensation: SRF

LimitedAnalysis of Consultant Recommendations

Group E12

• 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

Our Recommendations

4 broad job grades

Annual cost of living+ individual performance &

potential based

Independent of company's performance

14 Job grades

Compensation principle unchanged

Separate compensation structure for each business

unit

Potential based increases in range of 10-15%

Job levels reduced to 6

Individualized salary in same grade

"Development dialogue“ based new performance

management system

Salary increments for future years

Evaluation: achievement of specific goals+ initiatives

Rating inflation with time

1981

Job disparity among business units

Reluctance in transfer among units

Early 1990s

Evaluation: “control points”+ by multiple managers + combined

rating for performance and potential

2003

Evolution of SRF’s HR Policy

Advantages

• Objectivity and transparency in evaluation asratings from multiple managers included

• Financial security offered during poor performanceyears

• Benchmarking done to market rates every 2 yearsassuring fairness

• Performance appraisal aligned with SRF’s TQMbased approach

• Aimed at long-term incentive seeking employeeloyalty

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 short-

term incentives

• Potential and actual performance parameters

measured together in determining the salary, and

this leads to subjectivity

Market based salary

Assessed Potential

Individual Performance

Salary

SRF’s Current Performance Appraisal and Compensation System

SRF’s HR Values Aligned With Employee Needs

• Every person learns, grows, and experiences fulfillmentSelf Actualization

Self Esteem

Social

Security & Physiological

• 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

Maslow’s Hierarchy of Needs SRF’s HR Values

₹ 61 ₹ 72 ₹ 82 ₹ 106 ₹ 130

4.5% 4.4%5.1%

5.7%

8.1%7.2%

6.6%6.1%

4.5% 4.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006Th

ou

san

ds

Sales Profit Margin Staff Cost % of Revenues

Employee Compensation Has Been Fixed

• 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

• SRF has enough levers to increase employee

compensation through performance linked

variable pay system

• SRF’s fixed salary component can be

maintained in order to provide minimum

financial support to employees in times of poor

financial performance

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

• 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

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

10%

15%

25%

Average Good Outstanding

Pay Increase

• 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

SRF’s Non-financial ‘Psychological’ Awards Must Be

Augmented

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”

Introduce ‘variable pay’ compensation that is linked directly to individual and firm-wide performance

Consultant’s Recommendation

POSITIVE IMPLICATIONS NEGATIVE IMPLICATIONS

• Attracts ‘hungry’ performance oriented

employees reduces poaching and

identifies high performers

• Establishes direct links between employee

performance and SRF’s achievement of its

strategic objectives

• Lowers fixed wage bill for SRF and decreases

operating leverage hedge against

recession

• Signals moving away from emphasis on

moral values of promoting employee welfare

(retirement schemes and plan) Loss of

trust & loyalty

• Widening gap among employees due to

variable compensation Dissatisfaction

among mediocre employees

• Employees might exit if their compensation

is very negatively affected due to poor

financial performance of the firm

Existing Plan v/s Consultant’s PlanComparison Based On Motivation Theory

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

• 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 Plan v/s Consultant’s PlanSuccess Drivers

EXISTING CONSULTANT’s PLAN

ExternalEquity

AVERAGE Benchmarking, Low Attrition

HIGH Compensation is higher

InternalEquity

HIGH “DevelopmentDialogue” based evaluation

NA No information (depends on design of plan)

IndividualEquity

HIGH Individualized salary to ensure faircompensation reward

NA No information (depends on design of plan)

ProceduralEquity

HIGH Rating by multiple managers for objectivity

NA No information (depends on design of plan)

• The success of Consultant’s plan is contingent onhow the performance appraisal and rewardsdistribution system is structured such that itmotivates employees

• Employees expect that their efforts will produceperformance training programs to empoweremployees with skills, job descriptions clearlycommunicated

• 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 employeepreferences into account and offers choicebetween consultant’s plan and existing plan forcompensation

• 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

RecommendationsAlign Incentive Plan With ‘Moral Values’ Of Firm

1

• 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

RecommendationsOffer Customized Incentive Plan

2

Entry Level Employees15% Variable

Mid-level Management40% Variable

TopManagement75% Variable

• 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

RecommendationsNon-financial ‘psychological’ rewards should be included

3

• 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

RecommendationsPerformance standards are measurable and mutually agreed upon

4

• Multiplier approach must be incorporated for determining annual bonus or pay increase

under variable pay system to encourage individual performance

• Stock based compensation (SRF is a public firm) must be offered to key employees to

increase focus on long term performance of the firm

RecommendationsBalanced mix of short/long term incentives

5

FIRM’s PERFORMANCEIN

DIV

IDU

AL

PER

FOR

MA

NC

EExcellent 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