Performance related Pay Performance related pay (PRP) has been in existence for a very long time. PRP is also the most controversial element of a Performance Management System (PMS). PRP as a concept is excellent because it encourages entrepreneurship, risk taking ability, individual brilliance and initiative at all levels. The principle of equitable distribution of share of the profits is not fair to high performers. The high performers have to be rewarded more or they will try to escape from the environment. This is the main reason for high turnover of talented people at all levels. The biggest reason for adopting a PRP is to retain talented people and at the same time motivate average performers to become better performers. With increasing competition and globalization, this element cannot be ignored. The PRP will not work if the performance appraisal system is lax or faulty or not fair. A PRP must reward both the individual and the team members for overall performance. At the same time individual brilliance should not suffer because the team is mediocre.
PRP systems are fairly easy to design and implement. The environment has to be primed before that. The reason most PRP schemes fail is because of the fact that the environment and the people are not ready and mentally prepared for it. To avoid such failures the following are the points to be observed:
1. PRP is a tool and part of a PMS. If the PMS and other components are flawed, it will not work. It does not replace other aspects of people management.
2. If the base pay is very low, it will not work. The base pay should meet the minimum cost of living, must be fair and in keeping with external equity in the industry.
3. People must have faith and trust in the management. The management must be fair, involved and committed to all the stakeholders.
4. The scheme must be integrated into the overall compensation strategy. All fixed and variable aspects of pay at all levels have to be analyzed and disparities, if any, should be fixed. Most importantly, the management must be able to meet the extra outgo with the expected income. The extra money so earned must not be diverted for other short term working capital needs before meeting the compensation commitments. Commitments have to be met and in time.
5. It should be tailored to the organization needs and cannot be 'off the shelf'. It should match the strategy, culture and objectives of the organization.
6. Any PRP scheme which is based on a win/lose concept will ultimately fail. All employees may not be highly educated but are not morons.
PRP is a good and workable concept and more companies are likely to adopt it. However, design and implementation of such a scheme is critical.
The PRP must not be mixed up with ESOP schemes. The ESOP system of compensation was formulated by Dr. Michael Jensen of Harvard University for top executives to improve performance. Today, even junior executives are offered stock options. If it has fallen into disrepute, it is because of wrong approach of TMT for personal aggrandizement. (Late) Dr. Peter F Drucker was absolutely right when he said that the CEOs of giant corporations are more focused on the stock market figures rather than their company’s bottom-line. Some other system must be developed for compensating executives for performance because the stock markets react differently. Manipulation and speculation in stocks cannot be absolutely ruled out. It would be naïve not to expect that.
© June 27, 2007. www.madgopes.com. All rights reserved.
To learn more about this author, visit Madhavan T Gopalachary's Website.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name/
mtg.html
mmgconsu
lting.biz/
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