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Pay at risk also called Variable Pay - An amount paid when specified performance objectives are met. It is a replacement of fixed salary. Current human resource market also calls it contracting payments. For example some people work only on percentage basis of sale or profit that is called pay at risk.
Any benefit an employee receives from an employer or job that does not involve tangible value. This includes career and social rewards such as job security, flexible hours; opportunity for growth, praise and recognition, task enjoyment, and friendships Organizational Success is based on desired qualified talent. Non salary component is a major aspect of management compensation package to attract, retain and motivate an adequate and perpetual supply of qualified talent. These non salary components include:
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Bonuses - Employees are also entitled to receive some bonuses or incentives for their outstanding performance and for other reasons. Managers may be given some long term incentives like share options and pension entitlements. Stock options and stock grants not only provide long term incentives to the employees but also helpful in retaining a valuable and experienced employees through their ownership in the company. Following are the few examples of different bonuses:
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Sing on Bonus is main tool for attracting an adequate talent. It is usually offered at the time of signing a contract
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Ongoing Bonus is a retention tool of compensation package. It will keep desired staff for long term.
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Achievement Bonus is motivation tool to achieve organisational goals and success.
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Flexible Scheduling – In addition to time off, vacations, and other leaves, flexible schedule allows them to work on their own convenience. Some of the managers and employees happy to work from home office and vice a versa.
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Child-care programs – It facilitate employees and managers to work for long hours and without any personal destruction which helps to increase efficiency and profitability.
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Career growth opportunities - Most of the organisation support the career growth of their employees. It helps to increase organisational productivity and on other hand motivate employees for long term retention.
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Private Health Insurance Cover - Moreover health insurance or life and /or disability insurance can also consider being a one of the component of the salary package. Company- sponsored health insurance has a great value to the managers as it saves their own money.
ISSUE 2
- REQUIREMENT OF NON-SALARY COMPONENTS:
There has been compelling evidence showing with time that best way to attract, engage and retain employees is to focus on total rewards, not only pay and benefits. It can be more costly with the limited view of rewards, because organization tends to respond every situation with cash. Effective rewards also supports moving away from ineffective programs towards those help in business growth.
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Performance and Recognition – Recognition is a necessity in order to reinforce the value of performance improvement. It can me managed plan or simply work culture in execution. It is the way for employer to pay special attention to workers for their accomplishment, behaviour and successes. On other hand performance align organisational and individual goals towards business success.
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Attraction - One of the key planks of business success is to attract adequate and perpetual supply of qualified talent. The way organisation can address this issue is to determine which attractors are necessary in reward program to bring required talent.
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Retention – Employees move through their career life cycle. An ability to keep employees who are valued contributors towards organizational success for as long as is mutually beneficial. It can happen by using dynamic blend of elements from the reward program.
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Motivation – it’s a tool which lead employees to behave in a way that achieves the highest performance level. It involves three main segments
- Satisfaction
- Commitment
- Engagement
These segments linked to factors that include an employee’s sense of achievement, respect for the whole person, trust, advancement opportunities which consistently results in higher performance level.
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Environment – Physical, psychological and behavioural elements are the main cluster of organisational environment. It sets the tone of everyone who enters in organisation. It is directly observable and often measurable. The external environment in which organisation operates can influence the internal environment. Thus environment is depicted as a contextual element of the total rewards model, overlapping within and outside the organisation.
ISSUE 3
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Necessity of Salary components:
Management compensation schemes are major issues in the most of the big 4 companies. Manager’s compensation or remuneration is escalating day by day and shareholders perceive that it’s not matching with their performance. As a result of this, Australian securities exchange recommended a formation of remuneration committee and disclosure of the remuneration for the highest paid executives. Moreover, Corporation Act 2001 wants a full disclosure of the remuneration paid to the executives or managers.
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Improved recruitment and retention - Today employees are looking beyond the big picture in deciding where they want to work. Work and personal life should be seen as complementary priorities not competing ones. When a company helps its employees effectively run both their personal and work lives, the employee feel a stronger commitment towards the organisation. As such a highly desirable and potential candidates explore their options with various companies. In that case companies with high remuneration in a total reward package have a competitive advantage.
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Heightened visibility in a tight labour market – In a tight labour market organisations are quickly realising that every employee matters even more when there are not enough employees to fill the available jobs. Talent shortages have become chronic conditions of business life. As a result employer can no longer afford to simply view their employees as interchangeable parts.
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Salary components can communicate with quality not quantity – Employees who understand the true value of their total reward packages are more likely to appreciate the investment their employer making in them to stay with company and to deliver business results. Focus on delivering targeted rewards information to employees that is assessable upto date and meaningful.
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Manage the whole value of management compensation package – As market become more competitive, salary components make management compensation package stronger in a target segment and adequate talented candidate got narrow choice of companies.
ISSUE 4
Agency cost is a cost associated with separation of ownership and management. Agency relationship is a relationship between the principal and the agent or managers and the shareholders. It is paid by the company due to misalignment of the interest of the managers and the shareholders and information asymmetry. Agency cost arises from the two main sources. Firstly, it arises from the cost inherently associated with using an agent and there is always a risk that agents will not work for the benefit of the shareholders and use their power and organizational resource for their own self interest. Secondly, agency cost arises from the cost of techniques used to mitigate these problems and to align the interest of managers and shareholders. This cost consists of preparing financial reports, using stock options to align interest of managers with that of shareholders. These costs are divided into three main categories i.e. bonding cost, monitoring cost and Residual loss.
Bonding cost incurred by entering into contracts to modify behaviour. These costs may include agreement to establish internal audit teams, self imposed delegation authorities and voluntary interim financial reporting. These actions impose restrictions on the activities of the managers.
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Internal Control system cost – Shareholders or ownership holders longing to have control over management which creates a need of internal audit team. It will contribute to agency cost.
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Voluntary interim financial report – Keep check on cash flow and other financial status of business will increase the agency cost by producing interim financial reporting system.
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Self imposed delegation authorities – Control over management is a main point of consideration for shareholder or owners. Organisational management will create and delegate authorities and responsibilities. So it will lead to increase the bonding cost due to allocation by management.
Monitoring costs are the costs incurred by the firm on behalf of the shareholders to control or monitor the activities of the managers. These costs include external audit cost and the cost of implementing or establishing the management compensation plans:
- External Audit Cost
- Management compensation plan implementation cost
- Demand for security analysis
These costs occurs when the agent is not acting or taking decisions in the principal’s interests. So any loss arising from these actions or decisions represent a residual loss of value to the shareholders.
- Supply of claims
- Limited liability
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Source of market frictions - Information asymmetry, un-observability, risk aversion by agents.
ISSUE 5
The most obvious way that shareholders can mitigate agency cost is to provide incentives to the management to act in the shareholder’s interest. These incentives are often based on the operating performance i.e. profits of the company, sales of the company and return on the assets of the firm. These methods are quite simple as these are measurable, comparable, desirable and more directly related to management efforts. (P. 2.29 CPA)
But profit, sales and return on assets are an accounting concepts and reflective of cash flows and risk. The use of accounting numbers require estimation and professional judgement and therefore subject to manipulation through accounting policies and accounting methods.
Example : whether to expense or capitalise the research and development expenditure or the use of provisions to increase or decrease expenses. ( p.2.30 CPA MODULE 2)
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Quality assurance targets - These are the main targets of service industry. The Growth of service industry is totally based on quality of customer satisfaction. These targets are set on performance of quality service of individual or teams.
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Resource utilisation target – Production industry’s growth mainly based on cost of sale. They allocate targets based consumption of material used for production or sales. These targets are evaluate on work efficiency of individual employees or teams.
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Collection targets - These are the target allocated by management for collection of creditors. These are based on previous results and economic status of market.
This is a most appropriate method to reward the managers in terms of the market value of the firm’s securities, which are assumed to be influenced by the expectations about the net present value of the expected future cash flows. In these methods the bonus of the manager is based on any increase or decrease in the share prices of the firm. Additionally, managers are provided by the shares in the company or options to shares in the company to feel them that they are the part of the company. So if the share price increase both agent and principle will benefit. In other words, we can say that managers will be rewarded or will be given an incentive to increase the value of the firm. Moreover, it may be seen as a more appropriate measure to overcome the time horizon problem than short term profitability. However, share price will reflect general market, industry or economic factors which are outside the control of the company or management. It is therefore unlikely that managers would be happy to rely solely on the share price as the basis of their bonuses.
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Target of Market Share - These are the targets for marketing teams to capture the maximum portion of target market. It evaluate on the basis of market coverage or indirectly with sale.
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Sales Target – It is directly related to the sale figures of organisation. These targets are set on the basis of previous analysis and market research. Bonus and incentives are the main components of sales target rewards.
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Profit maximisation target – Organisational growth is based on net profit shows in financial statement. Share price, market reputation etc are also based on financial statements of organisation. These targets are set for top management to keep control over the complete organisational system which can maximise the profit and leads towards growth.
- Role of accounting numbers in these targets
Rewarding managers on the basis of accounting numbers may motivate or induce them to manipulate the accounting profits in order to increase the profits as to increase their own remuneration or bonus. Moreover, bonuses which are linked with the profits may cause managers to focus on the short term goals of the company rather than long term goal of the company which may cause harm to the company. Additionally, this may not induce the managers to take high risk if the returns are not expected to be consistent.
- Accounting incentives to management:
In order to upgrade a sales force and other level management’s productivity, powerful incentives programs which revolve around the company's corporate goals are of crucial importance. In the past, due to the high unpredictability of the market environment, many companies designed commission-based plans to stimulate sales and profit. The target incentive directs the attention to the company's strategic imperatives, such as key product growth rates and high net worth market shares. Basically, the achievement of the agreed objectives is rewarded regardless of the absolute sales amount associated to them.
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Target achievement incentives - companies continue to offer volume incentives for established business lines and sales territories. However, they increasingly
supplement these incentives with more rigid plan requirements. These may include incentive thresholds, i.e. minimum performance levels that trigger incentive payments.
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Operating or Pre-tax sales Incentives - markets and consumers grow more mature and companies enhance their sales force management, market planning becomes more predictable and performance indicators more elaborate. Furthermore, the key influencing factor of customers' purchasing decisions is gradually shifting from the sales force's performance to the overall performance of the various functions involved in the go-to-market strategy. It will leads top management to consentrate on over haul organisational structure instead of only on sales.
Conclusion
Research report of management compensation scheme shows breadth and depth of concept. It involves all major factors effecting and contributing management compensation package. The birth of new industries and emerging market have sprouted mergers & acquisitions, downsizing, globalization corporate restructuring and technological advancement shows the change in compensation package according to need of tight labour market.
In nut shell job related attitudes, expectations and priorities are changing on both sides of the desk. As employer, HR professionals must rethink their directions and realign their focus. It’s time to abandon the tried and true ways of thinking and redefine employee rewards against the new employee deal.
Outlandishly the new employee deal is not about just a pay increase or offering employees more money. That’s not the mean that the almighty dollar has lost its power or punch, but the way money talks requires an updated translation. It requires focusing on more than only pay which come in total reward package.
REFRENCES
- Corporation Act 2001, volume 1, viewed 16 April 2009
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CPA Program: CPA 107 Corporate Governance and Accountability, Deakin University, Geelong, January 2009.
- The Worldatwork hand book of compensation. Benefits & Total Rewards. Written by Anne C. Ruddy, CCP, CPCU Published by John wiley and Sons,