Performance Related Pay Job Formats: Importance And Implementation

Importance of performance-related pay job formats

Discuss about the Contingencies In Management Control Research.

Employers should always decide the pay of an employee on the basis of his performance, knowledge, skills, and attributes. Employees who are efficient and have better capabilities are attracted to performance related pay job formats. They are instilled with such formats to perform better and give best efforts. Most of the organization use performance related pay job formats for the purpose of employees’ yearly appraisal and to facilitate incentive procedures. Performance related pay aims at facilitating appraisal system and building enthusiasm in its employees’. There are various countries that allow a system where the financial appraisal of a personnel depends on their qualifications and designation. A lot of inequality of income was noted in different organizations. It was observed that such inequalities were mostly due to documented qualifications. Executive remuneration is one of the vital factors for the company because it helps the organization to retain the employees.  It needs to be noted that the executive remuneration should be linked to the aims of the organization as it will lead to a balanced approach.

There are many factors other than performance and paper qualifications on which the payment formats depends such as practice, custom, collective bargaining and behaviour of the labour industry. It has been observed that in order to achieve organizational objectives there is a downward trend mostly in the private sector in associating the incentives with the performance of the personnel in the last few years. Compensation has been closely knitted with performance. Resurgence of interest in performance related pay job formats is facilitated by governments in most developed countries (Balakrishnan et. al, 2014). Currently most of the companies are associating employee’s rewards on the basis of their performance. The employees, managers and society altogether hold a different view on compensation. For the society, compensation should be evaluated keeping justice in mind. Equal pay should be facilitated for equal work instead of fixed incremental procedures in an organization. This happens where the employees are not rewarded on the basis of their performance but on the basis of fixed incremental systems that are prerogative at the same time. Taking tenure of service into consideration, many personnel are promoted automatically. If the rewards are facilitated entirely on the basis of what an employee deserves taking his performance and such other required factors into consideration then the employees might be more motivated, enthusiastic and might give in more efforts. This might also help an organization to retain its workforce as well. The organization can retain the employees when the remuneration is in direct tune to the objectives of the company. this means that the employees needs to be remuneration as per their performance.  In order to gain a competitive advantage in the industry, the organization should always opt for performance-related pay job formats. In order to enhance the performance and overall productivity it is required for the organization to keep its employees motivated and enthusiastic (Parrino et. al, 2012).  Motivation happens when there is a remuneration structure based on the performance. The executives should feel that the remuneration is entirely based on the input provided by them.

Influence of human resource management on employee motivation and job performance

Employees who are not delivering as per the requirements and expectations are not rewarded legitimately for the management of the company would not want to pay employees for mere presence. It was a matter of debate that when compensation on the basis of prerogative rewards is given to employees then it develops an attitude of nonperformance in employees. A lot of research work for the human resource management has been infused in performance related pay job formats. Fewer samples are ascertained from non- western societies. Ghanaian situation is focussed on account of such backdrop.

The ultimate agenda of the research is to analyze the influence of the human resource management on the enthusiasm of personnel and on the ascertainment of company’s goals. There are various companies that adopted the PBP system which will further be assessed in the report. The important questions that are answered are-

1. In context to the ascertainment of organizational goals will it be appropriate to say that performance-based pay (PBP) system is better than time-based pay?
2. The connection with performance rewards important and appropriate enough?

The analysis will help to understand the influence of performance-based pay. The outcome might also build interest in the concept and also serve as a foundation for the research work. The yielded information might also allow the policymakers to take the importance of performance-based pay as a guiding tool in both private and public domain. The performance of a personnel is associated with his pay in the performance-based pay (Lee et. al, 2015). PBP is a compensation scheme that can be termed as a process of pay where an employee is provided an increment in pay or his appraisal is evaluated entirely taking his performance for a particular period into consideration (Horngren, 2011).  It is one of the innovative concepts that has played a bigger role in terms of influencing. It is the system where an employee is provided incentives entirely on the basis of performance. When remuneration justifies the performance it creates a sense of understanding and leads to enhancement in the work level.  Such performance can either be organizational, individual or group performance. Researchers also evaluated that the performance-based rewards are not just confined to financial rewards because sometimes non-financial rewards can also substitute for pay. Recognition is one such fine example of non-financial rewards (Marsh, 2009).

Gaining competitive advantage and equity is one of the most important reasons for acknowledging performance-based pay mechanisms. Researchers evaluated various factors for which the company’s management shall install performance-based pay like facilitating selection and hiring, alteration in company’s culture, exhaust trade unions, enhance the function of line manager, improve financial control and create higher value for money, allow for incentives and non-material rewards like recognition, and enhancing ductility. Performance-based pay can be classified as incentive pay or monetary rewards and merit pay. Incentive pay is when the compensation depends on the organizational performance factor like ROI, quantity of goods manufactured or sold, earning or share while merit pay is a type of compensation where the individual performance is assessed and the previous pay along with the increment earned becomes the revised pay for the employees. There are numerous types of incentive pay systems while only one type of merit pay systems. Incentive pay plans can be broadly classified into 3 categories-

1. Collective bonus schemes
2. Collective bonus schemes based on generated profits
3. Individual bonus schemes

Analysis of merit pay and incentive pay plans

The report lays entire emphasis on merit pay and its influence. The analysis of contingent pay for public managers was one of the first opinions of the influences of merit pay formats. Individual contingent pay formats which denoted increments in performance-based pay were the opinions confined to various research works. No positive results were identified in such research. It was ascertained that merit pay in the public sector was not backed up by the sufficient evidences and it was influenced by information asymmetries and invalid contracts (Peirson et. al, 2015). The managers also were not aware of the employees’ performance and lacked interdependence as well. Both private and public sector were analysed by the National Research Council (NRC) in the United States on performance pay. It was ascertained from, such analysis that the employees are instilled with motivation, enthusiasm and perform better if there are legitimate incentive plans. It was concluded that such schemes can be successfully installed in jobs that are simple and structured and where there is high trust and which allows for the formulation of better performance goals (Merchant, 2012). Research on pay for performance and he examined it using secondary sources on federal programmes. She initially emphasized the factors behind the installation of performance-based policy as an innovation in policy. She analysed governmental organizations as well by means of assessing prospects for the success of PBP. It was also reported that the legal constraints and regulations were not legitimate enough to progress in the public domain. Her reports reflected that the progress of performance-based pay is depressing on account of legal procedures, constraints, funding, and regulations but are not much affected by paramount failing (Petty et.a l, 2012).

Executive pay or executive compensation comprises of the financial rewards and non financial rewards received by an individual from the organization for their services to the same. It is actually a combination of bonuses, salary, shares of or call options on the organization stock, perquisites and benefits that are construed taking government laws and regulations, tax laws, the motives of the organization and the individual and incentives for performance. Equity-based incentives or EBC is also one substantial concept where the employer chooses to compensate his employees with incentives based on equity that is shares of or call options on the organization equity stock. Stock options are the common equity-based incentives amongst all. Other options used as equity-based incentives are restricted stock, phantom stock and LTIP. This allows the chief executive officers of the organization to act in the best interest of the stakeholders. The most commonly used elements for the remuneration are discussed below. It needs to be noted that the mechanism should be selected by the organization depending on the aims and objectives. It creates a strong morale factor and hence, leads to better performance (Phua et. al, 2011).  Therefore, executive remuneration can be in the form of various factors that are mentioned below:

1. Stock Options- The individuals are sometimes provided stock options that can be exercised later. Such compensation depends majorly on the organizational performance. This minimizes the conflict of interest with stakeholders but such options carry certain associated risks which is a disadvantage, for the employees are to be acknowledged by means of rewards for a better performance and not penalized for poor performance (Phua et. al, 2011). It creates a sense of understanding where the employees are able to provide strong effort to the organization.
2. Long-Term Incentive Plans- Performance measure is a factor for such plans so as to determine the right to receive or exercise options or procure such stocks. Such plans are mostly based on options and stocks. This is one of the long-term plans that is provided so that the employees perform and contribute to the organization on a long-term basis (Phua et. al, 2011).
3. Stock ownership – When an employee has more stock in an organization then his compensation is closely associated with the stock returns. This eradicates any conflict of interest between stakeholders and employees. Often there are some restrictions are allowed regarding the duration for which the stocks are to be sold. Such restrictions on stock are known as restricted stocks. Restricted stocks are not that commonly used in comparison to stock options.
4. Other compensation- It comprises of components such as severance payments, imputed interest, debt forgiveness, extra performance related bonus and pay-outs for cancellation of stock options. Such compensation does not belong to any other columns.
5. Bonus plans- It is evaluated on the basis of an executive’s performance. Cash bonuses are provided that are calculated on percentage basis of executive’s salary. Also, non-financial rewards are paid by means of recognition. It is one of the best methods to influence the employee and get the most out of work (Phua et. al, 2011). It leads to a strong focus on the work level and get the work done. it has been noted that this policy leads to the maximum work and create an atmosphere where the employees are able to contribute to the productivity.

1. When executive remuneration is linked to financial data it will create a culture that is not beneficial for the executives. The risk appears in the fact that such a presence leads to immense problem for the executives. It means only the financial data is concerned while the other parameters are left untouched. It needs to be noted that the executives are not only concerned with financial performance rather appears for the non-executive performance too. Moreover, considering this the employees even draw remuneration for their non-financial work (Brown, 2013). Hence, it is imperative that only the financial aspect should not be highlighted rather the non-financial aspect should even be projected. This will provide a clear cut highlight on the performance and in tune with the functioning of the company.

Executive compensation

It has been observed that the managers are using the method of analysis of work and strategies in order to evaluate appropriate results for the management. The evaluation of a balanced scorecard helps the management to analyze the situation of the organization and then make appropriate targets. It is not just a process of evaluation and improvement, but it is a diverse process which contains the analysis of products, processes, customers and the market developers (Chapman et. al, 2007). There are various choices provided by the balanced scorecard to the managers so that they can choose the most suitable criteria for themselves. It has been clearly stated that all the organizations nowadays have a large number of physical and operational strategies which are important for the achievement of the goals. Therefore the main objective of using a BSC is to provide the firm with the data of strategic and competitive needs that are to be fulfilled by the organization (Chenhall, 2007). The application of BSC enables the management to analyze the future and present performance of the firm. Also, the information that has been derived may be used by the firm to launch new products. The BSC also depicts all other strategies which have already been adopted by the firm in the past which can be analyzed to make future decisions. BSC cannot be defined as a template which is same for every firm, but it is different for every firm because of the different marketing strategies and the competition that is faced by the organizations (Hopper & Bui, 2016).

The current management systems have used the analysis of the organization’s operating system in order to identify and fill the certain gaps and problems that may prevail in the system. Therefore it can be clearly noticed that the use of a balanced scorecard will be a very modern technique for the organizations, so as to strategize and control the operational systems of the firm (Drury, 2011). It is imperative that the management can use the balance scorecard to trace the risk as the division is properly provided and can focus on the individual perspective to eliminate the risks. When an overall emphasis is provided on the specific segment, it eliminates the risks as the management can take appropriate decisions.

1) Profit desired by Mango ltd. = $1000000

Expected sale in the coming year= 750000 units

Fixed costs= $687500

Given,

The balanced scorecard and organizational performance

The variable costs are 55% of the selling price.

Assuming the selling price is x,

Variable cost= 0.55x

Hence, contribution = selling price – variable cost percent

= x – 0.55x

= 0.45x

When targeted profit is known,

Sales price per unit * quantity = (variable cost percent * number of units sold) + fixed expenses + target profit

hence, x * 750000 = (0.55x * 750000) + 687500 + 1000000

or, 750000x = 412500x + 1687500

or, 1687500 = 337500x

 x= $5

Thus, the selling price per unit should be $5 in order to make a profit of $1000000.

2) Overhead recovery rate- 175% of direct labour

Let the direct labour cost be $x

Therefore, the manufacturing overhead = 175% * x

= $1.75x

Direct material	$1200
Direct labour	$x
Manufacturing overhead	$1.75x

Total cost = 1200 + x + 1.75x

Or, 2506.25 = 1200 + 2.75x

Or, x= $475

Direct material	$1200
Direct labour	$475
Manufacturing overhead	$831.25
Total cost	$2506.25

Therefore, manufacturing overhead allocated to job 101 to date = $2506.25

3) Calculation of minimum acceptable selling price

Particulars	$
Direct material	7000
Direct labour	2500
Manufacturing overhead	1500
Total variable costs	11000

Creative kitchens has been operating at a capacity less than its maximum capacity and it has enough capacity to fulfil the order by renovations galore. Hence, they should not accept any selling price more than $11000.

4) Estimated annual savings= $300000

Estimated useful life = 15 years

Internal rate of return = 8%

Here, annual savings is the inflow.

We know, at IRR, Inflow= Outflow

Outflow= Estimated annual savings * Discouting factor

= 300000 * 8.5594

= 2567820

Therefore, cost of machinery = $2567820

5) Calculation of pay-back period

Year	Outflow	Inflow	Cumulative Inflow
0	19000	NIL	NIL
1	NIL	6000	6000
2	NIL	8000	14000
3	NIL	7000	21000
4	NIL	6000	27000
5	NIL	5000	32000
		32000

Pay-back period = 2 +  (5000/7000)

=2.714 years

Hence, payback period of the project = 2.714 years.

6) Calculation of Net Present Value(NPV)

Discount rate- 10%

Year	Inflow	Discounting factor	Present value
1	6000	0.9091	5454.6
2	8000	0.8264	6611.2
3	7000	0.7513	5259.1
4	6000	0.683	4098
5	5000	0.6209	3104.5
			24527.4

Where, Present Value= Inflow * Discounting factor

Given, present value of outflow= $19000

Net present value(NPV)= Present value of inflow- present value of outflow

= 24527.4 – 19000

= 5527.4

The accountant’s evaluation of the project is not correct as the calculation is done and the conclusion has been arrived at without taking into account the discounting factor.

present outflow		320000
major overhaul	90000 * 0.4972	44748
		364748

Present value of outflow (PVOF) = $364748

Calculation of inflow

Present value of inflow (PVIF) = 85000 * discounting factor

= 85000 * 4.4873

= 381420.5

Therefore, PVIF = $ 381420.5

Calculation of NPV(net present value)

PVIF	$381420.5
PVOF	$364748
NPV(NPV = PVIF-PVOF)	$16672.5

Since the NPV is positive at $16672.5, the project should be accepted.

At Internal rate of return, present value of inflow = present value of outflow

Therefore, at IRR, PVIF = PVOF

Here,

PVIF= $381420.5

Whereas, PVOF = $364748

Therefore, clearly the IRR is greater than 15%

For the quarter ending December 2018

	October	November	December	Total
a)      Budgeted sales(units)	20000	25000	30000	75000
b)      Budgeted sales($)	90000	112500	135000	337500
c)       Cash Sales(90%)	81000	101250	121500	303750
d)      Credit sales(10%)	9000	11250	13500	33750

for  the quarter ending December 2018

	October	November	December	Total
a)      Opening stock(units) [30% of the following month]	6000	7500	9000	22500
b)      Sales(units)	20000	25000	30000	75000
c)       Closing stock(units)	7500	9000	8400	24900
d)      Purchase(units) (b+c-a)	21500	26500	29400	77400
e)      Purchase($) (d * $3)	64500	79500	88200	232200

for the quarter ending December 2018

	October	November	December	Total
a)      Opening cash balance($)	15000	55200	113850	184050
b)      Cash Sales for the month($)	81000	101250	121500	303750
c)       Cash realised from debtors($)	7200	9000	11250	27450
d)      Payment made for purchases($)	48000	51600	64500	164100
e)      Closing balance($) (a+b+c-d)	55200	113850	182100	351150

1) Computation of purchases made in August and September

Purchase budget for August and September 2018

	August	September
a)      Opening stock(units)	4800	4800
b)      Sales(units)	16000	16000
c)       Closing stock(units)	4800	6000
d)      Purchases(units)(b+c-a)	16000	17200
e)      Purchases($) (@$3 per unit)	48000	51600

2) Cash received in October will be 10% of sales in September

Sales of September($) = 16000 units * $4.5/unit

= $72000

Credit Sales = 10% of total sales

= 10% of $72000

= $7200

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