Compensation Management

Module 04

Management Case Study

Prepared By

Sajeetha Rahumathulla PQHRM/40/38

Course: Professional Qualification in Human Resource Management

```April, 2010

Institute of Personnel Management Sri Lanka

IPM

www.ipmlk.org

Executive Summary

The coca-cola is the world’s largest beverage company, largest manufacturer,

distributer and marketer of non-alcoholic beverage concentrates and syrups in the

world. And it is one of the largest corporations in the United States. The company is

best known for its flagship product “coca-cola”, invented by pharmacist John Stitch

Pemberton in 1886.

The coca-cola formula and brand was bought in 1889 by Asa Candler who

incorporated the coca-cola company in 1892. Besides its name sake coca-cola

beverage, coca-cola currently offers more than 400 brands in over 200 countries or

territories and serves 1.6 billion servings each day.

The company operates a franchised distribution system dating from 1889 where

the coca-cola company only produces syrup concentrates which is then sold for

various bottlers throughout the world who hold an exclusive territory. The coca-cola

headquartered in Atlanta, Georgia. Its stock is listed on the NYSE and is part of

DJIA, S & P 500 Index, the Russell 1000 Index and the Russell 1000 growth stock

index. Its current chairman and CEO is Muhtar Kent.

John Stitch Pemberton – The founder of the world brand “coca-cola”

Asa Candler - who incorporated the coca-cola company in 1892.

Problem Statement

Though the coca-cola company leads the worldwide beverage industry in term of

volume, profitability, growth, and innovation, it is facing a major problem in its incentive

scheme. The incentive scheme that the company currently practices is flexible and

satisfies the needs of the employees as per the management. But the current incentive

scheme has its drawbacks. The drawbacks of the current incentive scheme of coca-cola

company can be listed as,

The performance of each division is assessed versus its objective for the year

relative to a funding matrix. The matrix weights volume and profit equally. The

matrix of which the company measures volume and profit equally does not give

credit fairly to the employees.

The conclusion and process of the company is that each division should stand

alone in its performance and not be awarded or penalized based on total company

performance.

Each division should have flexibility to determine the exact distribution of

incentives and stock option awards.

One universal program design should apply consistently to headquarters and all

operating divisions and to all levels of associates.

Its primary objective as a company is to grow shareowner value over time.

First, it works to fuel growth within the industry, increasing overall demand for

beverage products. Second, it focuses on in innovation in every area of the

business, including marketing, packaging and people management. Third, it

manages for the long term, making investments today that will pay off in the

future.

The organization strategy is to ensure that every decision it makes is sound from a

financial and shareowner value perspective, the company is managed from an

Economic Value Added (EVA) an Economic Profit Viewpoint.

Each division, working with senior management determines an objective for unit

case sales of company products (volume) and economic profit (profit). These two

objectives become the target for the division for annual incentive purpose.

If divisions meet their objectives exactly, the incentives are funded at 100 percent

of target. If they exceed objective, they are funded at greater than 100 percent and

if the fall short, they are funded at less than 100 percent.

Since so many financial rewards are directly tied to performance versus budget (at

both the division and corporate level), the company works constantly to ensure

that business plans are set with the same degree of difficulty across all divisions.

The next challenge that the organization faces is that, since both pool funding and

individual or tem performance can vary, it is difficult to explain to an individual

precisely what his exact reward would be under different performance scenarios.

The final challenge relates to making sure that every participant has some line-of-

sight between his or her actions and the financial rewards received from these

plans.

Alternatives

Though the organization believes that the current programs and strategies that are

being practiced in the organization are working well, are fully aligned with business

needs and no major changes are needed, there should be some changes made for the

organization to be more success in its operation. As some problems and issues are

being found in the organization’s compensation strategy, these issues and problems

should be eliminated in order for the organization to adopt a good compensation

program which will increase the employee contribution and productivity that will lead

to the achievement of organizational objective.

So, the problems which have been identified earlier should be corrected as

mentioned below for the organization to be a success.

Issue 01 => This issue says that the matrix which assesses the performance of each

division, weights the volume and profit equally. But this matrix does not give a fair

credit to all its employees.

For example if the monthly target for an outdoor sales person and a

showroom sales person is to bring in a revenue of $ 10,000 per month by selling

bottles of coca-cola. And if the outdoor sales man brings in revenue of $ 10,000 by

selling off 1000 small bottles of coke, whereas the showroom sales man brings in $

10,500 by selling 100 bottles of mega coke, these two men should not be assessed

based on the volume and profit matrix.

It is measured so, then it will not be equitable for the outdoor salesman.

Because the working environment, effort and the conditions of work of an outdoor

salesman are different from that of a showroom salesman. So, the matrix should be

re-designed or re-structured if the organization to maintain internal and employee

equity in the compensation process.

Issue 02 => This issue argues that each division should stand alone in its performance

and not be rewarded or penalized based on total company performance. Of course,

the performance of each division should stand alone if the organization is to achieve

its corporate goals. But when it comes to deciding the rewards for the performance,

then the organization’s availability of budget and the profitability should be

considered. If it is agreed with the organization’s statement that divisional

performance should not be affected by the organization’s performance, then there is

no point in rewarding the divisional performers when the organization is losing all

its profits.

And also the other way, when the company is doing good and earning as

triple return on investment as expected, when all the good performers are awarded

and the poor performers are not been recognized or given any form of incentive,

then it will create a grievance among the employees who are not been rewarded.

Because they know the company’s achievement and also they know that though

they have not achieved their target, they somehow contributed for the

organization’s success. So, this statement of the organization should be removed

from its compensation process since it will not contribute positively for the

compensation management.

Issue 03 => This statement of the organization says that each division should have

flexibility in determining the exact distribution of incentive and stock option award.

Of course this is agreeable. That each division should have flexibility in

determining the distribution of incentive among its members. But that flexibility

should be limited. That is, if the division decides to reward the good performer who

is the assistant HR by giving him 30% of the total divisional reward, then the

assistant production, who is in the production department who has also contributed

much in his department will get de-motivated since he got only 15% because his

department is not that flexible.

What is to be done is that, there should be flexibility in the divisions but it

should not break the internal equitability in the organization. So, the flexibility

should be practiced in the divisions in a way that encourages the internal equity in

the organization.

Issue 04 => This statement says that one universal program design should apply

consistently to all level of employees throughout the world where the organization

has its other offices in different part of the world. This statement cannot be

acceptable at all. Because as the jobs that are in an organization are not similar in

nature, all the jobs that are in the organization throughout the world are not similar

in nature.

That can be explained as follows. A person who is selling bottles of coca-

cola in California, USA, his working conditions, effort to sell and his use of

language are different from that of a person who is selling a bottle of coke in

Afghanistan. Since the skills, effort, responsibility, use of language, working

conditions etc….. Are different from job to job, organization to organization,

country to country, one universal program design should not be applied to all level

of employees. All the factors mentioned above should be taken in to account when

designing a compensation program.

Issue 05 => This statement tells about the organization’s primary objective. It says

that the organization’s primary objective is to grow shareowner value over time.

The primary and most important objective of this organization is to increase

shareowner value. But, coca-cola, the largest beverage industry in all over the world

has a negative reputation about its product. That is, some researchers and

pharmacist says that the coca-cola contains high percentage of alcoholic liquids

which can bring harm to human body.

Because of this statement of researchers, most of the middle east countries

and the countries where a large number of Islamic religion is followed, people and

hesitate and most of the people neglect the most popular beverage brand in the

world. So, as a company it should focus on proving that the statement made by the

researchers are not acceptable and the drink is much suitable for human thirst and

will not affect human body. And also it should focus on attracting the Middle East

populations and other Islamic population who neglects the intake of coca-cola to

accept it.

So, the organization should change its primary objective from increasing

shareowner value to creating a positive reputation for the products and attracting the

people who neglects the drink to accept it. By doing that so, it will increase the

organization’s profit thus automatically the shareowner value will be increased.

Issue 06 => This issue explains about the organization’s three secondary objectives.

First objective of the organization is to increase the overall demand for the beverage

products, second is to focus on innovation in every area of the business and the

third objective is to make investments today that will result in the future. In this

statement there is no particular objective set for the human resource management.

The success of any organization depends on the contribution of its employees.

So, the specific objectives should be set in order to get the maximum

contribution from the employees. But in this case there are no specific objectives

for managing the employee performance or contribution. These objectives should

be looked in to again, should be restructured and the objectives for management of

employee contribution and performance should be included in the organization’s

secondary objectives.

Issue 07 => This statement explains that the organization is managed from an

Economic Value Added and Economic Profit viewpoint. As discussed earlier, the

organization’s primary objective is satisfying the stakeholder interest and increasing

the profit. This statement also says that the organization focuses on Economic

Value Addition Economic Profit. This objective should be there in a private sector

organization since they exist for profit maximization. But only profit should not be

considered.

The other factors which influence and affect the organization performance

should be considered. For example, productivity level of employees, employee

turnover, job security and job satisfaction of employees etc…. These factors should

also be considered if the organization wants to retain in the market. Because, if

these factors are not well looked in to by the management and when management

focuses only on maximizing profit, the employee wills be dissatisfied and

frustrated. Then the turnover rate will be high.

If turnover rate is high then the organization will not be able to maximize

profit. So, not only Economic Value Addition should be considered but also the

employee perspectives.

Issue 08 => This statement explains that the divisional targets are set by each

division and then these targets will be the annual target for the division which will

decide the bonuses and incentives of the employees. This action of the company

will lead the organization to a negative direction. Because, each and every

organization has its vision and mission statements, from that the corporate strategy

is designed and from the corporate strategy, the business strategy is developed. And

then the business strategy is divided in to divisional or departmental objectives.

Then the divisional objectives are divided among the divisional employees.

And they are assigned with individual targets, which will decide on their

financial and non-financial incentives. Normally, the reason why organization’s

cascade the corporate strategy to individual employees is to make sure that each and

every employee of the organization performs their job in accordance with achieving

the corporate objectives.

But in this case, the divisional objectives are set by the division itself.

When the divisions set the objectives for themselves, then there is a possibility of it

being not connected with the corporate objectives. When each divisions set their

own objectives and each objective not being connected to any of the corporate

objectives, then the organization is at a risk.

So, to avoid this situation in the organization, one thing the organization

could do is to design the divisional objectives by the management which will be

cascaded down from the corporate strategy and then assign that objectives to

divisions or otherwise educate the divisional heads and other employees of the

divisions about how to set effective divisional goals that will lead to achievement of

corporate goal.

Issue 09 => This issue explains how the organization pays its employees based on

their performance. It says that employees are paid more than 100% if they exceed

the targets, they are paid at 100% if they exactly meet the targets and they are paid

less than 100% it they fall short in their targets. This practice of the organization is

not productive. Because all the employees who perform and who do not perform get

an incentive. The exceptional performers and the good performers are getting more

than 100% and 100% incentive respectively.

But the employees who do not meet their targets also get an incentive of

less than 100%. This practice will lead to grievance among the employees and also

it will affect the productivity level of good employees. When the good performers

know that the poor performers also getting an incentive, then they will get de-

motivated that will lead to grievance. And also if they got to know that even though

the other employees are not performing well they are getting an incentive, then the

best contributors also tries to reduce the productivity since they will also get an

incentive though they do not achieve the targets.

Moreover the organization does not get the optimum out of its available

human resource by paying incentives to non-performers. It increases its production

cost by paying non-performers and it is limiting the poor performers from

improving their productivity by satisfying them through incentives. Since this

practice of the organization has much negative aspects, this should be changed and

only the best and good contributors for the organization success should be

rewarded.

Issue 10 => The next challenge that the organization faces is that all the financial

rewards that are given to employees are directly tied to performance versus budget.

So the organization should work harder to ensure that all the business plans are set

with same degree of difficulty across all divisions. Since the financial rewards

should be based on budget, the organization can not set different type of targets to

different divisions and reward them differently. So all the business plans should be

set with same degree of difficulty across all the divisions and all divisions should be

paid equally.

This is challenge and an issue for the organization. Because, normally

organizations focus more on its core departments, assign them with challenge but

attainable targets and reward them according to their performance in order to make

sure that the organization remains competitive in the market. And other department

targets are set with a low degree of difficulty because their functions are not much

contributing for the core business (ex:- IT department, Logistics department etc….).

but in this case since rewards are linked to performance versus budget, each goal

should be set with same degree of difficulty and each division should be rewarded

accordingly.

Issue 11 => The other important issue that the organization faces is because of its

team incentive system. The issue that the organization faces is that it finds it

difficult to explain to an individual employee what his or her exact reward would be

under different performance scenarios. Though one individual contributes much for

the achievement of divisional objectives when other employee are not contributing

much, then the divisional productivity will be low. Since the incentive scheme in

this case is based on performance of team productivity, the team will not get an

incentive because the group productivity is low.

Then the high contributor of the team gets de-motivated.and in other way,

when the team performs well and achieves the target, the person who does not

contribute for the achievement will also get an incentive. So the organization is

finding it difficult to explain to an individual about their receipt of rewards since the

team performance is unpredictable. To overcome this issue, the organization can

introduce an individual incentive scheme in a team incentive scheme. For example,

when a team meets a target, then to adopt a measure to find out that who has

contributed much for the achievement and reward them accordingly.

If an individual has performed more than what is expected of him, then

pay him of a high percentage of incentive and if a less contribution is found, and

then pay him of a low percentage.

Issue 12 => The final issue found in this case is that to make sure that each

individual of the organization has an understanding of what his or her performance

level for the payment he or she receives. Some employees of the organization tries

to compare their rewards with that of others and starts complaining against the

management. But they do not have knowledge of why that employee has received

more than himself.

So, if the organization is to practice a performance based incentive

program, it should have a clear and specific methodology of making each and every

employee of the organization to understand what is expected of them and what will

be given to them if they achieve the targets.

Conclusion

As discussed earlier, the management of the coca-cola company is well

satisfied with organization’s current compensation practices. Though the current

practices suits the organization and boosts the employee moral that lead to

increased productivity, the organization should make some adjustments in the

current compensation system to make it very effective and efficient. The criteria

that the organization should follow in order to make the compensation system

effective s per Thomas Pattern is as follows,

Adequate Equitable

Balanced Cost effective

Incentive providing Acceptable to employees

So, the organization will be more successful and will achieve all its

corporate objectives by focusing on the employee contribution, performance, rewards

and benefits. Because human resource is the resource that manages all the other

resource in the organization. Since an organization success depend on the

contribution of its employees, the employees should be rewarded for their

contributions which reward will lead to organizational success.

Thank you