Creating Value: A Contemporary Model/Approach to Incentive Pay as a part of a Compensation Management Strategy

Prepared by

Mr John Pilgrim, Executive Director

The Productivity Council

Where does base pay fit within the

organization’s business strategy?

Compensation Philosophy

- A defined compensation philosophy is a statement of

what the organization believes about how people should be paid.

Compensation Strategy

- The compensation strategy includes the principles that guide the design, implementation and administration of a compensation program in an organization.

The Purpose of the Plan

Inspire employees to exceed the predetermined targets set by the company at the beginning of each business period.

Provide the opportunity to all employees to share in the financial gains resulting from improved organisational performance due to their increased labour productivity.

Enhance productivity growth and development in the organisation.

© The Productivity Council 4

The Issues

Poor performance of world markets

Changing Demographics: Aging workforce

Productivity and a totally engaged workforce

Attitudes and behaviour (Accountability and

Responsibility

The changing expectations

The rising costs and low revenues

Can companies continue to use traditional approaches to manage?

Are we using the opportunity to optimise the performance of our

employees and company?

Elements of the Plan

Measure 1:Return on Investments after inflation. (A financial measure).

Measure 2:Percentage of short-term benefits processed in one week or less. (A customer satisfaction measure).

Measure 3:Ratio of administrative expenses to value of contribution (An efficiency measure).

Measure 4: Percentage of persons who are happy with the service provided by organisation. (A quality of service measure).

Measure 5:Reduction in annual arrears portfolio. (An effectiveness measure).

Key Performance Targets (The Base)

Item Key Performance

Indicators (Measures)

Minimum

Target(s)

Weights

Measure 1 Return on Investment 5% 30

Measure 2 Processing of Short-term

Benefits

90% 20

Measure 3 Administrative Expenses

versus Contributions

16.5% 15

Measure 4 Customer Service

Satisfaction

95% 20

Measure 5 Arrears Portfolio

Management

10% 15

Table 1: Key Performance Indicators

Table 2: Performance Measures

MeasuresMeasure

1

Measure

2

Measure

3

Measure

4

Measure

5

Performance

Score/IndexLine

Ranges of Values

for Performance

Measures

5.5% 95.0% 14.0% 100% 7.5% 5 1

5.4% 94.0% 14.5% 99.0% 8.0% 4 2

5.3% 93.0% 15.0% 98.0% 8.5% 3 3

5.2% 92.0% 15.5% 97.0% 9.0% 2 4

5.1% 91.0% 16.0% 96.0% 9.5% 1 5

5.0% 90.0% 16.5% 95.0% 10.0% 0 6

Weights 30 20 15 20 15 7

Maximum Score 150 100 75 100 75 8

Actual Group’s

Performance5.4% 95.0% 14.5% 98.0% 8.5% 9

Group’s

Performance

Score4 5 4 3 3 - 10

Calculating the Bonus Pool

Then the bonus pool created to be paid to employees would be:(4x30) + (5x20) + (4x15) + (3x20) + (3x15)

= 385 points.

385 x four weeks value of all salaries500

That is, the amount that would be allocated as an incentive payment to employees would be the equivalent of twenty-two (22) days value of salary.

Bonus Allocation (%)

No Category Organisation PARS* Man-day Lost Factor

Total

1 A: Managing Director 100 - 100

2 B: Deputy Director & Managers

80 20 - 100

3 C: Supervisors 65 35 - 100

4 D: All Other Staff 55 30 15 100

*PARS – Performance Appraisal Review System

Individual Performance Appraisal

The purpose of a performance appraisal

system is to improve performance anddevelop people, realign individual goals, givefeedback on performance, recogniseachievements, facilitate assessment ofemployees potential training needs andprovide a tangible record of performancetrend.

Individual Appraisal Chart

Measure Performance Score

Pay out Index

Category B Category C Category D

Excellent 5 Full amount of 20%

Full amount of 35%

Full amount of 30%

Very Good 4 Partial amount of 15%

Partial amount of 25%

Partial amount of 20%

Satisfactory 3 Partial amount of 5%

Partial amount of 15%

Partial amount of 15%

Improvement required

2 Nil Nil Nil

Unsatisfactory 1 Nil Nil Nil

Man-hours Saved (Absenteeism Index)

Absenteeism is any failure of an employee to report to work. (This does not include vacation, jury duty, etc). Such absenteeism can cost the company in terms of loss of output both directly and indirectly, additional management and supervisory time, lower quality of work due to the lower number of skills on the job, and loss of goodwill and reputation of the NIC. Therefore in an effort to reduce the number of sick days employees take, an absenteeism criteria is incorporated into the plan.

Man-hours Lost Criteria

Number of Uncertified Sick Days Taken

Payout Index The Payout Level %

0-2

4-3

7-5

8 or more

3

2

1

0

10% (Full)

5% (Half)

2.5% (Quarter)

0

The Group (Who should be included in the Plan?)

This plan will cover management and staff of the NIC. The plan will not include:

those temporary staff employed for sixteen (16) weeks or less;

employees who resign during the period or who have been laid off and worked for less than seven (7) months of the calendar year;

persons under suspension during the period; persons dismissed during the period; and Persons who are away from office for a period of ten per

cent or more will have their incentive plan prorated (this computation will not include jury duty, official travel and vacation leave).

The incentive payout for persons on study leave would be prorated.

Frequency of Incentive Payment

Payment will be made once a year after making assessment of the result for the financial year.

Allocation of Bonus Pool

The Chief Executive Officer’s bonus payment will be influenced only by the extent to which the organisation achieves the targets set in relation to the Key Performance Indicators (KPIs).

100%

CATEGORY A: MANAGING DIRECTOR

Organisational Achievement

Allocation of Bonus Pool

The bonus pool created will be divided among this category of staff as follows: 80% of the pool will be based on Organisational Achievement (AO) (this portion is paid to all staff), and 20% is based on Individual Performance (IP) as reflected in the PARS.

CATEGORY B: DEPUTY DIRECTOR AND MANAGERS

O r g an is a t io n a l A ch ie ve m e n t

In d iv id u a l Pe r f o r m an ce

20%

80%

Allocation of Bonus Pool

The bonus pool created will be divided among this category of staff as follows:-where 65% of the pool will be based on Organisational Achievement (AO) (this portion is paid to all staff), and 35% is based on Individual Performance (IP) as reflected in the PARS.

Organisational Achievement

Individual Performance

35%65%

CATEGORY C: SUPERVISOR

Allocation on Bonus Pool

The bonus pool created will be divided among this category of staff as follows:- 55% of the pool will be based on Organisational Achievement (AO) (this portion is paid to all staff), and 30% is based on Individual Performance (IP) and 15% based on the Man-days Lost criteria. Organisational Achievem ent

Individual Perform ance

Man Days Lost

30%

15%

55%

CATEGORY D: OTHER SUPPORT STAFF

A Reminder: Benefits of Incentives

Pay

Lessens the Pressure to Provide Automatic Annual Increases in Base Pay

Provides for Employment Security in Bad Times

Focus executives, management and staff on the delivery of results

Links Individual Effort to OrganisationalViability and Success

Engenders Cooperation and Management/Labour Collaboration