BPI Performance Support and Recognition - Examples
The following is an example of a Performance Support and Recognition System Report. It covers a range of three system options based on their local and international experience in the development of reward and recognition schemes. Three spreadsheets at the end of the document incorporate the calculations for the three systems.
XYZ Ltd
Reward and Recognition System
FINAL REPORT
Contents
Introduction
Background
1.2 Major issues
vision for the future
No career path
A clash of cultures
Base pay and variable pay
System framework
A weighted profit share system
Individual performance measurement
Performance score weighting
Model Framework
Examples of Scheme Payout
Employee focus group assessment and approval
Conclusion
A more complete strategy
The weighted profit share system
External influence on the system
Fixed remuneration policy
Recognition of performance
Disclaimer
1 Introduction
1.1 Background
Following the submission of our Interim Report, External Consultant. compiled a range of system options based on our local and international experience in the development of reward and recognition schemes. These options were presented to Jon Smith in a Discussion Paper on Tuesday, 27 August 2012
There were three options presented for consideration. The first of these was built around a profit pool defined by the degree to which pre-determined targets are met. Profit share units are allocated to participating staff as a percentage of their existing total remuneration package. There is no assessment of individual performance; annual bonus payments are determined by the number of profit share units held.
The second option, the weighted profit share model, is described in detail below. As for the first option it is built around a profit pool and profit share units. In this scheme, individual performance is assessed and contributes directly to the size of the individual bonus achieved.
The third option also assesses individual performance, but does not have the profit sharing pool as its funding resource. A different funding mechanism would need to be devised by the Company.
The Discussion Paper provided the background information on each option. This information was based on our research on organizations that employ portfolio managers and traders/dealers. We have synthesized issues such as:
- individual versus team performance;
- the best performance measures and the time frame for measurement;
- setting objectives (e.g. agreement to achieve certain financial goals);
- delivery of incentives - in cash or kind (eg. recognition);
- assessment of competencies and any impact on the incentive payments.
The proposed Company system outlined in this report (the weighted profit share model) has been selected by Mr Smith as the option that best suits the Company's requirements. Based on our information gleaned from local and overseas organizations in the private and public sectors, this is also our preferred option.
We need to emphasize, however, that the success of the new system for the Company will be significantly diminished if the related issues discussed in our Interim Report, and summarized below, are not addressed. The implementation of a reward and recognition system will address only some of the concerns expressed by Company staff. (The findings in our report confirmed the results of the staff attitude survey conducted in 2012).
1.2 Major issues
1.2.1 A vision for the future
Staff expressed concern about the lack of a clearly articulated vision for the future of the Company, and particularly of the Australia Division. They want some direction from the Board about how it intends to position itself in the next three to five years.
1.2.2 No career path
The lack of a career path for traders was raised on a number of occasions. Some believed this is a major reason for staff leaving the Company.
1.2.3 A clash of cultures
There appear to be two cultures operating within the Company. The Australia Division is generally seen as aggressive and go-ahead, the rest of the organization more cautious and akin to its conservative origins. Some staff were concerned that the two cultures could be further pushed apart by use of an incentive scheme that covered only trading staff.
1.2.4 Base pay and variable pay
We understand the relationship of base pay to variable pay has been the subject of consideration by some members of the Company Executive Team.
We have examined the prospect of a reduction in base pay as part of funding the reward system. It is our view that this action is not appropriate. Advice from External Consultant. internationally, coupled with our local experience and contacts, is that reducing base pay was not the best way to proceed.
The presenting issue for this project was the difficulty the Company had in retaining quality staff. Reducing the base pay, even if total annual remuneration could be increased, would, in all likelihood, exacerbate the Company's staff retention problem.
Case study: A local External Consultant. client found that his managers were unmotivated and overpaid. Under the direction of the new Managing Director, External Consultant. designed and implemented an incentive scheme that included phased reductions in salary from the 75th percentile of market practice to the 25th percentile. Despite the offer of 25% bonuses, many managers resigned, which happened to be a desirable outcome of the Managing Director's "fresh blood" strategy.
Current base pay of Company staff is at the 75th percentile of general market practice. In our view, this is competitive with the industry and should be maintained until such time as the Company reward and recognition system is fully established and respected by staff.
The following section outlines the framework of the proposed system.
2 System framework
A variable pay scheme built exclusively upon individual performance has the potential to fragment an organization, and pit staff against each other in competition for a limited pool of available money. A team-based scheme in which all share equally, regardless of their performance, can rob staff of the potential motivational value of such schemes.
The recommended option (the weighted profit share model) contains elements of both team and individual performance. To maximize the size of the pool, determined as it is by exceeding nominated targets, requires the concerted effort of the entire team. However, individual staff will receive bonus pay according to their individual performance. This encourages the team to maximize their impact, rewards individuals for their particular contribution and encourages staff to take an interest in, and support the efforts of, their colleagues locally, nationally and internationally.
Finally, because the bonus amounts have to be won every year, they do not become part of the employee's base pay and the organization is not paying for performance that was demonstrated in the past. The scheme is driven by the organization's capacity to pay, rather than a view that staff are entitled to a pay increase regardless of the organization's capacity or their individual performance.
In broad terms, the most successful incentive systems for merchants, options and futures traders, portfolio managers and fund managers share the following characteristics:
- individual performance is most often the basis for the reward delivered;
- performance measures often include annual return on investment and market relative rate of return;
- objective setting utilizes recent financial achievements and peer performance;
- delivery of incentives involve annual cash bonuses;
- they are self-funding out of revenue generated from exceeding budget targets set;
- assessment of competencies is emerging as an impact on the incentive payments.
2.1 A weighted profit share system
This system is based on employees sharing in the success of the organization by sharing an incentive pool which is funded by corporate or divisional performance above budget. However, each employee's share of the pool is weighted by his/her relative performance.
This model may be applied where profit or a similar bottom-line contribution can be defined.
These systems are usually based on Earnings Before Interest and Tax (EBIT). This measure may be adopted for the whole organization, or if appropriate, for each Division.
The Company should consider the applicability of the EBIT measure to its operations. For example, we understand that some managers may be in a position to influence Interest income, which may have an impact on financial performance.
2.1.1 Individual performance measurement
The Key Result Area (KRA) process
The recently introduced KRA process was generally supported by staff. They expressed the view that the KRA process had the potential to provide valuable information to both evaluate the previous year's performance of individuals, groups and the organization, and set targets for the coming year. Staff commented upon the fact that the KRA process had improved since its inception. The view was also put that less quantifiable KRA's were also important and should not be ignored. This is consistent with an emerging picture of "best practice" in relation to performance management which argues that individual performance should comprise a combination of quantitative and qualitative targets to be achieved.
What can, and should, be measured.
Most staff with whom we spoke were prepared to have their performance assessed against the KRA's currently in place. Many staff also expressed some concern about the incentive scheme being based exclusively on dollar values dealt with. They believe that some roles offer far greater opportunities than others and are also less intellectually demanding than others.
There is also a need to develop a number of performance indicators around the qualitative indicators of performance or competencies. Doing so indicates that the Company is interested in how things get done as well as what things get done. These competencies should be linked to the leadership and management development program in which the Company is currently involved as well as other initiatives currently being investigated eg the Company as a learning organization. Thus the training activities, other organizational initiatives and the remuneration policy are mutually supporting.
The Balanced Scorecard
The Balanced Scorecard is built upon four areas in which organizational performance should be measured to ensure long-term success. These are:
- financial performance (eg. profitability);
- customer service (a core competency);
- innovation and learning (eg. new product development); and
- internal business processes (eg. linkage to competencies).
Relevant measures around these four areas of activity are developed at the corporate level and cascaded down through the organization via each business unit or division, group and individual. Thus there is organizational alignment throughout ensuring all staff are focused on the achievement of organizational success identified at the highest level.
2.1.2 Performance score weighting
While we do not have detailed information on the competencies that the Company is using, we have selected five core competencies that may be incorporated into a performance measurement system. With these core competencies, we should also identify up to five KRA's for each employee.
Given up to ten performance measures (five core competencies and five KRA's), we would need to apply a weighting of 1 (least value) to 5 (most value) to each measure.
Once the score weights are determined (usually by agreement with the employee(s)), each performance measure should be assessed on a numeric scale of, say, 1 (poor) to 5 (outstanding).
The performance score for each employee is recorded on a form similar to Attachment 1. The ten scores add to a total which should be aggregated with all other employees' scores to establish an overall ranking. This ranking defines employees' performance scores as deciles within the organization. (See Attachment 2 for a sample analysis).
Each employee's ranking may then be converted to "performance units" which would form the basis of the profit share calculations that follow.
2.1.3 Model Framework
Individual participants will be allocated performance-based Profit Share Units (PSU's) which will have a final payout value determined by the relative performance of the individual and the total value of the Profit Sharing Pool; ie:
Value of each PSU = Total Value of Profit Sharing Pool
Total Units on Issue
The relationship between the size of the pool and the achievement of EBIT targets is intended to ensure that the greater the achievement over targeted EBIT, the greater the reward to participants.
The value of the Profit Sharing Pool is therefore determined on a graduated basis. In the following examples, $35,000 is allocated for achievement of targeted EBIT and a further allocation of profit is assigned to specific profit ranges exceeding targeted EBIT as follows:
2012/13 Allocated Value of Profit
Company / Division EBIT Value Sharing Pool
Achievement of Target ($)
Below Target nil
Achievement of Target 35,000
Target + 5% 40,000
Target + 10% 45,000
Target + 15% 50,000
Target + 20% 55,000
Maximum Profit Sharing Pool 225,000
Once the actual EBIT is within a specific range above targeted EBIT, the allocated value of the Profit Sharing Pool (PSP) is determined on a proportionate basis within that range. The maximum allocated value of the PSP is to be set at $225,000; meaning that there is no further reward for achievements in excess of Target + 20%. (The table at Attachment 3 is a print of a spreadsheet that will be available to the Company to assist in the calculation of PSP).
The number of Profit Share Units will initially be allocated on the basis of 20% of total package (Total Employment Cost) at the beginning of the year; eg. if an employee's TEC is $80,000, the "base units" allocated will be 16,000 (ie. $80,000 x 20%).
However, when all participating employees' performance is individually assessed, a Performance Multiple will be applied to the base units. This Multiple will normally be within the range zero (0) to two (2), which will be determined by the relative performance of the employee.
For example:
Performance Rating Ranking Performance Multiple
(minimum percent) (decile)
88.6% 9th 2.0
81.8% 8th 1.7
76.4% 7th 1.4
65.3% 6th 1.2
62.4% 5th 1.0
58.8% 4th 0.8
51.5% 3rd 0.6
46.1% 2nd 0.4
45.1% 1st 0.2
Less than 45.1% 0.0
The tables in Attachment 3 present an analysis of the performance of 26 fictitious employees, which has derived the performance rating deciles.
In this example, an employee receiving a TEC of $80,000 and receiving an annual Performing Rating of 67% would have 19,200 Profit Share Units.
In order to ensure individual confidentiality, all participants would be asked not to disclose to their colleagues the number of units allocated to them.
In order to preserve the commercial confidentiality, the Company (or Divisional) EBIT would not be reported; however, in order to track the relationship between general business performance and current EBIT, the total value of the PSU's may be advised to all participants on a quarterly basis. This may be shortly after the completion of the Financial Accounts for each quarter.
2.1.4 Examples of Scheme Payout
- The participant is allocated, say, 12,500 base units (a TEC of $62,500);
- Total number of units on issue, say, 220,300 units1.
(i) Company/Division achieves EBIT of 95% of Target
- Target missed and no payout
(ii) Company/Division achieves EBIT of Target + 4%;
Performance is assessed as 59%, which carries a Performance Multiple of 0.8;
The participant's Profit Share Units = 10,000.
- Target achieved $35,000
- Target + 4%
4/5 x $40,000 $32,000
Total Allocated Profit Sharing Pool $67,000
Unit Value = Total Allocated Profit Sharing Pool
Number of units on issue
= $ÊÊ67,000
220,300
= 30.4c
Profit Share = $3,040 (5% of TEC)
(iii) Company/Division achieves EBIT of Target + 7%
Performance is assessed as 68%, which carries a Performance Multiple of 1.2;
The participant's Profit Share Units = 15,000.
- Target achieved $35,000
- Target + 5% $40,000
- Target + 7%
2/5 x $45,000 $18,000
Total Allocated Profit Sharing Pool $93,000
- Unit Value = $ÊÊ93,000
220,300
= 42.2c
Profit Share = $6,330 (10% of TEC)
(iv) Company/Division achieves EBIT of Target + 14.5%
Performance is assessed as 47%, which carries a Performance Multiple of 0.4;
The participant's Profit Share Units = 5,000.
- Target achieved $35,000
- Target + 5% $40,000
- Target + 10% $45,000
- Target + 14.5%
4.5 x $50,000 $45,000
5
Total Allocated Profit Sharing Pool $165,000
- Unit Value = $165,000
220,300
= 74.8c
Profit Share = $3,740 (6% of TEC)
(v) Company/Division achieves EBIT of Target + 15.1%
Performance is assessed as 79%, which carries a Performance Multiple of 1.4;
The participant's Profit Share Units = 17,500.
- Target achieved $35,000
- Target + 5% $40,000
- Target + 10% $45,000
- Target + 15% $50,000
- Target + 15.1%
0.1 x $55,000 $1,100
5
Total Allocated Profit Sharing Pool $171,100
- Unit Value = $171,100
220,300
= 77.6c
Profit Share = $13,580 (22% of TEC)
(vi) Company/Division achieves EBIT of Target + 25%
Performance is assessed as 92%, which carries a Performance Multiple of 2.0;
The participant's Profit Share Units = 25,000.
- Target achieved $35,000
- Target + 5% $40,000
- Target + 10% $45,000
- Target + 15% $50,000
- Target + 20 $55,000
- Target + 25% -ÊÊÊÊÊÊÊ
$225,000
- Unit Value $225,000
ÊÊ220,300
= $1.02
Profit Share = $25,500 (41% of TEC)
3 Employee focus group assessment and approval
External Consultant. facilitated a final discussion with a group of Australia Division employees. Mr Smith represented the Executive in these discussions.
The purpose of the additional focus group meeting was to ensure that the Executive's preferred model was fully understood and received the support of the employees.
The employees were free to offer suggestions to improve the framework of the system; however, there was no discussion of KRA's or the performance appraisal process.
Their preferred approach to recognition was clearly identified and should be incorporated into the system's framework.
4 Conclusion
4.1 A more complete strategy
On its own, a reward and recognition system is unlikely to lead to the retention of quality Company staff in the longer term. A well designed system should be viewed as a necessary but independently insufficient management tool to increase the desire of staff to commit themselves to the Company.
A reward and recognition system needs to be part of a more complete strategy aimed at dealing with the issues recorded in our Interim Report and in the staff attitude survey.
4.2 The weighted profit share system
The weighted profit share system outlined in this report will be a valuable management tool for the Company. As participants in this system, employees will be able to identify the importance of team (Divisional) performance, as well as individual performance. The rewards delivered by the system will become meaningful - employees will perceive that there is a sound link between the rewards received and their effort and results achieved.
4.3 External influence on the system
Where external factors beyond the control of the Company impact on its ability to achieve its EBIT (or other) target, consideration should be given to the effect on the weighted profit share system. For example, in a year when Australia produces a bumper crop that the Company can sell at high prices, EBIT targets may be exceeded by huge margins. In this case, it may be wise to roll over some of the Profit Sharing Pool surplus into the next year's Pool. If the next year delivers a drought with record low yields, it may be reasonable to lower the EBIT target and fund limited incentive payments from the previous year's success.
4.4 Fixed remuneration policy
We recommend that, for 1996/97, the Company maintains its policy of setting fixed remuneration levels at the 75th percentile of general market practice. As employees learn to respect the reward system, a greater proportion of annual remuneration may be put at risk. This will allow the Company to "freeze" the fixed remuneration component in real terms; ie. limit increases to CPI adjustments only. In due time, the fixed component may reduce to a policy setting of market median or lower.
4.5 Recognition of performance
Formal recognition remains an issue which requires deeper consideration. The performance assessment framework presented in this report will be sufficient for the objective ranking of employee performance, but each Division will need to assess the most effective and meaningful "trophies" that it should deliver to its employees.
4.6 Disclaimer
Please note that, in accordance with our firm's policy, we are obliged to advise that neither the firm nor any member or employee of the firm undertakes responsibility in any way whatsoever to any person or organization other than the XYZ Pty Ltd in respect of the information set out in this report, including any errors or omissions therein, arising through negligence or otherwise however caused.
XYZ Reward & Recognition System
| |||||||||
EBIT
Target =
|
$5.000.000
| ||||||||
Achievement =
|
$5.755.000
| ||||||||
Percent above Target =
|
15,10%
| ||||||||
EBIT Value
|
Allocated value
|
PSP Allocated
| |||||||
Below Target
|
0
| ||||||||
Target Achieved
|
35.000
|
$35.000
| |||||||
Target +
|
5%
|
40.000
|
$40.000
| ||||||
Target +
|
10%
|
45.000
|
$45.000
| ||||||
Target +
|
15%
|
50.000
|
$50.000
| ||||||
Target +
|
20%
|
55.000
|
$1.100
| ||||||
225.000
|
$171.100
| ||||||||
PSP / (EBIT above target) =
|
23%
| ||||||||
XYZ Reward & Recognition System
| |||||||||
Name:
|
"SENIOR MERCHANT 1"
| ||||||||
Performance Measures
|
Weight
|
Rating
|
Score
| ||||||
1 to 5
|
1 to 5
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Competency measures
| |||||||||
1
|
Managing customers
|
4
|
1
|
4
| |||||
2
|
Managing strategy
|
2
|
5
|
10
| |||||
3
|
Managing performance
|
2
|
4
|
8
| |||||
4
|
Managing relationships
|
2
|
2
|
4
| |||||
5
|
Managing teams
|
2
|
2
|
4
| |||||
Objective measures
| |||||||||
1
|
Total sales
|
5
|
5
|
25
| |||||
2
|
Profit target
|
5
|
3
|
15
| |||||
3
|
Container trade
|
4
|
4
|
16
| |||||
4
|
Growth of customer base
|
4
|
4
|
16
| |||||
5
|
Risk management tools
|
3
|
2
|
6
| |||||
Total:
|
108
| ||||||||
Percentage:
|
65%
| ||||||||
Summary of results
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Award
|
Decile
|
Minimum
|
Employee
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Percent
| |||||||||
Gold
|
9th
|
88,6%
| |||||||
Silver
|
7th
|
76,4%
| |||||||
Bronze
|
5th
|
62,4%
|
¦
| ||||||
Not placed
|
-
|
-
| |||||||
- The number of units on issue will vary according to individual performance. These examples do not match the total PSU's in the example in Attachment 2.2.
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