Session 8 and 9

Compensation and Benefit plans should be tied in with the organization’s strategy.
Organizations attempt to design C&B plans so as to elicit desired behaviour from
employees.

Earnings-as-risk plans indicate the proportion of an employee’s salary that is at risk

or is variable (linked to performance). Higher the proportion of variable pay higher
are the Earnings-at-risk. Factors that influence an organizations compensation mix
include Business strategy, Organizational Life Cycle stage, Nature of the Job,
Hierarchy, Collective bargaining agreements (with the Union), Measurability of
performance (and robustness of performance management systems), and Industry /
Market benchmarks.

Performance linked incentives can be either in the form of base pay increases
(irreversible) or one-time bonuses (reversible). Incentives can also be in the form on
non-financial components like training opportunities, challenging assignments,
recognition etc.

The Point system is a quantitative method for determining the relative worth of
jobs in the organization. The Job Evaluation Committee identifies Compensable
Factors, establishes Point Ranges for each factor and allots Points for each job. The
jobs are then plotted as the wage curve.

Whole Health Management

The case discusses the situation of an MBA participant who has been asked to quote
his compensation during a campus hiring program. The key issue is about the
compensation mix or allocation of base pay (fixed), bonus (variable pay) and ESOPs.
The case also enables participants to design a compensation plan that targets
desired behaviour from employees and is aligned with the business strategy.

WrapItUp

The case discusses the impact of a profit sharing plan. The initial compensation strategy
based on volume-based incentives fails to motivate employees who stop putting in extra
effort once the threshold has been achieved. The profit sharing plan links compensation
directly to the profits generated in respective sub-units (here restaurants). While the plan
seems effective in that restaurant managers strive harder to achieve greater profits, thus
positively impacting the company bottomlines, it also suffers from some problems. To begin,
with it seems evident that to successfully implement profit-sharing plans employees need
greater control over their work and more autonomy to make decisions. This could have a
negative effect on standardization which is an important element of service industries.
Further, in an effort to maximise profits the sub-unit managers could tend to compromise
service quality. The key issues in the case include design of variable pay plans to elicit
desired behavior, elements of variable pay plans, like multiple metrics for measurement,
and link with strategy.