Mid Term Examination
Compensation Management (Mgt422)
Submitted To
Mr. Zaheed Husein Mohammad Al-Din
Senior Lecturer
BRAC Business School
Submitted By
Afrida Hossain
ID-16204083
Sec- 01
Submission Date- 18/08/2020
Answer any 4 questions from the below 5 questions. Each carries 5 marks. You have 2 hours 30 minutes
for the exam.
1.
2.
3.
4.
Using examples, discuss how you can use long term incentives in organizations.
Explain the three strategic Objectives in the Pay Model.
Explain the following plans with examples: Gain sharing, Profit Sharing, Risk Sharing.
Using the Agency Theory of Motivation, discuss how you would design your compensation in an
organization.
5. Explain the most suitable compensation strategies for an organization where the variability in
organizational performance is high and the Individual Objectives are unstable. Use an example in your
answer.
1. Using examples, discuss how you can use long term incentives in organizations.
Long-term Incentives: Incentives may be short or long term. Long-term incentives are intended to focus
employee efforts on multi-year results. Although they could take the form of a cash bonus, more typically
these returns are in the form of stock ownership or options to buy stock at specified, advantageous prices.
Thus, they straddle the categories of cash compensation and benefits. Some argue that stock options are
not compensation at all, that they are more accurately described as an “equity incentive” granted by
owners to employees.
Incentives may be short or long term. Long-term incentives are intended to focus employee efforts on
multi-year results. Although they could take the form of a cash bonus, more typically these returns are in
the form of stock ownership or options to buy stock at specified, advantageous prices. Thus, they straddle
the categories of cash compensation and benefits. Some argue that stock options are not compensation
at all, that they are more accurately described as an “equity incentive” granted by owners to employees.
In any organization, I can use long term incentives in any of these ways. Either I can take the form of cash
bonus or profit bonus or stock ownership etc. As an example - Lank Bangla Securities follow various
strategies to compensate the employees. They share 5% of their yearly profit with employee as long-term
incentives.
2. Explain the three strategic Objectives in the Pay Model.
Policies and techniques are means to reach objectives.
There are three strategic objectives which are mention in the pay model: efficiency, fairness, compliance.
Efficiency:
Efficiency: It refers to issues such as performance enhancement, delighting customers, improving quality,
controlling labor cost, performance, quality, customers and stockholders, costs etc. It measures how
efficiently inputs are transferred into outputs.
Efficiency involves three general areas of concern.
(a) Strategy: It explains whether the pay-for-performance plan supports corporate objectives or not. The
plan should link well with HR strategy and objectives. The reward should not be on the basis of status quo.
Finally, management has to address the fact that how much of increase in wages motivates employee.
For example: Apple company is a good example of following efficiency objectives. It ensures better
communication, leadership, direction, adaptability, positive environment, effective interaction etc.
(b) Structure: Structure of the organization should be sufficiently decentralized to allow different
operating units to create flexible variations on a general pay for performance plan. Different operating
units may have different competences and different competitive advantages, so the organization should
not have a rigid pay-for- performance system that detracts from these advantages.
For example: telecom industries in Bangladesh like Robi, banglalink, gp they are conscious about
competitive advantage and keep flexibility while fixing pay scale of the employees.
(c) Standards: The key to designing a pay-for-performance system relies on standards: Objectives,
Measures, Eligibility, Funding.
For example: Multinational companies in Bangladesh like unilever, siemens, singer, nestle, standard
chartered bank etc. are maintaining standard regulations, measures, eligibility, funding efficiently.
Fairness:
Equity/Fairness: The second design objective is to ensure that the system is fair to employees. Two types
of fairness are concerns of employees: Distributive justice: Fairness in the amount that is distributed to
the employees. Managers have little influence over the size of employee’s paycheck. It is influenced more
by external market conditions, pay policy decisions of organization and occupational choices. Procedural
justice: Fairness of the procedure used to determine the amount of reward employee receives. Managers
have control over this type and the organizations that use fair procedures and supervisors are perceived
as more trustworthy and command higher levels of commitments. A key element in fairness is
communication regarding what is expected from employees. Pay procedures more likely to be viewed as
fair if they are consistently applied to all employees, employee participation/representation is allowed,
an appeals procedure is available, data used are accurate. There is another important factor here is
procedural fairness: It refers to the how pay decision is made. Fair treatment by recognizing both
employee contributions, and employee needs.
For example: Brac organization in Bangladesh ensures bonus, benefits, good working environment, fair
treatment, sound salary these facilities for their employees. They also arrange some reward system for
unprivileged workers and customers.
Compliance: Compliance is known as a pay objective involves conforming to various federal, provincial,
and territorial compensation laws and regulations. As these laws and regulations change, pay systems
may need to be adjusted to ensure continued compliance. Laws, minimum wages, equal remuneration
act, statutory compliances are also the factors considered under this pay objective. The pay for
performance system should comply with existing laws as a good reward system enhances the reputation
of the firm.
For example:
The govt. employees of Bangladesh receive their actual payment in this pandemic in proper ways as per
labor laws of Bangladesh. Ministry sector of Bangladesh holds their reputation by doing this.
3. Explain the following plans with examples: Gain sharing, Profit Sharing, Risk Sharing.
Companies can apply compensation plans that remunerate employees for successful teamwork.
Companies can take various methodologies for building team-based rewards, including programs such as
profit sharing and gainsharing, risk sharing etc.
Gain sharing:
Differs from profit sharing in that goal to exceed is not financial performance of organization but some
cost index (e.g., labor cost is most common, might also include scrap costs, utility costs).
Gain sharing is best described as a system of management in which an organization seeks higher levels of
performance through the involvement and participation of its people. As performance improves,
employees share financially in the gain. It is a team approach; generally, all the employees at a site or
operation are included. Gain-sharing measures are typically based on operational measures such as
productivity, spending, quality, customer service. It applies to all types of business that require employee
collaboration and is found in manufacturing, health care, distribution, and service, as well as the public
sector and non-profit organizations.
Less risk to individual than profit sharing because performance measure is more controllable.
For example – Whenever any teams or groups of Singer Bangladesh do extremely well and make huge
financial profits for the organization, Singer gives some percentage from that profit equally to each and
every member of the group.
Profit Sharing:
Profit sharing is a share of corporate profits which is distributed is cash on a current basis to all the
employees (driven by financial factors). It is linked to group performance (team, division, total company)
relative to exceeding some financial goal.
Profit sharing, when used as a special term, refers to various incentive plans introduced by businesses that
provide direct or indirect payments to employees that depend on company’s profitability in addition to
employees’ regular salary and bonuses. The profit-sharing plans are based on predetermined economic
sharing rules that define the split of gains between the company as a principal and the employee as an
agent.
Profit measures are influenced by factors beyond employee control (e.g. economic climate, accounting
write-offs). Less control means more risk.
For example – Robi shares 5% of their annual profit with their employees. Except few management
officials, every permanent employees’ of Robi get this amount of profit.
Risk Sharing Plans:
Generic category of pay add-on (variable pay) that differs from success sharing in that employee not only
shares in the successes but also is penalized during poor performance years. Penalty is in form of lower
total compensation in poor corporate performance years. Reward, though, is typically higher than that
for success-sharing programs in high performance years.
Greater risk than success-sharing plans. Typically, employees absorb a “temporary” cut in base pay. If
performance targets are met, this cut is neutralized by one component of variable pay. Risk to employee
is increased, though because even base pay is no longer totally predictable.
For example – Many organizations sometimes penalize employees for not being a performer. When the
expectation doesn’t match with the performance of the employee, the organization decides to penalize
the employee.
4. Using the Agency Theory of Motivation, discuss how you would design your compensation in an
organization.
Agency – Performance based pay must be tightly linked to organizational objectives. Employees dislike
risky pay and will demand a wage premium (higher total pay) in exchange for accepting performancebased pay. Performance based pay is optimal choice for complex jobs where monitoring is difficult. This
theory states that both the employer and the employee are the stakeholders of the company, and the
remuneration paid to the employee is the agency cost. The employee will try to get an increased agency
cost whereas the employer will try to minimize it. Hence, the remuneration should be decided in such a
way that the interest of both the parties can be aligned. It concentrates on the management process of a
firm which manages its relations and enters into contractual bargain with its managers or employees.
The conditions under which subordinate agents work with corporate managers may directly influence the
behavior of the organization, such as taking risks pertain to new ventures. Issues such as remuneration,
accounting techniques or risk-taking are among the major concerns of both parties in this relationship.
Example – The salaries of the employees from Marketing, Advertising and Public Relation agencies of
Bangladesh is fixed. The remuneration of the employees varies by the performance of them. Sometimes
it depends on the high performance, bringing clients as retainer, extra works etc.