Evaluating Settlement Strategy and Incentive Plans

1. 1. 0 Introduction

It is becoming increasingly more important, especially in the current conditions following a market meltdown for organisation to monitor and control labour costs, whilst striving for increased production, better quality and good customer support.

For this reason; there has been need to examine strategies, if not generate new strategies towards worker compensation and motivation schemes.

In this competitive environment, companies want to recruit and retain high performing and highly determined employees and taking note that this comes at a price, but a cost justifiable enough to ensure competitive gain and success of the organisation.

"Michael H. Schuster, P. H. D on Aligning Reimbursement Strategy" records that "Companies are evaluating the technique and basis for compensating employees, there's been a rise in the amount of companies wanting to develop powerful, high committed work systems, based upon expanded assignments for employees, require that employees accept more responsibility and accountability".

Therefore employee reimbursement is an important aspect to the financial success of the organisation. A strong emphasis is put on the fact that compensation and reward strategies should transparently indicate the financial probable of the business and align it to the company strategy and goals.

In days gone by, wages and salaries usually grew only by way of a consistent and regular spinal point. More recently, there has been a growth where in fact the labour market is becoming more and more aggressive and has brought about the idea that payment and incentive packages must compete enough to appeal to and sustain well skilled staff.

2. 1. 0 Reimbursement Strategy

As all strategies for any organisation, the best goal and objective is to maximise the riches for shareholders. The settlement strategy should take into consideration that;

They should obviously put into action a value based mostly company management system.

The long term gratitude and capital value of the company

Market conditions and orientation of engaging skilled and skilled workers

And essential requirement is the expense of the technique to the organisation.

Compensation is one of the main concerns to secure the powerful of the company. There is no understatement in declaring that organisations perform as a result of work being completed and accomplished by folks it employees, and therefore they make the difference. In saying this, it is important to notice that protecting human being capital is crucial, and this is performed through motivation, acknowledgement, an appropriate prize and compensation scheme.

An apparent and important aspect to consider in the strategy is the possible examination of the cost of executive and worker compensation will cost the organisation. This will be concentrated on the chance cost to the business of the stock and performance established parts. The price in cases like this to the business would therefore be the foregone resources on the reimbursement agreement.

"It is stated that money is a robust source of determination. But it is also said that salary increase can only just motivate until the next pay increase is due. "

An component of any organisation's settlement strategy is to always reflect the proper business aims. The objectives and goals should be plainly described, making them attainable through the reimbursement structure.

As stated previous and reemphasised now, the payment plan should be integrated with the performance goals of the company and with the employee's individual's goals.

2. 1. 1 Primary Elements of Payment Strategy

An intensive research needs to be carried out on the company framework, this can establish and indicate the demands into the future business development and which construction conditions will be required to structure a highly effective reimbursement strategy.

It is even more important to establish the management and operative levels taking into account value orientation. As well as the goals which may have been set out for each employee and exactly how their performance is evaluated.

Therefore clear assignments and responsibilities need to be defined and a strong communication system to be placed in place to ensure that employees know and understand how their performance is reflected into the motivation scheme.

Other elements to consider are should be;


They should be a buy in in to the incentive plan by the employees. It should be designed so that employees whatsoever levels are participative and have the same gaol and course.

Be of significant and Perceived Value to the employee.

Employees can easily recognise the actual praise related to performance.

Related to Person Performance

As explained by Bob Normand Institute of Smart Business Management. "A factor in the persistence of how much an individual employee receives should be their performance rating as dependant on their formal job review and appraisal.

Employee Loyalty

A good motivation plan can retain employees and gain their devotion. Therefore, a motivation plan should foster staff tenure and performance.

There are two main streams of rewards being economic and non financial. The economic being the preferred, and is usually a Pay-For-Performance structure. Types of performance based pay are;

Stock centered - This will include stock options and grants, equity shares.

Cash Reimbursement - These are usually add-ons and are related to the accomplishment of performance goals and goals that were set out. Cash motivation is the most typical and preferred form of a motivation scheme.

An effective reimbursement strategy if implemented effectively can fulfil other aims. This has been summarised in the desk below;



  1. Alignment to the strategy of business units.
  2. Strong market position.
  3. Strengthens the performance and is result focused.
  4. Competitive Advantage
  5. Enable company change and overall flexibility to adapt to transformed business situation.
  6. Success and onward moving company.
  7. Promotes drive and loyalty
  8. Retaining of very skilled employees.

Controversy Over incentive schemes

1Over the past years, and more recently the past 24 months, where the economy experienced a major depression and a down submit the market for some industries, there were continued sensitive quarrels over corporate professionals' compensation and how they align to the firm's performance. "Holmstrom 1979, viewed the contribution that clarified the trade off between risk and incentives in the moral hazard problem. " This review was partly predicated on his unpublished dissertation.

The media, public, politicians have raised concerns over the current executives compensation deals that seem to drive employees towards taking short term risks, without taking into consideration the long-term repercussions and effects on their organisation.

As a result of this, there have been regulations being placed on the desk that look at limited stock pay options and maximum level cash incentive, or other types of reimbursement that will concentrate more on permanent performance. This will press executives to always starting their investment and finance decisions with the shareholder's best interest accessible. There should be a strong correlation between long-term incentive compensation and the future firm performance.

With the focus on transparency, CEO's pay is usually publicized in the press in documents and mags such as Fortune Magazine that has an annual rank of the best paid CEOs. It's been witnessed that the firms that pay their CEO's the best are organisations that tend to be the people experiencing high earnings, and high operating performance compared to others.

4. 1. 0 Performance Dimension and Motivation Schemes

Leonard, 1990 and Hayes and Schaejar 2000, looked at the studies that focussed on the partnership between pay and the near future accountancy performance of the organisation.

There has been an assumption that in useful markets, professionals and traders will capitalise today's value of future company performance increase into the stock price.

The question is usually 2 how will you align strategic performance procedures and results to compensation and motivation ideas?".

"The first question to ask when designing a bonus plan that replicates the incentive of the owner is how to evaluate business performance. The right measure of commercial performance will have strong ties to the amount of additional wealth a company produces because of its shareholders and by expansion for society most importantly. It'll guide people to make the decisions that will generate the added value essential to fund their extra, to re w a rd the shareholders also to reinvest in business growth. "

They are several models that organisations may use to gauge the performance and determine the amount of incentive to be paid to professionals and employees.

Strategic Performance Measurement (SPM) System - This way of measuring translates the business strategies and goals into deliverable results. The good thing about this model is that it combines the financial, proper and operating actions and compares it against how well an company meets its aims, goals and the goals.

Economic Value Added (EVA) / Value Centered Management - This model emphasises on performance dimension and the cost of capital and procedures the value designed for shareholders. The main good thing about this measure is the fact its emphasis is on prosperity creation.

Balanced Scorecard System - Its main aspect is its focus on the main element business drivers such as customer and employee satisfaction, operational brilliance and new product development.

4 As firmly backed by Stern and Co. Economic Value Added offers more with an organisation as it targets measuring value created for shareholders, which is the essence and target of any organisation; to create wealth because of its shareholders. This strategy is also focuses more towards the capital markets and assists in developing company strategies in any way degrees of the organisation.

5 Other benefits of EVA as a dimension tool are;

  • It creates measurable aims and goals for employees and are specific
  • It may easily align the functions and business units with the overall corporate and business strategy.
  • EVA can link individual performance and compensation ideas to business strategies.

5. 1. 0 Relationship between Stock Price Performance and Incentive Schemes

The hypothesis with a paper compiled by "M. Cooper, H. Gulen and P. Ray - Performance for Pay?" viewed the relationship between CEO incentive compensation and future stock price performance.

They summarised that "The reliable market hypothesis recommended that marketplaces capitalise motivation pay grants into the stock price at the announcement day, leading to no relationship between motivation pay and future stock price performance. "

On the other hand, the optimal incentives hypothesis suggests that whilst reimbursement and incentive strategies can be aligned to managerial interests with shareholders value riches creation and maximisation, investors may not necessarily react to the data. This may be because of this of not understanding the incentive strategy, rather than getting the right measurement model to measure it against. Therefore traders cannot observe or attain the worthiness it could have to the company future stock price performance. 7A positive connection may be examined between the motivation pay and the future stock price performance.

8Needless to say, based on studies completed in the past and present on the partnership between Stock Price Performance and Motivation Schemes, there is not much direct facts that presents that incentive ideas do lead to a company's improvement in future stock price performance. Among the problems of stock results are they having shareholder's targets imbedded in them. Other challenges are that economical theory wouldn't normally have the ability to predict that increase in incentives would lead to upsurge in profitability.

9 A much early analysis by Masson 1971 linking financial incentive to future performance of the organisation, his conclusions were that businesses and organisation that experienced attractive financial incentives showed a much better stock market performance during the post-war period.


Due to the increased competition of business, it has subsequently increased your competition for employing skilled workers, and keeping them.

A compensation strategy creates and brings about a unified culture, and will be offering corporation and increases the implementation of the business enterprise strategy. This can essentially promote performance and employees will be effect oriented.

Incentive strategies should be examined on a yearly basis to analyse if they're actually effective and increasing the performance of the company and achieving the strategic goals. This involves taking a look at any accomplishments and the desired outcome.

"Regardless of the soaring pay, many experts claim that the system is working much better than ever. They see the bull market and healthy corporate sector as facts positive that companies get what they purchase. (Business Week April 21, 1997, p. p 60)

Performance centered pay is best incentive strategy for any company as it maximises on the tactical plan, as the compensation strategy requires that the plan is defined on company goals and objectives. This has a significant impact on the employees. Pay for performance has been cited to be a more motivating factor, both short term and long term incentives. A study carried out proven that employees revealed a far more positive work attitude with a purchase performance motivation. Other benefits of a pay for performance incentive system is the pay obtains special treatment in a few contexts. This is under the inner Income Code (IRC).

Essentially, by the end of everything, the payment strategy and incentive plan's main purpose is to
  • Attract and hold on to employees.
  • Motivate and set up loyalty towards the business.
  • Making sure the expense of the strategy is range.
  • Encourage peak performance.

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