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CHAPTER-1: INTRODUCTION

The term pays for performance or incentives refer to a pay strategy where evaluations of individual and/or organizational performance have significant influence on the amount of pay increases or bonuses given to each employee. When a pay for performance system functions properly: 1. Outstanding performers will receive the greatest rewards, to acknowledge their superior contributions and to motivate them to continue high performance. 2. Average performers will receive substantially smaller raises, which may encourage them to work harder to achieve larger raises in the future. 3. Poor performers will receive no increase, which is intended to persuade them to improve their performance or leave.

1.1 Performance Linked Incentive Schemes

The basic purpose of this system is to motivate the employees to work more effectively and efficiently in order to attain the organizational goals.As we know that success of any service organization depends upon how strong that organisation is managing its employees and retaining them over the period of time to have much better customer and employee relationship.

From the figure its clear that for attaining high profitability the organisation should try to have customer satisfaction which can only be attained if the employees are satisfied and they work wholly and solely for the organisation. The scheme aims at rewarding the performers. The following officers are eligible under this scheme: Branch Managers. Managers of division at branches. Assistant General Managers of regions.

1.2 Incentive System In many industries or undertakings and for a large group of operations well-designed systems of payment by results shall yield advantages to all concerned. Many of these benefits shall be realized when sufficient safeguards are provided. Such prerequisites are: 1. The co-operation of workers in the implementation of an incentive scheme is essential because the employees somehow devise, if they do not like a scheme, ingenious ways of evading or sabotaging the plan, often with the tacit connivance of the foreman of supervisor. Workers cooperation may be secured through proper discussion with their representatives. In particular, workers co-operation is necessary in: a) the methods followed in measuring the results or output upon which payment is based b) the methods followed in setting wage rates for different classes of work and c) appropriate safeguards concerning earnings, job security and settlement of disputes over piece-work rates and allotted time.

2. The scheme must be based on scientific work measurement. The standards set must be realistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, materials and equipments so as to enable them reach their standards.

3. Indirect workers, such as supervisors, foremen, charge hands, helpers, crane operators, canteen staff, store keepers and clerical staff should also be covered in the incentive scheme.

4. There should be management commitment to the cost and time necessary to administer incentive schemes properly and these must be carefully assessed before embarking on an incentive program. There are many situations in which the potential gains are just not worth the cost and effort involved. It also means a commitment in terms of integrity to the spirit as well as the letter of the programme having the courage to abide by it when the payout deteriorates and the honor to own up when the results are not forthcoming.

5. There is a greater need for planning. Many incentive schemes, started hurriedly, planned carelessly and implemented indifferently have failed and have created more problems for the organization than they have tried to solve. This was what happened to three big plants of Hindustan Steel (now SAIL), where an incentive scheme was introduced during 1960s. Though the initial objective of raising the output was achieved, problems arose regarding production of sophisticated items and improvement of the quality of products. The scheme did not function satisfactorily from the point of view of maintenance of plant and equipment, which, in turn affected output. The performance of ancillary units like the repair shops was unsatisfactory because the incentives in these shops were based on the overall steel production and not the units own performance. Thus, the need for careful preparation for the installation of an incentive scheme.

6. The other safeguards are:

(a) The incentive scheme should be appropriate to the type of work carried out and the workers employed. (b) The reward should be clearly and closely linked to the efforts of the individual or group. (c) Individuals or groups should be able to calculate the reward they get at each of the levels of the output they are capable of achieving.

(d) Individuals or groups should have a reasonable amount of control over their efforts and therefore their rewards. (e) The scheme should operate by means of a well-defined and easily understood formula. (f) The scheme should be properly installed and maintained. (g) Provisions should be made for controlling the amounts paid, to ensure that they are proportionate to effort. (h) Provisions should be made for amending rates in defined circumstances. (i) Create incentives for performance and disincentives for non-performance.

1.3 Types of Incentive Plans

PieceRate Piece rate incentive is given to the employees based on the number of units produced. This plan is practiced in the sectors dealing with manufacturing of products such as engineering automobile, telecommunication, FMCG, etc Commissions Commission is a variable component of compensation package. It is given on the basis of business generated by the employee. Commission is a pre fixed component say 5% of the total sales done by the employee. It is practiced in the retail, FMCG and other sectors in the marketing and sales segment. Bonuses Bonuses are given to employees on a pre established goal or criteria. The organizations set policies regarding the bonuses. Usually bonuses are provided during the festive season

Merit Raises Merit raises are given on the basis of predetermined policies. The employees are given raise on the basis of their performance. The performance standards are set by the organizations much in advance.

Standard Hour Pay Standard hour plan provides incentives to employees based on the time saved by them during the job course. Employees productivity and quality is evaluated with respect to the set standards.

Maturity Curves Maturity curve incentive plan considers the experience and performance of an employee for giving out the incentives. It is practiced in all the industries. Experience is always given a weight-age as experienced people can produce better quality results.

Gain Sharing Gain sharing incentive plans undertake those employees who give outstanding performances and provide for cost saving measures. Organizations believe in sharing the

profits with the employees who are responsible for producing those results.

Profit Sharing Profit sharing incentive plans are practiced in retail and FMCG sectors. Other sectors too implement the plan based on organizational policies. It refers to giving out the share of profits the organization earned to all the employees. Indirectly all the organizations follow the plan by giving out the dividends.

1.4 Performance feedback The manner in which feedback regarding work performance is provided to employees has a crucial impact on their behaviour. Therefore, the quality and frequency of performance feedback provided to staff by supervisors is central to the success of the appraisal process (Gomez-Mejia, 1990: 22). In short, supervisors and those being appraised need to develop a relationship that enables them to discuss constructively work processes, workplace conditions employee performance, and the training and developmental needs of staff on a regular basis throughout the appraisal cycle. Employee acceptance of performance-based pay was found to increase where the emphasis was on providing employees with performance feedback, was

systematically collected from a number of sources, and was discussed in a constructive and sensitive manner (Lewis, 1998: 75). The feedback provided to employees by supervisors during performance appraisal interviews might be detrimental to the individual and the organisation however, where it adversely affects an employees self-esteem (Perry, 1995: 109). Supervisors are also often reluctant to provide employees with critical feedback on their work performance because of a desire to avoid conflict during appraisal interviews. Staff can, moreover, respond negatively to criticisms of their work performance, even if constructively offered. Employees may also be defensive where criticisms of work performance are raised for the first time during the appraisal interview. As a result, many supervisors complete the appraisal interview as quickly as possible and with little detailed discussion of employee work performance (ODonnell, 1998). The potential for defensive reviews is heightened where appraisal and feedback are linked

to a pay increase rather than the training and developmental needs of employees (Gomez-Mejia, 1990: 21-2). Gaertner and Gaertner (1985: 18) found that performance appraisals that emphasise the developmental needs of public service managerial employees had considerable potential to increase employee performance. The potential for performance appraisal to increase the level of feedback on work performance provided by supervisors was viewed by a number of respondents as the most significant contribution that appraisal could make to improving both individual and organisational work performance. 1.5 Framing Incentives Variables One of the central issues in incentive scheme design is that of carrot and stick (Aron and Olivella, 1994; Lazear, 1991; Young and Lewis, 1995). When considering incentive framing, there basically are two possible frames, bonus and penalty, which means that employees can be rewarded for satisfactory performance or be punished when performance is poor. Indeed, it is possible to give a fixed wage of $50 to an employee and reward him with an additional $20 bonus when he achieves a predefined goal; while, on the other hand, it also is possible to give a fixed wage of $70, but punish an employee by imposing a $20 penalty when a goal is not met. Because the expected economic payoff is equal in both incentive frames, economic theory predicts that individuals should be indifferent between them (Aron and Olivella, 1994; Baker et al, 1988; Lazear, 1991; Tversky and Kahneman, 1986). However, according to Kahneman and Tverskys (1979) prospect theory, framing actually does matter. The prospect theory value function is concave for gains and convex for losses, and steeper for losses than for gains. The latter feature means that peoples response to losses is more extreme than to equal-sized gains, a phenomenon called loss aversion. Loss aversion leads to people preferring bonuses over penalties (Luft, 1994). However, despite this bonus preference, Hannan et al (2005) empirically demonstrated that penalty schemes encourage workers to work harder than bonus schemes, because loss aversion, which is higher under penalties, has a larger impact upon performance than fairness, which is higher under bonuses. In addition, Zelditch and Ford (1994) have shown that people rather minimize losses than maximize gains.

Chapter-2: INCENTIVES PLAN IN VARIOUS SECTORS

2.1 Banking Sector

In banking sector we will be considering two banks under which their incentive plan will be studied. 2.1.1 State Bank of India The incentives in SBI are given annually based on business performance and other specified criteria. The Scheme operates on the principle of achieving certain benchmarks of performance and at the present juncture achievement of business and profitability budgets for the branch are considered as the most noncontroversial and acceptable benchmarks. The inclusion of profit as one of the criteria is to ensure that an official will not be eligible merely on the achievement of budgetary goals in deposits and advances alone. Profit is a derivative of proper mix of the interest rate that is paid on deposits and received on advances. Moreover, profitability also reflects the concern of the Branch Manager/Assistant General Manager in controlling costs and improving other income by increasing non-fund based business. 2. All AGMs who are controllers of regions, Branch Managers and Managers of Divisions who achieve at least 100% of their budgeted growth in aggregate deposits, advances and net profit (not applicable to Managers of Divisions) during the year ending 31st March will be eligible for consideration. Budget and achievement for this purpose will be defined as quarterly average of deposits and advances and net proftfor the year. Further, for Branch Managers and AGMs of regions, there must be at least75% budget achievement in deposits and advances in all market segments taken together after excluding the C&I segment. For Branch Managers and Managers of Divisions the audit rating of their branch should be A or A (+). Separate criteria regarding audit ratings are stipulated for AGMs of regions. In addition, there should be at least 50% achievement under the budget for NPA recovery. The detailed criteria for each category are set out in.

1. These parameters for evaluation may undergo changes in future so as to keep an element of challenge therein. The respective amounts of incentive are also set out. 2. The incentive will be in cash and it is proposed to be given to those who meet the requirements detailed in Annexure I. The format in which the details of performance of Branch Managers, Managers of Divisions and Assistant General Managers of Regions is to be submitted to the Sanctioning Authority to claim the incentive. 3. The Deputy General Manager of the Zone will be the Recommending Authority for granting of incentives to Managers of Divisions, Branch Managers and Assistant General Managers of regions under their control. The Deputy General Manager (Credit Department) will recommend for grant of incentives to BMs, MoDs of branches under his direct control. The General Manager (Operations) will be the Sanctioning Authority. For operational convenience and to ensure the motivational aspect, all the recommendations from a Zone must be put up to the General Manager (Operations) in a single lot as early as possible and in any case, not later than 31st May. The incentives are proposed to be given on the following scales:-

4. For Branch Managers, the incentives will be subject to the following conditions: a. For achievement in deposits and advances, budgeted growth and actual calculated as quarterly average for the entire year are to be reckoned. Year-end budget achievement in deposits and advances in segments

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other than C&I, taken together, must be atleast 75%. For profit, yearend achievement of the budget is to be taken. b. The audit rating of the branch should have been maintained at or upgraded to A or A+. If the branch has been downgraded from A+ the incumbent will not be eligible. c. NPA recovery must be at least 50% of the budget of the branch. d. The Branch Manager must have remained in that position on 31st March for 9 months or more.

5. For Managers of Divisions, the incentives will be subject to the following conditions: a. The incentive scheme applies to divisions that have budgets for deposits, advances and NPA recovery. b. In respect of Managers of Divisions (P&SB, NRE, SIB, C&I & Agriculture) for achievement in deposits and advances, budgeted growth and actual calculated as quarterly average for the entire year are to be reckoned. Since divisional budgets are not settled for profit this parameter will not apply. c. The audit rating of the branch where the division functions should have been maintained at or upgraded to A or A+. If the branch has been downgraded from A+ the incumbent will not be eligible. d. NPA recovery must be at least 50% of the budget of the division. e. The Managers of the Division must have remained in that position on 31st March for 9 months or more.

6. For Assistant General Managers of regions, the incentives will be subject to the following conditions: a. For achievement in deposits and advances, budgeted growth and actual calculated as quarterly average for the entire year are to be reckoned. Year-end budget achievement in deposits and advances in segments other than C&I, taken together, must be atleast 75%. For profit, year-end achievement of the budget is to be taken. b. If 10% or more of the branches in their region are having B or B (-) ratings in the Audit Report Formats as on 31st March or if 25% or more of the branches of the region audited during the year had slippage in audit rating or if

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25% branches have registered negative growth in P segment deposits as on 31st March, the AGM will not be eligible. Year-end budget achievement of the region in deposits and advances in segments other than C&I, taken together, must be at least 75%. c. NPA recovery must be at least 50% of the budget for the region. d. The Assistant General Manager must have remained in that position on 31st March for 9 months or more.

2.1.2 AT ICICI BANK At year-end fiscal 2003, we had 15,179 employees, an increase from 5,063 employees for ICICI at year-end fiscal 2002 and 3,460 employees for ICICI at year-end fiscal 2001. ICICI Bank had 4,820 employees at year-end fiscal 2002 and 4,491 employees at year-end fiscal 2001. Of the 15,179 employees at year-end fiscal 2003, 5,558 were professionally qualified, holding degrees in management, accountancy, engineering, law, computer science, economics or banking. Management believes that it has good relationships with its employees. ICICI Bank has a staff centre, which serves as a forum for grievances, pay and benefit negotiations and other industrial relations matters. ICICI Bank had inducted 2,725 employees of Bank of Madura consequent to its acquisition in March 2001. The employees inducted from Bank of Madura in the grade of clerks and sub-staffs are unionized. We have a cordial relationship with this union. We have realigned the service conditions and compensation structure of the officers who came to us from Bank of Madura, which is now comparable with the one existing for ICICI Banks officers. The financial services industry in India is undergoing unprecedented change as deregulation gains momentum. Moreover, changing customer needs and rapid advances in technology are continually redefining the lines of innovation and competition, thereby providing us with new challenges and opportunities.

To meet these challenges, we have relied extensively on our human capital, which comprises some of the best talent in the industry. They continue to attract the best graduates from the premier business schools of the country. They dedicate significant amount of senior management time to ensure that employees remain highly motivated

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and perceive the organization as a place where opportunities abound, innovation is fuelled, teamwork is valued and success is rewarded. Employee compensation is clearly tied to performance and we encourage the involvement of all our employees in our overall performance and profitability through profit sharing incentive schemes based on the financial results. A revised performance appraisal system has been implemented to assist management in career development and succession planning. ICICI Bank uses Employee Stock Option Scheme as an incentive plan. It is used as follows: Used to retain high performing employees. Pursuant to the employee stock option scheme as amended by the Scheme of Amalgamation, up to 5.0% of the aggregate of ICICI Banks issued equity shares after the amalgamation, can be allocated under the employee stock option scheme. The stock option will entitle eligible employees to apply for equity shares. The grant of stock options is approved by ICICI Banks board of directors on the recommendations of the Board Governance and Remuneration Committee. The eligibility of each employee is determined based on an evaluation of the employee including employees work performance, technical knowledge and leadership qualities. Moreover, ICICI Bank places considerable emphasis and value on its policy of encouraging internal communication and consultation between employees and management. Management Compensation and Benefits to Directors and Officers Employee Stock Option Scheme

ICICI Bank has training centers at Khandala in the state of Maharashtra, which conduct various training programs designed to meet the changing skill requirements of its employees. These training programs include orientation sessions for new employees and management development programs for mid-level and senior executives. The training center regularly offers courses conducted by faculty, both national and international, drawn from industry, academia and ICICI Banks own organization.95Training programs are also conducted for developing functional as well as managerial skills. Products and operations training is also conducted through web-based training modules.

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In addition to basic compensation, employees of ICICI Bank are eligible to receive loans from ICICI Bank at subsidized rates and to participate in its provident fund and other employee benefit plans. The provident fund, to which both ICICI Bank and its employees contribute a defined amount, is a savings scheme, required by government regulation, under which ICICI Bank at present is required to pay to employees a minimum 9.0% (9.5% until fiscal 2003) annual return. If such return is not generated internally by the fund, ICICI Bank is liable for the difference.ICICI Banks provident fund has generated sufficient funds internally to meet the minimum annual return requirement since inception of the funds. ICICI Bank has also set up a superannuation fund to which it contributes defined amounts. In addition, ICICI Bank contributes specified amounts to a gratuity fund set up pursuant to Indian statutory requirements. ICICI Bank also offered an Early Retirement Option to its employees. All employees who had completed 40 years of age and seven years of service with ICICI Bank (including periods of service with Bank of Madura, ICICI, ICICI Personal Financial Services and ICICI Capital Services which were amalgamated with and into ICICI Bank) were eligible for the Early Retirement Option.Out of approximately 2,350 eligible employees, approximately 1,495 employees exercised the Option. The amount payable to these employees was the lesser of the amount equal to: 3 months salary for every completed year of service, and 1 months salary for the number of months of service left.

The above payment was subject to an overall limit of Rs. 2.0 million for employees at the level of Joint General Manager and below, and Rs. 2.5 million for employees at the level of General Manager and Senior General Manager. For the purpose of this computation, salary included basic pay and dearness allowance but excluded all other allowances. The total cost of the Early Retirement Option is estimated to be approximately Rs. 1.7 billion (US$ 36 million). In addition, while we have made provisions for leave encashment and retirement benefits based on actuarial valuation in accordance with relevant accounting guidelines, the early retirement of employees will result in additional payouts over and above the provisions made to date in respect of those employees. The total retirement benefits in excess of provisions made are

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estimated to be approximately Rs. 300 million (US$ 6 million). These costs will be accounted for in their financial statements.

2.2 FMCG Sector

In this sector we will be studying the incentive plan of Hindustan Liver Ltd. 2.2.1 Hindustan Unilever Limited The various incentive schemes on the bases of performance in HUL are as follows:

1) SOM (START OF THE MONTH) SOM is performance-based award, which is measured completely on the basis of an employee s performance within the working place. The employee is awarded on the basis of the rating given to him and this rating of the employees is done on the grade basis, which already exist within the organization. These grades are given to the employees on the basis of their achievements of targets set by their managers or supervisors. This is a monthly award where employees are rated for a month and then the deserving candidate is awarded. The best five are selected. The ratings are as follows: E- Exceeded the targets i.e achieved targets more than assigned. F-Fully achieved the targets i.e achieving exact targets as assigned. P- Partially achieved targets i.e achieving some of the assigned targets N- Not achieved the targets at all

Example of a monthly work plan of an employee:

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PARAMETERS Running Claims

MILESTONES E: 100% downloaded claims in 7 days F: 100% downloaded claims in 8 days P: 100% downloaded claims in 10 days N: 100% downloaded claims in more than 10 days

POINT SYSTEM: RATING E F P N POINTS 5 4 1 0 AMOUNT IN Rs. 500 300 50 0 REWARD Cash Cash/gift Gift coupon Nil

2) CUSTOMER DELIGHT

Customer delight is again a performance-based award, which is given to the employees for performing well. As we know that an employee not only has external customers but also internal customers i.e the employee of the other departments An employee has to deal with various other employees within the branch, they can be from the same department as well as other department. Thus the employee with the least number of complaints with most speedy delivery of data with most accurate data with most orderly data is awarded the customer delight award. The employees get to fill a customer delight form on basis of which the most suitable candidate is selected for this award. Maximum of 5 employees can be selected for the award. The customer delight form is as follows:

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3) A-T BOOK (ACHIEVEMENT- TALK BOOK) A-T book provides an employee, with the public recognition amongst the peers in the organization. This book is a great means of boosting the confidence and recognizing the performances and deeds of an employee in public. This recognition makes him/her feel recognized and motivated and definitely proves to be a boon in improving or increasing ones performances. A-T Book is a monthly issue of a book, which is circulated in all departments of the office. This book talks about the achievements of the employee and gives them the peer recognition in this form. As every employee loves to be recognized at his

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working place and amongst the people he works with, this is a very effective form and way of recognizing ones performances. This book consists of: Detailed information about the employees who have achieved some milestone during the month. The detail of the day and month of the achieved milestone. Birthday wishes are sent to the employees through this book. Various articles or precious experiences of employees

4) SAQ (STAR OF THE QUARTER)

SAQ award, which is given as per the ratings of an employee. This is a quarterly based award. As we have already seen the ratings, we ll further see what are the rewards that are given to the employees for their performances according to this scheme. First of all work plan of an employee of each department is allotted the targets for the quarter. The work plan of an employee consists of PARAMETERS and the MILESTONES to be achieved. These MILESTONES have some POINTS allotted

WHO GIVES AWAY THE AWARDS? The department head takes the final decision and the branch head gives away the award to the employees on the ceremony-honoring employee ceremony.

SAQ award is again a performance-based award, which is measured completely on the basis of an employee s performance within the working place. The employee is awarded on the basis of the rating given to him and this rating of the employees is done on the grade basis, which already exist within the organization. These grades are given to the employees on the basis of their achievements of targets set by their managers or supervisors. This is a quarterly award where employees are rated for a quarter and then the deserving candidate is awarded. The best five are selected. The ratings are as follows: E- Exceeded the targets i.e achieved targets more than assigned.

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F- Fully achieved the targets i.e achieving exact targets as assigned. P- Partially achieved targets i.e achieving some of the assigned targets N- Not achieved the targets at all Example of a quarterly work plan of an employee: PARAMETERS Damage Claims MILESTONES E: All claims coming with 100% accuracy F: At least 1 claim made every quarter N: No claims doing POINT SYSTEM: RATING E F P N POINTS 5 4 1 0 AMOUNT IN Rs. REWARD 2000 Cash 1500 Cash/gift 700 Gift coupon/dinner 0 Nil

5) TOTB (THINKING OUT OF THE BOX) The TOTB award is THINKING OUT OF THE BOX AWARD. This award is given to the employee/employees for their capability of giving some much needed extraordinary suggestion or idea to the branch management, the suggestion which is helps the management come out of crisis or helps the management to save the maximum and gets implemented is the best suitable for this award. This award is to foster employee suggestions to improve a work place, which can definitely help in some financial savings. WHO GIVES AWAY THE AWARD? Department head makes the final decision, and the branch head gives away the award. Every individual in this world has a viewpoint and has an idea or a suggestion waiting to pop out of his/her brain. So if these suggestions or ideas of the employees in the organization are used in a fruitful and an effective manner can work wonders for an organization. Thus it is really important to have an idea/suggestion management in an organization. This scheme of TOTB is a quarterly award. According to this scheme an issue can be put up in the cafeteria and learning centre as the employees have a frequent and easy access to these places, and hence the employees can present these ideas and suggestions. Now since collecting and

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evaluating the ideas is a major work, it can be done through web base applications like: emails, intranet etc. The ideas would be collected on the monthly basis but the best ideas will be rewarded on the quarterly basis. Feedback should be given to employees who send their suggestions and these feedbacks can be sent through web, phone, voice mails etc.

PARAMETER Most Extra Ordinary suggestion (implemented)

AMOUNT IN RS

REWARD

2500

Cash Gift Passes Dinner

Maximum saving suggestion

3% of amount Saved

Cash & Certificate

6) ON THE SPOT AWARD

The on the spot award is neither a monthly nor a quarterly award, as the name suggests it is an on the spot, instant, spontaneous award. It is not even a performance based award. As per this award the first level managers would recognize the employee. The purpose of this award is to recognize the employees who go extra mile or who perform above and beyond the call of duty , and many such exceptional courtesies.

WHO GIVES AWAY THE AWARD The first level manager or supervisor can recognize the eligible employee, as he/she can very well observe the employees and their deeds at the working place. PARAMETER Making high quality contribution to a difficult or important assignment AMOUNT IN Rs. 200 REWARD T-Shirt Mugs & Certificates

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Congratulatory Cards Some deeds of employees on a daily basis are so humble that they need to be recognized. It is sometimes not possible to recognize every individual on a daily basis, thus at such time recognizing an individual on the spot is an important and a sensible thing to do. According to this scheme employees can be awarded: To the employees for their on the spot attitude towards some particular situation For good and humble gestures towards peer and presence of mind throughout

Their managers give this award to the employee as they can keep a constant observation on their employees.

2.3 Consumer Durables Sector

Here we will be considering Philips for discussing their incentives Plan. 2.3.1 Philips The actual number of long-term incentives that will be granted to the eligible employees depends on the performance of the individual employee and on the share performance of Philips. The responsible management, under the supervision of the Group Management Committee and the Supervisory Board, is involved in assessing the performance of an individual employee, using the Companys People Performance Management process. The individuals performance will influence the number of long-term incentives granted. The share performance of Philips is measured on the basis of the Philips Total Shareholder Return (TSR) compared to the TSR of a peer group of 24 leading multinational electronics/ electrical equipment companies over a three-year period. The TSR performance of Philips and the companies in the peer group is divided into quintiles. Based on this relative TSR position at the end of December, the Supervisory Board establishes a multiplier which varies from 0.8 - 1.2 and depends on the quintile in which the Philips TSR result falls. Every individual grant, the size of which depends on the job grade and performance of the individual employee, will be

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multiplied

by

the

outcome

of

the

multiplier.

2.4 PUBLIC SECTOR

2.4.1 Central Public Sector Enterprises

The Committee recommended that the payment of perquisites & allowances could be up to a maximum of 50% of the basic pay. Payment over & above the ceiling of 50% are required to be entirely in the nature of Performance Related payment (PRP), which should not exceed 5% of the distributable profits in an enterprise. A Compensation Scenario In simple term, the compensation includes everything an employed individual receives in return for his work, which mainly comprises of salaries, allowances, incentives & miscellaneous fringe benefits. In todays terminology, it is called Cost to the Company (CTC). The competitive organizations design the compensation system in such a way that it results in enhanced performance and ensures the loyalty of the executives to remain with the company. In general term, the compensation package broadly includes the following components: Salary It comprises of basic pay in pay- scale linked to grade, Dearness Allowance (DA) etc. Performance Related Payments (PRP) PRP generally consist of payments linked to performance like incentives and rewards. PRP in CPSEs are linked to performance of the organization and that of unit, a few CPSEs have already

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introduced payment for individual performance. As per 1997 pay revision guidelines, the PRP shouldnt exceed 5% of the distributable profits of the organization. Allowance & reimbursements It would include various allowances and reimbursements like conveyance/transport allowance, city compensatory allowance, entertainment allowance etc. This is allowed at the rate applicable to Central Government employees. Social Amenities & Benefits It would include various facilities like housing, education, medical etc for which premium is borne by the organization. Retirement Benefits It would generally include Provident Fund, Gratuity and social security scheme. At present CPSEs dont have such schemes.

Fixed and Variable Compensation The Committee proposed to change the current pattern of compensation which is fixed in nature irrespective of performance of the company and is of the view that a significant part should be made variable as is in the private sector. The variable component is basically used to motivate and bring about desired behavioural changes in the employees and to reward those employees who have made significant contribution to the company. The variable component will be relatively low for lower level executives and progressively increases to as high as 200% of the basic pay at level of CEOs. This variable component to be called Performance Related Payment (PRP) and will be drawn from the Profit before the tax (PBT) and will be linked to individual, group and company performance.

Performance Management System A significant PRP assumes existence of a robust and transparent performance management system. The practice of grading most of the executive should be based on a bell curve shaped approach which is also followed by most of the private sector companies and MNCs. In this approach, no more than 10-15% of the executive should

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be graded outstanding and 10% non-performing executive should also be graded as below per. PRP should vary depending upon the performance. For determining the variable payments, companies as well as executive will have to achieve pre-determined physical as well as financial target as under MOU. Only those companies that achieve excellent MOU rating should pay up to 100% of PRP. Companies achieving very good, good, and fair rating should pay a maximum of 80%, 60% and 40% respectively. No PRP is payable if MOU is rating is poor. Similarly, Executives who get outstanding, Very Good, Good and Fair performance rating 20 should get up to 100%, 80%, 60% and 40% PRP. No PRP is recommended for those achieving Poor rating.

2.5 IT SECTOR
In IT sector, we will be studying the Incentive plan of MICROSOFT. 2.5.1 Microsoft The Microsoft Solution Incentives Program (the Program) is a channel investment to drive incremental demand and sales for specific products and workloads that represent key growth opportunities for the company. Solution Incentives reward partners that invest in selling Microsoft solutions to customers, resulting in a sales transaction. The Incentive Program Guide (Program Guide) describes requirements and policies for the Incentive that is offered under the Program. The Program is described in the Solution Incentive Program Addendum (the Addendum) to the Microsoft Partner Network (MPN) Agreement. The Incentive described in this Program Guide is only available for sales related to the Participating Products, which are set forth in Appendix A attached hereto. All capitalized terms used in this Program Guide will, unless defined herein or in Appendix B, have the respective meanings set forth in the Addendum. In the event of a conflict between this Program Guide and the Addendum, the terms and conditions of this Program Guide will control.

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Incentive Eligibility, Requirements and Process

Incentive Eligibility Requirements: Company must meet all of the following requirements to be eligible to earn Incentives as described in this Program Guide (the Incentive Eligibility Requirements): Maintain an active MPN membership and an active MPN ID for each location Achieve Active Earned Gold status in one of the following Gold or Silver* Competencies for each Microsoft subsidiary in which you wish to register: Unified Communications Communications

Incentive Enrollment Process Once Microsoft determines that Company has met the Incentive Eligibility Requirements set forth in Section 2.1, Microsoft will invite Company to participate in the Incentive. If Company accepts Microsofts invitation to participate in the Incentive the, Company must enroll online using Channel Incentive Platform (CHIP) where Company will sign (electronically) the Solution Incentive Addendum and provide banking details to be used to process Incentive payment(s).

Incentive Registration Requirements Company must actively request that an Opportunity be considered for an Incentive in Partner Sales Exchange (PSX). Company may register any new or existing Opportunity that meets the criteria in this Section 2.3 (each such Opportunity, a Registered Opportunity). Information collected on a Registered Opportunity may be accessed and utilized by Microsoft sales and support staff at any stage during the sales cycle.
In order to be deemed a Registered Opportunity and be eligible for an Incentive the opportunity must first meet the following requirements:

The opportunity must be one of the eligible Volume License Programs which include Enterprise Agreement (EA), Enterprise Agreement Subscription (EAS), Select, Select Plus, Open, Open Value, Open Value Subscription (OVS) and Academic (Academic must follow rules prescribed for Government Customers in this Section 2.3).

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The Opportunity must be a New, Add-On/True-ups or Standard Purchase Type. Add-On licenses for Purchase Types Renewals or Recurring will be eligible when purchased with License and Software Assurance (L&SA)). The Opportunity must be created in Partner Sales Exchange (PSX) The Customer Name entered by Company in the Opportunity must be located in the subsidiary where Company is eligible for SIP participation. The Opportunity, within PSX, must include a Participating Product. Participating Products can be found in Appendix A. The Opportunity must reach the Solution (40%) Sales Cycle Stage. This means that Company has a preliminary solution that includes a Participating Product, as identified and agreed upon by the Customer. The Opportunity Revenue must meet or exceed a minimum of $5,000 of first year revenue on participating products and eligible licenses before Incentive can be earned. (See Appendix A)

Company is eligible for Incentive payments to Government Customers, provided that Company confirms in writing for the Opportunity in PSX (in the Description field), that it has advised the Government Customer it may receive Incentive payments for Advisory Services performed under this program and confirms to Microsoft that it owes no fiduciary relationship with the customer nor otherwise has a conflict of interest in accepting fees under the Solution Incentive Program. The following is the required text to include: I certify my understanding of Incentive Program policies regarding incentive payments for Government and Public Sector customers as described in the relevant Incentive Program Guide. I have communicated to the customer that I may receive an incentive payment and will provide documentation to support as required.

The list of countries in which Incentives may be received for Government Customers may be confirmed through contacting your Partner Account Manager or on the MPN site: (https://partner.microsoft.com/40155490).

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Incentives related to eligible Opportunities prior to June 30, 2011 will continue to be valid and will be paid upon Sales Order Transaction Date provided that Company meets the current eligibility requirements. If company is not eligible at time of Sales Order Transaction Date, Company will have until June 30, 2012 to achieve eligibility. Incentive payment will be accrued until Company achieves eligibility. Incentive will be calculated based on Participating Products and Incentive rate at the time of Sales Order Transaction Date. Incentive Registration Process In registering for the Incentive, Company must complete the mandatory fields in PSX to provide basic information pertaining to the Opportunity including, but not limited to, the following:

PSX Opportunity Field Customer

Description Name of Customer to which Opportunity applies

Opportunity Name

Expected

date

for

customer

order.

Defaults to 90 days but may be adjusted as needed. Expected Close Expected date for customer order.

Defaults to 90 days but may be adjusted as needed

Sales Stage

The current Sales Cycle Stage at the Opportunity is currently

Product(s), Quantity and Estimated Price

Quantity and Estimated Retail Price (ERP) for Participating Products included in the Opportunity

Select Incentive Program

Click

option

corresponding

to

the

Incentive Program for which you are

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registering

The process of registering the Incentive begins with Company adding or importing an existing Opportunity in PSX and providing the relevant information on Customer, Opportunity and Participating Products. Company selects the Register for Incentive option from the top navigation ribbon

Company then selects the appropriate Incentive and provides comments (optional) then selects Register

Company selects Share

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Once Partner selects Share in the opportunity record in PSX, the opportunity becomes visible to Microsoft in GSX, and potentially to partner and sales management roles.

Opportunity Validation Process

After Company registers a Registered Opportunity, Microsoft then undertakes the Opportunity Validation Process. The Opportunity Validation Process is the process used to determine whether a Registered Opportunity qualifies for an Incentive, based on meeting pre-defined requirements set forth in this Program Guide as well as the terms and conditions of Microsoft Solution Selling Process. Microsoft will validate that the Company meets the Incentive Eligibility Requirements and determine whether the Opportunity meets the Incentive Registration Requirements. Microsoft will strive to provide Company with the results of the Opportunity Validation review as early as possible. Once the Opportunity Validation Process is complete, the Incentive status within the Opportunity record in PSX is set to Approved, as shown below.

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If an Opportunity fails to meet the Incentive Registration Requirements, Microsoft will determine the Opportunity ineligible for the Incentive, and Microsoft will provide notification to Company. In this instance, the Incentive status within the registered Opportunity record in PSX will be set to Declined, as shown below.

Microsoft reserves the right to request Customer input to help complete the Opportunity Validation Process. Before contacting the Customer, Microsoft will request Companys consent to do so. Microsoft may also, at any point of the sales cycle, revoke or suspend a previously approved Incentive request if Company cannot provide proof of having performed the Advisory Services with the Customer in connection with the sale of the Participating Products.

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Opportunities status updates: Microsoft will verify that the Sales Order transaction meets the requirements in Section 2.3 and then advance Opportunity to MS Win in GSX (Sales Cycle Stage = MS Win). At this point, Company becomes eligible to receive Incentives on that Registered Opportunity. Where the Company can provide the End Customer Volume Licensing Agreement ID, the Company needs to enter this information into PSX. Where the Company may not be able to provide the information, Microsoft will provide the associated End Customer Volume Licensing Agreement IDs after opportunity status has been set to MS Win 100%.

Sales Transaction Process and Incentive Payment Requirements Once a Sales Order has been submitted to Microsoft by a Licensing Partner and Microsoft has advanced the Opportunity to MS Win 100%, the Channel Incentives Platform (CHIP) will automatically access Company banking details for the account(s) into which the Incentive will be deposited provided during enrollment. Proof of execution may be required to process payment. Once the above opportunity requirements have been met, Microsoft will attempt to reconcile the Registered Opportunity and Sales Order information provided by Company within Microsoft systems, and according to the policies described below. Before paying any Incentives on a Registered Opportunity, Microsoft will determine whether the Registered Opportunity meets the following requirements: For any Opportunity and Agreement ID, partners have up to one year (12 months) to earn incentives for incented products from the Incentive Registration Date. Within that year, only eligible Sales Orders that are transacted on the Agreement ID after 30 days of the Incentive Registration Date are eligible for incentives. The Registered Opportunity must reach the MS Win Sales Cycle Stage. No Identical Opportunity has previously been approved for the Incentive for another Company. Multiple companies may register the same Opportunity in PSX but Microsoft will provide Incentive approval only to the first Company that meets the Incentive Registration Requirements and the Incentive Claim Requirements set forth in this Program Guide.

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Approval for the Incentive does not guarantee that Company will be eligible to collect the corresponding Incentive from Microsoft. A Sales Order must have been submitted by a Licensing Partner and Microsoft must have verified existence of an Opportunity that has been approved for the Incentive in PSX that corresponds to such Sales Order as a condition to release Incentives. Incentive Payment Upon successful completion of the process described in Section 2.7, Microsoft will calculate and release an Incentive according to the following policies:

(a) Incentive will be calculated only for Participating Products sold and for the actual quantities transacted in the Sales Order within the MS Sales System. If the pricing involves Software Assurance (SA), then it can also be included in the Opportunity Revenue. (b) Incentive will be calculated on first year billed revenue (c) Incentive will be calculated by multiplying the quantity of Participating Products sold, as defined below, by its ERP, and by the applicable Incentive rate indicated in Appendix A. (d) Incentives will be calculated and paid at the rate valid as of the Sales Order Transaction Date. (e) Incentives are capped at $50,000 USD per eligible Registered Opportunity. (f) Incentives will be paid out 45 days after end of month in which Sale Transaction occurred by means of electronic funds transfers (EFT) to financial institution designated by Company through CHIP. (g) If Microsoft declines payment of Incentives because payment has been already made to another Company, Microsoft will not be under any obligation to communicate the name(s) of the other Company. (h) Depending on country regulations, Microsoft may ask Company to submit an invoice for services provided as a condition to release Incentives. Companies should contact their corresponding Regional Service Center, as set forth below in Section 3 below for more details on this requirement. (i) Microsoft reserves the right to change Incentive rates after 1/1/2012.

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(j) Products licensed as part of the Core CAL and or Enterprise CAL suite will not qualify for the incentive and therefore will not be included in its calculation.

EXECUTIVE SUMMARY Pay for performance programs are being implemented by companies nationwide as a means of promoting teamwork. In fact, the entire concept of a pay for performance program is based on the idea that when group effort is required to obtain rewards, then the individual members of the group will go out of their way to do more than is required of them. It's a way for employers to streamline their rewards systems. In pay for performance programs, companies reward individual employees with monetary compensation if that employee's entire team or department meets certain goals within a specified time frame. In some company's, the entire business must meet certain goals before the compensation rewards are handed out. Paying for performance is not ordinarily as complete a wage structure as paying basically for the job or possibly competencies can be. Instead paying for performance is integrated within or added to wage structures primarily based upon performance criteria. With merit pay, performance becomes the standard by which the employee moves upward within the pay grade for the job. In most variable pay plans performance is a factor that leads to an addition to base pay or base pay is lowered to make room in the compensation budget for a performance reward. The theory behind this is based on the belief that employees will motivate and encourage each other to do well so that everyone can get the reward.

CONCLUSION

The assessment of individual employee performance also needs to focus on evaluating employee behavior and work performance and not the personality of the employee. Multi-source ratings need to be utilized to provide a more complete picture of employee performance. The evidence used to assess employees in the appraisal interview should also be fully documented in the form of diary records that detail performance over the course of the appraisal cycle. Employees should be assessed solely on the basis of performance that is within their capacity to control. Supervisors and others responsible for rating need to be provided with adequate training to enable

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them to make detailed observations regarding employee work behavior, to be aware of factors causing rater bias, and to ensure greater consistency between raters. Employees must also have the ability to contest evidence presented in appraisal interviews that they believe to be inaccurate or biased. To ensure that employee trust in the process is maximized, employees should be involved at all stages of the design, implementation and administration of the performance appraisal and pay system. Employee perceptions of procedural justice may be enhanced where they are involved in collecting information regarding work performance and in the appraisal interview. Employees must also believe that ratings that they perceive to be unfair can be appealed, and subjected to independent review. Finally, the linkage between performance ratings and performance pay outcomes must be both consistent and transparent

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REFERENCES
http://www.livemint.com/2008/10/06221650/Performancebased-incentive-sc.html http://EzineArticles.com/?expert=Brian_Bijdeveldt http://ezinearticles.com/?Creating-Effective-Employee-Incentive-Schemes-PartII&id=3693114 http://www.cgdev.org/section/initiatives/_active/ghprn/workinggroups/performanc e http://www.aer.gov.au/content/index.phtml/itemId/730820 http://www.financialexpress.com/news/performancebasedincentivesforpublicsecto rbankexecs/170897/ http://www.canarabank.com/Upload/English/PressReleases/CanPrMar07.doc http://www.docstoc.com/docs/22618401/All-Scheduled-Commercial-banks%28Including-Regional-Rural-Banks%29/ http://www.cab.org.in/FILCPortal/Lists/Policy%20Initiatives/Attachments/97/Ret rospect-bakg-system-VL.pdf http://www.federalreserve.gov/newsevents/testimony/alvarez20100225a.htm http://gujarati.economictimes.indiatimes.com/dirreport.cms?companyID=8944&y ear=0
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved= 0CCUQFjAA&url=http%3A%2F%2Fwww.acq.osd.mil%2Fdpap%2FDocs%2FPBPGuideNov2 001.doc&ei=SuVhUI6-E8rhrAfS0YCICw&usg=AFQjCNFB2ZjjhWVfYzgLnRiq6UZMZ9K43w

http://wwwdocs.fce.unsw.edu.au/orgmanagement/WorkingPapers/WP132.pdf http://www.cppawa.asn.au/wp-content/uploads/file/ResearchPERFORMANCE%20Based%20Pay%20for%20Teachers%20APPA%20Paper.pdf http://web.missouri.edu/podgurskym/articles/files/Pros_cons.pdf

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Appendix A: Participating Products, PSX Mapping & Incentive Percentage In Microsoft

Participating Products PSXMapping (corresponding Office Enterprise Lync Server Ent Lync Server Plus CAL Lync Server Ent product Incentive (%)

title within PSX tool) Lync Enterprise & Plus LCS 20%

CAL (Standalone)* Speech Server Ent Ed Lync Standard Lync Server Std Office Standard Office Live Comm Svr Lync Server Std LCS 10%

CAL (Standalone)* Speech Server Std Ed

5. Appendix B: Definitions
Active Earned refers to MPN competency requirements that must be earned in each participating subsidiary in contrast to those that can be inherited from other locations. Agreement ID refers to unique ID number which identifies a licensing agreement between Microsoft and Customer.

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Competency refers to an MPN recognition given to Company for specific areas of expertise. A complete list of Competencies and the requirements to achieve such Competencies is available on the Microsoft Partner Portal. Customer Order refers to the document by which the Customer (or its designee) requests Licensed Software and/or services. ERP refers to the Estimated Retail Price of a Participating Product. Identical Opportunity refers to an Opportunity submitted by more than one Company that contains an identical Customer name with identical Participating Products. Incentive Request Date refers to the date when Company registers the an Opportunity for Incentive in PSX. Incentive Registration Process refers to the process set forth in Section 2.2 of this Program Guide. Licensed Software refers to the software and technology that Microsoft, or one of its affiliates, may designate for delivery through or with the assistance of Company. Licensing Partner refers to the Microsoft authorized distributor who submits a Sales Order to Microsoft for the Participating Products recommended and sold to a Customer by the Company. Microsoft Solution Selling Process refers to a sales methodology within the opportunity management framework that is divided into Sales Cycle Stages. MS Win refers to the verifiable sales transaction of Participating Products as determined by PSX. Opportunity Revenue refers to the revenue flowing to Microsoft as a result of a Sales Order. Opportunity Validation Process refers to the process set forth in Section 2.3 of this Program Guide. PAM refers to the Partner Account Manager that is responsible for business development and collaboration between Company and Microsoft.

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Partner Solution Plan or PSP refers to a document that sets out objectives for collaboration between Microsoft and Company. Sales Order refers to the order that is submitted by a Licensing Partner to Microsoft for the Participating Products. Sales Order Transaction Date refers to the date when Microsoft confirms the Sales Order. Sales Cycle Stages refers to stages of the Microsoft Solution Selling Process which is a sales methodology that is divided into seven sales stages, namely: Prospect (0%), Qualify (10%), Develop (20%), Solution (40%), Proof (60%), Close (80%) and MS Win (100%) where each stage is defined by sales probability, a set of objectives and required deliverables.