4. Insentiivit ja targetin asettaminen Flashcards
What is the purpose of reward and incentive systems?
A good reward system aims to motivate employees to work harder, and align their goals with those of the organisation they work for.
Incentive programs aim to reward employees for completing certain actions or reaching milestones. Incentives aren’t the same as benefits, which include things like health insurance or a 401(k) and are provided to employees regardless of their performance. Instead, incentives must be earned.
Are incentive and reward systems the same thing?
Reward is a prize, which an employer gives to his/her employees for performing the job exceptionally.
- A tangible item that is given to congratulate and celebrate success or achievement.
- Is not predetermined
- Is retrospective
- Tarkoitus: palkita ihminen
Incentive is a motivational factor, which constantly encourages the employee to do better in their work.
- Motivational factor designed to tune the desired behavior.
- Is predetermined
- Is forward-looking
. Tarkoitus: motivoida saavuttamaan jotain
DIFFERENT TYPES OF REWARDS
Monetary rewards
Employee benefits
Dynamics in work, e.g.:
– Job descriptions
– Challenging assignments
– Clarity of roles and responsibilities
– Meeting practices
– Participation in developing own processes – Feedback
– Possibility to influence decision making
– Job rotation
Growth and development, e.g:
– Performance development discussion – Personal growth opportunities
– Training
– Growth paths
– Job rotation
Are incentive and reward systems formula based or not?
- Sometimes fully formula based, sometimes subjectivity plays a role
- In promotions subjectivity typically plays a big role
In annual bonus assignments
– All or part of bonus may be based on subjective judgement
– The weights on some or all of quantitative measures can be determined subjectively
– Subjective performance threshold or override can be used
SHAPE OF THE PAY FUNCTION
- Most often restricted range, i.e. one needs to achieve certain minimum level (e.g. 80% of budget) to receive bonus and there is a cap (e.g. 150 % of budget) restricting the maximum amount to be paid
- Reasons to use upper cutoffs?
PROS AND CONS OF GROUP REWARDS
Nää pystyy miettimään ite. Tässä vaan, että muistaa tollastenkin olemassaolon!
TARGETS – WHERE DO THEY COME FROM?
- Strategic / long-term targets vs. short-term (annual?) targets
- Required growth rate and firm current and future financial status allows you to calculate required profits / cash flow
- Merchant & Van der Stede focus mainly on financial performance targets in a budgeting context
- Strategy, organizational values, various initiatives, etc. may require accountability of non-financial KPI’s. This often requires targets to be set to those KPI’s
STRATEGY DRIVEN TARGET SETTING
BSC / Kaplan approach to target setting:
* Establish targets for 3-5 years
* Establish targets that, if achieved, company and its operating processes have been changed
* Part of this gets done when vision is determined
* Break long-term objectives into short-term milestones à connection to yearly planning and budgeting
* This means target setting is done already partly during the strategy process, not during yearly planning process!
FINANCIAL PERFORMANCE TARGETS
Model based, historical or negotiated
– Model based and historical provide often starting point for negotiations
– Negotiated most common in practice
Fixed vs. flexible targets
– Targets may be flexible in relation to volumes, price of inputs, interest rates, exchange rates, etc.
– Fixed more common in practice, especially at higher levels of hierarchy
– Relative performance evaluation one way to flex targets
Internal vs. external targets
– Internal by far most common, many firms do benchmarking, however
HOW CHALLENGING TARGETS SHOULD BE?
- What kind of targets should be used for strategic purposes, and what kind for short-term purposes?
- How do we define how much stretch there should be? If your answer is “it depends”, it depends on what?
- Research shows targets are largely achievable in practice (80-90% of the time). Why?
What is value-based management?
- Value-based management (VBM) = It provides a precise and unambiguous metric—value—upon which an entire organization can be built. It is the management philosophy where managers focus on the creation, management, and measurement of corporate value. Value in a corporation usually means maximizing shareholder value.
- The thinking behind VBM is simple The value of a company is determined by its discounted future cash flows. Value is created only when companies invest capital at returns that exceed the cost of that capital. VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions.
Minkä ongelman VBM taklaa?
Often the cause of failure was performance targets that were unclear or not properly aligned with the ultimate goal of creating value. Value-based management (VBM) tackles this problem head on.
Cons of VBM:
- It can become a staff-captured exercise that has no effect on operating managers at the front line or on the decisions that they make.
- The focus of VBM should not be on methodology. It should be on the why and how of changing your corporate culture. A value-based manager is as interested in the subtleties of organizational behavior as in using valuation as a performance metric and decision-making tool.
Cons of VBM:
- It can become a staff-captured exercise that has no effect on operating managers at the front line or on the decisions that they make.
- The focus of VBM should not be on methodology. It should be on the why and how of changing your corporate culture. A value-based manager is as interested in the subtleties of organizational behavior as in using valuation as a performance metric and decision-making tool.
Value creation mindset
Value creation mindset = means that senior managers are fully aware that their ultimate financial objective is maximizing value; and that they have a solid understanding of which performance variables drive the value of the company.
- They must know, whether more value is created by increasing revenue growth or by improving margins.
