Reward systems

Question 1

Introduction

Answer 1

Examiner will ask to evaluate if rewards systems is appropriate for the company
If reward system is suitable for organisation.
CSF should be consistent with strategy, KPI should be in lien with CSF, reward system should be in line with KPI.

Question 2

Fixed salary - positives and negatives

Answer 2

positive points
1. certainty of budgeting
2. staff will not want to lose their salary/job
3. promotion carries high value for staff - higher salary

Negatives
1. Salary is a fixed cost so it adds to operational gearing, if revenue falls cost remain fixed unlike variable costs which also falls and vice versa.
2. Staff not directly motivated to work hard or go beyond bare minimum
3. pension costs based on salary are getting very expensive

Question 3

Hourly Pay - positives and negatives

Answer 3

Positives
1. More time = more pay
2. flexible for business, pay for what you use
3. makes staff costs a variable cost and this reduces operational gearing

Negatives
1. Time is rewarded not effort or output
2. Rate can be higher pro rata than salary

Question 4

Group Bonuses

Answer 4

Paid to staff based on performance of the group they work in rather than individual performance

Positive points
1.Emphsizes teamwork
2. Shared successes of failure

Negative
1. Equal split seen as unfair as contribution may not be equal
2. The lazy can hide behind the work of others

Question 5

Individual Bonuses

Answer 5

Positive
1. Direct relationship between effort and reward.
2. Targets and rewards can be tailored to the individual

Negative
1. Employees may become competitive
2. Can be seen as in equitable as jobs may be different

Question 6

profit based measures - manipulation, Short termism

Answer 6

traditional profit measures are easy to manipulate, they are also a very common bonus basis

ways profits can be manipulated includes
1. Provisions - doubtful, judgemental
2. cut off errors
3. recording revenue expenditure as a capital item
4. moving revenue within divisions

Short termism
management of a business unit for the here and now or current year’s profit

A profit based measure is like having a single KPI for measurement, Staff will try to exploit it acting in a short-termist manner

ways it can be done
- abandonment of discretionary expenditure
- project are chosen that give quick hits rather than long term benefits

Question 7

Share Option Schemes

Answer 7

Shareholder wealth is determined by M.V of shares, M.V of shares is determined by present value of dividend into the future.
A long term view is taken

Director’s job is to increase share price and rewards are often salary and bonus based on profits. profit takes a short term view.

Share option schemes seek to align the objectives of directors with the objectives of shareholders.

Question 8

Hopwood management styles

Answer 8

Budget constrained - rewarding based on a budget target, this a short termist focus as budgets mostly have an annual focus.
Long term development might suffer

Profit conscious - rewards linked to long term profit achievement, managers may have to wait longer for rewards

Non accounting - Rewards linked to non financial targets, focus on long term drivers of performance