1.0 Introduction

It has become more and more of import, particularly in the current conditions following the recognition crunch for administration to supervise and command labor costs, whilst endeavoring for increased productiveness, better quality and good client service.For this ground ; there has been need to reexamine schemes, if non convey in new schemes towards employee compensation and inducement strategies.In this competitory environment, companies are looking to enroll and retain high acting and extremely committed employees and taking note that this comes at a cost, but a cost justifiable plenty to guarantee competitory advantage and success of the administration.

`` Michael H. Schuster, P.H.D on Aligning Compensation Strategy '' notes that `` Companies are analyzing the method and footing for counterbalancing employees, there has been a growing in the figure of companies seeking to develop high public presentation, high committed work systems, based upon expanded functions for employees, require that employees accept more duty and answerability '' .Therefore employee compensation is an of import component to the fiscal success of the administration.

A strong accent is placed on the fact that compensation and wages strategies should transparently reflect the fiscal potency of the company and align it to the administration scheme and aims.In the yesteryear, rewards and wages normally grew merely by a consistent and changeless spinal point. More late, there has been a growing where the labor market has become more and more aggressive and has brought about the impression that compensation and inducement bundles must be competitory plenty to pull and retain good skilled workers.

2.1.0 Compensation Strategy

As all schemes for any administration, the ultimate end and aim is to maximize the wealth for stockholders.

The compensation scheme should take into consideration that ;They should clearly implement a value based company direction system.The long term grasp and capital value of the companyMarket conditions and orientation of prosecuting qualified and skilled workersAnd of import facet is the cost of the scheme to the administration.Compensation is one of the chief concerns to procure the high public presentation of the administration. There is no understatement in stating that administrations perform because of the work being carried out and accomplished by the people it employees, and hence they make the difference. In stating this, it is of import to observe that protecting human capital is important, and this is done through motive, acknowledgment, an appropriate wages and compensation strategy.An obvious and of import component to see in the scheme is the possible analysis of the cost of executive and employee compensation will be the administration.

This will be concentrated on the chance cost to the company of the stock and public presentation based parts. The cost in this instance to the company would hence be the bygone resources on the compensation understanding.`` It is said that money is a powerful beginning of motive. But it 's besides said that salary addition can merely actuate until the following wage addition is due.

''An component of any administration 's compensation scheme is to ever reflect the strategic concern aims. The aims and ends should be clearly defined, doing them accomplishable through the compensation construction.As stated earlier and reemphasised now, the compensation program should be integrated with the public presentation aims of the administration and with the employee 's person 's ends.The diagram below summarises the above facets mentioned.

Committedness and Flexibility

Motivation and Performance Management

Scheme and Value Management

Compensation Scheme


1.1 Core Elementss of Compensation Strategy

An intensive analysis demands to be carried out on the administration model, this will be able to set up and reflect the demands of the hereafter concern development and which framework conditions will be required to construction an effectual compensation scheme.It is even more of import to specify the direction and operative degrees taking into history value orientation. Equally good as the aims that have been set out for each employee and how their public presentation is evaluated.Therefore clear functions and duties need to be defined and a strong communicating system to be put in topographic point to guarantee that all employees are cognizant and cognize how their public presentation is reflected into the incentive strategy.Other elements to see are should be ;GenericThey should be a bargain in into the inducement program by the employees.

It should be designed in such a manner that employees at all degrees are participative and have the same jail and way.Be of important and Perceived Value to the employee.Employees should be able to easy recognize the possible wages related to public presentation.Related to Individual PerformanceAs stated by Bob Normand Institute of Smart Business Management. `` A factor in the finding of how much an single employee receives should be their public presentation evaluation as determined by their formal occupation reappraisal and assessment.

Employee LoyaltyA good inducement program should be able to retain employees and derive their trueness. Therefore, an inducement program should further employee term of office and public presentation.There are two chief watercourses of wagess being pecuniary and non pecuniary. The pecuniary being the preferred, and is normally a Pay-For-Performance strategy.

Types of public presentation based wage are ;Stock based - This will include stock options and grants, equity portions.Cash Compensation - These are normally fillips and are related to the accomplishment of public presentation aims and ends that were set out. Cash inducement is the most common and preferable signifier of an incentive strategy.An effectual compensation scheme if implemented successfully can carry through other aims. This has been summarised in the tabular array below ;




Alliance to the scheme of concern units.1. Strong market place.2.

Strengthens the public presentation and is consequence oriented.2. Competitive Advantage3. Enable administration alteration and flexibleness to accommodate to alter concern state of affairs.

3. Success and frontward traveling administration.4. Promotes motive and trueness4. Retaining of extremely skilled employees.

Controversy Over incentive strategies

1Over the past old ages, and more late the past 2 old ages, where the economic system experienced a depression and a down bend in the market for most industries, there have been continued sensitive statements over corporate executives ' compensation and how they align to the house 's public presentation. `` Holmstrom 1979,[ 2 ]looked at the part that made clear the trade off between hazard and inducements in the moral jeopardy job. '' This survey was partially based on his unpublished thesis.The media, public, politicians have raised concerns over the current executives compensation bundles that seem to drive employees towards taking short term hazards, without taking into consideration the long term reverberations and effects on their administration.

As a consequence of this, there have been ordinances being put on the tabular array that look at restricted stock wage options and maximal degree hard currency inducement, or other types of compensation that will concentrate more on long term public presentation. This will force executives to ever establish their investing and finance determinations with the stockholder 's best involvement at manus. There will hold to be a strong correlativity between long term inducement compensation and the future house public presentation.With the accent on transparence, CEO 's wage is normally publicized in the imperativeness in documents and magazines such as Fortune Magazine that has an one-year ranking of the highest paid CEOs.

It has been observed that the houses that pay their Chief executive officer 's the highest are administrations that tend to be the 1s sing high returns, and high operating public presentation in comparing to others.

4.1.0 Performance Measurement and Incentive Schemes

Leonard, 1990 and Hayes and Schaejar 2000, looked at the surveies that focussed on the relationship between wage and the future accounting public presentation of the administration.

3There has been an premise that in efficient markets, executives and investors will capitalize the present value of future house public presentation addition into the stock monetary value.The inquiry is ever 2 how make you aline strategic public presentation steps and consequences to compensation and inducement programs? `` .`` The first inquiry to inquire when planing a fillip program that replicates the inducement of an proprietor is how to mensurate concern public presentation. The right step of corporate public presentation will hold strong ties to the sum of extra wealth that a company produces for its stockholders and by extension for society at big.

It will steer people to do the determinations that will bring forth the added value necessary to fund their fillip, to re w a rd the stockholders and to reinvest in concern growing. ''They are several theoretical accounts that administrations can utilize to mensurate the public presentation and find the degree of inducement to be paid out to executives and employees.Strategic Performance Measurement ( SPM ) System - This measuring translates the concern schemes and aims into deliverable consequences. The advantage of this theoretical account is that it combines the fiscal, strategic and runing steps and compares it against how good an administration meets its aims, ends and the marks.Economic Value Added ( EVA ) / Value Based Management - This theoretical account emphasises on public presentation measuring and the cost of capital and measures the value created for stockholders.

The chief advantage of this step is that its focal point is on wealth creative activity.Balanced Scorecard System - Its core component is its accent on the key concern drivers such as client and employee satisfaction, operational excellence and new merchandise development.4As strongly supported by Stern and Co. Economic Value Added offers more to an administration as it focuses on mensurating value created for stockholders, which is the kernel and aim of any administration ; to make wealth for its stockholders.

This step is besides focuses more towards the capital markets and aids in developing administration schemes at all degrees of the administration.5Other advantages of EVA as a measuring tool are ;It creates mensurable aims and ends for employees and are specificIt can easy aline the operations and concern units with the overall corporate scheme.EVA can associate single public presentation and compensation programs to concern schemes.


1.0 Relationship between Stock Price Performance and Incentive Schemes

The hypothesis by a paper written by `` M. Cooper, H. Gulen and P. Ray - Performance for Pay? '' looked at the relationship between CEO incentive compensation and future stock monetary value public presentation.

They summarised that `` The efficient market hypothesis suggested that markets capitalise incentive wage grants into the stock monetary value at the proclamation twenty-four hours, ensuing in no relation between incentive wage and future stock monetary value public presentation. ''On the other manus, the optimum inducements hypothesis suggests that whilst compensation and incentive strategies can be aligned to managerial involvements with stockholders value wealth creative activity and maximization, investors may non needfully respond to the information. This could be as a consequence of non understanding the inducement scheme, and non holding the right measuring theoretical account to estimate it against. Therefore investors are non able to detect or achieve the value it may hold to the administration future stock monetary value public presentation.

[ 6 ]7A positive relation may be evaluated between the incentive wage and the future stock monetary value public presentation.8Needless to state, based on surveies carried out in the past and present on the relationship between Stock Price Performance and Incentive Schemes, there is non much direct grounds that shows that inducement programs do take to a company 's betterment in future stock monetary value public presentation. One of the challenges of stock returns are they holding stockholder 's outlooks imbedded in them. Other challenges are that economic theory would non be able to foretell that addition in inducements would take to increase in profitableness.9A much earlier survey by Masson 1971 associating fiscal inducement to future public presentation of the administration, his findings were that houses and administration that had attractive fiscal inducements showed a better stock market public presentation during the post-war period.

DecisionDue to the increased competition of concern, it has later increased the competition for using skilled workers, and retaining them.A compensation scheme creates and brings about a incorporate civilization, and offers corporation and advances the execution of the concern scheme. This will basically advance public presentation and employees will be result oriented.Incentive programs should be reviewed yearly to analyze if they are really effectual and increasing the public presentation of the administration and run intoing the strategic aims.

This involves looking at any achievements and the coveted result.`` Despite the surging wage, many experts argue that the system is working better than of all time. They see the bull market and healthy corporate sector as proof positive that companies get what they pay for. ( Business Week April 21, 1997, p.

p 60 )Performance based wage is the best inducement scheme for any administration as it maximises on the strategic program, as the compensation scheme requires that the program is set on administration ends and aims. This has a major influence on the employees. Pay for public presentation has been cited to be a more motivative factor, both short term and long term inducements.[ 10 ]A survey carried out established that employees showed a more positive work attitude with a wage for public presentation inducement.

Other benefits of a wage for public presentation inducement strategy is the wage receives particular intervention in some contexts. This is under the Internal Revenue Code ( IRC ) .Basically, at the terminal of it all, the compensation scheme and inducement program 's chief intent is to:Attract and retain employees.Motivate and set up trueness towards the company.Making certain the cost of the scheme is line.Promote peak public presentation.