Article (January-2022)


Time for aligning incentives with performance

Mihir Gosalia

Designation : -  

Organization : -  Mumbai


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1. Highway Cargo Mover's Pvt. Ltd. had a fairly structured compensation policy that had components of fixed & variable pay apart from incentive structures. Employees felt satisfied & secured by and large with the simple and transparent compensation structure. There also existed a quarterly incentive scheme at individual & group level depending on nature of work of the departments. All of this kept the employees motivated and well rewarded that in turn increased customer satisfaction levels. However during Covid-19 pandemic times, Highway Cargo Movers decided to restructure the compensation package, objective being to increase variable pay component and reduce the fixed pay in a reasonable proportion. This didn't go down well with the employees who all of a sudden started feeling insecure in their jobs. This was further aggravated by the fact that department heads increased targets at their level. Employees felt that by increasing the targets, management did not want to pay the incentives also they felt that the targets were not realistic and impossible to achieve in the present business environment. So it was a negative sentiment prevailing all around. All of this also added fuel to the fire.

Company's approach in restructuring the compensation policy was a one - sided decision. It did not take employees' feedback or their concerns into account while it underwent restructuring. It looks like that Highway Cargo Movers tended to prioritize shot-term financial results over the long-term well-being of their employees. Such decisions can also pose a reputational risk for the company. These actions undid all that Highway Cargo Movers had achieved in terms of employer brand value and work culture by not reducing the employees during covid period. It lowered the employees' morale and diffused/diluted their motivation levels.

2. A good compensation system or policy always begins with an organisation's strategic goals. When compensation is misaligned with them, trouble ensues. Decisions about executive pay can have an indelible impact on a company. When compensation is managed carefully, it aligns people behaviour with the company's strategy and generates better performance. When it's managed poorly, the effects can be devastating: the loss of key talent, demotivation, etc. as is seen in the case of Highway Cargo Movers wherein the last three months data reflected that attrition had reached to 22% against average 3-4 %. Given the high stakes, it was critical for the company's management team to get the compensation right. An ideal compensation system should be designed along four dimensions: fixed versus variable, short-term versus long-term, cash versus equity, and individual versus group. The factors that drive choices should include the firm's strategic objectives, ability to attract and retain talent, ownership structure, culture, corporate governance, and cash flow. When setting executive pay, the company must decide how much will be variable or fixed, awarded in the short term versus the long term, delivered in the form of equity versus cash, and tied to the group versus individual performance. None of this is seen being researched or studied or taken into account by Highway Cargo Movers while restructuring their compensation policy.

3. Tejinder's view was taken more towards as being on softer side of the employees and of being in one's comfort zone. Tejinder was being viewed as one unable to be part of difficult organisational and business decisions. He was seen as being softer towards the employees, concerned for their well-being wherein the need of the hour was to take actions to ensure survival of the company as its profits had gone down due to pandemic and still the company had decided not to lay off any employee during these hard times. It was utilising its reserve funds to tide through these difficult times. Highway Cargo Movers as a Company needed to be sustainable and therefore it was very essential that it restructure its policy.

In order to gain employees acceptance, Tejinder could have communicated early and often through emails, meetings, video messages, and other channels, he could have announced the plan for restructure, clearly conveying as to why the change is being made and what can be expected. He could have charted a path for the employees in the revised structure so that they would get more clarity on it & perhaps gained their acceptance.

4. It is important for a company to give its employees meaningful work and then providing them with the resources they need to be successful. A thoughtful compensation plan makes the team feel valued, and that can be done with pay, noncash incentives, and many other contributors to workplace happiness. A good pay with a couple of perks will not stop the employees from leaving an otherwise miserable job. Compensation goes hand-in-hand with corporate culture. Well-designed incentives can respond to internal and external stakeholders' priorities as well as reinforce that sustainability efforts can have both financial and nonfinancial results. Highway Cargo Movers should take efforts to build a great company culture and employees will be eager to join its team and stay.

Below mentioned would be some of the strategies (approaches) to handle the whole issue i.e. stem down the flow of attrition and also recruit new hires & retain them.

1) Pay for performance. When we're hiring someone, cushion the offer with a lucrative bonus structure, commission pay, or other performance incentives. That way, they get paid for the value they add, up to.

2) Leverage equity compensation. Give each incoming employee an equity grant that vests over a certain period of time with a say one-year lock-in, so if a new hire leaves within the first year, the person is also leaving behind the shares. Highway Cargo Movers when granting these options, must explain to the incoming employee what they might translate to in cash as the company grows, and also discuss how that employee can contribute toward increasing the stock price.

3) Leverage profit sharing instead of equity sharing, whereby all eligible employees take home a set proportion of cash proceeds at the end of each quarter.

In both scenarios, the team does well when the company does well, thereby aligning incentives for performance.

4) Reducing the risk in case of turnover by introducing a signing bonus or quarterly retention bonuses, both of which are swiped if an employee leaves the company too soon. A signing bonus can also be given to poach an executive from the current company prior to an annual bonus, the cash up front is a form of reimbursement for what the person will be leaving behind. The initial outlay for Highway Cargo Movers can beworth the cost savings of retaining good talent.

5) Invest in training and professional development. Highway Cargo Movers can pitch to prospective hires on the opportunities they'll have to grow and advance in their career at the company. Successful professionals have invested in their career and want to continue to do so. The Company can introduce L&D policy wherein the team is encouraged to take time during work to develop new skills or to speak at conferences. Employees can be asked to set goals and report on professional growth during quarterly reviews. This may cost Highway Cargo Movers a few hours of productivity per month, but they will earn back that time back as itsemployees will have by that time, leveraged new skills or networks to be more efficient at their jobs.

6) Create a formal mentorship program wherein junior employees are matched with senior ones. Connect employees to experts in their field for one-on-one coffees and institute weekly lunch and learns wherein interesting peoplefrom the industry are brought in to share their experiences with the full team or they teach something new. Highway Cargo Movers by showing that it has invested in helping people grow can be a big draw during the recruitment process.

7) Promote balance and flexibility. Adopt other noncash incentives such as generous vacation and leave policies, flex time, remote days, or sabbaticals for senior employees. Have an unlimited vacation policy with a requirement that the team members take at least three weeks off over the course of the year. Allow employees to work from home, don't mandate set work hours. Many of these perks can be especially attractive to those with family obligations, being able to work remotely with the family at home can dramatically simplify one's life.