CIMA P3 Syllabus B. Strategic risk - Reward systems and incentives - Notes ^{5 / 13}

Problems with reward systems

Reward systems are subject to a range of pressures that influence their working and affect the psychological contract.

• Where trade unions are weak, as in the UK, employers have more freedom to introduce performance related pay.

• Economic conditions may prevent employers from funding the rewards they might wish to provide in order to improve commitment. The result would be disappointment and dissatisfaction.

• Performance pay systems are prone to subjective and inconsistent judgement about merit; this will discredit them in the eyes of the employees.

Why reward systems fail to deliver IT transformation

Bet Co had a plan for a new online gaming platform, which was well thought through and should have worked well. But when the project was implemented it was a failure.

A report into the reasons for the failure came to the conclusion that one of the reasons for the failure was the way in which IT professionals and managers were rewarded.

• Rewarding hours worked
  IT staff were paid based on the hours worked. Since this measure rewards quantity rather than quality, staff ended up working very long days simply because they did a poor job of estimation and planning up front. It was also discovered that a lot of re-working was going on, to correct mistakes.

• Rewards based on output quantity or complexity
  Specialist staff were rewarded by the volume and complexity of their work. This encouraged them to develop more complex or larger volumes of outputs without considering what Bet Co needed.

• Rewards based on salary surveys
  Salaries were based on industry averages, meaning that some of the competitor companies in the market are paying more (although some are also paying less).  As they became more skilled (through working on the project), staff defected and moved to higher-paying rival companies.

• Rewarding people based on the number of problem statements they close
  This is problematic because some people will solve multiple problems with one problem statement, while others will open and solve as many problem statements as they can to inflate the number of problems solved.

(Source: Joe McKendrick, (2010) Why reward systems fail to deliver IT transformation, www.zdnet.com)

Relationship of reward systems to quality initiatives, process redesign and e-business opportunities

The value of performance measurement come from aligning individual staff goals with the strategic goals of the organisation.

• Quality initiatives
  Clearly, rewards should be linked to the desired outcomes of the quality process. If a call centre is seeking to improve the quality of the service provided to customers it would set objectives such as calls answered in two minutes or customer satisfaction scores above 80%. These objectives would translate into individual objectives when agreeing employee targets with employees during the appraisal process.

  When the appraisal takes place and performance is assessed it would include these targets. Depending on the outcome, promotion may be offered or further training and development may be recommended.

  However, it is not always possible to link pay or rewards to the achievement of targets as so much also depends on the resources available in the organisation.

• Process redesign
  Redesigning processes can involve change to people's jobs or organisational structures, and new high-level objectives may be set. These changes will need to be reflected in the individual's personal objectives and in the appraisal process.

  Equally, managers should also recognise that employees may be resistant to change, so the reward system needs to provide sufficient incentive to encourage them to support the changes. 

  The successful implementation of any process redesign depends on acceptance by the staff and managers who will have to operate the new process. Rewards available for advocating the new process, or successfully implementing it could act as a significant incentive to employees to accept the new process.

  Positive or negative reinforcement could be used here: with positive rewards (for example, pay increases) being offered to staff who support the change, but sanctions (for example, a pay freeze) for people who continue to resist the new process.

  Although they can be financial, the rewards and incentives offered to staff need not necessarily be in the form of extra pay: for example, employees who have played an important role in the process redesign could have their holiday entitlement increased. Nonetheless, people's contributions to the redesign should be recognised explicitly at appraisal time.

  Equally, however, once the process redesign has been implemented, the organisation should consider ways of encouraging individuals to reach ever higher levels of performance, so individual's goals should continue to be challenging although still achievable.

• Harnessing of e-business opportunities
  E-business involves business processes spanning the entire value chain: electronic purchasing and supply chain management, processing orders electronically, handling customer service, and cooperating with business partners. 

  The reward system can ensure individual objectives reflect the strategic and tactical aims of the organization in developing new processes and technologies.

Performance measurement in different sectors

As well as taking into account the various levels at which information is required, the management accountant must have regard to the sector in which the organisation is located. A range of measures will be significant in each sector, similar to the balanced scorecard approach that you will have covered in your earlier studies.

Performance measurement in the manufacturing sector

Performance will not just be measured by traditional cost measures. Other non-financial measures will be important including:

• Quality

• Delivery

• Process time

• Flexibility

Performance measurement in the service sector

The management accountant must take into account the characteristics of the service sector, including the production and consumption occurring at the same time, the problems of ensuring consistently high-quality service and the problems of assessing which parts of the service the customer values most.

Ideally in the service sector performance evaluation should take place over six dimensions:

• Flexibility

• Innovation

• Resource utilisation

• Excellence

• Financial performance

• Competitiveness

Performance measurement in the not-for-profit sector

Performance is usually judged in terms of inputs and outputs, which tie into the idea of 'value for money', based on:

• Economy - obtaining suitable inputs at the lowest cost

• Efficiency - the process working as expected

• Effectiveness - achieving your goals