Good management- Most of the Employees value rewards of different nature and they are therefore motivated by positive rewards. Employees are known to put less effort to those activities or tasks that are not well rewarded and hence in order to motivate them in their work, a good scheme for rewarding them is important. These rewards are different in nature and include compensation, awards, off duties and many others. Mr. Gonzalez came up with the idea of implementing compensation plan as a way of improving performance of the employees in the company.His intention was to include managers, buyers and salesmen in this new compensation incentive. However, the consultancy firm found this to be difficult since it was challenging to measure the performance of the salesmen and buyers. The consultancy firm therefore advised Mr. Gonzalez to use the plan for managers of the companies only without including other staffs. The success of any plan or policy depends so much on the involvement of people who will be affected by that plan in its development.
Employees will always support implementation of a plan they were involved in its development. For instance, considering their views before the development of the scheme will make them to own the plan and therefore support it when it comes to the implementation of the plan. This means that for the success of the new compensation plan, Mr. Gonzalez had to make sure that he involved all the parties who will be affected by the new plan. In the development of the new compensation schemes, Mr.
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Gonzalez sought the services of the consultancy firm who worked together with the human resource and finance department representatives. The involvement of these two departments was important in order take care of financial and human resource considerations during the plan implementation. However, the plan did not involve other staffs who were to be affected by the plan. This include managers from other departments such as store managers and sales manager who were the beneficially of the new plan.
This could make it difficulty for the company to implement the plan since there may be tradeoffs between the performance of the whole team and that of individual managers (Gerhart et al, 2009). During the development of the plan, it was necessary to take and consider the views of other managers and not just human resource and finance managers. This would have made the plan makers to consider all the issues like bonus pool allocation, performance measures to be used and other important issues that may affect the
implementation of the plan. This would have ensured issues like how the bonus will be allocated among the managers. The plan allocated 70% of the bonus to the store managers and the rest to corporate staffs and regional managers. Though, store managers perform a crucial role in sales, other department managers may not be comfortable with the way the bonus is allocated. The allocation of the bonus could have been agreed by all departmental managers before the implementation of the new plan.
BONUS POOL ALLOCATION
According to the new compensation plan, the bonus pool would be allocated among store managers depending on the bonus units they have earned. A 5% earning in ROI would earn a store manager one unit of bonus. Any additional percentage earning in ROI would earn an additional bonus unit. This formula will continue to apply as the percentage in ROI earning increases. The allocation will also put into consideration those store managers who have been in their position for a period less than a year.
The allocation of bonus among regional managers would be different where the formula used will consider the bonus unit that has been earned by stores in the managers’ region divided by all total unit bonus that have been earned by all stores in the company. Finally according to the new compensation plan, bonus pool for the corporate staff would be divided by the CEO, depending on the ROI earnings of the corporation in that year. The formula used in the compensation plan is very clear and simple hence understandable by all managers. A good bonus plan should be simple and clear to the parties who are affected by that plan.
This would make it simple for those party affected by the plan to implement it. Clarity of the compensation plan means that the plan has little or no ambiguity and uncertainty about the standards that will be used to measure the performance of the beneficiaries. This means that the superiors are not in a position to show any favourism or bias when measuring the performance of their subordinates. In this company, the formula applied is based on the allocation of bonus pool among the store managers according to the unit bonus they have earned relative to the ROI earning.
The formula is simple and managers can easily understand it and work hard to increase their ROI earning in order for them to increase their bonus units. Again, the formula is fixed and it may not be possible for those people who will be assessing the performance of the managers to show any bias or favouritism. This will ensure the efficiency of the compensation plan. This also applies to the formula used to calculate bonus for regional managers and corporate staffs. A good reward system should produce some impacts to the corporation.
The system used should be aimed to improve the performance of the organisation after its implementation. Managers and other staffs ought to be motivated to work hard by the reward system as they strive to earn the promised bonus. Their increased performance will be reflected in the increased performance of the whole company. In addition, a good reward system ought to be timely where employees are rewarded immediately without any delay. This will motivate workers to work even harder in the next period thus improving the performance of the corporation in the long term.
THE PRINCIPLLE OF CONTROLLABILITY
According to the controllability principle, all employees ought to be held accountable only for those variables that are within their control (Giraud et al, 2008). Employees ought not to be penalized when things fail because of bad luck as well as not being rewarded when things succeed because of good luck. Thus managers should be held accountable for the outcomes of the variables they control. At managerial level, many factors that affect the performance of an organisation are only partially controlled. However, managers are usually in a position to make decisions that may make the uncontrollable factors affect result in a positive way.
The advantage of this method is that managers can be held accountable for the areas they are intended to influence. This will direct all the effort of the managers to the areas that can improve the performance of the organistion (profit centre). For instance, the compensation plan employed by Mr. Gonzalez will hold managers accountable for their profit centre.
The main profit centre of the corporation are the stores thus basing the compensation plan of the managers on performance of this area will ensure that, managers effort are directed to the profit centre. Managers will also be more responsible since they will be accountable for all the factors they are controlling in the stores. However managers should also be rewarded for those factors they do not control and yet affect the outcome of their division outcome.
BONUS DECISION ON CORPORATE PROFIT
The new compensation plan is based on the ROI earnings at the end of financial year. The allocation of bonus among corporate staffs is based directly on the ROI earning of the corporate while among the managers it is indirectly based on ROI earnings. This means the bonus compensation plan may have impact on the corporate profit as it becomes expenses to the company.
Increased ROI does not necessarily translate to increased profit and therefore basing bonus compensation on ROI may reduce the profit of the company due to increased expenses. The payment of all bonuses may be too expensive to the corporation thus reducing the profit of the organisation. However, this does not mean that the increased performance of the managers would not increase the profit of the corporation.
QUESTION TWO CHALLENGES OF USING ROI Though the use of ROI to measure the performance of different division has a many advantages, it also has many disadvantages (Rachlin, 1997). Using this method to measure the performance of managers in the corporation may pose a number of challenges to Mr. Gonzales. According to Hoffman and Rogelberg (1998), the method may be referred to as a discretionary system since it does not include all the staffs of the corporation. The plan only covers the managers and does not cover other players in profit generation such as salesmen and buyers.
This means that the plan will not motivate all the workers together since it only covers some of them and not all of them. This will be difficult for all the employees to be united in order to achieve a common goal of improving performance of the organisation. Increasing ROI earnings can only occurs when all the employees of the organisation combine their effort together to achieve a certain level of ROI earnings. This is not possible when all the staffs are not rewarded fairly for their effort.
ROI performance measures show the ratio of the profit in relation to the investment used to generate it. This measure at times may be problematic for instance when it comes to the determination of the investments that were used to generate a given level of profit. It is difficult to measure the amount of fixed asset that was used to generate a given level of profit. Mr. Gonzalez may find it difficult to relate the profit generated in a given store with fixed assets that were used to generate that profit. This because fixed assets will be used in more than one financial year.
The use of ROI earnings to measure the performance of managers may lead to sub optimization where managers concentrate only on the ROI earnings of their division without necessary working to improve the performance of the whole corporation. Improving the ROI of a certain division is usually a short term goal which may not increase the performance of the organisation in the long term. Managers and other staffs may work very hard only for the purpose of earning the bonuses in the new compensation plan without necessary aiming to improve the performance of the company.
The measure of earning on investments may also include those factors that are not controlled by the managers. This may include liabilities and assets that are not controlled by division managers and yet they affect the profit of a given store. Division managers usually control receivables and payments within that division and they should only be accountable for that. Holding division managers accountable for factors they do not control may be unfair to them. Thus Mr. Gonzalez ought to look for a method of measuring performance that will be fairer to all the managers.
The use of ROI method may also create unhealthy competition among the store managers. Bonus pool is allocated among store managers according to the percentage of ROI they have earned in their stores. The managers can therefore do anything possible to increase their ROI so that they can increase their bonus. This may involve manipulating their revenue and expenses in order to report high profit figures at the end of financial period. This behaviour will create unnecessary short term pressure among the managers which can be avoided using a different method of measuring the performance of the managers (Eva & Mika, 2010).
This may have a negative impact to the long term performance of the company. Each division may also work more independent without co-working with other divisions since different divisions will be operating like rivals which may also not improve the long term performance of the company. It is also difficult to know whether the increase in sale in a certain store is as result of the new compensation plan (Sammer, 2006). It may take sometime before Mr. Gonzalez knows whether the implemented plan is successful.
This is because there are other factors that are not controlled by the manager that may result in increased ROI earning. The use of the ROI method compare all managers on the same platform without considering differences in areas like their division, their region and many other differences. For instances, managers in different departments carry out different operations that have different expenses and revenues. These differences will also affect their department profitability and thus their earnings in ROI.
Different regions also have different rate of sales and although efforts put by manager in that region matters, regional differences will also affect the outcome of those regions. The use of ROI to measure the profitability of the manager does not put into consideration factors like regional differences which will affect the outcome of a certain region. Thus rewarding managers using ROI earnings which do not consider such factors will be unfair to some managers who may come from those regions that are not favourable.
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