Compensation Management System at Tata Consultancy Service - Case Study Example

Organisational Behaviour Running head: ORGANISATIONAL BEHAVIOUR Organisational Behaviour: EVA and Compensation ManagementSystem at Tata Consultancy Service In APA Style Student's Full Name Name of University l Organisational Behaviour 2 Introduction The effectiveness of a company is dependent upon the behaviour of the workforce. It is quite challenging to deal with the workforce's behaviour and motivation because it is dynamic and competition and the market is constantly changing. In order to manage the dynamics, create a workforce that works as a team, capitalise on the workforce's assets and skills, and to create a professional, enjoyable working environment, company's should provide appropriate incentives. The management of Tata Consultancy Services (TCS) chose to employ the combination of Economic Value Added (EVA) and Employee Stock Ownership Plan (ESOP) in order to provide motivation and incentives to handle the challenges that companies face. This compensation system, as the company believed, would capitalise on the workforce's skills which would help the company reach its goals. Reaching goals in this manner is a form of performance management as "performance management includes activities to ensure that goals are consistently being met in an effective and efficient manner. Performance management can focus on performance of the organization, a department, processes to build a product or service, employees, etc.," as reported by McNamara (1997-2006). Literature Review "EVA is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. (It) also is the performance measure most directly linked to the Organisational Behaviour 3 creation of shareholder wealth over time," reports Stewart (2006). TCS uses EVA as a tool to measure the value that has been created by the company within a certain amount of time. In other words, TCS's monetary value at the beginning of a time period is subtracted from the monetary value at the end of that period in order to come up with the EVA. The workforce's pay and bonuses were then based on this EVA. This created a close relationship between work performance and pay. A bonus bank was created to hold potential bonuses when targets are reached and 2/3 of the yearly amount can be drawn. This encourages long-term consistent performance. Most of TSA's workforce scope of EVA, only a few were able to benefit from Employee Stock Ownership Plans (ESOPs). Retirement Terminology (n.d.) states that an ESOP "gives employees the opportunity to invest in the potential growth of their employer. If the company prospers, stock will follow suit. But, stock can decline if the fortunes of the company take a turn for the worse. Also, employees can become over invested, and be vulnerable to inadequate portfolio diversity." From management on down, all benefited from the advantages of EVA. Employees realised that they played a part in increasing the EVA of the unit and the organisation. They also realised the importance of their responsibilities as there was a close link between performance and pay. The bonus banks also confirmed the connection and the importance of responsibilities. Due to an increase in EVA resulting in an increase in pay, teamwork was better achieved and all acquired a sense of belonging. All were involved in making decisions which empowered the staff members. They benefited from pride of ownership which causes people to work harder. Employees received credibility as they were rewarded for their performance and those who fell below par were given Organisational Behaviour 4 additional training. Other benefits included focusing on long term goals and increased transparency as communication amongst all staff members, particularly within a unit, had increased. The company revealed one of the lowest attrition rates of the Indian IT businesses. The average employee turnover rate at that time (2004) was 15% yet TCS's was 7.9%. With the main focus on people, the company had a performance improvement plan which allowed employees to find solutions to issues. All of this led to TCS's being selected as the "Best Employer in India" by Hewitt CNBC TV 18 and the "Best IT Employer in India" by Dataquest for the fiscal year 2004-05. Other awards included a high ranking in the Dataquest Annual Survey and the 12th rank on the Business Week Information Technology 100. As with most things in life, with advantages there are disadvantages and TCS had its share. People criticised the EVA system during start-up and implementation. Analysts stated that the company focused mainly on the return of investments which could restrict their growth. The first big devastating hit was a 10% decrease in employee salaries. This was not a good first start as the EVA system was being introduced. Commentators stated that with lower salaries saw a decrease in take-home pay yet those whose salaries were "over performed" saw an increase in take-home pay. Other disadvantages included having to cut corners in order to reach their goal of accruing $10 billion in revenue by the year 2010. By decreasing profit margins (compensation saw a 5-25% decrease), employees had less pay at the initial stages of the EVA system. A large amount of money and time was required as the system incorporated a holistic approach to management and there was a decrease in the number of employees. The focus on teamwork and team players also presented problems. If an employee had good potential for performance was Organisational Behaviour 5 placed on a poor performing team then that individual would acquire a low ranking. This low score resulted in low pay but this was unfair as the individual could not help the underperformance of the entire team. All of these disadvantages resulted in the speculation that TCS's image would go down. Human Resource analysts also stated that employees who performed well were practically imprisoned by the company with "golden handcuffs" as the bonus bank kept them from leaving if they ever had to or wanted to do so. Chart of Advantages and Disadvantages In summarising the advantages and disadvantages of implementing and employing the EVA system, the chart below lists them accordingly: EVA and Compensation Management System at Tata Consultancy Service Advantages: Employees realised their responsibilities Employees realised their importance and contribution Connection between performance and pay-motivation Bonus bank encouraged long-term good performance Teamwork and a sense of belonging All were involved in the decision making process Pride of ownership Employees' empowerment Macro management instead of micro management Credibility given Organisational Behaviour 6 Rewards Increase transparency and more communication Focus on long term goals Company high rankings Company Awards Success in all areas and on all levels One of the lowest attrition rates Decrease average employee turnover rate Disadvantages: Traumatic start up and initial period Initial 10% decrease in employee's pay at the same time as major changes were being introduced Criticism from analysts and the public Speculation regarding lower salaries causing a decrease in take-home pay yet those whose salaries were "over performed" seeing an increase in take-home pay Cut corners in order to reach their goal of $10 billion in revenue by 2010 5-25% decrease in profit margin/employee pay during initial stage Decreased number of employees Require large amount of time and money to start Employees with good potential placed on poor performing team resulted in low individual ranking which means lower pay Lower company image and speculation of lower company image Good performing employees "golden handcuffed" to the company due to bonus bank Organisational Behaviour 7 Recommendations/Suggested Changes The company's initial start up and introduction phase presented problems. There were many traumatic changes all at once starting with the letting go of many employees and the 10% decrease in pay that current employees experienced. Regardless of the possibility (and reality) of future success, this left most employees insecure and worried. The disadvantages that were listed were genuine as one can find that these are truly disadvantages that companies considering employing EVA would face. The drawbacks to be expected are as listed (Disadvantages of Value Based Management, 2006): Holistic management philosophy requires lots of time, money, and patience Value creation sounds more simple than corporate strategy but is similar Measuring for value comes with a cost of their own; do not go too deeply Measuring the wrong things leads to value destruction Strong management and support is required Comprehensive training and counseling is highly recommended but expensive There are always drawbacks as nothing is perfect. Theories It is important that an organisation such as TCS learns about and integrates theory and concepts from the behavioral and social sciences in order to gain an understanding of human behaviour within organisations. (Mangelsdorff, 1998-2001.). It is also recommended that focusing on the individual along with the team (a unit) can help address problems such when a person with good potential is assigned to a poor performing team. As The Personality Project (2006) reports, "people differ from each other is obvious. How and why they differ is less clear and is an important part of the Organisational Behaviour 8 study of personality." Topics such as personality theory, cognitive abilities, and theoretical explanations can help organisations and managers better understand the structure and dynamics of the differences in humans. Boeree (2006) explains the study of theories, particularly personality theories: A theory is a model of reality that helps us to understand, explain, predict, and control that reality. In the study of personality, these models are usually verbal. Every now and then, someone comes up with a graphic model, with symbolic illustrations, or a mathematical model, or even a computer model. But words are the basic form. In studying personality theories and assessing individual performance, these models are usually verbal Usually when we talk about someone's personality, we are talking about what makes that person different from other people, perhaps even unique. This aspect of personality is called individual differencesThese theories often spend considerable attention on things like types and traits and tests with which we can categorize or compare people It is also recommended that this company, along with others, invest in organizational studies. Understanding organisations and individuals will give companies a much more balanced and well-rounded approach especially in the case of TCS's introduction of the EVA system. Wikipedia (2006) explains in more detail, "Organizational studies, organizational behavior1, and organizational theory are related terms for the academic study of organizations, examining them using the methods Organisational Behaviour 9 of economics, sociology, political science, anthropology, and psychology. Related practical disciplines include human resources (HR) and industrial and organizational psychology." Studying organisational theory can help explain the why organisations have the structure that they do. Structures of companies vary dramatically and today most theorists believe that there is no one best way to organize. "What is important is that there be a fit between the organization's structure, its size, its technology, and the requirements of its environment. This perspective is known as "contingency theory" and contrasts with the perspective of classical theorists like Weber, Taylor, Fayol, etc. who thought that there probably was one way to run organizations that was the best," reports Organizational Theory (1996). The writer lists an example and explanation by Perrow (1967): Few Exceptions Many Exceptions Un-analyzable pottery, specialty glass, motel room artwork; plumbing; computer technical support (craftwork) routine work, but when problems crop up, it is hard to figure what to do film making; aerospace; (non routine research) tasks that no one really knows how to do: work on intuition, implicit knowledge Analyzable routine, like screws; (routine manufacturing) the few problems that occur are usually easy to understand custom machinery, building dams; (engineering production) the application of well-known principles and technologies to lots of new and different situations (The) bottom left organizations (analyzable and few exceptions) tend to be highly centralized and formalized -- in short, bureaucracies. Bureaucracies are the best possible organizational form when the task is well-understood, and how to best execute it can be specified in advance. At the other extreme, the top right organizations (unanalyzable and many exceptions) are not well handled by bureaucracies. There are so many exceptions and new situations that having a set of formal procedures which specify how to handle every situation is out of the question. Organizations in this box tend to be highly decentralized and use informal means of coordination and control. The reasons have to do with human bounded rationality. (Bounded rationality refers to the fact that since humans have limited brain capacity, we cannot always find the absolute optimal solution to a given problem -- we only have the time and capacity to consider a few possible solutions, and choose the best among those. But we can't consider all possible solutions.) Really complex systems are difficult to pre-plan: there are too many contingencies. We simply can't figure it all out. Need to allow for real-time, flexible adjustment. Organisational Behaviour 10 Additional Recommendations/Suggested Changes: Technology and Computer-Mediated Communication Making dramatic changes all at once and creating fear in people leads to criticism, speculation, poor image, and other effects that fuels the media. In this age of technology, the media also includes the Internet and computer-mediated communication(CMC). Although these things may just be heresy, the role that the media and technology plays is enough to create these "what-if's" to become reality. It is recommended that the attrition be gradual and that CMC is employed to inform everyone-within and outside of the organisation-of the company's plans. Innovative media tactics and CMC can be used to introduce, present, manage, and gain feedback. The Internet has provided tools that companies can use to research the information that is being broadcasted to the publics and can respond accordingly in order to prevent, minimize, and counterattack. Using traditional tactics (press releases, newsletters, and articles that are produced for the World Wide Web) and/or innovative media tactics (dialogic communication, blogs, multi-media effects, etc.), an organization can track real-time happenings and respond immediately and often beforehand. Immediate responses, interaction with the publics, and real-time monitoring can make or break a business during crisis. When all the fears, criticism, and drama were going on, the company could employ the tools of technology. Assumptions and speculation can lead to a crisis if not managed properly. There is does not exist a corporation that is immune to crisis. (Coombs, 1999) and organisations can use the Internet in their crisis communication response to employing new/innovative media tactics and utilise the two-way communication benefits the Internet brings. Crisis is a part of life and Organisational Behaviour 11 organisations are not immune to them. (Taylor and Perry, 2005; and Weick, 1995). A crisis can now become a global issue in a matter of seconds thanks to the Internet and if an organisation is to respond to its stakeholder, then it is crucial that they adopt the internet into business operations. In conclusion, Tata Consultancy Services did quite well in its introduction, implementation, and management of the new system. There were only a few steps that the organisation could have taken to reduce some of the drawbacks. This study finds a company that should be followed by those who want to grab a better hold of the market share, take care of its management, staff, and customers, and one that has risen above its competitors. References Boeree, G. (2006). Personality Theories. Retrieved December 4, 2006, from http://www.ship.edu/cgboeree/persintro.html Coombs, T. (1999). Ongoing Crisis Communication. Sage Publications. www.english-test.net (2003-2006). Retrieved February 6, 2006, from Read More