The Reward System in MB - Essay Example

Business Report Table of content 1 Business Report Table of content 21.1. Executive Summary 3 1.2. Introduction 4 Part 2: Financial Rewards 4 2.1. Base Pay 4 2.2. Contingent Pay 5 2.2.1. Annual Increment 5 2.2.1.1. Cost-cutting Measures: 8 2.2.2.3. Cost-cutting Exercises: 9 Part 3: Non-financial Rewards. Overall Recommendations: 11 3.1.1. Learning and Development 11 3.1.1.1 Learning and Training 11 3.1.1.2. Performance Management 11 3.1.1.3. Career Development 12 3.1.2.Work Environment 12 3.1.2.1. Recognition 12 Part 4: Alternative Retention and Cost-Cutting Methods for Employees and Executives in Banks 13 Part 5: Specific Reward Recommendations for MB Departments: 14 5.2. Hemel Hempstead Staff: 15 Conclusion 16 Part 1: Introduction 1.1. Executive Summary This business report analyzes the reward system, both financial and non-financial, in MB as a cause of poor performance, low commitment, and morale, and the consequent low profitability of the business, and proposes a new cost-effective reward scheme. The second part of the business report concentrates on the analysis of proposed financial rewarding structure, with emphasis on the analysis of base pay, contingency pay, and bonuses in the MB highlights the faults in the reward structure that the company uses. The business report proposes several considerations on the base pay, which include external competition, employee equity, the Equal Pay Act of 1970, communication strategy, and use of point-factor rating and definition and evaluation of benchmark jobs. In the contingency pay reward structure, the main proposal is to disregard the current system in place (contribution pay) with a combination of Competence Related Pay and Individual Performance Related Pay reward schemes. The section also proposes several cost-cutting measures and exercises. Part three of the report highlights the non-financial rewards and an overall reward recommendation, including learning and development, performance management, career development, and work environment. Part four of the report contains all the possible alternative retention plans and cost cutting strategies that are applicable in MB’s environment, including Employment Stock Ownership Plan, time extension of paying bonuses, and enhancement of job designations. The fifth and final part of the business report concludes with specific recommendations on a cost-effective reward structure for MB that will enhance the commitment of the workers, raise the morale of the employees, and thus increase the profitability of the company. 1.2. Introduction The combination of low profitability, a lack of performance culture, low morale, and commitment in MB is the result of embedded complacent attitude, irrelevant reward structure, and multiple shortcomings in HR practices multiplied by too hierarchical structure and remote location of departments from each other and the Head Office. The changes offered below are vital to stay afloat. Part 2: Financial Rewards 2.1. Base Pay Base pay (aimed to attract potential employees (Els 2011)) should be based on job evaluation and market rate analysis. It is necessary to follow basic considerations in design of pay structure: 1. Increasingly popular in job evaluation is a method of combining of two analytical schemes: using point-factor rating to define and evaluate benchmark jobs (jobs which can be used as points of comparison for others), and evaluating the remaining jobs by means of analytical matching (Armstrong pg 254 - 263) 2. External competitiveness: it is necessary to operate exact figures linking pay reward to the market rate. An effective way to determine prevailing pay rates in the industry is to conduct a compensation survey by analyzing other banks benchmark jobs compensation levels through disclosing their pay data in exchange for free copies of the overall industry result in return (Gardner,2011, pp 198-201). To ensure external competitiveness through pay audit: review salaries against the market median to correspond with since extent of de-motivation is proportional to perceived disparity with others (Adams equity ..n.d.). 3. Employee equity: similar jobs paid according to employees’ unique factors (performance level or experience) which ensures fair ratio of input-to-output (Adams equity..n.d.) 4. Internal equity: fair ratio of input-to-output with ‘referent others’ in the organization (Adams equity…n.d.). (Gardner, 198-201) 5. Men and women equal pay as per the Equal Pay Act 1970 6. Changes in the reward system should be communicated to staff and managers as a matter of course (Rewarding performance). The right communication strategy will allay fears by sharing what, why and how the exercise happening (Perkins and White in Armstrong p 136). In determining where the job has to be placed in the company hierarchy and defining pay levels and the scope for pay progression, it is advisable to replace the current easy to manage and ensure internal equity Graded Pay practice. This is especially important where disadvantages are rigidity and quick hitting the pay ceiling by good performers (Burley) by the Career Family structure (Appendix 1) which is, according to Armstrong, difficult to develop and administer. However, this will provide the foundation for personal development by defining what needs to be learnt and done to move to higher levels (2007, p.282) which is crucial for enhancement the poor performance culture in MB. 2.2. Contingent Pay 2.2.1. Annual Increment The currently used Contribution Pay increment system that is more suitable for the public sector, should be exchanged for a combination of Individual Performance Related Pay and Competence Related Pay because: IPRP is a potential to create a highly motivated workforce in which employees see a correlation between performance and pay IPRP enables retention of high performers, who will have as a result a higher market rate in the external labor market than average performers IPRP can help to remove poor performers: since their relationship to the external market falls, they will not be able to afford remaining as employees (Lawler in Armstrong, 2000, p.170) However, if IPRP is poorly designed and short of transparency, it can result in manipulation of profits by managers with the intention to show year-on-year improvements, or the abuse of customers (Marchington, 480-81). Competence Related Pay is appropriate for organizations undergoing rapid technical change (Marchington & Wilkinson 484) which are necessary for developing on-line banking, which will significantly decrease total cost of MB. It is a supplementing IPRP method of paying people for the ability to perform now and in the future, argues Armstrong (180): Whereas IPRP can appear to be simply a punitive system to penalize workers, states Armstrong, competency-base systems can in contrast appear positive for employees’ own career development Workers aren’t only encouraged to develop their skills but also rewarded for doing so Competency-based scheme rewards co-operation, courtesy, and communication in contrast with IPRP where employees focus only on what is required to be achieved thus undermining teamwork. (Kessler in Armstrong, 2005,p. 176) Employers are concerned with the application as much as with the acquisition of skills to avoid paying for unutilized skills, adds Marchington and Wilkinson (484) To allocate performers according to their merits, it is necessary to introduce Forced Distribution Ranking for 3 years long period as an effective, though unpopular tool, to achieve consistency (Singh, 2010, p 114), which is unavoidable in MB case where 80% of the staffs are on their grade maxima. Grote underlines that it is beneficial when used only for some period: the method should not be used on an annual basis. It is most appropriate for recognizing and retaining top performers, thus creating a productive work force and improving or removal of low productive employees (2005, p 25). Staff should be allocated into five already existing MB performance system but not properly used categories and distribute employees among them as advised by Armstrong (401) and Singh (114): A (Outstanding) 5% B (Superior) 15% C (Good) 60% D (Weak) 15% E (Unacceptable) 5% Benefits of Forced Distribution (Blackwell, 1998, p 229): The rating require relatively simple comparative judgments by the rater The pre-specified distributions rules out leniency errors and central tendency errors Raters know directly the outcome of the ratings Identifying top talent may be more important than taking action on their poorest performers High performers paid below the market rate may get a bigger pay rise to bring them nearer the market rate (Armstrong, p 253) It is essential to develop guidelines for managers how to distribute the increment within a devolved budget and take into consideration the market-pay increase data in UK banks (Appendix 2). 2.2.1.1. Cost-cutting Measures: Freeze increment for those whose compensations already exceed the market rate Cancel the 3% general increment in favor of merit increases as per appraisal ratings. Expand merit increases from current 1% to up to 6-10% relevant for the industry as it is in Barclays Bank (Burley) & others (Appendix 2) with consideration of the economical circumstances freeze pay increase based on seniority but promote rise based on merit, skills and competence pay only for the skills which are utilized by MB instead of paying for unrelated ones as a part of a package 2.2.2. Financial Benefits (aimed to retain (Els, 3)): 1. It’s practical to offer flexible benefits packages instead imposed thus letting employees choose desired benefits within a certain amount as an option to attract good candidates and combat the high turn-over rate. In spite of complexity and expenditure to set up and maintain the initiative as well as employee’s possible wrong choice affecting both employer and employee; the advantages noticeably overcome disadvantages according to a CIPD research (CIPD in Cushway, 2011,p 92-93) where advantages of flexible benefits (not a comprehensive list) are: Employees value chosen benefits more highly Employees obtain a sense of control and involvement by having a choice Dual career couples avoid having the same benefits Competitive benefits package is valuable in attracting and retaining key personnel Awarding of expensive benefits becomes less divisive. The “menu” should include: a) Childcare vouchers b) Car allowance c) Accommodation allowance in Hemel Hempstead (for top-managers) MB can communicate its ‘cafeteria benefits’ through brochures, videos, and Intranet (Rewarding performance 2003). Suitable packages for different departments are covered in Part 4. 2. It’s beneficial to introduce various innovative benefits f.e: A quarterly draw amongst employed in the same departments, ex: a return ticket to a certain destination or within a given amount, etc. Such methods: Brighten routine with a play element and excitement Restrain from job resigning for the 3 months periods repetitively Relatively low cost for the organization - the outcome overcomes the cost (Raza, 2011) Specific benefits for different MB departments are proposed in Part 5. 2.2.2.3. Cost-cutting Exercises: 1. Exchange “Defined benefit” practice for “Defined contribution” For employers, defined-contribution plans are advantageous because they are easier to manage, they have fewer government regulations, they provide a greater number of investment choices, and they come in many different types. The disadvantage to employers is that these plans take time and resources to manage (Explain Defined-Contribution n.d.) 2.2.3 Bonus (aimed to motivate (Els, p 3)) In spite of over-complexity, Armstrong (365) advises combination plan bonuses based on the mix of the business and individual performance which are distributed among well-performing staff in the case of achieving 100% target level to provide a general reward and encourage identification with the business (E-reward, 2006). There may be no contributions made if the company has an unprofitable year (Explain Defined-Contribution [n.d].) While considering bonus sums in MB, it is important to emphasize on individual performance (determined by performance rating indicator) rather than organizational (determined by revenue growth): 30% business performance, 70% individual performance. This proportion aligns bonus reward with organizational strategy and establishes a real performance culture through competition, commitment, and share in the organizational success. For MB branches might be more suitable team-based awards based on the branch’s outstanding performance, which will promote team spirit. This bonus plan is likewise applicable for directors (Armstrong, 367) including investment bankers with the difference of 50/50 percentage consideration of business and individual performance to retain this core asset in the case of economic recession. Cost-cutting measures mentioned in Part 4, point b, c, d, e Part 3: Non-financial Rewards. Overall Recommendations: 3.1 Intangible (not a comprehensive list) (Armstrong, p 35): 3.1.1. Learning and Development 3.1.1.1 Learning and Training To enhance everyday learning and training on the workplace through rotating employees between different departments, this results in “acquisition of new skills and enhancement of existing ones” (Armstrong, p 35). Furthermore, employees might find interesting occupations in other MB departments instead of other banks and stay for long on the right placements 3.1.1.2. Performance Management Performance Management reviews should lead personal development planning by giving support to self-learning (Armstrong, p 35). To enhance the system, it is necessary to: separate appraisal meetings which include training and development needs discussion from salary review which should be held a couple of months later, after thorough performance perusal apply 360* appraisal which increases self-awareness through a number of assessments while self-awareness is a prerequisite for improving performance (Marchington & Wilkinson, 2008, p 279) ensure quality vs. quantity approach in meeting targets by usage of Balance Scorecard method Change the appraisal date from July to February: February - fresh data is available after closing a financial year July is summer leave time Conduct employees’ appraisal twice a year, managers’ appraisal once a quarter thus keeping either’s productivity and attitude in line; whereas salary review once a year (Khan 2011) Introduce a performance matrix (see Appendix 3) to illustrate managers’ performance against their peers’ performance. The purpose is to help managers focus on what they do well and areas for improvement Ensure timely provided detailed unbiased feedback 3.1.1.3. Career Development Career development is based on self-actualization need according to Maslow’s hierarchy therefore; it is one of prerequisite of talents’ turnover in Business and Corporate Banking where too many old managers block promotional opportunities. Unbiased performance appraisal might influence significantly some of currently ineffective managers increase productivity. Otherwise, MB should propose “Golden Handshake” voluntary retirement package tailored against fixed criteria such us below average performance, length of service, etc where underperforming, overpaid for length of service managers offered 12-18 months’ salary in exchange of retirement and get replaced by more effective and less paid professionals. Eventually, the bank will save on reward costs (Vyas 2011), (Khan 2011). 3.1.2. Work Environment 3.1.2.1. Recognition Recognition by Armstrong is one of the most powerful methods of rewarding linked with esteem needs in Maslow’s hierarchy; it is a motivator in F.Herzberg’s motivational theory (Frederick Herzberg motivational n.d.). Recognition should be accomplished by immediate and positive managers and colleagues’ feedback, promotion, providing scope for more interesting and prestigious work along with ‘public applause’, status symbols, appreciation certificates, trips and financial awards “as mutually reinforcing symbols of financial and non-financial rewards” (38). 1. Quality of working life - 2. Work itself 3. The work expertise 4. Work-life balance - 5. Organizational values - encourage desired behaviors and penalize disrupting, this will lead to improvement of culture, morale and higher-than-average customer retention rates (How to develop..2005) 6. Voice – the poor communication caused by long-distance between Head Office and Retail, Business and Investment departments as well as a very (14 levels) hierarchical structure resulted in numerous troubles due to one way communication with no feedback. Structural reduction is inevitable to: decrease operational cost and bureaucracy; reduce attrition and improve morale, discipline and productivity through making employees feel belonging to MB 7. Achievement 8. Job Design 9. Leadership – leadership training programs for managers and young graduates to develop appropriate skills 10. Part 4: Alternative Retention and Cost-Cutting Methods for Employees and Executives in Banks The worldwide used innovative methods advised by top and middle managers of UAE leading banks: Vyas, Khan and Raza (2011) and tailored to restrain staff (especially top-managers) from quick resigning, reduce turnover, focus on company’s performance and make executives feel belonging to a bank a. Convincing valuable employees and executives to borrow solid loans from MB provided that while working for MB they enjoy “preferred customer” interest rate, in the event of dismissal the rate increases to the level of ordinary clients b. Greeting new appointed executives with given upfront solid bonuses refundable to MB in the event of working there less than agreed signed term (f.e. 4 years), or providing staff with valuable training courses which cost is refundable to the bank in the event of staying with MB for less than signed term. c. Employee Stock Ownership Plan – ESOP aka “Golden handcuff” technique: paying a half of executive bonuses instead of cash in MB shares as per their PAR value which maturity date is in (example) 3 years therefore the equities are inviolable till date. This will ensure focusing on company performance, share price appreciation and staying with MB to annual receipt of such immature shares d. Time extension of paying bonuses: instead of February - March (worldwide practice), to distribute them on May – June. If bankers leave after receiving bonuses, successors will probably not pay bonuses for the remaining half a year e. Partial scheme of bonus distribution (repetitive): 60 % in the due date, 30% next year, 10% after one year – bankers don’t resign prior to receiving the entire bonus f. Enhancement of designation: employees’ packages remain the same but with job titles changed, f.e. Bank officer instead of bank processor; senior supervisor instead of supervisor; Manager assistant instead senior supervisor. Part 5: Specific Reward Recommendations for MB Departments: All departments: a) Urgently conduct “customer service/retention” learning course 5.2. Hemel Hempstead Staff: Provide all not living there with travel cards or fuel reimbursement The Call Center: a) Call Centre staff: RBS – introduced “My family Care” introduced by Spanish bank Santander who entered UK retail banking. To support the large number of women in their workforce, as they tend to be the primary carriers. *Jessica Twentyman, 2 Dec 2008 Personnel Today: Rewards programme for a culturally diverse workforce Introduce customer inquiry recording and quality vs. quantity approach in remuneration Retail Business and Corporate Banking Head Office Investment Banking: Internal vs. external promotion to minimize the recruitment and retention cost as well as motivate own people to continue with the bank Engage young graduates to the department to grow future leaders Introduce an adequate appraisal scheme to evaluate the pay, increment and bonuses sums on the merit base Apply for them all aforementioned executive tightening methods (See Part 2, 2.1.) Young Graduates Job design – rotate them among MB sectors thus letting them gain experience and abilities to choose a desired department They suppose to be inspired by challenging tasks in Retail sector where incentive fee, sale and commission take place and their expertise and energy are utilized (this is more important for youngsters than job security, guaranteed pension and routine work). Since they are mostly bachelors (easy to move) it’s reasonable to dispatch them to branches to gain practical experience in addition to the theoretical thus bringing fresh ideas to embedded routine Involve into the Graduate Development Scheme more fresher graduated in Marketing to market new products and services as well as in IT to support innovations and enhance obsolete embedded practices Alternatively, such youngsters can be placed in Investment and other departments lacking internal talents as trainees Conclusion The new reward scheme is bound to assist MB in improving the human resource and the work force in place. The incorporation of cost-cutting measures and exercises will be an added advantage, similar to hitting two birds with a single stone. The career development strategy of absorbing fresh young graduates into the business will enhance the creativity and innovativeness of MB, thus attaining a competitive edge in the banking market. In addition, job rotation will enhance the workflow, even at the absence of some employees. However, the proposed reward structure is effective in theory, and there is a need for the practical evaluation of the reward scheme to understand its cost-benefit analysis and effectiveness. Read More