special aspects of reward management
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Special Aspects of
Reward Management
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Boardroom Pay
Salary policy for directors is usually an indicationof corporate culture.
The press has always reacted badly to major payhikes in the boardroom
The way in which boards of directors are paidtends to reflect the pay philosophy of theorganization as a whole.
Some promote Performance-related pay downthrough the whole organization, while otherschoose to reinforce other values such as loyaltyand commitment
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Contd
Boards, especially in family companies where
remuneration does not come from basic salary
alone, do not always appreciate that the level
of their basic pay sets the ceiling below which
all other salaries generally have to fit.
Also potentially damaging are salary levels
which employees perceive as excessive inrelation to their own rewards
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Corporate governance
A UK company is owned by its shareholders,but the power and responsibility for almost alldecisions concerning its business operations
are devolved to its board of directors,including most decisions about pay.
In the UK (as in the USA) the board ofdirectors is a single or unitary structure,responsible for corporate governance as wellas business decision making.
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PAY MANAGEMENT PROCESSES IN UK
COMPANIES
In broad terms, the UK unitary board typically
manages its own pay along the following lines
Responsibility for the pay of the executive directors isdelegated to the remuneration committee
The pay of the non-executive directors is usually managedby the chairman, perhaps in conjunction with the chiefexecutive
The board as a whole votes on these pay
recommendations but no director is able to vote on his orher own pay
Shareholders have the opportunity annually to vote on theacceptability of the remuneration committees report
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The Greenbury and Hampel Report
A study group on directors remuneration chaired by Sir Richard
Greenbury was set up as a response to a growing concern
regarding pay of directors in the UK
The outcome of greenbury was a code of best practices divided
into five main areas (The remuneration committee, Disclosure,Approval, Remuneration Policy and Service Contracts)
The Hampel report which was published in 1998 laid the
foundation for pulling together the Cadbury and Greenbury
recommendations as well as give its own view on corporategovernance
The Hampel reports key principles fall along the areas of; the
level and make up of remuneration, procedure and disclosure.
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Board Remuneration Committees
This committee acts on behalf of the shareholders
It is required to be composed of a group of non-executive directors
The committee should consult the chairman and/orchief executive about their proposal and have accessto professional advice inside and outside the company
Sometimes it may also have to provide a check on
excessive boardroom greed It normally review and authorize pay recommendations
on an annual basis
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Executive directors pay
Basic salaries should be maintained at a level that allows
the company to compete effectively for good-calibre executives
Annual pay increases (if any) should be awarded in relation to
performance and an assessment of market competitiveness
The basis, targets and payments from executive incentive
schemes should serve the needs of the business
The balance between the elements of pay and benefits should
be maintained
Relationships between boardroom pay and that of employees ata more junior level should remain consistent
Directors contracts should be reviewed from time to time to
ensure they remain up to date and defensible
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Non-executive directors pay
Should provide a reasonable recompense forthe time and commitment a non-executivedirector contributes to board meetings
Should not be so large or so structured Many companies pay non-executive directors
purely in cash but now some allow or even
require their non- executive directors to takesome or all of their fees in the form of thecompanys shares.
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Contd
In Ethiopia, the National Bank of Ethiopia
licenses, supervises and regulates the
operations of banks and insurance companies
which are around 29 currently.
The banking industry is governed by
Proclamation No. 592/200, which includes
among other things: Shares and Register of Shares
Limitations on the Acquisition of Shares
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Contd
Shareholders Meetings
Limitations on Voting Rights
Appointment of Directors and Officers
Prohibitions Cessation of Banking Management Functions
Suspension and Removal by the National Bank
Maintenance of the Required Capital
Disclosure
Remunerations of Receiver
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Contd
Such a scheme emphasizes: 1) share price growth
2) loyalty to the company, 3) real earnings per
share growth, and 4) share capital stability or
reduction. Performance share schemes
Executives are provisionally awarded shares. The
release of the shares is subject to the companysperformance,
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Cond
Such a scheme emphasizes: 1) relative share price
and dividend performance, 2) loyalty to the
company, 3) value delivered to share- holders but
does not link directly to business performance. Deferred bonus schemes
Part of the executives annual bonus is deferred
for, say, three years
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Contd
Such a scheme is designed to reward: 1) annual
(sometimes personal) performance, and 2) loyalty
to the company.
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INDIVIDUAL REMUNERATION
PACKAGES
Known as cafeteria or flexible remuneration
packages.
The idea essentially is that employees should
be offered the chance to select how they wishto be paid in terms of cash and benefits
For executives in particular, the remuneration
packages are individually negotiated andtailored at the time of recruitment to a boardlevel appointment.
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Contd
In this case HR directors need to have: a willingness to tailor the remuneration package to fit
individual requirements;
a clear idea of which items of pay they are prepared
to negotiate on; the ability to cost out alternatives quickly;
a maximum total earnings cost they are prepared togo to, to get the executive they are after;
a prepared case to defend a package which otherdirectors or even shareholders may initially perceiveas an anomaly
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GUIDING PRINCIPLES FOR
BOARDROOM REMUNERATION
Executive pay systems can and should be used to helpattract and retain top executives of outstanding ability
Executive pay should foster a pay-for-performanceorientation and top management focus on sustainedperformance that results in increased value for theorganizations owners over the long term
Executive pay should be derived from an explicit payphilosophy and strategy consciously developed to
support the organizations business strategy,organizational structure and approach to humanresource management
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Contd
Executive pay should be tailored to theorganizations particular culture, managementstyle, institutional guidelines and competitive
environment; Executive pay systems should be consistent with
the organizations overall management process.
Executive pay design should consider the needs
of individual executives but not at the expense ofthe organizations underlying goals and
objectives.
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Contd
While the design of top-pay systems can becomplex, plans should be simple, easilyunderstood and clearly communicated.
Executive pay should be determined andmonitored in a manner that safeguards againstself-interest and avoids the appearance ofimpropriety.
Global organizations need executive pay advice
from global advisers that have appropriateexecutive pay expertise in the right parts of theworld.
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TYPES OF OVERSEAS EMPLOYMENT
The terms and conditions of employment whileabroad typically depend upon the nature of the
work and its likely duration
Feasibility studies to assess the potential market for the introduction or
development of the companys goods or services
method of payment is usually no more sophisticated than
a reimbursement of expenses
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Home Based Balance sheet (build-up) approach Is a build up approach that composes home based
salary, spendable income and the main allowances (likeRelocation allowance, Added responsibility allowance,Separation allowance, Hardship allowance, Cost-of-
living-allowance)
most commonly used expatriate remuneration method,
easy to communicate and transparent to the expatriate most appropriate method of pay for short- to medium-
term assignments,
EXPATRIATE . , Contd
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EXPATRIATE . , Contd
Market rate approach
The market rate is also preferred when the
assignment is likely to be long-term or permanent.
Advantages
administratively simpler than the balance sheet
rarely be applied if the employee is moving from ahigh- to a lower- paying country,
also discourages repatriation
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Cont
Pension; Care should be taken to ensure that
the expatriates final pension is never
adversely affected as a result of an overseas
assignment.
Car; cars are common perquisites for
expatriate staff of all grades.
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Less common benefits associated with expatriate assignments
Servants; although the employments ofservants may sound like a relic of a bygonecountry, there are still many countries in the
world where it represents affluence, power &status.
Club subscriptions: Club membership fees &subscriptions are usually paid for by an
expatriates employer if there is a goodbusiness case.
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Third Country Nationals (TCN)
It describes an employee, whose home country is
not that of his/her employer, who is expatriated
to third country. Concerning to payments there isno perfect TCN strategy.
Taxation; Countries & or companies may elect tosafeguard expatriate from fiscal penalization by
one of the following two methods.
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Cont
Tax protection ; when an expatriate is paid a
gross salary & working in a location where the
tax rates are low , the employer need make no
adjustment, but when the host country tax
rates are higher than the employee home
country, the difference is reimbursed, usuallyin the home country.
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Cont
Tax Equalization; the system of tax
equalization is more equitable than that of tax
protection & is therefore favored by
multinational with large number of overseas
employees. Thus, all staff is maintained on a
tax standard which reflects that of the homecountry.
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Net Payments
It ensures expatriate throughout the world of
fiscal equity & removes the onus of tax
administration from the employee in countries
which have no equivalent of the pay system.
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Acquisition
When one company takes over another andclearly established itself as a new owner
It is a purchase of one business or company by
another company or other business entity. Acquisition are divided in to private and
Public
Acquisition can be either friendly or hostile.
Friendly acquisitions occur when the target firmexpresses its agreement, whereas hostileacquisitions dont have the same agreement
I li ti f M&A d
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Implication of M&A on pay and
conditions of employment
In most M & A companies, more attention isgiven to cutting costs, and increasing revenues.And this leads to de-motivating managers andemployees
There are two extremes on pay and conditions ofemployment: Handsoff approach = leaving the acquired company
to run its own business in its own way and terms and
conditions Harmonized approach = merged entirely in to the
parent company in all terms and conditions ofemployment
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Continued .
Salary administration procedures
- Should standardization procedures operatethroughout the new group?
Bonus schemes- Should different arrangements for bonuses be
allowed to continue?
Profitsharing schemes
- What should be done about profit sharing, assuming ascheme exists in one or other or both of thecompanies?
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Cont..
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The thinking of the founders of the business willtypically based on;
1. Reward system from previous employers(bringing the staff hand book/salary policy);
2. Throwing out the bits of these that they founddemotivationg;
3. cheery picking from reward policies they haveknown or linked the sound of from otheremployers;
4. Selection of benefits(notably pension) providedon the basis that suits to a small high-poweredcadre but cant easily be extended to a morebalanced group of employees in a maturing
organizations;
cont
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cont.
5.Failure to understand the underlying pluralism of
employment-Where to Start
The objective of a reward system designed to
meet the needs of a business start-up are to;1. Attract and keep people anxious to make the
organization grow and flourish;
2. Reward the risk of coming into a new venturewith high rewards and generally a share in thebusiness if the risk pays off- for those who havereal control over development.
Cont.
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It is more difficult and probably unrealistic to
reward support and more junior staff on a
high-risk basis.
3. Provide a sensible basic salary that is
reasonably competitive with the market for
most staff and highly competitive if rare skills
have to be brought in.
4. Lock people in to give business stability.
Typically with share scheme for senior
executives and an all employees share
scheme or profit sharing for everyone else.
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Cont
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Cont
3. Executive share options/employee share
schemes: should be capable of extension-again anarea for good professional advice.
4.Perforamcne rewards: need to relate to the
milestones in the business plan an be based onachievement of agreed objectives/performance
standards.
Reinforcing the culture of success
h f h f i i i
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Much of the success of a growing organizationdepends on close and effective teamwork.
Reward systems need to support this.This means that as organizations grow they have
much to gain from implementing.
1.Perormance rewards which reflect team as wellas individual achievement;
2.Consistent as far as possible harmonizedbenefits;
3. A beginning of a formal approach to settinginternal relativity so that a defensible 'peckingorder emerges.
Cont.
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4.Effective performance management as part of the
way the business run;5.Management of the reward system by an
individual who is wise custodian of both policy
and implementation until the organization is large
enough to have a personnel/HR remuneration
professional to do the job.
The last is critical because, experience shows that
most of the mistakes made by new business in the
reward area are because the wrong personnel had
accountability for it.
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