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1. Introduction: __________________________________________ Employee compensation is one of the major functions of HRM. Dessler (2007) defined

employee compensation as all forms of pay or rewards going to employees and arising from

their employment. Compensation is important for both employers and employees. It is

important to the employees because it is one of the main reasons for which people work.

Employees living status in the society, motivation, loyalty, and productivity are also influenced

by the compensation. Again, it is very important for the employers because it creates substantial

cash out flow of an enterprise. Compensation includes both financial and non-financial benefits.Financial elements comprise two elements, namely: direct and indirect forms of payments to the

employee. Direct compensation includes hourly and monthly rated wages or salaries, and

incentives such as bonuses, commissions, and profit sharing plans. Indirect compensation

includes benefits such as provident fund, gratuity, and health insurance, paid leaves, vacations,

company car, furnished house, retirement benefits, stock option, and the like. Non-financial

benefits comprise challenging job, responsibilities, appreciation, working environment,

empowerment, and others.

The compensation that an organization provides may be based on either membership (job) or

performance (skill). In the traditional system, employees are paid according to the job or

membership that has no connection with the employees or organizations performance. On the

contrary, in the case of performance or skill based pay, employees are compensated with respect

to their performance, abilities, and knowledge. In practice, performance may be a minor

determinant of compensation though academic theories extend the view that performance-based

compensation leads to high motivation of employees.

Compensation, once determined, should not remain the same for years. It should be reviewed

and changed after a certain period through a proper pay survey. Compensation serves many

functions. Sound compensation can attract, motivate, and retain the competent employees of an

organization


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1.1 Historical Background of Compensation Practices in Bangladesh: _______In 1971, Bangladesh started its journey as an independent and sovereign nation. During that

time, only 4% gross domestic product (GDP) came from the industrial sector, most of which

were mainly small scale industries. The socialist prone philosophy and huge immobilized

abandoned industrial units of the non-Bengali communities led the nationalization of industries

soon after the independence. The investment policies of 1973 and 1974 gave further emphasis on

public sector oriented industrialization and were against the expansion of the private sector.

Nevertheless, the public sector industrial enterprises, unfortunately, did not perform well. They

were rather emerging as a white elephant through incurring huge losses every year. On the other

hand, from December 1975 until now, all the governments have been emphasizing the

development of the private sector industrial enterprises through the investment policy of 1975,

and industrial policies of 1982, 1986, 1991, 1999, and 2005. However, it is also found that the

performance of the private sector industrial enterprises has not achieved ultimate success. A

number of issues are liable for such state of affairs in the public and the private sector industrial

enterprises of Bangladesh where ineffective compensation practices are reported to be one of

them. Therefore, a study to evaluate the comparative status of compensation practices in thepublic and the private banking sector of Bangladesh can be pertinent and worthwhile. The

research findings would help the public and the private banking enterprises in Bangladesh to

improve their compensation practices towards creating a sustainable competitive advantage

based on human capital. The research findings would be also useful for the academicians,

researchers, policy- makers, and practitioners of HRM.


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1.2 Literature Review: ____________________________________________Compensation has been researched from different perspectives at home and abroad. Rab (1991),

in a study on 24 small enterprises operating in Dhaka, identified that most of the enterprises

(87.5%) paid one or more types of allowances in addition to salary. He found that nearly 7%

enterprises paid festival bonus, 20% paid medical allowance, and 20% provided pay increment.

A case study (Taher, 1992) on the overall personnel management (HRM) practices of Khulna

Hard Board Mills Ltd unearthed inadequate compensation as one of the main problems of that

enterprise. Chowdhury (2000) in a book review mentioned that compensation has been a veryimportant aspect of HRM in a developing country like Bangladesh where employees are

commonly low paid with little or no fringe benefits. A research study (Mamun and Islam, 2001)

examined the HRM practices of the ready-made garments (RMG) enterprises. The study

identified that compensation and labor productivity of workers in Bangladesh were very low in

comparison to competing nations. Ernst and Young, and Metropolitan Chamber of Commerce

and Industry (2007) in a survey on HR practices in Bangladesh found that most of the surveyed

organizations have in-house payroll processing. It was also found that sales incentives and pay

based on individual performance were not widely practiced in the surveyed organizations.

Uddin, Habib, and Hassan (2007) depicted a comparative scenario of HRM practices with

respect to two public and the private sector organizations of Bangladesh. The study discovered

that most of the employees of Wartsila, the private sector organization, were satisfied with their

salaries whereas most of the employees of Bangladesh power development board (BPDB), the

public sector organization, were highly dissatisfied with their salaries. A study (Huda, Karim and

Ahmed, 2007) on the HRM practices of 20 non-government organizations (NGOs) of

Bangladesh observed that inadequate financial incentives represented one of the main reasons

behind the job dissatisfaction of the employees. The study recommended determining entry-level

remunerations and benefits properly to attract qualified candidates. Khan (2007) categorically

mentioned that the public and the private sector institutions of Bangladesh failed to discharge


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their duties properly due to incorrect recruitment and selection of employees, politicization of

promotion and posting, low compensation, and ineffective training.

Hoque (1994) investigated 10 industrial enterprises (5 public and 5 private) located in

Chittagong. He found that human resource development (HRD) had a positive impact onorganizational effectiveness (OE). He measured HRD in terms of investments in HRD in the

forms of employees

compensation, their training and development expenses, and OE was

measured in terms of growth and profit effectiveness. The empirical study depicted that with

respect to the broad staffing (HR) pattern, qualities of employees, delegation of authority to

subordinates, decentralization of decision and policy makings, and span of supervision, the

private sector enterprises were in a much better position than the public sector enterprises. The

study identified that low investment in HRD had created lower growth and profit in the public

sector enterprises, unlike private sector ones. He finally recommended that any enterprise,

especially the public sector industrial enterprises, should develop their human resources through

more investment in the forms of compensation, and training and development expenses.

A study (Ali, 1989) on the employees of nine public sector industrial enterprises identified pay

structure as the prime reason behind the dissatisfaction of the workers. The other reasons for

dissatisfaction of workers were job security, promotion system, and work autonomy. The

employees in the mentioned firms were highly dissatisfied with pay and benefits. A large numberof employees were even found to be ready to sacrifice quick promotion, job security, and

friendly colleagues for higher pay and fringe benefits. Thus, the study challenged the western

belief of motivating workers more by the intrinsic rewards like autonomy, and task identity. He

claimed that unless salary and benefits met the basic needs, the intrinsic rewards might not work

in Bangladesh.

Through an in-depth study on 178 industrial enterprises of Greece, Katou and Budhwar (2007)

found that HR practices such as recruitment, training, promotion, compensation, involvement,and safety and health were positively related with the elements of organizational performance

such as innovation and satisfaction of stakeholders. Then, employee compensation, especially the

performance based compensation system, resulted in better organizational performance in Indian

firms (Singh, 2004). Huselid (1995) investigated the impact of HRM practices such as

recruitment and selection, training, compensation on turnover, productivity, and corporate


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financial performance in USA. He found that investment in HRM practices was associated with

lower employee turnover, greater productivity, and higher corporate financial performance.

Huang (2001), in a study on the past, present, and future challenges of HRM practices of

Taiwan, demonstrated compensation as the second most important functions of HRM inachieving organizational objectives. Yeganeh and Su (2008) examined the HRM practices

including compensation of Iranian public sector enterprises. They found that in Iranian public

sector enterprises, employee compensation was basically determined on the basis of seniority

and education. Performance based compensation was not that much prevalent in Iranian public

sector.

Thus, the above literature survey indicates that compensation has been investigated from

different perspectives around the globe as an important practice of HRM. It is also evident thatvery limited number of comparative studies was conducted on compensation practices with

respect to the public and the private banking organizations of Bangladesh. Moreover, no specific

study was found on employee compensation in Bangladeshi context. The present study is,

therefore, an endeavor to fill up this obvious research gap.

2. Banking sector in Bangladesh: _____________________________ Bank is very old institution that is contributing toward the development of any economy and it is

treated as an important service industry in modern world. Now days the function of bank is not

limited to within the same geographical limit of any country. The Jews in Jerusalem introduced a

kind of banking in the form of money lending before the birth of Christ. The word 'bank' wasprobably derived from the word 'bench' as during ancient time Jews used to do money -lending

business sitting on long benches.

First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank' which opened


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up a new era of banking activities throughout the European Mainland. In the South Asian region,

early banking system was introduced by the Afghan traders popularly known as Kabuliwallas.

Muslim businessmen from Kabul, Afghanistan came to India and started money lending business

in exchange of interest sometime in 1312 A.D. They were known as 'Kabuliwallas'.

The banking system at post independent Bangladesh consisted of two branch offices of the

former State Bank of Pakistan and seventeen large commercial banks, two of which were

controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There

were fourteen smaller commercial banks. Virtually all banking services were concentrated in

urban areas. The newly independent government immediately designated the Dhaka branch of

the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank

was responsible for regulating currency, controlling credit and monetary policy, andadministering exchange control and the official foreign exchange reserves. The Bangladesh

government initially nationalized the entire domestic banking system and proceeded to

reorganize and rename the various banks. Foreign-owned banks were permitted to continue

doing business in Bangladesh. The insurance business was also nationalized and became a source

of potential investment funds. Cooperative credit systems and postal savings offices handled

service to small individual and rural accounts. The new banking system succeeded in

establishing reasonably efficient procedures for managing credit and foreign exchange. The

primary function of the credit system throughout the 1970s was to finance trade and the public

sector, which together absorbed 75 percent of total advances.

The government's encouragement during the late 1970s and early 1980s of agricultural

development and private industry brought changes in lending strategies. Managed by the

Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and

fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and

1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh

Bank and the World Bank to focus their lending on the emerging private manufacturing sector.

Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2

percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from

13 percent to 53 percent.


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The transformation of finance priorities has brought with it problems in administration. No sound

project-appraisal system was in place to identify viable borrowers and projects. Lending

institutions did not have adequate autonomy to choose borrowers and projects and were often

instructed by the political authorities. In addition, the incentive system for the banks stressed

disbursements rather than recoveries, and the accounting and debt collection systems were

inadequate to deal with the problems of loan recovery. It became more common for borrowers to

default on loans than to repay them; the lending system was simply disbursing grant assistance to

private individuals who qualified for loans more for political than for economic reasons. The rate

of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans

was even worse. As a result of this poor showing, major donors applied pressure to induce the

government and banks to take firmer action to strengthen internal bank management and credit

discipline. As a consequence, recovery rates began to improve in 1987. The NationalCommission on Money, Credit, and Banking recommended broad structural changes in

Bangladesh's system of financial intermediation early in 1987, many of which were built into a

three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.

One major exception to the management problems of Bangladeshi banks was the Grameen Bank,

begun as a government project in 1976 and established in 1983 as an independent bank. In the

late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and

to generate productive self-employment without external assistance. Its customers were landless

persons who took small loans for all types of economic activities, including housing. About 70

percent of the borrowers were women, who were otherwise not much represented in institutional

finance. Collective rural enterprises also could borrow from the Grameen Bank for investments

in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The

average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the

maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms were 4

percent for rural housing and 8.5 percent for normal lending operations.

The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years.

Most of its customers had never dealt with formal lending institutions before. The most

remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of

bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans


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were overdue. The bank had from the outset applied a specialized system of intensive credit

supervision that set it apart from others. Its success, though still on a rather small scale, provided

hope that it could continue to grow and that it could be replicated or adapted to other

development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500

branches throughout the country by the late 1980s.

Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the

growth of domestic private credit and government borrowing from the banking system. The

policy was largely successful in reducing the growth of the money supply and total domestic

credit. Net credit to the government actually declined in FY 1986. The problem of credit

recovery remained a threat to monetary stability, responsible for serious resource misallocation

and harsh inequities. Although the government had begun effective measures to improvefinancial discipline, the draconian contraction of credit availability contained the risk of

inadvertently discouraging new economic activity.

The Banking sector in Bangladesh is different from the banking as seen in other developed

countries. This is one of the Major Service sectors in Bangladesh economy, which divided into

four categories of scheduled Banks. These are Nationalized Commercial Banks (NCBs),

Government Owned Development Financial Institutions (DFIs), Private Commercial Banks

(PCBs), and Foreign Commercial Banks (FCBs). The number of banks in all now stands at 49 in

Bangladesh. Out of the 49 banks, four are Nationalized Commercial Banks (NCBs), 28 local

private commercial banks, 12 foreign banks and the rest five are Development Financial

Institutions (DFIs).


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3. Pay for performance: ___________________________________ The term pay for performance refers to a pay strategy where evaluations of Individual and/or

organizational performance have significant influence on the amount of pay increases or bonuses

given to each employee.

When a pay for performance system functions properly:

Outstanding performers will receive the greatest rewards, to acknowledge their superior

contributions and to motivate them to continue high performance.

Average performers will receive substantially smaller raises, which may encourage them

to work harder to achieve larger raises in the future.

Poor performers will receive no increase, which is intended to persuade them to improve

their performance or leave.

However, any organizations especially banks should not rely only upon the motivational ability

of money to improve individual or organizational performance because more employees aremotivated by factors, such as personal pride or satisfaction in my work or a personal desire to

make a contribution rather than a monetary award. Additio nally, conditions in the work

environment of Bangladeshi banks (e.g., limited funding to support performance-based increases

or awards, skepticism about whether or not supervisors will reward high performance) have

created a rather tenuous link from pay to performance.


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3.1 Pay for performance and financial incentive practices in Bangladesh: ___

While monitoring the profile of these public and private banks in Bangladesh, we have found

that they have different characteristics while designing their compensation policies and practices.

The compensation and incentives policies and practices are completely different in public and

private banking sector of Bangladesh whereas among the ban of the dimensions concerned,

varies slightly in terms of their compensation and benefit issues.

For the purpose of our research, we conducted a structured interview with 8 banks consisting of

samples from both public and private sector. The banks we have considered for our study are:

1. IFIC Bank Limited

2. BRAC Bank Limited

3. Eastern Bank Limited4. AL-Arafah Islami Bank Limited

5. HSBC Bank Limited

6. Sonali Bank Limited

7. Janata Bank Limited

8. Shahjalal Islami Bank Limited


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IFIC BRAC EBL Al-Arafarh HSBC SIB

Main product

Retail bankingCorporate banki ng

SME BankingTreasury and Capital Market

Agriculture Credit

Retail bankingCorporate banki ng

NRB BankingSME Banking

Treasury and CapitalMarket

Consumer BankingCorporate Banki ng

SME BankingTreasury and Capital

BankingNRB Banking

Islamic Consumer bankingSME BankingMicro Fi nance

Treasury and Capital Banking

Personal BankingCorporate Banking

Islamic Banking(AMANAH)Treasury and Capital Banking

Isla mic Consumer bankSME BankingMicro Fi nance

Treasury and Capital Ba

Establishment year 1976 2001 1992 1995 1996 2001Number of employees 1660 2100 1900 1150 1151 1600

Total Asset (million BDT) 62901 1338 69870 8580 81538 58921Average Age 38 31 32 37 32 35

Average Education Masters Masters Masters Masters Masters MastersAverage monthly salary 30000 28000 30000 25000 40000 28000

No. of Branches 82 57 49 50 13 63Business Growth 8% 17% 6.20% 12.90% 15.50% 13.38%

Employee Turnover Rate Confindential Confindential Confindential Confindential Confindential Conf

Private sectorBanking sector

Table 1: Demographics of private sector banks

IFIC Bank Limited

International Finance Investment and Commerce Bank Limited (IFIC Bank) is banking company

incorporated in the Peoples Republic of Bangladesh with limited liability. It was set up at the

instance of the Government in 1976 as a joint venture between the Government of Bangladesh

and sponsors in the private sector with the objective of working as a finance company within thecountry and setting up joint venture banks/financial institutions aboard. In 1983 when the

Government allowed banks in the private sector, IFIC was converted into a full fledged

commercial bank. The Government of the Peoples Republic of Bangladesh now ho lds 32.75%

of the share capital of the Bank. Directors and Sponsors having vast experience in the field of

trade and commerce own 8.62% of the share capital and the rest is held by the general public.

BRAC Bank Limited

With the vision of "Building profitable and socially responsible financial institution focused on

Market and Business with Growth potential, thereby assisting BRAC and stakeholders to build a

just, enlightened, healthy democratic and pove rty free Bangladesh, BRAC Bank Limited has

started its journey in the Banking Sector of Bangladesh.
http://www.brac.net/http://www.brac.net/http://www.brac.net/


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Now, BRAC Bank Limited is one of the leading private banks in Bangladesh. BRAC Bank has

received the commercial banking license from Bangladesh Bank in 2001. Since then it has

established its name and branding with its quality of service and products. In a very short

time BRAC Bank became one of the successful and fastest growing private banks in Bangladesh.

BRAC Bank is owned partially by BRAC, the largest non-government organization in the

world, International Finance Corporation (IFC), the private sector arm of The World Bank

Group, and Shore Cap International. The head office of the bank is situated at Gulshan, Dhaka.

BRAC Bank is operating its business in the whole of Bangladesh. BRAC Bank is expanding its

branch network rapidly throughout the country.

Currently, BRAC Bank has 100 Branches, 60 SME Service Centers, 3 SME/Krishi Branches,more than 300 ATMs and 424 SME Unit offices across the country. It has disbursed over

BDT10000 crores of SME loan and has over 500,000 individual customers who access online

banking facilities. Its services cuts across all strata of clientele are its corporate, retail or SME.

Eastern Bank Limited

With a vision to become the bank of choice and to be the most valuable financial brand in

Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL hasestablished itself as a leading private commercial bank in the country with undisputed leadership

in Corporate Banking and a strong Consumer and SME growth engines. EBLs ambition is to be

the number one financial services provider, creating lasting value for its clientele, shareholder,

employees and above all for the community it operates in.

Bangladesh Banking Sector has grown from strength to strength over the past one decade and is

fiercely competitive, especially in the Consumer Banking segment. EBL offers a wide range of

depository, loan and card products to cater virtually for every customer segment. From Student

Banking to Priority Banking to Platinum card EBL has almost all banking products in its

repertoire. The product basket is rich in content featuring different types of Savings & Current

Accounts, Personal Loans, Debit Cards, Credit Cards, Pre-paid Cards, Internet Banking,

Corporate Banking, SME Banking, Investment Banking, Treasury & Syndication services. The
http://www.brac.net/http://www.ifc.org/http://www.ifc.org/http://www.brac.net/


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customers are served through a network of 49 Branches, 74 ATMs and 6 Kiosks countrywide.

EBL has its presence in 11 major cities/towns in the country including Dhaka, Chittagong,

Sylhet, Khulna, Rajshahi & Coxs Bazar.

Al-Arafah Islami Bank Limited

To achieve Islamic ideology Al-Arafah Islami Bank Ltd was established (registered) as a public

limited company on 18 June 1995. The inaugural ceremony took place on 27 September 1995.

The authorized capital of the Bank is Tk.5000.00 million and the paid up capital is Tk. 4677.28

million as on 31.12.2010. Renowned Islamic Scholars and pious businessmen of the country are

the sponsors of the Bank. 100% of paid up capital is being owned by indigenous shareholders.

The equity of the bank stood at Tk. 9647.45 million as on 31 December 2010, the manpower was

1711 and the number of shareholders was 49,386. It has achieved a continuous profit and

declared a good dividend over the years. High quality customer service through the integration of

modern technology and new products is the tool of the bank to achieve success. The bank has a

diverse array of carefully tailored products and services to satisfy customer needs.

The Bank is committed to contribute significantly to the national economy. It has made a

positive contribution towards the socio economic development of the country with 78 branches

of which 21 is AD throughout the country.

HSBC Bank Limited

In Bangladesh, the HSBC Group's history dates back to 1996 when The Hongkong and Shanghai

Banking Corporation (HSBC) Ltd opened its first branch. Today, the HSBC Group offers acomprehensive range of financial services in Bangladesh including commercial banking,

consumer banking, payments and cash management, trade services, treasury, and custody &

clearing. The bank opened first Bangladesh branch in December 1996. Today it has a network of

13 offices, 39 ATMs, 9 Customer Service Centres, an offshore banking unit, and offices in 7

EPZs. As of December 2010 the bank boosts 1051 employees.


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Shahjalal Islami Bank Limited

Shahjalal Islami Bank Limited (SJIBL) commenced its commercial operation in accordance with

principle of Islamic Shariah on the 10th May 2001 under the Bank Companies Act, 1991. Duringlast nine years SJIBL has diversified its service coverage by opening new branches at different

strategically important locations across the country offering various service products both

investment & deposit. Islamic Banking, in essence, is not only INTEREST-FREE banking

business, it carries deal wise business product thereby generating real income and thus boosting

GDP of the economy. Board of Directors enjoys high credential in the business arena of the

country, Management Team is strong and supportive equipped with excellent professional

knowledge under leadership of a veteran Banker Mr. Md. Abdur Rahman Sarker.

The bank today has 63 branches, 14 ATM booths, 6 SME Centers and 1 off-shore banking unit.

The companys authorized capital is BDT 6,000 million and its paid up capital is BDT 3,425.12

million. The company today has total of 1601 employees.

Banking sector Public sector

Sonali Janata

Main product Personal BankingCorporate Banking

SMERural & Micro credit

NGO LinkageTreasury and capitalGovt. Treasury fund

NRB Banking

Personal BankingCorporate Banking

SMERural & Micro credit

NGO LinkageNRB Banking

Establishment year 1972 1972

Number of employees 21839 13000

Total Asset (million BDT) 543,969.28 267157

Average Age 39 39

Average Education Masters Masters

Average monthly salary Govt. Pay scale Govt. Pay scale

No. of Branches 1191 860

Business Growth 20.23% 15.68%

Employee Turnover Rate Confindential Confindential

Table 2: Demographics of public sector banks


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Sonali Bank Limited

Soon after independence of Bangladesh Sonali Bank emerged as the largest and leading

Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order 1972(Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank and Bank

of Bhwalpur. As a fully state owned institution, the bank had been discharging its nation-

building responsibilities by undertaking government entrusted different socio-economic schemes

as well as money market activities of its own volition, covering all spheres of the economy.

The bank has been converted to a Public Limited Company with 100% ownership of the

government and started functioning as Sonali Bank Limited from November 15 2007 taking over

all assets, liabilities and business of Sonali Bank. After corporatization, the management of thebank has been given required autonomy to make the bank competitive & to run its business

effectively.

Sonali Bank Limited is governed by a Board of Directors consisting of 13(thirteen) members.

The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-known

Banker and a reputed professional. The corporate head quarter of the bank is located at

Motijheel, Dhaka, Bangladesh, which is the main commercial center of the capital.

Janata Bank Limited

Janata Bank Limited, one of the state owned commercial banks in Bangladesh, has an authorized

capital of Tk. 20000 million (approx. US$ 289.85 million), paid up capital of Tk. 5000.00

million, reserve of Tk.8202.00 million and retained surplus Tk. 2737.00 million. The Bank has a

total asset of Tk. 282423.00 million as on 30th November 2009. Immediately after the

emergence of Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited

were renamed as Janata Bank. On 15th November, 2007 the bank has been corporatized and

renamed as Janata Bank Limited.


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Janata Bank Limited operates through 860 branches including 4 overseas branches at United

Arab Emirates. It is linked with 1202 foreign correspondents all over the world. The Bank

employs more than 13(Thirteen) thousand employees.

The mission of the bank is to actively participate in the socio- economic development of the

nation by operating a commercially sound banking organization, providing credit to viable

borrowers, efficiently delivered and competitively priced, simultaneously protecting depositors

funds and providing a satisfactory return on equity to the owners.

The Board of Directors is composed of 13 (Thirteen) members headed by a Chairman. The

Directors are representatives from both public and private sectors. The Bank is headed by the

Chief Executive Officer & Managing Director, who is a reputed banker. The corporate headoffice is located at Dhaka with 10 (ten) Divisions comprising of 37 (thirty seven) Departments.

3.2 Current pay for performance and financial incentive practices in publicand private banking sector of Bangladesh:________________________________

Pay for performance can encompass a variety of rewards for above average performance. The

two most common are bonuses, which are one-time cash payments, and performance-based pay,

which provides a permanent increase to base pay. Each of these has advantages and

disadvantages, which are explored further below.

3.2.1 Bonuses:

Bonuses represent an amount of pay that is at risk every year. In contrast to base pay, which is

stable and primarily reflects an employees market value, bonuses should depend purely on


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performance and are not guaranteed. Employees in these types of systems frequently receive a

base pay that is considered comparable to average market rate to facilitate recruitment and

retention of a high-quality workforce, but additional amount of money is distributed (often

annually) on the basis of performance during the rating period. As a result, employees are

guaranteed a certain salary, with the potential for earning more. The amount generally depends

on a variety of factors, such as the available funding and the evaluation of the individuals

contributions, but the bank retains discretion over how much to spend each year.

As illustrated by the example shown in Figure 1, bonuses serve to raise an employees salary

above average market rate but only on an annual basis. In other words, each year an employee

must earn a n amount above the base rate of pay. Since each years bonus is independent of the

bonus earned in prior years, total salary can fluctuate dramatically from year to year. When the

employee excels, he may receive a sizable bonus, but if the employees performance is average

or lower, he may not receive a bonus and his salary drops to the base rate.

Effect of bonuses on private sector bank

In this report, we have taken six prominent private sector banks as our sample for private

banking sectors. From the research, we came to know that the following are the most common

type of bonuses that the private sector banks usually practice:

1. Festival bonus

2. Cash bonus

3. LFA

In the following graph, we will display how the bank constructs the yearly salary paid to the

employees of these banks from private sector:


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Figure 1: The bonus components in private banking sector.

From the graph we can see how the bonuses construct the basic salary of an employee for a given

year. Differences are clearly visible due to the differences in payment policies of the six different

banks. For each of the banks, one pillar represents the average income of an employee of thebank concerned. The different color depicts the bonus components of the salary of that employee

working in private sector banks.

From the research what we can see is that in private banking sector of Bangladesh, the bonus

components cover a significant portion of the salary. Each of banks has different payment

policies for calculating bonuses of the employees. Each bank develops a formula for calculating

different bonus schemes and that formula is built around the basic pay which means the bonuses

follow different percentage of the basic pay of each employee.

-

100,000.00

200,000.00

300,000.00

400,000.00

500,000.00

600,000.00

IFIC Bank

Limited

BRAC

BankLimited

Eastern

BankLimited

AL-Arafah

IslamiBank

Limited

HSBC

BankLimited

Shahjalal

IslamiBank

Limited

LFA

CashBonus

FestivalAllowance

YearlySalary

Y e a r l y S a

l a r y


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Effect of bonuses on public sector bank

In this report, we have taken two most prominent public sector banks as our sample for public

banking sectors. From the research, we came to know that the following are the most common

type of bonuses that the private sector banks usually practice:

1. Festival bonus

2. Medical allowance

3. TA/DA

Figure 2: The bonus components in private banking sector.

From the research on public banking sectors where we tried to collect data from the two most

significant banks of Bangladesh. Here what is more visible in the total salary of the public sector

employees is the only significant component is festival bonus. The other two bonus components

are not as significant as the elements of the private banking sector. The main reason for the

difference is that the public banks follow a specified salary structure which is not as adjustable

with the current economic situation.

130,000.00

140,000.00

150,000.00

160,000.00

Sonali BankLimited

Janata BankLimited

TA/DA

Medical Allowance

FestivalAllowance

YearlySalary

Y e a r l y

S a

l a r y


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3.2.2 Performance-based pay increases:

In contrast to bonuses, performance- based pay increases are incorporated into the employees

base pay and are usually only adjusted upward. Organizations differ in how they move

employees through the performance-based pay scales. Some pay systems include pre-determined

levels, which employees step through in an orderly manner, while others allow the supervisors to

determine salary amounts anywhere within a broad range.

As in the prior example, average market rate may be used to set a baseline for pay. The employee

may be hired at this rate, but salary progression depends primarily upon performance. When the

employees performance warrants a raise (during Years 2, 4 and 5), the employee receives an

increase. The upward trend highlights the main difference between bonuses and performance-

based pay increases: pay increases are typically treated as permanent increases.

Picture 2: Impact of pay for performance strategy in private and public banking sector

0%

50%

100%

150%

200%

250%

Year-01

Year-02

Year-03

Year-04

Year-05

Year-06

Year-07

Year-08

Year-09

Year-10

Private

BankingSector

PublicBankingSector

Y e a r l y G r o w t h

Years of Service


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In the private banking sector, there is a strong correlation between the yearly profitability of a

bank and the total compensation package of an employee. In our research we found that at the

end of every financial year, the private banks allocate a significant percentage of the before tax

profit using through the performance based payment strategy. However, on the other hand, there

is no such strategy of payment in the public banking sector to influence the growth both person

and company wise,

In the graph we can see that the yearly growth in the private banking sector is quite faster and

with time the difference is becoming bigger. In the private banking sector, they follow a

company wide policy to share a specific percentage of their yearly profit which is one the biggest

impact creator on the growth. But in the public banking sector, the amount to be allocated as a

performance bonus depends on the tenure and position of the employee in the hierarchy. Also the

salary structure is reviews after a comparatively longer period, usually 5-6 years.

3.2.3 Combination strategy of bonus and pay for performance strategy:

As an alternative to choosing one or the other, most banks use both bonuses and base pay

increases. Combining bonuses and base pay increases enables organizations to realize thebenefits of both while limiting the downsides. For example, the bank may use bonuses to

recognize exceptional achievements, while pay increases may be reserved for longer term

accomplishments.

Another option that eliminates or at least reduces some of the disadvantages associated with the

use of one-time cash payments (bonuses) and performance-based pay increases, involves

building a control point into the pay band. Base pay increases enable the employee to rea ch a

certain salary level, often the average market rate for the skills encompassed in the pay band,which then serves as a ceiling for base pay. If an employee reaches this level and his

performance would otherwise warrant a pay increase, a one-time payment may be given in lieu

of increases to base pay.


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Consequently, such employees must compete each year for a bonus above the established market

rate for their skill set. Another strategy is to set a higher control point for high performers, so

these employees continue to receive pay increases until they reach a point higher than the

average market rate (at which point they may continue to receive bonuses to recognize superior

performance). Using these flexibilities enables an organization to set policies to help them recruit

and retain employees with critical areas of knowledge, skills, and abilities.

Figure 3: The possible impact of combination strategy

In the example shown in Figure 3, a control point has been set at BDT 45,000. The employee is

paid at the average entry level pay rate (management trainee) of BDT 30,000 per month in the


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first year. During the second year, he receives a performance-based pay increase to BDT 40,000.

He does not receive an increase in the third year. In his fourth year, his performance warrants a

BDT 50,000 salary, which would exceed the BDT 45,000 control point. Therefore, he receives a

BDT 5,000 increase in base pay and the additional amount is paid as a bonus of BDT 60,000 in a

year. In the fifth year, the control point holds his salary at BDT 45,000 and he receives a BDT

180,000 yearly bonus.

As the example helps illustrate, control points ensure that employees do not receive pay above a

certain level unless they sustain high performance levels. Employees at the control point may see

this as a downside, since they cannot accurately predict what their salary will be each year, but at

least they can be confident that their pay will not slip below the control point once they reach it.

3.3 The process performance based pay are funded in Banks:__________ In the private banks, financial results (e.g., income and profits) frequently determine and fund

bonuses and pay increases. In this manner, employees are able to share in the increased proceedsthat their efforts have brought to the company. In good years, funding is readily available. In bad

years, the employees often share the downturn in the companys fortunes by receiving little or no

salary increase or bonus, whether or not the companys decreased pr ofit is due to their efforts or

to external economic factors over which they have no control.

Funding is dramatically different in the public sector. The Public Banks obtain financial returns

from their work. Even when they do (e.g., revenue collection, law enforcement), it is rarely

appropriate to allow Government employees to directly benefit from these returns. Furthermore,most government organizations are funded through appropriations, and the relationship between

performance and appropriations is tenuous at best. High performance and mission

accomplishment does not necessarily lead to larger appropriations, and mediocrity or failure may

have few, if any banking consequences.


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3.4 The influencers of pay for performances in Banks:_________________ In banking sectors of Bangladesh, there are a few influencers of an employees pay for

performance excluding his own performance. Given that various perspectives often offer a more

complete view of an employees performance, it may be worthwhile to consider input from a

variety of sources, including the first-level supervisor, the second-level manager, and the

employees colleagues and customers, as well as directly from the employee. A 360 degree

feedback instrument that includes input from higher levels, peers, and subordinates, and/or a

balanced scorecard that includes business results and customer feedback help to ensure thatimportant input is not overlooked.

Supervisor

In most pay for performance systems, supervisors have the greatest influence on em ployees pay

increases because they make the assignments and evaluate performance. However, relying

exclusively on supervisors may increase a pay for performance systems vulnerability to errors

and abuse, as discussed previously. The risks are increased when some employees are experts at

impression management and can convince a supervisor that they are performing above their

actual level, while other employees achieve more but do not tout their accomplishments as well.

Some supervisors may also be more e ffective at identifying and presenting their employees

accomplishments. In other cases, supervisors may skew their ratings to unfairly reward favored

employees at the expense of those who may be more deserving of pay increases.

Manager

Involvement of higher level managers in rating and pay decisions introduce a reality check

whereby their perspectives are used to calibrate ratings and pay increases. For example,

supervisors may accurately or inaccurately believe that their employees are above average.


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However, the next-level manager has the advantage of being able to compare accomplishments

across work teams and may be able to provide feedback to bring a supervisors ratings in line

with those for the rest of the organization. Another advantage may be that any intentional or

unintentional biases that a supervisor has may be noticed if a second-line manager reviews the

recommendations. Involving someone outside of the employees management chain may further

increase perceptions of fairness, though it also probably reduces first-hand knowledge of

performance that such a reviewer will have.

Employee (Self-rating)

With increasing supervisory ratios and the need for supervisors to devote time to tasks other than

observing the work of their employees, it is understandable that supervisors may not be familiar

with all of an employees accomplishments during a rating period. Hence, it is advantageous for

employees to provide their supervisors with a summary of accomplishments during the rating

period. This enables employees to explain extenuating circumstances that prevented achievement

of all the established objectives and to highlight accomplishments supervisors may otherwise

overlook. Although some employees may embellish or underestimate their achievements,

effective supervisors will use this exchange of information as an opportunity to clarify actual

accomplishments and discuss with employees past, present, and future goals and ways the

employees can improve their performance.

Peers

Peers often occupy a position that provides them with insight into the day-to-day performance of

their coworkers. Peers see coworkers on a regular basis and may be best able to judge the effort a

colleague makes. Since their work is often very similar, peers are able to assess whether the

outcomes reported by the employee are reasonable and if other constraints are operating that

prevented the employee from accomplishing the desired objectives. However, peer input must begiven weight cautiously, especially in a pay for performance setting where employees may view

each other as competition because this may lead employees to undermine others to build

themselves up or to establish mutually beneficial pacts with colleagues to rate each other

positively. Further, opinions may be clouded by irrelevant biases if employees do not receive


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extensive training in proper evaluation techniques, which should raise their awareness of any

discriminatory tendencies.

Customers

Many Public Banks have customers outside the Government, although the definition of customer

may not correspond with what we typically view as a customer in retail or service environment.

In these banks, employees need to treat their customers in a way that accomplishes the desired

interaction in a professional, effective, and efficient manner. Additionally, bank employees who

work in support functions, such as human resources, finance, and information technology, have

customers within their banks. In some cases, customer satisfaction can be traced directly to

individual employees and may be an appropriate factor to consider in evaluating performance.

Figure 4: Influencers in private banking sector

The private banks they follow a structured performance appraisal system to measure employee

performance. In our research we found all thought different organizations follow different

methods, but the inputs for judging employee performance main come from the Supervisor,

Performance

Appraisal

Supervisor

Customers

PeersEmplyeeSelf

Manager


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Department Manager, Peers, Customers and on self cases self evaluation. And depending on the

employees performance measure size of the performance bonus and pay raises are set.

Figure 5: Influencers in private banking sector

In the public banks employee performance measure is doesnt follow a regular structured method

as it is followed in the private banks. Here on only means of performance can be gathered from

the inputs of the Supervisor or the Departmental Head.

3.5 Pay for performance decision points:___________________________ Understanding the theory behind pay for performance and its potential impact is critical to

understanding the role performance-based pay can play in a bank. Nevertheless, Banks also need

to pay attention to technical design points to ensure that the mechanics of the system are sound.

The effectiveness of pay for performance in facilitating recruitment, retention, and motivation

(and the resulting improvements in individual and organizational performance) depends heavily

upon matching the approach to the situation. Thus, agencies need to carefully consider numerous

PerformanceAppraisal

SupervisorDepartment

Head


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decision points, such as those discussed below. To make it even more challenging, the various

choices often have both advantages and disadvantages. Although it is tempting to simply

transplant compensation systems from other organizations where they appear to be functioning

well, agencies need to tailor pay systems to fit their unique circumstances and needs.

Fortunately, agencies can learn from the dilemmas others have faced and base their decisions on

experience gained elsewhere combined with information they glean from within.

Questions banks need to ask themselves range from the most basic

Is the bank ready for pay for performance?

To the more specific, questions such as

Who should be covered, what behaviors should be rewarded, and how bonuses should bedistributed. Obtaining adequate funding and ensuring fairness can also challenge agencies, so

these goals need to be pursued early in the planning process. Anticipating the substantial

decision points and understanding the available options can help agencies make the best possible

decisions. While exploring these issues requires some time and effort, it is worth the investment

to avoid potential negative consequences in the long term.

Is the bank ready for pay for performance?

Given the appeal of paying for performance instead of tenure, many banks have already moved

past deciding whether to adopt a performance-based pay system and are rapidly moving towards

implementation. Some of these organizations may already have in place an organizational culture

conducive to pay for performance.

However, many do not. Fortunately, these banks do not have to passively wait for the conditions

to improve. They can use pay for performance as a tool for organizational change to move the

bank in the desired direction. For example, leading banks can drive major organizational change

by demonstrating commitment to a performance-based pay strategy through their words and


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actions. As time progresses, the emphasis on performance perpetuates itself as the components of

an effective pay for performance system facilitate further evolution towards a performance-based

culture.

Since organizational culture may influence the ease with which pay for performance can be

implemented, agencies may find it useful to do a self-assessment before deciding how to design

and implement a new pay system. Table 3 displays relevant dimensions of organizational

readiness and selected indicators to help agencies gauge where they currently are.

Dimension Indicator Private Sector Public Sector Organizational

Culture Both way Communication Prominently visible Top down approach and

one wayTrust between employee and

supervisorsLow level of trust Comparatively higher

HRM policies Regularly practiced andmonitored

No clear policies

Supervisors Employee efforts alignment Strong and visible Weak and vague

Task structure Decentralized andauthoritative

Centralized andBureaucratic

Discretion and accountability Clear and strong No clear discretion

PerformanceEvaluation

Fairness and accurateness High Low

Time length Yearly Every 5-7 years

Funding Pay increase and bonus Company profits Governmentexpenditure

Difficulty level Clear and mathematic Bureaucratic

Table: Assessing organizational readiness for pay for performance


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3.6 Goals of pay for performance:_________________________________ In order to guide themselves through the decision-making process, banks should establish clear,

realistic goals for pay for performance before taking any action to change their pay systems.

Although recruitment, retention, and motivation (and resulting individual and organization

performance) represent broad areas that agencies often wish to improve through pay for

performance, banks should also consider other goals and priorities. For example, another goal

those leading banks may have in mind when implementing pay for performance is to improve the

equity of pay practices by providing more compensation to the highest performers.

It is also useful to keep in mind the impact that pay system changes will have on the

organizational culture and the importance of maintaining alignment between bank values and pay

strategies. For example, if the nature of the work requires collaboration, a bank may choose a

team-based reward structure or at least incorporate teamwork into the reward structure to avoid

pitting employees against one another in competition for individual rewards.

3.7 Eligibility for receiving pay for performance:______________________ Pay for performance systems can be inclusive or exclusive. To choose the appropriate range of

coverage, an organization needs to decide the message it wants the pay system to send to the

workforce, including what is to be measured and how. Some organizations cover all employees

with a single pay for performance plan to unify the workforce in pursuit of common goals. Other

organizations limit performance-based pay to those employees with direct responsibility for the

organizations core functions and results. For example, a pay for pe rformance plan might be

limited to front-line employees whose work is directly linked to mission accomplishment


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because their work is more readily measured (and of more immediate importance to the public)

than work performed by employees whose activities indirectly support organizational goals. In

other cases, performance-based incentives may be reserved for those employees at the top levels

of the organization. The logic behind this strategy is that accountability should be limited to

those with the most control over results. In other words, since executives exert substantial

influence over organizational success, they are entitled to significant recognition or blame for

what they do or do not accomplish. In the private sector, Chief Executive Officers often receive

sizable bonuses or performance-based pay increases that are linked to organizational outcomes,

such as attainment of profit or other financial goals. Likewise, in the Government Banks, Senior

Executives are eligible for annual bonuses and pay increases linked to their achievement of

organizational objectives. Limiting pay for performance plans to select groups may enable the

organization to highlight clearer links between employee behavior and outcomes, but doing somay create divisiveness. Depending upon the circumstances, such as whether the dual pay

systems offer markedly different earning potential, coverage may be viewed as distinguishing

between the haves and the have nots, creating some dissension between the two groups. This

is particularly relevant if the benefits provided to one group are viewed as coming at a cost to the

other group.

3.8 Criteria in the pay for performance process:______________________ An essential point to keep in mind is that pay for performance is a powerful tool, which must be

used wisely. The axiom that what gets measured, gets done has particular relevance when

measures are reinforced by monetary incentives. For that reason, organizations must be verycareful when deciding what to measure and reward, because they are quite likely to get what they

measure which may or may not be what they really want. In other words, banks must be sure

they are reinforcing desired behaviors associated with the most critical outcomes and not

encouraging counter-productive responses.


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An effective performance appraisal system requires clearly defining expectations in advance,

while recognizing that priorities may shift along the way. Enumerating specific goals gives

employees a clear road map that they can use to decide how t o allocate their time and efforts.

Some jobs lend themselves more easily to this type of direction, while for others it is more

difficult to specify in advance the precise accomplishments expected since the nature of the work

is more complex or fluid. In these cases, flexibility regarding anticipated outcomes can be

incorporated in the evaluation process. In the meantime, supervisors and employees should

engage in continuing discussions so that expectations can be shared, despite necessary

adjustments. Addi tionally, when circumstances outside the employees control determine

outcomes, comparisons across employees in similar positions may assist the supervisor with

evaluating employee performance. In such circumstances, supervisors subjective judgments

necessarily play a role in evaluating performance. While subjective judgments cause someemployees discomfort, supervisory discretion to evaluate performance is generally not something

that can or should be orchestrated out of the process.

Use of multiple measures

Given the complexity of work, multiple measures are often necessary to adequately capture

accomplishment. To decide what to measure, agencies need to ensure that they focus on

important outcomes without excluding other critical aspects of individual or organizationalperformance. One common problem in this area involves organizations that set quantitative goals

only to find a negative impact on quality because important qualitative aspects of performance

were not included in the goals. In other cases, organizations accurately identified top objectives,

but overlooked subtle, yet important, priorities or activities. For example by focusing employees

attention only on part of a work process, such as timeliness, a bank can unintentionally instigate

cutting corners and unsafe activities, which may serve to speed up the work process production

at an unacceptable cost. While granting flexibility to employees who are pursuing difficult goals

may encourage innovation, safeguards may need to be built in to ensure that necessary steps have

not been inappropriately sacrificed. Additionally, it is important that the reward system does not

undermine desirable aspects of performance, such as teamwork, that may not be explicitly

recognized yet are important to organizational success. In situations that warrant looking at

multiple facets of employee performance, a balanced scorecard5 perspective may prove to be


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very useful. Although notable differences between the private and public sectors impact what

measures would be appropriate, a balanced scorecard approach for the public sector could

include measures such as quantity and quality of output, teamwork, safety, and customer

satisfaction, while focusing attention on the organizations overarching mission.

Alignment of organizational goals and measures

Supervisors frequently derive employees goals, at least in part, from high -level organizational

goals. This cascading of goals is useful for aligning employee efforts with organizational

objectives. To achieve this, employees need to understand how their individual performance

supports organizational outcomes. However, supervisors should also recognize the value of abottom -up approach that gives employees a voice in how they will be evaluated and some

discretion in deciding how best to achieve the results desired. Excessive top-down control of

goals, work methods, and job behaviors may stifle risk-taking and innovation by employees. In

contrast, rewarding an open exchange of information may result in improved organizational

outcomes over time as trust between the levels grows. Further, by aligning individual success

with organizational success, there is a greater likelihood that agencies will be able to encourage

employees to exert effort to achieve organizational objectives in concert with their personal

goals.

Standardized (organizational) vs. tailored (individual) criteria

Choosing between standardized organization-wide evaluation criteria and evaluation criteria

tailored to individuals largely reflects an organizations philosophy regarding the relative priority

of what should be rewarded. Having a clear, overarching mission facilitates the use of standardcriteria. Evaluating everyone against a common set of standards, linked to high level

organizational goals, also serves to focus the attention of all employees on the highest level

priorities. Likewise, using a bank-wide competency model reinforces bank values and promotes

consistency across occupations and organizations. The downside of standardized criteria is that


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with their generality, the evaluation measures may not seem applicable to everyone. For

example, front-line employees typically have a clearer line of sight to accomplishing mission

objectives than administrative employees, who support the mission in a secondary manner. In

other cases, the functions within an organization may be so diverse that it becomes difficult to

use universal criteria. Providing leeway for tailoring criteria may be more appropriate in many

banks. This individuation of evaluation criteria may be by organizational subcomponent,

occupation, grade level, or other categories.

Individual vs. team vs. organizational performance

Similarly, the level at which performance is assessed for award purposes should reinforce thedesired breadth of collaboration, although this must be balanced with the need to be able to

identify individual contributions. It is important to consider whether cooperation should be

encouraged within a discrete work unit or across a broader context, such as organizational

components. For example, when employees work independently, it may make more sense to

evaluate them individually. However, when high levels of interaction and communication are

necessary, it becomes much more difficult to accurately measure the accomplishments of

individual employees. Rewarding only individuals when mutual support helps advance the

organizational goals may discourage cooperation and teamwork, to the organizations detriment.

In other cases, the connection between individual performance and organizational performance

appears relatively clear and individuals tend to provide relatively similar levels of contributions.

In these cases tying individual fortunes to the organizational outcomes rallies the entire

workforce to work together. Discord may result if some people do not pull their weight, although

peer pressure can often remedy these situations. Organizations may also wish to supplement

group measures with individual measures, such as teamwork, to recognize personal efforts.

However, the best approach may be to include both specific individual goals and a broader view

of contributions. Along these lines, the Government Accountability Office recommends linking

individual performance with organizational goals to identify how daily activities eventually

support high-level organizational goals. Maintaining the connection to the bigger picture

provides employees with a bit more context than if they are only aware of their individual roles.


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The link to broader goals also enables consideration of additional behaviors that may not be

explicitly described in a performance agreement yet are important to the organizations overall

functioning. Ultimately, what works best in an organization will depend on the nature of the

workers and the work, as well as the corporate philosophy. Some work groups are relatively

homogeneous in their level of contributions, while the performance in others varies so much that

individual differences should be recognized. Some work is clearly independent, while other

projects require extensive collaboration and teamwork. Finally, some organizations want to

promote active cooperation, while others may encourage a healthy level of competition.

Possession vs. demonstration of competencies

Pay for performance plans may also vary depending on whether they reward possession of

desired competencies or require the actual demonstration of these competencies. Some banks

forgo an outcome-oriented evaluation and instead focus on the development of competencies.

For example, an organization may reward employees for possessing or obtaining certain

competencies that the organization values because it believes it is useful to have staff on-board

who possess certain capabilities. As a result, once the employee has been certified as possessing

certain competencies, the bank may increase the employees pay whether or not the employee is

called upon to demonstrate these competencies during the performance appraisal cycle. Other

banks compensate individuals only for the time that they demonstrate the competencies. Banks

may take this strategy a step further by focusing on demonstrated competencies in relation to

organizational goals and performance. Under this strategy, employees must demonstrate that

their increased competence enables them to perform more effectively to support achievement of

organizational outcomes. For this system to be effective, an organization must clearly identify

the competencies that are required for optimal organizational performance and measure

employees poss ession of those competencies. If done properly, advantages of this approach may

include the opportunity for ambitious employees to be compensated for developing themselves,

which in turn benefits the organization by increasing the depth and breadth of its talent pool.

Consequently, career progression can be tied more closely to competencies that support

organization goals rather than to tenure.


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Short-term vs. long-term goals

Performance appraisal cycles in the banks are typically one year in duration. As a result, short-term goals may be more easily assessed than long-term projects, which may cross multiple

assessment cycles. For assessments to be fair, the life cycle of projects should be taken into

account and proper credit given for progress towards the end goal. Further, complex projects can

usually be broken into intermediary steps to evaluate progress against these milestones. Taking

both short and long perspectives into account helps ensure that employees on the extended

projects will be rewarded for their achievements to date and not forced to wait until project

completion years down the line. Without intermediate reinforcement, employees might gravitate

toward quick-return assignments and neglect the more challenging endeavors.

External constraints

A common frustration for employees involves the inability to control all of the factors that affect

their performance and results. These include changing priorities; supervisor-controlled work

assignments and resources; geographical variations in workload or other conditions; and accessto equipment and information, as shown in the following examples. An employee may work

diligently toward a goal, only to have the priorities shift just before project completion.

Supervisors also exercise control over some of the parameters of what an employee can

accomplish by allocating job assignments and training. Another external variable is location,

which often drives workload and therefore, could be factored into performance-based pay

decisions. For example, one location, such as a large business hub, may have a greater volume of

traffic than a smaller rural branch. Similarly, the work done at a headquarters office is usually

quite distinct from that done at branches. The unavailability of needed equipment or information

can also prevent employees from working at their optimal level. Therefore, many of the variables

that determine individual productivity operate outside of employees control. Although some

banks may focus exclusively on outcomes, others may decide to keep external constraints in

mind when making pay and award decisions to avoid penalizing high performers who are


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negatively impacted by circumstances beyond their control. At a group level, work units are

sometimes dependent upon another unit for a critical step in the process and cannot proceed until

that entity completes its role. There may also be uncontrollable external events that hamper

successful completion of objectives, such as budget limitations or technical failures. Therefore,

individuals or groups may find that they have worked hard and have done everything they can,

but are impeded by factors outside their control. Again, in these cases, raters must consider how

to evaluate performance whether to rely entirely on outcomes or to give at least partial credit

for efforts keeping in mind that it can be quite de-motivating to employees if the rating system

is so rigid that it does not take external factors into account.

4. Recommendations for efficient and effective pay for performance

4. 1 Banks must tailor pay for performance systems to their mission andenvironment:

Pay for performance focuses attention on the monetary aspect of the relationship between

employees and organizations. However, the greatest changes that pay for performance effects in

individual and bank performance are probably those stemming from increased emphasis on

defining and communicating goals to employees, providing concrete feedback, and heightening

employees sense of responsibility for contributing to well -defined portions of their

organizations goals. To ensure that employees efforts are ali gned with banks priorities,

supervisors need to take the bank s unique goals, needs, and environment into account when

defining employee objectives.


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4.2 For pay for performance to be effective, banks need to meet certainrequirements:

These include:

A culture that supports pay for performance; A rigorous performance evaluation system; Effective and fair supervisors; Appropriate training for supervisors and employees; Adequate funding;

A system of checks and balances to ensure fairness; and Ongoing system evaluation

While many of these requirements relate to effective human resources management practices that

are important to any organization, pay for performance further increases their necessity.

Attending to these human resources management issues provides agencies with a much greater

likelihood of achieving a fair and effective pay for performance system.

4.3 To make pay for performance successful, banks need to make a substantialinvestment of time, money, and effort:

Pay for performance systems require substantial initial and continuing investment. These

resources must be carefully spent on building and maintaining a system that suits the banks

mission and objectives.


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4.4 Performance evaluation serves as the foundation of a pay for performancesystem:

An effective performance evaluation system is a fundamental prerequisite of pay forperformance. Agencies must be able to communicate with employees regarding what the

organization values and how it will accurately measure employee contributions to these goals.

Without this information, agencies would be unable to appropriately distribute performance-

based pay increases and bonuses.

4.5 Agencies should select supervisors based on their supervisory potential,

develop and manage them to function as supervisors rather than technicians or

staff experts, and evaluate and pay them based on their performance as

supervisors:

Because supervisors play a pivotal role in pay for performance systems, it is essential that they

be able and willing to perform the important supervisory functions inherent in performance-

based pay systems. To achieve this goal, agencies must select, train, and pay supervisors basedon their demonstration of qualities that are suited to a pay for performance environment.

4.6 Communication, training, and transparency are essential elements of agood pay for performance system:

The key to the effectiveness of a pay for performance system rests with clarifying the mission

and objectives of the organization, how these are linked with employees efforts, andconsequently, what competencies, behaviors, and/or outcomes the organization values. Open

communication regarding goals and progress; training in the philosophy and mechanics of the

pay system; and transparency regarding how the system operates can mobilize the workforce in

the desired direction.


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4.7 Checks and balances are necessary:

Banks can greatly facilitate the real and perceived fairness of the pay system by building in

appropriate checks and balances. Although knowledge about the banks pay for performance

plan and transparency regarding its outcomes can help supervisors and employees understand

how the system should work, other mechanisms to ensure fairness are needed to further raise and

maintain confidence in the system.

In this report, we have discussed requirements of a successful pay for performance environment.

Table 2 summarizes the characteristics that organizations should demonstrate to most effectively

support pay for performance. However, taken as a whole, these qualities represent an ideal

setting that exists in few, if any, organizations. Given that organizations cannot (and should not)

wait for perfect circumstances to begin to implement pay for performance, agencies should keep

these features in mind as a goal, and work towards them.

Fortunately, if done correctly, implementing a performance-based pay system can also help

agencies move in the direction of these critical success factors if they understand how pay for

performance can help them reach these goals. Banks management need to understand that they

have enormous discretion and can select from a multitude of options to build a performance-

based pay system that will work well under their unique circumstances. The greatest challenge

for many decision makers is likely to be making the choices that will best enable their pay

system to help them to achieve their goals.


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5. Conclusion:___________________________________________________ To ensure that the pay for performance system is operating as intended, the banks should conduct

ongoing data analyses to evaluate the systems impact. These analyses should provide a

comprehensive perspective on the effects of the pay system at various points in time, comparing,

for example, pre-implementation measures with data for the system as it progresses and when it

becomes firmly entrenched in the organizational culture. The focus of the analyses will vary

according to organizational emphases, but issues such as fairness, cost, and the distribution of

funds should be relevant to every bank.

At a minimum, organizations should conduct some basic analyses of data from the human

resources management data files to ensure that the system is operating in a fair, efficient, and

effective manner. For example, the banks should compare performance ratings, salary levels, and

pay increases by various demographic groupings, while keeping other factors in mind, such as

employees tenure, education, and job series. They should also monitor the frequency (as a

percentage of the population) of bonuses or increases and their amount to ensure that thedistribution is consistent with organizational philosophy. Finally, banks need to develop

objective measures to help examine the impact of the pay system on outcomes.

Clearly, no one model exists for how to design, implement, and operate a pay for performance

system. While banks can learn from the experience of others, ultimately, each organization must

consider the issues carefully in order to make the best decisions given their unique

circumstances.

Although paying for performance requires attention to an extensive list of serious issues,

considering them in advance of implementation enables banks to lay the groundwork for a

successful performance-based compensation system. Since many of the decisions are

interrelated, it is critical that they be considered simultaneously. While one best answer may not

be readily apparent, banks must consider the best information that they can gather during the


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design phase. Upon implementation, an ongoing effort to evaluate results and adjust the system

as necessary should be viewed as a logical and critical aspect of supporting the system.

Change especially change as momentous as introducing pay for performance creates stress in

an organization. When banks embark on significant changes with low levels of trust in place,

employees frequently experience anxiety about how they will be impacted. However, properly

building, implementing, and operating a pay for performance system can actually serve as a tool

for developing trust between supervisors and employees. Although such initiatives may

encounter resistance in the initial periods but with time most of concerns regarding pay for

performance will be proven unfounded as employees became comfortable with the new system.

Therefore, the fear of the unknown may be overcome if the right approach is taken. The

problems associated with the pay for performance in public and private banks are making these

organizations face difficulties in making ultimate financial growth. If the banks overcome theseproblems, then it is possible to be internationally competitive banks in the competitive globe. So,

the Human Resources Division as well as the top strategic level management should find out

underlying causes of weaknesses related to of the banks and to be more supportive to eradicate

the problems for achieving the highest position in this industry in the country at least.

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