has pay for performance had its day?

Continuation of the previous blog....

In practice, this approach is unworkable except in the smallest companies. In larger ones, top managers are generally too far from the places where ideas are generated to be effective judges and motivators. Weak ideas may get too much attention because the boss happens to like them, while great ideas can end up outside the business as frustrated employees leave. Moreover, if the trade-offs between growth and performance are pushed upward, the result can be bottlenecks at the top of the organization and frustrated senior executives who are overloaded with information but still need to make timely decisions.

The better practice is to have managers at many levels pursuing new business ideas and better current performance simultaneously. This approach keeps innovation alive and ensures that new ideas are linked to the company’s customers and markets. But how can top management motivate people at a number of levels to pursue the seemingly conflicting objectives of encouraging future growth and, at the same time, improving current performance? How can these people most effectively be persuaded to divide their time between the two

has pay for performance had its day? 3

Of course, not everyone, or even every manager, must allocate time between both. Quite the contrary, the benefits of having some people concentrate exclusively on one or the other can be enormous. To this end, some companies actually put exploratory and current activities in different business units—an approach known as "cocooning."³ But even in these companies, some people need to allocate scarce resources between current and future activities.

Cocooning tends to shift the burden of balancing growth and performance upward: top managers—sometimes CEOs—must select the new ideas that are pursued, drive promising ideas to fruition, ensure that current assets are sweated effectively, and get rid of businesses that have passed their sell-by date. In the extreme version of cocooning, everyone other than the CEO would have only one task: to find new ideas for the company or to expand existing businesses.

Weak ideas may get too much attention merely because the boss happens to like them, while great ideas end up outside the business

My teacher's conviction

My teacher was an unabashed advocate of capitalism, free trade, open markets and has an equally negative view of socialist economic policies and the ability of the state to deliver. To the extent, some of his views seem to be skewed and overboard. But then we do need more people like him. Our country did suffer a lot from socialist state controlled planning and there are still camps that question the need for opening up our economy, liberalization and free trade. So we do need advocates of liberalization, to be aware of the good that it can do us as a nation and more importantly dispel fears about the “evils” of multinationals and “foreign invasions” by big foreign companies- views that are planted and propagated by certain groups even today. But as I said, in all fairness, the views are extreme. He sees no way in which the public sector enterprises have, or can in any way, be profitable and contribute to a country’s economy. This is not all true. Accepted, a lot of PSUs have not done well, are plagued by low productivity and losses and have strong labour unions. A lot of others, on the other hand, did fairly well. BHEL has done impressive work in building heavy electrical, CMC has executed challenging projects in software both within India and abroad.We should remember these when we are critical about such enterprises.

has pay for performance had its day? 3

A simple tally wouldn’t do, since it might be years before an idea’s real value could be assessed. The company would also have to adjust for more elusive factors, such as the willingness of customers to provide information about their preferences. All this is so difficult to quantify that to use formal incentives effectively a company would have to monitor, in minute detail, the way each sales agent actually behaved with customers.

And performance in highly exploratory tasks—biochemical research, for instance, or scenario planning—can’t really be measured at all. Who knows, in advance, which experiments will yield fruitful results or which scenarios will yield valuable insights? Proxy measurements can give a rough idea in some contexts. Management consultants, for example, who often work in teams, use peer observation to assess one another’s ability to come up with new ideas. But few companies have a performance-management system that assesses how well employees deal with growth-oriented tasks as accurately as it assesses their current performance.

Some companies try to get around the problem of measuring exploratory activities by promising a big, one-off bonus to anyone who comes up with an idea that is later commercialized. But these arrangements can prove difficult to operate. In 1964 Peter Roberts developed an innovative socket wrench as an employee of Sears, Roebuck. For the rights to the patent, Sears paid him $10,000, a handsome sum to the 18-year-old inventor. Five years later he sued Sears, claiming that it had deliberately underestimated the tool’s sales potential, which had proved to be in the millions of dollars. Roberts received an award of more than $8 million and, after Sears appealed the judgment, settled for an undisclosed sum.

The problem of rating performance in exploratory tasks makes it hard to design effective financial-reward systems to motivate innovation

The problem of measuring performance in exploratory tasks makes it hard to design effective financial-reward systems that motivate innovation. It is doubly difficult to design incentive schemes that induce people to pay proper attention to current performance as well as exploration.

AIDS

AIDS is a killer disease.India is a victim of this disease.AIDS means Acquired Immuno Deficiency Syndrome.This disease is caused by a virus called HIV(Human Immunodeficiency Virus).The cure for this disease is yet to be found.This disease has posed a dangerous threat to the future of mankind.The peculiarity and strange nature of this disease is that the HIV virus completely damages the immunity mechanism of the human body.Whenever a virus or a foreign body enters the body,the defence mechanism in the white blood corpuscles will fight against it .But in the case of AIDS,the patient can not be helped or cured since the defence mechanism itself is killed by the AIDS virus.

This disease is transmitted from the HIV positive individual to another individual through the blood.This disease is also called as sexually transmitted disease.The people who lead the immoral sexual life become easy victims of this disease.This disease also spreads through the use of infected injection syringes.The dangerous feature of this disease is that the virus is dormant or less active for a longer period.The external symptoms are seen only when it reaches the advanced stage.Now-a-days clinical tests are available for the early detection of the disease.

Everyone should know about this disease.There is no need for panic.If one leads the disciplined life he can prevent the disease.We should be careful when we donate and accept blood.This disease does not spread through handshake,mosquito bite orby touch.

It is reported that about 40 lakhs HIV positive cases are found in India.As there is no medicine for this disease ,prevention is the only cure for this.So the State and the central governments are making use of Radio,Television,and other mass media for creating the awareness among the people.To focus the attention of all the nations in the world,the UNO has declared December 1 as the World AIDS day.We should not segregate or ill-treat the AIDS victims.We should train the younger generation of this country to prevent this disease.Let us make a AIDS free world today.

has pay for performance had its day?2

Encouraging growth and performance

With few exceptions, corporate incentive schemes encourage managers to concentrate either on executing current tasks or on developing and implementing new business ideas to fuel future growth, but not both. Most such schemes are designed to motivate current performance: retail organizations, for example, tie rewards to current sales, manufacturing companies to production costs and volumes. In such companies, the need to meet performance targets leaves people with little time to innovate. As one harried manager in a global industrial company put it, "We are very welcome to do innovative stuff—after 11:30 PM."

Incentive mechanisms emphasizing current performance tend to be more common because measuring the familiar tasks that boost it—the exploitation that leverages existing competencies—is so much easier than measuring the exploration and experimentation that may lead to future growth.So, for example, a company that wants to motivate its sales representatives to sell more goods or services will track how many contracts its agents close, adjust the scores for differences beyond their control (such as the number of customers in each area), and reward them accordingly. Effort and score are usually clearly linked, so the company can expect agents to work hard if high scores are well rewarded.

But the achievements of these agents would be a lot harder to measure if the company wanted them to bring back ideas for new product offerings based on the changing needs of its customers.

Personality

A Google search for “personality test” gives 4,190,000 results and most of them are websites where you can go and take an online test which will tell you your personality type. While many tests were based on Jung-Myers-Briggs typology (the one we did in class) and some on Type A personality test I was amazed to find few websites who determined your personality depending on the colors you choose. For example, www.ColorQuiz.com offers a free five minute personality test based on decades of research by color psychologists around the world. There are no complicated questions to answer you had to simply choose colors with a click of the mouse and they will tell you your personality traits. This test is based on the work of Dr. Max Lûscher and is used worldwide, most notably in Europe, by psychologists, doctors, government agencies, and universities to screen their candidates. Since the 1950's the test has been given to hundreds of thousands of people.
The Myers-Briggs Type Indicator (MBTI) assessment is a psychometric questionnaire designed to measure psychological preferences in how people perceive the world and make decisions.
The original developers of the personality inventory were Katharine Cook Briggs and her daughter, Isabel Briggs Myers. They began creating the indicator during World War II, believing that a knowledge of personality preferences would help women who were entering the industrial workforce for the first time identify the sort of war-time jobs where they would be "most comfortable and effective". The initial questionnaire grew into the Myers-Briggs Type Indicator, which was first published in 1962. The MBTI focuses on normal populations and emphasizes the value of naturally occurring differences.

The Relationship Manager

Being a marketing manager of a company, I consider, is a great boon to me. If we do not "think differently", we cannot make a living. But the process of thinking differently is something which I thoroughly enjoy. Which I relish, rather. I cannot see myself doing any other job so well. Initially, I used to brood about my job to my friends and family as it was a boring job. What more can you expect to do after just passing out of a business school?! Obviously, they posted me as a "Relationship Manager" which has more to do with interacting with people and understanding nuances of the business. I was a bit bored with the job initially. But I could not express my feelings to others. I had to impress everyone in the office, my superiors in particular, for which I had to fake that I enjoyed my job. All this drama was happening for about four months after I joined the company..till the day my boss called me and told that I had performed well as a "relationship manager" and that they decided to make me the marketing manager of the firm. It was obviously coupled with a higher pay, but what made me more happy was the fact that I would love my job from now on. I would be able to use my creative skills in my job which I honed in my B school when I specialized in "Marketing". So keep visiting my blog to know about my experiences as a Marketing Manager :-)

Has pay or performance had its day?

Key point of my posts on this topic is 

The way to get your employees to focus on both the present and the future is to adjust your culture and to weaken your financial incentives

Pay for performance has these days achieved the status of a management mantra. A generation of executives, motivated by performance-measurement systems linking their actions to results and, ultimately, to compensation, has embraced the creed and practice of making assets "sweat." To continue flourishing, however, companies need to innovate as well as to exploit their existing assets. Yet most find it very hard to motivate their people to develop new business ideas and, simultaneously, to manage current performance.

The natural reflex might be that people should receive higher pay for innovating effectively. But our research¹ suggests otherwise. Surprisingly, the secret of persuading people to focus simultaneously on developing new businesses and managing current operations may be to rely less on pay for performance. In fact, companies that achieve both objectives de-emphasize performance pay or use it in a more nuanced, less intense manner. Crucially, they combine it with an unusually inclusive culture. In these companies, employees feel that their interests and those of the business are much the same, so they naturally try to do what is best for its current and long-term welfare, just as they do for themselves in their personal lives. Pay for performance may still have an important job to do in such a culture, but as a supplemental boost rather than a primary driving force.

Unemployment

The problem of unemployment is soaring everyday.About fifteen crores of people are unemployed in India.To be unemployed,when one is worthy of being employed,is a tragedy in his life.The causes off Unemployment are many.The rural unemployment is due to our dependance on monsoons for agriculture.India is basically an agrarian country.Industrial Unemployment is because of our defective planning.India is poor in executing the plan.Educated unemployment is caused by our defective system of education.

The British rule in India destroyed our village industries.Moreover the education system started by the foreign rulers was to produce only clerks.Another important reason for unemployment is the rapid increase in population.So certain things are to be urgently done to tackle this problem.Our education should be practical and job oriented.Secondly population growth should be kept under control.Thirdly our plans and schemes should be employment-oriented.Lastly educated youth should be given loans to become self-employed.More cottage industries should be setup in rural areas.The central and State governments have taken many steps to solve the unemployment problem through Five year plans and twenty point programmes.Jawahar employment scheme is meant for rural unemployed.Nationalised Banks have come out with loan schemes for educated youth.Presently job oriented courses are offered through vocational Education.Abundant man power is a great blessing to our country.If we exploit it fully,our country can become one of the super powers in the world.

stock options 4

Sorry for not finishing my post about the stock options. Had been busy with office work.. So here i go...final post on this topic..

3. Favor the grant of restricted stock over stock options

As noted, indexed stock options offer one way to distinguish between value created by external forces and value arising from individual performance. But this solution is only partial. Indexed options can still motivate executives to pursue interests that are unlikely to maximize shareholder value.

One answer would be to replace stock options with restricted stock, granted under conditions relating to executive tenure and performance. By requiring executives to invest some minimum proportion of their wealth or multiple of their salaries in the stock of the companies they run, boards can ensure that they will care about a sustained drop in share prices. Many companies, including Citigroup and Bank One, have introduced such rules.

4. Restrict the timing of stock sales

Boards can also restrict the sale of a significant portion of a CEO’s stock awards for a period of, say, two years beyond the end of his or her tenure. This would ensure that CEOs focus on the creation of long-term value and not on short-lived bumps in stock prices. It would also deter CEOs from leaving unpleasant surprises for their successors and give them more incentive to orchestrate or facilitate their replacement by strong ones.

5. Limit the potential for hedging strategies

Senior executives have many ways to hedge their holdings in the shares of their own companies. From the executives’ perspective, doing so might seem to be a sensible way of diversifying a portfolio. But this course poses a danger because it can, without the shareholders’ knowledge, limit the real exposure of these executives to the consequences of their own decision making. They could, for example, hedge by taking short positions in other companies in the same sector, thus offsetting part of their holdings.

Since there are many ways to hedge, it is difficult to make it impossible for executives to do so against the possibility of a drop in the value of the stock of their own companies. To provide the greatest transparency, boards might consider asking executives to make regular disclosures of their holdings in the industry—or indeed all of their investment activity—as a deterrent to egregious hedging practices.

Recent accounting scandals have given companies an opportunity to rethink stock options and their ideal role in aligning the interests of management and shareholders. The principles described here are not a comprehensive solution to the questions surrounding the use of stock options, but as a point of departure from earlier practices they might help balance the interests of executives with those of the companies and the investors they serve.

I hope this concept was clear and i have done justice in putting this across to you!! :-)

stock options 3

2. Minimize incentives to alter the company’s risk profile

Investors have discovered that executives of the companies whose shares they own have ample opportunity to affect share prices by managing in ways that aren’t necessarily in investors’ best interest. Increasing the financial leverage of a company or the degree of business risk it bears are two prime examples.

Consider the situation of a CEO who holds a substantial number of options that are in effect worthless because the share price has fallen significantly below the "strike" price at which he or she can exercise them. If there is little likelihood that the share price will rise sufficiently, the CEO might well consider undertaking risky acquisitions or new projects that could increase the expected volatility of the stock price and restore the options’ value. All approaches to valuing stock options agree that increasing the volatility of the underlying stock price boosts an option’s value—because as share price movements increase, so does the probability that the stock price will exceed the option’s strike price at some time during the option’s life.

The CEO faces a limited downside; the options were worthless to begin with, and no matter how far the stock might plunge, they can’t become any more so. He or she has nothing to lose and everything to gain from greater volatility—which, however, increases the potential magnitude of downward share price movements and may therefore introduce a degree of risk that many investors would neither anticipate nor welcome. To guard against such circumstances, the board’s best response might be to reduce the weight of stock options in the CEO’s compensation

getting what you want with stock options 2

This post is my continuation to the previous post on getting what you want with stock options..

The change, by itself, won’t make it easier for executives and boards to manage compensation. For a start, treating options as expenses opens up another arcane accounting debate: how to calculate their real cost. Moreover, managers must continue to evaluate the desired mix of cash, restricted stock, shadow stock, options, and other such mechanisms, the strategic implications of these mechanisms, and their effect on an organization’s ability to attract executive talent. As the income statements of many companies begin to reflect, for the first time, the true cost of options, senior executives and boards should take the opportunity to rethink this approach to compensation in light of five principles that would help them align more closely the role of options as managerial incentives with the interests of the shareholders.

1. Explicitly tie compensation to individual value creation

In case after case, investors have seen executives reap extraordinary rewards tied to share price increases that had little to do with management and everything to do with factors beyond its control, such as interest rate movements and changes in macroeconomic conditions.

In the 1990s, market and industry factors drove some 70 percent of the returns of individual companies

Since standard stock options don’t differentiate between value created by external factors and individual performance, investors may be shortchanged and CEOs may be rewarded regardless of merit—as happened during the stock market run-up of the late 1990s—and top-performing CEOs may be penalized if their tenure coincides with a bear market. Indeed, McKinsey research shows that from 1991 to 2000, market and industry factors drove about 70 percent of the returns of individual companies, company-specific factors only about 30 percent.

One way to home in on the unique value an individual creates is to strip out the effect of factors outside the control of executives as well as the return on equity expected by shareholders. What remains—reflecting improvements in performance or changes in expectations for which the executives were themselves responsible—should be compared with the achievements of their peers. In general, executives ought to be held accountable for their ability to meet the shareholders’ expectations as defined by the cost of equity. In addition, they should (and, presumably, would wish to) be rewarded for any individual value creation and penalized for any individual value destruction.

Indexed options can be a useful tool here. Unlike standard options, indexed ones make it possible to benchmark an executive against a set of his or her peers. Of course, making the right selection of peers is crucial: in the few cases in which indexed options have been employed for this purpose, their impact has been diluted by the use of too lenient or broad a definition of the peer group.

Stay tuned for more on this topic

getting what you pay for with stock options

Today's topic is ging to be 'Getting what you pay for with stock options'

Companies now have an opportunity to rethink their use of stock options so that they serve shareholders as well as executives.

Executives can no longer think of stock options as a free ride. The exodus of investors from equity markets and the accounting scandals that toppled Enron and WorldCom have made scores of blue-chip companies—Coca-Cola, General Electric, and Procter & Gamble among them—announce plans to account explicitly for the cost of the options they use to compensate executives and other employees. In November of 2002, the International Accounting Standards Board published a proposal to require all companies to do the same. In any case, rather than burying options as a footnote in financial reports, more and more companies will now report these payouts in the same way they do office rents, salaries, and other business expenses. Such accounting changes are unlikely to harm stock prices, and over time this healthy standard of disclosure should spread throughout the economy, thereby providing investors with clearer and more complete information.

workforce management

we are still dealing with the problem of workforce management in my blog...

While a fair number of software firms offer customized solutions for the problems of managing a workforce, many such applications are not yet commercially available in off-the-shelf configurations. That should change within 12 to 18 months. So far, niche players and providers of customized services have successfully targeted specific industries and functions—training and development, the staffing of projects, and retention planning. But we believe that the larger enterprise resource providers might be better placed to develop or acquire applications for human-capital management.

Implementation challenges are sure to abound, but as these are worked out, managers will find that they have powerful new people-management tools. Much as customer-relationship- and risk-management applications enabled sales managers and senior financial executives, respectively, to control customer relationships and risk profiles from the desktop, the next generation of human-capital-management software will let senior managers use human-capital data to drive constant gains in productivity.