The Concept of Pay by Performance – Part2

The Concept of Pay By Performance

Coach Cahyadi Kurniawan

Coach Cahyadi

…To make a performance scheme successfully, the company should have a solid measurement which is based on RESULT oriented, as only result can generate those extra cash to pay for the performance bonus.

Competency and process should be appraised for adjustment of the grading which will reflect on the salary adjustment, but cannot be regarded as performance pay.

Pay by Performance

Few seminars were hold on this topics, but most company only sent their HRD to attend and not the key CEO who has the authority to make change, therefore only few company has really taken pay by performance seriously for implementation.

Hindrance to implement pay by performance:

  1. Difficult (and why waste the time?) to set up measurement on each job level, without an objective (but never can achieve 100%) measurement it will be difficult to implement pay by performance, as it will be perceived as bias, subjective and even worst foster company to politicking between group.
  2. Afraid up to frightening as with the performance rewarding scheme, somebody will earn (if they are good, result is good and momentum is good) so much that it will up set the whole team, even to the top management. Therefore most of the scheme ends up putting a ceiling or cap which deteriorate the whole spirit of pay by performance.
  3. Top management reluctant to implement, as it will some how take away part of their authority to decide the “fate” of his/her subordinates, moreover if Top management is happy with the status quo then WHY CHANGE?

Without a clear communicative measurement and reward system, it will end up that the company will separate into two groups, Management and Union, and more people like to join union as they perceive union will take care of their future not the management which represents the company.

Once both parties do not trust each others, it is difficult for the company to grow and thrive as all energy will be absorbed just to solve internal problem and with the internal company politic growing, there will be vested party to take advantage in this situation.

The Right Rewarding Scheme

A right performance rewarding scheme has to promote team work, deem to be FAIR and transparent, understandable to the employee, but if we just assign a complicate rewarding scheme onto the company bottom line, it will not work, as it is a human nature, they will only concern (either attractive or fear) if they are measured on the factors which are more or less they can control to influence. In the other word, different job will have a different  parameter for measurement.

Example:

A local salesman for sheet fed will not interested and cares about the bottom line of the total result in HQ.

Same with a shop floor will never understand that the company does not make money because he/she works hard according to instruction and he/she never has the authority to decide how much his/her boss spends

Therefore the rewarding scheme should be designed as such that IT IS VISIBLE (most people are short sighted), ACHIVIEABLE (when individual and team perform synergy) and SIZEABLE (create a personal impact!)

Seeking for the Ultimate Perfect Performance Rewarding Scheme

No scheme is perfect, as business situation and environment keep changing, therefore the CEO (or board) has the right to alter the detail scheme according to company target and business situation, but spirit has to remain.

The scheme works for a certain period (1 years) and only will be calculated once the audit company figure is announced, finally the CEO (or board) should justify whether it is fair according to the spirit or not.

The spirit of performance reward is based on Contribution, of which contribution can be divided into:

  1. Add Value:Increasing of sales through the combination of volume, price improvement, while price level is more or less dictated by the market price and level of competition. It needs a continue innovative strategy to sustain this value added
  1. Cost Reduction:Cost is a more controllable operational issue, it is more internal rather than external and there are so many cost aspects, which can be targeted by reduction:Raw Material Cost (RMC)the biggest portion in the ink industryReduction of mistake made during process (reduce hold rate)
    Reduction of Stock level (money cost in Indonesia is high)
    Reduction of Debtor day (interest rate is high in Indonesia)
    Reduce Wastage during production
    Reduce, slim line and simplify Administration process

Of course, cost reduction is a hyperbole function and only achieve up to an optimum point, one it achieve is asymptote trend, and we have to move the next level of cost reduction. Most important in a mature industry, low cost with operational effectiveness is the key point to out beat the competition.

Measurement parameters

To make a performance scheme successfully, the company should have a solid measurement which is based on RESULT oriented, as only result can generate those extra cash to pay for the performance bonus.

Competency and process should be appraised for adjustment of the grading which will reflect on the salary adjustment, but cannot be regarded as performance pay.

Here are some parameters which will impact the financial result of a company:

  • RMC  (Raw Material Cost)
    Consists of landed cost calculation and wastage included during handle and manufacturing process (2%, 5% up to 7%)
  • RMP (Raw Material Profit)
    RMP is equal to Sales – RMC, this parameter is used for the sales force to quickly decide whether the business is still feasible or not, RMP does not take any production, delivery cost into account, it takes merely the RMC into consideration therefore, a minus RMP surely will make a lost!
  • RMP %
    An acid test for the field force whether to take the order or not, it depends on business segment, production process and volume, a trading product does not need a high RMP % as it has no production process involved, a huge volume of product is worth to take if the RMP % is lower than those color matching spot color with limited volume.
  • O.I (operating Income)
    Before tax and financial exchange income/lost
  • Debtor days
    Average debtor days compared to sales
  • Stock days
    Average stock keeping days compared to RMC of sales
  • Creditor days
    Average credit financed by external supplier compared to RMC
  • TWC (Trade Working Capital)
    TWC is equal to Debt – Credit + Stock value
  • Others Income/Expenses from non operational (NOIE)
    Disposal of waste, fix assets, good will, income from port folio etc

Download the Table for Different Job Different Measurement

– Coach Cahyadi –

ActionCOACH South Jakarta business coaches  guide businesses in selecting and implementing effective and cost-efficient marketing strategies to boost results with a proven 17-week guarantee. For more information on business coaching, visit www.actioncoachsouthjakarta.com or  call 021 2567 5775 .

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Related Article(s) :

  1. Price Increase : Study Case in The Ink Industries
  2. Bagaimana Menetapkan Harga untuk Produk Anda

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Local website : http://www.actioncoachsouthjakarta.com

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