2. Incentive, compensation, and performance measurement systems are a common way

Question

2. Incentive, compensation, and performance measurement systems are a common way in which organizations try to enhance their overall performance. Drawing on your readings and our class discussions:

MGT303 EXAM POOL QUESTIONS

Describe at least five key challenges to designing, changing, and implementing incentive, compensation, and performance measurement systems.

UMass needs to raise more than $100 million funds continued expansion and upgrade of the campus, including the construction of a new science center. The Development Office plans to hire 15 members of the Class of 2015 to help raise this money. These 15 new staff members will be assigned to UMass’s various Colleges (College of Management, Arts & Sciences etc.) and report jointly to a dean and the head of the university’s development office. Describe the key elements of an incentive, compensation, and performance measurement system for these new development staff members and advise the director of development how he can avoid the perils of “Rewarding A While Hoping for B.” [Note: UMass does need to raise money, but the example here is fictitious.]

Explanation / Answer

Answer:-

For all kind of activity certain proposed amount is allocated. Till activity is completed and post activity completion, associated business process reaches its break even point, it is considered as Cost Center and later post break even point as Profit Center. While in cost centre, certain budgeted amount from proposed amount would be allocated for activity task completion. These budgeted amount will have certain fixed and variable percentage associated with known cost. This cost includes resource cost too.

Resource budgeted cost associated with the activity will define or provide input to resource incentive, compensation and performance measurement system. This is one of the key element for such measurement system as it provides the required cash flow.

With cash flow being known, the next step would be cash allocation among the resources depending upon the resource contribution to the activity. Every activity will go on phases or milestones, this budgeted cash allocation would be further divided across phases or milestones. Few resources would be on one or two phase and few would be across more or all phases or milestones. These resources need to be further divided by their skills contribution to each phase and milestones to arrive at real resource contribution. The resources skill set giving highest contribution or is critical to activity success factor will have highest compensation than the next level resource skill set contribution. Similarly, second level resource contribution will have more compensation than third one, third one more than fourth one and so on.

These data point will also help to develop performance management system. The highest critical success factor resource will have stringent Key Performance Indicator (KPI), second one will have less stringent KPI, third one little less stringency and so on. Also, phase or milestone where all skill set will contribute to overall success of phase or milestone will have certain KPI, so as to have deliverable before time, of good quality (less or zero rework) and no cost overshoot.

The incentive (resource level variable cost) is a lever for resources to go extra mile in their KPI deliverables. Certain percentage of incentive should be there to all resources to go extra mile and delivery early, with less cost and zero rework. Also, certain incentives should also be given to phases or milestones for team work for good quality, before time deliverables, these incentive should be up and above their individual deliverables.

Managers can control the activity with KPI and incentive system. Also, managers can reduce cost by outsourcing low skill set work to external agency while focusing core competent skill set.

The required skill set and associated cash flow will help to prepare resource control system and have oversight in terms of resource compensation, performance management system as well as associated incentive.

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