Answer to Question 4

Strengths and Weaknesses of CHNGs Incentive System

Brief Overview of the Incentive System
CHNGs has a bonus scheme in place, which is based on the total companys wages and salaries,
as its key incentive method. CHNGs incentive system is established on the basis of performance
appraisal. Group company subsidiary company of the year award given amount calculated
according to the following rules:
For performance appraisal of 100 points: the total prize money of wage and payroll full
subsidiaries 50%
For performance appraisal of every additional point above 100 points: addition of 0.5% of the
total amount of wages and salaries to the total award amount
For performance appraisal of every point below 100 points: deduction of 0.5% of the total
amount of wages and salaries from the total award amount
Therefore, the maximum bonus amount for a subsidiary company is 65% of the companys the
total amount of wages and salaries.
Based on the rules, a company-wide bonus pool is created which is allocated on the following
basis:
-

Individuals receive bonus as per their individual organization level and performance

ratings
For individual organization level Points is given
For performance rating superiors, peers and subordinates rate individuals of their
department in four performance areas with varying weight, both by the performance areas
and the rate givers organizational position. The weights are as follows:
Performance Criteria:
Ethics (20%)
Effort (20%)
Capability (20%)

 Performance (40%)
Rate provider
Superior (50%)
Peers (30%)
Subordinates (20%)
Calculation of General Managers:
Companies meeting all four criteria very well: bonus point of 2.5- 2.8 greater than the average
company employees bonus amount
Companies meeting all four criteria as per standard: bonus point of 2.0- 2.5 greater than the
average company employees bonus amount
Companies failing to meet all four criteria but profit generated: bonus point of 1.5- 2.0 greater
than the average company employees bonus amount
Companies failing to meet all four criteria and no profit generated: bonus point equal to average
company employees bonus amount
A second incentive system of annual compensation increases is in place paid out 65% as
increases in monthly salary and 35% as one-time bonus.
Strengths
1. Incentive based on performance
As a result of basing bonus payments on individuals performance, employees are likely to be
driven to perform better and enhance their organization level. It can promote a sense of healthy
competition among employees. There is a positive correlation between effort and performance
and employee retention is likely to be enhanced since those who perform best, being rewarded
for their efforts, are more likely to stay. . They can also serve to increase employees'
identification with a company and align them with its operational objectives giving them a
vested interest. By placing the highest weight in performance out of all the four criteria,
employees are made to drive up their efforts towards the companys success.

2. Objective Standard for evaluating subsidiary company managers

By implementing objective standards for evaluating subsidiary managers, CHNG has brought
managers performance under scrutiny as well. It puts the managers in equal line with the rest of
the employees demonstrating the parent companys impartiality and commitment to equality.
While it shall go onto make managers more concerned and careful about their performance,
efforts and dedication towards achieving the organizational objectives, it also shall have a
positive effect in the minds of other employees about the organization they work for. It suggests
a level of trust between employer and employee and enhances the view of a shared culture.

3. Comprehensive rating system

The bonus scheme of the incentive system is highly comprehensive in nature. It takes into
account multiple factors, which includes: Ethics, Effort, Capability and Performance for giving
out individual bonus. The criteria are given varying weights as per their significance. Even those
who provide the ratings are given varying weights as per their significance and rationality
coming with the position they hold. Besides individual performance, the entire organizations
performance is brought under the evaluation system. This can strongly boost up team work given
the organizations performance is a result of such. This system results in an objective design of
the bonus scheme. Also, the existence of a bonus pool brings everyone closer to the incentive
system and work together for it.
4. Managers bonus link to employees
Having managers bonus amount linked to that of employees will make them more committed
towards improving their subordinates performance. The higher the average employees bonus
higher will be the amount of their own bonus given they fulfill the evaluation criteria
requirements. This will push up overall organizational performance.
5. Transparent and fair

Through the detailed and objective calculation process of the bonus amount and inclusion of all
the members of the organization, the incentive system appears to be fair and transparent. This
can have significant positive impact on the motivational level of employees and make them more
committed towards the organization, and take pride in it.
Weaknesses
1. Insufficient bonus amount
Despite the fairness and objectivity of bonus calculation, the bonus amount in itself is quite
small. This can act as a negative aspect since a poor bonus amount may not be able to drive up
employee motivation adequately.
2. Monetary incentive only; lack of motivation
The incentive system comprises of only monetary incentive measures. According to most
motivation theories like Herzbergs two factor theory, Maslows hierarchy of needs monetary
incentives are not the most effective of drivers of employee motivation. Also, Monetary
incentives tend to be most effective when there is a clear and immediate causal link between an
individual action and a desired outcome, and when the desired outcome is easily measurable. The
ambiguity of how much performance level should generate the desired bonus level can limit
employee performance growth.
Furthermore, there is no other incentive at work for the poor performers who will fail to earn as
much bonus given their lack of relative expertise. Adequate training and education system and
other non-monetary incentives could work better in incorporating and aligning everyone with the
organizations beliefs.
3. Team work jeopardized
An individual performance oriented bonus-scheme can intensify competition given the limited
bonus pool, and hence jeopardize team work. Individuals might be more concerned with own
performance and try to obstruct others growth as this would add more claimants to the limited
bonus pool
4. Constraints to the incentive system

The incentive system in itself is also constrained. The increase in total compensation cannot
exceed the increase in the subsidiary companys profit. While handing out such benefits can be
expensive to the organization, its existence can drive down motivation especially when such a
mismatch occurs as employees might feel betrayed.
So it can be deduced that CHNGs current incentive schemes has various strong points but
nonetheless are not without weaknesses. This incentive system is good given: it can improve the
whole performance of the company, to strengthen the group's cooperation. It emphasizes the staff
qualifications, experience and education, encourage employees to the company's long-term
success as the goal. However, this system also has obvious shortcomings, it does not attach
importance to personal achievement award, it may lead to the lack of enthusiasm of the staff. The
lack of diversity in the incentive system is also its major weakness since there are no nonmonetary incentives at play.
Brief ov:
CHNGs incentive scheme comprises of a bonus scheme and an annual compensation increase
scheme. The incentives are all monetary in nature and are given out based on a strict evaluation
method.
CHNGs has a bonus scheme in place, which is based on the total companys wages and salaries,
as its key incentive method. CHNGs incentive system is established on the basis of performance
appraisal. The main characteristics of its incentive system is: (1) the bonus is calculated on the
basis of the company; (2) it uses four performance metrics: ethics, effort, ability and
performance, with different weights assigned; (3) Evaluation is carried out by supervisors, peers
and subordinates, and assign different weights; (4) A separate bonus distribution exists for
managers.
A second incentive system of annual compensation increases is in place paid out 65% as
increases in monthly salary and 35% as one-time bonus.