Performance appraisal, emp turnover and retention

MODULE 5
PERFORMANCE APPRAISAL
1
Mr. Ajinkya Damle
Assistant Professor, MBA@AITM

MODULE 5 : PERFORMANCE APPRAISAL
• Meaning and Process of Performance Appraisal
• Methods of Performance Appraisal
• Essential Characteristics of an Effective Appraisal System.
EMPLOYEE TURNOVER & EMPLOYEE RETENTION:
• Meaning and Strategies to manage employee turnover
• Employee retention : Meaning and retention strategies
COMPENSATION
• Meaning of Compensation
• Objectives of Compensation Planning
• Job Evaluation
• Compensation Pay Structure in India
• Wage and Salary Administration
• Factors Influencing Compensation Levels
• Executive Compensation. 2

• Performance Appraisal is a method of evaluating the performance of
employees in the workplace
• It evaluates both qualitative and quantitative aspect of job performance
• Performance Appraisal is a systematic way of communicating to
employee about how they are performing their job.
Features of Performance Appraisal
1. Setting work standards
2. Assessing employee’s actual performance relative to these standards
3. Offering feedback to the employee so that he can determine
deficiencies and improve performance in courses of time
4. It tries to find out how well employee is performing the job and what
needs to be done for further improvement
5. That appraisal is carried out periodically, according to definite plan.
3

1. What do we Evaluate?
• Individual Task Outcomes
• Behaviours
• Traits (characteristics, loyalty)
2. Who do we Evaluate?
• Supervisors
• Subordinates
• Self-appraisals
Objectives of Performance Appraisal
• Compensation Decisions
• Promotion Decisions
• Training and Development
• Personal Development 4
Performance Appraisal Contd….

PERFORMANCE APPRAISAL PROCESS
5
Establish Performance
Standards
Communicate The
Standards
Measure Actual
Performance
Compare Actual
Performance with
Standards
Taking Corrective Action,
if necessary

1. ESTABLISHING PERFORMANCE STANDARDS
• Any appraisal system requires performance standards which serve as
benchmarks against which performance is measured
• To be useful, standards should relate to the desired results of each job
• Performance standards must be clear to both the employer and
employee
• Performance standards or goals must be developed after a thorough
analysis of the job
• The actual performance and standards must be measured within a
certain time with overall considerations
• If the company sets a clear performance standards then even the
employee will be determined to do the job effectively as employees
exactly know their standards or benchmarks at works.
6
Performance Appraisal Process Contd….

2. COMMUNICATE THE STANDARDS
• Performance appraisal involves two parties, the appraiser(employer)
and the appraisee (employee)
• Both the parties have equal contributions in appraisal system and for an
effective performance appraisal system, proper communication is must
• The appraiser should prepare a clear job description and help the
appraisee set their goals and targets
• The appraiser should analyse the results objectively, offer coaching and
guidance to the appraisee and reward their good results
• The appraisee also should be very clear about what he is doing and why
he is doing it
• For this purpose, performance standards should be communicated to
the appraisee and their reactions should be noted down
• If necessary, the appraisee should also modify or revise the standards
7

3. MEASURE ACTUAL PERFORMANCE
• After the performance standards are set and accepted, the next step is
to measure the actual performance
• This requires the use of dependable performance measures, the rating
used to evaluate performance
• The performance measure techniques must be easy to use, reliable and
report on critical behaviours that determine the performance
• The company should also consider what exactly to measure when they
are measuring actual performance
• The common sources of information which are used by managers to
measure actual performance are personal observation, statistical
reports, oral reports and written reports
• Measuring actual performance may be objective or subjective
• Objective measures are indications of job performance which are
verified by others and are usually quantitative
• Subjective performance measures are rated by those doing evaluation
and are usually qualitative
8

4. COMPARE ACTUAL PERFORMANCE WITH STANDARDS & DISCUSS THE
APPRAISAL
• The next step in the performance appraisal system is to compare the
actual performance with the standards set
• Appraisal can only be decided by comparing actual performance with
the standards decided or set
• The outcome is said to be good is actual performance is above the
standards and negative if actual performance is below the standards
• Whatever may be the consequences, the result has to be
communicated and discussed
• Discussing the performance is very important as it is helpful in further
development and improvement
• Any appraisal based on subjective criteria is likely to be questioned in
case the actual performance is below standards
9

5. TAKING CORRECTIVE ACTION, IF NECESSARY
• After the actual performance is compared with standards set, it is
necessary to take corrective actions in required areas
• Corrective action is of two types, one which puts out the fire
immediately, while the other destroys the root of problem permanently
• Immediate action set things right and get things back on track
• On the other hand, basic corrective steps seek to find out how and why
performance deviates
• Taking corrective actions also requires careful analysis because
corrective actions if taken wrong then can affect the upcoming task
• The company should take corrective actions only if necessary
• Also the corrective actions should not be taken in all the areas but only
in selected or problematic areas to solve the deviations and problems
10

PERFORMANCE APPRAISAL METHODS
11
INDIVIDUAL
EVALUATION
METHODS
(employee evaluation is
done one at a time without
comparing them with
other employees)
OTHER METHODS
1. Confidential Report
2. Essay Evaluation
3. Critical Incidents
4. Checklists
5. Graphic Rating Scale
6. Behaviourally
Anchored Rating
Scales (BARS)
7. Forced Choice
Method
8. MBO
MULTIPLE – PERSON
EVALUATION
TECHNIQUES
(employee evaluation is
done by comparing one
employee with other
employees)
1. Ranking
2. Paired Comparison
3. Forced Distribution
1. Group Appraisal
2. Human Resource
Accounting (HRA)
3. Assessment Center
4. Field Review

1. CONFIDENTIAL REPORT
• A confidential report is a descriptive report prepared generally at the
end of every year
• This report is prepared by the employee’s immediate superior
• The report highlights the strengths and weakness of the subordinates
• The view of the superior about his subordinate on concerned areas is
recorded here
• This report is kept confidential and is not displayed or told to
subordinates
• This type of report is mostly used in government organisations
• The subordinates have no idea about the report prepared and the
details mentioned in report about them by their superior
• One of the drawback of this evaluation is
– Sometimes, if the superior has no good relations with his
subordinates then he can be biased in preparing the report 12
Performance Appraisal Methods Contd….
INDIVIDUAL EVALUATION METHODS

2. ESSAY EVALUATION
• Under this method, the rater is asked to express the strong and weak
points of the employee’s behaviour
• This technique is usually used with a combination of graphic rating scale
• While preparing the essay on the employee, the rater considers the
following factors
– Job Knowledge and potential of the employee
– Employee’s understanding on company's policy and objectives
– Employee’s relation with co-workers and superiors
– Employee’s planning, organizing and controlling ability
– Attitude and perceptions of employee in general
• Essay evaluation is a non-quantitative technique
• The essay provides a good deal of information about the employee and
also reveals more about the evaluator
• The major drawback of essay evaluation methods is that it is highly
subjective, time consuming and some evaluators may be poor in writing
essays
13

3. CRITICAL INCIDENT TECHNIQUE
• Under this method, the manager prepares list of statements of very
effective and ineffective behaviour of an employee
• These critical incidents or events represent the outstanding or poor
behaviour of employees on the job
• The manager maintains the record of each employee of such incidents
• At the end of the rating period, these recorded critical incidents are
used in evaluation of the employee’s performance
• In short, the behaviour, attitude and performance of employee in some
important situations is recorded under critical incident method
• Some of the drawbacks of this method are
– Negative incidents may be highlighted more
– The recording of incidents has to be done immediately or can else manager
may fail to record about the incident later
– The perception of a manager and an employee about a particular incident
may differ
14

4. CHECKLIST AND WEIGHTED CHECKLIST
• A checklist represents in a simple form with a set of objectives or
descriptive statements about the employee and his behaviour
• The rater checks or tick marks the options on the checklist for each
employee
• A rating score from the checklist helps the manager in the evaluation of
the performance of employee
• A recent variation of the checklist method is weighted list
• Under weighted list, there is a value or weights assigned to each
questions
• The weights or value may be high for some and less for some questions
• The major drawback of checklist method is that the rater may be biased
in distinguishing the positive and negative questions
Example of Checklist
• Is the employee interested in the task assigned Yes / No
• Does he follow instructions properly Yes / No15

5. GRAPHIC RATING SCALE
• Under this method, a printed form is used to evaluate the employee
performance
• The graphic rating scales can also be adopted by including the traits
(characteristics) that the company considers important for effectiveness
on the job
• A variety of traits may be used in the rating scales including qualitative
and quantitative
• Graphic rating scale is the most common and widely used method for
performance appraisal today as it easy to understand and easy to
implement
• The major drawback of this method is that it may be difficult to analyse
subjective or qualitative ratings
16

6. BEHAVIOURALLY ANCHORED RATING SCALES (BARS)
• This method represents the latest innovation in performance appraisal
• BARS method is a combination of rating scale and critical incident
method
• The critical incident serves as anchor statements on a scale and the
rating form usually contains 6 to 8 performance dimensions
• There are certain steps to be followed in constructing BARS, which are
– Collect Critical Incidents
– Identify Performance Dimensions
– Reclassification of Incidents
– Assigning Scale Values to the Incidents
– Producing the Final Instrument
• The behaviours used in BARS method are activity oriented and not
behaviour oriented, which can be a drawback
17

7. FORCED CHOICE METHOD
• This method was developed to eliminate bias and the preponderance of
high ratings that might occur in some organisations
• The primary purpose of the forced choice method is to correct the
tendency of a rater to give consistently high or low ratings to all
employees
• This method makes use of several sets of pair phrases, two of which
may be positive and two negative and the rater is asked to indicate
which of the four phrases is the most and least descriptive of a
particular employee
• The favourable qualities earn a positive credit and negative qualities
earn a negative credit
• The overall objectivity is increased under this method because the rater
does not know how high or how low he is evaluating the employee
• The limitation of this method is that to construct this technique, experts
are required which results in high cost
18

8. MANAGEMENT BY OBJECTIVES (MBO)
• MBO requires the management to set specific, measurable goals with
each employee and then periodically discuss the progress towards goals
• MBA emphasis participatively set goals that are tangible, verifiable and
measureable
• MBO focuses attention on what must be accomplished (goals) rather
than how it is to be accomplished
• MBO technique involves 6 major steps
– Set the organisation goals
– Set the departmental goals
– Discuss departmental goals
– Define expected results
– Performance reviews
– Provide feedback
• One of the major drawback of MBO is that setting clearly measurable
goals is not an easy task and it requires lot of time and high efforts
19

1. RANKING METHOD
• Under this method, the ranking of an employee in a work group is done
against that of another employee
• This is a relatively easy method of performance appraisal
• The relative position of each employee is expressed in terms of his
numerical rank
• It may also be done by ranking an employee on his job performance
against another number of the competitive group
• While using this method the evaluator is asked to rate the employees
from highest to lowest on the mentioned criteria
• The evaluators then appraise the top ranked employees first and then
the subsequent ranked employees
• An important drawback of this method can be comparing individuals
with varied behavioural traits
• Also when large number of employees are working, the ranking of
individuals becomes difficult
20
MULTI – PERSON EVALUATION

2. PAIRED COMPARISON METHOD
• Here, each employee is compared with all other employees in group
• For every trait, employee is compared with all other employees
• Ex : If there are 5 employees in group (A B C D E), then A’s performance
will be compared with remaining 4
• This method was introduced to overcome the drawback of ranking
method where it was difficult to assign ranks sometimes
• Paired comparison method gives a clear picture on the performance of
employees
• But if the number of employees in a group are more, the comparing
each employee with other employees in group becomes difficult
21
As Compared To A B C D
A + - +
B - + +
C + + +
D - - +

3. FORCED DISTRIBUTION METHOD
• Under this method, the rater is asked to appraise the employee
according to a predetermined distribution scale
• Normally the two criteria used here for rating the job are performance
and promotability
• Further a 5-point performance scale is used without any mention of
descriptive statements
• Employees are placed between two extremes of “GOOD” and “BAD”
performances
• Apart from job performance, this method give equal importance to
promotability where employees may be classified according to their
promotional merits
22

1. GROUP APPRAISAL
• In this method, an employee is appraised by a group of appraisers
• This group consists of immediate supervisor of employee, other
supervisors who have close contact with employee’s work and HOD
• This group uses any one of the multiple techniques like ranking method,
paired comparison or forced distribution
• The group appraises the performance of employee, compared the actual
performance with standards, finds out deviations and discusses reasons
• This method eliminates personal bias as performance is evaluated by a
group of people and not single person
• But on the other hand, it is a very time consuming process
23
OTHER METHODS

2. HUMAN RESOUCE ACCOUNTING (HRA)
• HRA is a sophisticated way to measure(in financial terms) the
effectiveness of personnel management activities and the use of people
in the organisation
• In this method the employee performance is evaluated in terms of costs
and contributions of employees
• HRA is a process of accounting for people as an organisational resource
• It tries to place a value on organisational human resource as assets and
not as expenses
• HRA process shows the investment an organisation makes in employees
and how the value these employees changes over time
• The value increases when the company invests in training, development
etc
• The value decreases when the qualified and experienced employees
leave the organisation
24
OTHER METHODS

3. ASSESSMENT CENTRE
• In this approach, employees from various department are brought
together to spend two or three days working on individual or group
assignment similar to the one they would be handling when promoted
• This method was first applied in Germany in 1930
• It is a technique where appraisal is done by various experts
• The officials rank the performance of each participant on merit basis
• All employees are given equal opportunities to display their talents and
capabilities
• Assessment centers use various techniques to evaluate performance
and these techniques include, role playing, case study analysis etc
25
OTHER METHODS

4. FIELD REVIEW METHOD
• In this method, a trained and skilled representative of HR department
foes into the “field” and assists employees with their ratings of their
respective subordinates
• The HR specialist records the specific information about the employees
performance
• Based on this information, the experts prepare a report which is sent to
supervisor for review and discussions
• The ratings are done on standardised forms
26
OTHER METHODS

PROBLEMS WITH PERFORMANCE APPRAISAL
PROBLEMS EXPLANATION
First Impression
(Primacy Effect)
The appraiser’s first impression about employee may be applied to all
other behaviours, be it positive or negative
Halo Effect It occurs when one aspect of subordinate’s performance affects the
rater’s evaluation of other performance dimensions.(an employee
might be rated high on performance just because he/she has a good
dress sense)
Horn Effect The rater’s bias is in the other direction where one negative quality of
employee is being rated harshly (the employee rarely talks, so he
cannot get along with people)
Leniency Depending on the behaviour of rater, the employee may be rated
strictly or leniently
Central tendency It occurs when raters rate all employees as average performers
Stereotyping It is a mental picture that an individual holds about a person because
of that person’s gender, religion, caste, status etc
Recency Effect In this case, the rater gives greater Weightage to recent occurrences
than the earlier performance
27

360 – DEGREE FEEDBACK SYSTEM
• A 360 degree appraisal is a type of employee performance review in
which subordinates, co-workers, and managers all anonymously rate the
employee. This information is then incorporated into that person's
performance review.
• 360-degree feedback will include direct feedback from an employees,
subordinates, peers (colleagues), supervisors, as well as a self-
evaluation.
• It can also include, in some cases, feedback from external sources, such
as customers and suppliers or other interested stakeholders.
• 360-degree feedback or multi-source feedback is an appraisal or
performance assessment tool that incorporates feedback from all who
observe and are affected by the performance of a candidate.
• 360 degree feedback is the most comprehensive appraisal where the
feedback about the employees’ performance comes from all the
sources that come in contact with the employee on his job.
28

29

ADVANTAGES
• Evaluates methods applied to
achieve targets
• Reveals strengths and
weaknesses in management
style
• Forces inflexible managers to
initiate self-change
• Creates an atmosphere of
teamwork and improvement
DISADVANTAGES
• Ignores performance in terms
of reaching goals
• Peers and others employees
may tend to be bias
• Assesses deny the truth of
negative feedback
• This system can humiliate
employee
30

ESSENTIAL CHARACTERISTICS OF AN EFFECTIVE
PERFORMANCE APPRAISAL SYSTEM
31
ESSENTIAL CHARACTERISTICS EXPLAINATION
Reliability and Validity
information is reliable and valid
Standardisation
forms, procedures, techniques should be standardised
Job Relatedness
performance of job related activities / areas
Practical Viability
techniques should be practical and also easy to implement)
Legal Sanction
appraisal must meet the laws set
Training to Appraisers
appraisers must be trained so they conduct fair and effective
appraisals
Open Communication
information on appraisal must be communicated
Employee Access to Results
employee should know the results
Due Process
company must clear the doubt or complaints of employees relating to
appraisal system

EMPLOYEE TURNOVER
&
EMPLOYEE RETENTION
32

EMPLOYEE TURNOVER
• Employee turnover is a measurement of how long your employees stay
with your company and how often you have to replace them.
• Any time an employee leaves your company, for any reason, they are
called a turnover or separation.
• Employee turnover is calculated by dividing separations by the total
staff:
• EMPLOYEE TURNOVER = NO OF SEPARATIONS / AVERAGE NO OF
EMPLOYEES
• Employee turnover may be caused due to voluntary turnover or
involuntary turnover
• If the company has turnover then it is always costly, risky and has a bad
impact on present employees
• Costs of employee turnover include : Separation cost, replacement cost
and productivity cost
33

EMPLOYEE RETENTION
• Employee retention refers to the ability of an organization to retain
its employees
• Employee retention refers to the various policies and practices which let
the employees stick to an organization for a longer period of time
• Employee retention strategies go a long way in motivating the
employees so that they stick to the organization for the maximum time
and contribute effectively
• Employee retention has become a major concern for corporate in the
current scenario.
• Individuals once being trained have a tendency to move to other
organizations for better prospects.
37

COMPENSATION
• Compensation refers to all forms of financial returns and tangible
services and benefits employees receive as a part of an employment
relationship
• Compensation is what employees receive in exchange for their
contribution to the organisation
• Compensation (also known as Total Rewards) can be also be defined as
all of the rewards earned by employees in return for their labour.
• Thus compensation is the monetary and non monetary rewards given to
the employees on the basis of the value of the job, their contribution
and their performance
• It is compensation, which motivates the employees to work in the
organisation
• Thus, we can say that compensation is one of the most vital elements
that the organisation should look upon
40

FORMS OF PAY
• There are varieties of returns employees receive from work
• These various forms are categorized as Total Compensation and
Relational Returns
• Total Compensation includes
– Cash compensation : Base Wage, Cost of Living, Short-term
Incentives, Long term incentives
– Benefits : Income Protection, Work / Life Balance, Allowances
• Relational Returns Include
– Recognition and Status
– Employment Security
– Challenging Work
– Learning Opportunities
41

OBJECTIVES OF COMPENSATION PLANNING
• Major objectives in compensation planning include Efficiency, Fairness and
Compliance
• Efficiency can be stated as improving performance, increasing quality,
delighting customers and shareholders and also controlling labour costs
• Fairness (or Equity) is a fundamental objective of pay system which
suggests that there should be fair treatment for all the employees by
recognizing both employee contributions and employee needs. Equity has
three dimensions
– Internal Equity : more difficult jobs are paid more
– External Equity : jobs are fairly compensated in comparison to similar jobs in
the labour market
– Individual Equity : equal pay for equal work, employees doing same job must be
paid equally
• Compliance means conforming to government’s compensation laws and
regulations which suggests that if the law changes then the pay system
should also change
42

Apart from the major objectives, compensation planning also has some
other significant objectives which are :
1. Attract Talent
2. Retain Talent
3. Ensure Equity
4. New and Desired Behaviour
5. Control Costs
6. Comply with Legal rules
7. Ease of Operations
43
Objectives of Compensation Planning Contd….

JOB EVALUATION
• Job evaluation is the process of systematically determining the relative
worth of jobs to create a job structure for organisation.
• The worth or value of a job to the organisation is ascertained through
job evaluation
• It tries to make a systematic comparison between jobs to assess their
relative worth for the purpose of establishing a rational pay structure
• It offers a systematic procedure for determining the relative worth of
jobs.
• Jobs are ranked on the basis of rational criteria such as skill, education,
experience, responsibilities, hazards, etc., and are priced accordingly.
• The basic objective of job evaluation is to determine which jobs should
get more pay than others.
• The evaluation is done through the use of market pricing or through the
use of ranking method, classification method and point or factor
comparison methods
44

METHODS OF JOB EVALUATION
There are three basic methods of job evaluation:
1. Ranking
2. Classification
3. Factor Comparison.
45

1. Ranking method
• Perhaps the simplest method of job evaluation is the ranking method.
• According to this method, jobs are arranged from highest to lowest, in order
of their value or merit to the organization.
• Jobs can also be arranged according to the relative difficulty in performing
them.
• The jobs are examined as a whole rather than on the basis of important
factors in the job
• The job at the top of the list has the highest value and obviously the job at
the bottom of the list will have the lowest value.
• Jobs are usually ranked in each department and then the department
rankings are combined to develop an organizational ranking.
• The variation in payment of salaries depends on the variation of the nature
of the job performed by the employees.
TECHNIQUES/METHODS OF JOB EVALUATION CONTD…..
46

2. Classification method
• According to this method, a predetermined number of job groups or job
classes are established and jobs are assigned to these classifications.
• This method places groups of jobs into job classes or job grades.
• Separate classes may include office, clerical, managerial, personnel, etc.
Following is a brief description of such a classification in an office.
• Class I - Executives: Further classification under this category may be Office
Manager, Deputy office manager, Office superintendent, Departmental
supervisor, etc.
• Class II - Skilled workers: Under this category may come the Purchasing
assistant, Cashier, Receipts clerk, etc.
• Class III - Semiskilled workers: Under this category may come Stenotypists,
Machine-operators, Switchboard operator etc.
• Class IV - Unskilled workers: This category comprises , File clerks, Office
boys, etc.
47

3. Factor comparison method
• A more systematic and scientific method of job evaluation is the factor
comparison method.
• Though it is the most complex method of all, it is consistent and
appreciable.
• Under this method, instead of ranking complete jobs, each job is ranked
according to a series of factors.
• These factors include mental effort, physical effort, skill needed,
responsibility, supervisory responsibility, working conditions and other such
factors (for instance, know-how, problem solving abilities, accountability,
etc.).
• Pay will be assigned in this method by comparing the weights of the factors
required for each job, i.e., the present wages paid for key jobs may be
divided among the factors weighted by importance (the most important
factor, for instance, mental effort, receives the highest weight).
• In other words, wages are assigned to the job in comparison to its ranking
on each job factor.
48

MAJOR DECISIONS IN JOB EVALUATION
• There are some major decision to be made in job evaluation
• The major decisions in job evaluation process are
1. Establish the purpose
2. Decide on single v/s multiple plans
3. Choose among alternative methods
4. Obtain involvement of relevant stakeholders
5. Evaluate the usefulness of the results
49

WAGE AND SALARY ADMINISTRATION
• Wage and salary administration is establishment and implementation of
sound policies and practices of employee compensations.
• Wage policies of different organisations vary to different extent.
• Some organisations pay minimum necessary to attract the required
number and kind of labour, while some organisations pay well above
the going rates in the labour market.
• The compensation system should be duly aligned with the
organisational need and should also be flexible enough to modification
in response to change
• The basic objective of wage and salary administration is to establish and
maintain an equitable wage and salary structure and secondary
objective is to establish and maintain an equitable labour cost structure
50

OBJECTIVES
1. To establish fair & equitable pay offering similar pay for similar work
2. To attract qualified and competent personnel
3. To retain the present employees
4. To control labour and administrative costs
5. To improve motivation and morale of employees
6. To protect a good image of the company and comply with legal needs
relating to wages and salaries
PRINCIPLES OF WAGE AND SALARY ADMINISTRATION
1. Wage and salary should be sufficiently flexible
2. Job evaluation must be done scientifically
3. Wage and salary administration plans must be consistent with
organisational plans
4. Wage and salary administration plans and programmes should be
responsive to the changing local and national conditions
5. These plans should simplify other administrative processes
WAGE AND SALARY ADMINISTRATION CONTD…..
51

FACTORS INFLUENCING COMPENSATION
LEVELS
1. Job Needs
2. Ability to Pay
3. Cost of Living
4. Prevailing (current) Wage Rates
5. Unions
6. Productivity
7. State Regulations
8. Demand and Supply of Labour
52

EXECUTIVE COMPENSATION
• Executive compensation or executive pay is composed of the financial
compensation and other non-financial awards received by an executive
from their firm for their service to the organization.
• It is typically a mixture of salary, bonuses, allowances etc
• Executive Compensation packages are designed by a company's Board
of Directors, usually by the Compensation Committee
• The purpose is to incentivize the executive team, who have a significant
impact on company strategy, decision-making, and value creation (Pay
for Performance) as well as enhancing Executive Retention
• Executive compensation is a very important thing to consider when
evaluating an investment opportunity.
• Executives who are improperly compensated may not have the
incentive to perform in the best interest of shareholders, which can be
costly for those shareholders
53

Executive Compensation has four distinct characteristics:
1. Pay Package Design: Executive pay arrangements typically consist of six
distinct compensation components: salary, annual incentives, long-term
incentives, benefits, perquisites and severance/change-in-control
agreements.
2. Equity Compensation: The majority of compensation of most executive
pay packages comes in the form of company stock.
3. Performance-Contingent Pay: Executive pay packages are designed so that
the bulk of an executive's compensation is contingent on a company
achieving pre-established criteria of specific financial results and/or
strategic objectives.
4. Vesting Schedules: Even after financial or strategic criteria for an award is
met, full ownership of the equity award are often conditioned on the
executive's compliance with certain covenants.
• Executive Compensation plan characteristics and design are heavily
influenced by elements of Corporate Management and Federal Law.
EXECUTIVE COMPENSATION CONTD…..
54

Basic Components of Executive Compensation
1. Base Salary
2. Short-Term Incentive
3. Long-Term Incentive
4. Employee Benefits
5. Perquisites
6. Severance/Change-in-Control Payments
EXECUTIVE COMPENSATION CONTD…..
55

Performance appraisal, emp turnover and retention

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