One of the tools that Restco Products' management can use to influence its policy despite the diversification of its portfolio is incentive compensation structure. As such, the compensation system must be made consistent with the company's strategy. To evaluate whether the structure is consistent Restco should put into consideration interdivisional relationships, short run and long run corporate objectives, and risks involved. According to Gupta & Shaw (2014), there are three crucial elements of an incentive compensation system including performance measures, financial instruments, and frequency of awards. The task of encouraging policy level managers at the company is the responsibility of the chief executives. Most companies usually use financial reward systems and formal management appraisal to reinforce their efforts to achieve organizational objectives (Samnani, & Singh, 2014).
Research conducted by Grabner (2014) revealed that the highest percentage of companies use cash bonus systems as incentives to their employees. However, the vast majority of these companies also use other forms of incentives such as improved holiday packages to supplement the cash bonuses (Chrisman, Devaraj, and Patel, 2017). As Restco Products diversifies its market, the character of its bonus system should change in three essential ways. First, the company should increase its range of possible payoffs. Secondly, the variability of the bonus system should increase over time. More importantly, bonuses should become more closely tied to performance rather than position in the company's hierarchy (Osibanjo et al., 2014). With such a strategy, Restco's management will be able to influence its workforce to achieve its goals. One problem that remains is making this policy consistent with the firm's overall strategy to diversify.
To ensure that Restco's incentive compensation system is consistent with the company strategy, the management should evaluate the strategy against the risks involved, short-run and long-run goals, and interdivisional relationships. For instance, incentive compensation can influence how division managers at Restco work together. If cooperation is required between airline products division and nap products division, the incentive should facilitate cooperation.
Chrisman, J. J., Devaraj, S., & Patel, P. C. (2017). The impact of incentive compensation on labor productivity in family and nonfamily firms. Family Business Review, 30(2), 119-136. https://doi.org/10.1177/0894486517690052
Gupta, N., & Shaw, J. D. (2014). Employee compensation: The neglected area of HRM research. Human Resource Management Review, 24(1), 1-4. https://doi.org/10.1016/j.hrmr.2013.08.007
Grabner, I. (2014). Incentive system design in creativity-dependent firms. The Accounting Review, 89(5), 1729-1750. https://doi.org/10.2308/accr-50756
Osibanjo, A. O., Adeniji, A. A., Falola, H. O., & Heirsmac, P. T. (2014). Compensation packages: a strategic tool for employees' performance and retention. Leonardo Journal of Sciences, (25), 65-84. Retrieved from https://ljs.academicdirect.org/
Samnani, A. K., & Singh, P. (2014). Performance-enhancing compensation practices and employee productivity: The role of workplace bullying. Human Resource Management Review, 24(1), 5-16. https://doi.org/10.1016/j.hrmr.2013.08.013
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