1.

Introduction:__________________________________________

Employee compensation is one of the major functions of HRM.

Dessler (2007) defined

employee compensation as all forms of pay or rewards going to employees and arising from their employment. Compensation is important for both employers and employees. It is important to the employees because it is one of the main reasons for which people work. Employees living status in the society, motivation, loyalty, and productivity are also influenced by the compensation. Again, it is very important for the employers because it creates substantial cash out flow of an enterprise. Compensation includes both financial and non-financial benefits. Financial elements comprise two elements, namely: direct and indirect forms of payments to the employee. Direct compensation includes hourly and monthly rated wages or salaries, and incentives such as bonuses, commissions, and profit sharing plans. Indirect compensation includes benefits such as provident fund, gratuity, and health insurance, paid leaves, vacations, company car, furnished house, retirement benefits, stock option, and the like. Non-financial benefits comprise challenging job, responsibilities, appreciation, working environment, empowerment, and others. The compensation that an organization provides may be based on either membership (job) or performance (skill). In the traditional system, employees are paid according to the job or membership that has no connection with the employees or organizations performance. On the contrary, in the case of performance or skill based pay, employees are compensated with respect to their performance, abilities, and knowledge. In practice, performance may be a minor determinant of compensation though academic theories extend the view that performance-based compensation leads to high motivation of employees. Compensation, once determined, should not remain the same for years. It should be reviewed and changed after a certain period through a proper pay survey. Compensation serves many functions. Sound compensation can attract, motivate, and retain the competent employees of an organization

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1.1

Historical Background of Compensation Practices in Bangladesh:_______

In 1971, Bangladesh started its journey as an independent and sovereign nation. During that time, only 4% gross domestic product (GDP) came from the industrial sector, most of which were mainly small scale industries. The socialist prone philosophy and huge immobilized abandoned industrial units of the non-Bengali communities led the nationalization of industries soon after the independence. The investment policies of 1973 and 1974 gave further emphasis on public sector oriented industrialization and were against the expansion of the private sector. Nevertheless, the public sector industrial enterprises, unfortunately, did not perform well. They were rather emerging as a white elephant through incurring huge losses every year. On the other hand, from December 1975 until now, all the governments have been emphasizing the development of the private sector industrial enterprises through the investment policy of 1975, and industrial policies of 1982, 1986, 1991, 1999, and 2005. However, it is also found that the performance of the private sector industrial enterprises has not achieved ultimate success. A number of issues are liable for such state of affairs in the public and the private sector industrial enterprises of Bangladesh where ineffective compensation practices are reported to be one of them. Therefore, a study to evaluate the comparative status of compensation practices in the public and the private banking sector of Bangladesh can be pertinent and worthwhile. The research findings would help the public and the private banking enterprises in Bangladesh to improve their compensation practices towards creating a sustainable competitive advantage based on human capital. The research findings would be also useful for the academicians, researchers, policy- makers, and practitioners of HRM.

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1.2

Literature Review:____________________________________________

Compensation has been researched from different perspectives at home and abroad. Rab (1991), in a study on 24 small enterprises operating in Dhaka, identified that most of the enterprises (87.5%) paid one or more types of allowances in addition to salary. He found that nearly 7% enterprises paid festival bonus, 20% paid medical allowance, and 20% provided pay increment. A case study (Taher, 1992) on the overall personnel management (HRM) practices of Khulna Hard Board Mills Ltd unearthed inadequate compensation as one of the main problems of that enterprise. Chowdhury (2000) in a book review mentioned that compensation has been a very important aspect of HRM in a developing country like Bangladesh where employees are commonly low paid with little or no fringe benefits. A research study (Mamun and Islam, 2001) examined the HRM practices of the ready-made garments (RMG) enterprises. The study

identified that compensation and labor productivity of workers in Bangladesh were very low in comparison to competing nations. Ernst and Young, and Metropolitan Chamber of Commerce and Industry (2007) in a survey on HR practices in Bangladesh found that most of the surveyed organizations have in-house payroll processing. It was also found that sales incentives and pay based on individual performance were not widely practiced in the surveyed organizations. Uddin, Habib, and Hassan (2007) depicted a comparative scenario of HRM practices with respect to two public and the private sector organizations of Bangladesh. The study discovered that most of the employees of Wartsila, the private sector organization, were satisfied with their salaries whereas most of the employees of Bangladesh power development board (BPDB), the public sector organization, were highly dissatisfied with their salaries. A study (Huda, Karim and Ahmed, 2007) on the HRM practices of 20 non-government organizations (NGOs) of Bangladesh observed that inadequate financial incentives represented one of the main reasons behind the job dissatisfaction of the employees. The study recommended determining entry-level remunerations and benefits properly to attract qualified candidates. Khan (2007) categorically mentioned that the public and the private sector institutions of Bangladesh failed to discharge

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their duties properly due to incorrect recruitment and selection of employees, politicization of promotion and posting, low compensation, and ineffective training. Hoque (1994) investigated 10 industrial enterprises (5 public and 5 private) located in Chittagong. He found that human resource development (HRD) had a positive impact on organizational effectiveness (OE). He measured HRD in terms of investments in HRD in the forms of employees compensation, their training and development expenses, and OE was measured in terms of growth and profit effectiveness. The empirical study depicted that with respect to the broad staffing (HR) pattern, qualities of employees, delegation of authority to subordinates, decentralization of decision and policy makings, and span of supervision, the private sector enterprises were in a much better position than the public sector enterprises. The study identified that low investment in HRD had created lower growth and profit in the public sector enterprises, unlike private sector ones. He finally recommended that any enterprise, especially the public sector industrial enterprises, should develop their human resources through more investment in the forms of compensation, and training and development expenses. A study (Ali, 1989) on the employees of nine public sector industrial enterprises identified pay structure as the prime reason behind the dissatisfaction of the workers. The other reasons for dissatisfaction of workers were job security, promotion system, and work autonomy. The employees in the mentioned firms were highly dissatisfied with pay and benefits. A large number of employees were even found to be ready to sacrifice quick promotion, job security, and friendly colleagues for higher pay and fringe benefits. Thus, the study challenged the western belief of motivating workers more by the intrinsic rewards like autonomy, and task identity. He claimed that unless salary and benefits met the basic needs, the intrinsic rewards might not work in Bangladesh. Through an in-depth study on 178 industrial enterprises of Greece, Katou and Budhwar (2007) found that HR practices such as recruitment, training, promotion, compensation, involvement, and safety and health were positively related with the elements of organizational performance such as innovation and satisfaction of stakeholders. Then, employee compensation, especially the performance based compensation system, resulted in better organizational performance in Indian firms (Singh, 2004). Huselid (1995) investigated the impact of HRM practices such as recruitment and selection, training, compensation on turnover, productivity, and corporate

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financial performance in USA. He found that investment in HRM practices was associated with lower employee turnover, greater productivity, and higher corporate financial performance. Huang (2001), in a study on the past, present, and future challenges of HRM practices of Taiwan, demonstrated compensation as the second most important functions of HRM in achieving organizational objectives. Yeganeh and Su (2008) examined the HRM practices including compensation of Iranian public sector enterprises. They found that in Iranian public sector enterprises, employee compensation was basically determined on the basis of seniority and education. Performance based compensation was not that much prevalent in Iranian public sector. Thus, the above literature survey indicates that compensation has been investigated from different perspectives around the globe as an important practice of HRM. It is also evident that very limited number of comparative studies was conducted on compensation practices with respect to the public and the private banking organizations of Bangladesh. Moreover, no specific study was found on employee compensation in Bangladeshi context. The present study is, therefore, an endeavor to fill up this obvious research gap.

2.

Banking sector in Bangladesh:_____________________________

Bank is very old institution that is contributing toward the development of any economy and it is treated as an important service industry in modern world. Now days the function of bank is not limited to within the same geographical limit of any country. The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word 'bank' was probably derived from the word 'bench' as during ancient time Jews used to do money -lending business sitting on long benches.

First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank' which opened

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up a new era of banking activities throughout the European Mainland. In the South Asian region, early banking system was introduced by the Afghan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afghanistan came to India and started money lending business in exchange of interest sometime in 1312 A.D. They were known as 'Kabuliwallas'. The banking system at post independent Bangladesh consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances. The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.

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The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh's system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987. One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations. The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans

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were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s. Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.

The Banking sector in Bangladesh is different from the banking as seen in other developed countries. This is one of the Major Service sectors in Bangladesh economy, which divided into four categories of scheduled Banks. These are Nationalized Commercial Banks (NCBs), Government Owned Development Financial Institutions (DFIs), Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalized Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are Development Financial Institutions (DFIs).

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3.

Pay for performance:___________________________________

The term pay for performance refers to a pay strategy where evaluations of Individual and/or organizational performance have significant influence on the amount of pay increases or bonuses given to each employee.

When a pay for performance system functions properly:

Outstanding performers will receive the greatest rewards, to acknowledge their superior contributions and to motivate them to continue high performance. Average performers will receive substantially smaller raises, which may encourage them to work harder to achieve larger raises in the future. Poor performers will receive no increase, which is intended to persuade them to improve their performance or leave.

However, any organizations especially banks should not rely only upon the motivational ability of money to improve individual or organizational performance because more employees are motivated by factors, such as personal pride or satisfaction in my work or a personal desire to make a contribution rather than a monetary award. Additionally, conditions in the work environment of Bangladeshi banks (e.g., limited funding to support performance-based increases or awards, skepticism about whether or not supervisors will reward high performance) have created a rather tenuous link from pay to performance.

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3.1

Pay for performance and financial incentive practices in Bangladesh:___

While monitoring the profile of these public and private banks in Bangladesh, we have found that they have different characteristics while designing their compensation policies and practices. The compensation and incentives policies and practices are completely different in public and private banking sector of Bangladesh whereas among the ban of the dimensions concerned, varies slightly in terms of their compensation and benefit issues. For the purpose of our research, we conducted a structured interview with 8 banks consisting of samples from both public and private sector. The banks we have considered for our study are:

1. 2. 3. 4. 5. 6. 7.

IFIC Bank Limited BRAC Bank Limited Eastern Bank Limited AL-Arafah Islami Bank Limited HSBC Bank Limited Sonali Bank Limited Janata Bank Limited Shahjalal Islami Bank Limited

8.

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Banking sector

IFIC

BRAC

EBL

Private sector Al-Arafarh

HSBC

SIBL

Main product Establishment year Number of employees Total Asset (million BDT) Average Age Average Education Average monthly salary No. of Branches Business Growth Employee Turnover Rate

Retail banking Consumer Banking Retail banking Corporate banking Corporate Banking Islamic Consumer banking Islamic Consumer banking Corporate banking NRB Banking SME Banking SME Banking SME Banking Personal Banking SME Banking SME Banking Treasury and Capital Micro Finance Micro Finance Corporate Banking Treasury and Capital Market Treasury and Capital Banking Treasury and Capital Banking Islamic Banking(AMANAH) Treasury and Capital Banking Agriculture Credit Market NRB Banking Treasury and Capital Banking

1976 1660 62901 38 Masters 30000 82 8% Confindential

2001 2100 1338 31 Masters 28000 57 17% Confindential

1992 1900 69870 32 Masters 30000 49 6.20% Confindential

1995 1150 8580 37 Masters 25000 50 12.90% Confindential

1996 1151 81538 32 Masters 40000 13 15.50% Confindential

2001 1600 58921 35 Masters 28000 63 13.38% Confindential

Table 1: Demographics of private sector banks

IFIC Bank Limited

International Finance Investment and Commerce Bank Limited (IFIC Bank) is banking company incorporated in the Peoples Republic of Bangladesh with limited liability. It was set up at the instance of the Government in 1976 as a joint venture between the Government of Bangladesh and sponsors in the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial institutions aboard. In 1983 when the Government allowed banks in the private sector, IFIC was converted into a full fledged commercial bank. The Government of the Peoples Republic of Bangladesh now holds 32.75% of the share capital of the Bank. Directors and Sponsors having vast experience in the field of trade and commerce own 8.62% of the share capital and the rest is held by the general public.

BRAC Bank Limited

With the vision of "Building profitable and socially responsible financial institution focused on Market and Business with Growth potential, thereby assisting BRAC and stakeholders to build a just, enlightened, healthy democratic and poverty free Bangladesh, BRAC Bank Limited has started its journey in the Banking Sector of Bangladesh.

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Now, BRAC Bank Limited is one of the leading private banks in Bangladesh. BRAC Bank has received the commercial banking license from Bangladesh Bank in 2001. Since then it has established its name and branding with its quality of service and products. In a very short time BRAC Bank became one of the successful and fastest growing private banks in Bangladesh.

BRAC Bank is owned partially by BRAC, the largest non-government organization in the world, International Finance Corporation (IFC), the private sector arm of The World Bank Group, and Shore Cap International. The head office of the bank is situated at Gulshan, Dhaka. BRAC Bank is operating its business in the whole of Bangladesh. BRAC Bank is expanding its branch network rapidly throughout the country.

Currently, BRAC Bank has 100 Branches, 60 SME Service Centers, 3 SME/Krishi Branches, more than 300 ATMs and 424 SME Unit offices across the country. It has disbursed over BDT10000 crores of SME loan and has over 500,000 individual customers who access online banking facilities. Its services cuts across all strata of clientele are its corporate, retail or SME.

Eastern Bank Limited

With a vision to become the bank of choice and to be the most valuable financial brand in Bangladesh, Eastern Bank Ltd. (EBL) began its journey in 1992. Over the years EBL has established itself as a leading private commercial bank in the country with undisputed leadership in Corporate Banking and a strong Consumer and SME growth engines. EBLs ambition is to be the number one financial services provider, creating lasting value for its clientele, shareholder, employees and above all for the community it operates in. Bangladesh Banking Sector has grown from strength to strength over the past one decade and is fiercely competitive, especially in the Consumer Banking segment. EBL offers a wide range of depository, loan and card products to cater virtually for every customer segment. From Student Banking to Priority Banking to Platinum card EBL has almost all banking products in its repertoire. The product basket is rich in content featuring different types of Savings & Current Accounts, Personal Loans, Debit Cards, Credit Cards, Pre-paid Cards, Internet Banking, Corporate Banking, SME Banking, Investment Banking, Treasury & Syndication services. The

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customers are served through a network of 49 Branches, 74 ATMs and 6 Kiosks countrywide. EBL has its presence in 11 major cities/towns in the country including Dhaka, Chittagong, Sylhet, Khulna, Rajshahi & Coxs Bazar.

Al-Arafah Islami Bank Limited

To achieve Islamic ideology Al-Arafah Islami Bank Ltd was established (registered) as a public limited company on 18 June 1995. The inaugural ceremony took place on 27 September 1995. The authorized capital of the Bank is Tk.5000.00 million and the paid up capital is Tk. 4677.28 million as on 31.12.2010. Renowned Islamic Scholars and pious businessmen of the country are the sponsors of the Bank. 100% of paid up capital is being owned by indigenous shareholders. The equity of the bank stood at Tk. 9647.45 million as on 31 December 2010, the manpower was 1711 and the number of shareholders was 49,386. It has achieved a continuous profit and declared a good dividend over the years. High quality customer service through the integration of modern technology and new products is the tool of the bank to achieve success. The bank has a diverse array of carefully tailored products and services to satisfy customer needs. The Bank is committed to contribute significantly to the national economy. It has made a positive contribution towards the socio economic development of the country with 78 branches of which 21 is AD throughout the country.

HSBC Bank Limited

In Bangladesh, the HSBC Group's history dates back to 1996 when The Hongkong and Shanghai Banking Corporation (HSBC) Ltd opened its first branch. Today, the HSBC Group offers a comprehensive range of financial services in Bangladesh including commercial banking, consumer banking, payments and cash management, trade services, treasury, and custody & clearing. The bank opened first Bangladesh branch in December 1996. Today it has a network of 13 offices, 39 ATMs, 9 Customer Service Centres, an offshore banking unit, and offices in 7 EPZs. As of December 2010 the bank boosts 1051 employees.

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 Shahjalal Islami Bank Limited

Shahjalal Islami Bank Limited (SJIBL) commenced its commercial operation in accordance with principle of Islamic Shariah on the 10th May 2001 under the Bank Companies Act, 1991. During last nine years SJIBL has diversified its service coverage by opening new branches at different strategically important locations across the country offering various service products both investment & deposit. Islamic Banking, in essence, is not only INTEREST-FREE banking business, it carries deal wise business product thereby generating real income and thus boosting GDP of the economy. Board of Directors enjoys high credential in the business arena of the country, Management Team is strong and supportive equipped with excellent professional knowledge under leadership of a veteran Banker Mr. Md. Abdur Rahman Sarker. The bank today has 63 branches, 14 ATM booths, 6 SME Centers and 1 off-shore banking unit. The companys authorized capital is BDT 6,000 million and its paid up capital is BDT 3,425.12 million. The company today has total of 1601 employees.
Banking sector Sonali Main product
Personal Banking Corporate Banking SME Rural & Micro credit NGO Linkage Treasury and capital Govt. Treasury fund NRB Banking

Public sector Janata

Personal Banking Corporate Banking SME Rural & Micro credit NGO Linkage NRB Banking

Establishment year Number of employees Total Asset (million BDT) Average Age Average Education Average monthly salary No. of Branches Business Growth Employee Turnover Rate

1972 21839 543,969.28 39 Masters Govt. Pay scale 1191 20.23% Confindential

1972 13000 267157 39 Masters Govt. Pay scale 860 15.68% Confindential

Table 2: Demographics of public sector banks

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 Sonali Bank Limited

Soon after independence of Bangladesh Sonali Bank emerged as the largest and leading Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order 1972 (Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank and Bank of Bhwalpur. As a fully state owned institution, the bank had been discharging its nationbuilding responsibilities by undertaking government entrusted different socio-economic schemes as well as money market activities of its own volition, covering all spheres of the economy. The bank has been converted to a Public Limited Company with 100% ownership of the government and started functioning as Sonali Bank Limited from November 15 2007 taking over all assets, liabilities and business of Sonali Bank. After corporatization, the management of the bank has been given required autonomy to make the bank competitive & to run its business effectively. Sonali Bank Limited is governed by a Board of Directors consisting of 13(thirteen) members. The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-known Banker and a reputed professional. The corporate head quarter of the bank is located at Motijheel, Dhaka, Bangladesh, which is the main commercial center of the capital.

Janata Bank Limited

Janata Bank Limited, one of the state owned commercial banks in Bangladesh, has an authorized capital of Tk. 20000 million (approx. US$ 289.85 million), paid up capital of Tk. 5000.00 million, reserve of Tk.8202.00 million and retained surplus Tk. 2737.00 million. The Bank has a total asset of Tk. 282423.00 million as on 30th November 2009. Immediately after the emergence of Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were renamed as Janata Bank. On 15th November, 2007 the bank has been corporatized and renamed as Janata Bank Limited.

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Janata Bank Limited operates through 860 branches including 4 overseas branches at United Arab Emirates. It is linked with 1202 foreign correspondents all over the world. The Bank employs more than 13(Thirteen) thousand employees.

The mission of the bank is to actively participate in the socio- economic development of the nation by operating a commercially sound banking organization, providing credit to viable borrowers, efficiently delivered and competitively priced, simultaneously protecting depositors funds and providing a satisfactory return on equity to the owners.

The Board of Directors is composed of 13 (Thirteen) members headed by a Chairman. The Directors are representatives from both public and private sectors. The Bank is headed by the Chief Executive Officer & Managing Director, who is a reputed banker. The corporate head office is located at Dhaka with 10 (ten) Divisions comprising of 37 (thirty seven) Departments.

3.2

Current pay for performance and financial incentive practices in public

and private banking sector of Bangladesh:________________________________

Pay for performance can encompass a variety of rewards for above average performance. The two most common are bonuses, which are one-time cash payments, and performance-based pay, which provides a permanent increase to base pay. Each of these has advantages and disadvantages, which are explored further below.

3.2.1 Bonuses:
Bonuses represent an amount of pay that is at risk every year. In contrast to base pay, which is stable and primarily reflects an employees market value, bonuses should depend purely on

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performance and are not guaranteed. Employees in these types of systems frequently receive a base pay that is considered comparable to average market rate to facilitate recruitment and retention of a high-quality workforce, but additional amount of money is distributed (often annually) on the basis of performance during the rating period. As a result, employees are guaranteed a certain salary, with the potential for earning more. The amount generally depends on a variety of factors, such as the available funding and the evaluation of the individuals contributions, but the bank retains discretion over how much to spend each year. As illustrated by the example shown in Figure 1, bonuses serve to raise an employees salary above average market rate but only on an annual basis. In other words, each year an employee must earn an amount above the base rate of pay. Since each years bonus is independent of the bonus earned in prior years, total salary can fluctuate dramatically from year to year. When the employee excels, he may receive a sizable bonus, but if the employees performance is average or lower, he may not receive a bonus and his salary drops to the base rate.

Effect of bonuses on private sector bank

In this report, we have taken six prominent private sector banks as our sample for private banking sectors. From the research, we came to know that the following are the most common type of bonuses that the private sector banks usually practice: 1. Festival bonus 2. Cash bonus 3. LFA In the following graph, we will display how the bank constructs the yearly salary paid to the employees of these banks from private sector:

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600,000.00 500,000.00 400,000.00

Yearly Salary

LFA Cash Bonus Festival Allowance Yearly Salary IFIC Bank Limited BRAC Bank Limited Eastern Bank Limited AL-Arafah Islami Bank Limited HSBC Bank Limited Shahjalal Islami Bank Limited

300,000.00 200,000.00 100,000.00 -

Figure 1: The bonus components in private banking sector. From the graph we can see how the bonuses construct the basic salary of an employee for a given year. Differences are clearly visible due to the differences in payment policies of the six different banks. For each of the banks, one pillar represents the average income of an employee of the bank concerned. The different color depicts the bonus components of the salary of that employee working in private sector banks. From the research what we can see is that in private banking sector of Bangladesh, the bonus components cover a significant portion of the salary. Each of banks has different payment policies for calculating bonuses of the employees. Each bank develops a formula for calculating different bonus schemes and that formula is built around the basic pay which means the bonuses follow different percentage of the basic pay of each employee.

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Effect of bonuses on public sector bank

In this report, we have taken two most prominent public sector banks as our sample for public banking sectors. From the research, we came to know that the following are the most common type of bonuses that the private sector banks usually practice: 1. Festival bonus 2. Medical allowance 3. TA/DA

160,000.00

TA/DA Medical Allowance Festival Allowance Sonali Bank Limited Janata Bank Limited Yearly Salary

Yearly Salary

150,000.00 140,000.00 130,000.00

Figure 2: The bonus components in private banking sector. From the research on public banking sectors where we tried to collect data from the two most significant banks of Bangladesh. Here what is more visible in the total salary of the public sector employees is the only significant component is festival bonus. The other two bonus components are not as significant as the elements of the private banking sector. The main reason for the difference is that the public banks follow a specified salary structure which is not as adjustable with the current economic situation.

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3.2.2 Performance-based pay increases:

In contrast to bonuses, performance-based pay increases are incorporated into the employees base pay and are usually only adjusted upward. Organizations differ in how they move employees through the performance-based pay scales. Some pay systems include pre-determined levels, which employees step through in an orderly manner, while others allow the supervisors to determine salary amounts anywhere within a broad range. As in the prior example, average market rate may be used to set a baseline for pay. The employee may be hired at this rate, but salary progression depends primarily upon performance. When the employees performance warrants a raise (during Years 2, 4 and 5), the employee receives an increase. The upward trend highlights the main difference between bonuses and performancebased pay increases: pay increases are typically treated as permanent increases.

250%

200%

Yearly Growth

Private Banking Sector

150%

100% Public Banking Sector Year01 Year02 Year03 Year04 Year05 Year06 Year07 Year08 Year09 Year10

50%

0%

Years of Service

Picture 2: Impact of pay for performance strategy in private and public banking sector

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In the private banking sector, there is a strong correlation between the yearly profitability of a bank and the total compensation package of an employee. In our research we found that at the end of every financial year, the private banks allocate a significant percentage of the before tax profit using through the performance based payment strategy. However, on the other hand, there is no such strategy of payment in the public banking sector to influence the growth both person and company wise, In the graph we can see that the yearly growth in the private banking sector is quite faster and with time the difference is becoming bigger. In the private banking sector, they follow a company wide policy to share a specific percentage of their yearly profit which is one the biggest impact creator on the growth. But in the public banking sector, the amount to be allocated as a performance bonus depends on the tenure and position of the employee in the hierarchy. Also the salary structure is reviews after a comparatively longer period, usually 5-6 years.

3.2.3 Combination strategy of bonus and pay for performance strategy:

As an alternative to choosing one or the other, most banks use both bonuses and base pay increases. Combining bonuses and base pay increases enables organizations to realize the benefits of both while limiting the downsides. For example, the bank may use bonuses to recognize exceptional achievements, while pay increases may be reserved for longer term accomplishments. Another option that eliminates or at least reduces some of the disadvantages associated with the use of one-time cash payments (bonuses) and performance-based pay increases, involves building a control point into the pay band. Base pay increases enable the employee to reach a certain salary level, often the average market rate for the skills encompassed in the pay band, which then serves as a ceiling for base pay. If an employee reaches this level and his performance would otherwise warrant a pay increase, a one-time payment may be given in lieu of increases to base pay.

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Consequently, such employees must compete each year for a bonus above the established market rate for their skill set. Another strategy is to set a higher control point for high performers, so these employees continue to receive pay increases until they reach a point higher than the average market rate (at which point they may continue to receive bonuses to recognize superior performance). Using these flexibilities enables an organization to set policies to help them recruit and retain employees with critical areas of knowledge, skills, and abilities.

Figure 3: The possible impact of combination strategy

In the example shown in Figure 3, a control point has been set at BDT 45,000. The employee is paid at the average entry level pay rate (management trainee) of BDT 30,000 per month in the

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first year. During the second year, he receives a performance-based pay increase to BDT 40,000. He does not receive an increase in the third year. In his fourth year, his performance warrants a BDT 50,000 salary, which would exceed the BDT 45,000 control point. Therefore, he receives a BDT 5,000 increase in base pay and the additional amount is paid as a bonus of BDT 60,000 in a year. In the fifth year, the control point holds his salary at BDT 45,000 and he receives a BDT 180,000 yearly bonus. As the example helps illustrate, control points ensure that employees do not receive pay above a certain level unless they sustain high performance levels. Employees at the control point may see this as a downside, since they cannot accurately predict what their salary will be each year, but at least they can be confident that their pay will not slip below the control point once they reach it.

3.3

The process performance based pay are funded in Banks:__________

In the private banks, financial results (e.g., income and profits) frequently determine and fund bonuses and pay increases. In this manner, employees are able to share in the increased proceeds that their efforts have brought to the company. In good years, funding is readily available. In bad years, the employees often share the downturn in the companys fortunes by receiving little or no salary increase or bonus, whether or not the companys decreased profit is due to their efforts or to external economic factors over which they have no control. Funding is dramatically different in the public sector. The Public Banks obtain financial returns from their work. Even when they do (e.g., revenue collection, law enforcement), it is rarely appropriate to allow Government employees to directly benefit from these returns. Furthermore, most government organizations are funded through appropriations, and the relationship between performance and appropriations is tenuous at best. High performance and mission accomplishment does not necessarily lead to larger appropriations, and mediocrity or failure may have few, if any banking consequences.

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3.4

The influencers of pay for performances in Banks:_________________

In banking sectors of Bangladesh, there are a few influencers of an employees pay for performance excluding his own performance. Given that various perspectives often offer a more complete view of an employees performance, it may be worthwhile to consider input from a variety of sources, including the first-level supervisor, the second-level manager, and the employees colleagues and customers, as well as directly from the employee. A 360 degree feedback instrument that includes input from higher levels, peers, and subordinates, and/or a balanced scorecard that includes business results and customer feedback help to ensure that important input is not overlooked.

Supervisor

In most pay for performance systems, supervisors have the greatest influence on employees pay increases because they make the assignments and evaluate performance. However, relying exclusively on supervisors may increase a pay for performance systems vulnerability to errors and abuse, as discussed previously. The risks are increased when some employees are experts at impression management and can convince a supervisor that they are performing above their actual level, while other employees achieve more but do not tout their accomplishments as well. Some supervisors may also be more effective at identifying and presenting their employees accomplishments. In other cases, supervisors may skew their ratings to unfairly reward favored employees at the expense of those who may be more deserving of pay increases.

Manager

Involvement of higher level managers in rating and pay decisions introduce a reality check whereby their perspectives are used to calibrate ratings and pay increases. For example, supervisors may accurately or inaccurately believe that their employees are above average.

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However, the next-level manager has the advantage of being able to compare accomplishments across work teams and may be able to provide feedback to bring a supervisors ratings in line with those for the rest of the organization. Another advantage may be that any intentional or unintentional biases that a supervisor has may be noticed if a second-line manager reviews the recommendations. Involving someone outside of the employees management chain may further increase perceptions of fairness, though it also probably reduces first-hand knowledge of performance that such a reviewer will have.

Employee (Self-rating)

With increasing supervisory ratios and the need for supervisors to devote time to tasks other than observing the work of their employees, it is understandable that supervisors may not be familiar with all of an employees accomplishments during a rating period. Hence, it is advantageous for employees to provide their supervisors with a summary of accomplishments during the rating period. This enables employees to explain extenuating circumstances that prevented achievement of all the established objectives and to highlight accomplishments supervisors may otherwise overlook. Although some employees may embellish or underestimate their achievements, effective supervisors will use this exchange of information as an opportunity to clarify actual accomplishments and discuss with employees past, present, and future goals and ways the employees can improve their performance.

Peers

Peers often occupy a position that provides them with insight into the day-to-day performance of their coworkers. Peers see coworkers on a regular basis and may be best able to judge the effort a colleague makes. Since their work is often very similar, peers are able to assess whether the outcomes reported by the employee are reasonable and if other constraints are operating that prevented the employee from accomplishing the desired objectives. However, peer input must be given weight cautiously, especially in a pay for performance setting where employees may view each other as competition because this may lead employees to undermine others to build themselves up or to establish mutually beneficial pacts with colleagues to rate each other positively. Further, opinions may be clouded by irrelevant biases if employees do not receive

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extensive training in proper evaluation techniques, which should raise their awareness of any discriminatory tendencies.

Customers

Many Public Banks have customers outside the Government, although the definition of customer may not correspond with what we typically view as a customer in retail or service environment. In these banks, employees need to treat their customers in a way that accomplishes the desired interaction in a professional, effective, and efficient manner. Additionally, bank employees who work in support functions, such as human resources, finance, and information technology, have customers within their banks. In some cases, customer satisfaction can be traced directly to individual employees and may be an appropriate factor to consider in evaluating performance.

Supervisor

Manager

Customers

Performance Appraisal

Emplyee Self

Peers

Figure 4: Influencers in private banking sector The private banks they follow a structured performance appraisal system to measure employee performance. In our research we found all thought different organizations follow different methods, but the inputs for judging employee performance main come from the Supervisor,

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Department Manager, Peers, Customers and on self cases self evaluation. And depending on the employees performance measure size of the performance bonus and pay raises are set.

Supervisor

Department Head

Performance Appraisal

Figure 5: Influencers in private banking sector In the public banks employee performance measure is doesnt follow a regular structured method as it is followed in the private banks. Here on only means of performance can be gathered from the inputs of the Supervisor or the Departmental Head.

3.5

Pay for performance decision points:___________________________

Understanding the theory behind pay for performance and its potential impact is critical to understanding the role performance-based pay can play in a bank. Nevertheless, Banks also need to pay attention to technical design points to ensure that the mechanics of the system are sound. The effectiveness of pay for performance in facilitating recruitment, retention, and motivation (and the resulting improvements in individual and organizational performance) depends heavily upon matching the approach to the situation. Thus, agencies need to carefully consider numerous

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decision points, such as those discussed below. To make it even more challenging, the various choices often have both advantages and disadvantages. Although it is tempting to simply transplant compensation systems from other organizations where they appear to be functioning well, agencies need to tailor pay systems to fit their unique circumstances and needs. Fortunately, agencies can learn from the dilemmas others have faced and base their decisions on experience gained elsewhere combined with information they glean from within. Questions banks need to ask themselves range from the most basic Is the bank ready for pay for performance? To the more specific, questions such as Who should be covered, what behaviors should be rewarded, and how bonuses should be distributed. Obtaining adequate funding and ensuring fairness can also challenge agencies, so these goals need to be pursued early in the planning process. Anticipating the substantial decision points and understanding the available options can help agencies make the best possible decisions. While exploring these issues requires some time and effort, it is worth the investment to avoid potential negative consequences in the long term.

Is the bank ready for pay for performance?

Given the appeal of paying for performance instead of tenure, many banks have already moved past deciding whether to adopt a performance-based pay system and are rapidly moving towards implementation. Some of these organizations may already have in place an organizational culture conducive to pay for performance. However, many do not. Fortunately, these banks do not have to passively wait for the conditions to improve. They can use pay for performance as a tool for organizational change to move the bank in the desired direction. For example, leading banks can drive major organizational change by demonstrating commitment to a performance-based pay strategy through their words and

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actions. As time progresses, the emphasis on performance perpetuates itself as the components of an effective pay for performance system facilitate further evolution towards a performance-based culture.

Since organizational culture may influence the ease with which pay for performance can be implemented, agencies may find it useful to do a self-assessment before deciding how to design and implement a new pay system. Table 3 displays relevant dimensions of organizational readiness and selected indicators to help agencies gauge where they currently are.

Dimension
Organizational Culture

Indicator
Both way Communication Trust between employee and supervisors HRM policies

Private Sector
Prominently visible Low level of trust Regularly practiced and monitored Strong and visible Decentralized and authoritative Clear and strong High Yearly Company profits Clear and mathematic

Public Sector
Top down approach and one way Comparatively higher No clear policies Weak and vague Centralized and Bureaucratic No clear discretion Low Every 5-7 years Government expenditure Bureaucratic

Supervisors

Employee efforts alignment Task structure Discretion and accountability

Performance Evaluation

Fairness and accurateness Time length

Funding

Pay increase and bonus Difficulty level

Table: Assessing organizational readiness for pay for performance

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3.6

Goals of pay for performance:_________________________________

In order to guide themselves through the decision-making process, banks should establish clear, realistic goals for pay for performance before taking any action to change their pay systems. Although recruitment, retention, and motivation (and resulting individual and organization performance) represent broad areas that agencies often wish to improve through pay for performance, banks should also consider other goals and priorities. For example, another goal those leading banks may have in mind when implementing pay for performance is to improve the equity of pay practices by providing more compensation to the highest performers. It is also useful to keep in mind the impact that pay system changes will have on the organizational culture and the importance of maintaining alignment between bank values and pay strategies. For example, if the nature of the work requires collaboration, a bank may choose a team-based reward structure or at least incorporate teamwork into the reward structure to avoid pitting employees against one another in competition for individual rewards.

3.7

Eligibility for receiving pay for performance:______________________

Pay for performance systems can be inclusive or exclusive. To choose the appropriate range of coverage, an organization needs to decide the message it wants the pay system to send to the workforce, including what is to be measured and how. Some organizations cover all employees with a single pay for performance plan to unify the workforce in pursuit of common goals. Other organizations limit performance-based pay to those employees with direct responsibility for the organizations core functions and results. For example, a pay for performance plan might be limited to front-line employees whose work is directly linked to mission accomplishment

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because their work is more readily measured (and of more immediate importance to the public) than work performed by employees whose activities indirectly support organizational goals. In other cases, performance-based incentives may be reserved for those employees at the top levels of the organization. The logic behind this strategy is that accountability should be limited to those with the most control over results. In other words, since executives exert substantial influence over organizational success, they are entitled to significant recognition or blame for what they do or do not accomplish. In the private sector, Chief Executive Officers often receive sizable bonuses or performance-based pay increases that are linked to organizational outcomes, such as attainment of profit or other financial goals. Likewise, in the Government Banks, Senior Executives are eligible for annual bonuses and pay increases linked to their achievement of organizational objectives. Limiting pay for performance plans to select groups may enable the organization to highlight clearer links between employee behavior and outcomes, but doing so may create divisiveness. Depending upon the circumstances, such as whether the dual pay systems offer markedly different earning potential, coverage may be viewed as distinguishing between the haves and the have nots, creating some dissension between the two groups. This is particularly relevant if the benefits provided to one group are viewed as coming at a cost to the other group.

3.8

Criteria in the pay for performance process:______________________

An essential point to keep in mind is that pay for performance is a powerful tool, which must be used wisely. The axiom that what gets measured, gets done has particular relevance when measures are reinforced by monetary incentives. For that reason, organizations must be very careful when deciding what to measure and reward, because they are quite likely to get what they measurewhich may or may not be what they really want. In other words, banks must be sure they are reinforcing desired behaviors associated with the most critical outcomes and not encouraging counter-productive responses.

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An effective performance appraisal system requires clearly defining expectations in advance, while recognizing that priorities may shift along the way. Enumerating specific goals gives employees a clear road map that they can use to decide how to allocate their time and efforts. Some jobs lend themselves more easily to this type of direction, while for others it is more difficult to specify in advance the precise accomplishments expected since the nature of the work is more complex or fluid. In these cases, flexibility regarding anticipated outcomes can be incorporated in the evaluation process. In the meantime, supervisors and employees should engage in continuing discussions so that expectations can be shared, despite necessary adjustments. Additionally, when circumstances outside the employees control determine outcomes, comparisons across employees in similar positions may assist the supervisor with evaluating employee performance. In such circumstances, supervisors subjective judgments necessarily play a role in evaluating performance. While subjective judgments cause some employees discomfort, supervisory discretion to evaluate performance is generally not something that canor should beorchestrated out of the process.

Use of multiple measures

Given the complexity of work, multiple measures are often necessary to adequately capture accomplishment. To decide what to measure, agencies need to ensure that they focus on important outcomes without excluding other critical aspects of individual or organizational performance. One common problem in this area involves organizations that set quantitative goals only to find a negative impact on quality because important qualitative aspects of performance were not included in the goals. In other cases, organizations accurately identified top objectives, but overlooked subtle, yet important, priorities or activities. For example by focusing employees attention only on part of a work process, such as timeliness, a bank can unintentionally instigate cutting corners and unsafe activities, which may serve to speed up the work process production at an unacceptable cost. While granting flexibility to employees who are pursuing difficult goals may encourage innovation, safeguards may need to be built in to ensure that necessary steps have not been inappropriately sacrificed. Additionally, it is important that the reward system does not undermine desirable aspects of performance, such as teamwork, that may not be explicitly recognized yet are important to organizational success. In situations that warrant looking at multiple facets of employee performance, a balanced scorecard5 perspective may prove to be

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very useful. Although notable differences between the private and public sectors impact what measures would be appropriate, a balanced scorecard approach for the public sector could include measures such as quantity and quality of output, teamwork, safety, and customer satisfaction, while focusing attention on the organizations overarching mission.

Alignment of organizational goals and measures

Supervisors frequently derive employees goals, at least in part, from high-level organizational goals. This cascading of goals is useful for aligning employee efforts with organizational objectives. To achieve this, employees need to understand how their individual performance supports organizational outcomes. However, supervisors should also recognize the value of a bottom-up approach that gives employees a voice in how they will be evaluated and some discretion in deciding how best to achieve the results desired. Excessive top-down control of goals, work methods, and job behaviors may stifle risk-taking and innovation by employees. In contrast, rewarding an open exchange of information may result in improved organizational outcomes over time as trust between the levels grows. Further, by aligning individual success with organizational success, there is a greater likelihood that agencies will be able to encourage employees to exert effort to achieve organizational objectives in concert with their personal goals.

Standardized (organizational) vs. tailored (individual) criteria

Choosing between standardized organization-wide evaluation criteria and evaluation criteria tailored to individuals largely reflects an organizations philosophy regarding the relative priority of what should be rewarded. Having a clear, overarching mission facilitates the use of standard criteria. Evaluating everyone against a common set of standards, linked to high level organizational goals, also serves to focus the attention of all employees on the highest level priorities. Likewise, using a bank-wide competency model reinforces bank values and promotes consistency across occupations and organizations. The downside of standardized criteria is that

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with their generality, the evaluation measures may not seem applicable to everyone. For example, front-line employees typically have a clearer line of sight to accomplishing mission objectives than administrative employees, who support the mission in a secondary manner. In other cases, the functions within an organization may be so diverse that it becomes difficult to use universal criteria. Providing leeway for tailoring criteria may be more appropriate in many banks. This individuation of evaluation criteria may be by organizational subcomponent, occupation, grade level, or other categories.

Individual vs. team vs. organizational performance

Similarly, the level at which performance is assessed for award purposes should reinforce the desired breadth of collaboration, although this must be balanced with the need to be able to identify individual contributions. It is important to consider whether cooperation should be encouraged within a discrete work unit or across a broader context, such as organizational components. For example, when employees work independently, it may make more sense to evaluate them individually. However, when high levels of interaction and communication are necessary, it becomes much more difficult to accurately measure the accomplishments of individual employees. Rewarding only individuals when mutual support helps advance the organizational goals may discourage cooperation and teamwork, to the organizations detriment. In other cases, the connection between individual performance and organizational performance appears relatively clear and individuals tend to provide relatively similar levels of contributions. In these cases tying individual fortunes to the organizational outcomes rallies the entire workforce to work together. Discord may result if some people do not pull their weight, although peer pressure can often remedy these situations. Organizations may also wish to supplement group measures with individual measures, such as teamwork, to recognize personal efforts. However, the best approach may be to include both specific individual goals and a broader view of contributions. Along these lines, the Government Accountability Office recommends linking individual performance with organizational goals to identify how daily activities eventually support high-level organizational goals. Maintaining the connection to the bigger picture provides employees with a bit more context than if they are only aware of their individual roles.

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The link to broader goals also enables consideration of additional behaviors that may not be explicitly described in a performance agreement yet are important to the organizations overall functioning. Ultimately, what works best in an organization will depend on the nature of the workers and the work, as well as the corporate philosophy. Some work groups are relatively homogeneous in their level of contributions, while the performance in others varies so much that individual differences should be recognized. Some work is clearly independent, while other projects require extensive collaboration and teamwork. Finally, some organizations want to promote active cooperation, while others may encourage a healthy level of competition.

Possession vs. demonstration of competencies

Pay for performance plans may also vary depending on whether they reward possession of desired competencies or require the actual demonstration of these competencies. Some banks forgo an outcome-oriented evaluation and instead focus on the development of competencies. For example, an organization may reward employees for possessing or obtaining certain competencies that the organization values because it believes it is useful to have staff on-board who possess certain capabilities. As a result, once the employee has been certified as possessing certain competencies, the bank may increase the employees pay whether or not the employee is called upon to demonstrate these competencies during the performance appraisal cycle. Other banks compensate individuals only for the time that they demonstrate the competencies. Banks may take this strategy a step further by focusing on demonstrated competencies in relation to organizational goals and performance. Under this strategy, employees must demonstrate that their increased competence enables them to perform more effectively to support achievement of organizational outcomes. For this system to be effective, an organization must clearly identify the competencies that are required for optimal organizational performance and measure employees possession of those competencies. If done properly, advantages of this approach may include the opportunity for ambitious employees to be compensated for developing themselves, which in turn benefits the organization by increasing the depth and breadth of its talent pool. Consequently, career progression can be tied more closely to competencies that support organization goals rather than to tenure.

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Short-term vs. long-term goals

Performance appraisal cycles in the banks are typically one year in duration. As a result, shortterm goals may be more easily assessed than long-term projects, which may cross multiple assessment cycles. For assessments to be fair, the life cycle of projects should be taken into account and proper credit given for progress towards the end goal. Further, complex projects can usually be broken into intermediary steps to evaluate progress against these milestones. Taking both short and long perspectives into account helps ensure that employees on the extended projects will be rewarded for their achievements to date and not forced to wait until project completion years down the line. Without intermediate reinforcement, employees might gravitate toward quick-return assignments and neglect the more challenging endeavors.

External constraints

A common frustration for employees involves the inability to control all of the factors that affect their performance and results. These include changing priorities; supervisor-controlled work assignments and resources; geographical variations in workload or other conditions; and access to equipment and information, as shown in the following examples. An employee may work diligently toward a goal, only to have the priorities shift just before project completion. Supervisors also exercise control over some of the parameters of what an employee can accomplish by allocating job assignments and training. Another external variable is location, which often drives workload and therefore, could be factored into performance-based pay decisions. For example, one location, such as a large business hub, may have a greater volume of traffic than a smaller rural branch. Similarly, the work done at a headquarters office is usually quite distinct from that done at branches. The unavailability of needed equipment or information can also prevent employees from working at their optimal level. Therefore, many of the variables that determine individual productivity operate outside of employees control. Although some banks may focus exclusively on outcomes, others may decide to keep external constraints in mind when making pay and award decisions to avoid penalizing high performers who are

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negatively impacted by circumstances beyond their control. At a group level, work units are sometimes dependent upon another unit for a critical step in the process and cannot proceed until that entity completes its role. There may also be uncontrollable external events that hamper successful completion of objectives, such as budget limitations or technical failures. Therefore, individuals or groups may find that they have worked hard and have done everything they can, but are impeded by factors outside their control. Again, in these cases, raters must consider how to evaluate performancewhether to rely entirely on outcomes or to give at least partial credit for effortskeeping in mind that it can be quite de-motivating to employees if the rating system is so rigid that it does not take external factors into account.

4.

Recommendations for efficient and effective pay for performance

4. 1 Banks must tailor pay for performance systems to their mission and
environment:

Pay for performance focuses attention on the monetary aspect of the relationship between employees and organizations. However, the greatest changes that pay for performance effects in individual and bank performance are probably those stemming from increased emphasis on defining and communicating goals to employees, providing concrete feedback, and heightening employees sense of responsibility for contributing to well-defined portions of their organizations goals. To ensure that employees efforts are aligned with banks priorities, supervisors need to take the banks unique goals, needs, and environment into account when defining employee objectives.

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4.2 For pay for performance to be effective, banks need to meet certain
requirements:

These include: A culture that supports pay for performance; A rigorous performance evaluation system; Effective and fair supervisors; Appropriate training for supervisors and employees; Adequate funding; A system of checks and balances to ensure fairness; and Ongoing system evaluation

While many of these requirements relate to effective human resources management practices that are important to any organization, pay for performance further increases their necessity. Attending to these human resources management issues provides agencies with a much greater likelihood of achieving a fair and effective pay for performance system.

4.3 To make pay for performance successful, banks need to make a substantial
investment of time, money, and effort:
Pay for performance systems require substantial initial and continuing investment. These resources must be carefully spent on building and maintaining a system that suits the banks mission and objectives.

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4.4 Performance evaluation serves as the foundation of a pay for performance

system:
An effective performance evaluation system is a fundamental prerequisite of pay for performance. Agencies must be able to communicate with employees regarding what the organization values and how it will accurately measure employee contributions to these goals. Without this information, agencies would be unable to appropriately distribute performancebased pay increases and bonuses.

4.5 Agencies should select supervisors based on their supervisory potential,

develop and manage them to function as supervisors rather than technicians or staff experts, and evaluate and pay them based on their performance as supervisors:
Because supervisors play a pivotal role in pay for performance systems, it is essential that they be able and willing to perform the important supervisory functions inherent in performancebased pay systems. To achieve this goal, agencies must select, train, and pay supervisors based on their demonstration of qualities that are suited to a pay for performance environment.

4.6 Communication, training, and transparency are essential elements of a

good pay for performance system:
The key to the effectiveness of a pay for performance system rests with clarifying the mission and objectives of the organization, how these are linked with employees efforts, and consequently, what competencies, behaviors, and/or outcomes the organization values. Open communication regarding goals and progress; training in the philosophy and mechanics of the pay system; and transparency regarding how the system operates can mobilize the workforce in the desired direction.

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4.7 Checks and balances are necessary:

Banks can greatly facilitate the real and perceived fairness of the pay system by building in appropriate checks and balances. Although knowledge about the banks pay for performance plan and transparency regarding its outcomes can help supervisors and employees understand how the system should work, other mechanisms to ensure fairness are needed to further raise and maintain confidence in the system. In this report, we have discussed requirements of a successful pay for performance environment. Table 2 summarizes the characteristics that organizations should demonstrate to most effectively support pay for performance. However, taken as a whole, these qualities represent an ideal setting that exists in few, if any, organizations. Given that organizations cannot (and should not) wait for perfect circumstances to begin to implement pay for performance, agencies should keep these features in mind as a goal, and work towards them. Fortunately, if done correctly, implementing a performance-based pay system can also help agencies move in the direction of these critical success factorsif they understand how pay for performance can help them reach these goals. Banks management need to understand that they have enormous discretion and can select from a multitude of options to build a performancebased pay system that will work well under their unique circumstances. The greatest challenge for many decision makers is likely to be making the choices that will best enable their pay system to help them to achieve their goals.

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5.

Conclusion:___________________________________________________

To ensure that the pay for performance system is operating as intended, the banks should conduct ongoing data analyses to evaluate the systems impact. These analyses should provide a comprehensive perspective on the effects of the pay system at various points in time, comparing, for example, pre-implementation measures with data for the system as it progresses and when it becomes firmly entrenched in the organizational culture. The focus of the analyses will vary according to organizational emphases, but issues such as fairness, cost, and the distribution of funds should be relevant to every bank.

At a minimum, organizations should conduct some basic analyses of data from the human resources management data files to ensure that the system is operating in a fair, efficient, and effective manner. For example, the banks should compare performance ratings, salary levels, and pay increases by various demographic groupings, while keeping other factors in mind, such as employees tenure, education, and job series. They should also monitor the frequency (as a percentage of the population) of bonuses or increases and their amount to ensure that the distribution is consistent with organizational philosophy. Finally, banks need to develop objective measures to help examine the impact of the pay system on outcomes. Clearly, no one model exists for how to design, implement, and operate a pay for performance system. While banks can learn from the experience of others, ultimately, each organization must consider the issues carefully in order to make the best decisions given their unique circumstances. Although paying for performance requires attention to an extensive list of serious issues, considering them in advance of implementation enables banks to lay the groundwork for a successful performance-based compensation system. Since many of the decisions are interrelated, it is critical that they be considered simultaneously. While one best answer may not be readily apparent, banks must consider the best information that they can gather during the

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design phase. Upon implementation, an ongoing effort to evaluate results and adjust the system as necessary should be viewed as a logical and critical aspect of supporting the system. Changeespecially change as momentous as introducing pay for performancecreates stress in an organization. When banks embark on significant changes with low levels of trust in place, employees frequently experience anxiety about how they will be impacted. However, properly building, implementing, and operating a pay for performance system can actually serve as a tool for developing trust between supervisors and employees. Although such initiatives may encounter resistance in the initial periods but with time most of concerns regarding pay for performance will be proven unfounded as employees became comfortable with the new system. Therefore, the fear of the unknown may be overcome if the right approach is taken. The problems associated with the pay for performance in public and private banks are making these organizations face difficulties in making ultimate financial growth. If the banks overcome these problems, then it is possible to be internationally competitive banks in the competitive globe. So, the Human Resources Division as well as the top strategic level management should find out underlying causes of weaknesses related to of the banks and to be more supportive to eradicate the problems for achieving the highest position in this industry in the country at least.

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