Business Report: Barclays

Challenge of establishing effective incentives and reward systems

One of the main challenge in developing an effective incentive and reward system is the difficulty in specifying the kind of performance that is desired so that the employee can be rewarded.The remuneration policy of Barclays is pegged on the balanced scorecard to assist in measuring of the performance. The balanced scorecard is used in determining both the financial and non-financial performance. The challenge arises in determining the value of the non-financial activities. For instance, the competency and hard work of an employee may not be measured in monetary terms. This implies that it will be difficult to measure the performance of the employee(Michael Dennis Graham, Effective Executive Compensation: Creating a Total Rewards Strategy for Executives, 2008, p. 109).

Lack of clear communication within the organization may pose a challenge in developing an effective incentive system and reward system. An effective remuneration strategy helps in ensuring that employees are rewarded for providing the organization goals and objectives(Kressler, 2003, p. 45).

There is no formal decision that is made regarding the hierarchical nature of rewarding the employees. In most organizations, there is no well defined egalitarian approach that is used in rewarding the best performing employees. The implication is that employees who are in higher ranks of the organization often receive a higher amount of money than the junior staff. In such situations, a climate of different status of power is created. This may also lead to additional status differences. The junior employees will feel inferior(Ryan Watkins, 2009, p. 79). This is the same case in Barclays. For example, in 2013, the senior executives in Barclays will receive a higher amount of rewards than the junior staff. The junior employees are thus de-motivated. The main challenge involves creating a reward system that will be acceptable to all employees.It would be beneficial for Central Bank to implement a uniform reward incentive and reward system. This involves eliminating special entrances for the senior staff and executive restrooms. People from all levels within the bank should work together, travel together and eat together. Another challenge involves determination of the reward mix that would be appropriate. Rewards are in many forms. The form of rewards include fringe benefits, medical insurance or in the form of cash.Other employees may prefer the rewards in the form of status symbol. Depending on the nature of the reward, not all employees will be satisfied. For example, reward in the form of cash may be considered to be very high. However, the money may lose value upon conversion into fringe benefits and other perquisites(Bain, 2010, p. 149).

The reward system applied by Barclays involves payment towards defined contribution pension scheme, annual leave, and life assurance and health benefits. The defined contribution pension scheme for Barclay’s employees is known as the Barclays Pension Savings Plan. Some employees are interested in cash rewards. This implies that the nature of rewards offered by Barclays may not yield the same level of satisfaction to all employees.Hence, defining a universal type of reward system that is acceptable to all employees is a challenge.

Majority of incentives and rewards do not create an enduring commitment among the employees. Studies have shown that most of incentives and rewards are meant to secure employees’ temporary compliance. For example, punishment does not produce lasting attitude among the employees. Barclays offers market competitive pensions and benefits to its employees. In September 2012, Barclays launched a program referred to as ‘My Rewards.’ The program was meant to provide competitive remuneration package and rewards for Barclays employees. Such incentive programs were essential in reducing the rate of employees’ turnover. However, the rewards would not be effective in a situation where an employeegets better rewards in another organization. Alternatively, the employees may seek alternative sources of employment once the benefits and rewards run out(Michael Davis, 2004, p. 63). There are difficulties associated in setting up effective incentive and reward system that reflects the productivity of the workers. Employees who do not expect to receive any form of reward are reluctant to improve their output. Additionally, it is difficult to set up a reward system for senior management. Andrew Tinney, the former chief operating officer at Barclays’ high end private investment decision, was entitled to an annual package worth around $5 million in salary, bonus, incentive payments and share options.

Andrew was involved in misleading banking regulators and the then chief executive, Antony Jenkins. Andrew’s actions show that there is no relationship between rewards and productivity. Despite the high amount of rewards and incentive, Andrew still engaged in fraudulent activities. This is an indication that there is no relationship between the reward system and productivity for the senior management( Great Britain: Ministry of Defence, 2010, p. 25).

How modern organisations might constructively seek to compensate their executives

An effective remuneration and reward system for company executives is crucial in supporting an organizations’ business strategy. Effective executive remuneration results to cost savings, good company reputation, and corporate culture, attracting and retaining highly qualified executives.However, executive compensation should be reasonable and competitive. The compensation package of the executives should be tied to the organizations’ performance. There should be a clear relationship between executive performance and the incentives being paid(Balsam, 2002, p. 181).

An organization can compensate the executives in the form of share options. This involves giving the executives the option to buy the organization shares at a fixed price. The executives, however, will buy the shares at a future date. In case there is an increase in market value of the shares, the executives will buy the shares at a discount since their purchase price had already beenpredetermined. The executive management will be motivated to work hard in order to increase the value of the organization(Michael Dennis Graham, 2008, p. 101).

The executives may also be compensated in the form of bonuses. This involves offering the executives a profit-based remuneration. For example, an executive’s salary may be based on the amount of profit. An increase in the annual profit, therefore, implies that there will be an increase in the amount of bonus. This is clearly demonstrated in Barclays. In 2012, the bonuses paid to the Managing Director were 100% deferred at a graduated level of deferral.

Bonuses are meant to reduce the level of conflict between the shareholders and the management. In most organizations, bonus payment is used as a way of reducing the conflicts between the top management and shareholders(Michael S. Sirkin, 2000). There must be a positive correlation between bonuses and the performance of the executives. Performance of an executive may be measured by things such as profits or revenue growth, share price appreciation and/ or return on equity. An increase in customer base and profits may be used as a measure of the performance of Barclays Bank executives.

Paying executive expenses is also another significant method of compensating the executives. Paid expenses or perquisites involve paying some executive expenses for the senior management. The expenses may include fuel expenses and reimbursement of private expenditure. Alternatively, the organization may provide benefits such as sick leave and vacation to the executives.Other benefits include employer paid servants, group insurance and disability income. The benefits act as motivation to the executives. As a result, the executives will invest in projects that yield high returns to the organization. The remuneration policy committee in Barclays Bank may implement the benefits discussed to its senior executives. For example, the executives may be provided with company cars, entertainment allowance and insurance benefits(Lars Oxelheim, 2008, p. 57).

Stock ownership by the executives is a significant method of compensating executives.Common stock ownership involves giving the executives ordinary shares. Ideally, the executives’ interest will be tied with the interest of the shareholders. However, the executives must be given bonuses on the condition that the proceeds will be used in buying in buying the company shares. In such situations, theexecutives and the shareholders will have the same interest. Instances of conflict of interest will be reduced. Stock ownership will also motivate the executives to keep the share price increasing. This will encourage the executives to focus exclusively on the performance of the organization.It is common for executives to manipulate the financial statements of an organization in order to ensure that short term targets are achieved. Such scenarios would be minimized by having stock ownership(Frederick D. Lipman, 2008, p. 13).

A competitive retirement remuneration package is also a form of executive compensation. It is crucial for every organization to provide adequate, sufficient and competitive remuneration package for all employees.Most executives will be interested in the benefits they will receive after retirement. The value of the retirement package will have a significant influence on the behaviour of the executive during their employment. Poor remuneration package may force the executive to engage in illegal business activities.Barclays bank should also incorporate the concept of competitive remuneration package for its executives(Organisation for Economic Co-operation and Development, 2002, p. 231).

Conclusion

Effective incentive and reward system play a crucial role in improving the motivation of employees. It is the role of the human resource department to set up effective incentives and reward systems for an organization. In addition, the department should ensure fair remuneration package for the executives. The remuneration package must include the retirement package for all employees within the organization. It is important to ensure that the benefits and rewards paid to the executives are in accordance to the company policy. It is also important to disclose all the benefits, rewards and bonuses paid to the executives in the statement of comprehensive income. The company should devise ways of measuring the performance of employees in the organization. The company should also have clear methods used in identifying the employees who should be rewarded.