Performance Management and Compensation

Question: Discuss about the Performance Management and Compensation. Answer: Introduction Microsoft is an American multinational technology company which is develops and sells different kinds of software products, electronics and personal computers. The most popular products of the company are Microsoft Office Suite, Internet Explorer and Bing Search Engine. It is one of the largest software maker and distributor and considered as one of the worlds most valuable company. The company is run by board of directors similar to other publically traded companies and they are selected every year. There are five other committees including the audit committee, compensation committee, finance committee, governance committee and antitrust compliance committee which oversee the different aspects of the companys business (Microsoft, 2017). In the 1990s, the global computer and the software industry was dominated by IBM; however, with its innovation and cutting edge technology. Microsoft emerged as the new global leader in the software industry. Microsoft Corporation is the leading multinational technology company founded in 1975 by Bill Gates and Paul Allen in Washington. In the first decade of 21st century, the competition in the software industry has increased drastically. The software companies have implemented several strategies to foster innovation and offer the most technically advanced products to the customers. In this regard, developing excellent organization culture is important as human resources are highly significant in the fostering innovation within the organization. However, in the recent times, the performance of the company is constantly degrading. The high attrition rate of the company is a significant factor in degrading the overall performance of the organization. In this essence, this report will examine the performance management and the compensation issues in the company and several recommendations will be made to address the situation (Microsoft, 2017). Performance Management and Compensation Management Issue The compensation management and the performance evaluation is one of the most challenging tasks of the human resource management. A business organization can achieve its objectives and goals by taking into cognizance the performance management of the organization. With the effective implementation of the compensation packages, a business organization can motivate the subordinate employees to reach beyond the expected performance level (Shields, 2016). The employee compensation is the integral part of the relationship between the employees and the employer as the employer work for the wages and remuneration in the company. The remuneration incentives and the compensation is directly associated with the performance management practices of the organization. If a business organization is ineffective in the performance evaluation of the employees, they are unable to retain talented workforce within the organization (Colvin, 2015). With the increased market competition, Microsoft along with other technology companies implemented a stack based performance review system. In this system, the companies have to evaluate each and every employee of the organization. This performance evaluation tool was popularized by Jack Welch, CEO of General Electric. In this rating system, the employees have to be evaluated in three categories, namely, high middle and low. The performance rating system was badly received by most of the employees as they considered that they were either badly reviewed or the performance management method made them to compete with each other. It reduced innovation in the company as the employees avoided sharing their ideas with each other and started to compete with each other (Allen, 2013). It is a destructive management technique which has degraded the performance of the company s every venture it has entered recently, such as e-books, music, search and social networking. It is a stack ranking syst em wherein every unit or team of the organization has to declare a certain proportion of the employees as the top performer, good performers, poor and average. The bizarre competition among the employees also increased the attrition rate of the organization and drove out some of the best performers of the company (Buckingham, 2013). This performance management system resulted in the employees competing with each other rather than competing with other companies. Moreover, the employees instead of honing their skills made efforts to reduce their visibility to their manager. It is also very difficult for the managers to rank every team member in a graph, when actually the whole team has performed better. This is important to understand that each member in a team has a specific set of skills and knowledge which is indispensible. When the employees are ranked in a linear system, it reduces their overall motivation and productivity (Warren, 2013). With the inappropriate performance management system, the company is also lagging behind offering the employees and the workforce in accordance to their contribution to the organizations performance. However, the pay gap between the median workers salary and the CEO is very high. The CEO of the Microsoft earns about 615 times higher than its median employees. Although the compensation that the CEO of a company receives is highly volatile as it contains bonuses and the stock options such that the CEO earnings vary every year (Saleem, 2015). The excessive CEO compensation is a problem for the business organizations as it makes the companies pay more than necessary to these executives which ultimately hurt the interest of the shareholders and workers. As per the current trend, the companies design the whole compensation package for the top executives as an incentive pay wherein they are provided total remuneration on variable performance measures such as stock prices and net turnover. H owever, it is conducted to align the interest of these executives with the shareholders. It is not ideal practice as it leads the CEOs to focus on the short term profitability and share market return rather than the long term growth of the organization. This practice also leads the corporate boards to pay more than unnecessary to these executives (Gelenbe, 2000). Analysis and Discussion of the Identified Issues In the recent years, the overall performance of Microsoft Corporation has substantially declined due to the number of external and internal factors. In the present competitive business scenario, the human resource is considered as the most critical asset to the organization. They are specifically significant for an organization when it relies on innovation and creativity (Chai, 2009). In this regard, it is important for Microsoft Corporation, to design its performance management system so that a positive organization culture is established in the organization which assists in the growth of the organization. The performance management is the discipline of the human resource management which assists an organization to achieve maximum productivity with its resources and assets. The performance management practices are implemented in an organization so that the organization can achieve the maximum output from its human capital. Several times, it is observed that the interest of an employ ee is not aligned with employer which results in pursuing of different goals by the employees. Therefore, it is important for an organization to align the organizations objectives with the objectives of the employees. The performance management practices assist the organization in achieving maximum performance. The performance management practices encompass certain aspects such as performance evaluation, monitoring, providing feedback and helping the employees in achieving their performance objectives (Solomon, 2009). There are several theories associated with the current performance management practices of the organization such as principal-agent theory, game theory and the human capital theory. The principal-agent theory presumes that when the goals and benefits of one party does not align with the goals of another party, then the principal party needs to identify a rational way to exercise control over the agents. In this theory, the actors are considered as self-interested individuals who try to maximize their profits. The game theory is another theory which underpins the performance management system and suggests that each person tries to maximize his profits, benefits and other returns in a rational and legal manner. However, this theory states that the rational choice for a person might not be the rational choice for the entire group. Another theory which underpins the performance management practices of the current organizations is the human capital theory wherein the cost for the skilled labor should be considered as the investment cost rather than the operating cost (Caldwell, 2002). The performance management of the employees requires both intrinsic motivation and extrinsic motivation. The intrinsic motivation of the employees refers to employee motivation through objective setting, performance review and training and development. Along with it, the extrinsic motivation of the employees refers to outcomes of good performance such as recognition awards and incentives (Houldsworth and Jirasinghe D. 2006). The current performance management system of the organization is dependent upon game theory. With excessive feedbacks and incentive based compensation, the companies try to align the goals of the organization with the goals of the employees. However, they fail to recognize that the human capital are the major asset to the organization and they must be motivated to achieve the organizations goals rather than competing with others. The stack based performance management system also reduces the communication between the employees and the employer. It increases the f rustration of the employees and increases the voluntary turnover rate of the organization. The assessment of the employees performance directly clashes with the responsibility of the managers to motivate the employees. The capability of the supervisor or the manager to counsel and mentor their subordinates is also compromised as an employee is unwilling to confess their shortcomings or weaknesses when it can impact the performance rating at the next annual review. Along with it, the performance review system of Microsoft is also problematic as the bias or the personal prejudice of the mangers may interfere with the honest review of the employees. An ineffective performance review system can decline the performance and morale of the employees. The CEOs compensation is also significant ethical issue in the contemporary organizations. The design of the CEO compensation is challenging for an organization as the CEO of an organization is responsible for creating wealth for the shareholders and other stakeholders of the organization. The responsibility of the CEO is to create wealth for the shareholders; therefore, if his returns are not tied to the organizations goals than there is no effectiveness in the CEOs compensation. With the widening gap between the compensation of the top level executives and the middle level employees, the companies are struggling to achieve the collaboration and team spirit required for their success. There are also certain ethical and moral issues which require that the executive compensation should be limited (Elson, 2003). Recommendations for Improvement As the performance management and the executive compensation of Microsoft Corporation is degrading the performance of the organization, it is important for the organization to abandon the current practices and implement changes within the organization to increase the employee productivity and the performance. The organization should abandon the current feedback system and motivate the employees to achieve their regular targets. The annual performance review diminishes the productivity of all the managers and the employees as they worry about how to rank the employees honestly justifiably. Microsoft can learn from Abode system to design a different performance management system in accordance to their suitability for their organization. Abode Corporation realized that although the performance rating system was developed to increase the efficiency and the productivity of the organization, the employee turnover rate increases suddenly at the end of the year after the performance review. Moreover, performance management should be focused to develop more effective teams; however, it is distracting the managers from meaningful work. In this regard, the company has implemented a check-in system wherein clear expectations are set, frequent positive and negative feedbacks are given without any rank ing or ratings (Elnaga and Imran, A 2013). It is a positive feedback system and the employees can be evaluated honestly without any fostering any feeling of competition. In the previous stack ranking system, the companies have to evaluate the performance of the employees and kept them in certain criteria. However, there was no accommodation when more employees are fitted in a single criterion. In this regard, the performance evaluation system of abode allows giving positive feedback to all or no employees. The company should also make investment to grow talent within the organization. Appropriate training should be provided to the employees with low performance. If the performance of the employee has declined suddenly, then the human resource professionals should explore the reason of the sudden decline in the performance rather than terminating the employee (Noee al., 2006). The executive compensation is a controversial issue as the compensation contracts predict that the providing proper incentives to the CEO will increase the long-term value for the organization. However, it rarely happens in the designing of the executive packages. The companies need to align the business incentives with the contribution of the CEOs to the value created within the firm. In this regard, the firms should emphasize on development of more explicit employment contracts and increase the correlation between firms objectives and the goals of the top management. The compensation of the CEO must not be determined by himself (Llense, n.d.). The overall package and the share of different incentives and stock options must be determined by the board of director and other human resource experts. It is also important that the board members of the organization do not have any undue influence of CEO or his or her close associates. Before the determination of the exact remuneration pack age, the firm should conduct extensive research regarding the compensation structure of CEOs in similar organizations. Moreover, the firm should also evaluate the nature of the organization and how the compensation level affects the overall productivity (Conyon, 2006). Conclusion Microsoft Corporation is a leading technology company headquartered in Washington. The company is one of the leading organizations in technology and innovation. The human resources are considered as a significant asset in fostering innovation capabilities and increasing the productivity of the organization. However, the current performance evaluation system has degraded the performance of the workforce and reduced the employee morale. It has increased the voluntarily employee turnover rate in the recent years. With the lack of the accurate performance measurement tool, the compensation system of the organization is also compromised. The gap between the CEO compensation and the employee compensation is enormous which shows that the distribution of the organizations profits is not equivalent. In this regard, Microsoft Corporation should learn from the performance management practices of Abode system and determine the CEO compensation independent of the CEO or his/her close associates. References Allen, F.E. 2013. The Terrible Management Technique That Cost Microsoft Its Creativity. Forbes. [Online]. Available at: https://www.forbes.com/sites/frederickallen/2012/07/03/the-terrible-management-technique-that-cost-microsoft-its-creativity/#97f02e6dbf86 [Accessed on: 7 March 2017]. Buckingham, M. 2013. Trouble with the Curve? Why Microsoft is ditching Stack Rankings. Harvard Business Review. [Online]. Available at: https://hbr.org/2013/11/dont-rate-your-employees-on-a-curve [Accessed on: 7 March 2017]. Caldwell, C. M. 2002. Performance Management: EBook Edition. AMACOM Div American Mgmt Assn. Chai, N. 2009. 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