The quantitative compensation model depends on the performance scoring system as a basis for formulating a reward scheme for performance.
The detail of the components are as follows:
The NFV metric used is Economic Profit, EP (also known as Economic Value Added, EVA™ measure) with the adding back of any new investment, above normal staff training expenses and extra-ordinary promotional expenses for the year , considered the most appropriate financial measure as it takes into consideration both the organization’s employees and the investors’ interest into consideration. The definition is as follows:
EP = NOPAT – (WACC*Capital Employed)
Or EP = Invested Capital (ROIC – WACC)
where NOPAT stands for Net Operating Profit After Tax (before interest charges), WACC stands for Weighted Average Cost of Capital (all funding sources, including shareholders fund),
The Continuous Process Development metric, CPD is as follows:
CPD = a + b*Customers + c*Operations + d*Innovation + e*Manpower + f*Regulatory
where;
Customers processes (e.g. Customer relationship management, customer service turnover time)
Operations processes (e.g. supply chain, flexible production)
Innovation processes (e.g. Quality Function Deployment or also known House of Quality approach, concurrent prototyping and market testing)
Manpower management processes (e.g. internal 'selling' process of management objectives to staff, appropriate structure of staff performance review system)
Regulatory or Social Processes (e.g. lobby process, strategic public communication program) and
a, b, c, d, e and f are constants related to the specified indicators.
The choices of special projects for development, SPD are wide and diverse or at times, none for certain business years. Hence, it is necessary to dedicate a metric to monitor and reward its performance based on the pre-defined organization indicators for the projects.
To illustrate the application of metric, two possible projects for organization development are namely; mergers and acquisitions, M&A or market share goal.
The possible key indicators in market share metrics are:
a) The percentage market share attainment of each business units.
b) The level of customers’ awareness change of the organization or its products.
c) The level of ‘positiveness’ towards the organization or its products’ image
i. The success level of channel development
ii. Other criteria that are in congruent to market share goal
Given that each strategic process development project are different, the SPD metric will be defined as follows:
SPD = a + b*Indicator 1 + c*Indicator 2 + …...+ n*Indicator N
where each of the Indicator, 1 to n represent the respective key indicators that are chosen and its respective constants.
The Share Price Metric, SPM metric is defined as follows:
SPM = (MVAYearN+1 – MVA YearN) / MVA YearN
Where MVAYearN+1 is the MVA at the end of the year N and
MVAYearN is the MVA at the beginning of the year N.
The organization risk management, ORM metric of OP-Score model is as follows:
ORM = a + b*R + c*M + d*F + e*O + f*I + g*HR + h*E + i*P
where;
R is Reputational Risk
M is Market Risk
F is Financial Risk
O is Operations Risk
I is Innovation risk
HR is Human resource (or Manpower) and Administration risk
E is Economic risk
P is Political and Regulatory risk and,
a, b, c, d, e, f, g, h, and i are constants associated with the respective risk measures.
Building on the Performance Scoring System, the quantitative compensation model is as follows:
For further details to the rationale of these indicators and sub-indicators and the methodology of establishing the appropriate compensation system, it will be in the book that I will be publishing soon. For those who are interested in the book, please email me at artlim66@hotmail.com
