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Rewarding Performance

Delve into the intricate world of rewarding performance in Corporate Finance with this comprehensive guide. This resource sheds light on the role, importance, and methods of effectively rewarding performance in business. It explores numerous factors that influence the creation of a performance-driven rewards strategy, and elaborates on the connection between…

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Rewarding Performance

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Delve into the intricate world of rewarding performance in Corporate Finance with this comprehensive guide. This resource sheds light on the role, importance, and methods of effectively rewarding performance in business. It explores numerous factors that influence the creation of a performance-driven rewards strategy, and elaborates on the connection between corporate finance and performance-related rewards. By understanding the art of rewarding performance, you can significantly boost employee motivation and business growth. This guide provides practical techniques and innovative approaches to use in your business.

Understanding Rewarding Performance in Corporate Finance

Rewarding performance is a crucial facet in the field of Corporate Finance. It plays an instrumental role in shaping a company's culture, promotes efficiency and productivity, aids in attracting and retaining talented employees and essentially feeds into bolstering profits.

The Importance of Rewarding Performance in Businesses

In the dynamic and competitive business world, rewarding performance has profound significance. An effective reward system in a corporate setting impacts several aspects such as employee attraction and retention, motivation, job satisfaction, and team building. Consider this:

Performance-based rewards are additions to employees' regular pay, granted as recognitions of exceptional effort, hard work, dedication or innovation.

The impact of rewarding performance tends to encompass:
  • Attraction and Retention: Top-quality prospective employees are attracted towards organizations that reward efforts and achievements.
  • Motivation: When employees know their efforts won't go unnoticed, the level of motivation elevates. It pushes them to perform in ways surpassing their previous capacities.
  • Job Satisfaction: Performance-based rewards are key contributors to job satisfaction. When an employee feels appreciated, they tend to enjoy a higher level of satisfaction which impacts their productivity positively.
  • Team Building: When accomplishments are rewarded, it promotes a sense of team spirit as employees work together for their mutual benefit and success.

A company Alpha Corp introduced performance-based bonuses that resulted in a 1.5 times increase in employee productivity, and significantly reduced turnover rates within six months.

The Role of Performance Rewards in Employee Motivation

Rewards, especially those tied to performance, play pivotal roles in motivation. This motivation isn't limited to improving an individual’s working efficiency, but also motivates others to push their own benchmarks. Rewarding performance can be either extrinsic or intrinsic.

Extrinsic rewards are tangible rewards such as bonus, increase in pay or promotions. Intrinsic rewards, on the other hand, are intangible and relate to psychological rewards like recognition, appreciation, and positive feedback.

The relationship between rewards and motivation can be exemplified by the Expectancy Theory proposed by Victor Vroom. According to this theory: \[ Motivation = Valence \times Expectancy \times Instrumentality \] Valence reflects the degree to which the employee values the rewards, expectancy measures the belief that increased effort will lead to increased performance, and instrumentality is the belief that if one performs well, then a valid outcome will be there.

While rewarding an employee's performance is important, the reward must be seen as fair and equal. The perceived Equity or fairness of rewards is linked to the employee's motivation level. Research shows that perceived inequalities in rewards can demotivate employees and reduce their productivity.

Resorting to an effective performance reward system helps keep the employees feel valued, enhances their level of commitment, and ensures that the best talent stays within the organization.

Techniques for Rewarding Performance

An effective performance reward strategy requires employers to adopt different techniques orientated towards rewarding high-performance standards. Be it through financial incentives, fostering a culture of appreciation, or offering opportunities for personal and professional development, these techniques can drive strong work ethic and foster a culture of high performance.

Common Techniques Used in Appraising and Rewarding Performance

There are several widely adopted techniques for appraising and rewarding performance. These can be broadly classified into monetary rewards, non-monetary rewards, and recognition. Monetary Rewards: This approach includes financial incentives like:
  • Raise in salary
  • Bonuses
  • Stock Options
  • Profit share
The specific type of monetary reward offered can depend on the employee's role, the company's financial capabilities, and the achievement being rewarded. Non-Monetary Rewards: If the company's budget restrictions do not allow for substantial monetary incentives, there are numerous other ways to reward employees:
  • Additional leave days
  • Flexible working hours
  • Training and development opportunities
  • Office perks (like a prime parking spot or name on a company leaderboard)
Recognition: Recognition isn't necessarily a tangible reward, but a public acknowledgment of an employee's exceptional effort. This could be carried out at team meetings or corporate events. It builds employee confidence, fosters a positive work environment, and doesn't necessarily require a significant financial investment from the company.

Commendation and Recognition: An Example of Rewarding Performance

Consider a scenario where a team in a tech company has successfully completed a demanding project within a tight deadline. A simple, yet effective example of performance recognition in this situation could involve:

The manager publicly commending the team's hard work during the company-wide meeting, highlighting specific achievements, acknowledging individual contributions and reiterating the positive impact of their work on the company's growth. The team could also be written about in the company newsletter, or be permitted a few extra leave days.

Innovative Methods in Rewarding Performance

In the contemporary corporate world, innovative methods of rewarding are increasingly being adopted to cater to modern workforce needs. Companies are creative in their approach here. Personalized Rewards: Understanding an employee's individual preferences can help tailor a reward that is particularly satisfying for them. It could range from a cooking class for a culinary enthusiast to a set of books for an avid reader. Gamification: Gamifying achievements and rewards can significantly boost employee engagement. Implementing a system where workers earn points for reaching certain milestones, which can be later exchanged for rewards, can be increasingly motivating. Peer Recognition Programs: Allowing employees to acknowledge each other's efforts can foster a sense of unity and shared success within the team. A "kudos" system where employees publicly appreciate colleagues' achievements can create a culture of recognition and positivity. All these innovations, while diverging from traditional methods, redefine rewarding performance in unique ways. They can be powerful tools to maintain motivation and encourage superior performance among employees.

Factors Influencing Rewarding Performance

Rewarding performance in the corporate world isn't a one-size-fits-all venture. The strategy adopted to reward employees' success hinges on a multitude of factors, both internal and external to the organisation. These factors are integral in shaping not only the type of rewards businesses offer but also how they motivate and retain their employees.

Internal Factors in Shaping Performance Rewards Strategies

Several key internal factors can significantly influence the strategy that organisations adopt for rewarding performance. Firstly, organisational culture plays a substantial role in reward systems. Organisations with cultures that value teamwork would likely reward team performance, while entrepreneurial cultures might reward individual innovation and initiative. Another internal factor is the performance measurement system. Organisations need reliable ways to assess employee performance objectively. The evaluation criteria can influence the rewarding strategy as rewards are usually tied to these performance measurements. Financial affordability also impacts an organisation’s rewards strategy. Firms need to assess what they can afford before implementing any rewards scheme. Monetary rewards like salary hikes, bonuses, and stock Options, while appealing to employees, can burden company finances. So companies might resort to non-monetary rewards to incentivise staff. Lastly, the structure of the organisation can influence reward strategies. For instance, in decentralised structures, reward decisions could be left in the hands of departmental heads, while in centralised structures, a uniform reward policy might be implemented throughout the organisation.

A reward strategy is a firm's formal policy to incentivise and motivate its employees through rewarding their performance. The strategy usually outlines how the company measures performance, what rewards it provides for meeting objectives, and how it allocates these rewards.

External Factors Influencing Techniques for Rewarding Performance

Just as internal factors play their part, external influences also significantly impact how businesses shape their performance rewards strategies. The industry standard is one of the primary external factors affecting the rewarding performance. Organisations often look at industry standards as a starting point when designing their rewards strategy to remain competitive and appeal to potential talent. Jein the next external factor is laws and regulations. External laws regarding minimum wages or overtime, for instance, dictate the baseline for certain types of rewards. Additionally, tax laws may impact the affordability of certain rewards, particularly for smaller or financially-constrained organisations. The economic climate is another critical external factor. During prosperous economic conditions, organisations can afford to provide generous rewards. In contrast, during economic downturns, firms might need to cut back on their rewards expenditure, potentially focusing more on non-monetary rewards. Lastly, businesses must consider the current labour market. In a competitive job market, an attractive rewards system can draw talent. However, in saturated labour markets, the emphasis on rewarding performance may be less pronounced.

The labor market is the pool of qualified potential workers in a particular industry or economy, representing competition among employers to hire the best candidates and among employees for the best jobs.

The Interplay of Corporate Finance and Rewarding Performance

Corporate finances and rewarding performance are inherently interlinked. Both financial and non-financial rewards can have significant financial implications for a business. Whether it is budgeting for bonus payments, allocating shares, funding professional development programmes or cost of employee turnover, these factors directly impact a firm's profitability and sustainability. Understanding the Return on Investment (ROI) of performance rewards is crucial for businesses. ROI, in this context, refers to the value gained by the company in terms of increased productivity, decreased turnover, and enhanced company morale against the expense of the reward system. Performing a cost-benefit analysis before implementing a reward strategy is also paramount. Businesses must evaluate if the expected benefits in terms of enhanced productivity and team morale outweigh the costs associated with the rewarding system. The budget allocation assigned to employee rewards also forms an integral aspect of corporate finance. This allocation should be balanced and efficient to optimise the Returns on monetary expenditure while sustaining employee motivation and job satisfaction. Lastly, the Equity theory plays a vital role here as it deals with the perceptions of workers regarding their input-to-outcome ratios and the fairness of their financial Compensation. The finance department should ensure equitable distribution of rewards to maintain a motivated and productive workforce. Given these interplays, businesses need to strategically implement rewarding systems in line with their financial capabilities, ensuring sustainable and beneficial practices. They need to be cautious that inefficient rewarding strategies may lead to financial drain and demotivated employees. Hence, a considered balance between corporate finance and rewarding performance is of utmost importance.

Rewarding Performance - Key takeaways

  • Rewarding performance is key in corporate finance, impacting a company's culture, efficiency, productivity, and profitability.
  • An effective reward system can drive employee attraction and retention, motivation, job satisfaction, and team building.
  • Performance-based rewards can be extrinsic (tangible rewards) or intrinsic (intangible or psychological rewards).
  • Techniques for rewarding performance can be monetary (e.g., salary increase, bonuses), non-monetary (e.g., additional leave days, training opportunities), and recognition.
  • A reward strategy must consider internal (e.g., organizational culture, performance measurement, financial affordability, and company structure) and external factors (e.g., industry standards, laws and regulations, economic climate, labour market).

Frequently Asked Questions about Rewarding Performance

The key principles are fairness, clarity, measurability, and relevance. The system should be fair and equitable, clearly communicated, based on measurable performance indicators, and aligned with the overall goals and values of the business.

Rewarding performance can significantly influence employee motivation and productivity within a business. It encourages increased output, fosters a positive work environment, inspires employee loyalty, and stimulates a culture of continuous improvement. This is because recognised achievement promotes personal satisfaction and validates the employees' value to the organisation.

Businesses can implement strategies such as performance-based bonuses, recognition awards, paid time-off, profit sharing and stock options. They can also offer personalised incentives like flexible hours, professional development opportunities, added responsibilities or promotional opportunities to reward exceptional performance.

The nature of a job role impacts the method of rewarding performance as different roles require different skills and outcomes. For instance, a sales role might be rewarded based on sales achieved, whereas a creative role might be rewarded based on the innovative ideas generated.

The advantages of financially rewarding performance are increased productivity, motivation and loyalty. However, potential drawbacks may include fostering unhealthy competition, increased pressure and stress, and the risk of encouraging quantity over quality.

Final Rewarding Performance Quiz

Rewarding Performance Quiz - Teste dein Wissen

Question

What is Economic Value Added (EVA)?

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Answer

EVA is the net operating profit a company makes after deducting its capital costs. It helps determine if a business is earning more than its cost of capital, hence showing the company's financial performance.

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What does a positive EVA indicate?

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Answer

A positive EVA indicates that the business is creating wealth for shareholders, signifying that the operating profit is more than the cost of capital.

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How is the Economic Value Added (EVA) calculated?

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Answer

EVA is calculated as NOPAT (operating income * (1 - corporate tax rate)) minus the product of Invested Capital (equity + long-term debt) and Cost of Capital.

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Question

What is the role of Economic Value Added (EVA) in business valuation and corporate finance?

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Answer

EVA evaluates a business's performance by discerning the economic profit it generates above its cost of capital. It aids in making investment decisions, performance measurement, managerial compensation, and value creation. Businesses with positive EVA often attract more investments, signifying sustainable profitability.

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Question

What is the difference between Economic Value Added (EVA) and Market Value Added (MVA)?

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While EVA is an internal measure of value creation, calculated using operating profit after tax minus the cost of capital times the invested capital, MVA is an external measure calculated by subtracting the capital invested from the total market value. Both are centered around value creation for shareholders, despite different approaches.

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Question

How is Economic Value Added (EVA) valuation calculated and how does it work?

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Answer

EVA valuation is calculated by subtracting the product of the invested capital and cost of capital from the net operating profit after taxes (NOPAT). A positive EVA indicated wealth creation, attracting investors. If a business's EVA is declining, it signals the need to rectify the situation before value destruction becomes a problem.

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Question

What are the key advantages of using Economic Value Added (EVA) as a performance measurement tool?

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EVA encourages value creation, promotes capital efficiency, and provides a comprehensive measure of a company's performance by combining elements of income, balance sheet, and cash flow statements.

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Question

What are the disadvantages or limitations of using Economic Value Added (EVA)?

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EVA's calculation can be complex and time-consuming, and its focus on financial returns and capital efficiency may overlook other vital aspects of business success such as customer satisfaction, innovation, and employee morale.

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Question

Why should businesses pay attention to Economic Value Added (EVA)?

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EVA is a comprehensive performance metric that provides insight into true economic profit, promotes a value-oriented culture within the organisation, and signals profitability and value creation to external stakeholders.

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Question

What is a primary problem with the Economic Value Added (EVA) methodology?

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The primary problem with EVA is its innate complexity, which involves rigorous financial data and numerous, potentially subjective, adjustments.

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What is one common misuse of the Economic Value Added (EVA) metric?

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One common misuse of EVA is the overemphasis on short-term performance at the expense of long-term value creation.

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What does a negative Economic Value Added (EVA) indicate about a company?

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A negative EVA simply means the company's returns did not exceed the cost of capital over the measured period. It does not necessarily indicate the company is performing badly.

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Question

What is the definition of Residual Income in corporate finance?

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Residual Income is the net operating income or profit that exceeds the minimum required return. It's often used to measure the profitability of an investment or a division in a company.

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How is Residual Income calculated?

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The Residual Income formula is represented as: RI = NI - (CE x COC), where RI is the Residual Income, NI is the Net Income, CE represents the Capital Employed and COC is the Cost of Capital.

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How does an understanding of Residual Income aid in better investment decisions?

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Understanding Residual Income can assist investors, business owners, and financial managers in identifying truly profitable ventures or investments, leading to an improvement in overall financial performance.

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What is the formula for calculating residual income in a business finance setting?

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The formula for calculating residual income is RI = NI - (CE x COC), where RI is the Residual Income, NI is the Net Income, CE is the Capital Employed, and COC is the Cost of Capital.

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What factors may affect the calculation of residual income?

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Factors that may impact the calculation of residual income include changes in the company's revenue and costs, which affect net income, and changes in total assets and current liabilities, which affect capital employed.

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How is capital employed computed?

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Capital employed is computed as the net assets of a company, calculated as total assets minus current liabilities.

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Question

What are the two essential components represented in a basic residual income chart?

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The time as the X-axis and the residual income figures as the Y-axis.

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What steps are followed to plot a basic residual income chart?

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1. Collect the necessary data 2. Plot the points on the chart 3. Connect the plotted points using lines.

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What are some tips for interpreting a residual income chart effectively?

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Look for trends, spot significant fluctuations, and compare with other metrics.

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Question

What is the Residual Income model in the field of business studies?

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The Residual Income Model is a finance approach used to evaluate the net income of a firm after considering the cost of capital. It's a tool to assess financial performance; it calculates surplus income after covering all business expenses and the desired return.

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What is the formula used in the Residual Income Model?

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The formula for the Residual Income Model is Residual Income= Net Income - (Capital Employed x Cost of Capital). Where Net income is total earnings after tax, Capital Employed is sum of company's debt and equity, and Cost of Capital is minimum return expected by investors.

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How does the residual income model find practical application in a business context?

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The Residual Income Model is used in performance evaluation, making budgeting decisions, determining bonus allocation, and in investment decisions. It helps in assessing cash flows and profitability, enabling informed decisions for business growth.

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What are the key advantages of using residual income as a financial evaluation tool?

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The advantages of residual income include accounting for the cost of equity, calculating true economic profit, promoting better capital utilization, and serving as an effective performance metric for project evaluation and budgeting.

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Question

What are the major disadvantages of using residual income as a performance metric?

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The disadvantages of residual income include a potential short-term focus, dependence on accurate calculation of the cost of capital, confusion with absolute values, and a tendency to favour expansion without considering associated risks.

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How should businesses balance the advantages and disadvantages of residual income for effective decision-making?

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Businesses should optimise the use of residual income's advantages, such as equity cost and true economic profit, while being wary of its potential drawbacks like short-term focus and confusion due to absolute values. This balance will allow for robust decision-making.

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Question

What is the definition of Rewarding Performance in the context of Corporate Finance?

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Rewarding Performance is a strategy where financial and non-financial rewards are distributed to employees for achieving predefined business goals. These rewards can be in the form of bonuses, promotions, recognition, or other benefits.

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Why is Rewarding Performance crucial in Business Studies?

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Rewarding Performance is crucial for motivating employees, attracting high-quality candidates, reducing turnover, and aligning the goals of the individual with those of the business.

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How does Rewarding Performance play a role in Corporate Finance?

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Rewarding Performance in Corporate Finance aligns employee motivation with the company's financial goals, directly influencing the company's bottom line. Various reward systems like merit-based, profit-sharing, and stock options help achieve this.

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Question

What are traditional ways of rewarding performance in corporate finance?

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Traditional ways of rewarding performance include: bonuses based on business and individual performances; annual salary increments for ongoing contributions; promotions for individual growth and contributions; profit sharing to foster a sense of ownership; and stock options to align employees’ interests with the shareholders.

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What are some techniques for rewarding performance in corporate finance?

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Techniques include assessing performance against predefined goals, commissions based on a percentage of sales, Relative Performance Evaluation (RPE) to create competition among employees, and Behaviour Anchored Rating Scale (BARS) to consider employee's behaviour and attitude.

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Question

What are innovative ways companies reward their employees?

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Innovative rewards include non-financial recognition like 'employee of the month' awards, educational opportunities such as conference participation or certifications, and work-life balance perks like additional leave or flexible working hours.

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Question

What is Google's approach to rewarding performance?

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Google's performance reward system includes competitive salaries, stock options, and perks like free meals, on-site healthcare, and other wellness benefits. This holistic approach fosters a positive work environment that contributes to higher productivity.

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Question

What approach did Microsoft adopt for rewarding performance, according to a case study?

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Microsoft implemented the "Connects" performance management system that fosters continual learning through timely feedback. The rewards include financial rewards, career advancement opportunities, and recognition.

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What is Salesforce's approach to rewarding performance?

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Salesforce offers cash bonuses to its employees based on key business objectives. Also, employees who exceed expectations are celebrated through the 'Salesforce Ohana Culture', which acknowledges and rewards exceptional work.

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What are the key factors that influence the rewarding performance in a company?

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Answer

The key factors influencing rewarding performance are organisational objectives, employee performance, resource availability, job nature, and market conditions.

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How does resource availability affect the reward system in a company?

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Resource availability not only determines the monetary value of rewards but also impacts the feasibility of non-monetary rewards such as training and development opportunities.

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How can organisational objectives influence the rewarding performance process?

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Organisational objectives fundamentally steer the kinds of behaviours and results that are rewarded. They help determine department-specific or individual KPIs and form the basis for the rewarding performance mechanism.

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Question

What are the benefits of integrating appraisal and rewards in a business environment?

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Integrating appraisal and rewarding performance in businesses promotes fairness, enhances job satisfaction and performance, and aids in retaining the best talent. It fosters a culture of transparent meritocracy, improved morale, and increased productivity.

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Question

What are the two processes involved in evaluating and rewarding employees' performance?

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The two processes are Appraisal, a formal assessment of employees' work performance, and Rewarding Performance, which involves compensating employees for their contributions to the organisation.

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Question

What are some strategies for effective appraising and rewarding performance?

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Effective strategies include setting clear and achievable objectives, maintaining two-way communication, ensuring transparency with regards to the appraisal process and its link to rewards, ensuring consistency in appraising and rewarding, and extending rewards beyond just monetary incentives.

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Question

What is the significance of rewarding performance in the corporate world?

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Answer

Rewarding performance has profound significance in the corporate world. It impacts areas like employee attraction and retention, motivation, job satisfaction, and team building. It also shapes a company's culture and promotes efficiency and productivity.

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Question

What are performance-based rewards and what impacts do they have?

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Answer

Performance-based rewards are additions to the regular pay of employees, granted as recognitions of exceptional effort, hard work, dedication or innovation. They impact attraction and retention, motivation, job satisfaction, and team building.

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Question

What are extrinsic and intrinsic rewards?

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Answer

Extrinsic rewards are tangible rewards such as bonuses or promotions. Intrinsic rewards relate to psychological rewards like recognition and positive feedback.

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Question

What is Victor Vroom's Expectancy Theory related to employee motivation?

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Answer

According to Victor Vroom's Expectancy Theory, motivation equals valence times expectancy times instrumentality. Meaning, an employee must value the rewards, believe that increased effort will improve performance, and trust that good performance will be rewarded.

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Question

What are the three broad classifications of techniques used for appraising and rewarding performance?

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The three broad classifications of techniques used for appraising and rewarding performance are monetary rewards, non-monetary rewards, and recognition.

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Question

What can monetary rewards for performance include?

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Monetary rewards can include a raise in salary, bonuses, stock options, or profit share.

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How can recognition act as a technique for rewarding performance?

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Recognition is a public acknowledgment of an employee's exceptional efforts, which can build employee confidence and foster a positive work environment without a significant financial investment.

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What are some innovative methods of rewarding performance in the modern corporate world?

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Some innovative methods of rewarding performance include offering personalised rewards based on employees' individual preferences, gamifying achievements and rewards, and starting peer recognition programs to foster unity and shared success.

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Test your knowledge with multiple choice flashcards

What is Economic Value Added (EVA)?

What does a positive EVA indicate?

How is the Economic Value Added (EVA) calculated?

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Flashcards in Rewarding Performance50+

Start learning

What is Economic Value Added (EVA)?

EVA is the net operating profit a company makes after deducting its capital costs. It helps determine if a business is earning more than its cost of capital, hence showing the company's financial performance.

What does a positive EVA indicate?

A positive EVA indicates that the business is creating wealth for shareholders, signifying that the operating profit is more than the cost of capital.

How is the Economic Value Added (EVA) calculated?

EVA is calculated as NOPAT (operating income * (1 - corporate tax rate)) minus the product of Invested Capital (equity + long-term debt) and Cost of Capital.

What is the role of Economic Value Added (EVA) in business valuation and corporate finance?

EVA evaluates a business's performance by discerning the economic profit it generates above its cost of capital. It aids in making investment decisions, performance measurement, managerial compensation, and value creation. Businesses with positive EVA often attract more investments, signifying sustainable profitability.

What is the difference between Economic Value Added (EVA) and Market Value Added (MVA)?

While EVA is an internal measure of value creation, calculated using operating profit after tax minus the cost of capital times the invested capital, MVA is an external measure calculated by subtracting the capital invested from the total market value. Both are centered around value creation for shareholders, despite different approaches.

How is Economic Value Added (EVA) valuation calculated and how does it work?

EVA valuation is calculated by subtracting the product of the invested capital and cost of capital from the net operating profit after taxes (NOPAT). A positive EVA indicated wealth creation, attracting investors. If a business's EVA is declining, it signals the need to rectify the situation before value destruction becomes a problem.

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