Executive compensation

As a service company, Noncredit is dependable on the consistent perfection offered by their employees. With over 1 57,000 employees worldwide, Noncredit has the terrific task of maintaining excellence throughout. In order to satisfy this complex mission, noncredit places their employee’s at the heart of the company. This policy report attempts to value the importance Of Unaccredited employment by understanding the processes applied to noncredit, questioning these processes in terms of appropriateness to the industry and by recommending possible different opportunities to consider.

The main focus of this report will be put on Unaccredited overall human capital, on the relationship between performance and compensation and on the incentives driving the employee’s actions. The policy report will end by an overall conclusion about the issues treated. . Human Capital Matching is the very first step in hiring new employees. As every company is different, not every candidate with similar skills and abilities will fit as well for the job since differences in human capital lead to different future outcomes in terms of performance and productivity.

In the financial sector the workers portfolio of skills and abilities will be an important determinant in finding the perfect fit between the worker and the job. At Noncredit much is demanded of some employees outside their working hours. For example, an investment banker should be willing to take on extra work late at night or on the keened in order to fulfill the tasks required. Two employees with the same set of skills and abilities will probably not react in the same way when pressured by such extra work. Noncredit achieves this amount of commitment by focusing on leadership development. Taking into account the differences of the required tasks, it is possible to match the employee with his best fitting job in order to avoid many turnovers. 2. 1 . General and Specific Knowledge At Noncredit, job candidates are required to have a high level of previous general knowledge in order to be fit and ready to start professionally right away. Indeed, financial positions require extensive amounts of labor hours, therefore preventing new employees to undertake on the job training.

At the beginning it is important for the employees to concentrate on the regular tasks rather than spend costs and time on trainings. It is also really important to decide which kind of job training the firm should invest more in. At the beginning the company might gain greater effectiveness by offering job training for a consultant than to an investment banker. Indeed, Noncredit offers induction programs to acclimatize new employees and help them feel like a part of the organization. However, after the employee got used to the job and is familiarized with his tasks, training is indispensable for all kind of positions. 20th of them have required skills to start to work on their position right away, however the first one needs to have specific knowledge to know how to deal with the clients of a specific bank, to operate certain IT systems and to provide clients with essential information for their decision-making, whilst the second one needs to use more general skills that are not specific for this company. 2. 2. Training Once employees are established in the company, more time is available for hem to pursue specific training programs in order to increase the knowledge and skills required to deliver the best services to all customers.

At Noncredit, careers are at the core of the company. Different training and professional skills enhancement programs serve as a bridge towards never-ending opportunities. The aim of the company is to attract and retain a highly skilled workforce in order to meet its goals and develop future success at Noncredit. Noncredit provide a framework for career development, enabling talent to identify the most suitable positions in which to grow an advance (Our people 2012).

Noncredit improves specific human capital by offering training programs for particular, specified jobs in the banking industry to make employees more up- to-date with the overcharging financial environment and to ensure that the workers remain highly qualified and competent. On the job training is an opportunity to inform the employees about new trends and regulations upcoming in the financial sector. It develops the potential of highly skilled employees and therefore increases their possibility for future promotion within the company.

On the job trainings are also aimed to increase the knowledge and skills squired to deliver best-in-class services to both internal and external customers. Training programs are also important in order to mend general human capital, thus to improve teamwork in a company, to raise worker’s ability to learn foreign languages or to help employees’ gain the ability to deal with multitasking jobs. In order to be successful in the long-term, units of Noncredit have to follow the market trends and adjust their specific investment strategies in order to make the customers satisfied. This concerns all job positions in the company.

Most job trainings at Noncredit cannot be categorized by either general unman capital or firm specific human capital, but a mix of both. The company has to pay attention on the fact that the required general human capital increases the worker’s value on the entire labor market, not only in the company. Indeed, if Noncredit offers graduate programs to employees they must keep in mind that the individual is still free of making his own choice. An employee who receives education from the firm can use the situation to his advantage and gain from new and different possible opportunities.

The company can never be certain that if they pay for the employee’s education, hither the worker would decide to stay with a company for a long time. However, if the employee does stay within the company then Noncredit secures groups of loyal workers trained from the beginning, according to the needs of the company. When Noncredit behaves in that way, the employee’s trust increases, thus he becomes more motivated and more productive. 2. 3. Investment vs.. Substitution Policy On the other hand, a company can develop the skills of an employee through investing in his education.

It is in general a good investment for companies to offer training programs and further education. For Noncredit, looking for students and graduates, investing in education and developing the capabilities of employees are a major strategy as the employees are the most valuable assets for the company. Indeed, this strategy is especially important for service companies as the level of quality can vary much more. The customer perceives the quality level of services and firms therefore have little control.

For example, Noncredit offers international graduate programs and also two distinct master programs for students and graduates. They concentrate a great amount on young graduates since they have more time o build their careers. Noncredit also offers a variety of scholarships that make sure the student is $” devoted to developing the right abilities for the company. Students must attend at least 1 ,OHO hours Of classes, workshops and seminars followed by a 3-month internship and the final thesis. Despite the fact that education represents general human capital it is a good investment for Noncredit.

The reason behind this is that the company needs to have a good, long-term relationship with a qualified work force. Furthermore, paying for future employees’ studies gives the opportunity to he company to have highly qualified workers with the right mix of skills and the right extent of education that is needed for a job. Lastly Noncredit manages through these education programs to build long-term relationships with their employees. They strengthen the bond between them and their employees to ensure that these are not only qualified but also motivated and enthusiastic.

Despite the fact that many companies follow the substitution strategy in apprenticeship training, in the case of Noncredit an effective way is to follow the investment policy. At the company, apprenticeship programs are good illusions to develop the employees from the beginning on. However, the method of using apprentices as cheap substitutes for unskilled or semiskilled workers is not realizable in Unaccredited case. The substitution strategy works against their culture of developing a highly skilled work force to be successful.

Furthermore, it is not possible to work with unskilled employees in the financial sector due to the fact that it requires a lot of knowledge. Most of the positions at Noncredit, for example an investment banker, are impossible to us bustiest by cheaper working force without decreasing productivity and laity of the services rendered whilst increasing the risk that company will face. In this case Noncredit can only use an investment strategy to keep their performance stable and succeed in the future. It may be easy to think that the job of, for example a consultant, can be substituted.

However, even that kind of position needs specific training to improve specific human capital. If noncredit decided to hire a less skilled person then they would have to train him in order for him to know how the specific tasks of a consultant at Cindered look like. Most of the trainings at Noncredit represent a mix Of unreal and specific human capital. It means that they need to invest, so this is no longer a substitution strategy. To conclude, we can say that there are several clear relationships between firms and their employees.

Once an employee is chosen and hired, there are various programs that a firm may W’ offer to guarantee highly skilled and qualified members of staff. The company must identify the different opportunities from which they can benefit and act appropriately. An increase in human capital leads to an increase in performance and productivity of an employee and consequently to a higher salary. . Pay for Performance 3. 1 The principal-Agent problem Relationships are at the basis of every social activity that people encounter. In economics, the basic framework to underpin the concept of relations is the principal-agent theory.

The idea behind this problem is that the agent acts on behalf of the principal, that certain conflicts of interest may arise and that the principal must provide something in return to the agent. In order to align the interest of both parties, the agent must be given incentives and the principal should be able to measure the actions of the agent precisely. Measuring the reference of employees is one of the most difficult tasks an employer can accomplish. Indeed, the principal cannot be around his employees at all times to validate their actions.

At Noncredit, managers promote the use of efficient collaboration between departments and individuals, making the disentanglement of individual actions complicated. 3. 2 Quantitative performance measurements The main measurement mechanism is quantitative evaluation; it makes use of numeric information to measure performance. Noncredit Group has an essential accounting department, which uses quantitative data to measure the company overall performance. When using a quantitative evaluation plan, the principal must keep in mind that the employee doesn’t have all the factors of his job under control.

For example; a private investment manager from Noncredit can’t evaluate the performance of his employee based on the total stock price of the company, as too many uncontrollable factors would be taken into account. A more suitable quantitative performance measure would be the employees average expected return offered to his clients. Quantitative measurement can lead to important disadvantages. Distortion arises when the agent has some asymmetric information about the weights f importance that are allocated to his different tasks.

Distortions can lead to unmerited return for the employee and especially for the financial sector excessive risk taking by the employee. For example, if a financial adviser, from Noncredit, has the task to maintain a 15% return for his clients whilst keeping the risk for the firm to a minimum, could decide to purposely take excessive risks to maintain a high return, as he knows he will receive higher compensation for it in the short-term. In general, firms have constructed their performance measures depending on the design of each job.

Narrow job designs, with a restrained amount of tasks to fulfill, are attributed narrow performance measurements whereas a job in which multitasking is often required to have broad performance measurements. This automatic matching applies to Noncredit as the CEO is evaluated for the overall accountability for Company results, regardless of their specific individual achievements (Noncredit 2012 Group Compensation policy). 3. 3 Subjective performance measurements As a firm providing services in the financial sector, Noncredit was built and developed, at first, around quantitative results.

Positive results meant growth ND therefore a great deal of emphasis has always been placed on quantitative performance measures. This quantitative, pay for performance philosophy has grown to become one of the components of Unaccredited corporate culture. Nevertheless, over time, standards have improved and noncredit has evolved with them. Indeed the use of subjective performance measurements is more and more present at Noncredit. In most of Unaccredited branches, employees receive a subjective grade once or twice a year.

Effective subjective evaluation can bring many benefits to the company. It can help to avoid many typical flaws in quantitative measures. Indeed, at noncredit the board of directors has implemented a self-evaluation procedure since the financial crisis to try and control their activities to a maximum extend. The company should also use it to reduce distortion in incentives and manipulation. Noncredit has also written a report about “their people” to encourage communication been their colleagues on their progress in achieving the strategic plan’s goals.

It also helps to filter Out uncontrollable, thus decreasing risk. Subjective evaluation gives managers the chance to improve the worker’s effectiveness every day, not only after he gets valuated. At Noncredit more experienced workers should work with younger employees by helping and coordinating them. Since employees, working in the financial sector, need to be well skilled and qualified, it is important for noncredit to have a good relationship between the managers and workers, In order to enhance trust to retain these highly skilled employees.

However, qualitative measures must be accompanied by an ex ante indication of objective parameters to be considered in the evaluation, the descriptions of expected performance and the person in charge for the evaluation Noncredit 2012 Group Compensation Policy). Indeed, there are also some downsides to subjective evaluations. It is difficult to remain completely objective when appraising. Most of managers, not only at Noncredit, but also in plenty of other companies, give employees overly positive ratings. It is not a bad habit, because giving employees bad ratings can decrease their motivation.

However, the company and manager should maintain their attitude on appropriate levels. The major drawback of qualitative evaluation is the risk of bias; employees want to work in an environment where each individual is treated airily and equally and where their compensation reflects the work they have provided not the supervisor’s personal opinion. The board needs to remember that subjective evaluation is not always effective on its own; rather a multi;perspective view of sustainable performance results and quality should be adopted.

Noncredit should maintain an adequate mix of financial quantitative goals with non-financial performance objectives. Noncredit has been putting more and more emphasis on decentralized evaluations. Their 201 2 “people priorities” underline the many social issues they want to address. Unaccredited main points of improvement are to engage employees, to enhance leadership and development and to foster inclusion and diversity. In 2011 , Noncredit launched their sixth edition of the people survey, with roughly 1 1 5,000 questionnaires completed and a 72 percent participation rate.

In addition to this survey, the company is promoting social dialogue through improved interaction be;en management and employees. Noncredit provides regular opportunities for consultation, most importantly during the Cindered European Works Council (SEC) meeting. Cooperation twine management and employee representatives also resulted in the implementation of the 201 0 agreement on voluntary early retirement in Italy and alignment of compensation with European and Group standards in Croatia (Our People 2012).

Even though Noncredit has taken specific actions to improve the quality of work and the interactions between management and employees, some recommendations can still be given. Using 360-degree evaluations should help cooperation and also decrease the risk of biased (” subjective evaluations. In practice, the company needs to involve the employees in giving feedback to the supervisors. Remember only, that it is more effective to do this evaluation in secret. This will give the company more reliable survey results, assuming that the employees are conscientious and responsible.

As Noncredit is a company that has cultural norms and job designs, which insist on open communication, the 360-degree evaluation is likely to be effective. 3. 4 Reward-based incentive schemes Besides a linear pay for performance scheme, there are several other pay- performance relationships. Noncredit decided in 2000 to follow the guidelines proposed by the Financial Stability Board (IFS). Their implementation tankards are based on the fact that, compensation at significant financial institutions is one factor among many that contributed to the financial crisis that began in 2007.

Official action to address unsound compensation systems must therefore be embedded in the broader financial regulatory reform program (IFS Principles for Sound Compensation Principles, 2009). Applying the Fib’s principles and standards, Noncredit makes use of the reward incentive scheme. It is a popular system where employees earn a base salary for low levels Of output, only earning a bonus when their performance rises above a certain threshold.

According to Unaccredited 2012 compensation policy, reward is directly linked to performance, which is evaluated on the basis of results achieved and on the alignment with our leadership model and values. Noncredit also makes use of a Base Salary and Pay-Mix. The base pay provides some insurance for risk averse employees. Consequently the employee will, amongst other things, not be punished for bad luck. Some amount of risk taking and high performance from the employees is important for Noncredit to be competitive and maintain the high level of positive turns.

In the financial sector there is a huge upside potential, which allows the company to strive for being the best firm in the financial sector. Nonetheless there are also some major downsides that Noncredit will face. Dealing with money, every job in the company is related to a high risk for the company. Indeed this type of compensation system can lead to excessive risk- taking by individual employees; these concerns will be dealt with in the next part of the report. 3. 5 Performance-based incentive schemes A performance-oriented incentive system could be a way for Noncredit to Andre the problems arising from their reward incentive scheme.

When using a performance incentive scheme, the company concentrates on career opportunities in order to build up a qualified workforce. The employee gets more responsibility and higher skilled tasks. Therefore there must be an obvious jump in rewards, which ensures that compensation moves over time with the increase of qualification through on the job learning and trainings. If the employee performs well in his job there can be also the possibility for the employee to gain a lump sum bonus. This refers to a non standard insemination which can be achieved through meeting important targets.

Welcome bonuses, guaranteed bonuses and special awards can be cited as examples. As Noncredit considers these lump sum bonuses as exceptions, they are only for specific situations for example the launch of a special project, hiring phases or the achievement of extraordinary results. Nevertheless, Noncredit does consider special benefits. A range of various benefits completes the offer to employees as part of a total compensation package, which aims to reflect internal equity and overall coherence of our remuneration systems.

These benefits include welfare benefits or special terms and conditions of access to various banking products (Noncredit 201 2 Compensation Policy Report). A smooth pay-performance relationship represents the best opportunity for financial firms, as it tends to give continuous incentives. Setting continuous incentives for the employees instead Of one-time incentives plays an important role in creating a sustainable pay scheme for noncredit. According to Noncredit, pay is considered sustainable to the extent that a direct link is maintained between pay and performance and that rewards are consistent with longer takeover value creation.

In order to maintain a sustainable remuneration policy within the firm, Noncredit focuses on core aspects that shape sustainable pay with performance. Firstly, noncredit wishes to formulate a balanced total compensation structure between fixed and variable compensation elements. Secondly, they want to assure the presence of a direct link between pay and performance by aligning incentive payout levels with overall company risk. Lastly, Noncredit has decided to adopt a multi-year view of performance. Focusing on the longer term to ensure that pay moves ever time in the same direction as sustainable profitability.

These long-term performance objectives are the core of Unaccredited sustainable pay for performance philosophy. 4. Additional aspects of pay 4. 1 Incentives Between Firms (and Within) In the previous section it was explained how performance evaluations and compensation policies were both a result of the rather simplistic economic theorem, the principal-agent problem. This article has a look at the development of this theory and how new foundations within the theory influence incentives between firms. The article helps to find the best model abstract from the issue of risk version for Noncredit.

The theory of incentive contracts needed and received new foundations. The compromise between incentives and insurance is an important issue at Noncredit. Employees, who work as analysts or bankers need stronger incentives than consultants or secretaries for example, as the risks they incur are much higher. Employees whose actions have greater impact on the overall outcome of the firm should be motivated appropriately. The article explains that new directions in incentive theory have been developed. Incentive contracts are not the only source of incentives.

For example, a promise of promotion might involve a contract, but not an incentive contract. Instead, a promise of promotion uses a contract that bases the agent’s reward on the principals decision. The article also shows a fresh view on objective performance measurement and gives some formulas to illustrate the process of quantitative measures in a financial sector company. At Noncredit most jobs need to be evaluated objectively, however it is impossible to get rid of the subjective appraisal completely. Integration decision is an instrument in the incentive problem.