report- performance related payment in brac bank

7/28/2019 Report- Performance related payment in BRAC Bank

1/28

Report on

Performance related pay ofBRAC Bank Ltd


2/28

Objectives:

The prime objective of the internship program is to gain practical experience by working in a

head office of Bank and thus relate theoretical knowledge with reality. Some other objectives

are as follows,

To fulfill the requirement of ending activities of BBA program.

To have practical exposure that will be helpful in the near future.

To gather knowledge about functions and transactions of different departments of

bank and comparison of practice based on theory.

To loan desk-wise activities in the bank.

Gather knowledge and observe activities of various departments.

Methodology of Report:

In order to make the report more meaningful and presentable, two sources of data and

information have been used. The present data is being compared with the previous data andthe result being compared with different theories articles and formulas of finance and

macroeconomics.

Primary Sources are as follows:

Personal observation Discussion with banks officers

Desk work in different section/division

Secondary Sources are as follows:

Different statements of bank

Annual report of BRAC Bank Limited

Consultation of related books and publications

Vouchers, leaflets, loan files, PPG of the bank

Files, balance sheet and various documents of BRAC Bank Limited


3/28

Data Collection

Then the report is based on the internship and regarding on related information. Aftercollecting essential information from employee, I transferred it in MS-word. For the

secondary data took the help of Internet, websites, magazines, books & article.

Limitations:

The research report may not show the overall condition of the bank as Head office or

may not be a proper representative. There may be a completely different scenario inother branches of other banks.

The study has suffered from a number of barriers.

Data from BRAC Bank is highly confidential for the outside people. No banks in

Bangladesh disclose the opposite partys name in the transaction.

Time is also a big constraint for my research. I have to submit a broader deal in a

shorter form of outcome.

It was difficult to communicate with the employee, as many of them were unable to

give me much time for interview.

Lack of information

So naturally our research is not up to the standard, as we wanted it to be


4/28

Company profile:

BRAC Bank Limited, with institutional shareholdings by BRAC, International Finance Corporation

(IFC) and Shore cap International, has been the fastest growing Bank from 2004 to 2007. The Bank

operates under a "double bottom line" agenda where profit and social responsibility go hand in hand

as it strives towards poverty free enlighten Bangladesh.

A fully operational Commercial Bank, BRAC Bank focuses on pursuing unexplored marketniches in the Small and Medium Enterprise Business, which hitherto has remained largely

untapped within the country. In the last six years of operation, the Bank has disbursed over

BDT 7500 crore in loans to nearly 200,000 small and medium entrepreneurs. Themanagement of the Bank believes that this sector of the economy can contribute the most to

the rapid generation of employment in Bangladesh. Since inception in July 2001, the Bank'sfootprint has grown to 56 branches, 30 SME Service Centers, 427 SME unit offices and 112

ATM sites across the country, and the customer base has expanded to 465,000 deposit and187,000 advance accounts till December 2008. In the years ahead BRAC Bank expects to

introduce many more services and products as well as add a wider network of SME unit,

Retail offices Branches and ATMs across the country.

BRAC Bank Limited, one of the latest generation commercial banks has started its operation

on 4th of July 2001 with a vision to be the market leader through providing all kinds of

banking services suitable to the needs of modern and dynamic business in the commercialworld. The promoter of BRAC Bank is BRAC the largest development agency of the worldrooted in the economy of Bangladesh. BRACs traditional expertise in the field of

multifaceted development program has been one of the driving forces behind BRAC Bank.

The Bank draws its strengths from the image of BRAC not only in Bangladesh but also acrossthe globe where it is regarded as a beacon for the development of the economy.

BRAC Bank Limited is a commercial scheduled bank operating under banking companys act& companys act extending full range of banking facilities as per the guideline of Bangladesh

Bank. BRAC Bank Limited intends to set standards as the market leader in Bangladesh by

providing efficient, friendly and modern fully automated on-line service one profitable basis.

Since inception, it has introduced fully integrated online banking transaction to provide allkind of banking facilities from many of our conveniently located branches. The goal of BRAC

Bank is to provide mass financing to enable mass production and mass consumption and

thereby contribute to the development of Bangladesh.

BRAC Bank Limited promotes broad-based participation in the Bangladesh economy through

the provision of high quality banking services. BRAC Bank will do this by increasing accessto economic opportunities for all individuals and business in Bangladesh with a special focus


5/28

on currently under-served enterprises and households across the rural urban spectrum.

BRAC Bank believes that the pursuit of profit and developmental goals is mutually

reinforcing. Increasing the ability of underserved individuals and enterprises to build theirasset base and access market opportunities will increase the economic well being for all

Bangladeshis at the same time, this will contribute significantly to the profitability of the

Bank.

As a new comer with only three & half years of history to its portfolio BRAC Bank Limited

has opened thirteen branches and extending all sorts of banking facilities/services to itscustomers.

Corporate Vision, Mission & Values:

Corporate Vision

" Building a profitable and socially responsible financial institution focused on Markets and

Business with growth potential, thereby assisting BRAC and stakeholders build a "just, enlightened,healthy, democratic and poverty free Bangladesh".

Corporate Mission

BRAC Bank will adhere to highly professional and ethical business principles andinternationally acceptable banking and accounting standards.

Every BRAC Bank professional will need first of all a commitment to excellence in all that

he/she does, a keen desire for success, a determination to excel and a drive to be the best.We will individually and jointly learn continuously from customers and professional

colleagues around the globe to improve the way we do business so that we are the best. We

will walk that extra mile with enthusiasm and empathy to serve our customers and to solveproblems together so that our customers succeed in their business and remain loyal to our

Bank. We will set up goals for ourselves and then exceed the goals that we set up. We shall

not accept failure.

Sustained growth in 'small & Medium Enterprise' sector

Continuous low cost deposit growth with controlled growth in Retained Assets

Corporate Assets to be funded through self-liability mobilization. Growth in Assets through

Syndications and Investment in faster growing sectors


6/28

Achieve efficient synergies between the bank's Branches, SME Unit Offices and BRAC field

offices for delivery of Remittance and Bank's other products and services

Manage Continuous endeavor to increase fee-based income.

Keep our Debt Charges at 2% to maintain a steady profitable growth

Various lines of business in a fully controlled environment with no compromise on service

quality

Keep a diverse, far flung team fully the bank's vision into reality motivated and driven towards

materializing

Corporate Values

We hold the following values and will be guided by them as we do our jobs

Value the fact that we are a member of the BRAC family.

Creating an honest, open and enabling environment.

Have a strong customer focus and relationships based on integrity, superior service

and mutual benefit.

Strive for profit & sound growth.

Work as a team to serve the best interest of our owners.

Relentless in pursuit of business innovation and improvement.

Value and respect people and make decisions based on merit.

Base recognition and reward on performance.

Responsible, trustworthy and law-abiding in all that we do.

Value and respect people and make decisions based on merit.

Value Our Strength emanates from our owner - BRAC. This means, we will hold the

following values and will be guided by them as we do our jobs.

The fact that we are a member of the BRAC family.

Creating an Honest open and enabling environment.

Have a strong customer focus and build relationships based on integrity, superior service

and mutual benefit

Recognition and reward on performance

Strive for profit & sound growth

Work as a team to serve the best interest of our owners


7/28

Relentless in pursuit of business innovation and improvement

Responsible, trustworthy and law-abiding in all that we do

Strategic Statement:

Small & Medium Enterprise sector will be the major asset builder

Continuous refinement of Lending Risk Management Techniques to continue asset

growth

Continues low-cost deposit growth with controlled growth in Retail Assets

Corporate asset to be funded by self-liability mobilization. Growth in Assets throughSyndications and Investment in faster growing sectors

Continues endeavor to raise fee based income

Keep our Debt Charges at 2% by continues refinement of Lending RiskManagement Techniques to maintain a steady profitable growth

Achieve efficient synergies between the banks branches, SME unit officers andBRAC field offices for delivery of Remittance and Banks other products

Manage various lines of business in a fully controlled environment with no

compromise on service quality

Keep a diverse, far-flung team fully motivated and driven towards materializing

banks vision reality

Long-Term Strategy:

Summed up in a single sentence, BRAC Banks long-term strategy is to go where the

market is. The SME market in Bangladesh is large. The report produced by the shore Bank

team, (Ronald Grzywinsky, Mary Houghton and Lynn Pikholz) and the independentconsultant, Kaiser Zaman, indicates that the market size would be over hundreds of billions

of takas.

As a result of the achievements of the micro-credit provider, Bangladesh now has an hour

glass shaped banking market in which credit and other limited financial services are

valuable to both very large and every small businesses and very wealthy and very poorindividuals. While there is well-known informal system that provides credit to businesses,

virtually nothing is an available from either banks or micro finance provider to the million

the middle-business and individual-who are severally constrained in their ability to produce

and save for lack of access to financial resources and services. Until modern, competitive


8/28

financial services are readily available-including credit in amounts, terms and conditions

that small can access, Bangladesh will not be able to create the large middle class that is a

prerequisite to social stability.

Functions & Activity of BRAC Bank Limited:

There are 5 (five) different business units that are generating business named as:

Small and Medium Enterprise

Corporate Banking

Retail Banking Treasury

Remittance Services

Credit Department

Lending is one of the main functions of commercial bank. The success and failure of this

department keeps a great influence over the profit & loss of the bank. One of the core

functions of commercial banks is to create the claim against individual borrower or real thepurpose of sanctioning credit. KYC (Know Your Customer) is also one of the main upper

streams for any bank

Roles and Goals

Managing credit exposure

Managing credit risk

Compliance of the rules of central Bank

Compliance the rules of BRAC Bank

Support corporate and retail divisions regarding credit facilities

Collection of overdue of retail loans and advantage

Corporate


9/28

BRAC bank offers its customers free access to their accounts through its online facility, which

is now available in Dhaka, Chittagong and Sylhet. At BRAC Bank our corporate customers

are served by dedicated account managers who understand their specific requirements. BRACBank Limited offers the following accounts to our valued corporate customers.

Current Account

Short Term Deposit

Fixed Deposit

Savings Account

Convertible Account

Foreign Currency Account

The corporate banking group would try to serve the financial market of the country with the

following objectives

To develop and sustain mutually beneficial customer relationships based on high

quality service and innovative products

Maintaining a diverse and quality asset base and pursue a sustainable growth

strategy

To pursue a management style that contributes to the well-being and development of

a fully responsible and accountable workforce under a high corporate standard and

business ethics

To provide and deliver services in a cost effective manner

Treasury

Money Market Desk

BRAC Bank has a strong presence in the Treasury Market in Bangladesh. The Money Market

Desk of the Treasury Division mainly deals in Bangladeshi Taka transactions.

Activities

Management of Statutory Reserves viz. Cash Reserve Ratio (CRR) & Statutory

Liquidity Ratio (SLR) Daily Funds & Liquidity Management

Investment Management

Products and services

Call/Overnight Lending & Borrowing

Term Money Borrowing & Lending


10/28

Repurchase Agreement (Repo)

Treasury Bills (T-Bills)

Foreign Exchange

BRAC Bank Treasury is an active player in the inter-bank foreign exchange market. The

Bank deals in all the major currencies i.e. USD, GBP, JPY, CHF and EURO along with other

currencies. Our experienced dealers are able to provide very competitive spot and forwardprices to our clients.

Products & Services

Spot Contracts:

Transactions widely used by corporate to cover their receivables and payables.Commitment by the Client to sale & purchase of foreign currency against Taka fordelivery at the same day to eliminate the possible risk due to exchange rate

fluctuations.

Corporate can buy /sell foreign currency for genuine transactional purposes only.

Forward Contracts:

Commitment by the client to buy or sell one currency against Taka at a fixed rate for

delivery on a specified future date.The onshore inter-bank forward market remains liquid for 6months.

SRS (Secured Remittance Service)

BRAC Bank has introduced an innovative remittance service for Bangladeshis living abroadwith some unique features compared to any of the existing remittance program. Bangladeshi

expertise can now send their money to their relatives any where in Bangladesh even to the

remotest part within 24 hours at a reasonable cost and competitive exchange rate.

Special Feature

Countrywide network comprising more than 1100 BRAC offers for payment to the

recipients.

For the first time in Bangladesh recipient to recipient to receive cash from the nearestBRAC office even without having ay Bank account

No need to spend time for DD collection, as it has facility to draw cash instantly from

the BRAC field office.

Own communication network through advanced electronic media


11/28

Performance of BRAC Bank Limited:

The business of banking consists of borrowing and lending. As in others businesses,

operational must be based on capital but banks employ comparatively small of their own

capital in relation to the total volume of their transaction. The purpose of capital a reserveaccounts its primary to provide an ultimate cover against losses on loans and investments.

In Bangladesh, there are many types of Banks, which are formed as commercial banks, butabove all, BRAC Bank is a new generation private commercial bank who introduces real time

online banking at first in Bangladesh.

Part of the others lending, BRAC Bank has introduced lending in SME (Small & Medium

Enterprise) sector in first time. Other then doing all commercial business activities SME is anadditional and specialized horizon of the bank that serves the banks special focus in

promoting broad based participation by catering to the small and medium entrepreneur. Thenetwork of SME has already been established through out Bangladesh.

In year 2004 BRAC Bank Limited made commendable in all business arenas like Deposit,Credit, Fund Management and Investment business and earned NET Profit of BDT.

99,302,749.

Below we compare Balance Sheet and Profit & Loss Accounts of BRAC Bank Limitedbetween 2003 & 2004 and come to know the growth rate.

Data Processing:After collection of the raw data using the following computer packageshad done editing and processing

SPSS

MS-Excel

MS-Word

Data Analysis: The classified and tabulated data has been analysis elaborately in a numberof tables in an analysis part.


12/28

Organogram of BBL:

HR

Division

EVP/VP

Board of DirectorBoard of Director

Executive committee

of the board

Policy committee

Of the board

Managing

Director

Board Secretariat/Company

Affairs & Shares

Board Audit Cell

Addl. Managing Director Credit Committee Deputy Managing Director

Sr. Executive VP

/Executive VP

Credit Division

Audit and

Inspection

DivisionSVP/VP

TrainingInstituteSVP/VP

PublicRelations

DivisionSAVP/AVP

Logistics& Support

Division

International

Division

EVP/SVP

Treasury

Division

VP/SAVP

Corporate

Affairs

Division

Research&

Development

Cell

General

Services

DivisionSVP

IT

Division

SVP/VP

MB &

Investment

DivisionEVP/SVP

Marketing

DivisionSAVP/AVP

Financial

Administration

DivisionEVP/SVP

CardDivision


13/28

Organizational Setup at Head Office, Finance Department:

Organizational Setup at Branch:

Head of Branch

Corporate Banking Credit Risk Management Credit Administration Unit Credit Recovery

DeputyManaging

Director

Head ofReporting

and

Taxation.

OfficerGrade -1

OfficerGrade -2

PrincipleOfficer

SeniorPrinciple

Officer

SeniorAsst. Vice

Precedent

Asst. VicePrecedent


14/28

Performance Related Pay:

An efficient transportation system is essential to facilitate economic growth inBangladesh . The countrys economy needs to grow at a sustained 7 percent per year to

achieve the first goal of the MDGs: that of halving the proportion of people living under a

dollar a day by 2015. To achieve this growth, the transport sector will need to reduce costs

and allocate resources among different modes of transport in a more balanced manner.

Performance pay schemes link pay to a measure of individual, group or organizational

performance. There is a wide variety of methods used, but all schemes assume that thepromise of increased pay will provide an incentive to greater performance.

Many employers are now seeking to sustain their competitiveness through pay increases

which are more related to performance measures as a way of absorbing increased labour costs,

while at the same time rewarding and motivating employees.

To create favourable environment for better motivation of employees and support

achievement of organisational goals. Through performance based pay schemes employees are

transmitted the message what results and effort is especially expected from them.

Types of performance based pay:

There are many different forms of performance related pay, which may be used on their own

or side by side. Employers may move from one to another. Most common are:

Piecework: A price is paid for each unit of output; this is the oldest form of performance pay.

Payment by results: Bonus earnings depend on measured quantities or values of output for

individuals or groups, usually based on work studied time units; this covers a wide range ofbonus schemes.

Plant or organization wide incentives: Bonus earnings or pay levels are based on measured

quantities or values for the whole establishment.


15/28

Merit pay: Bonus earnings or pay levels are usually based on a general assessment of an

employees contributions to performance; this is an earlier, less structured form of the next

system.

Performance related pay: Bonus earnings or pay levels are based on an assessment orappraisal of an employees (or teams) performance against previously set objectives, usually

part of a performance management system; this is a fairly recent development, particularly in

the public sector, which has grown sharply in use since the 1980s.

Competence based pay: Reward and training are linked to competency frameworks, based on

the worker demonstrating certain skills (eg. Problem solving, decision making, leadership,

customer service, dealing with differing views) or achieving certain qualifications.

Profit related pay: Bonus or share options are based on the organizations profit performance;

this is widespread in the private sector, where share options are often important for seniormanagers. Profit related pay has become less common since the government phased out tax

relief on PRP schemes.

Individual performance based, such as incentive schemes and sales commissions.

Profit-sharing, which applies to all or most of the employees.

Gain-sharing measured by a pre-determined performance formula, applicable to all or

groups of employees. The performance measure may be profit or some other

objective, such as productivity.

Employee share ownership of the company.

Example:

Average return on money invested in pay for performance programs was 134%.

500 companies reported in theEconomistindicated that companies actively using pay

for performance programs showed twice the shareholder returns as those who were not

user of these programs

Objective of Performance Related Pay:

To clarify objectives and engage employees with the organizations goals

To motivate employees by linking pay to achievement of targets not length of service

To reward achievement and identify under performance; foster teamwork and fairness.

To contribute to overall improvements in productivity;


16/28

To introduce more flexible pay systems or deal with recruitment and retention

problems

In the case of some employers, to give greater power to managers and weaken

trade union influence in bargaining and representation of staff.

Benefit of Performance Related Pay:

The effectiveness of any pay system depends on many factors. However, there are some

problems inherent in all performance related pay schemes:

Staff motivation and moral A wide range of research has found schemes less effective

than expected. In the public sector this is frequently due to cash limits making rewards forhigh performance ratings too small to motivate staff. Problems of poor training for managers

and inadequate communication with staff have had a negative impact on staff morale. Studies

of NHS managers in 1997 and 1998 showed that performance-related pay did not contribute

to improve performance but did cause jealousies between staff and undermine moral.(Dowling and Richardson, 1997, Marsden and French, 1998).

Fairness Because performance related pay systems are based on appraisal of the individual

worker, often by their line manager, bias and personal favoritism can influence the result of

pay reviews. Instead of motivating workers, performance pay can undermine performance ofboth the individual and the organization by undermining team work, encouraging a short term

focus and leading people to believe that pay is not related to performance, but to having the

right relationships and an ingratiating personality. (Jeffrey Pfeffer, Harvard Business

Review, May/June 1998)

Discrimination Recent research found that performance based pay systems oftendiscriminate against women because: the appraisal process is subject to gender bias and

stereotypes; womens skills are often undervalued by their managers (and by women

themselves); womenespecially those working part time-have fewer opportunities for

training, and managers are less likely to correctly assess womens training needs.(M.T.

Strebler, M. Thompson, P. Heron, Skills, Competencies and Gender; Issues for pay and

training, IES Study 333, 1997). Performance pay may run counter to the development of

objective, gender neutral job evaluation schemes which are being introduced to achieve equal

pay for work of equal value. A study by the Institute of Personnel and Development, found

that almost two-thirds of employers had no provision for monitoring sex and racial

discrimination in their performance related pay systems


17/28

Review of Literature:

The New Economics of Personnel (NEP) stresses the superiority of performance-related pay

over time-based pay systems under circumstances in which employees can exercise a good

deal of discretion in their jobs and their effort is hard to monitor (Fernie and Metcalf, 1999). It

is a powerful theory with important predictions because these conditions apply in a very largenumber of workplaces. The large-scale switch from time- to performance-based pay in the

British public services over the past decade offers an excellent opportunity to test of some of

these theories.

This article analyses results from the first large-scale study of the effects on performance pay

in the British public services to explore its effects on motivation and work relations. Inparticular, it seeks to establish how far employees judge the new incentives to have motivated

them to perform, what they believe have been their effects on workplace cooperation, and

how far alternative motivational forces, such as commitment and a belief in work standardsare active in sustaining performance levels. Thus a novel feature of our study is to combine

questions from the NEP and the Human Resource Management literature on incentives andemployee performance. Based on questionnaire surveys of employees and their line managers

who appraise performance, our study lacks objective data on output or organizationalperformance. Nevertheless, both the NEP and the dominant HRM theories, such as

expectancy theory, predict that when employees have discretion in their jobs, heir

willingness to use it positively, that is, their work motivation, is the chief link betweenincentives and performance, the other being the ability to recruit higher productivity workers.

For a great many jobs in the public services, the NEP would predict that performance pay

would give superior results. Teachers, health service professionals, job placement advisersand many tax officials have considerable control over how they work, and in many cases, it is

very hard for management to monitor the effort and care they put into their jobs. In this

regard, public sector employees differ little from their private sector counterparts. They alsoresemble private sector employees in that assessment of their performance relies heavily onsubjective appraisal by line managers. In his JEL review of theoretical and empirical work on

performance incentives within firms, Prendergast (1999) contrasted the dearth of studies on

the effects of incentive pay on such employees, who make up the majority of the workforce,with the large number devoted to CEOs, sports and sales personnel. From the point of view of

incentive theory, conditions for public sector employees have become more like those in the

private sector in another respect.

The break up of large bureaucracies into specialist agencies responsible for the delivery of

specific services, each with their own set of performance targets, has reduced the problems

posed by conflicting levels of political and management leadership (multiple principals,Tirole, 1994). Finally, as Bewleys (1999) recent study shows, private employers also feel the

need to take account of employees sentiments of fairness, commitment and risk aversionwhen adjusting their pay. Performance related pay (PRP) has been at the forefront of the

reform of pay incentives for public servants in the UK since the late 1980s. By the late 1990s,

it had replaced pure time-based pay with annual increases based on seniority for most civilservants, and for many in local government and the health service. In schools, head teachers

also had a form of PRP, and by the end of 2000, classroom teachers will have their own


18/28

system. The introduction of a new pay system on this scale offers an excellent test of some of

the NEP theories of incentives. Its sheer scale gives an opportunity to assess the effects of

performance pay across a wide variety of work environments and occupations. The drive forPRP from central government means that it applied both where local management might have

adopted it anyway, such as in the NHS hospital trusts in our sample, and where agency

management might, if free, have opted for a different kind of scheme. An example of thelatter is the Employment Service whose moves to develop team-working conflicted with

individual performance pay. Our study therefore avoids some of the self-selection problems

highlighted by Prendergast (1999). The shift to performance pay also has taken place against acommon background: that of time-based pay scales containing seniority-based increments. In

fact, these were never intended to provide automatic progression up to the top of the pay scale

for a particular grade, but as the Megaw inquiry (1982) observed, procedures for withholding

increments for poor performance were rarely if ever invoked. In effect, public servants werepaid on time rates, independently of their short-term performance. This is reinforced by the

weakness of promotion as an incentive for a great many non-managerial public servants. The

National Audit Office highlighted the slow rates of promotion for many in the civil service,

for example, 20 years for a newly promoted SEO to reach the next grade up of Principal(NAO, 1989). The de-layering of recent years will have restricted promotion still further.

This is also reflected in employee expectations. In the evidence to the Sheehy enquiry onpolice pay, for example, it was found that over 40% of police officers did not expect to be

promoted, despite the rank structure and a strong internal labor market (Touche Ross, 1993).

Performance pay in the British public services is mostly consolidated into basic salary so thatthe accumulation of above average awards can lead to quite big and lasting benefits for

individual employees. It is most commonly awarded on the basis of individual performance

appraisal, by each employees line manager, against pre-agreed objectives. Given the

importance assumed by qualitative aspects of public service performance, appraisal by linemanagers has been the preferred route, as predicted by the NEP. Nevertheless, line managers

are given guidelines about relevant criteria, and about the need to be concrete about

performance objectives, not least because the schemes must be defensible if challenged asdiscriminatory. The organizations covered in this study follow the same broad principles as

those elsewhere in the British public services, with one exception. One of the trust hospitals

has a trust-wide performance bonus payable to all satisfactory performers if the trust achievesits targets. Since the first performance pay schemes in the Inland Revenue in the late 1980s

(see Marsden and Richardson, 1994), appraisal has undergone a sea change: away from

evaluation against a standard set of criteria for all employees, and towards setting individual

objectives in line with those of the organization as a whole. In many respects, all theseschemes have followed the cannons of personnel management best practice at the time as

systematized by bodies such as the Institute of Personnel and Development, ACAS (1990),

and leading private sector consultants such as Armstrong and Murlis (1994).

Principal-Agent Moral Hazard Analysis of Performance Pay:

The theoretical rationale for performance related pay has been most clearly stated in the

principal-agent moral hazard model. The idea can be explained very simply in terms of


19/28

Figure 1. For simplicity, assume that employees have discretion over the level of effort they

provide, and that they can choose between providing low effort (e1) and high effort (e2).

Suppose too that they wish to minimize the effort they exert for a given reward, and that theemployer cannot observe effort directly. If the employer offers a fixed wage, then employees

will supply low effort. The employer could respond by reducing the wage until it matches

the value of the low effort level, but this may not always be desirable for either party. Onesolution is to link pay to observed output or performance, with a low wage (w1) for low effort

output (e1), and a high wage (w2) for (e2). This allows employees to choose, and the employer

can offer a schedule of wages designed to encourage e2. If performance is easily measuredand strongly correlated with employee effort this is a fairly simple matter. But in practice

often neither relationship is straightforward. This is shown by the dispersion of performance

levels associated respectively with the low and high effort levels. The two black (narrow)

distribution curves represent the dispersion of output levels associated with each level ofeffort. As is well known, one might work hard and achieve low output because of lack of

suitable training, poor management co-ordination, or other factors outside ones control.

Equally, one may be lazy but lucky. With the two black distribution curves, the overlap is

small so it is fairly easy for management to discriminate between employees providing thelow or the high levels of effort. However, the curves could overlap a great deal more, as do

the grey ones, and then it is much harder to determine whether a given level of output, sayX, corresponds to low or high effort. In this case, there is a much greater chance that

employees who work hard will not be rewarded, and vice versa. The solution, which has

received more attention in the NEP literature, has been to use more highly geared incentives,by offering a performance bonus that is a larger percentage of basic salary (egLazear, 1999,

Ch. 3). In effect, the prize is made larger to compensate for the greater probability of error. An

alternative solution, more common in the HRM literature, is to stress the need for improved

appraisal systems. Good appraisal can help by agreeing objectives and obtaining bettermeasurement of outcomes, particularly where it is hard to

obtain valid objective measures. In the public services, there are severe constraints on the use

of highly geared incentives for large numbers of staff for budgetary and other reasons, whichplaces a greater burden on the fairness of appraisals. Difficulty of measuring performance

raises a second problem: whether management, which controls performance evaluation, can

be trusted to act fairly. Given the need for a mix of quantitative and qualitative workobjectives, there is little alternative to subjective appraisal if a bias towards quantitative

outcomes is to be avoided (Holmstrom and Milgrom, 1991). However, it is very difficult for

employees to verify the accuracy and fairness of such appraisals at the individual level.

Whatever the actual honesty with which appraisals are conducted, our survey illustrates thedepth of employee suspicion regarding moral hazard by their employers. Across the

organisations we surveyed, it was widely thought that performance pay was a device to cut

the pay bill; over 60% thought management applied a quota to good appraisals; around 55%of employees thought they would not be awarded performance pay even if their work was

good enough; and over 40% thought line managers used performance pay to reward their

favourites1. On the latter two questions, similar results have been found in the US federalservice (Milkovitch and Wigdor, 1991). 1 The favouritism question was not asked of head teachers.4


20/28

Finally, Figure 1 brings out the importance of the initial assumption that employees are

effort minimizes and will opt for low effort if they think it will pass undetected. That

raises the question as to what sustained effort among the majority of public servants beforePRP was introduced. Promotion may have been part of the answer, but, as mentioned earlier,

for most employees such opportunities are limited. In some kinds of clerical work, clear job

descriptions and well-paced work-flows make sub-standard performance easily detectable byline managers. In contrast, where employees have a lot of discretion, as is the case for many

public servants, a mixture of organizational commitment, a belief in professional work values,

may counteract such tendencies.

Measuring the Effects of PRP on Work Behavior and Attitudes in

Public Services:

In this paper, we consider three main kinds of impact of performance pay: on motivation, on

work relations, and on communicating management objectives. They correspond to differentaspects of the performance outcomes sought by the use of incentive pay: giving employees

greater incentive to provide higher levels of effort; encouraging more flexible working and

team work; and redirecting employees effort towards new goals that management wants them

to achieve.

Motivation:

We interpret motivation as the willingness to undertake certain kinds of action, but we also

ask about public servants agreement with the principle of performance pay, and whether they

believe it rewards good work. Particularly important in the principal-agent analysis, but alsoin the views of management expressed to us in our interviews, was the willingness of staff to


21/28

use their work discretion to the benefit of the organization. We focused on whether staff felt

PRP gave them an incentive to work beyond the requirements of their jobs, and to show more

initiative in their work. Agreement with the principle implies accepting its legitimacy as an exante incentive, in keeping with the principal-agent analysis. Agreeing that it rewards good

work captures a different nuance: that one appreciates the ex postrecognition by ones boss,

and this might appeal more to those attracted to the intrinsic satisfactions of their work whichmight be especially important in health and education services (Deci and Ryan, 1985). 5

Work relations

In much of the public service, a high degree of cooperation between employees is needed for

efficient working. Indeed, management has sought to encourage greater team working. We

therefore asked employees whether, in their experience, performance pay caused jealousiesamong staff; whether it undermined team working; whether it improved cooperation with

management; and whether management operated a quota on good assessments. The first two

would be outcomes of PRP that inhibit more flexible work organization. Likewise,willingness to co-operate with management becomes more important the greater the amount

of discretion employees have in their work. Finally, whether management operates a quota

on performance pay and performance ratings can be interpreted as an indicator of trust inhigher management. In fact, in the Inland Revenue higher management instructed line

managers not to apply a quota, and the Employment Service scheme, like that of the trust

wide bonus hospital, had no place for a quota of any kind. Only the hospital using individual

PRP used a standardized distribution.

Communicating objectives

Over the past decade, there has been considerable devolution of public management towardsspecialist agencies, hospital trusts and local management of schools. One reason has been to

enable management to formulate objectives closer to the point at which public services are

delivered than previously. In all the organizations we studied, there was strong emphasis on

formulating clear organizational objectives and communicating these to individual employees,together with a view that performance appraisal was a natural focus for this. The more

discretion employees have, the more important it is that they are aware of organizational

objectives. We therefore asked whether employees believed that PRP had raised theirawareness of their organizations objectives.

PRP and employee willingness to work beyond job requirements:

Turning to the willingness of staff to use their work discretion positively, receiving above

average performance pay has a strong positive effect. Indeed, this was one of the consistentlystrong coefficients to emerge, holding across four of the five measures of positiveperformance effects. The question of objective setting and work measurement is critical. If

employees believe PRP has led managers to set work objectives more clearly, then they are

more likely to respond positively on working beyond job requirements and using initiative.Likewise, if they believe their work is hard to measure, then they respond negatively. Closely

related is whether employees believe there is an appropriate standard of performance which

they should achieve. This might be an internalized belief about work levels, or stem from


22/28

professional work norms, but either way, it suggests a degree of conflict with management

over the determination of work standards in connection with PRP. The link with professional

norms was confirmed in a separate logic analysis, based only on organizational, occupationaland biodata variables. That showed that professionals and those in professional bureaucracies

were more likely to respond that performance was difficult to measure and that PRP did not

motivate because employees already worked to an appropriate standard. What is the strengthof the financial incentive relative to the other factors measured? As is well known, legit

regression coefficients tell us the change in the log of the odds 4 that a person will work

beyond job requirements for a unit change in the independent variable. This cumbersomeconcept can be made simpler by taking the exponent: the proportionate change in the odds

arising from a unit change in the independent variable. Values of less than one imply a

decrease in the odds. Thus in moving to above average PRP increases the odds by a factor of

1.8. Because the mean values of the independent variables differ, it may be felt preferable tocompare elasticity. These relativist the effect of getting above average

performance pay: although still strong, it is considerably less so than the other variables.

However, elasticity for binary and five-point scale variables are far from ideal, so a finalcheck on the relative strength of each variable was done by computing logit coefficients for

all of them measured as binary variables. This involves some loss of information, but it ( 4 Theodds are used in their strict sense here to refer to the ratio of the probability of the event occurring to its not

occurring. 10 shows that the effect of getting above average performance pay is probably

weaker than the beneficial effects of setting work targets more clearly, and is of a comparableorder of magnitude to the negative effects of unfair appraisals and perceived measurement

difficulties.

Performance pay and workplace cooperation:

The most devastating evidence of the malfunctions of PRP in the public services are to be

found in the effects on divisiveness and cooperation among colleagues and with management.It was this evidence that a recent government report cited as showing that the current civil

service PRP schemes were ineffective and discredited (MacKinnon, 2000: p2). The key

factors likely to intensify perceptions of jealousies and divisiveness (that PRP undermines

team working) were: a) poor target setting by line managers, b) the belief that even if oneperformed well one would not get a good appraisal, c) that line managers do not know ones

work well enough to appraise fairly, and, very strongly, d) the belief that ones work is hard to

measure. Willingness to co-operate with management, and employee trust in their fair dealing,

were additionally undermined for those who thought their last appraisal had been unfair. Theincentive effects of getting above average PRP did nothing to reverse this. There are two main

reasons why PRP should cause jealousies, and why it should undermine relations withmanagement. The first has to do with the transition to a new pay system in any organisation,

and the second, with the difficulty of drawing the line between those who get PRP, and those

who do not. When any new pay system is introduced in a brown field organisation, there arelikely to be both winners and losers. The more losers there are, the greater the likely

opposition, but equally, the more winners, the more costly is the whole system to


23/28

management. The usual way out of this dilemma is to make transition to the new system

voluntary for incumbent employees, and wait for the old system to wither as older employees

leave or retire, and younger ones are promoted, the condition for which is often to move ontothe new system. This was the method adopted in the trust hospitals, but not in the civil

service, and is likely to have caused some jealousies between those on the new

and the old systems.

The second problem is more fundamental, and concerns managements ability to justify

why some employees get higher PRP awards than others. If everyone agrees that the appraisalsystem deciding the allocation of PRP is fair and honest, then it may be relatively easy.

Cropanzano and Fulger (1991) show that employees are more likely to accept unfavourable

ratings if they believe the appraisal process is fair. But if appraisals are poorly done, or

managers lack good enough information, or they are thought to be biased or open tonegotiation, then it can be hard to justify awarding only a standard appraisal rather than a

good one. Examples chosen to explain tournament theory often compare extremes, such as

between the manager who achieves only modest profit figures while turning round an

unprofitable plant compared with one who gets good profits on an easy one. However, thedifficulties of awarding PRP do not lie between the extremes, but rather, in dealing with the

borderline cases. If we assume performance is normally distributed, then few workers areeither extremely good or extremely bad performers, and most cluster around the borderline

between satisfactory and good. As a result, line managers much more often face the task of

explaining why they rate one employees performance good and anothers onlysatisfactory. Unlike academic examiners, line managers rarely have the luxury of

anonymous double marking and examination boards to protect them, and mostly they have to

continue working with the disappointed employee afterwards. It is enough of a problem if the

feeling of injustice arises only from imperfect monitoring, but our research suggests thatmany employees were distrustful of managements motives. Many thought that PRP was

about cutting labour costs, that management operated a quota, and that many line managers

used PRP to reward their favourites.

Performance Outcomes, Professional Standards and Commitment:

Our study, therefore, highlights both that some employees find PRP motivates their

performance, especially those getting above average payments, but a larger number

experience its effects in a deterioration of workplace relations and cooperation. The latter

effect shows the importance of how incentive systems are operated, and their effect on

employees perceptions of fair treatment. In the public services there are limits on how fargreater uncertainty of reward can be compensated by increasing its size. So the obvious route

if PRP is to be retained is to reduce the noise in the relationship between effort and assessedperformance, narrowing the dispersions shown in Figure 1.

The second conclusion concerns the role of commitment and prior work values insustaining performance even though employees believe the incentive system is unfair.


24/28

Following the principal-agent moral hazard analysis, one would expect employees to respond

12 in two ways when faced with an incentive system they feel is unfair. Our study found

evidence of both. Employees might begin to bargain over their work objectives, and theymight start gaming behaviour, for example, manipulating performance data. Both are

potentially very destructive to the goal setting functions of performance appraisal. In the

Inland Revenue, where we asked the question, about 40% of employees thought thatemployees exceeding their work targets did so because they were clever at negotiating easy

performance agreements. Over 55% said that in agreeing their objectives they were more

concerned to avoid a bad appraisal than to achieve a good one. Shortly after our survey, theGuardian newspaper reported a series of scams in the Employment Service, mis-reporting and

double-counting job placements, which it estimated could have inflated placements nationally

by up to 30%5. It seems that the grey area concerning whether a placement should be logged

as successful, and so counting towards ones targets, had flipped from being a minor abuse,tolerated by management to help employees meet their targets, into serious over-reporting by

both staff and management. The event was serious enough for the then government to launch

an internal inquiry although its results were never made public. In both examples, the lack of

faith among employees in the systems fairness seemed to transform an essential tool of goodmanagement - communicating work targets to employees - into a numbers game.

In view of these dysfunctions one might expect real, as opposed to measured, productivity

to have collapsed. A number of indicators suggest that it did not fall, and may even have

risen. Our discussions with senior managers in the Inland Revenue and the EmploymentService, who will have had access to internal performance benchmarking data, and with the

unions, indicated that productivity had risen, and particularly in the Inland Revenue, there had

been quite large cuts in staff without corresponding cuts in the organisations workload. Both

trust hospitals did well on the NHS performance indicators. We have no hard data on schools,but all the Teachers Review Body evidence points to sustained high workloads. We also have

the evidence from line managers who conduct appraisals, and who were included in the

sample. Between a quarter and a half believed PRP had led employees in their organisationsto work harder, and a smaller percentage, believed it had increased work quality. Although

there was a larger percentage of disagrees, they would include no change.

Findings of Study:

It is a great pleasure for me to have practical exposure in BRAC Bank Limited because

without practical exposure it couldnt be possible for me to compare the pay and other relatedissue of bank There are number of commercial banks operating their activities in Bangladesh.

The BRAC Bank Limited is a promising one in them. Sustainable profitable growth continue,

to be prime objective and is fundamental to our success in that variable incentive pay what wecall Performance Based remains as one of the key initiative for rewarding our employees

based on their individual contribution to team performance also in individual performance.

Learning from our experience, we have redesigned that their performance based pay policy tocreate a stronger and focused link between employees performance and banks business


25/28

results which highlights our profit growth targets without losing sight on other growth

priorities. This report will help us to know better about this factor.

Conclusion:

An evaluation of the Bangladesh Bank Reporting Department and Retail Department was the

basic concern of my study and I completed this report on this basis Retail Department of

BRAC Bank Limited. A retail loan files evaluate & approved by this department before

disbursed a loan. Day by day, BRAC Bank increasing its business, that reason BBL approved

more loan files everyday to its retail customer and my study was find out the percentage of

their performance pay and include it with their basic pay , it is the only one portion of my

work, thats why I prepare report on about this.

Banks always contribute towards the economic development of a country. BBL compared

with other banks is contributing more by investing most of their funds in fruitful projects and

risk free individual. It is obvious that the right thinking of the bank including establishing a

successful network over the country and increasing resources, will be able to play a

considerable role in the portfolio of development of financing in the developing country like

ours. BRAC BANK Equipped with all modern banking facilities, the bank is expanding its

activities more rigorously than ever, Our aim is to grab the position of number one bank in

Bangladesh within a very few years," a statement from the management of BBL. Robust


26/28

presence in the SME, institutional shareholdings along with public, broad business focus, tech

savvy culture of banking operation, thrust on human capital development, young and vibrant

management, strong corporate social responsibilities

Recommendation:

BRAC Bank Ltd provide their employees based on their individual contribution to team

performance also in individual performance on basis their basic salary. Some employee getone times, some get two and half times and who perform excellent, get six times of his basic

pay. But its a matter of great regret that the salary and performance pay of BBL is not so

much attractive rather than other commercial bank of Bangladesh. So it is highly

recommended to review their salary structure. But other facility and work environment is

satisfactory.


27/28

Bibliography:

Zikmund William G., 2003, Research Methodology, 7th

Edition, South-WesternPublisher.

Essentials of services Marketing, Concepts, Strategies, & cases. K.Douglas Hoffman,

John E. Bateson. 2 nd Edition.

Malhotra Naresh K., 2004, Marketing Research, 4 th Edition, Person Education.

Bateman, D. N. (1977), The employees' rights to know the issues and the

corporations' responsibility to communicate, Journal of Business Communication,Vol. 14, No. 2, pp. 3-9.

Bhagat, R. S. (1982), Conditions under which stronger job performance-job

satisfaction relationships may be observed, Academy of Management Journal, Vol.

29, pp. 772-789.

www.thedailystar.com

www.financialexpress.com

www.bracbank.com

www.salary.com


28/28

www.jstor.org.

report- performance related payment in brac bank

Documents