Quiz 16: Performance Evaluation and Incentive Compensation

Bonus payments are payment system designed to enhance the performance of the employees. These are the rewards given to the employees for enhancing their efficiency by the organization. Bonus payments is also based on company performance. Bonus system is used by healthcare organization to increase productivity and efficiency of their employees by the awarding of incentives to the employees. Bonus arrangement can be classified into two categories: Individual merit: under this, performance of each individual is evaluated and bonuses are given according to their individual performance and the other system under which employees share in a bonus pool irrespective of their individual performance. Uses of Bonus system by a healthcare organization is as follows: 1. Increase motivation : bonus provided by the healthcare organization to their staff to motivate the employee to perform and to enhance their efficiency and productivity. 2. Improves performance : Bonus system is designed to recognize and mainly to reward high performers. Its main objective is to encourage the beneficiaries to strive for higher performance. In such a way Employees put extra efforts in order to improve their performances. 3. Enhances quality and efficiency : Bonus provided by the healthcare organization to their staff to encourage them to perform well which results into better quality services provided to the patients.

Return on investment Return on investments (ROI) is a profitability ratio which is used to determine the profitability of the investment. It also facilitates the comparison of efficiency or profits among different investments. It is calculated by given formula: Return on assets: Return on assets (ROA) is a financial ratio which is commonly defined as ratio of net income to total assets. It reflects the ability of company of earning income by utilizing assets of company. Here Net income is calculated from the income statement of the company and is considered profit after taxes. It is calculated by given formula: Where, Hospital C has invested $30 million on assets from which $15 million are firm's own funds and rest $15 million are borrowed funds. Interest charged on the borrowed sum is 10%. Interest before interest is $6 million. a. It is required to calculate ROI: Therefore, Rate of return on Investment is Working note: 1. Calculate Net profit: Calculate total investment on assets: b. It is required to calculate Return on assets. Therefore, Rate of return on assets is c. It is required to calculate the Residual Income, if expected rate is 15% Residual Income is an approach in which minimum desired return is defined by health care organization. Here, residual can be understood as an amount which is left after base charge. Higher total residual income represents that management is performing better. It is calculated as: Thus, residual income is d. Net income for next project is $2.7 million and investment for next projects is $15 million. Desired return is 15%. It is required to state that which method is better? ROA indicates how efficiently your company generates income using its assets. Therefore, Rate of return on assets is ROI, on the other hand, measures profitability in terms of investment. Therefore, Rate of return on Investment is Residual income has advantage over ROI. Base charged used in RI can be applied to whole assets irrespective of facts whether source of assets is equity or debt. Thus, residual income is So from above calculations it can be concluded that Residual Income method should be used.

Bonus payments are payment system designed to enhance the performance of the employees. These are the rewards given to the employees for enhancing their efficiency by the organization. Bonus payments is also based on company performance. Bonus arrangement can be classified into two categories: Individual merit: under this, performance of each individual is evaluated and bonuses are given according to their individual performance and the other system under which employees share in a bonus pool irrespective of their individual performance. Company also uses other alternatives to bonus system to enhance the performance of their managers in order to achieve the desired targets. The alternatives to bonus system are as follows: 1. Incentive plans : Incentive plans are extensively used to reward managers for doing what is in the best interest of the organization. It is a formal plan used to motivate or encourage specific behavior or actions of the managers to exceed the growth expectations of the organization. Incentive plans are usually tied either to the value of profits or to the value of company's stocks. 2. Profit sharing plans : It is an incentive plan introduced by organizations to provide employees a share in the company's profits based on its earnings. These plans are generally based on some target profits and if the set target is achieved or exceeded, a percentage of profits is distributed to the managers. Example: A corporate health care organization is expected to make a profit of $3 million in a year and trustees decide that the executives' incentive pool is $150,000. So, by comparing the $150,000 with the $ 3 million would give 5% of profits. Thus, the organization establish the pool of 5% profits each year. 3. Stock option plan : It is a stock option under which executives received the right to buy a certain number of shares in the company at a discounted price from the market price for a specified period of time. Corporate health care organization have alternative options in developing incentive plans for their executives. They provide stock option plan, under which managers buy shares at specified prices as a part of their incentive compensation. The managers will be benefitted when they buy the shares at a lower price and then sell at a higher price in the market.