Case Analysis – Allied Electronics sample essay
Robert Venter, second-generation Chief Executive (CE) of family-owned Allied Electronics Corporation Ltd, considered the pros and cons of more clearly linking the firm’s compensation system to sustainability performance. In June 2011, Altron, a multinational headquartered in Johannesburg, South Africa, controlled more than 200 companies in Africa, Europe, the US, the UK, Australia, and the Far East. More than 14,000 employees designed, developed, manufactured, and marketed a range of telecommunications, electronics, power electronics, and information technology systems and products. Having made a clear commitment to sustainable development, Venter was confident that the commitment was shared across the senior management team. However, there appeared to be a higher acceptance in the operating units for meeting financial targets than for meeting sustainability targets.
There was a clear difference between Venter and his predecessor, Dr. Venter. Dr. Venter adopted a value-based culture in the company, ensuring that the mission and vision of the company were followed and reviewed after every year. The codes of ethics were maintained and that the company responded quickly to changing external forces and trends. Dr. Venter was mostly the sole decision maker at that time and whatever his decision was, was accepted by the organization. At the time Dr. Venter was in charge of the company, it was mostly bottom-line drive; focusing mostly on profits. No doubt that with the family oriented approach that Dr. Venter had and the sole responsibility that he had undertaken for all decision making made the company soar to new heights.
But with the global changes in the corporate world took place and the way corporations did business shifted, a change was needed to handle this change. This was the perfect time that Robert Venter took over the company. He differed from his father in many ways, the biggest being; he concentrated more on sustainable development. He believed that the company should be more transparent and everyone’s views mattered. He created a more participative decision-making process that involved a process by which the idea would float and if the ideas clicked on each level of the process, it would be implemented. This not only empowered employees, but lead to more ideas being generated.
Even though Venter focused more on the sustainability goals of the company, most of the senior managers were still focused on the financial bottom line. With the new process for feeding new idea to the company, Johnston came up with a business case for a carbon footprinting concept. The main idea of this concept was to link the end-goal of a sustainable goal with a tangible success. Johnston set-up to develop a case on the shift from bottom line to sustainable goals and how they were suppose to implement this. The following considerations and steps were performed:
* Why they needed the change
* Culture of the organization
* Risks facing the change
* Whether they had the proper systems and the structure for the change * How they would bring about the change in the organization and how to educate the employees about the change The carbon footprinting brought a change for the greater good in the company, the reporting system became more transparent and numbers and reports were being shared and used in different decision making processes. This led to better decision making and found out where the company lacked how proper steps could be followed to make the company having a better standing in its operations.
This system also led the company to incorporate broad-based black economic empowerment, which gave a good image to the company in the eyes of the public as well as the government. A compensation plan was drawn up which was based on key performing indicators, this was linked to the annual performance bonuses. After the success of the carbon footprinting across Altron, it was evident that if a proper research, methodology and the respective steps were followed they could bring about a change in the organization and change its structure, the way they did their work and better efficiency in their operations.
King III and the How Altron embraced change
With the new legal requirement, known as King III, in South Africa required organizations to publish their integrated reports, Altron had an edge on its competition since it had already started publishing its report a year before the legal requirement. As mentioned in the case, Venter, chief executive of Altron, find this to be satisfying since it put the company in a proactive position. Altron was able to adapt with the new legal requirement faster than the other companies. This adaptation to the evolving reporting environment led Altron to come up with a new, better and a more integrated corporate strategy. There was an increase in the strategic themes from 8 before the new reporting system to 11 with the implementation of the new reporting system. Even though most of the strategic themes of the company were the same, they were now looked upon with a broader perspective. Along with the 8 existing themes revitalized and broadened, three important themes were added which were essential for the growth and sustainability of the company. These themes include:
* Human capital
* Corporate governance
Venter believed these new themes were critical for future sustainability of the organization. All three themes were essential to give the company an edge on the competition as well as show the public the greener, environmental friendly and public friendly the company was. If these three factors were incorporated properly in the company strategy it would lead the company to new heights in the eyes of the employees and the public. With the new strategy that was being implemented in Altron, a lot of different changes were to be made and Altron faced different challenges in designing the new corporate strategy keeping in mind the 11 new strategic themes. Also, they had to come up with a payment policy aligned with the strategy of the company based with the individual performance of the employee. There were mixed reviews about the change in the compensation policy of the company, some employees were reluctant to the change of the already existing compensation policy while others were questioning the existing policy and looking forward to the change.
As mentioned in the case, the King III regulation was an opportunity for Altron to rethink its strategy and closely incorporate sustainability into its strategy, something that Venter had wanted since he had become the CE of the company. Yet again, Johnston steeped up to the task to come up with a case that would allow the company to embed sustainability into the company’s strategy. For this purpose he assembled a team and carried a research on the different aspects that are already mentioned in the above section (why they needed change, risk involved in the change, manpower and organizational culture etc.). Altron was one of the first companies to start the integrated reporting and the following quote explains why Venter thought it was important for them to do so: “Integrated reporting focuses management and others on looking forward rather than only backwards, which has historically been the case with most reporting.
It creates a complete and accurate picture of the company.” “Not necessarily more detail, but greater insight into the strategy, risks and value creation of a company.” – Robert Venter (Reference: http://www.kpmg.de/docs/20110912_Integrated_Reporting.pdf). As the quote above explains that the research led Johnston and Venter to identify various risks, value creation factors and the strategy that is being used. It put everything Altron was doing in perspective and evaluated where the company stood, locally and globally. After the evaluation of the research and the decision to broaden their strategic themes, to embed sustainability into their strategy, they came up with the 11 new strategic themes. Not only that but they also; * Defined targets
* Timeframe, for every task to be done and operations to take place * The measure of performance of an employee that was going to take place on the basis of the 11 strategic themes
An analysis of the Compensation Strategy
With the changes taking place and sustainability being implanted into the strategic goals of the company, Venter was uncertain about the incentive structure and what kind of message it would send about the sustainability-oriented corporate strategy that they had come up with. With the already existing compensation plan focusing on rewarding consistent long term individual, it drove employee’s energies and activities towards key business goals, creating a competitive and a challenging work environment. This also led to the alignment of shareholders interest with the;
* Operational requirement
* Strategic direction
* Business-specific value drivers of the employees
5 compensation policies were introduced in Altron that focused on:
* Attracting talent
* Motivating employees
* Rewarding employees on their work
* And retaining the high-caliber people
The 5 policies that Altron came up with were supposed to be transparent and were to link the compensation plan with the sustainability of the company. These 5 policies were explained in details so that employees and managers to sure about the factors they had to follow in order to get a high compensation in a year. Although the compensation plan was a good one, there were a lot of managers and employees that were not happy with this new plan which led Venter to ponder on the effectiveness of the compensation plan with the new sustainability approach the company had took. Analysis:
With the company being a market leader and one of the most successful and highly respected companies in South Africa, this new change from focusing on bottom-line to sustainable growth was an important because of the developing markets around the world and the increasing competition. Altron had the right attitude and the right pace to maintain the market leader status because of the efficiency in their work pattern and them doing work according to the rules and regulations that they had come up with. Not only that, but Altron considered both the internal and external factors before bringing forward a new idea or a change. With the new change that was being implemented and the broadening of the strategic themes of the company, Venter had to consider the sustainability drivers and how they were going to implement that change.
In the case the highlight is on the compensation plan of the employees and the managers, this maybe because Venter feels that one of the biggest assets the company has is its employees. No doubt in the market that companies exist in there are very minute difference in products and services and it all comes down to the people that work for the company create a difference between one company to the other. In our view, the better the more motivated the employees are the better they would perform and bring forth and change in the company. Venter believed that the employees working for Altron were going to bring a change in the strategy of the company due to which he had to align the compensation plan with the new strategic themes they had come up with. These compensation policies that he had come up with had different criteria’s that an employee or a manager had to fulfill in order to get a good bonus. This involved individual performance and the performance of a certain department.
Even though these policies were carved wonderfully, there were employees and managers that were not happy with them. Statistics from exhibits show that even though the company was maintaining a good financial position, employee turnover had increased. This could result in a problem for Altron. With the 11 new strategic themes focused on different areas, Altron realized the importance of having strategic themes for the employees and the customers. Overall we think that these policies were necessary and would bring a change in the working environment of the company and help people work efficiently in order to get a bonus. Although employees were reluctant to the change there were some pros and cons in the policies:
* Adopted a total cost of employment policy. * Performance evaluation of employees twice a year, which would lead to detecting problems earlier and whether the goals of the company were being met or not. * Feedback to the employees, which is essential in the growth of the company and the employee. * Aligning interests of the employees and managers with the interests of the company and the stake holders. | * The 70/30 ratio for the financial and non financial KPIs was a bit high. * The performance evaluation and group evaluation at an 80/20 rate, respectively, as high as well. * |
Recommendation and Conclusion
Although we are in favor of the new policies being implemented because they take in account all the aspects that are needed for the company to grow and different evaluation techniques that should be used in order to come up with the compensation and bonuses that the employees should get, we recommend that: The financial and nonfinancial KPI ratio is lowered, so that people don’t only worry about the financial outcome of the task they perform but also focus on the nonfinancial work they do. In fact there would be departments such as the customer complaint department, which would not know how their financial outcome would be determined since there suppose to interact with the customers rather than increase the sales or make profits.
Each department should be given their own set of KPIs that would be used to evaluate their performance. One of the biggest concerns we have is the 80/20 ratio that Altron is thinking of incorporating. This would mean that employees would rather work on their own than work with each other. Department synergy would be destroyed because everyone would rather work to get a better evaluation that his colleague. This ratio should be kept at 50-50 because with the new integrated report system Altron is using it is very important for departments and employees to work together rather than just focus on their individual performance.
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