What Is Prefferd Stock

It is actually possible in rare cases for a company to be controlled, effectively, by the preferred stock. In fact, I once wrote about this regarding a business called the Chase Candy Company. The preferred stock was a special type known as convertible preferred stock, giving the owners the right to turn their preferred stock into common stock and take control of the business. In addition, this special class of preferred stock was entitled to massive liquidation preference if the business were ever sold or shut down, meaning there was virtually no chance the common stock would see any cash dividends ever (or at least for decades).

The Many Flavors of Preferred Stock

Preferred stock is a hybrid between common stock and a bond. Each share of preferred stock is normally paid a guaranteed dividend which receives first priority (i.e., the common stockholders cannot receive a dividend until the preferred dividend has been paid in full) and has dibs over the common stockholders at the company's assets in the event of bankruptcy (its claim is still subordinate to that of the bond holders, however). In exchange for the higher income and perceived safety, preferred shareholders forgo the possibility of large capital gains.

The terms of preferred stock issues can vary widely, even among the same corporation. Arguably, the most important characteristic of a preferred stock is if it is cumulative or non-cumulative. In a cumulative issue, dividends that are not paid (referred to as "in arrears") build up. Before any dividend can be paid on the common stock, the entire in arrears balance must be paid in full. If a preferred issue is non-cumulative and a dividend payment is missed, the shareholders are out of luck; they will, most likely, never receive that money from the company even if and when the enterprise encounters prosperous times.

There are a number of additional provisions that can affect the value of a preferred stock. Here are just a few:

* Voting vs. Non-Voting: Owners of preferred stock may or may not have voting rights. There have been cases in the history wherein preferred shares only received voting rights if dividends had not been paid for a stipulated length of time. Such a provision effectively puts the preferred shareholders in the position of a first mortgage bond holder by giving them the collective power to enforce payment on their claim, resources permitting.

* Adjustable rate preferred stock: Holders of the preferred stock receive a dividend that differs based on any number of factors stipulated by the company at the issue's initial offering.

* Convertible preferred stock: Holders of this type of security have the right to convert their preferred stock into shares of common stock. This allows the investor to lock in the dividend income and potentially profit from a rise in the common stock while being protected from a fall in the same.

* Participating preferred stock: Normally, shares of this type of preferred stock receive a set dividend plus an additional dividend based upon a stipulated percentage of either the net income or the dividend paid to the common stock holders.

The variations are endless. It is quite possible an investor could come across a non-voting cumulative participating convertible preferred issue. Due to the individuality of the preferred stock field, we must stick to generalizations.

How do preferred shares respond to moves in the common stock?

If a large drug company discovered a cure for the common cold, the common stock would go through the roof in anticipation of the tens of billions of dollars the shareholders expect to earn in the future. At the same time, the company's preferred shares probably wouldn't budge much in price. The preferred shareholders would have missed out on the huge capital gains, albeit while collecting dividend checks. If, two weeks later, the company announced that the cure is not effective, the common stock would plummet. What happens to the company's preferred shareholders? Not much as long as the business is still making the respective dividend payments, they haven't lost a dime.

If, however, the investor had owned convertible preferred shares in this scenario, the price of convertible "percs", as they're known, would have experienced a tremendous rise and fall based on the expected profit an investor could have realized by converting his shares into common stock. As long as the holder of the preferred did not convert his shares or acquire more preferred at the inflated price, he would experience no loss of principal. (Perhaps now is the time to repeat the old Wall Street maxim, "never convert a convertible stock".)

Should I invest in shares of preferred stock?

In many ways, the insulation preferred stock appears to offer shareholders can seem attractive. The truth is, preferred stock probably doesn't make much sense for individual investors; however, it can be a goldmine for corporate portfolios. Why? Federal tax laws only require companies to pay income tax on 30% of their preferred dividends, meaning a full 70% is essentially tax-free! Individual investors, on the other hand, have to pay taxes on the full dividend received. Your portfolio will probably receive a higher after-tax yield by investing in corporate bonds when rates are attractive enough or municipal bonds if you are in a higher tax bracket. Equally as important, however, is the fact that you will likely receive a senior claim in such investments as opposed to the subordinate position offered by most preferred stocks.

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How to Calculate the Intrinsic Value of Preferred Stocks

Valuing preferred stock is one of the easiest things you can learn, which is why I like to teach it to new investors early in their financial education. The best way to do that is to dive right in with a fictional scenario so you can see how the math works.

Imagine that you buy 1,000 shares of preferred stock at $100 per share for a total investment of $100,000. Each share of preferred stock pays a $5 dividend, resulting in a 5% dividend yield ($5 annual dividend divided by $100 preferred stock price = 5% dividend yield). That means that you collect $5,000 in dividend income on your $100,000 investment each and every year. For now, let's pretend that this is a very simple form of preferred stock and not one of the special types like convertible preferred stock.

Whether you realize it or not, you own what is known as a perpetuity. There is a simple formula for valuing perpetuities and basic growth stocks called the Gordon model, or the Gordon dividend discount model. The formula is k÷(i-g). The "k" variable is equal to the dividend you receive on your investment, "i" is the rate of return you require on your investment (called the "discount rate"), and "g" is the growth rate of the dividend.

Here are some intrinsic value calculations for the preferred stock:

* If the preferred stock dividend has a 0% growth rate and you had a required rate of return of 10%, you would calculate $5.00÷(0.10-0). That is simplified to $5.00÷0.10 = $50.00. That is, if you wanted to earn a 10% rate of return, you couldn't pay more than $50.00 for the preferred stock. Any price lower than $50.00 will result in a higher return.

* If the preferred stock dividend had a growth rate of 3% per year and you had a required rate of return of 7%, you would calculate $5.00÷(0.07-0.03). The next step is $5.00÷0.04 = $125.00. That is, If you wanted to earn 7% on your preferred stock investment and the dividend increased at 3% forever, you could pay $125.00 per share to hit your return. If you pay more, you will have a lower return than 7%. If you pay less, you will have a higher return than 7%.

An Interesting Limitation to the Intrinsic Value Calculation for Preferred Stock

One limitation of the intrinsic value formula is that you cannot have a growth rate that exceeds the discount rate or your calculator will return an error or indicate infinity. The reason is that a perpetuity is expected to last forever; from now until Doomsday. If the rate of growth exceeds the required rate of return, the value of the investment is theoretically infinite because no matter what price you pay for your stock, you are someday going to hit your rate of return and exceed it. It may take 300 million years but the math isn't concerned with human lifespans!

Other than that interesting quirk, when you are dealing with pure vanilla, simple preferred stock, that really is all there is to it. You now know how to calculate the intrinsic value of preferred stock! Congratulations! Use your new power wisely and start working on a list of stocks that you may want to consider for your portfolio.

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Difference between Sale and Agreement to Sell

Section 4(1) of the sale of Goods Act defines a contract of sale of goods as – “a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price”.

The definition of contract of sale of goods reveals that either actual sale or an agreement to sell both are covered under the act. But, there are certain differences between the two.

Where in a contract of sale, the property in the goods is immediately transferred from the buyer to the seller it is called a sale.

Where under a contract of sale, the transfer of property in the goods is to take place in the future or after the fulfillment of certain conditions, it is called ‘An agreement to sell”.

A sale and an agreement to sell can be distinguished as:-

i) Transfer of Property (Ownership): In a sale, the property in goods or the ownership is immediately transferred from the seller to the buyer.

In an agreement to sell the property in the goods is not transferred immediately at the time of contract, but the ownership is transferred at a later time either at the expiry of a certain period or fulfillment of certain condition. Until then, the seller continues to be the owner of the goods.

ii) Risk of Loss: The general rule is that, unless otherwise agreed, the risk of loss passes with property. In case of sale, if the goods are destroyed the loss falls on the buyer, even if the buyer is not in possession of goods because the ownership has been transferred.

In an agreement to sell, the loss is to be borne by the seller because the ownership has still not passed on to the buyer, even if the buyer has possession of it.

iii) Consequences of Breach: In case of sale, if the buyer fails or refuses to pay the price of the goods, the seller can sue for the price, even if he has the possession of goods.

In an agreement to sell, if the buyer fails to accept and pay the price, the seller can sue him only for damages and not for the price, even if the goods in possession of the buyer.

iv) Right of Resale: In a sale the property of goods is immediately transferred to the buyer and so the seller (even if the goods are in his possession) cannot result the goods. If the seller does so, the subsequent buyer cannot acquire the title to the goods. The original buyer can recover the goods from the third person and can also sue the seller for the breach of contract.

In an agreement to sell, the seller can sell the goods to anyone as he has the property of goods and the new buyer gets the title of goods as he purchases the goods for consideration and without any notice of prior agreement. In such a case the original buyer can only sue for damages.

v) Buyers Insolvency: In a sale, if the buyer becomes insolvent before he pays the price of the goods, the seller will have to deliver the goods to the official assignee or receiver and he can only claim dividend for the price of the goods.

In an agreement to sell, if the buyer becomes insolvent and has not paid the price, the seller can refuse to deliver the goods to the official assignee or receiver until paid in full.

vi) Seller’s Insolvency: If the seller becomes insolvent then in case of sale the buyer is entitled to recover the goods from the official assignee of receiver since the ownership has been transferred to the buyer.

In case of an agreement to sell, if the buyer has paid the full price, he can only claim a rateable dividend and not the goods because the property in the goods still rests with the seller.

vii) Nature of Contract: A sale is an executed contract. An agreement to sell is an executary contract.

viii) Types of Goods: A sale can only be in the case of existing and specific goods. An agreement to sell mostly takes place in the case of future and contingent goods.

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The Concept of Occupational Safety and Health

Since 1950, the international labor organization (ilo) and the world health organization (who) have shared a common definition of occupational health. It was adopted by the joint ilo/who committee on occupational health at its first session in 1950 and revised at its twelfth session in 1995. The definition reads: “occupational health should aim at: the promotion and maintenance of the highest degree of physical, mental and social well-being of workers in all occupations; the prevention amongst workers of departures from health caused by their working conditions; the protection of workers in their employment from risks resulting from factors adverse to health; the placing and maintenance of the worker in an occupational environment adapted to his physiological and psychological capabilities; and, to summarize, the adaptation of work to man and of each man to his job.”

Need for more research on health and safety of employees:

Compared to other elements of the hrm model, workplace health and safety is under-researched by hrm scholars and has been largely neglected in the hrm discourse. This is one reason – together with the rising cost of health, new laws and the ‘deregulatory’ proposals – why more research should be devoted to workplace health and safety by hrm specialists. However, there is another important reason why hrm scholars and practitioners need to pay more attention to health and safety. It is this: if strategic hrm means anything, it must encompasses the development and promotion of a set of health and safety policies to protect the organization’s most valued asset, its employees.

The changing approach to workplace health and safety:

The traditional approach to safety in the workplace used the ‘careless worker’ model. It was assumed by most employer and the accident prevention bodies that most of the accidents were due to an employee’s failure to take safety seriously or to protect herself or himself. The implication of this is that work can be made safe simply by changing the behavior of employees by poster campaigns and accident prevention training.

In the 1960s, something like a thousand employees was killed at their work in the uk. Every year of that decade about 500,000 employees suffered injuries in varying degrees of severity, and 23 million working days were lost annually on account of industrial injury and disease. Such statistics led investigators to argue that ‘for both humanitarian and economic reasons, no society can accept with complacency that such levels of death, injury and disease and waste must be regarded as the inevitable price of meeting its needs for goods and services’ (robens, 1972). Since the robens report, there has been a growing interest in occupational health and safety. Moreover, it has been recognized that the ‘careless worker’ model does not explain occupational ill-health caused by toxic substances, noise, and badly designed and unsafe of work. Nor does this perspective highlight the importance of job stress, fatigue and poor working environments in contributing to the causes of accidents. A new approach to occupational health and safety, the ‘shared responsibility’ model, assumes that the best way to reduce levels of occupational accidents and disease relies on the cooperation of both employers and employees: a ‘self-generating effort’ between ‘those who create the risks and those who work with them’ (robens, 1972).

Health and safety and the HRM cycle:

The employer has a duty to maintain a healthy and safe workplace. The health and safety function is directly related to the elements of the hrm cycle – selection, appraisal, rewards and training. Health and safety considerations and policy can affect the selection process in two ways. It is safe to assume that in the recruitment process potential applicants will be more likely to be attracted to an organization that has a reputation for offering a healthy and safe work environment for employees. The maintenance of a healthy and safe workplace can be facilitated in the selection process by selecting applicants with personality traits that decrease the likelihood of accident. The appraisal of a manager’s performance that incorporates the safety record of a department or section can also facilitate health and safety. Research suggests that safety programs are more effective when the accident rates of their sections are an important criterion of managerial performance. Safe work behavior can be encouraged by a reward system that ties bonus payments to the safety record of a work group or section. Some organizations also provide prizes to their employees for safe work behavior, a good safety record or suggestions to improve health and safety. Training and hr development play a critical role in promoting health and safety awareness among employees.

Costs of health and safety of employees:

Workplace health and safety raises the question of economic costs. The economic cost of occupational health and safety to the organization is double-edged. On the one hand, health and safety measures which protect employees from the hazards of the workplace can conflict with management’s objective of containing production costs. On the other hand, effective health and safety policies can improve the performance of employees and the organization, by reducing costs associated with accidents, disabilities, absenteeism, or illness.

There are also indirect costs associated with work-related accidents. The indirect costs include overtime payments necessary to make up for lost production, cost of retaining a replacement employee, a wage cost for the time spent by hrm personnel recruiting, selecting and training the new employee and, in less typical cases and the cost associated with loss of revenue on orders cancelled or lost if the accident causes a net long-term reduction on sales.

A healthy and safe work environment helps to reduce costs and improve organizational effectiveness. If work-related illness and accidents can be transposed on to the balance sheet the organization can apply the same management effort and creativity to designing and maintaining a healthy and safe workplace as managers customarily apply to other facets of the business. As robens stated ‘accident prevention can be integrated into the overall economic activity of the firm’ (1972).

The importance of health and safety:

In addition to improving and reducing costs, maintaining a healthy and safe work environment helps to facilitate employees’ commitment to quality and improve industrial relations. One of the side effects of a proactive health and safety policy is that it leads to improved productivity and quality. Collard (1989) reports that in two foreign companies studies, a cap (cost and productivity) program was continually emphasized by top management and ‘one major aspect of this was the highest standards of housekeeping’ (19849). Further it is argued that employee and union-management relations can be improved when employers satisfy their employees’ health and safety needs.

In some cases, new provisions covering health and safety have been negotiated into collective agreements. When employers take a greater responsibility for occupational health and safety it can change employee behavior and employees might take a less militant stance during wage bargaining if management pay attention to housekeeping. Attention to workplace health and safety can have a strong, positive effect on employee commitment. When employees work in healthy and safe workplace, higher levels of motivation, performance and loyalty will result.

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Role of Management in Improving Workplace Safety and Health

Perhaps more than any other HR activity, health and safety offer HR manager an opportunity to be more proactive than reactive. There are a number of strategies that can be used by organizations to ensure a healthy and safe workplace and ensure compliance with legal requirements. Some are:

Design	Safe and healthy systems of work
Exhibit	Strong management commitment
Inspect	Workplace for health and safety problems
Establish	Procedures and controls for dealing with health and safety issues
Develop	Training programs
Set up	Health and safety committees
Monitor	Safety policies
Draw up	Action plan and checklist

1. Design safer systems of work:

The most direct approach to ensuring a safe and healthy workplace is to design systems of work that are safe and without risk to health. This can often only be done satisfactorily at the design, planning or purchasing stage. It may be far more difficult to modify existing machinery or systems of work to eliminate or reduce hazards, than at the investment stage. Thus, management must take cognizance of long-term organizational changes to control hazards. Simply trying to persuade employees, for instance by poster campaigns, to adapt their behavior to unsafe systems of work is unacceptable. ‘Most accidents involve an element of failure in control – in other words failure in management skill. A guiding principle when drawing up arrangements for securing health and safety should be so far as possible work would be adapted to people and not vice versa’. As managers identify processes, machines and substances that are hazardous to the health and well-being of employees, they must modify the process to eliminate or reduce the hazard and risk ‘at source’. The provision of protective equipment is the typical means used by organizations to reduce physical hazards, and it is also an employer responsibility.

2. Exhibit commitment:

No matter how much activity on health and safety is initiated by HR professionals, health and safety should be an integral part of every manager’s responsibility, from the chief executive officer down to the lowest level supervisor. Anything less than total support from top management raises questions about sincerity of the organization’s commitment in the eyes of employees, government agencies and the public at large. To exhibit commitment, managers’ salaries and promotion might be tied to a satisfactory safety record and compliance. Larger organizations have also appointed specialists in the area, including health and safety officers, safety engineer and medical technicians. If the safety officer is to be effective she or he must be given adequate authority in the management hierarchy to implement changes.

3. Inspect the workplace:

Another proactive approach to the management of health and safety is regular formal inspections of the workplace, regular monitoring of the work environment and regular physical examination of employees. For example, construction sites and manufacturing plants require regular inspections to check the application of safety standards and relevant laws. Organizations may monitor a wide range of matters relating to employees’ health, from routine eye tests and chest X-rays to screening for breast and cervical cancer and incidents of infertility and abnormal childbirths. A ‘health’ survey of employees can also help identify hazardous and unhealthy processes.

We can identify three main types of formal inspection, accident, special and general. Accident inspections will follow an accident or dangerous incident in the workplace. Special inspections might concentrate on a particular work station, system of work or hazard. The safety committee might decide that it is necessary to examine the training of fork-lift truck operators or dust problems; this would be the first step in a plan of action. A comprehensive survey of the entire workplace is the purpose of general inspection.

4. Establish procedures and controls:

A healthy and safety policy is likely to fail unless there are effective procedures and controls established. The procedures for handling and safety problems need to meet some basic requirements:

1. Allow employees and union representatives to talk directly to the managers who can make decisions.
2. Operate without undue delay.
3. Be able to handle emergency problems and
4. Permit discussion about long-term decisions affecting health and safety.

Clearly, these recommendations have important implications for HRM policy and action. Problems might occur if line managers are expected by senior management to be responsible for safe working practices, but at the same time are denied the authority to make decisions and implement changes. In principle, organizational procedures should ensure that the responsibility of each level of management to make decisions. The appointment of a safety officer may be a necessary prerequisite to establishing effective procedures and controls, but it is not sufficient. The position must be placed into the management hierarchy with clear lines of reporting and accountability, which will enable procedures for raising problems to operate without undue delay and avoid other managers absolving themselves from responsibilities.

5. Develop training programs:

One way to obtain compliance with health and safety regulations is through enhancing employees’ knowledge, understanding and commitment, which can be achieved through healthy and safety programs. The purpose of safety training is generally the same as that of any other training program: to improve job knowledge and skills and to ensure optimum employee performance at the specified level. In health and safety training, specified performance standards include attention to safety rules and regulations regarding safe work behavior. Like any other training, health and safety training should be developed systematically. First, problems or training needs are identified by inspection, by accident reports, and through discussion at the health and safety committee. Next, planning, execution and evaluation of the training take place. Top management support is a key ingredient in the availability and success of health and safety training.

6. Set up health and safety committees:

When health committees are not initiated by the union, organization often have safety committees which have employee members and are chaired by the safety or HRM specialist. Making the committee effective is mainly in the realm of senior management. A safety committee may develop into a ‘talking shop’ with no effective decision-making authority. To avoid this, a senior member of management team, with executive authority, should be a member of the committee.

The functions of the committees, their terms of reference, depends on individual company policy, relevant safety legislation and the employee-union relations situation. Employers or their representatives are primarily responsible for compliance with health and safety laws. The existence of this committee does not diminish the employer’s duty to ensure a healthy and safe workplace. The work of the safety committee should supplement management’s arrangements for regular and effective monitoring for health and safety precautions; it cannot be a substitute for management action. All forms of safety matters reduce the incidence of accidents.

Read: The Concept of Occupational Safety and Health

7. Monitor policy

Safety specialists argue that the safety policy should reflect the employer’s commitment to develop safe systems of work, and to pursue a healthy work environment. Apart from giving details of the specialist safety services provided by the organization, the safety policy also outlines the safety responsibilities of all levels of management within the hierarchy. This part of the safety policy is particularly important for identifying which member of the management hierarchy should be involved when a health and safety problem arises in the workplace. A proactive approach would involve HRM professionals regularly checking to ensure that safety policy; management procedures and arrangements work, and are changed to suit new developments or work structures in the workplace.

8. Draw up action plan

Thorough preparation, including designing a comprehensive set of checklists covering all aspects of the workplace, is essential if managers are to discover physical hazards. HRM professionals can be more proactive in the area of health and safety be developing an action plan and checklist.

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Topics for Employee Training Programs

Training can be defined as the process of “Transferring information and knowledge to employers and equipping employers to translate that information and knowledge into practice with a view to enhancing organization effectiveness and productivity, and the quality of the management of people.” It also means that in organizational development, the related field of training and development deals with the design and delivery of workplace learning to improve performance. The common topics for employee training and development programs are;

1. Corporate ethics: This covers the value of good manners, courtesy, consideration, personal decor and good rapport. It also shows why and how to discourage gossip, controversies, personal work at office, rush jobs etc.
2. Communications: The increasing diversity of today’s workforce brings a wide variety of languages and customs. Right from the way the receptionist handles a call to how the CEO deals with a customer gives a glimpse of the image of an organization. Such training encompasses oral, written and presentation skills. It stresses the importance of communication being clear, concise, concrete and colorful.
3. Career and life planning: A primarily employee-oriented training objective u undertaken to help employees plan for their lives, career, retirement, redundancy etc. Such training imparts the values of life skills that employees need under different and difficult circumstances.
4. Computer skills: Computer skills are becoming a necessity for conducting administrative and office tasks.
5. Customer service: Increased competition in today’s global marketplace makes it critical that employees understand and meet the needs of customers.
6. Diversity: Diversity training usually includes explanation about how people have different perspectives and views, and includes techniques to value diversity
7. Staff management and team building: Such training shows the importance and benefits of good management and how everyone can achieve more through teamwork.
8. Stress management: Stress is an individual’s response to threats and challenges in the environment. Manifested physiologically and physically, it may occur due to role conflict, role ambiguity, role incompatibility, role overload or role under load. Stress management techniques are covered under this objective.
9. Time management: Time management skills covered here showcase the importance of being specific, delegation and prioritization. They also show how to set measurable, attainable, relevant and time-bound goals.
10. Human relations: The increased stresses of today’s workplace can include misunderstandings and conflict. Training can people to get along in the workplace. It also includes interpersonal relationship skills. Communication is a two-way exercise and this objective covers the importance of listening, concentrating, showing empathy and self-awareness.
11. Quality initiatives: Initiatives such as Total Quality Management, Quality Circles, benchmarking, etc., require basic training about quality concepts, guidelines and standards for quality, etc.
12. Safety: Safety training is critical where working with heavy equipment , hazardous chemicals, repetitive activities, etc., but can also be useful with practical advice for avoiding assaults, etc.
13. Sexual harassment: Sexual harassment training usually includes careful description of the organization’s policies about sexual harassment, especially about what are inappropriate behaviors.
14. Memory skills: This objective highlights techniques for better reception, retention and recall through audio and visual learning techniques. It helps to improve skills by employing all senses, associating and following systematic review plans.
15. Special skills: Besides the above, organizations also impart special job-related skills. These may include technology training, report writing, technical training, quality assessments etc.

An organization may choose to impart training in any or many of the objectives mentioned above. But before one invests it is important to choose a trainer who is good and capable of making a positive difference with his or her training methodologies. Also organizational training needs to be undertaken keeping the mission and the vision statement of the organization in view.

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Case Study of IBM: Employee Training through E-Learning

“E-learning is a technology area that often has both first-tier benefits, such as reduced travel costs, and second-tier benefits, such as increased employee performance that directly impacts profitability.” – Rebecca Wettemann, research director for Nucleus Research

In 2002, the International Business Machines Corporation (IBM) was ranked fourth by the Training magazine on it’s “The 2002 Training Top 100”. The magazine ranked companies based on their commitment towards workforce development and training imparted to employees even during periods of financial uncertainty.

Since its inception, IBM had been focusing on human resources development: The company concentrated on the education and training of its employees as an integral part of their development. During the mid 1990s, IBM reportedly spent about $1 billion for training its employees. However, in the late 1990s, IBM undertook a cost cutting drive, and started looking for ways to train its employees effectively at lower Costs. After considerable research, in 1999, IBM decided to use e-Learning to train its employees. Initially, e-Learning was used to train IBM’s newly recruited managers.

IBM saved millions of dollars by training employees through e-learning. E-Learning also created a better learning environment for the company’s employees, compared to the traditional training methods. The company reportedly saved about $166 million within one year of implementing the e-learning program for training its employees all over the world. The figure rose to $350 million in 2001. During this year, IBM reported a return on investment (ROI)’s of 2284 percent from its Basic Blue e-Learning program. This was mainly due to the significant reduction in the company’s training costs and positive results reaped from e-learning. Andrew Sadler, director of IBM Mindspan Solutions, explained the benefits of e-learning to IBM, “All measures of effectiveness went up. It’s saving money and delivering more effective training,’ while at the same time providing five times more content than before.” By 2002, IBM had emerged as the company with the largest number of employee’s who have enrolled into e-Learning courses.

However, a section of analysts and some managers at IBM felt that e-Learning would never be able to’ replace the traditional modes of training completely. Rick Horton, general manager of learning services at IBM, said, “The classroom is still the best in a high-technology environment, which requires hands-on laboratories and teaming, or a situation where it .is important for the group to be together to take advantage of the equipment.”

Though there were varied opinions about the effectiveness of e-Learning as a training tool for employees, IBM saw it as a major business opportunity and started offering e-­learning products to other organizations as well. Analysts estimated that the market for e-Learning programs would grow from $2.1 billion in 2001 to $33.6 billion in 2005 representing a 100 percent compounded annual growth rate (CAGR).

Background Note

Since the inception of IBM, its top management laid great emphasis on respecting every employee. It felt that every employee’s contribution was important for the organization. Thomas J. Watson Sr. (Watson Sr.), the father of modern IBM had once said, “By the simple belief that if we respected our people and helped them respect themselves, the company would certainly profit.” The HR policies at IBM were employee-friendly. Employees were compensated well – as they were paid above the industry average. in terms of wages. The company followed a ‘no layoffs’ policy. Even during financially troubled periods, employees were relocated from the plants, labs and headquarters, and were retrained for careers in sales, customer engineering, field administration and programming.

IBM had emphasized on training its employees from the very beginning. In 1933 (after 15 years of its inception), the construction of the ‘IBM Schoolhouse’ to offer education and training for employees, was completed. The building had Watson Sr.’s ‘Five Steps of Knowledge’ carved on the front entrance. The five steps included ‘Read, Listen, Discuss, Observe and Think.’ Managers were trained at the school at regular intervals.

To widen their knowledge base and broaden their perspectives, managers were also sent for educational programs to Harvard, the London School of Economics, MIT and Stanford. Those who excelled in these programs were sent to the Advanced Managers School, a program offered in about forty colleges including some in Harvard, Columbia, Virginia, Georgia and Indiana. IBM’s highest-ranking executives were sent to executive seminars, organized at the Brookings Institutions this program typically covered a broad range of subjects including, international and domestic, political and econQll1ic affairs. IBM executives were exposed to topical events with a special emphasis on their implications for the company.

In 1997, Louis Gerstner (Gerstner), the then CEO of IBM, conducted a research to identify the unique characteristics of best executives and managers. The research revealed that the ability to train employees was an essential skill, which differentiated best executives and managers. Therefore, Gerstner aimed at improving the managers’ training skills. Gerstner adopted a coaching methodology of Sir John Whitmore, which was taught to the managers through training workshops.

However, after some time, Gerstner realized that the training workshops were not enough. Moreover, these workshops were not ‘just-in-time.’ Managers had to wait for months before their turn of attending the work shops came. Therefore, in most of the cases, during the initial weeks at the job, the employees did not possess the knowledge of critical aspects like team building.

IBM trained about 5000 new managers in a year. There was a five-day training program for all the new managers, where they were familiarized with the basic culture, strategy and management of IBM. However, as the jobs became more complex, the five-day program turned out to be insufficient for the managers to train them effectively. The company felt that the training process had to be continuous and not a one-time event.

Gerstner thus started looking for new ways of training managers. The company specifically wanted its management training initiatives to address the following issues:

• Management of people across geographic borders
• Management of remote and mobile employees
• Digital collaboration issues
• Reductions in management development resources
• Limited management time for training and development
• Management’s low comfort level in accessing and searching online HR resources

The company required a continuous training program, without the costs and time associated with bringing together 5000 managers from all over the world. After conducting a research, IBM felt that online training would be an ideal solution to this problem. The company planned to utilize the services of IBM Mindspan Solutions to design and support the company’s manager training program. This was IBM’s first e-­learning project on international training.

Online Training at IBM

In 1999, IBM launched the pilot Basic Blue management training program, which was fully deployed in 2000. Basic Blue was an in-house management training program for new managers. It imparted 75 percent of the training online and the remaining 25 percent through the traditional classroom mode. The e-Learning part included articles, simulations, job aids and short courses.

The founding principle of Basic Blue was that ‘learning is an extended process, not a one-time event.” Basic Blue was based on a ’4- Tier’ blended learning model’. The first three tiers were delivered online and the fourth tier included one­-week long traditional classroom training. The program offered basic skills and knowledge to managers so that they can become effective leaders and people-oriented managers.

The managers were provided access to a lot of information including a database of questions, answers and sample scenarios called Manager QuickViews. This information addressed the issues like evaluation, retention, and conflict resolution and so on, which managers came across. A manager who faced a problem could either access the relevant topic directly, or find the relevant information using a search engine. He/she had direct access to materials on the computer’s desktop for online reading. The material also highlighted other important web sites to be browsed for further information. IBM believed that its managers should be aware of practices and policies followed in different countries. Hence, the groups were foremen virtually by videoconferencing with team members from all over the world,”

In the second tier, the managers were provided with simulated situations. Senior managers trained the managers online. The simulations enabled the managers to learn about employee skill-building, compensation and benefits, multicultural issues, work/life balance- issues and business conduct in an interactive manner. Some of the content for [his tier was offered by Harvard Business School and the simulations were created by Cognitive Arts of Chicago. The online Coaching Simulator offered eight scenarios with 5000 scenes of action, decision points and branching results. IBM Management Development’s web site, Going Global offered as many as 300 interactive scenarios on culture clashes.

In the third tier, the members of the group started interacting with each other online. This tier used IBM’s collaboration tools such as chats, and team rooms including IBM e-Learning products like the Team-Room, Customer-Room and Lotus Learning Space. Using these tools, employees could interact online with the instructors as well as with peers in their groups. This tier also used virtual team exercises and included advanced technologies like application sharing, live virtual classrooms and interactive presentation: on the web. In this tier, the members of the group had to solve problems as a team by forming virtual groups, using these products. Hence, this tier focused more on developing the collaborative skills of the learners.

Though training through e-Learning was very successful, IBM believed that classroom training was also essential to develop people skills. Therefore, the fourth tier comprised a classroom training program, own as ‘Learning Lab.’ By the time the managers reached this tire, they all reached a similar level of knowledge by mastering the content in the first three tiers. Managers had to pass an online test on the content provided in the above three tiers, before entering the fourth tier. In the fourth tier, the managers had to master the information acquired in the above three tiers and develop a deeper understanding and a broader skills set. There were no lectures in these sessions, and the managers had to learn by doing and by coordinating directly with others in the classroom.

The tremendous success of the Basic Blue initiative encouraged IBM to extend training through e-Learning to its-sales personnel and experienced managers as well. The e-Learning program for the sales personnel was known as ‘Sales Compass,’ and the one for the experienced managers, as ‘Managing@ IBM.’ Prior to the implementation of the Sales Compass e-Learning program, the sales personnel underwent live training at the company’s headquarters and training campuses. They also attended field training program, national sales conferences and other traditional methods of training. However, in most of the cases these methods proved too expensive, ineffective and time-consuming. Apart from this, coordination problems also cropped up, as the sales team was spread across the world. Moreover, in a highly competitive market, IBM could not afford to keep its sales team away from work for weeks together.

Though Sales Compass was originally started in 1997 on a trial basis to help the sales team in selling business intelligence solutions to the retail and manufacturing industries, it-was not implemented on a large scale. But with the success of Basic Blue, Sales Compass was developed further. The content of the new Sales Compass was divided into five categories including Solutions (13 courses), industries (23 courses), personal skills (2 courses), selling skills (11 courses), and tools and job aid (4 aids).

The sales personnel of IBM across the globe could use the information from their desktops using a web browser. Sales Compass provided critical information to the sales personnel helping them to understand various industries (including automotive, banking, government, insurance etc) in a much better manner. The information offered included industry snapshot, industry trends, market segmentation, key processes, positioning and selling industry solutions and identifying resources.

It also enabled the sales people to sell certain IBM products designed for Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), Business Intelligence (BI), and so on. Sales Compass also trained the sales personnel on skills like negotiating and selling services. Like the Basic Blue program, Sales Compass also had simulations for selling products to a specific industry like banking, about how to close a deal, and so on. It also allowed its users to ask questions and had links to information on other IBM sites and related websites.

Sales Compass was offered to 20,000 sales representatives, client relationship representatives, territory representatives, sales specialists, and service professionals at IBM. Brenda Toan (Toan), global skills and learning leader for IBM offices across the world, said, “Sales Compass is a just-in-time, just-enough sales support information site. Most of our users are mobile. So they are, most of the times, unable to get into a branch office and obtain information on a specific industry or solution. IBM Sales Compass provides industry-specific knowledge, advice on how to sell specific solutions, and selling tools that support our signature selling methodology, which is convenient for these users.”

IBM also launched an e-Learning program called ‘Managing @ IBM’ for its experienced managers, in late 2001. The program provided content related to leadership and people management skills, and enabled the managers to meet their specific needs. Unlike the Basic Blue program, this program enabled managers to choose information based on their requirements. The program included the face-to-­face Learning Lab, e-learning, and Edvisor, a sophisticated Intelligent Web Agent. Edvisor offered three tracks offering various types of information.

By implementing the above programs, IBM was able to reduce its training budget as well as improve employee productivity significantly. In 2000, Basic Blue saved $16 million while Sales Compass saved $21 million. In 2001, IBM saved $200 million and its cost of training per-employee reduced significantly – from $400 to $135. E-learning also resulted in a deeper understanding of the learning content by the managers. It also enabled the managers to complete their classroom training modules in lesser time, as compared to the traditional training methods used earlier. The simulation modules and collaboration techniques created a richer learning environment. The e-learning projects also enabled the company to leverage corporate internal knowledge as most of the content they carried came from the internal content experts.

IBM’s cost savings through E-Learning

Program	Saving in 2000 (in US $million)
Basic Blue	16.0
Going global	0.6
Coaching simulators	0.8
Manager Quick-Views	6.6
Customer-Room	0.5
Sales Compass	21.0

The e-Learning projects of IBM had been successful right from the initial stages of their implementation. These programs were appreciated by HR experts of IDM, and other companies. The Basic Blue program bagged three awards of ‘Excellence in Practice’ from the American Society for Training & Development (ASTD) in March 2000. It was also included among the ten best ‘world-class implementations of corporate learning’ initiatives by the “E-Learning across the Enterprise: The Benchmarking Study of Best Practices” (Brandon Hall) in September 2000.

IBM continued its efforts to improve the visual information in all its e-Learning programs to make them more effective. The company also encouraged its other employees to attend these e-learning programs. Apart from this, IBM planned to update these programs on a continuous basis, using feedback from its new and experienced managers, its sales force and other employees.

IBM used e-Learning not only to train its employees, but also in other HR activities. In November 2001, IBM employees received the benefits enrollment material online. The employees could learn about the merits of various benefits and the criteria for availing these benefits, such as cost, coverage, customer service or performance ­using an Intranet tool called ‘Path Finder.’ This tool also enabled the employees to know about the various health plans offered by IBM. Besides, Pathfinder took information from the employees and returned a preferred plan with ranks and graphs. This application enabled employees to see and manage their benefits, deductions in their salaries, career changes and more. This obviously, increased employee satisfaction. The company also automated its hiring process. The new tool on the company’s intranet was capable of carrying out most of the employee hiring processes. Initially, IBM used to take ten days to find a temporary engineer or consultant. Now, the company was able to find such an employee in three days.

IBM also started exploring the evolving area of ‘mobile learning’ Analysts felt that for mobile sales force of IBM, m-Learning was the next ideal step (after e-Learning). IBM leveraged many new communication channels for offering its courses to employees. IBM also started offering the courses to its customers and to the general public. In early 2002, American Airlines (AA) used IBM’s e-Learning package, which enabled its flight attendants to log on to AA’s website and complete the ‘safety and security training’ from any place, at any time. The content included instruction clips, graphics, flash animation, and so on. This made the airlines annual safety training certification program guides more effective. Shanta Hudson-Fields, AA’s manager for line training and special projects, commented, “The full service package that IBM offers has allowed us to develop an effective online course for our large group of busy attendants. In addition to providing a flexible training certification experience for our attendants, American has also brought efficiency and cost savings to our training processes using IBM’s e-Learning solution.” The company had trained 24,000 flight attendants by November 2002.

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Employee Training

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Improving business performance is a journey, not a destination. Business performance rises and falls with the ebb and flow of human performances. HR professionals lead the search for ways to enhance the effectiveness of employees in their jobs today and prepare them for tomorrow. Over the years, training programmes have grown into corporate with these goals in mind. Training programmes should enhance performance and enrich the contributions of the workforce. The ultimate goal of training is to develop appropriate talent in the workforce internally.

Training has made significant contributions to development of all kinds. Training is essential; doubts arise over its contribution in practice. Complaints are growing over its ineffectiveness and waste. The training apparatus and costs have multiplied but not its benefits. Dissatisfaction persists and is growing at the working level where the benefits of training should show up most clearly. This disillusionment shows in many ways – reluctance to send the most promising people for training, inadequate use of personnel after training etc. With disillusionment mounting in the midst of expansion, training has entered a dangerous phase in its development.

Training is neither a panacea for all ills nor is it a waste of time. What is required is an insight into what training can or cannot do and skill in designing and carrying out training effectively and economically.

The searchlight of inquiry may make the task and challenges stand out too starkly, too simply. Using experience with training in India and other rapidly developing countries has this advantage at similar risk. The contribution that training can make to development is needed acutely and obviously. At the same time, the limited resources available in these countries make this contribution hard to come by. These lines are sharply drawn; on the one hand, no promise can be ignored; on the other, no waste is permissible.

Much of the training provided today proceeds as if knowledge and action were directly related. This assumption is itself a striking illustration of the wide gulf that separates the two. On a continuum with personal maturation and growth at one end and improvement in performance of predetermined tasks at the other, education lies near the former, and training near the later. Focusing training on skill in action makes the task wide and complex. Training embraces an understanding of the complex processes by which various factors that make up a situation interact.

For every training strategy, no matter which, the proper focus right from the very outset is on one or more people – on-the-job-in-the-organization – this whole amalgam. Wherever the focus moves during the training programme, the starting point becomes the focus again at the end. The difference lies in what people have learned that they now apply. That difference, in terms of more effective behavior is the measure of the efficacy of training.

The training process is made up of three phases:

Phase 1: Pre-training. This may also be called the preparation phase. The process starts with an understanding of the situation requiring more effective behavior. An organization’s concerns before training lie mainly in four areas: Clarifying the precise objectives of training and the use the organization expects to make of the participants after training; selection of suitable participants; building favorable expectations and motivation in the participants prior to the training; and planning for any changes that improved task performance will require in addition to training.

Phase 2: Training. During the course of the training, participants focus their attention on the new impressions that seem useful, stimulating and engaging. There is no guarantee that the participants will in fact learn what they have chosen. But the main purpose remains: participants explore in a training situation what interests them, and a training institution’s basic task is to provide the necessary opportunities.

Having explored, participants try out some new behavior. If they find the new behavior useful, they try it again, check it for effectiveness and satisfaction, try it repeatedly and improve it. Finally, they incorporate this new facet into their habitual behavior in the training situation. If they do not find it useful, they discard it, try some variant, or discontinue learning in this direction. The intricate process of selection and testing is continuous and more or less conscious. It is important that work organizations meanwhile prepare the conditions for improved performance by their participants upon their return.

Phase 3: Post-training. This may be called the “follow up” phase. When training per se concludes, the situation changes. When the participants return back to work from the training, a process of adjustment begins for everyone involved. The newly learned skills undergo modification to fit the work situation. Participants may find their organizations offering encouragement to use the training and also support for continuing contact with the training institution. On the other hand, they may step into a quagmire of negativity.

More effective behavior of people on the job in the organization is the primary objective of the training process as a whole. In the simplest training process, improvement is a dependent variable, and participants and organizations independent variables.

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Performance Management Process

Performance management process is composed of four main stages:

1. Planning Performance
2. Managing Performance
3. Reviewing Performance
4. Rewarding Performance

1. Planning Performance

As with the introduction of any process, there first needs to be clarity about the primary reason for introducing performance management and a clear view about what it is expected to deliver in terms of results. There also needs to be strong commitment from the top to the introduction of process, as without this commitment it will be difficult to gain support from the lower echelons of organizations and insufficient resources may be allocated to achieve the desired result.

The next logical step in designing a performance management system is the setting of objectives. Typically, these will derive from the organization’s overall direction and strategy and from broad statement of intent which will be gradually refined, cascading down the organization, until they are translated into individual targets. This is known as the top-down approach. An alternative to this is bottom-up approach. In this case, as the name suggests priorities and targets would be identified by those lower down in the organization. In some respects this might seem illogical as it runs counter to the theory that jobs exist for a particular purpose is determined by the organization’s management. Certainly in most situations it would be expected that the targets of individual employee would be dependent on the overall objectives. However, there are circumstances in which the bottom-up approach can be useful means of determining overall objectives. This will normally arise in large organization in which senior management may be a long way removed from the customer or client base. In such circumstances the employees at the ‘coal-face’ may well have a sounder appreciation of the needs of those customer or clients and be therefore better able to decide on the kinds of priorities that are likely to result in greater customer satisfaction.

When consideration is given to target setting for individuals, it should also be borne in mind that those individuals will have aims that are not just work related. Indeed their priorities are much more likely to revolve around such issues as promotion prospects, pay, recognition, time-off, lifestyle, relations with colleagues and the boss.

Objective setting:

An objective may be defined as a “clear statement indicating how a particular output will be achieved in both quantitative and qualitative terms”. Good objectives should conform to what have been described as “SMART’ criteria, i.e. they should be:

• Specific- As precise as possible and relating to only one identifiable output.
• Measurable- Or it will be difficult, if not impossible, to judge when they have been achieved.
• Achievable- Or they will lose credibility, be demoralizing and serve no useful purpose.
• Result oriented- Be related to the end result which is to be achieved.
• Time related- Objectives without a clear timescale give no guidance on priorities.

There are a number of other factors to be taken into account when setting objectives. It has already been stated that they should be achievable., but it should also be borne in mind that the extent to which someone will be motivated to achieve a particular objective will depend on the extent to which they are able to influence it.

In a manufacturing environment, for example, an individual may well have a higher degree of control over the number of units produced. Similarly sales representative will usually have a high degree of control over the visits they might make to potential customers. In these case objectives can be set which can contain, among other things, certain target volumes to be achieved, and the individuals will usually regard these as being logical, although they might debate the actual numbers selected.

On the other hand, setting targets over which a person has little control will be demoralizing and will be unlikely to result in the set target being reached. There are numerous examples of this; supervisors may often be held accountable for the motivation and morale of employees under their control. However, this motivation and morale can suffer for reasons that are totally beyond the control of the supervisor, such as poor business performance, weak senior management, redundancies, etc.

While it is crucial that objective and targets should be those that individuals can influence, it is also important that they are significant ones for the organization. Almost anyone who works in an office, for example, has a considerable amount of influence over the way in which they organize their paperwork, but setting targets for them to attain is hardy likely to make a significant contribution to the organization unless that is the organization’s business, such as a company which processes credit card transactions on behalf of Barclay card or American Express. The overriding consideration is that any objective should, as far as possible, both give the organization some kind of competitive advantage or have the impact on the direction and performance of the business, and also be those over which the individual has a high degree of control. The higher degree of control and the more significant the attainment of a specific objective, the more desirable it is for the organization.

It is very important to ensure that any objective set relate to corporate objectives and that they align well with those set for other posts. For this reason objective setting should not be done in isolation for one post only but should take account of all other posts in a particular team or group and all the other individuals and teams with which they interact.

Although objectives have to be achievable, they should also be stretching to ensure that the organization performs well and grows where possible and to develop the individual post holder. Objectives that will be attained in any case and with the little discernible effort on the part of post holder are of little value.

Objectives should be set in all the important areas of the job and should not be too numerous, otherwise it will dilute the impact and divert the individual’s attention from the matters that are really important. While the precise number will depend on the type of job and the kind of objectives set, any number significantly greater than ten is likely to be too many for one person to cope with realistically.

Obviously some objectives will be more important than others and the priorities should be made clear. Those which should be given greatest priority are ones which will have most significant impact on the organization and give the greatest competitive advantage.

A surprisingly difficult aspect of measuring actually knows when someone has attained his or her targets. Even when clear and concrete targets are available this can still be difficult. For example, if someone has set a sale target of Rs.100, 000 in a year but achieves Rs.97, 000 only, is that on target or not? A strict literal interpretation would be that individual is below the target. However it is more likely that any figures within what may be regarded as an acceptable range would be treated as on-target performance.

It all depends on he circumstances in which he results are obtained and the way in which the performance process operates. What is important is that wherever possible numerical targets are set. Obviously most jobs have certain aspects to them that are not easily measurable and for others the output may be very difficult indeed to define. How, for example, can you measure the outputs of a scene of a crime officer in a police force? Or a researcher? In such cases performance objectives may have to relate more to competencies than measurable outputs, and this is considered further below.

Competency based objectives:

It has been stated that objective should, as far as possible, be specific and measurable. This means using clear output measures wherever possible. For many jobs, however, outputs are not all clear. While generally it is easy to determine the performance measures for the most senior management posts in the organization, usually based on overall organization performance and including such parameters as earning per share, and for the most junior posts which are likely to be task based, it is much more difficult for those posts in the middle where there is a less direct link with outputs. Similarly even where there are clear measures, to focus on unit of production alone could neglect the qualitative and development aspects of any role.

Any performance management scheme should therefore have a mixture of quantifiable outputs and more behaviorally based competencies. The important points in using competencies as performance measures are:

• They must be worded in such a way that they can be objectively assessed, otherwise they run the risk of becoming just shopping list of desirable traits.
• They must be relevant to the job.
• There should be a common core of competencies for jobs operating in same environment; otherwise it will be difficult to establish common standards.
• They should mot be too numerous otherwise the same thing may be measured more than once.

2. Managing Performance

Once performance objectives have been set and action plan agreed, the next stage of the performance management process is to ensure that those plans are acted on and the required results produced. ‘Management’ in this sense means more than conducting an annual appraisal, although such actions will inevitably form an important part of the process. What it is really about is giving employees the necessary support and create the appropriate conditions for them to be able to deliver required results, in effect ‘empowering’ them. In particular terms that is likely to mean:

• Giving necessary practical support, such as providing the appropriate resources.
• Ensuring that employees are clear about the results and giving any advice or clarification that may be needed.
• Giving employees the necessary training and development to ensure that they are able to achieve their accountabilities.
• Adjust targets, priorities and performance measures according to changes in organizational priorities, markets, government, policies, etc.

In essence this involves adopting a management style approach that helps to develop a performance culture in which results are perceived as more important than traditional conventions of behaviors within the organization. For example, there should be less emphasis on ensuring that people are in the office between certain hours and more on what they produce while they are there, although of course in many environments good timekeeping would be an essential requirement for effective performance.

An important part of managing performance is also taking responsibility for one’s own performance. This requirement applies equally to managers and subordinate, but it’s particularly important for managers to lead by examples.

It is over simplifying to suggest that there is any one management style that is the best. The most appropriate style in any particular situation will depend on a number of factors, including personality of the individual, the nature of the task, the timescale and the culture of organization. For example, in any organization such as fire services, because of consequences of not acting as a team and responding quickly to direct instructions could be fatal, a directive style of management is most appropriate, at least for operational staff. This is reinforced by strict rules, drills and uniforms. On the other hand, with a team of professional engineers, a more participative style is more appropriate to ensure the fullest consideration of ideas and views and because the nature of the role is to reach agreement through discussion (in most cases). Similarly some individuals prefer to be directed while others loathe it. Jobs that have to be completed against a very tight deadline require strong direction and control.

Except where tasks are very prescribed, and possibly even then, the most effective management style is likely to be one that empowers individuals to make decisions that are within there competence and that gives them all the necessary support and encouragement. The aim in effectively managing performance, therefore, should be to adopt a style which gives coaching and assists in people’s development, but with the option held in reserve of becoming more directive should be the need arise. At the end of day it’s the role of the manager to ensure that the results within his control are obtained, and the delegation or empowerment of subordinates does not absolve that manager of that responsibility. There may be the danger that subordinates may not be able to cope with the ambiguity that could arise from the use of different styles at different times. The way round this problem is to make it very clear just what the ground rules are i.e. “the way things are done round here”. Over the years organizations have written down what their philosophy of management.

3. Reviewing Performance

Strictly speaking that performance review is part of the process of managing performance. However, in view of specific considerations that apply to this aspect of the process it is convenient to examine it as a separate element.

Where performance appraisal exists, it typically centers round interview held once or twice a year, between the post holder and his or her boss. Sometimes the outcomes of this interview can have a direct bearing on pay or promotion, whereas in other cases the emphasis is on training and development. Often performance issues are raised that may not have been discussed at any time during the year.

Some interviews can be bland, with the employee left with the impression that he or she is performing satisfactorily even though that may not be the manager’s true view, this is because large number of managers find it uncomfortable to be openly critical of their subordinates’ performance, even though they may be prepared to make such criticism to third parties. At the other extreme, interviews can degenerate into sessions for apportion blames for past failures.

What is ideally required is a process that is constructive and supportive and that gives advice that can help individual improve and develop. Able and well-motivated staff will usually welcome constructive criticism. To achieve this there are certain principles that need to be adhered to:

• The appraisal interview should not contain any surprises. The appraisee should be well aware of his/her level of performance before the interview because of the regular feedback given by managers.
• The process should be applied to everybody. Every employee has the right to know how well he/she is doing and it is an obligation on the part of management to let him/her know.
• Employee should be encouraged to review their own performance and give the opinions about how they think they have done.
• The discussion should be focused on the targets that have been set and the achievements against those targets.
• Appraisers should remember the rule that they have two ears and one mouth, to be used in that proportion when conducting an appraisal interview.

Rating performance

A crucial part of performance appraisal is judging how well an individual has performed against identified targets. Generally, assessing the results will be easier than judging the quality of those results, but it can be far from straightforward even when the measure seems obvious. In making judgments about performance there are a number of key principles to be adhered to:

• The performance should be judged against overall objectives, which may have been broken down into separate targets which together contribute to the overall objective. For example, an objective of reaching a certain level of sales may be comprised of target figures for individual products.
• As far as possible, objectives should be quantifiable, although for most jobs there will be a mixture of hard objective measures and competencies.
• Unfortunately there are few short cuts when it comes to assessing performance. Careful consideration has to be given to each of the objective and targets and account has to be taken of the circumstances in which they were achieved. There is rarely any easy formula that can be used for a particular measure.
• In rating performance, the appraiser should take account of every aspect of the job, give an overall rating for the job as a whole and not be unduly influenced by extremes of performance in one part of it.
• In considering individual performance, emphasis should be placed on what are regarded as priority objectives and the overall performance should be measured against the post holders’ accountabilities.
• Account should be taken of any internal factors affecting performance, such as changes to the organization, the availability of resources, the degree of challenge built into the accountabilities in first place.
• One of the greatest difficulties any manager experiences in appraising staff is being objective about the individual. There is a tendency, naturally, to want to give better ratings to people we like than to those we are less keen on. Similarly, judgments can be influenced by the “halo effect” in which one impressive attribute can tend to make the appraiser rate the others more highly than they perhaps deserve. The converse could be described as the “horns effect”, in which poor performance in one area could color judgments about other aspects.
• The appraiser should also take account of external circumstances, particularly in terms of market conditions, changes to the law or in government policies, and economic conditions. There are several examples of large divisionalised companies where some divisions are buoyant and managers are hitting their targets or exceeding them with ease, whereas in other divisions of the company, because of a difficult market, managers with similar targets struggle to get even close. In such circumstances account has to be taken of the prevalent market conditions, even at the risk of undermining what might be perceived as internal equity.

There are a number of different ways of describing the performance rating. Some organizations use a standard verbal description, others may assign an alphabetical or numerical rating, while yet others may describe performance as ‘on target’, ‘above target’, etc. Similarly the number of levels varies, with five being about the most commons.

The key to successful performance appraisal probably lies in ensuring that line managers have ownership of the process, that they are fully trained in it, and that there is general acceptance of the principle of appraisal by the employees concerned. The one thing that is certain is that is individuals’ performance will be appraised anyway. The issue is that whether it should be done informally or formally and in an open and systematic way which can develop and reinforce a performance culture. However, once implemented, the process must be the only one in existence. There is at least one organization in which in addition to the formal scheme there was another, informal one through which manager could qualify any comments they might have made in face-to-face discussion with the appraisee. These qualified comments could be made unofficially to senior members of management and would be placed on individual’s files. Obviously such an approach undermines the whole principle of performance management.

4. Rewarding Performance

Rewarding performance is the element of the performance management process which seeks to give employees some kind of return for achieving their targets. This is wider than just financial recompense and includes such things as praise, greater opportunities for training and development, and promotion. Very often one of the things most sought by an employee is the recognition that he or she is doing a good job and where, for example, this is expressed in terms of bonus it is very often the recognition rather than the cash that really matters. It is only when money enters the equation that rewarding performance become very tricky and the emphasis her is therefore on the financial aspects.

People very often consider performance management solely in terms of performance related performance related pay (PRP). When there are business pressures to improve performance a common reaction of many managers is to want to pay for the results, even though the organization may have no comprehensive system of performance management. However, it is never appropriate to introduce PRP unless there is already such system in place. It is very difficult to get this aspect of process right, and there are numerous examples of PRP schemes, which may be called, ‘merit pay’, ‘performance bonuses’, ‘incentive bonuses’, etc that have fallen into disrepute.

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Determining Factors of Industrial Relations

The relationship between Employer and employee or trade unions is called Industrial Relation. Harmonious relationship is necessary for both employers and employees to safeguard the interests of the both the parties of the production. In order to maintain good relationship with the employees, the main functions of every organization should avoid any dispute with them or settle it as early as possible so as to ensure industrial peace and higher productivity.

Good industrial relations depend on a great variety of factors. Some of the more obvious ones are listed below:

1. History of industrial relations – No enterprise can escape its good and bad history of industrial relations. A good history is marked by harmonious relationship between management and workers. A bad history by contrast is characterized by militant strikes and lockouts. Both types of history have a tendency to perpetuate themselves. Once militancy is established as a mode of operations there is a tendency for militancy to continue. Or once harmonious relationship is established there is a tendency for harmony to continue.

2. Economic satisfaction of workers – Psychologists recognize that human needs have a certain priority. Need number one is the basic survival need. Much of men conducted are dominated by this need. Man works because he wants to survive. This is all the more for underdeveloped countries where workers are still living under subsistence conditions. Hence economic satisfaction of workers is another important prerequisite for good industrial relations.

3. Social and Psychological satisfaction – Identifying the social and psychological urges of workers is a very important steps in the direction of building good industrial relations. A man does not live by bread alone. He has several other needs besides his physical needs which should also be given due attention by the employer. An organization is a joint venture involving a climate of human and social relationships wherein each participant feels that he is fulfilling his needs and contributing to the needs of others. This supportive climate requires economic rewards as well as social and psychological rewards such as workers’ participation in management, job enrichment, suggestion schemes, re-dressal of grievances etc.

4. Off-the-Job Conditions – An employer employs a whole person rather than certain separate characteristics. A person’s traits are all part of one system making up a whole man. His home life is not separable from his work life and his emotional condition is not separate from his physical condition. Hence for good industrial relations it is not enough that the worker’s factory life alone should be taken care of his off-the-job conditions should also be improved to make the industrial relations better.

5. Enlightened Trade Unions – The most important condition necessary for good industrial relations is a strong and enlightened labor movement which may help to promote the status of labor without harming the interests of management, Unions should talk of employee contribution and responsibility. Unions should exhort workers to produce more, persuade management to pay more, mobilize public opinion on vital labor issues and help Government to enact progressive labor laws.

6. Negotiating skills and attitudes of management and workers – Both management and workers’ representation in the area of industrial relations come from a great variety of backgrounds in terms of training, education, experience and attitudes. These varying backgrounds play a major role in shaping the character of industrial relations. Generally speaking, well-trained and experienced negotiators who are motivated by a desire for industrial peace create a bargaining atmosphere conducive to the writing of a just and equitable collective agreement. On the other hand, ignorant, inexperienced and ill-trained persons fail because they do not recognize that collective bargaining is a difficult human activity which deals as much in the emotions of people as in their economic interests. It requires careful preparation and top –notch executive competence. It is not usually accomplished by some easy trick or gimmick. Parties must have trust and confidence in each other. They must possess empathy, i.e. they should be able to perceive a problem from the opposite angle with an open mind. They should put themselves in the shoes of the other party and then diagnose the problem. Other factors which help to create mutual trust are respect for the law and breadth of the vision. Both parties should show full respect for legal and voluntary obligations and should avoid the tendency to make a mountain of a mole hill.

7. Public policy and legislation – When Government, regulates employee relations, it becomes a third major force determining industrial relations the first two being the employer and the union. Human behavior is then further complicated as all three forces interact in a single employee relation situation. Nonetheless, government in all countries intervenes in management – union relationship by enforcing labor laws and by insisting that the goals of whole society shall take precedence over those of either of the parties. Government intervention helps in three different ways 1) it helps in catching and solving problems before they become serious. Almost every one agrees that it is better to prevent fires them to try stopping them after they start; 2) It provides a formalized means to the workers and employers to give emotional release to their dissatisfaction; and 3) It acts as a check and balance upon arbitrary and capricious management action.

8. Better education - With rising skills and education workers’ expectations in respect of rewards increase. It is a common knowledge that the industrial worker in India is generally illiterate and is misled by outside trade union leaders who have their own axe to grind. Better workers’ education can be a solution to this problem. This alone can provide worker with a proper sense of responsibility, which they owe to the organization in particular, and to the community in general.

9. Nature of industry – In those industries where the costs constitute a major proportion of the total cast, lowering down the labor costs become important when the product is not a necessity and therefore, there is a little possibility to pass additional costs on to consumer. Such periods, level of employment and wages rise in decline in employment and wages. This makes workers unhappy and destroys good industrial relations.

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Requirements of a Successful Industrial Relations Programme

Today’s professional industrial relations director, or by whatever title he is designated, no longer views his job as personalizing management, or that of a social worker in a factory, or a union buster, he looks upon his department as an adjunct to management supervision at all levels; he keeps other executives informed about new discoveries, programme trends and needs. At the same time, he provides efficient service in the operation of several centralized services. A successful industrial relations programme reflects the personnel viewpoint, which is influenced by three main considerations:

• Individual thinking
• Policy awareness and
• Expected group reaction

Individualized thinking makes if imperative for the administrator to consider the entire situation in which the affected individual is placed. Policy awareness underscores the idea of the consistency of treatment and the precedent value of any decision which a management takes; while expected group reaction balances what we know of human nature in groups against an individual’s situation in the light of the policy that has been formulated and implemented. In all these different circumstances, reality demands that all the three aspects of the personnel viewpoint should be considered at once in terms of the past, the present and the future. This viewpoint is held at all the levels of management from the top to the bottom, from the top executives and staff to the line and supervisory personnel.

The basic requirements on which a successful industrial relations programme is based are :

Top Management Support: – Since industrial relations is a functional staff service, it must necessarily derive its authority from the line organization. This is ensured by providing that the industrial relations director should report to a top line authority to the president, chairman or vice president of an organization.

Sound Personnel Policies: – These constitute the business philosophy of an organization and guide it in arriving at its human relations decisions. The purpose of such policies is to decide, before any emergency arises, what shall be done about the large number of problems which crop up every day during the working of an organization. Policies can be successful only when they are followed at all the level of an enterprise, from top to bottom.

Adequate Practices should be developed by professionals: – In the field to assist in the implementation of the policies of an organization. A system of procedures is essential if intention is to be properly translated into action. The procedures and practices of an industrial relations department are the “tool of management” which enables a supervisor to keep ahead of his job that of the time-keeper, rate adjuster, grievance reporter and merit rater.

Detailed Supervisory Training : – To ensure the organizational policies and practices are properly implemented and carried into effect by the industrial relations staff, job supervisors should be trained thoroughly, so that they may convey to the employees the significance of those policies and practices. They should, moreover, be trained in leadership and in communications.

Follow-up of Results: – A constant review of an industrial relations programme is essential, so that existing practices may be properly evaluated and a check may be exercised on certain undesirable tendencies, should they manifest themselves. A follow up of turnover, absenteeism, departmental morale, employee grievances and suggestion; wage administration, etc. should be supplemented by continuous research to ensure that the policies that have been pursued are best fitted to company needs and employee satisfaction. Hints of problem areas may be found in exit interviews, in trade union demands and in management meetings, as well as in formal social sciences research.

An industrial relations system consists of the whole gamut of relationships between employees and employees and employers which are managed by the means of conflict and cooperation.

A sound industrial relations system is one in which relationships between management and employees (and their representatives) on the one hand, and between them and the State on the other, are more harmonious and cooperative than conflictual and creates an environment conducive to economic efficiency and the motivation, productivity and development of the employee and generates employee loyalty and mutual trust.

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