Bank Alfalah a commercial bank throughout Pakistan

INTRODUCTION

Bank Alfalah is a commercial bank that is owned by the Abu Dhabi Group. In Pakistan, Bank Alfalah became functional in the year 1997. Initially it started working as a public limited company under the Companies Act 1948. In the same year, in the month of November, it started working as a bank. 

Currently there are 347 branches of Bank Alfalah in 75 different cities of Pakistan. Out of these, 162 branches are reserved for Islamic banking and the rest of them deal with commercial banking. The head office of Bank Alfalah is located in Karachi.

Vision

Bank Alfalah’s vision is “To be the premier organization operating locally & internationality that provides the complete range of financial services to all segments under one roof”.

Mission

Mission of Bank Alfalah is “To develop & deliver the most innovative products, manage customer experience, deliver quality service that contributes to brand strength, establishes a competitive advantage and enhances profitability, thus providing value to the stakeholders of the bank”.

Functions and Services

Branch banking, which includes deposits, remittances, foreign trade, lockers etc.

Consumer banking, which includes auto loans, credit cards, home loans, consumer durables etc.

Electronic banking, which includes telephone banking, online banking, ATMs etc.

Corporate banking, which includes the facilities and services such as short/long term finance, trade finance, structured finance etc.

Treasury & Investment that includes services such as money market, forex market, investment, government securities, correspondent banking etc.

STRATEGIC ANALYSIS OF BANK ALFALAH

External Market Analysis

Industry Profile: Pakistan’s banking sector has witnessed some difficulties in the past, but was able to survive the impact of weakening macroeconomic fundamentals since 2007. However, recent disastrous floods will have serious implications for macroeconomic stability and on growth prospects. Though, even before the floods, the macroeconomic conditions and outlook were looking weak, the overall sector is well placed to withstand modest shocks.

Competition: The competition in banking sectors is low as banks have formed cartel.

Foreign Demand: Foreign demand does not apply to Bank Alfalah. Bank Alfalah is an international bank; it has branches located in different countries but it does not operate on global scale i.e. Each country has its own head quarter and policies.

Industry’s Long-term Prospects: The industry is passing through a transitional period from long established patterns and norms to the unknown land of threats and opportunities. To change every turn into an opportunity will differentiate the banking organizations. A strong and efficient compensation system is a good opportunity to create a competitive advantage.

Labor Market Assessment: The labor force trends have direct implications for compensation practice. In banking sector there is higher labor supply as compared to demand because current trend among people is getting job in banking organizations and the market is flooded with Post Graduates having MBA. So, Bank Alfalah does not have to be concerned about its compensation policy.

Internal Market Capabilities

Functional Capabilities: Maintaining the competitive advantage is crucial for every organization. In banking sector this can be maintained by hiring knowledgeable employees and retaining them. An effective compensation system is a key to retain employees that are most beneficial for the organization. The compensation system of Bank Alfalah is efficient and effective. They have developed techniques and tools to reward employees. (mentioned and discussed later in the report)

Human Resource Capability: Bank Alfalah is staffed with knowledgeable and productive employees. Employees are rewarded frequently and fairly. Employees generally know in advance about the compensation and the performance goals. Every employee has to launch a project every year and at the end of the year his/her performance is evaluated and rewards are given on the basis of their performance. (Shabbir, 2010)

Financial Condition: Financial condition of Bank Alfalah is strong and stable. Bank Alfalah is a project of Abu Dhabi Group that allows the bank to invest in advanced and effective technology in order to widen the range of its services and products. Sound financial condition enables Bank Alfalah to meet operational and capital requirements. Employee pay is revised annually and incentives are given recurrently based on their performances. (Shabbir, 2010)

EXISTING COMPENSATION MANAGEMENT SYSTEM IN BANK ALFALAH

Organizational Structure

Job Listing

Job listing is done mostly through newspapers in which a basic overview of the required skills and experience as well as the number of positions for applicants is given. The newspaper advertisement is first sent to the compensation department which conducts a profit-loss analysis of its impact. The advertisement is only published if the compensation department gives it the go ahead.

Groups of Job

Jobs that exist throughout the bank branches are categorized on the basis of similar characteristics and are grouped under the same job family. The job descriptions are relevant to the tasks involved rather than the person doing the job. The performance evaluation judges how well the person was able to perform the tasks designated according to the job description.

Salary Structure

Bank Alfalah uses nine pay ranges for employee compensation. Pay is offered to employees in the same job or grade from within that pay range. A pay range consists of a minimum and maximum salary and a midpoint. The midpoint is usually considered to be the market rate for an effective performer in a given job. The advantage of this range system is that an employee’s pay can vary within the range.

Employees who are paid midpoint rate will therefore be newly appointed, undergoing training, in plentiful supply, or classified as less than effective performers. Employees who are paid above the midpoint, conversely, will be experienced, highly skilled, in short supply, and rated as high performers.

Salary ranges can be distinguished from incremental scales by the fact that they do not consist of a series of fixed steps; actual salaries can be set at any point between the minimum and maximum points, and therefore managers have greater discretion in deciding what an individual’s salary will be.

Bank Alfalah follows the seniority based pay system as far as promotions are concerned. Employee promotion occurs every 2 years depending upon the number of employees in that unit as well as performance of the employee.

Pay grades are helpful in positioning the employees in above mentioned pay ranges. The organizational hierarchy of Bank Alfalah is flatter which depicts that there are wider pay grades.

Basic Salary, Gratuity and Provident Fund Deduction

The formula used for basic salary calculation by Bank Alfalah is

Basic salary = 0.607 * gross salary

Provident fund deduction takes place every month which is calculated as

Provident fund deduction = .0866 * Basic salary

The Gratuity Act, 1972 came into force with effect from 16th September, 1972 and provides rules of payment of gratuity to all employees irrespective of their cadre/scale. The gratuity as per this act is payable to all employees/officers in the event of their superannuation, retirement, resignation, death, discharge on the grounds of total disablement due to an accident or a disease. Minimum continuous service of not less than 5 years is required so as to entitle an employee for gratuity except where the termination of employment of any employee is due to death or disablement. Quantum of gratuity payable under the Act is 15 day wages based on the rate of wages last drawn for each completed year of service or part thereof, in excess of 6 months; subject to ceiling on quantum of amount fixed by the government from time to time (which has been enhanced from Rs.3, 50,000/- to Rs.10, 00,000/- with effect from 24th May, 2010).

Bank Alfalah follows the gratuity act as per government laws and regulations and is liable to provide its employees gratuity after completion of 5 years employment with Bank Alfalah but employee must fulfill other conditions as well to obtain gratuity.

JOB EVALUATION

Job Description

Employees that are hired are given a basic outline of their job description, it is a prerequisite that they add projects and assignments to that job description for themselves every year so as to survive and progress in the organization.

Job Analysis

Observation and interview are two methods that are practice by Bank Alfalah for job analysis. Interviews are conducted by managers to know the duties and performance of employee.

Appraisals Approaches Adopted by Bank Alfalah

There are two types of appraisal approaches adopted by bank Alfalah; traditional approach and modern approach.

Traditional Approach: This approach of appraisal is about the overall organization, on the basis of their past performance. In Bank Alfalah, it is reviewed at branch level. Each branch is responsible to show its performance in accordance to the set goals in a positive direction.

Modern Approach: In this method the employees are allocated certain goals or targets to be fulfilled in the given period, which show the overall performance of each employee e.g. they are asked to collect the deposit of certain amount in the prescribed period. Bank Alfalah has developed their own performance management process which is performed biannually in the months of June and December. It is done with the consent of both manager and subordinate. Manager conducts thirty minutes interview with his subordinate to discuss about his projects and rates him according to appraisal form established at the start of the year. Employees are aware of these evaluation criteria at the start of the year so that they can improve performance according to criteria set by the bank.

This performance management process differentiates the employees as following three categories

Partially performing

Performing

Excelling

If an employee does not achieve his goals in given period, he would be rated as partial a performing employee.

If an employee completes his work in the given time he would be rated as a performing employee.

If an employee is doing the work designated to him as well as showing concern for other projects, he would be rated as an excelling performer.

After the performance management process, employees who lie among the performing and excelling rank are given bonuses and only excelling employees are given performance bonuses as for their good performance. These are given to appreciate employees and to motivate partially performing and performing employees. After the completion of evaluation process manager discusses it with employees.

Time management is another process adopted by Bank Alfalah to observe the employee’s performance. Employees are required to complete their work according to decided time lines.

ASSESSMENT OF EXTERNAL AND INTERNAL ENVIRONMENT

Following are the external and internal environment factor for Bank Alfalah.

Strengths

Bank is in its growing stage so there is good financial position.

Professional and committed workforce.

Well experienced and quality staff.

Efficient internal communication system.

Expansion in Islamic banking.

Weaknesses

Although the bank is growing but it has some weaknesses which it should remove to make itself even stronger.

The workforce is not satisfied with the salary structure.

The bank gives its workforce less benefits as compared to other banks.

Communication gap between employee and management causing instability in work and increasing job insecurity.

Opportunities

Extension of international network of the branches

Growing market.

Threats

Uncertain economic conditions.

Actions taken by competitors.

IDEAL COMPENSATION SYSTEM

Human resource is the fundamental element of any organization. It is responsible for all the work and its result. Employees should be motivated and pre-arranged properly so that they can give the best output and compensation as per the industry principles. Compensation is the payment received by an employee in the return for hisher role in the organization. It is a controlled practice that involves harmonizing the work-employee relation by providing monetary and non-monetary reimbursement to employees. Compensation systems are made keeping in view the tactical goals and objectives of the organization. They are designed on the basis of certain factors and after analyzing the work and job responsibilities.

Objectives of the Compensation Management System

A good compensation package plays an important role in motivating employees and for the organizational productivity.

If the compensation is not provided a potential employee will be reluctant to work for the organization. So the compensation package keeps the process running effectively.

Salary is just a part of the compensation system. The compensation system makes negotiation offers to the employee so that a certain set of terms and conditions can be agreed upon which suitable for both employee and organization.

Competitive compensation system will attract and maintain the new talent.

Compensation system is designed keeping in view the budget and the financial abilities of the organization, so it can be beneficial for the organization and maintains a balance between the working of all departments.

Appointment of Compensation Personnel

A permanent position should be created in organization to develop, maintain and review the compensation system and make any changes if required. HR manager will oversee the program; only after his approval, changes would be implemented.

For making a compensation system consultants can be hired, who have studied the recent market, have knowledge about the opportunities and threats and can help the organization in making their own compensation system keeping in view the competition in the market. It is a onetime cost but can help an organization by getting new information and compensating on the basis of new marketing approaches.

Company should compensate the employees on the basis of the market lead concept which is paying employees more than the standard pay levels prevailing in the market. It would be more attractive for new and talented young people. It could be look expensive in start but ultimately the organization would benefit from this strategy by getting profit due to effective working and productivity of the employees.

Compensation Committee

Heads of the different departments of the organization should make up a compensation committee. They would perform following duties

Review the work of the consultant and give their recommendations.

Discuss pros and cons of the recommendations.

Give the best recommendations to the consultants by negotiating.

Difference among the pays of the executives, professionals, employees, sales employees and other workers should exist. Executives should be paid for job performance and knowledge pay system. Other employees should be paid on the basis of skills pay system. Sales employees should be given incentives and bonuses if they succeed in selling more than the standards defined in their job description.

Benefits that are given to employees should supplement the cash compensation of the employee rather that replacing it.

Job Description

Job description should be prepared before hiring the person and it should include following sections:

Title of the position

Department

The person reports to whom directly

Overall responsibility

Key areas of responsibility

Term of employment

Qualifications (necessary skills and experience required)

Job Analysis

Job analysis is a systematic process for gathering, documenting and analyzing information in order to describe jobs.

One of the main goals of a compensation department is to promote internal consistency, which will clearly define the relative value of each job among all jobs within a company. Job analysis and job evaluation are the tools that are used to maintain internal consistency. It is necessary that the job analysis conducted should be reliable and valid.

The division heads will be involved in assigning the tasks to their relevant department employees, they will only consider representative positions as there are too many similar jobs to analyze. Interviews combined with questionnaire will be useful in conducting job analysis. It will be beneficial to use manuals describing previously used job description details so that it becomes clear if any changes in duties and responsibilities have taken place.

The job incumbents as well as the supervising managers will be involved in the job analysis. It will also be clearly communicated to them as to why they are participating and what results this will yield so as to avoid future discrepancy and discontent.

The Common Metric Questionnaire (CMQ) is an effective tool which can be used for the purpose of job analysis. The CMQ is a standardized job analysis tool that was developed by RJ Harvey in 1987 to address many of the limitations facing job analysis surveys and job ‘card sort’ tools. The CMQ is unique, in that all rating scales and questions are behaviorally specific and focused on the measurement of observable, verifiable, and replicable job behaviors. The CMQ is based on the idea that the world of work can be measured along four general categories:

Interpersonal

Decision Making

Mechanical and Physical

Work Context

The first category, Interpersonal Activities, is used to describe people related work activities, such as supervising and directing employees, dealing with people internal and external to the organization.

The second category, Decision Making Activities, includes decision making about financial resources, human resources, operations, and equipment. In addition, this category covers the use of specialist knowledge, skills, languages and the five senses.

Physical activities, such as walking, running, lifting, and pushing, and mechanical activities, such as using computers, office equipment, stationary machines, tools, and vehicles, serve as the subject of the third category of work characteristics, Mechanical and Physical Activities.

Finally, the Work Context category covers the physical, social, and other environmental characteristics of jobs. Examples here include: working under adverse weather conditions or on unstable or slippery working surfaces; exposure to loud noises; working in personally demanding situations; working under time pressures; and the degree of control over work pace.

The CMQ system provides you with several reporting options with respect to job descriptions.

These reports include:

Basic narrative report showing item responses, and dimension score profiles for a job.

Administrative and developmental performance-rating forms for the job.

Work-similarity report comparing several different jobs.

Ratings-quality report examining, for a given CMQ item, how different raters within a single job title produced different ratings.

At the most basic level, we can generate reports that show the ‘scale score’ (to what extent is this activity present in the role) and a ‘percentile rank’ (which shows the percentage of other jobs in the community which would be expected to score lower on this dimension)

After the completion of (CMQ) questionnaire and analysis of the results, develop a final draft of job descriptions, meet with department heads to review job descriptions and finalize and document all job descriptions.

Job Evaluation

In Job Evaluation process the worth of job is identified based upon job comparability and according to worth, importance of job and relative value compensation is designed and selected.

In order to evaluate jobs there is a need to define relevant compensable factors which should satisfy two conditions

Factors must be job related

Factor must further the Bank’s strategy

Multiple job evaluation techniques will be used for employees with different occupations and job family, because each of them will have dissimilar use of compensable factors. A job evaluation committee comprising of a consensus of employees will be more beneficial in terms of minimizing biases.

The committee will

be aware of the purpose of job evaluation

make a documented plan of evaluation for future reference and draw on the previously used and documented evaluation plans

involve employee in the process of job evaluation to ensure understanding and acceptance

set up an employee appeal process if necessary

The Hay System

The scheme determines, correlates and evaluates the input or output of a job. Input is measured in terms of the knowledge and skills (professional, managerial and human relations) required of the job holder in order to achieve optimum performance. Output, both direct and indirect, is measured in terms of the problems and employee is required to solve and his relationship to financial results achieved.

For any given job, there will be a relationship between the following three factors. The output or end results expected from the job (the Accountability) will demand a certain level of input (Know-how) and processing of this Know-how (Problem Solving) to enable delivery of the output.

Job Content Evaluation Technique

Job content evaluation plans emphasize the company’s internal value system by establishing a hierarchy of internal job worth based on each jobs role in company strategy.

Based on the bank’s strategy Job Content evaluation technique is appropriate for them.

Performance Appraisal

For performance appraisal following methods are more appropriate for Bank Alfalah.

Behaviorally Anchored Rating Scales: This method focuses on specific job behaviors and encourages all raters to make evaluation in same way which will reduce biases.

Management by Objective: Management by objective promotes the effective communication between supervisors and employees. This helps in defining the goals for employees and for managers to appraise them accordingly.

360 Degree Feedback: This method is based on taking feedback from all the entities involved in work environment included the employee and helps the organization to develop a complete understanding of an employee’s performance.

DEFINING PAY STRUCTURE

Number of Pay Structures

Depending on markets rates and company’s job structure Bank Alfalah should establish more than one pay structure. Bank Alfalah should adopt exempt pay structure and pay structure based on geography. Jobs at Bank Alfalah are generally professional, managerial or executives that have wide varieties of duties so that is the reason it should adopt exempt pay structure.

As different job families exist in the organization, it should also adopt pay structure based on job families that show a vary salary pattern in the market.

As Bank Alfalah operates in different cities so, it should also adopt pay structures based on geography because local conditions influence pay levels and salary rates can be different in different regions.

Determining Market Pay Line

Bank Alfalah is establishing competitive advantage by adopting a diffrentiation strategy. Islamic banking, now operating as a part of Bank Alfalah, will be separate bank in a few months. As organization is going for differentiation strategy, market lead policy is appropriate for them.

Defining Pay Grades

Based on compensable factors and management’s philosophy, wide pay grades are suitable for the organization that will minimize the hierarchy and social distance between employees and managers.

Pay Ranges

After deciding number of grades, pay ranges for each grade should be defined. Pay ranges include minimum, mid and maximum pay rates. As organization would establish market lead policy, mid points would be higher than the market averages of similar jobs.

If organization hired an employee who does not meet minimum requirement in work specification, he/she should be paid at green circle rates but they should be brought to normal pay ranges by eliminating the deficiencies in skills or experience.

By paying at red circles pay rates valuable employees can be retained who have other opportunities in job market.

COMPARISON OF IDEAL AND EXISTING COMPENSATION SYSTEM

The job description should be developed before hiring of employees and should be effectively communicated to them. In Bank Alfalah newly hired employees are given a basic outline of their job description and it is a prerequisite that they add projects and assignments to that job description for themselves every year so as to survive and progress in the organization.

The employees hired have certain insecurities as far as their performance is concerned. Bank Alfalah requires that they introduce a new project every year which is beneficial for the organization. Although it is a good technique to encourage employee involvement and induce loyalty towards organization, it can however become burdensome for the employees as they have to get the projects approved by the management and then perform the tasks mentioned in their respective job description as well, which leads to a sense of job insecurity.

During job analysis employee feedback is as important as any other factor. In Bank Alfalah, however, the job analysis process comprises of observation and interviews only. Employee feedback is not a part of job analysis process.

Bank Alfalah uses exempt pay structures as far as managerial, supervisory and executive positions are concerned. This is according to the Fair Labor Act.

Wider pay grades have been adopted by Bank Alfalah that minimizes the hierarchy and social distance between employees.

CONCLUSION

Although compensation system of Bank Alfalah is effective and according to their strategic direction, there is still room for improvements. The compensation system in accordance with the organization’s rules and benefits and employees feel that fairness and job security is unpredictable. Job description should be prepared and documented before hiring. Job evaluation process is quite extensive but lack employee appeal process. Wider pay grades exist which are appropriate for the organization.

RECOMMENDATIONS

Officers and managers should have different job descriptions as they have to undertake different tasks, manager being only involved in management.

Use of Common Metric Questionnaire (CMQ) as a job analysis tool will be more beneficial as it is less troublesome being an online facility and it is less costly compared to hiring of a professional external observer.

A job evaluation plan should be documented and a proper evaluation committee should exist to supervise and conduct it.

An employee appeal process is a necessary part of the job evaluation as it helps in maintaining good employee-management relations. It should permit review of employee evaluation on case by case basis and provide a check of the process through re-examination. Most companies do not bother to set up an appeal process which is perceived by employees as unfair.

Bank Alfalah being a project of an international group of investors, the Abu Dhabi group, has sound financial support. Market lead policy is more appropriate for them because they will then be able to choose best applicants from the available pool and they can also pursue differentiation as an organizational strategy.