Module-3

Performance Management and Appraisal: Objectives of Performance Management, Performance

Management and Performance Appraisal, Common Problems with Performance Appraisals,
Performance Management Process, Types of Performance Rating Systems, Future of Performance
Management
Compensation and Benefits: Introduction, Definitions, Total Compensation, Total Rewards System,
Forms of Pay, External and Internal Factors, Establishing Pay Rates, Employee Benefits.

Industrial Relations: Decent Workplace, International Labour Organisation, Industrial Relations, The
Objectives of Industrial Relations, Approaches of Industrial Relations Systems, The Actors in Industrial
Relations, Indian Context, Industrial Relations, and Human Resource Management.

Performance Appraisal
Define Performance Appraisal and Performance Management

Performance Appraisal:
Performance appraisal is the process of examining and assessing the employee’s work performance.
The focus of the performance appraisal is measuring and improving the actual performance of the
employee. It is a method of evaluating the behavior of employees in the work environment, normally
including both the quantitative and qualitative aspects of job performance. It is typically performed
annually by a supervisor for a subordinate, designed to help employees understand their roles,
objectives, expectations, and performance success.

Performance Management:
Performance management includes activities to ensure that goals are consistently being met in an
effective and efficient manner. It is the process; employers use to make sure employees are working
toward organizational goals.
The process of creating a work environment in which people can perform to the best of their
abilities. It comprises of performance appraisal process, which includes training, motivational
programmes, assessment and feedback.
Performance Appraisal Performance Management
Focus is on top down assessment Stresses on mutual objective setting through a
process of joint dialogue
Usage of ratings is very common Usage of ratings is less common
Focus is on traits and focus is more on problems Focus is on quantifiable objectives, values and
behaviors and a collegial feedback is given
Monolithic system Flexible system
Are very much linked with pay Is not directly linked with pay
Objectives / importance/ effectiveness of Performance Appraisal:

Performance Appraisal could be taken either for evaluating the performance of employees or developing
them. The developmental objectives focus on finding individual and organizational strengths and
weaknesses; developing healthy superior‐subordinate relations; and offering appropriate coaching to the
employee with a view to develop his potential in future.
Compensation decisions:
It can serve as a basis for pay raises. Managers need performance appraisal to identify employees who
are performing at or above expected levels. This approach to compensation is that raises should be given
for merit rather than for seniority. Under merit systems, employee receives raises based on performance.
Promotion decisions:
It can serve as a useful basis for job change or promotion. When merit is the basis for reward, the person
doing the best job receives the promotion. If relevant work aspects are measured properly, it helps in
minimizing feeling of frustration of those who are not promoted.
Training and development programmes:
It can serve as a guide for formulating a suitable training and development programme. Performance
appraisal can inform employees about their progress and tell them what skills they need to develop to
become eligible for pay raises or promotions or both.
Feedback:
Performance appraisal enables the employee to know how well he is doing on the job. It tells him what
he can do to improve his present performance and go up the ‘organizational ladder’.

Personal development:
Performance appraisal can help reveal the causes of good and poor employee performance. Through
discussions with individual employees, a line manager can find out why they perform as they do and
what steps can be initiated to improve their performance.
Performance Appraisal Process:
Performance appraisal is planned, developed and implemented through a series of steps:
 Performance Appraisal Process
External Environment
Internal Environment

Establish Performance
standards

Communicate Performance
Criteria (Standards)
Employees

Measure actual performance

Compare actual with the

standard

Discuss Appraisal with

Employee

Establish performance standards:

Appraisal systems require performance standards, which serve as benchmarks against which
performance is measured. Standards should relate to the desired results of each job. This step requires
setting the criteria to judge the performance of the employees as successful or unsuccessful and the
degrees of their contribution to the organizational goals and objectives. The standards set should be
clear, easily understandable and in measurable terms. Performance standards must be clear to both the
appraiser and the appraisee
Communicate the standards:
The employees should be informed and the standards should be clearly explained. This will help them to
understand their roles and to know what exactly is expected from them. Performance appraisal involves
at least two parties; the appraiser who does the appraisal and the appraisee whose performance is being
evaluated. The appraiser should prepare job description clearly; help appraisee set his goals and targets;
offer coaching and guidance whenever required and reward good results. The appraisee should be very
clear about what he is doing and why he is doing it.
Measure the actual performance:
The most difficult part of the Performance appraisal process is measuring the actual performance of the
employees that is the work done by the employees during the specified period of time. It is a continuous
process which involves monitoring the performance throughout the year. Performance measures may be
objective or subjective. Objective performance measures are indications of job performance that can
be verified by others and are usually quantitative. They include quality of production, absenteeism,
length of service etc. Subjective performance measures are ratings that are based on personal standards
and are not verifiable by others. They include rating by superiors, overall goals and socio‐cultural values
of the environment.
Compare actual performance with standards:
The actual performance is compared with the desired or the standard performance. The comparison tells
the deviations in the performance of the employees from the standards set. The result can show the
actual performance being more than the desired performance or, less than the desired performance
depicting a negative deviation in the organizational performance.

Discussing the appraisal with the employee and Taking corrective action:
The result of the appraisal is communicated and discussed with the employees on one‐to‐ one basis. The
feedback should be given with a positive attitude as this can have an effect on the employees’ future
performance. The purpose of the meeting should be to motivate the employees to perform better.
The last step of the process is to take decisions which can be taken either to improve the performance of
the employees, take the required corrective actions, or the related HR decisions like rewards,
promotions, demotions, transfers etc.
 Performance Appraisal Methods
 Multiple person evaluation methods
 Ranking
 Paired Comparison
 Forced Distribution
 Individual evaluation methods
 Annual confidential reports
 Narrative Essay
 Critical incident method
  Graphic Rating Scale (GRS)
 Checklist
 Behaviorally Anchored Rating Scales (BARS)
 Forced Choice
 MBO
Other methods
 Group appraisal
 Field review methods
 HRA
 Assessment centre

MULTIPLE PERSON EVALUATION METHODS

RANKING
Ranking employees from best to worst on a particular trait, choosing highest, then lowest, until all are
ranked.
Drawbacks
Does not show size of differences in performance between employees
Implies that lowest‐ranked employees are unsatisfactory performers.
Becomes a difficult process if the group to be ranked is large.

Alternation ranking method Ranking employees from best to worst on a particular trait, choosing
highest, then lowest, until all are ranked.
PAIRED COMPARISON METHOD
Ranking employees by making a chart of all possible pairs of the employees for each trait and
indicating which is the better employee of the pair.
Number of comparisons may be calculated with the help of the formula N(N‐1)/2.
Ranking is done based on the number of times each person is considered to be superior.
Example
Note: + means “better than.” − means “worse than.”
FORCED DISTRIBUTION
Performance appraisal method in which ratings of employees are distributed along a bell‐shaped
curve.
Operates under the assumption that the employee’s performance level conforms to a normal statistical
distribution
Drawbacks
Assumes a normal distribution of performance.
Resistance by managers to placing individuals in the lowest or highest groups.
Providing explanation for placement in a higher or lower grouping can be difficult.
Is not readily applicable to small groups of employees.
Individual evaluation methods
1. ANNUAL CONFIDENTIAL REPORTS
Superior maintain the report about his subordinate’s strengths, weakness, intelligence, attitude to work,
sincerity, commitment, punctuality, attendance, conduct, character, friendliness. In this method
superior appraises his subordinates based on his observations, judgments and intuitions Used in Public
sectors / Government organizations.
Various traits are listed depending on the kind of job and they are evaluated.
Promotions are usually based on this method.
System is highly secretive and confidential and no feedback.
ESSAY METHOD
 It is a narrative appraisal method and is based on absolute standards
 It describes an employee's actions rather than indicating an actual rating
 The intent is to allow the rater more flexibility than other rating methods do.
Drawbacks
Depends on the managers’ writing skills and their ability to express themselves.
Time consuming
Critical Incident Technique
 Critical incidents are behaviors that result in good or poor job performance.
 The rater records all such incidents and the ratee’s involvement in it.
 The rater plays the role of ‘Observer’ rather than ‘Judge’.
 Manager keeps a written record of highly favorable and unfavorable employee actions.
Drawbacks
 Variations in how managers define a “critical incident”
 Time involved in documenting employee actions
 Most employee actions are not observed and may become different if observed
 Employee concerns about manager’s “black books”
 For eg. “I saw Mishra closing the steam line valve at the instant the pipeline burst. We could save
a lot of lives due to the above factor.”
[Link]

A performance appraisal tool that uses a list of statements or work behaviors that are checked by raters.
Can be quantified by applying weights to individual checklist items.
Drawbacks
 Interpretation of item meanings by raters
 Weighting creates problems in appraisal interpretation
 Assignment of weights to items by persons other than the raters
Steps in construction of check lists
Generate a large no. of behavioral statements relevant to work
These should represent all levels of effectiveness
Rules to follow
Express only one thought per statement
Use understandable terminology
Eliminate double negatives
Express thoughts simply and clearly
A panel of experts judges how far each statement represents effective or ineffective behaviorr
Expert ratings summarised to identify those statements consistently placed at some point on the
continuum
Graphic rating scale
A scale that lists a number of traits and a range of performance for each is used to identify the score that
best describes an employee’s level of performance for each trait.
Drawbacks
Restrictions on the range of possible rater responses
Differences in the interpretations of the meanings of scale items and scale ranges by raters
Poorly designed scales that encourage rater errors
Rating form deficiencies that limit the effectiveness of the appraisal
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Behaviorally anchored rating scales (BARS)

Developed by Patricia Cain Smith and Lorne Kendall.
Combination of critical incidents and graphic rating scale
Behavioral descriptions exemplifying various degrees of each dimension serve as anchors on the scale
Designed to allow superiors to be more comfortable while giving feedback.
Appraiser rates employee on factors which are defined by behavioral descriptions illustrating various
dimensions along each rating scale.
For example, in a hypothetical position of human resources coordinator, one of the job holder’s
responsibilities is to complete status change notices, which update the personnel system regarding
changes in employee pay, position, title, supervisor, and personal data.
The BARS method for this specific task in this specific job could read as follows:
5 — Exceptional performance: Accurately completes and submits all status change notices within an
hour of request.
4 — Excellent performance: Verifies all status change notice information with requesting manager
before submitting.
3 — Fully competent performance: Completes status change notice forms by the end of the workday.
2 — Marginal performance: Argues when asked to complete a status change notice.
1 — unsatisfactory performance: Says status change notice forms have been submitted when they
haven’t.

Advantages:
 It’s behaviorally based. The BARS system is totally focused on employee performance. Ideally,
it removes all uncertainty regarding the meaning of each numerical rating.
 It’s easy to use. The clear behavioral indicators make the process easier for the manager to carry
out and the employee to accept.
 It’s equitable. With its heavy emphasis on behavior, the evaluation process comesacross as fair.
 It’s fully individualized. From the standpoint of consistency within a company, BARS is
designed and applied individually and uniquely for every position.
 It’s action‐oriented. With an understanding of the specific performance expectations and
standards of excellence, employees can much more easily take steps to improve their performance, and
they’re more likely to do so as a result.
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Disadvantages:
 The process of creating and implementing BARS is time‐consuming, difficult, and expensive.
Each BARS form must be created from scratch for every position in the company.
 Sometimes the listed behaviors still don’t include certain actions required of the employee, so
managers can have difficulty as signing a rating.
 It’s high maintenance. Jobs change over time, which means that BARS requires a high degree of
monitoring and maintenance.
 It’s demanding of managers. In order to successfully conduct BARS evaluations, managers need
detailed information regarding the actions of their employees. Gathering such data can be quite time‐
consuming, and many managers end up letting this slide.

Forced Choice Method

 A rating technique specially designed to increase objectivity and decrease biasing factors in
ratings.
 It comprises of the use of statements that are grouped into sets according to certain statistical
properties.
 Rater is “forced” to select from each group of statements a subset (usually 2) of those
statements that are “most descriptive” of each ratee.
Advantages of the method
 Difficulty in deliberately distorting ratings in favour of or against particular individuals because
raters have no idea which statements of each group will ultimately result in higher (or lower)
ratings.
 Research has proved that ratings from this method were a more valid measure of real worth than
ratings from other formats used earlier.
Disadvantages of the method
 Statements may not be properly framed.
 They may not precisely describe ratee’s traits.

Management By Objective
 The use of Management By Objectives was first widely advocated in the 1950s by the noted
management theorist Peter Drucker.
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 MBO methods of performance appraisal are results‐oriented i.e., they seek to measure employee
performance by examining the extent to which predetermined work objectives have been met.
 It is a ‘process whereby the superior and subordinate managers of an organization jointly
identify its common goals, define each individual’s major areas of responsibility in terms of results
expected of him and use these measures of guides for operating the unit and assessing the contribution
of its members.’
 It focuses attention on participatively set goals that are tangible, verifiable and measurable.
 The emphasis is on what must be accomplished rather than how it is to be accomplished.

Key MBO Ideas

 Employee involvement creates higher levels of commitment and performance.
 Encourages employees to work effectively toward achieving desired results.
 Performance measures should be measurable and should define results.
Process of MBO
 Set the organization’s goals
 Set the departmental goals
 Discuss departmental goals
 Define expected results
 Performance reviews
 Provide feedback

Set the organization’s goals:

Establish an organization-wide plan for next year and set company goals.
Set the departmental goals:
Departmental heads at this stage take the broader company goals (such as improving profits by 20%,
increasing market share by 10% etc.) and, with their superiors, jointly set goals for their departments.
Discuss departmental goals:
The departmental heads would require the subordinates to set their own preliminary individual goals,
focusing mostly on what they can do to achieve the departmental goals
Define expected results:
In this step, the departmental heads and their subordinates agree on a set of participatorily set short term
and individual performance targets.
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Performance reviews:
Departmental heads compare each employee’s actual and targeted performance, either periodically or
annually.
Periodic review is intended to identify and solve specific performance problems.
Annual review is conducted to assess and reward one’s overall contribution to the organization.
Provide feedback:
Both the parties now discuss and evaluate the actual progress made in achieving goals, where things
have gone off the track, how best to rectify the mistakes made in the past, and how the employee could
meet the targets next time, focusing attention on his strengths.
Problems
 Setting clearly measurable goals is not an easy task.
 It is time consuming as it demands a great deal of time to set verifiable goals at all levels of an
organization.
 In the race to define everything rigidly, some of the qualitative aspects such as employee
attitudes, job satisfaction etc might be ignored.
 The superior may set goals at a frustratingly high level, whereas the subordinate may wish to
have it at a comfortable level.
 At times, the short term goals may take precedence over long term goal.

How to overcome these problems?

 The only way is to allow managers at all levels to explain, co‐ordinate and guide the programme
in a persuasive, democratic way.
 The jointly set targets must be fair and attainable.
 Both the superior and the subordinates must be taught how to set realistic goals and be
familiarized with the results for which they are finally held responsible.
OTHER METHODS
Assessment centre:
 This method of appraising was first applied in German Army in 1930.
 Later business and industrial houses started using this method.
 It is a system or organization, where assessment of several individuals is done by various experts
using various techniques.
 These techniques include in‐basket, case studies, simulation exercises, etc.
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 In this approach, individuals from various departments are brought together to spend two or three
days working on individual or group assignments similar to the ones they would be handling when
promoted.
 Observers rank the performance of each and every participant in order of merit.
 It is basically meant for evaluating the potential of candidates to be considered for promotion,
training or development.
Merits

 They offer an excellent means for conducting evaluation processes in an objective way.
 All assesses get an equal opportunity to show their talents and capabilities and secure promotion
based on merit.
 The performance ratings may find favour with a majority of the employees.
 People chosen by this method prove better than those chosen by other methods.
 The centre enables individuals working in low status departments to compete with people
from well‐known departments and enlarge their promotion chances.
 When created on a regular basis, it will go a long way in improving the morale of promising
candidates working in ‘less important’ positions.
Field Review
Outside reviewer (Someone from the corporate office or HR) interviews the ratee and/or his superior
about the performance. The rater also reviews the employee records.
Advantages
 Used for making promotional decisions.
 Useful when comparable information is needed for employees of different units/ locations.
 Disadvantages
 Lack of observation.
 Outside rater is not familiar with the employee and their work environment
Human Resource Accounting:
This method deals with cost and contribution of human resources to the organization.
In his method, cost of the employee includes cost of manpower planning, recruitment, selection,
induction, placement, training, development, wages etc. Employee contribution is the money value of
employee service which can be measured by labor productivity or value added by human resources.
Employee performance can be taken as positive when contribution is more than the cost and
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performance can be viewed as negative if cost is more than contribution.
Group Appraisal
Under this method an employee is appraised by a group of appraisers. This group consists of the
immediate supervisor of the employee and group of appraisers.
In this method supervisor may act as the coordinator for the group activities. This group uses multiple
techniques discussed earlier; the supervisor enlightens other member about job characters, etc. The
group appraisers appraise the employee and compare his/her performance with set standards.

360‐degree Appraisal method

360‐degree feedback, also known as multi‐rater feedback, multi source assessment, is feedback that
comes from members of an employee's immediate work circle. Most often, 360‐degree feedback will
include direct feedback from an employee's subordinates, peers, and supervisor(s), as well as a self‐
evaluation. It can also include, in some cases, feedback from external sources, such as customers and
suppliers or other interested stakeholders. The results from a 360‐degree evaluation are often used by the
person receiving the feedback to plan and map specific paths in their development.
Results are also used by some organizations in making administrative decisions related to pay and
promotions.
PROS
 The system is more comprehensive in that responses are gathered from multiple perspectives.
 Quality of information is better. (Quality of respondents is more important than quantity.)
 It complements TQM initiatives by emphasizing internal/external customers and teams.
 It may lessen bias/prejudice since feedback comes from more people, not one individual.
 Feedback from peers and others may increase employee self‐development.
CONS
The system is complex in combining all the responses.
Feedback can be intimidating and cause resentment if employee feels the respondents have “ganged up.”
There may be conflicting opinions, though they may all be accurate from the respective standpoints.
The system requires training to work effectively.
Employees may collude or “game” the system by giving invalid evaluations to one another.
Appraisers may not be accountable if their evaluations are anonymous.
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Problems with performance appraisal

JUDGEMENT ERRORS

 Halo error ‐ Occurs when manager generalizes one positive performance feature or incident to all
aspects of employee performance resulting in higher rating
 Horn error ‐ Evaluation error occurs when manager generalizes one negative performance feature
or incident to all aspects of employee performance resulting in lower rating
 Leniency ‐ Giving undeserved high ratings
 Strictness ‐ Being unduly critical of employee’s work performance
 Central tendency: The reluctance to use the extremes of a rating scale and to adequately
distinguish among employees being rated. Error occurs when employees are incorrectly rated near
average or middle of scale
 Recency effect: Employee’s behavior often improves and productivity tends to rise several days
or weeks before scheduled evaluation. Its natural for rater to remember recent behavior more clearly
than actions from more distant past. Rater gives greater weightage to recent occurrences than earlier
performance.
 Stereotyping: Managers allow individual differences such as gender, race or age to affect ratings
they give. Effects of cultural bias, or stereotyping, can influence appraisals. Other factors – Example:
mild‐mannered employees may be appraised more harshly simply because they do not seriously object
to results.
 Spillover effect: Refers to allowing past performance appraisal ratings to unjustifiably influence
current ratings.
Poor design of appraisal forms

 Rating scale may be vague and unclear

 Rating form may ignore important aspects of job performance
 Rating form may contain irrelevant performance dimensions.
 Lack of rater preparedness: The raters may not be adequately trained to carry out performance
management activities. This becomes a serious limitation when the technical competence of a ratee is
going to be evaluated by a rater who has limited functional specialization in that area.
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Uses of Performance Appraisal

 Improve employee performance
 Determine pay adjustments
 Assist management when making placement decisions
 Identify training needs
 Assist with career planning
 Identify job design errors
 Provide feedback to management
 Equal Employment Opportunity

PERFORMANCE MANAGEMENT PROCESS

Performance goal setting
The performance planning process, where individual objectives are linked to organisational goals, is the
typical starting point of the cycle. Objectives are expressed as Key Result Areas or Accountabilities
(KRA) and underpinned by performance standards and performance measures. Defining objectives is not
sufficient in itself. There has to be some agreement and understanding of how performance is to be
measured. There has been considerable debate on the extent to which performance goals are ‘hard’,
objective, quantifiable and capable of being directly measured, or ‘soft’, subjective and focused on such
things as behaviours or traits – and many organizations use a mix of both hard and soft goals. goal‐
setting should be a joint activity involving the individual and her or his line manager. Performance Goals
need to be SMART:

 S Specific ‐ objective should state its expected outcome or result simply, concisely, and explicitly
 M Measurable ‐ accomplishment of the outcome can be assessed quantitatively, qualitatively,
charted, or behavioral elements observed
 A Achievable ‐ objective is challenging but realistic given current conditions, resources, and time
available
 R Relevant ‐ objective is aligned with department/division/university goals and objectives
 T Time‐bound ‐ deadlines are set for accomplishment

Performance coaching and monitoring

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Coaching is an ongoing process of communication between the supervisor and the employee focused on
improving current performance and building capabilities for the future. It involves the supervisor and
employee working together to share information about work progress, potential barriers and problems,
possible solutions to problems, and how the supervisor can help the employee. It is a dialogue that links
performance planning and performance review. It involves informal conversations or notes.
Coaching and monitoring includes a variety of activities, such as:
 Observing performance
 Providing instruction
 Directing employee’s efforts
 Providing encouragement
 Correcting poor performance
 Recognizing excellent performance
 Listening to employee concerns and ideas
 Removing barriers to performance
Coaching should occur on an as‐needed basis throughout the year and may be initiated by either the
supervisor or the employee. The type of coaching that supervisor would do initially is much more
intensive. Coach would be directing the employee to a greater degree – some might even call it
micromanaging. They tell the employee what to do more than making suggestions

In the later part of the time period the coach maintains a level of coaching that empowers and motivates
the employee, but not micro‐managing. They make suggestions, engage in problem solving, but also
motivate the employee to make many of the decisions on their own.
Performance evaluation

Formal assessment is a key component of any Performance management system and performance
appraisal is one of the most common vehicles for reviewing performance against objectives.
Performance appraisal focuses on four specific purposes: documentation, development, administrative
purposes and subordinate expression.
Performance feedback
Getting feedback from multiple sources helps employees know when they are doing something really
well, and when it would be helpful to do something a little differently. Multiple sources of feedback
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could include one or more of the following:
Self‐evaluation
 Upward feedback (people who report to you)
 Peer feedback (people with whom you work)
 Customer feedback (people you serve both in and outside the unit).
 Work environment surveys (an expanded form of upward feedback)
 Every employee should receive feedback from at least one other source in addition to their
supervisor and their own self‐evaluation. The rationale behind such multiple evaluations is that an
individual obtains a breadth of information.
 Essential Characteristic of an Effective Appraisal System.
 An appraisal system, to be effective, should posses the following essential characteristics.

 Reliability and validity: This data must be used to defend the organisation in case o legal
challenges. Reliability is when two appraisers are equally qualified and competent to appraise an
employee with the help of the same appraisal technique, their ratings should agree with each other.
Validity is measuring exactly what it is supposed tomeasure.
 Job relatedness: It should measure the performance and provide information in job related
activities/areas.
 Standardization: Appraisal forms, procedures, administration of techniques and rating must be
standardized.
 Practical viability: practically viable to administer, possible and economical to implement
 Legal sanction: Must meet the laws of the land. Comply provision of various laws.
 Training to appraisers: It is required to train appraiser on the insights and ideas on rating,
documenting appraisals and conducting interviews.
 Open communication: Provide needed feedback on continuing basis. Permit both the parties to
learn about gaps and prepare themselves for future. Managers must clearly explain their expectations to
their subordinates in advance.
 Employee access to results: Employee should know the rules of the game. They should receive
adequate feedback on their performance. Results should not be withheld, if they disagree with the
evaluation they can challenge the evaluation.
 Due process: There must be means to pursue grievances and having them addressed objectively.
 Potential Appraisal: Potential appraisal forms a basis for both lateral and vertical movement of
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employees. By implementing competency mapping and various assessment techniques, potential
appraisal is performed. A potential appraisal provides crucial inputs for succession planning and
job rotation
Compensation.
Compensation is the remuneration that the employees receive in exchange for their contribution to the
organization. It is a total of all rewards provided to employees in return for their services.

Compensation offered by an organization can come both directly through base pay and variable pay and
indirectly through benefits.
 Base pay – Basic compensation of an employee. Usually wage or salary
 Wage –remuneration paid by the employer for the services on an hourly, daily, weekly and
fortnightly basis to the employees.
 Salary‐ remuneration paid to the clerical, administration and managerial personnel employed on
a monthly basis.
 Variable pay – compensation that is directly linked to performance accomplishments (bonuses,
incentives, commission, Stock options)
 Benefits‐ Indirect rewards given to employee or group of employees as a part of organizational
membership. (Health insurance, vacation pay, pension)

Objectives Primary objective

The most important objective of any pay system is fairness or equity.
 Equity means fair pay treatment for employees. The term equity has three dimensions:
 External equity ‐ Firm's employees are paid comparably to workers who perform similar jobs in
other firms
 Internal equity ‐ Exists when employees are paid according to relative value of their jobs within
same organization
 Employee equity ‐ Individuals performing similar jobs for same firm are paid according to
factors unique to employee, such as performance level or seniority. (Equal pay for equal work )
 Secondary objectives
 To attract talent / acquire competent personnel‐ Compensation needs to be high enough to attract
talented people and to motivate.
 To retain talent / retain the present employees‐ If compensation level falls below the
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expectations, employees will quit in frustration.
 To inculcate new and desired behavior‐ pay should reward loyalty, commitment, experience, risk
taking and other desired behavior among the employees.
 To control costs‐ Effective compensation management ensures that workers are either overpaid or
underpaid.
 To comply with legal rules regarding minimum wages, bonus, allowances, benefits etc.
 To improve morale and motivation of the employees.
 To project a good image of the company. Factors affecting Wages/Salary/ compensation levels
Internal factors

Compensation strategy of the organization‐ compensation plan should further the firm’s strategic
aims – management should produce an aligned reward strategy. Organization compensation policy can
be to lead, lag, or match competitors’ pay.
 Worth of a job – Jobs vary greatly in their difficulty, complexity and skills. The worth of the job
is calculated by establishing the internal wage relationship among jobs and skill levels.
 Employee’s relative worth ‐ Rewarding individual employee performance
 Employer’s ability to pay‐ Having the resources and profits to pay employees. High profits
enable companies to pay higher wages. This partly explains why software industry pays better
than the commodity industry.
 External factors
 Conditions of the labor market – The demand for and supply of certain skills determine prevailing
wage rates. High demand for software professionals, R&D professionals, financial consultants
ensure higher wages.
 Area wage rates‐ prevailing wage rates in that particular area also determines the wage and salary
levels.
 Cost of living –Inflation reduces the purchasing power of employees. To overcome this, unions
and workers prefer to link the wages to the cost of living index.
 Legal requirements ‐ the legal stipulations in respect of minimum wages, bonus, dearness
allowance, HRA etc determine the wage structure in the industry.
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Job Evaluation
 Meaning ‐ The systematic process of determining the relative worth of jobs in order to establish
which jobs should be paid more than others within an organization.
 Definition ‐ Job evaluation is a process of determining the relative worth of the various jobs
within the organization, so that a differential wages may be paid to jobs of different worth.‐
Wendell L. French
Objectives
 To ensure fair and equitable wages on the basis of relative worth.
 To compare the duties, responsibilities and demands of a job with that of other jobs.
 To determine the hierarchy of various jobs in an organization.
 To determine the ranks or grades of various jobs.
 To minimize wage discrimination.
Job evaluation Procedure
 Gaining acceptance – unions and employees
 Creating job evaluation committee
 Find the jobs to be evaluated‐ Every job need not be evaluated. Certain key jobs in each
department must be identified and they must represent the type of work in that department.
 Analyze and prepare job description.
Select the method of evaluation
‐ Ranking method
‐Classification method
‐Factor comparison method
‐ Point rating method
Classify the jobs‐ Classify the jobs in a sequential order based on their significance.
Install the program – Educate the employees and then put it into operation.
Review periodically and maintain Different job evaluation system
SCOPE OF COMPARISON

JOB AS JOB PARTS

BASIS FOR A WHOLE OR FACTORS
COMPARISON (NONQUANTITATIVE) (QUANTITATIVE)
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Job vs. job Job ranking Factor comparison

system system

Job vs. scale Job classification system Point system

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Job ranking—placing jobs in order from most valuable (or most important or most difficult) to least
valuable (or least important or least difficult) using a single factor such as job complexity or the
importance of the job to the firm's competitive advantage.
advantages
 simplest method
 inexpensive
 easy to understand
disadvantages
 Does not provide a precise measure of each job’s worth.
 Final job rankings indicate the relative importance of jobs, not extent of differences between
jobs.
 Method can used to consider only a reasonably small number of jobs.
Job classification—broad descriptions are designed in advance to reflect the characteristics of the jobs
that would be placed at each level in that system; then, specific positions are compared to these generic
descriptors and a decision is made as to which level best fits.
A system of job evaluation in which jobs are classified and grouped according to a series of
predetermined wage grades. Successive grades require increasing amounts of job responsibility, skill,
knowledge, ability, or other factors selected to compare jobs.
advantages
 simple
 easy to use for large numbers of jobs
 one rating scale
disadvantages
 ambiguous
 overlapping grade descriptors
Factor Comparison System ‐ Under this method each job is ranked according to a series of factors. These
factors include mental effort, physical effort, skill, responsibility, working conditions etc.
‐A job evaluation system that permits the evaluation process to be accomplished on a factor‐by‐factor
basis by developing a factor comparison scale.
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‐ The compensable factors of a job evaluated are compared against the compensable factors of key jobs
within the organization that serve as the job evaluation scale.
advantages
 Analytical and objective
 Valid as each job is compared with all the other jobs in terms of key factors.
 Money values are assigned in a fair way
disadvantages
 Using the same criteria to assess all the jobs is questionable
 more difficult to understand
 Time consuming and costly

Point factor/ Point rating

A variety of factors are the basis for determining relative worth; after the factors are identified, points
are assigned to each factor. They are usually weighted because all factors are probably not equally
important to the organization. The points are summed up to determine the wage rate.
A quantitative job evaluation procedure that determines the relative value of a job by the total points
assigned to it.
Point factor evaluation typically done within a job family
Point Manual‐ A handbook that contains a description of the compensable factors and the degrees to
which these factors may exist within the jobs.
advantages
 more specific and larger numbers of factors
 off‐the‐shelf plans available (e.g., Hay Plan)
 more precise measurements
disadvantages
 time‐consuming process
 more difficult to understand
 Point Values for Job Factors of The American Association of Industrial Management (only for
understanding purpose)

1ST 2ND 3RD 4TH 5TH DEGREE

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FACTORS DEGREE DEGREE DEGREE DEGREE

Skill

1. Education 14 28 42 56 70
2. Experience 22 44 66 88 110
3. Initiative & ingenuity14 28 42 56 70

Effort
4. Physical demand 10 20 30 40 50
5. Mental/visual demand5 10 15 20 25

Responsibility
6. Equipment/process 5 10 15 20 25
7. Material or product 5 10 15 20 25
8. Safety of others 5 10 15 20 25
9. Work of others 5 10 15 20 25
Job Conditions
10. Working conditions10 20 30 40 50
11. Hazards 5 10 15 20 25

Establishing pay rates / Salary fixation

Wage and salary survey

 A survey of the wages paid to employees of other employers in the surveying organization’s
relevant labor market (The area from which employers obtain certain types of workers).
 A survey aimed at determining prevailing wage rates
 Helps maintain external pay equity for employees.
 Procedure for wage and salary survey
 Select key jobs.
 Determine relevant labor market.
 Select organizations.
 Decide on information to collect: wages/benefits/pay policies.
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 Compile data received.
 Determine wages and benefits to pay.

Salary surveys can be formal or informal. Informal telephone or internet surveys are good for checking
on a relatively small number of easily identified and quickly recognized jobs. 20% of large employers
use their own formal questionnaire surveys to collect compensation information.

Job evaluation
 Job evaluation is a process of determining the relative worth of the various jobs within the
organization, so that a differential wages may be paid to jobs of different worth.
 Group similar jobs into pay grades
 Once it has used job evaluation to determine the relative worth of each job, the committee can
turn to the task of assigning pay rates to each job; however, it will usually want to first group
jobs into pay grades. Pay rates can be assigned to each job, but it becomes difficult when the
organization is big and large number of jobs exists. Therefore, the committee will group similar
jobs into grades for pay purpose.
 Price each pay grade – Wage curves
 The next step is to assign pay rates to your pay grades. Wage curve is used to assign pay rates to
each pay grade (or to each job).
 Wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or
rankings assigned to each job or grade by the job evaluation. In simple terms Wage curve shows
the relationship between the value of the job and the average wage paid for this job.
Developing pay ranges ‐ Most employers do not pay just one rate for all jobs in a particular pay
grade. Employers develop vertical pay ranges for each horizontal pay grade. Pay ranges are a series of
steps or levels within a pay grade, usually based on years of service. Pay ranges are depicted in the graph
below and this graph is known as Wage Structure. Wage structure shows overlapping wage classes and
maximum minimum wage ranges. (refer the diagram in the next sheet).

Correcting out of line rates‐ The wage rate for a particular job may fall well off the wage line or outside
the rate range for its grade. This means that the average pay for that job is currently too high or too low
relative to other jobs in the firm. For underpaid jobs, the wage rate has to be increased at least to the
minimum of the rate range for their pay grade.
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Points falling above are called RED CIRCLE. There are several ways to overcome this problem.
One is to freeze the rate paid to the employees until general salary increases bring the other jobs into
line.
Second option is to transfer or promote some or all of the employees involved with those jobs.
Third option is to cut the pay of these employees to the maximum in the pay range for their pay grade

"Wages"
Wages means all remuneration (whether by way of salary allowances or otherwise) expressed in terms
of money or capable of being so expressed which would if the terms of employment express or implied
were fulfilled by payable to a person employed in respect of his employment or of work done in such
employment and includes ‐
 any remuneration payable under any award or settlement between the parties or order of a
court;
 any remuneration to which the person employed is entitled in respect of overtime work or
holidays or any leave period;
 any additional remuneration payable under the terms of employment (whether called a bonus or
by any other name);
 any sum which by reason of the termination of employment of the person employed is payable
under any law contract or instrument which provides for the payment of such sum whether with
or without deductions but does not provide for the time within which the payment is to be made;
 any sum to which the person employed is entitled under any scheme framed under any law for
the time being in force, but does not include ‐
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 any bonus (whether under a scheme of profit sharing or otherwise) which does not form part of
the remuneration payable under the terms of employment or which is not payable under
 any award or settlement between the parties or order of a court;
 the value of any house‐accommodation or of the supply of light water medical attendance or
other amenity or of any service excluded from the computation of wages by a general or special
order of the State Government;
 (any contribution paid by the employer to any pension or provident fund and the interest which
may have accrued thereon;
 any travelling allowance or the value of any travelling concession;
 (any sum paid to the employed person to defray special expenses entailed on him by the nature
of his employment; or
 any gratuity payable on the termination of employment

Wage policy in India "Basic wages"

means all emoluments which are earned by an employee while on duty or on leave or on holidays with
wages in either case in accordance with the terms of the contract of employment and which are paid or
payable in cash to him but does not include:

 the cash value of any food concession;

 any dearness allowance (that is to say all cash payments by whatever name called paid to an
employee on account of a rise in the cost of living) house‐rent allowance overtime allowance
bonus commission or any other similar allowance payable to the employee in respect of his
employment or of work done in such employment;
 any presents made by the employer;
 While deciding the basic wages following criteria’s must be considered
Skill needs of the job
Experience needed.
Difficulty of work; mental as well as physical
Training needed.
Responsibilities involved
Dearness allowance (DA)
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Allowance paid to employee to facilitate to manage the increasing prices of commodities. It is a cushion,
sort of security against increasing price. DA is paid to neutralize the effect of inflation; when priced go
down DA can also be reduced.
Other allowance:

Attendance Night shift Canteen

Books Overtime Transport

Car Paternity Telephone

Credit card allowance Pension Uniform

Club membership Provident Fund Relocation

Computer Servant Deputation

Driver Education ESIS

Family Group Insurance Leave Travel allowance

Lunch Medial

WAGE AND SALARY ADMINISTRATION

Compensation is divided into two types.
 Base compensation: Monitory payment in terms of wage and salary. It is a fixed and non‐
incentive payment on the basis of time spent by an employee on the job.
 Supplementary compensation: Incentive payment based on individual or group performance.
 Structured pay scales of the government sector
What is a Pay Commission?
The Pay Commission is an administrative system/mechanism that the government of India set up in
1946 to determine the salaries of government employees.
History of Pay commission in India

The First Pay Commission was established in 1946, every decade has seen the birth of a commission that
decides the wages of government employees for a particular time‐ frame. The commission emphasized
on the idea of the living wages and stated that the government which is going to introduce the minimum
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wages legislation for the workers of the private industry should also follow the same principle for its
own employees. The commission basically recommended that the lowest rung employee should at least
get minimum wages.

The Second Pay Commission was set up in August1957 and gave its report in two years. The
recommendations of the second pay commission had a financial impact of Rs 396 million. The chairman
of the second pay commission was Jaganath [Link] second pay commission reiterated the principle on
which the salaries have to be determined. It stated that the pay structure and the working conditions of
the government employee should be crafted in a way so as to ensure efficient functioning of the system
by recruiting persons with a minimum qualification.

The Third Pay Commission, set up in April 1970, submitted its report in March 1973. Cost the
government Rs. 1.44 billion. The chairman was Raghubir Dayal. The third pay commission added three
very important concepts of inclusiveness, comprehensibility, and adequacy for pay structure to be sound
in nature. It emphasized that government should adopt ways to know whether the services are attractive
and it retains the people it needs and if these persons are satisfied by that they are getting paid.
The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The
chairman of fourth pay commission was P N Singhal. its report was given in three phases within four
years and the financial burden to the government was Rs.12.82 billion

The Fifth Pay Commission covered the period between 1996 and this year The Union Cabinet, under the
stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to
revise the pay scales of central government employees in July 2006.
Huge burden was taken up by the central government and declared salary and allowances hikes for its
approximately 3.3 million employees, and insisted that the state governments to revise the pay of their
employees as per the Commission's recommendations. The Fifth pay commission disturbed the financial
situation of both the Central and the State Governments and led to a hue and cry after its
implementation. The Central government's wage bill before the implementation of the commission’s
recommendations was 218.85 billion in 1996‐1997 which also included pension dues, and by 1999 it
shot up by about 99% and the burden on the exchequer was about to Rs 435.68 billion in 1999‐2000
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The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia,
J S Mathur and Sushama Nath as its other members. The Pay Commission was supposed to submit its
report in 18 months. While formulating pay scales with upward revision and fixing the minimum salary
at entry level at Rs.6660 (Basic Pay Rs.4860 and Grade Pay Rs.1800) and maximum at Rs.80000 at
Secretary level, the Commission mainly focused on removing ambiguity in respect of the existing pay
scales and, introducing the idea of ‘Pay Bands’, while reducing the number of pay scales. It
recommended for removal of Group – D cadre.

Seventh Pay Commission

The Government of India constituted Seventh Pay Commission on September 25, 2013 and the
recommendations of the Commission are likely to be implemented with effect from 1st January 2016.
Chairman is Justice Ashok Kumar Mathur, Retired Judge of the Supreme Court and Retired Chairman,
Armed Forces Tribunal Chairman. The Commission shall study the structure of salaries of different
cadres of the 50 lakh Central Government employees and 30 lakh Pensioners and recommend for
upward revision of scales and allied service matters. Constitution of the Chairman and Members of the
Commission shall be taken up in due course of time.
EXECUTIVE COMPENSATION
Executive compensation basically built around three important factors: Job complexity (sales volume,
assets, and geographical coverage) , employer’s ability to pay an executive human capital.
The economic theory of human capital says that the compensation of a worker should be equal to his
marginal productivity. The productive of an executive, likewise depends on his qualifications, job
knowledge, experience and contribution.

Executive compensation (also executive pay), is financial compensation received by an officer of a firm.
It is typically a mixture of salary, bonuses, shares of and/or call options on the company stock, benefits,
and perquisites, ideally configured to take into account government regulations, tax law, the desires of
the organization and the executive, and rewards for performance.

In recent years, instead of increasing the base compensation, companies are providing payment plans
based on earnings/assets or sales growth of the company over a period of time, well supported by various
allowances and perquisites including stock options, educational, recreational, academic allowances and
several other initiatives. Executive compensation is how top executives of business corporations are paid.
 Human Resource Management

Objectives of Executive Compensation:

 Aligning managerial interest with ownership interest
 Enhancing employee motivation, involvement and commitment
 Ensuring complete financial security
 Bringing in the best executives
 Promoting managerial efficiency
 Encouraging progressive learning
Features of Executive Compensation:
 Managerial compensation cannot be compared to the wage and salary schemes meant for in
other employee’s in organizations.
 Executives are denied the privilege of having unionized strength.
 Secrecy is maintained in respect of executive compensation.
 Executive pay is not supposed to be based on individual performance rather on organizational
performance.
 Their compensation cannot be compared to salary schemes meant for non – executive
 in organization factors variables are numerous.
 Competence & contributions are their strength.
 Not involved in any collective bargaining.
 Secrecy to be maintained – since compensation & reward depends on: Competence: length of
services.
 Contributions: Loyalty to the company.
 Not supposed to be individual performance rather on the unit or organization performance.
Theoretically, compensation guided by:
Job description ‐ Job evaluation ‐ Salary survey.
Executive Compensation Components:

Salary Bonus Long term incentives Perquisites(perks)

Usually noncash items

Determined through Generally paid Ex: Shares Normally

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job evaluation & serve annually. executive are allowed to provided are.
the basis for other types Based on performance purchase at a fixed P.F
of benefits. orprofit sharing. prices. Others are grouped as
Paid for. Some organizations, Stock options are Transportation.
Capabilities. give bonus based on valuable as long as the Company car or car
Job performed. The profit generated. price of share keeps allowance.
salary varies based on. Others follow share increasing. First class air travel.
Type of job. return on investment as Share price may come Assured car parking.
Size of organization. the basis. down in case of poor A car to offices &
Region of the country. Some others by decision performance of another to home.
Type of industry. of boards of directors or organization. Usage of company
Forms about 40% to CEO/COO. airplane, helicopter.
60% of total They need to be given Financial / legal.
compensation. bonus, since their status Financial planning.
Salary – also subject to to influence Tax planning / tax
tax as per government organizational success preparation.
regulations. or much more than other Low interest loan.
Hence compensated by levels. Legal counseling.
incentives perks. Membership.
Country club.
Health club.

Why executives should be paid more?

 Executives have intensive worth & hence command heavy premium.
 They are in short supply, talented & competent.
 Retaining such caliber is more critical than attracting them.
 In the process of retaining, motivation is the route & such motivation & factors is lead by
compensation.
 Global level liberal packages are the trend to enable extract potential of executives.
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Organizations need good brain power & the services of executives with experience on high‐tech,
knowledge based information & service oriented based.
Expectations of executives, in general, have gone up.
For executives financial reward is social prestige & position.
One another reason is to minimize corruption any scam or scandals will cost organization
irreparable damage.
Executive Compensation and the Board of Directors: The BOD is the major policy‐setting entity. For
publicly traded companies covered by federal regulatory agencies, such as the Securities and Exchange
Commission (SEC), the board of directors must approve executive compensation packages.
Even for many nonprofit organizations, Internal Revenue Service Regulations require boards of
director’s review and approve the compensation for top‐level executives.
In both family‐owned and privately owned firms, boards of directors may have less involvement in
establishing and reviewing the compensation packages for key executives.
Compensation Committee of the Board of Directors:
The compensation committee is a subgroup of the board composed of directors who are not officers of
the firm. Compensation committee generally make recommendations to the BOD on overall pay
policies, salaries for top officers, supplemental compensation such as stock options and bonuses and
additional perquisites (perks) for executives.
However, the independence of board compensation committees increasingly has been criticized.
One major concern voiced by many critics is that the base pay and bonuses of CEOs often are set by
board compensation committee members, many of whom are CEOs of other companies with similar
compensation packages.
Also, the compensation advisors and consultants to the CEOs often collect large fees, and critic’s charge
that those fees distort the objectivity of the advice given.
To counter criticism, some corporations have changed the composition of the compensation committee
and given it more independence. Some of the changes have included prohibiting “insider” company
officers and board members from serving on compensation committees.
Also, some firms have empowered the compensation committee to hire and pay compensation
consultants without involving executive management.