Commonwealth of Learning Executive MBA/MPA

C3 Human Resource Management

Block 8

Rewarding Employees: Performance Appraisal,

Compensation Including Job Evaluation

Course Developer: Lalith Weeratunga
Senior Consultant
Postgraduate Institute of Management
University of Sri Jayewardenepura
Columbo, Sri Lanka

Copyright Commonwealth of Learning, 2003

All rights reserved. No part of this course may be reproduced in any form by any means
without prior permission in writing from:
The Commonwealth of Learning
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Vancouver, BC V6H 3X8
CANADA
e-mail: [email protected]
 Contents
1 Objectives................................................................................................................... 5
2 Basic Concepts of Performance Appraisal ............................................................. 5
3 The Reasons for, and the Importance of, Performance Appraisal....................... 6
3.1 Performance Appraisal and Productivity ............................................................ 8
3.2 The Process and the Components of Performance Appraisal............................. 9
3.2.1 Appraiser......................................................................................................... 9
3.2.2 The Appraisee ............................................................................................... 10
3.2.3 Trait Approach.............................................................................................. 11
3.2.4 Behavioural Approach .................................................................................. 11
3.2.5 Results Approach .......................................................................................... 11
3.2.6 Formal Evaluation ........................................................................................ 13
3.3 Methods of Performance Appraisal ................................................................. 13
3.3.1 Written Essays............................................................................................... 13
3.3.2 Critical Incidents .......................................................................................... 13
3.3.3 Graphic Rating Scale (GRS)......................................................................... 14
3.3.4 Behaviourally Anchored Rating Scale (BARS) ............................................. 14
3.3.5 Individual Ranking, Paired Comparison and Group Order Ranking........... 14
4 Feedback on Performance...................................................................................... 16
4.1 Feedback Model................................................................................................ 16
4.2 Cognitive Evaluation of Feedback.................................................................... 17
5 Reasons for Malfunction or Failure ...................................................................... 17
5.1 System Design and Operating Problems........................................................... 17
5.2 Problems with the Appraiser............................................................................. 18
5.2.1 The Halo Effect ............................................................................................. 18
5.2.2 Standards of Appraisal ................................................................................. 18
5.2.3 Central Tendency .......................................................................................... 18
5.2.4 Recent-behaviour Bias .................................................................................. 18
5.2.5 Personal Biases............................................................................................. 19
5.3 Employee Problems with Performance Appraisal ............................................ 19
6 Job Evaluation......................................................................................................... 20
6.1 Definition .......................................................................................................... 20
6.2 Job Evaluation Methods.................................................................................... 21
6.2.1 Job Ranking .................................................................................................. 21
6.2.2 Factor Comparison....................................................................................... 22
6.2.3 Classification or Grading System ................................................................. 22
6.2.4 The Point System........................................................................................... 22
7 Compensation .......................................................................................................... 23
7.1 Definition .......................................................................................................... 23
7.2 Objectives of Compensation ............................................................................. 24
7.3 Compensation Decision Makers ....................................................................... 24
7.4 Compensation Decisions................................................................................... 24
8 Methods of Payment ............................................................................................... 25
8.1 Payment for Time Worked................................................................................ 25
8.2 Incentive Plans .................................................................................................. 26
8.3 Individual Incentives......................................................................................... 26
8.4 Group Incentives............................................................................................... 27
8.5 Enterprise Incentive Schemes ........................................................................... 27
8.5.1 Suggestion Systems ....................................................................................... 27
8.5.2 Company Group Incentive Plans .................................................................. 28
8.5.3 Profit Sharing Plans ..................................................................................... 28
8.5.4 Stock Ownership Plans ................................................................................. 28
8.6 Executive Compensation .................................................................................. 29
8.6.1 Executive Pay................................................................................................ 29
8.6.2 Executive Perks............................................................................................. 29
8.6.3 Bonuses ......................................................................................................... 30
9 Employee Benefits ................................................................................................... 30
9.1 Definition .......................................................................................................... 30
9.2 Reasons for Using Fringe Benefits ................................................................... 30
9.3 Cafeteria Benefits.............................................................................................. 31
9.4 Basic Types of Benefit...................................................................................... 31
10 Summary.............................................................................................................. 32
11 References and Further Reading....................................................................... 34
1 Objectives
When you have studied Block 8 of this course, you will be able to:
• articulate the basic concepts regarding performance appraisals and the roles they
play in management
• explain performance appraisal is carried out
• discuss the concepts, roles and methods of job evaluation
• describe the concepts and principles of compensation
• discuss employee benefits

2 Basic Concepts of Performance Appraisal

Although the terms ‘performance evaluation’ and ‘performance appraisal’ are
interchangeable, only the latter term will be used in this course so as to minimise
potential confusion throughout the text. Performance appraisal can be defined as a formal
and structured system by which management measures, evaluates and assesses an
employee’s job-related attributes, behaviours and outcomes. It is undertaken to discover
how productive the employee is and whether the employee can continue to perform in
future to help achieve the organisation’s goals. It constitutes an essential part of the
human resource management process and is a factor in determining the crucially
important dimensions of employee and organisation effectiveness for success. As the
following diagram illustrates, it occupies an important subroutine function within the
human resource management function of an organisation. As indicated in the diagram,
performance appraisal can be linked to the career planning and development of the
employee.
1

7 2

Key:
1. Personnel planning & forecasting Employee & organisational
2. Employee recruitment & selection effectiveness
3. Employee training & development 6 3
4. Performance appraisal and
career planning & development
5. Compensation & employee benefits
5 4
6. Promotion, transfer & separation
7. Labour relations

C3: Human Resource Management, Block 8 page 5 of 34

When you examine the above diagram carefully, you will note that the whole process is
central to the organisational as well as personal effectiveness. HR departments start with
personnel planning and forecasting. Block 4 discussed this aspect under HR planning.
Once the requirements are determined, then recruitment and selection is done, as earlier
blocks have also discussed, and the personnel thus acquired need to be oriented, and later
trained and developed. When the new employee works in the job, there needs to be an
appraisal of his or her work periodically.

Self-Assessment Question
What are your initial thoughts about performance appraisal in your organisation?

3 The Reasons for, and the Importance of,

Performance Appraisal
As an individual whose work performance may have been appraised in a formal process,
you may not be conscious of one of the features of this organisational activity. The
feature is somewhat abstract, but worthy of note. It is that only a minority of activities in
HRM – selection, appraisal, and grievance resolution or discipline – are concerned with
appraising or evaluating employees as individuals. In all other cases, the focus of
attention is on jobs, structures, procedures or people in groups, and not on individuals per
se.
Take for example, job evaluation (to be discussed later in this block) which focussses on
jobs, not on job holders. Job design and organisation development focus on job/task
structures; wage and salary administration focus on procedures. HR planning and
collective bargaining focus on people in groups.
As Cole (1991) argues appraisal or evaluation of an employee’s performance in terms of
their job performance is a serious activity requiring a quality of managerial judgement
that, places a considerable responsibility on the managers involved. As you observed in
the diagram above, compensation, further development and promotion depend on how
managers evaluate an employee’s performance. As Cole very aptly says, ‘it is a task that
is delicate as well as complex.’
According to Cole (1991), there are several reasons why appraisals are carried out in
organisations. These may be summarised as follows:
• to identify an individual’s current level of job performance
• to identify employee strengths and weaknesses
• to enable employees to improve their performance
• to provide a basis for rewarding employees in relation to their contribution to
organisation goals

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 • to motivate individuals
• to identify training and development needs
• to identify potential performance
• to provide information for succession planning
The most likely reason for the adoption of appraisal of employees is to draw attention to
present performance in the job in order to (a) reward people fairly and (b) identify those
with potential for promotion or transfer.
Today, throughout the world, performance appraisals play an integral part in making a
variety of critical decisions in the management of human resources. The order of
importance among these uses is, from most to least –
1. Salary administration
2. Performance feedback
3. Identifying individual strengths and weaknesses
4. Documenting personnel decisions
5. Recognising individual performance
6. Identifying poor performance
7. Assisting in goal identification
8. Making promotional decisions.
9. Retention or termination of personnel
10. Evaluating goal achievement
You have seen the various reasons why performance appraisal is so important in the
personnel/HR function of organisations and some form of prioritising on the uses of
appraisal of person’s performance. This is not all. One of the key areas why performance
appraisal is so diligently carried out by managers is the productivity of people in jobs. Let us
in the next section explore some concepts as well as practical approaches on productivity
and its reliance on performance appraisal.

Activity
With reference to your organisation, write a brief account on uses of performance
appraisal schemes. Compare it with the uses outlined above.

C3: Human Resource Management, Block 8 page 7 of 34

 3.1 Performance Appraisal and Productivity
Productivity experts recommend that people work smarter and not harder. While
education and appropriate training are required to do this, it is crucial to note that the
relevant process does not end with training. When training ends, performance begins, and
its appraisal (performance appraisal) merges into support productivity increase.
Hence, today’s employees in modern organisations need ‘instructive performance
appraisal’ leading to supportive feedback that links to desired rewards for the desired
behaviour, i.e., behaviour that engages acquired knowledge to improve productivity. It
can thus be seen that, when construed instructively, the performance appraisal process
can channel an employee’s efforts into strong job performance with sustainable growth of
productivity. Similarly, the opposite is also true. Weak and uncoordinated performance
appraisals linking to equally weak feedback and reward systems can surely lead to poor
results. Here lies the crux of the matter: human effort in the final analysis must be
managed and nurtured well for superior performance.
The following diagram illustrates this intimate link between effort, performance appraisal
and job productivity.
Effort, performance appraisal and job productivity

Properly Stable,
Periodic Timely and administered strong job Productivity
Performance constructive rewards performance increase
feedback

Positive effectsJ

Effort

Negative effectsJ

Poorly Unstable, Poor

No formal Inadequate administered poor job Productivity
Performance feedback rewards performance

If you examine the above diagram, you will notice that performance appraisal needs to be
done periodically and feedback immediately made available to the employee. It has to be
timely and constructive. In other words, comments by a manager or a supervisor, about
an employee’s job performance needs to be available to the employee as early as possible

C3: Human Resource Management, Block 8 page 8 of 34

and also should point to a direction where the employee is able to correct any wrong job
behaviour so that his or her performance will be as per the expected outcomes in the job
description.
As you will have noted, the whole process of performance appraisal involves key
elements. The next section helps you examine closely what these are in order to fully
comprehend the complexity of, and potential for improvement in, any appraisal you must
do in your organisation.

Activity
In a commercial organisation which deals with marketing of consumer products, what
role can performance appraisal play to increase productivity?

3.2 The Process and the Components of Performance

Appraisal
The performance appraisal process can be broken down into four elements, namely, the
appraiser, the appraisee, the appraisal method and the outcome. The following diagram
explains the process graphically.

Appraiser

Appraisal Outcomes

Appraisee

3.2.1 Appraiser
The appraiser is a key element in the process but managers generally dislike playing the
role of appraiser of their employees. In most situations, the immediate supervisor or his
senior conducts this task, and research in the U.S. companies indicate that many dislike it
and try to avoid it. The problem arises due to complexity and difficulty of the process the
diagram above depicts in very simple terms. The essence of the complexity lies in the fact
that appraisal involves a human being observing and judging the performance of another.
The purpose is to be completely objective and neutral as appraiser, devoid of personal
considerations whatsoever. Yet charges o fbias and perceptual distortion (based on race,
gender age and such) are often levelled at the appraiser.

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The common perceptual errors such as halo effect, leniency, central tendency, recency
and contrast are tractable to human factor involved here.
The experts on the subject have specified four important criteria that must be satisfied to
become a performance appraiser. (Kreitner & Kinicki 1992, 478)
• Able and willing to observe the behaviour & performance of the appraisee at
work.
• Knowledgeable about the dimensions or features of performance.
• Understand the instrument used, its format and the scale.
• Possess the motivation to conduct a performance appraisal conscientiously.

3.2.2 The Appraisee

In the appraisal process the appraisee (the subject) usually plays a passive role when the
appraiser is observing his or her performance. Therefore, unless the appraisee is properly
prepared to understand the process, he or she may find it a demeaning and potentially
threatening experience. Some experts suggest that the appraisee himself/herself needs to
play the role of analyser, influencer, planner and protégé in the process, to achieve a sort
of equality with the appraiser (Kreitner & Kinicki, 1992). Proactive appraisee roles are
the following.

1. Analyser • Performs self-assessment of goal achievement

• Identifies performance strengths & weaknesses
• Makes suggestions for performance improvement
• Takes personal responsibility for solving performance problems.

2. Influencer • Improves communication skills (e.g., Negotiating, advocating,

providing information, advising, soliciting feedback and listening)
• Strives for collaborative relationship with boss.

3. Planner • Develops a clear vision of why his or her job exists.

• Identifies quality of service goals relative to customers or clients.
• Understands what his or her job contributes (or does not
contribute) to the organisation.

4. Protege • Learns from high-performing roles without compromising

uniqueness.
• Learns through initiative rather than by waiting for instruction
from others.
(Source: Jacobsre, B. & Keye, B.L. 1986, 26-32)

The basic goal of this proactive role for the appraisee is to link performance appraisal and
career development and to achieve a mutually beneficial development programme.
Having discussed the appraiser and the appraisee, you can now turn to the appraisal
method, which needs elaboration. Over the years, various methods have evolved and tried

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out, sometimes producing controversy. When you have spent a few minutes on the
activity below, proceed to the explanations of the three principal approaches, namely:
• Trait approach
• Behavioural approach
• Result approach

Activity
Have you seen a performance appraisal interview? For an appraisal interview to be
successful, what skills should an appraiser possess?

3.2.3 Trait Approach

As the term implies, this approach involves rating the individual employee’s personal
traits or characteristics such as initiative, decisiveness and dependability. Though used
commonly by management, this approach is considered to be the weakest. This basically
arises from the fact that these traits are ambiguous relative to the actual job performance
and the needed improvement. Appraising someone as having low initiative does not say
anything precise about how to improve. Also this can trigger a defensive reaction on the
part of the employee being appraised.

3.2.4 Behavioural Approach

This approach points directly to the persons’ actual work behaviour rather than a trait like
his or her personality. For example, it can be focussed to seek information as to whether
the employee works alone on all projects, on most projects or about half the projects.
Similarly, whether he or she teams up with others on major projects or works alone on all
major projects. When these behavioural patterns are coupled with performance rating,
appraisal is enhanced.

3.2.5 Results Approach

This approach focusses on the product or the outcome of one’s effort. It seeks to identify
and evaluate what has been accomplished by an employee subject to appraisal.
Management By Objectives (MBO) is usually regarded as the most appropriate format
for using the results approach.
Performance appraisal is undertaken to serve a variety of management purposes. The
controversy regarding which approach is best can only be resolved when you consider the
reasons for doing the appraisals. Hence, the contingency approach has an overarching
consideration here.
The following table presents appraisal methods from the perspective of the management
purposes they serve.

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 Contingency approach to appraisal methods.

Management purpose Appraisal Strengths and weaknesses

or function. method

Promotion decisions Trait Appropriate when competing

appraisees have dissimilar jobs.
Appropriate when competing
Behavioural appraisees have similar jobs.
Results Same as above.

Development decisions Trait Tend to cause defensiveness among

low-esteem employees.
Pinpoints specific performance
Behavioural improvement needs.
Identifies deficient results and not
why.
Results.

Pay decisions Trait Weak performance–reward linkage.

Behavioural Enhances performance reward
linkage.
Results.
Same as above.

Layoff decision Trait Inappropriate, potentially

discriminatory.
Behavioural
Weighted combination of
Results. behavioural, result plus seniority is
recommended.
Same as above.
(Source: Wesley & Klimoski, 1984, 35-79).

The above tabulation indicates clear strengths of the behavioural approach. However,
much depends on the nature of the role and the character of the appraisee. For roles in
which the nature of the role is less prescribed and yet has a significant effect on
outcomes, the results based approach may be favoured. This often is the case with
management roles for which many organisations favour the results based model of
Management by Objectives. Performance appraisals are employed by management to
inform human resource development decisions and productivity. It is therefore crucial
that performance appraisals be effectively conducted so as to provide instructive
information.

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3.2.6 Formal Evaluation
The main purpose of appraisal is to help staff improve their performance. To that end, it
is imperative that credibility is built into appraisal system, thereby maintaining employee
goodwill. Therefore, it is necessary to develop a formal procedure that is clearly
understood by all employees. There should be an appeal procedure should disagreement
and misunderstanding occur in the course of implementation. This appeal procedure must
provide for staff to be assisted by a trade union or staff representative if requested.
As an appraisal system can be used to measure performance, behaviour, and attitude, the
actual method used can be a combination of both quantitative measures such as rating
scales and qualitative measures involving unstructured and narrative reports on specific
factors or overall levels of behaviour and work performance.

3.3 Methods of Performance Appraisal

The efficacy of the performance appraisal system as a whole in human resource
management is dependent on the right choice being made as to methodology. Many tools
and techniques are employed in the appraisal process. Let us focus on some of the key
ones to understand their relative merits.

3.3.1 Written Essays

These are written narrative describing an employee’s strengths, weaknesses, past
performance, future potential and suggestions for improvement.
Although this is simple method, it requires a great deal of writing ability and use of
objective language on the part of the appraiser. Therefore, what can be considered a good
or bad appraisal is dependent not only upon the employee’s actual level of performance
but also upon the appraiser’s writing skill.
Therefore, this method is not generally suitable for most organisations except for
professional organisations where there are generally accepted terms and vocabularies that
are considered to be objective and expressive.

3.3.2 Critical Incidents

In this method, the appraiser focusses attention on those key factors within the whole
array of factors in the appraisee’s behaviour that renders the performance effective or
ineffective.
The appraiser observes the actual behaviour of the employee and notes the key factors
that lead to effective outcomes. The entire focus is on critical factors which are
observable, specific behaviours and not vaguely understood personality traits. When
conducted properly, the appraiser records and interprets a list of critical incidents that can
inform the appraisee of behaviour that most significantly affects outcomes. The employee
can then focus on such behaviour to ensure results that are acceptable or expected. You
should note that this method places demands on the competency and objectivity of the

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appraiser in identifying, noting and relaying on a regular basis those activities that
determine the employee’s effectiveness.

3.3.3 Graphic Rating Scale (GRS)

This is an old method of performance appraisal used by managers. Under this method, a
set of performance standard criteria is developed. These standards are usually related to
such factors as quantity and quality of work, extent of knowledge related to job tasks,
attendance, initiative, honesty and loyalty. Once these criteria are determined, we decide
on the scale to be used for evaluating each criterion established. Typically, five scale
points are used for evaluation. For example, the required job knowledge might be rated
ranging from level 1, being equated to poorly informed about work duties, to level 5,
equated to complete mastery of all job tasks and duties.
Though easy to administer, graphic rating scales do not provide the depth of information
that essays or critical incidents do. One important advantage, however, is that GRS
allows quantification and easy analysis for comparison.

3.3.4 Behaviourally Anchored Rating Scale (BARS)

This combines both the critical incident and GRS methods. Under this method, the
appraiser rates the employee based on pre-determined items on a continuum scale and the
points scored measures actual behaviour rather than traits or general employee
characteristics. Thus BARS is designed to assess definite, observable and measurable job
related behaviour.
The BARS technique is well recognised for its objectivity and for reducing common
sources of appraiser errors, such as generalising an overall impression about the
employee onto all the factors being assessed (the halo effect), the leniency factor and
central tendency. However, three types of problems are commonly associated with
BARS. Firstly, initial anchors, i.e., the baselines for measurement, are difficult to specify
and apply objectively. Secondly, each scale is developed for a specific behaviour and
cannot be commonly applied to other situations and thirdly, development of BARS are
costly and time consuming. Therefore, many organisations may not be in a position to
afford this method.

3.3.5 Individual Ranking, Paired Comparison and Group Order Ranking

Irrespective of the techniques used to appraise performance, organisations often then rank
their employees. There are three common approaches to ranking: individual ranking,
paired comparisons and group order ranking.
1. Under the individual ranking approach, individual employees are ranked from the level
of best to the level of worst. The result is the rank ordering of employees in a particular
category from the highest performer to the lowest. The problem with such ordering is
that, while it shows who is better than whom, it gives no absolute measure of
performance nor the degrees by which any individual is better or worse than another.

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2. Under paired comparisons, each employee is compared with another, and one is
considered as superior or weaker of the pair. When all paired comparisons are
completed, each employee is assigned a summary ranking based on the number of
superior scores achieved. This approach ensures that each employee is compared against
each other. However, this comparison system can easily become unwieldy if the number
of employees is large.

3. Group order ranking is the method by which the employees are categorised after
evaluation into groups such as top 5 per cent, next 15 per cent and so on. This takes
away the need to rank order each and every individual. Instead employees are ranked
into groupings like the top 5 per cent or such. When the number of employees is small,
these groupings become rather meaningless

Group order Ratings by a combination of approaches: 360-degree feedback. A survey of

Fortune 500 companies showed that only about 10 per cent of employees were satisfied
with their organisation’s performance appraisal methods (Vinson, 1996). According to
Ivancevich (1998), therefore, it is not surprising that organisations are experimenting
with alternatives to the traditional ‘supervisor only’ downward appraisal. One system of
appraising performance that appears to be growing in popularity is the 360-degree
feedback system. As the name implies, this method uses multiple appraisers, including
supervisors, subordinates, and peers of the target person. In some cases, it also includes
self-appraisals. The appraisal is 360-degree feedback in that information is collected and
feedback is provided in full circular fashion – top to bottom and back to the top.
Many organisations now utilise some form of 360-degree feedback programmes. The
programme at British Aerospace is typical (Ivancevich 1998, 271). The upward portion of
the feedback programme involves an anonymous system whereby team members provide
information about their supervisors, using a questionnaire. Then, these results are collated
so that a report can be prepared for the manager. Anonymity is generally considered
important, except in an environment where there is an exceptionally high degree of trust.
Ivancevich (1998) further argues that research does suggest that including upward and
peer feedback in an appraisal can have positive effects on managers’ behaviour. Further,
he argues that these effects seem to be sustainable over time. Thus, there appears to be a
future for 360-degree feedback. These programmes were originally believed to be useful
to develop feedback, but more and more companies seem to be using it for helping with
personnel decisions such as merit pay increases and promotions. However, some authors
have pointed out that improper attempts to introduce 360-degree systems into climates
not prepared for them (for example, where there is a low level of trust or too much
competition) can have predictably disastrous effects.

Activity
Examine the performance appraisal schemes (at least one each from the public, private
and non-profit or non-government sectors) in your country and write a comparative
account on the strengths and weaknesses of each scheme.

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4 Feedback on Performance
Feedback is conceptually objective information about adequacy of one’s own job
performance. It serves two basic functions called instructional and motivational. In its
instructional function it clarifies the role or teaches new behaviour as when an accountant
for example is advised to handle a certain entry as capital item rather than as an expense
item or when a college professor is led to replace reading assignments with take home
writing assignments for first year law students. Secondly, feedback can well serve as a
motivational factor when the boss compliments an employee verbally with a promise of a
reward for successfully completing a project before deadline.
An effective feedback system entails the following basic elements: a set of performance
standards, a mechanism for monitoring performance and finally the act of providing
objective feedback. It is said that self control or regulation is the desired end result for all
feedback control systems.

4.1 Feedback Model

A conceptual feedback model on job performance may be composed as follows.
Sources of feedback Behavioural outcomes
• Other employees Recipient’s perception of feedback
• Task & cognitive evaluation • Direction
• Self of feedback • Efforts
• Persistence
• Resistance

(Source: Taylor et al., 1984)

The above conceptual model indicates that employees receive feedback from a variety of
sources, namely, peers, subordinates, supervisors and outsiders, the task itself and
oneself. Self managed persons and those with high self-confidence rely on own personal
feedback more than others. The presence of multiple sources for feedback may leave an
employee bombarded by feedback from all sources and this would require that the
recipient establish some means of screening them.
In most situations, the request for feedback information as perceived by the employee
comes too late and with no effect on performance. The typical example is when a
restaurant server asks the question from the guest, ‘How was every thing?’ before
presenting the bill. This probing question should have been asked while eating was in
progress, where the guest would respond instead of turning a deaf ear. Hence, managers
need to consider the situational variables in the feedback system.
The most critical factor in the feedback is whether it is positive or negative. It is critically
important to consider the ultimate impact of the feedback on the employee’s motivation
and behaviour. Certain kinds of negative feedback (e.g., the employee being told that his
or her performance is below average) can have a positive impact on improving

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performance when the employee takes it as a challenge and sets higher goals to pursue.
However, care must be taken when giving negative feedback to minimise the threat
content to avoid creating undesirable insecurity and defensiveness.

4.2 Cognitive Evaluation of Feedback

People cognitively evaluate factors such as accuracy, the credibility of the source, the
fairness of the system of appraisal, the performance-reward expectancies and the
reasonableness of the standards set by the organisation. Any feedback that fails to clear
one or more of these cognitive hurdles, will be rejected or down played by the employee.
Personal experiences of the employee largely dictate how these will be considered and
weighed. In a performance appraisal system, the credibility of the source of the feedback
is determined by three crucially important perceptions about the provider:
trustworthiness, expertise and dynamism. It is said that belief in the credibility of the
manager providing the feedback is what matters most in the performance appraisal
feedback system.
Expectancy Motivational Theory suggests that a proper feedback system must foster the
belief that high effort in attaining performance expectancies leads to performance
rewards, if it is to motivate desired behaviour from the employee. Hence, evidence of a
powerful linkage should be inbuilt in the chain of activity, efforts, and performance and
be made evident and reinforced by the performance appraisal feedback system.

5 Reasons for Malfunction or Failure

There is room for any system or function, including performance appraisals, to
malfunction at some point in time. Many managers are aware of this and have heeded the
warning of experts to ‘beware.’ Let us examine some of the problems that performance
appraisal can develop and ways to avoid them. Generally, the problems are concerned
with system design and operation, the appraiser, and the employee.

5.1 System Design and Operating Problems

Poor design can be the cause of some performance appraisal systems failing or
malfunctioning. The design can be blamed if the criteria for appraisal are poor, the
technique used is cumbersome, or the system is more form than substance. If the criteria
used focus on activities instead of output results, or on the person rather than
performance, performance appraisal will be faulty. These will be explained as you
proceed. Some appraisal techniques take a long time to do or require extensive written
analysis, both of which many managers resist. If this is the problem, another technique
can be chosen.

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5.2 Problems with the Appraiser
Even if the system is well designed, problems can arise if the appraisers (usually
supervisors) are not cooperative and well trained. Supervisors may not be comfortable
with the process of appraisal, or what Douglas McGregor called playing God. Often this
is because they have not been adequately trained or they have not participated in the
design of the programme. Inadequate training of appraisers can lead to any one of the
recognized appraiser problems outlined below.

5.2.1 The Halo Effect

The halo effect appears in appraisal when the appraiser tends to assign ·the same rating
or level to each factor being rated for an employee. This results from an overall
assessment of the person that totally colours the appraiser’s view of the employee.
Appropriate supervisory training can reduce halo problems, which are present more in
some techniques (e.g., graphic rating scales) than in others.

5.2.2 Standards of Appraisal

Appraisal standards may also cause problems in performance appraisal. This arises be-
cause of perceptual differences in the meaning of the words used to evaluate. Thus, good,
adequate, satisfactory, and excellent may mean different things to different appraisers. If
only one appraiser is used the appraisal can be distorted, and there may be a constant
error between the two. Also in work situations this is not practical. In many systems there
is a tendency to rate persons higher than they should be, especially if negative ratings
must be explained to employees. Training of the appraisers plus review of the appraisal
patterns by the appraiser’s superiors can reduce this problem somewhat.

5.2.3 Central Tendency

Some appraisers rate all their personnel within a narrow range. Although there are actual
performance differences between individuals, supervisors may rate them all either
average or above average. This distorts the results for promotion and compensation
decisions. The problem is most likely to be found with graphic rating scales. Appraiser
training probably would help this problem, too.

5.2.4 Recent-behaviour Bias

One difficulty with many of the appraisal systems is the time frame of the behaviour
being evaluated. Appraisers forget more about past behaviour than current behaviour.
Thus many persons are evaluated more on the results of the past several weeks than on
six months’ average behaviour. You would have noticed that some employees are well
aware of this difficulty. If they know the dates of the appraisal, they make it their
business to be visible and noticed in many positive ways for several weeks in advance.
This fault in appraisal can be mitigated by using a technique such as critical incident or
management by objectives (MBO) or by irregularly scheduled appraisals.

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5.2.5 Personal Biases
Various studies have indicated that appraisers’ biases can influence their appraisals of
employees. If appraisers like certain employees better than others, this can influence the
ratings they give. This problem is related to the effects of prejudices against groups of
people. Some studies indicate that sexual and racial stereotypes can creep into appraisals
and discriminate certain communities. Effective training of appraisers removes these
biases. Some appraisal techniques (such as forced choice, field review, performance tests,
and MBO) tend to reduce this problem. It is the manager’s responsibility to examine the
patterns of appraisal and promotion to determine if there might be systematic
discrimination at appraisal time and take steps such as supervisory training or discipline
to reduce this bias.
You would have observed through the topics discussed above that many appraiser
problems can be solved by training the appraiser. This training is of two types: how to
rate effectively and how to conduct effective appraisal interviews. It has been clearly
established that appraiser training reduces rating errors. You should note that the quality
of the appraiser is more important to effective appraisal than the technique used. Training
alone will not eliminate all appraiser problems, just as driver training does not eliminate
speeding and accidents. But appraiser training, combined with good system design, can
make performance appraisal more effective.

5.3 Employee Problems with Performance Appraisal

For the appraisal system to work well, the employees must understand it, must feel it is
fair, and must be work oriented enough to care about the results. If the system is not
explained to the employees so that they understand it, they will not work well. One way
to foster this understanding is for the employees to participate in system design and be
trained to some extent in performance appraisal. Reflect upon the scheme of appraisal
used to evaluate your performance. Do you feel that you participated in the design of it?
Another is the use of self-appraisal systems. With regard to fairness, performance
appraisal is in some ways like grading systems in schools. How would you react if you
got a lower mark than you had hoped you would get? You may get angry or give up.
Similar responses can come from employees as well, if the performance appraisals are
incompetent or unfair.
Performance appraisal may also be less effective than desired if the employee is not work
oriented and sees work only as a means to ends sought off the job. It might be seen only
as paper work, unless the appraisal is so negative that the employee fears termination.
Reaction to positive and negative feedback varies depending on a series of variables: (1)
the importance of the task and the motivation to perform it, (2) how highly the employee
rates the appraiser, (3) the extent to which the employee has a positive self-image, and (4)
the expectancies the employee had prior to the appraisal; for example, did the employee
expect a good appraisal or a bad one?

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Let us briefly see how performance appraisal can be a useful personnel activity. Whether
formal appraisal becomes a problem for an enterprise or has a positive influence on it
depends on four factors:
• When appraisal takes place – the timing (when to do it and how often)
• Who evaluates – the appraisers (there can be several supervisors and the HR
department personnel)
• What is evaluated – the criteria for appraisal (some examples are, quality of work,
quantity of work and employee’s interpersonal relations; however, the criteria
should be relevant, unbiased, significant and practical)
• How appraisal takes place – the appraisal technique (individual appraisal
methods, multiple-person appraisal methods and other methods)

Activity
Why is performance appraisal difficult to implement? Review the reasons outlined above.

6 Job Evaluation
In addition to relating pay levels to those paid for comparable jobs in other enterprises,
the enterprise must also determine pay structures for its employees having different jobs
within the organisation. Factors similar to those affecting pay levels affect these pay
structures too.
Managers can cope with the attempt to provide equal pay for positions of approximately
equal worth by arbitrary management decisions, collective bargaining, or job evaluation.
If managers try to make these decisions without help from tools such as job evaluation, it
can result in unsystematic decision-making that is likely to lead to perceived inequities.
Decisions based on bargaining alone can lead to outcomes based solely on relative power.
Therefore, most management experts suggest that compensation decisions be based on
systematic job evaluation, influenced by the results of collective bargaining. Later on in
this course, you will be discussing collective bargaining; let us now discuss job
evaluation.

6.1 Definition
What do you understand by the term ‘job evaluation’? Job evaluation is the formal
process by which the relative worth of various jobs in the organisation is determined for
pay purposes. Essentially, it attempts to relate the amount of the employee’s pay to the
extent that her or his job contributes to organisational effectiveness (Glueck, 1978).
You will not find it easy to evaluate the worth of all the jobs in an enterprise. Take the
example of a physician and a nurse’s aid. It may be obvious that the effective physician

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will contribute more to the goals of patient care in the hospital than the nurse’s aid; what
is important is how much the differential is worth. Since it is difficult to compute how
much a particular job contributes to organisational effectiveness, proxies for effectiveness
are used.
Let us see what these proxies are. These are skills required to do the job, amount and
significance of responsibility involved, effort required, and working conditions.
Compensation must be in keeping with the differing demands of various jobs if
employees are to be satisfied and if the organisation is to be able to attract the personnel
it wants.
You should also know how job evaluation is done. It is usually performed by analysing
job descriptions and occasionally job specifications. Early in the process, it is imperative
that job evaluator check the availability and accuracy of the job descriptions and
specifications. It is usually suggested that job descriptions be split into several job series,
such as managerial, professional, and technical, clerical and operative.
The next step is to select and weight the criteria used to evaluate the job. Typical factors
frequently used for job evaluation are education, experience, amount of responsibility,
job knowledge, and work hazards and working conditions. It is however important that
the factors used are accepted as valid for the job by those being evaluated.
Once the method of evaluating the job (discussed below) is chosen, evaluators make job
evaluations. As those familiar with the jobs tend to rate them higher, especially if they
supervise the jobs, it is useful for each committee member to evaluate each job
individually. Then the evaluators should discuss each job on which the ratings differ
significantly, factor by factor, until agreement is reached.

6.2 Job Evaluation Methods

The four most frequently used job evaluation methods are:
1. job ranking
2. factor comparison
3. classification
4. the point system
Although there is little research in the area, it appears that the four methods do about
equally reliable jobs of evaluation.

6.2.1 Job Ranking

The simplest system, used primarily in smaller, simpler organisations, is job ranking.
Instead of analysing the full complexity of jobs by evaluating parts of jobs, the job
ranking method has the evaluator rank order whole jobs, from the simplest to the most
challenging. Because of problems you will see below, ranking is probably the least
frequently used method of job evaluation.

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The evaluator sorts the jobs into ranks, allowing for the possibility of ties. If the list of
jobs is large, the paired-comparison method, whereby each job is compared to every
other job being evaluated, can be used. The evaluator counts the number of times a
particular job is ranked above another, and the one with the largest number of highest
rankings is the highest ranked. There is no assurance that the ranking thus provided is
composed of equal-interval ranks. The differential between the highest job and next
highest may not be exactly the same as that between the lowest and next lowest. If the
system is used in an enterprise with many jobs to be rated, it is clumsy to use, and the
reliability of the ratings is not good.

6.2.2 Factor Comparison

At the other extreme is the most complex (and the next least frequently used) system: the
factor comparison method. This is probably the most costly, and it is probably slightly
more reliable than the other methods. The factor comparison method requires five steps.
1. Choose the key jobs to be evaluated. These jobs are well known in the enterprise and,
in the opinion of the evaluators, are properly paid, at present.
2. Rank the key jobs on important factors of job evaluation. These factors usually are
mental requirements, skill requirements, physical requirements, responsibility, and
working conditions.
3. Divide up the current pay among the factors. Thus, the rater is asked: If the jobs pay
US$8.00 per hour, how much of the US$8.00 is for mental requirements? and so on.
4. Reconcile the differences in rankings found in steps 1 and 2 by the committee
members.
5. Place the key jobs on a scale for each factor. This becomes the basis for evaluating
non-key jobs in the structure.

6.2.3 Classification or Grading System

This system used in many levels of governments groups a set of jobs into a grade or
classification. Then these sets of jobs are ranked in levels of difficulty or sophistication.
The classification approach is more sophisticated than ranking but less so than the point
system or factor comparison. It can work reasonably well if the classifications are well
defined. It is the second most frequently used system.

6.2.4 The Point System

Most job evaluation plans use the point system, not only because it is more sophisticated
than ranking and classification systems but also because it is relatively easy to use.
Essentially, the point system requires evaluators to quantify the value of the elements of a
job. On the basis of the job description or interviews with job occupants, points are
assigned to the degree of various factorsfor example, skill required, physical and
mental effort needed, degree of dangerous or unpleasant working conditions involved,

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and amount of responsibility involved in the job. When these are summed, the job has
been evaluated. Most point systems evaluate about ten aspects of each job. The aspects
chosen should not overlap, should distinguish real differences between jobs, should be as
objectively defined as possible, and should be understood and acceptable to both
management and employees. Because not all aspects are of equal importance in all jobs,
different weights reflecting the differential importance of these aspects to a job must be
set. These weights are assigned by summing the judgments of several independent but
knowledgeable evaluators. Thus a clerical job might result in the following weightings:
education required, 20 percent; experience required, 25 percent; complexity of job, 35
percent; responsibility for relationships with others, 15 percent; working conditions and
physical requirements, 5 per cent.

Self-Assessment Question
What do you understand by the term ‘job evaluation’? How is it different from
‘performance appraisal’?

7 Compensation
Compensation is part of a transaction between an employee and an employer that results
in an employment contract. From the employee’s side, pay is a necessity in life.
Compensation received for work is one of the chief reasons people seek employment. Pay
is the means by which they provide for their own and their family’s needs. Pay can do
more than provide for the physiological needs of employees. It can also serve their
recognition needs.
Compensation is one of the most important functions in the HR functions for the
employer, as well. Compensation claims a large part of the cash flow in an enterprise. It
may be the major method used by an enterprise to attract the employees needed to get the
work done, as well as a means to try to motivate more effective performance.

7.1 Definition
Compensation is the monetary reward paid by an enterprise for the work
done by an employee.
You should note that compensation or pay is only one way: the employee is rewarded for
work. Work also provides benefits, promotions and status, intrinsic rewards of the job,
and other rewards. The relative importance of pay to the other rewards varies with the
employee.

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7.2 Objectives of Compensation
The objective of a compensation system is to create a system of rewards that is equitable
to the employer and employee alike, so that the employee is attracted to the work and
motivated to do a good job for the employer. Glueck (1978) cites Thomas Patten who
suggests that in compensation policy there are seven criteria for effectiveness. The
compensation should be:
Adequate: Minimum governmental, union, and managerial levels should be met.
Equitable: Each person is paid fairly, in line with his or her effort, abilities, training, and
so on.
Balanced: Pay, benefits, and other rewards provide a reasonable total reward package.
Cost effective: Pay is not excessive, considering what the enterprise can afford to pay.
Secure: The employee’s security needs relative to pay and the needs which pay satisfies
are met
Incentive providing: Pay motivates effective and productive work.
Acceptable to the employee: The employee understands the pay system and feels it is a
reasonable system for the enterprise and himself.

7.3 Compensation Decision Makers

Three groups of managers are involved in compensation decisions. The first are HR
executives; the HR department develops the pay system and administers it. For smaller
enterprises, the personnel specialist does this as part of the total job. When an enterprise
has more than about 500 employees, a compensation manager (also called wage and
salary administrator) may be made responsible for the compensation activity. The
compensation administrator is a consultant, coordinator, catalyst, and implementer of the
system, which is designed in conjunction with top managers and the chief HR/personnel
executive.
Secondly, operating managers make the raise decisions, but a crucial factor is the policy
decisions made by the third group, top management. They determine the pay policies of
the enterprise (for example, pacesetter or follower in the industry). Top managers make
the decisions that determine the total amount of the budget that goes to pay, the form pay
will take (time versus incentive) and other pay policies such as raise levels, secrecy and
communication policies, security in pay policies, and executive compensation.
Compensation decisions, then, generally are made by operating management (as advised
by HR/personnel) and administrated and implemented by HR/personnel.

7.4 Compensation Decisions

How do you think pay is determined? Do you believe that pay can be determined by a
manager and employee sitting down and talking it over, or do you think the government

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or unions determine pay. In fact, pay is influenced by a series of internal and external
factors.
Pay can be determined absolutely or relatively. There is a school of thought that a pay
system set by a single criterion for a whole nation or the world, an absolute control of
pay, is the best procedure. However, attempts to use this approach, was not a great
success. Since absolute pay systems are not used, the pay for each individual is set
relative to the pay of others.
Glueck (1978) cites Allen Nash and Stephen Carrol who point out that pay for a
particular position is set relative to three groups. These are:
• Employees working on similar jobs in other enterprises (Group A).
• Employees working on different jobs within the enterprise (Group B).
• Employees working on the same job within the enterprise (Group C).
The decision to examine pay relative to group A is called the pay-level decision. Let us
look at this first. The objective of the pay-level decision is to keep the enterprise
competitive in the labour market. The major tool used in this decision is the pay survey.
The pay decision relative to group B is called the pay-structure decision and uses job
evaluation, a topic discussed earlier. The decision involving pay relative to group C is
called individual pay-determination.

8 Methods of Payment

8.1 Payment for Time Worked

Employees can be paid for the time they work, the output they produce, or a combination
of these two factors. The great majority of employees are paid for time worked, in the
form of wages or salaries. Pay surveys are used to establish competitive pay for the
industry, and job evaluation is the principal method for setting time-pay schedules. Then
pay ranges, pay classifications, and similar tools are developed for individual pay
determination, the final step in a time-based pay system.
Typically, most employees are paid salaries; exceptions are blue-collar and some clerical
employees, who are paid hourly wages. One issue in the time-pay system is whether
everyone should be paid a salary. Would you rather be paid strictly by the hour and not
know your income week to week, month to month, or be paid a salary so you could plan
your life? In general, most blue-collar employees are given hourly pay, but there has been
a movement to place all employees on salaries and give them the same benefits and
working conditions others have. The advantage claimed for this move is that blue-collar
workers become more integrated into the enterprise, and this improves the climate of em-
ployee relations.
But if everyone goes on salaries, it is possible that the long-run security of positions will
be diminished. With hourly workers, if business is down it is relatively easy for an

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enterprise to reduce the hours worked daily or weekly, save the labour costs, and adjust to
the realities of the marketplace. If everyone is on salary, management tends to look
toward full layoffs or reduction in the labour force by attrition or terminations. Salaries
for everyone changes labour costs from variable to fixed, and this can have serious
employment security implications.
The success of a total-salaries program requires stable, mature, responsible employees, a
cooperative union, willing supervisors, and a work load that allows continuous
employment.

8.2 Incentive Plans

The methods for paying employees on the basis of output are usually referred to as
incentive forms of compensation. Incentives can be paid individually, to the work group,
or on an enterprise wide basis. Incentive compensation assumes it is possible and useful
to tie performance directly to pay.

8.3 Individual Incentives

The oldest form of compensation is the individual incentive plan, in which the employee
is paid for units produced. Today, the individual incentive plan takes several forms:
piecework, production bonus and commissions. These methods seek to achieve the
incentive goal of compensation. One or more of these methods may be there in your
workplace as well.
Straight piecework usually works like this: an employee is guaranteed an hourly rate
(probably the minimum wage) for performing an expected minimum output (the
standard). For production over the standard, the employer pays so much per piece
produced. This is probably the most frequently used incentive pay plan. The standard is
set through work measurement studies, as modified by collective bargaining. The base
rate and piece rates may develop from pay surveys.
A variation of the straight piece rate is the differential piece rate. In this plan, the
employer pays a smaller piece rate up to standard and then a higher piece rate above the
standard. Experience shows that the differential piece rate is a more effective incentive
than the straight piece rate, although it is much less frequently used.
Production bonus systems pay an employee an hourly rate, and then a bonus when the
employee exceeds standard.
Commissions are paid to sales employees. Straight commission is the equivalent of
straight piecework and is typically a percentage of the price of the item. A variation of
the production bonus system for sales is to pay the salesperson a small salary and
commission or bonus when she or he exceeds standard (the budgeted sales goal).

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Individual incentives are used more frequently in some industries (clothing, steel,
textiles) than others (lumber, beverage, bakery), and more in some jobs (sales,
production) than others (maintenance, clerical).
For incentive schemes to work, they must be well designed and administered. It has been
observed that incentive plans are likely to be more effective under certain circumstances.
These are when:
• The task is liked.
• The task is not boring.
• The supervisor reinforces and supports the system.
• The plan is acceptable to employees and managers and probably includes them in
plan design.
• The standards are carefully designed.
• The incentive is financially sufficient to induce increased output.
• Quality of work is not especially important.
• Most delays in work are under the employees’ control.

8.4 Group Incentives

Piecework, production bonuses, commissions and other individual incentives can also be
paid to groups of individuals. This might be done when it is difficult to measure
individual output, when cooperation is needed to get production, and when management
feels this is a more appropriate unit on which to base incentives. Group incentive plans
also reduce administrative costs. Group incentive plans are used less frequently than
individual incentive plans.

8.5 Enterprise Incentive Schemes

Four approaches to incentive plans are used at the enterprise level: suggestion systems;
company group incentive plans; profit sharing; and stock ownership plans.

8.5.1 Suggestion Systems

Most large and medium-size enterprises have suggestion systems designed to encourage
employee input for improvements in enterprise effectiveness. Typically, the employee
submits the suggestion in writing, perhaps placing it in a suggestion box. If, after being
screened by a committee, the idea is tried and proven useful, the employee receives a
financial reward. If the savings due to the idea are hard to compute, the employee is given
a standard reward. If they are measurable, the employee receives a percentage of the first
year’s savings, typically 10 to 20 percent.
Effective administration of the suggestion program is essential to its success. The reasons
for rejecting a suggestion must be carefully explained to the submitter. If a group idea is

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successful it is useful to reward the whole group rather than an individual. In general,
suggestion systems seem to be useful incentive plans.

8.5.2 Company Group Incentive Plans

Several enterprises have developed elaborate group incentive and participation schemes,
which generally have been quite successful. For these plans to succeed, management
must be willing to encourage and work with participating workers. All workers must
provide their fair shares of suggestions and work. The union must develop a new degree
of cooperation. It is likely to be more successful in organisations that are less than
gigantic. It also has worked well in troubled companies that provide the necessary
conditions of participation, communication, and identification.

8.5.3 Profit Sharing Plans

Essentially, profit sharing is the payment of a regular share of company profits to
employees as a supplement to their normal compensation. Many enterprises do this today.
Profit sharing plans divide a set percentage of net profit among employees. The
percentage varies, but 25 per cent is about normal. The funds can be divided equally
based on the base salary or job grade, or in several other ways. The profit share can be
paid often (such as quarterly) or less frequently (such as yearly), or deferred until
retirement.
Advocates of profit sharing contend that the plans successfully motivate greater
performance by employees. Many firms also see profit sharing as a way to increase
employee satisfaction and quality workmanship and to reduce absenteeism and turnover.
Essentially, they contend that employees who have profit-sharing plans identify more
closely with the company and its profit goal, and thus they reduce waste and increase
productivity.
There are problems with profit sharing. First, an enterprise cannot share what it does not
have; and in bad years, there are no profits to share. The employees may have cut costs
and worked hard, but perhaps a recession slowed sales and thus profits, or management
chose an expensive but ineffective marketing programme. Profit sharing has had limited
success because of the difficulty of tying individual rewards to effort and the problems
raised when there are no profits to share. The plans probably are more successful in
smaller firms.

8.5.4 Stock Ownership Plans

Many companies encourage employee purchase of company stock (often at advantageous
prices), to increase employees’ incentives to work, satisfaction, and work quality, and to
reduce absenteeism and turnover. Purchase plans often allow for payroll deductions or
company financing of the stock. Sometimes, the company will agree to buy the stock
back at a guaranteed rate if it appears that the employee would take a significant loss.
Companies use these plans for the same reasons as they do profit sharing plans: when
employees become partners in the business, they work harder.

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Some of these plans are very successful. But in general, stock purchase plans have most
of the disadvantages of profit sharing. It is hard for an employee to identify his working
harder with an increase in the value of his stock.

8.6 Executive Compensation

8.6.1 Executive Pay
One of the most controversial groups in terms of designing reward structures is the CEOs
of large privately held firms. It is well known that they make many times as the average
worker and according to Ivancevich (1998), especially in medium sized and small
corporations, the ratio with the average worker is 15:1 or less. While the executive pay is
of interest to stockholders, managers and other employers, the basis upon which it is built
has been changing. Traditionally, executives’ salaries were based on the competitive-pay
approach. Companies within and across industries would act as if they were engaging in a
price war, trying to outbid each other with fat pay envelopes for proven performers.
Today, executive pay packages are more likely to be based on comparative performance.
This new pay design has five underlying principles (Ivancevich, 1998):
1. Compensation committees made up of stockholders and company directors link
CEOs’ pay to returns to shareholders.
2. Variable performance-based pay is emphasised over guarantees.
3. CEOs are encouraged to invest in company stock.
4. Performance yardsticks are linked to actual key productivity indices, to the
competition, or to both.
5. CEOs are held responsible for the cost of capital; this forces them to look for vehicles
of growth rather than just amass personal wealth.
As CEOs are paid very high salaries, shareholders and other stakeholders are holding
CEOs to a tighter standard. They expect CEOs to take a personal risk basing their own
pay on their ability to perform, investing their own money in the business, and to provide
candid disclosures about both arrangements.

8.6.2 Executive Perks

In addition to the pay, executives receive special perquisites and extras commonly called
perks. In different countries these may vary, but generally they include: better office
decor; choice office location; a company car; reserved parking; a car for personal use;
and first-class air tickets. In this block, the details are covered under the topic of
employee benefits.

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8.6.3 Bonuses
As you may already know, a bonus is a compensation payment that supplements salary
and can be paid in the present or in the future, in which case it is called a deferred bonus.
The size of bonuses and long-term payments relative to salary clearly changes with the
size of the chief executive officer’s company. The larger the company, the greater is the
proportion of incentive awards making up total annual compensation.
A majority of large firms pay bonuses, on the belief that this leads to better profitability
and other advantages for enterprises. Bonuses involve large expenditures of funds; they
vary from 80 per cent of top executive’s salaries to 20 per cent of the salaries of lowest
levels participants.

Activity
What are the different schemes of compensation implemented in your country? Compare
with the schemes outlined above.

9 Employee Benefits
What do you understand by benefits? Let us look at a definition.

9.1 Definition
Employee benefits and services are a part of the rewards (including pay and promotion)
that reinforce loyal service to the employer. Major benefits and services programmes
include pay for time not worked, subsidised insurance, subsidised retirement and services
(Glueck, 1978). This definition is a bit vague because the term ‘benefits and services’ is
applied to hundreds of programmes.
Let us also see why benefits and services programmes are offered to employees? The
programmes offered in work organisations today are the product of efforts in this area for
the past 30 years. Some employers provide these programmes for labour market reasons;
that is, to keep the enterprise competitive in recruiting and retaining employees in relation
to other employers. Or they may provide them to keep a union out, or because the unions
have won them. Another reason often given is that they are provided because they
increase employee performance.

9.2 Reasons for Using Fringe Benefits

Beardwell and Holden (1998) list some of the reasons for using fringe benefits:
• Most fringe benefits do not attract tax and therefore can be advantageous for
employer and employee, particularly the high earner.

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 • Some benefits can be provided cheaply through economies of scale.
• Some benefits are needed to facilitate the execution of the job duties of the
employee: for example, company cars for sales representatives, and special
equipment or clothing.
• Some companies may be able to offer discounts on their own products or services,
for example, banks and building societies, retailers, car manufacturers, etc.

9.3 Cafeteria Benefits

There appears to be a movement towards flexible compensation schemes more com-
monly known as ‘cafeteria benefits.’ (Beardwell and Holden, 1998). Cafeteria benefit
schemes operate by setting a ‘price’ for each level of the selected benefits within a menu
and each employee is allocated a budget to spend on benefits, expressed as credits, points
or cash amounts. Thus employees are able to decide which benefits they prefer and how
to balance the amount of cash pay to benefits.
Though companies have not adopted ‘cafeteria benefits’ on a large scale, Beardwell and
Holden provide some of the objectives of those employers who do introduce flexible
benefit schemes:
• to ensure flexibility in the compensation package to improve retention and
recruitment;
• to offer employees the rewards they desire and thereby increase their motivation;
• to maintain ‘value for money’ with the benefits provided;
• to create single status employment.

9.4 Basic Types of Benefit

According to Beardwell and Holden (1998), the following are the basic types of benefit.
• Company cars - Britain seems to be unique in the provision of cars as a managerial
status symbol. However, recent evidence suggests the supply of cars is no longer so
widespread in Britain.
• Subsidised meals and/or the supply of canteen facilities.
• Holiday entitlements.
• Opportunities for foreign travel
• Telephone costs.
• Discounted, or the provision of, insurance.
• Private health care, dental treatment and eye tests.
• Crèches.
• Office accommodation and facilities that may indicate a certain level of status.

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• Sabbaticals.
• Sports/social facilities that can encourage identification with the company.
• Discount and company purchase plans where employees can purchase goods at a
favourable price.
• Assistance with housing, i.e., company owned houses, house-moving expenses and
assistance with house purchase.
• Help with educational courses.
• Pension schemes.
Companies need to recognise what they want to achieve from the provision of each
benefit and understand the motivational characteristics of each benefit for their own
employees.

10 Summary
When people perform in jobs their performance needs to be appraised or evaluated. This
is called performance appraisal. Performance appraisal or appraisal can be defined as a
formal, and structured system of measuring, evaluating and assessing an employee’s job
related attributes, behaviours and outcomes as well as absenteeism, by the management to
discover how productive the employee is and whether the employee can continue to
perform in future in achieving an organisation’s goal.
In general, managers of most organisations use performance appraisal information for
multiple purposes in human resource management, such as salary administration,
performance feedback, documentation of personnel decisions, recognition of individual
performance, identification of poor performance and promotional decisions.
A strong performance appraisal process providing systematic feedback, linked to a
reward system, can channel employee’s efforts into strong job performance with
sustainable growth of productivity. A weak and uncoordinated performance appraisal
linking to equally weak feedback and reward systems can surely lead to poor results.
There are different approaches to performance appraisal. This block has discussed three:
trait, behavioural and results approaches.
Different methods are used in performance appraisal and each of them will have its
advantages and disadvantages. Therefore, a manager will have to carefully select the
method appropriate for the organisation and the person being appraised. In recent times,
360-degree feedback programmes have been used. Feedback is conceptually objective
information provided to employees about the adequacy of their job performance.
We noted that there can be system design errors of various types that will defeat the
purpose of performance appraisal. Also problems can arise if the evaluators (usually
supervisors) are not cooperative and well trained. Inadequate training of evaluators can
lead to a series of problems in the execution of their roles. These are the halo effect,

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standards of evaluation, and personal biases. Various studies have indicated that
evaluators’ biases can influence their evaluation of employees. There also can be
problems with the system of evaluation due to employees not being aware of the system
fully.
Job evaluation is the formal process by which the relative worth of various jobs in the
organisation is determined for pay purposes. It is usually performed by analysing job
descriptions and occasionally job specifications. Typical factors frequently used for job
evaluation are, education, experience, amount of responsibility, job knowledge, and work
hazards and working conditions. The four most frequently used job evaluation methods
are: job ranking, factor comparison, classification or the grading system and the point
system.
Compensation is the monetary reward paid by an enterprise for the work done by an
employee. Work also provides benefits, promotions and status, intrinsic rewards of the
job, and other rewards. The importance of pay relative to the other rewards varies with
the employee. The objective of a compensation system is to create a system of rewards
that is equitable to the employer and employee alike, so that the employee is attracted to
the work and motivated to do a good job for the employer. Pay, benefits, and other
benefits provide a reasonable total reward package.
Employees can be paid for the time they work, the output they produce, or a combination
of these two factors. The great majority of employees are paid for time worked, in the
form of wages or salaries.
Finally, this block has discussed a variety of employee benefits and services that form an
overall reward structure (including pay and promotion) that reinforces loyal service to the
employer.

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11 References and Further Reading
Beardwell, I. & Holden, L. (Eds.) 1998. Human resource management: a contemporary
perspective. New Delhi: Macmillan India Limited.
Cole, G. A. 1991. Personnel management, theory and practice. London: ELBS/DP
Publications.
Glueck, William F. 1978. Personnel: a diagnostic approach. Dallas: Business
Publications, Inc.
Ivancevich, J. M. 1998. Human resource management (7th ed.). Boston: Irwin McGraw-
Hill.
Jacobsre, B. & Keye, B.L. January 1986. Career development & performance appraisal:
It takes two to tango. Personnel.
Kreitner, R & Kinicki, A. 1992. Organizational behavior. Burr Ridge, NY: Irwin.
Taylor, S.M., Fisher, C.D. &. Ilgen, D.R. 1984. Individual reactions to performance
feedback in organizations: a control theory perspective. In Rowland, K. M. et al. (Eds)
Research in personnel and human resource management, Vol. 2. Greenwich, Conn.: JAI
Press.
Vinson, M. N. 1996. The pros and cons of 360-degree feedback: making it work.
Training and Development. April, 11-12.
Wesley, K. N. & Klimoski, R. 1984. Performance appraisal-an update. In Rowland, K.
M. et al. (Eds) Research in personnel and human resources management (Vol. 2).
Greenwich, Conn: JAL Press.

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