Flipped Classroom – HRM – Batch D
Unit 3 – Performance Appraisal and Compensation
Performance Appraisal - Purpose and Factors affecting performance appraisal - Process and Methods - Factors
that distort performance appraisal - Potential Appraisal - Compensation across Industries - Objectives of
Compensation Planning - Principles and Techniques of Pay Fixation (Components of Pay Structure in India and
select countries) - Job Evaluation Methods - Incentive Schemes - Compensation Innovations.
Performance Appraisal
A performance appraisal is a systematic and periodic process of measuring an individual’s work
performance against the established requirements of the job. It’s a subjective evaluation of the employee’s
strengths and weaknesses, relative worth to the organization, and future development potential.
Purpose of Performance Appraisal
• Evaluate employee performance.
• Identify strengths and areas for improvement.
• Provide feedback for career development.
• Determine rewards, promotions, and training needs.
Factors Affecting Performance Appraisal
• Job Description: Clear job roles and responsibilities.
• Performance Criteria: Specific, measurable, achievable, relevant, and time-bound (SMART) goals.
• Feedback Mechanisms: Regular feedback and communication channels.
• Training and Development: Continuous learning opportunities.
• Managerial Bias: Addressing biases in rating and evaluation.
• Organizational Culture: Supportive environment for performance improvement.
Performance Appraisal Process
• Goal Setting: Establishing performance expectations.
• Monitoring: Regularly tracking employee performance.
• Evaluation: Assessing performance against set criteria.
• Feedback: Providing constructive feedback to employees.
• Rewards and Recognition: Recognizing and rewarding good performance.
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Methods of Performance Appraisal
• 360-Degree Feedback: Feedback from multiple sources (peers, supervisors, subordinates).
• Management by Objectives (MBO): Setting goals and evaluating based on achievements.
• Behaviorally Anchored Rating Scales (BARS): Using specific behavioral indicators for assessment.
• Critical Incident Technique: Focusing on critical events to evaluate performance.
• Graphic Rating Scales: Using scales to rate performance on various criteria.
Factors That Distort Performance Appraisal
• Halo Effect: Generalizing positive or negative traits across all aspects of performance.
• Leniency/Strictness Bias: Consistently rating employees too high or too low.
• Recency Bias: Giving more weight to recent events or performance.
• Central Tendency Bias: Rating all employees as average regardless of performance.
• Personal Bias: Allowing personal feelings or prejudices to influence ratings.
Potential Appraisal
• Assessing employees' future potential and capabilities.
• Identifying high-potential employees for leadership roles.
• Providing development opportunities to nurture potential.
Compensation Across Industries
• Types of Compensation: Salary, bonuses, benefits, incentives.
• Industry Variations: Varied compensation structures based on industry norms and market trends.
• Benchmarking: Comparing compensation packages with industry standards.
• Equity: Ensuring fairness and equity in compensation across industries.
Objectives of Compensation Planning
• Attract and Retain Talent: Offer competitive compensation to attract and retain skilled employees.
• Motivate Performance: Use compensation as a motivator for high performance.
• Fairness: Ensure fairness and equity in compensation practices.
• Cost Control: Manage compensation costs effectively within budget constraints.
Principles of Pay Fixation
• Equity: Fairness in pay relative to job roles and market standards.
• Performance-Based: Linking pay to performance and contributions.
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• Transparency: Clear and transparent pay structures and policies.
• Competitiveness: Offering competitive pay to attract and retain talent.
Techniques of Pay Fixation
• Job Evaluation: Assessing job roles to determine their relative worth and set pay levels.
• Compensation Surveys: Gathering data on industry pay trends to inform compensation decisions.
• Pay for Performance: Rewarding employees based on their performance levels.
• Salary Banding: Grouping jobs into salary bands based on their value and complexity.
Components of Pay Structure in India and Select Countries
India
• Basic Salary: Fixed component of pay.
• Dearness Allowance (DA): Adjusted to account for inflation.
• House Rent Allowance (HRA): Housing-related allowance.
• Variable Pay: Performance-based bonuses or incentives.
• Employee Benefits: Provident Fund (PF), medical insurance, etc.
Select Countries (e.g., USA, UK)
• Base Salary: Fixed pay component.
• Bonuses: Performance-based or annual bonuses.
• Stock Options: Equity-based compensation.
• Benefits: Healthcare, retirement plans, vacation days.
• Perks: Company cars, expense accounts, gym memberships.
Job Evaluation Methods
• Point Factor Method: Assigning points to job factors like skills, responsibilities, and working
conditions.
• Ranking Method: Ranking jobs based on their relative worth or importance.
• Classification Method: Grouping jobs into predefined classes or grades based on job content.
• Factor Comparison Method: Comparing jobs based on key factors like skill requirements and
responsibilities.
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Incentive Schemes
Types of Incentive Schemes
• Monetary Incentives: Bonuses, profit-sharing, commissions.
• Non-Monetary Incentives: Recognition, awards, career advancement opportunities.
• Performance-Based Incentives: Tied to individual or team performance goals.
• Sales Incentives: Commission-based or target-driven incentives for sales teams.
Designing Effective Incentive Schemes
• Clear Objectives: Align incentives with organizational goals.
• Measurable Metrics: Define performance metrics for incentive payouts.
• Timely Rewards: Ensure timely and fair distribution of incentives.
• Communication: Clearly communicate incentive schemes and criteria to employees.
Compensation Innovations
• Flexible Benefits: Allowing employees to customize their benefits package.
• Total Rewards: Including non-monetary rewards like recognition and career development
opportunities.
• Variable Pay Plans: Offering variable pay based on performance, profits, or other metrics.
• Skill-Based Pay: Paying based on employees' skills and competencies rather than job roles.
• Wellness Programs: Including wellness incentives and benefits in compensation packages.
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