Module-II

Performance Appraisal :-

It is the process of measuring quantitatively and qualitatively an employees’ past or present

performance against the background of his expected role performance, the background of his work
environment, and about his future potential for an organization. It is a process of collecting, analyzing
and evaluating data relative to job behavior and results of individuals.

Definition :- Performance appraisal is a formal structured system of measuring and evaluating an

employee’s job related behavior and outcomes to discover how and why the employee is presently
performing on the job and how the employee can perform more effectively in the future so that the
employee, organization and society will benefit.

Features of PA:-

1. It is a systematic process consisting of a number of steps to be followed for evaluating an employee’s

strength and weakness in terms of job.

2. It is an ongoing and continuous process where the evaluations are arranged periodically.

3. It seeks to secure information necessary for making objective and correct decisions on employees.

4. It determines whether a subordinate’s responsibilities can be expanded

5. It identify future training and development needs.

6. Review progress toward goals and objectives

7. Determines readiness for promotion

8. Motivate and guide growth and development

Objectives of PA :-

1. Work –Related objective :-

i) To assess the work of employees in relation to job requirements

ii) To improve efficiency

iii) To help management in fixing employees according to their capacity, interest, aptitude and
qualifications.

iv) To carry out job evaluation.

2. Career Development Objectives :-

i) To assess the strong and weak points in the working of the employees and finding remedies for weak
points through training.

ii) To determine career potential

iii) To plan promotions, transfers, lay offs etc of the employees

iv) To plan career goals.

3. Communicational Objectives :-

i) To provide feedback to employees so that they come to know where they stand and can improve their
job performance

ii) To clearly establish goals i.e. what is expected of the employee in terms of performance and future
work assignments

iii) To provide coaching, counseling, career planning and motivation to employees

iv) To develop positive superior-subordinate relations and thereby reduce grievance.

4. Organizational objectives :

i) To serve as a basis for promotion or demotion

ii) To serve as a basis for wage and salary administration and considering pay increases and increments

iii) To serve as a basis for planning suitable training and development programs

iv) To serve as a basis for transfer or termination in case of reduction in staff strength.

PA Process :-

It should be done on the basis of certain standards or criterion fixed in advance. Unless a proper
process is used for evaluation, it will not give good results.

The process of PA’s are :-

1. Establishing Standards :- Organizations need to measure employee performance to determine

whether acceptable standards of performance are being maintained. The six primary criteria on which
the value of performance may be assessed are : quality, quantity, timeliness, cost effectiveness, need for
supervision and interpersonal impact. These standards will help in setting yardsticks for evaluating
performance.

2. Communicating Standards to employees :- The standards set for performance should be

communicated t the employees. They should know what is expected from them. When the standards
are made known to employees, they will try to make their performance equal or above them.
3. Measuring Actual performance :- The performance may be measured through personal observation,
Statistical reports, oral reports, Written reports etc.

4. Comparing Actual with Standards :- The actual performance is compared to the standards set earlier
for finding out the standing of employees. The employee is evaluated and judged by his potential for
growth and advancement.

5. Discussing Reports with employees:- The assessment reports are periodically discussed with
concerned employees. The weak points, good points and difficulties are indicated for helping employees
to improve their performance. It also influence their attitude and work in future.

6. Taking Corrective Action :- One corrective action may be in the form of advice, counsel, warning etc.
Other action may be in the form of additional training, refresher courses, delegation of more authority,
special assignments, coaching etc.

Methods of Performance Appraisal :-

There are generally two broad category mentioned about the methods of PA. These are :-

Traditional Methods :-

1. Confidential Report:- It relates to the performance, ability and character of the employee during a
year. It is pure subjective , A very casual attitude is found among raters while filling confidential reports
of the employees working under them. Here no feedback is provided to the employee bring appraised
and therefore, its credibility is low. This method focuses on evaluating rather than developing the
employee. In most of the government offices and public enterprises, performance appraisal is done
through this process.

2. Graphic Scales Method :- A rating scale lists traits and a range of performance values for each trait.
The supervisor rates each subordinate by circling or checking the score that best describes his
performance for each trait. The assigned values for the traits are then totaled. The selection of factors to
be measured on the graphic rating scales is an important point under this system.

Rating scales are of two types viz. continuous and discrete. In continuous scale the degree of a trait are
measured in numbers ranging from 0 to 5 whereas in a discrete scale, appropriate boxes or squares are
used.

3. Straight Ranking Method:-In this method, Every is judged as a whole without distinguishing the rates
from his performance. A list is then prepared for ranking the workers in order of their performance on
the job so that an excellent employee is at the top and the poor at the bottom. It permits comparison of
all employees in any single rating group regardless of the type of work.

4. Paired Comparison Method :-In this method every person is compared trait-wise, with other persons,
one at a time, the number of times one person is compared with others is tallied on a piece of paper.
These numbers help in yielding rank orders of employees.
5. Grading System :- Under this system certain features like analytical ability, Co-operativeness,
dependability, job-knowledge etc. are selected for evaluation. The employees are given grades
according to the judgement of the rater.

6. Forced distribution Method :- This system is based on the presumption that all employees can be
divided into five categories i.e. Outstanding, above average, average, below average and poor. The rater
is asked to place 10% persons in outstanding group, 20% in above average, 40% in average, 20% below
average and 10% in poor category. The main idea in this system is to spread ratings in a number of
grades.

7. Check list Method :- A check list is a list of statements that describes the characteristics and
performance of employees on the job. The rater checks to indicate whether the behavior of an
employee is positive or negative to each statement.

There are three types of check lists that can be used :-

a. Simple Check List :- Under this method the supervisors are provided with printed forms containing
descriptive questions about the performance of employees. The supervisor has the answer in yes or no.
After ticking these questions the forms are sent to Personnel Department where final rating is done

b. Weighted Check List :- In this method, weights are assigned to different statements to indicate their
relative importance.

c. Forced Choice Check list :- In this check list, five statements are given for each trait, Two most
descriptive statements, two least descriptive statements and one neutral statements. The rater is
required to tick one statement each from the most descriptive and less descriptive ones.

Example:-

i) Always regular

ii) Informs in advance for absence or delay

iii) Never regular

iv) Remains absent without prior notice

v) Neither regular nor irregular.

8. Critical Incident Method :- this methods attempts to measure worker’s performance in terms of
certain-events or incidents that occur in the course of work. The assumption in this method is that the
performance of the employee on the happening of critical incidents determines his failure or success.

9. Free Essay Methods :- Here the supervisor continuously watches the subordinates and writes his
assessment in the report. The rater generally considers the following factors :-

i) Job knowledge and potential of the employee

ii) Employee’s relations with co-workers and supervisors

iii) Employee’s traits and attitudes

iv) Employee’s understanding of the company’s programs, policies, objectives etc.

v) Developments needs for future

10. Group Appraisal :- Here, employees are rated by an appraisal group, consisting of their supervisor
and three or four other persons who have some knowledge of their performance.

11. Field review Method :- Under this method, an expert from the personnel department interviews line
supervisors to evaluate their respective subordinates. The supervisors is required to give his opinion
about the progress of his subordinates, the level of the performance of each subordinates, his
weakness, good points, outstanding ability, promotability and the possible plans of actions in case
requiring further considerations. The questions are asked and answered verbally.

Modern Methods :-
Modern concerns use the following methods for the performance appraisal :

1. Assessment Centre :- A assessment centre is a central location where in the managers may come
together to participate in job related exercises evaluated by trained observers. The principle idea is to
evaluate managers over a period of time, by observing and later evaluating their behavior across a series
of select exercises or work samples, Managers are asked to participate in in-basket exercises, work
groups(without leaders) computer stimulations, role playing and other similar activities. After recording
their observations, the raters meet to discuss these observations. The decision regarding the
performance of each manager is based upon the discussion of observation. Self appraisal and peer
evaluation are also used in for final rating.

2. Human Resource Accounting :- Human Resource Accounting method attaches money value of a
firm’s internal human resources and its external customer goodwill. Under this method, performance is
judged in terms of costs and contributions of employees. Costs of human resources consists of
expenditure on human resource planning, recruitment, selection, induction, training, compensation etc.
Contribution of human resources is the money value of labor productivity or value added by human
resources. Difference between cost and contribution will reflect the performance of employees.

3. Behaviorally Anchored Rating Scale(BARS) :- It is a combines the benefits of critical incidents and
graphic rating scales by anchoring a scale with specific behaviorally examples of good or poor
performance. Developing a BARS typically requires five steps :-

a. General Critical Incidents :-Persons who know the job being appraised are asked too describe specific
illustrations of effective and ineffective performance.
b. Develop Performance Dimensions :- These people then cluster the incidents into a smaller set of
performance dimension. Each cluster such as “conscientiousness” is thus defined.

c. Reallocate Incidents :- Another group of people who also know the job then reallocate the original
critical incidents.

d. Scale the Incidents :- The second group is generally asked to rate the behavior described in the
incident as to how effectively or ineffectively it represents performance on the appropriate dimension.

e. Develop final Instrument :- Systematically clustering incidents into 5 or 6 performance dimensions,

helps in making the dimensions more independent of one another.

4. Management By Objectives (MBO) :- It requires the managers to set specific measurable goals with
each employee and then periodically discuss his progress towards these goals. It can be a modest scale
with subordinates and superiors jointly setting goals and periodically providing feedback. MBO almost
always refers to a comprehensive, organization wise goal setting and appraisal programs that consists of
the following steps :-

i) Set the Organization’s Goals :- Establish an organization wise plan for next year and set goals.

ii) Set Departmental Goals :- In this step departmental heads and their superiors jointly set goals for
their departments.

iii) Discuss Departmental Goals :- Every employee should state how can he contribute to the
department’s attaining its goals.

iv) Define Expected Results(Set Individual Goals) :- Department heads and their subordinates set short
term performance target.

v) Performance Reviews(Measure the results) :- Department heads compare the performance of each
employee with expected results.

vi) Provide Feed back :- Department heads hold periodic performance review meetings with
subordinates to discuss and evaluate the latter’s progress in achieving expected results.

5. 360 Degree Performance Appraisal :- This technique involves a systematic collection of performance
data on an individual or group, derived from a number of stake holders. The stake holders being the
immediate supervisors, team members, customers, peers and self. In fact anyone who has useful
information on “how an employee does the job” may be one of the appraisers. By design this appraisal
is effective in identifying and measuring interpersonal skills, customer satisfaction and team building
skills.

6. Computerized and web Based Performance Appraisal :- These programs enable the managers to
keep notes on subordinates during the year and then to electronically rate them on a series of
performance traits. Electronically performance monitoring(EPM) is in some respects ultimate in
computerized appraisals. In EPM, the supervisors electronically monitor the computerized data an
employee is processing per day, and thereby monitors his performance.

Errors in Performance Appraisal :- Difference in perception and value

systems influence evaluations. For instance, two raters observe an employee disagreeing with a
supervisor. One perceives this as insubordination, but the other sees it as a willingness to stand up for
what he believes in. Individual rater bias can seriously compromise the credibility of an appraisal. Some
of the common syndrome are :-

1. Halo effect :- This is a tendency to let the assessment of a single positive trait influence the evaluation
of the individual on other traits too. For example, an employee demonstrates a high degree of
dependability and from this behavior, a comparable high degree of integrity is inferred.

2. Horns effect :- This is a tendency to allow one negative trait of the employee to color the entire
appraisal. This results in an overall lower rating than may be warranted.

3. Leniency or Constant error :- Depending upon the appraiser’s own value system which acts as a
standard, employees may be rated leniently or strictly. Some appraisers consistently assign high values
to all employees, regardless of merit. This is a leniency error. The strictness tendency is a reverse
situation, where all individuals are rated too severely and performance is understated.

4. Central tendency :- This is the most common errors that occurs when a rater assigns mainly middle
range scores or values to all individuals under appraisal. Extremely high or extremely low evaluations are
avoided by assigning “average ratings” to all.

5. Spill over effect :- This refer to allowing past performance to influence the evaluation of present
performance

6. Personal Bias :- it is observed that very few people are capable of objective judgments entirely
independent of their values and prejudice.

Legal issues in PA.

Performance appraisal is used as the basis of so many HR decisions like promotions, dismissals, tran
sfers etc. The appraisal system is a common target of legal disputes by employees, involving charges of
unfairness and personal biases. Moreover, legal does not always mean ethical, but ethics should also
play a role in an appraisal. Most employees find that the appraisers can stick to the rules and do lawful
performance review but still fail to provide honest assessment.

Several recommendations have been made over the years to assist the employers in conducting fair
performance appraisal and to avoid legal suits. The recommendations are

1. Legally defensible appraisal procedure :-

a. Every organization should have a formal standardized performance appraisal system.

b. There should be uniformity in the application of performance appraisal process for all the employees
within a job group.

c. Employee should be aware and knowledgeable about all specific performance standard.

d. All the employees should be given opportunity to review their appraisal results.

e. There should be a formal appeal process whereby an employee can question the rating given by the
appraiser.

f. Supervisor(Appraiser) should be trained to use the appraisal instruments properly.

g. All HR decision makers should be well informed about the anti discrimination laws.

2. Legally Defensible Appraisal content :-

a. Job Analysis should be conducted to establish the performance appraisal contents.

b. Appraisal based on traits (e.g. loyalty, honesty) should be avoided.

c. Objectivity verifiable performance data e.g. turnover, productivity etc. should be used as far as
possible.

d. Subjective ratings should be used only as one component of the overall appraisal process.

e. The performance dimensions should be assigned weights to reflect their relative importance in
calculating the composite performance score.

f. Constraints on an employee’s performance that are beyond the employee’s control should be
prevented from influencing the appraisal to ensure that the employee has an equal opportunity to
achieve any given performance level.

3. Legally Defensible documentation of appraisal results

a. A written documented record of all information and reasons bearing on any HR decisions should be
properly maintained.

b. Written documentation for extreme ratings should be maintained and it must be consistent with
numerical ratings.

c. All the raters should follow consistent documentation requirements

4. Legally defensible appraiser(Raters)

a. The raters should be trained in or thoroughly instructed in “how to use an appraisal system”

b. The raters should have substantial daily contact with the employees they are rating.
c. Whenever possible, have more than one rater conduct the appraisal and conduct all such appraisals
independently.

d. One rater should never have the absolute authority to determine an HR action.

Potential Appraisal
The potential appraisal refers to the appraisal i.e. identification of the hidden talents and skills of a
person. The person might or might not be aware of them. Potential appraisal is a future – oriented
appraisal whose main objective is to identify and evaluate the potential of the employees to assume
higher positions and responsibilities in the organizational hierarchy. Many organisations consider and
use potential appraisal as a part of the performance appraisal processes.

The purposes of a potential review are:

1. to inform employees of their future prospects;

2. to enable the organisation to draft a management succession programme;
3. to update training and recruitment activities;
4. to advise employees about the work to be done to enhance .their career opportunities.

Techniques of potential appraisal:

1. Self – appraisals

2. Peer appraisals

3. Superior appraisals

4. MBO

5. Psychological and psychometric tests

6. Management games like role playing

7. Leadership exercises etc.

Potential appraisal helps to identify what can happen in future so that it can be guided and directed
towards the achievement of individual and organizational growth and goals. Therefore, potential should
be included as a part of the Performance appraisal in organisations.

Facts [+]
The Potential for Improving Performance, or PIP, measures the performance of the average worker
versus the best person performing a particular task. Large differences suggest that performance can be
improved by bringing average performance up closer to the best performance. Small differences suggest
little potential for improvement.

The following are some of the requirements and steps to be followed when introducing a potential
appraisal system:

Role Description: A good potential appraisal system would be based on clarity of roles and functions
associated with the different roles in an organisation. This requires extensive job descriptions to be
made available for each job. These job descriptions should spell out the various functions involved in
performing the job.

Qualities Required: Besides job descriptions, it is necessary to have a detailed list of qualities required
to perform each of these functions. These qualities may be broadly divided into four categories –

(1) technical knowledge and skills, (2)managerial capabilities and qualities, (3) behavioural capabilities,
and (4)conceptual capabilities.

Indicators of Qualities: A good potential appraisal system besides listing down the functions and
qualities would also have various mechanisms for judging these qualities in a given individual. Some of
the mechanisms for judging these qualities are - (a) rating by others, (b) psychological tests, (c)
simulation games and exercises, (d) performance appraisal records.

Organising the System: Once the functions, the qualities required to perform these functions, indicators
of these qualities, and mechanisms for generating these indicators are clear, the organisation is in a
sound position to establish and operate the potential appraisal system. Such establishment requires
clarity in organisational policies and systematisation of its efforts.

Feedback: If the organisation believes in the development of human resources it should attempt to
generate a climate of openness. Such a climate is required for helping the employees to understand

their strengths and weaknesses and to create opportunities for development. A good potential appraisal
system should provide an opportunity for every employee to know the results of assessment. He should
be helped to understand the qualities actually required for performing the role for which he thinks he
has the potential, the mechanisms used by the organisation to appraise his potential, and the results of
such an appraisal.

A good potential appraisal system provides opportunities continuously for the employee to know his
strengths and weaknesses. These are done through periodic counseling and guidance sessions by either
the personnel department or the managers concerned. This should enable the employee to develop
realistic self-perceptions and plan his own career and development. Potential Appraisal Vs. Performance
Appraisal
Potential Appraisal is forward looking process whether performance appraisal is backward looking
process. Any good or worse assessment results of performance appraisal may not be a good factor for
potential appraisal. But current performance of an employee could show evidence somewhere whether
he/she is flexible for new working conditions.

Job Evaluation :-
Job evaluation is a systematic technique which aims at determining the worth of a job. It is an objective
evaluation for ascertaining the value of each job for fixing their remuneration. Job evaluation rates the
job not the man. It considers the demands of the job in terms of efforts and abilities but does not take
into account individual abilities and efforts.

Objectives of Job Evaluation :- As per an ILO report the aim of the majority systems of job
evaluation is to establish on agreed logical basis the relative values of different jobs in given plant or
industry.

1. To know the worth of each job of the organization.

2. To determine upon a standard procedure for determining the relative worth of each job in the plant.

3. To determine fair and equitable wage structure in the plant, industry and place.

4. To ensure that equal wages are paid to persons with equal qualification.

5. To ensure utmost job satisfaction to all employees.

6. To provide a sound basis for consideration of wage rates for similar jobs in industry and community.

7. To provide a fair change for all employees for advancement.

8. To provide information for devising good methods of recruitment, selection and training.

9. To help in introducing standardization in wage differentials.

Principles of Job Evaluation :-

The main objective of job evaluation is to pay for each job according to its difficulties.

1. Rate the job and not the man. Each element should be rated on the basis of requirements of the job.

2. The elements selected for rating purpose should be easily explainable in terms that would avoid any
overlapping.

3. The elements should be clearly defined and properly selected.

4. Any job rating program must be told to foremen and employees.

5. Foremen should participate in the rating of jobs in their own departments.

6. The employees will give maximum cooperation to job evaluation program if they have an opportunity
to discuss job rating.

7. In talking to foremen and employees any discussion of value should be avoided.

8. Too many occupational wages should not be established.

Process Of Job Evaluation:-

The process of job evaluation involves the following steps :-

1. Gaining Acceptance :- Before undertaking any program of job evaluation, the top management

must explain the aims and uses of the program to the employees and unions.

2. Constituting job evaluation Committee :- A Committee consisting of experienced and respected

representatives of management and workers and outside experts should be constituted, to set

the ball rolling.

3. Selection of key jobs for evaluation :- Certain key jobs are evaluated in detail and the other jobs

are compared with the key jobs.

4. Job Description :- It defines the title of the job, analyses the job into its constituent tasks and

records why, how and when these are done, states the responsibilities involved and conditions

of employment for each job.

5. Selecting the Method of Evaluation :-

6. Classifying jobs :- The relative worth of various jobs in an organization may be found out after

arranging jobs in order of importance using criteria like : Skills-mental and manual, Experience,

Efforts & Initiative, Working conditions, Responsibilities involved, Supervision required.

7. Installing the Program :- Once the evaluation process is over and a plan of action is ready,

management must explain it to employees and put it into operation.

8. Periodic Review :- Periodic review will enable management to update job description in the light

of technological and other changes. It will also help to assuage the feelings of employees who

believe that their work was not properly evaluated.

Employee Compensation :-
One of the most difficult functions of human resource management is that of determining the rates of

monetary compensation. Compensation is any form of payment given to employees in exchange for

work they perform.

Financial payment made at or near the place where work is performed is called “direct compensation”

e.g. wages, salaries, overtime pay, commissions, and bonuses.

Benefits like leave travel concession and holidays, health care, insurance and pensions are forms of

deferred or indirect compensation.

The factors of compensation systems are :-

a. While other aspects of human resource systems like training, carrer management are important

to some employees , compensation is considered crucial almost everyone.

b. One of the goals of compensation system is to motivate employees, yet there is tremendous

variation in the value different individuals attach to specific reward or package rewards.

c. Compensation systems consist of many components. These are to be properly co-ordinated and

balanced.

d. A number of central and state rules and regulations affect compensation systems.

e. Empoyees either directly or through collective bargaining arrangements, may desire to

participate in the determination of compensation.

f. The cost of living varies considerably in different regions.

Compensation Function :-
a. Compensation can serve to attract qualified applicants to the organization

b. Compensation helps to retain competent employees in the organization.

c. It serves as an incentive to motivate employees to put forth their best effort.

d. Minimizing the costs of compensation can also contribute to organizational effectiveness.

Compensation Objectives :-
a. To enable the employee to earn a good and reasonable salary or wage

b. To pay equitable sums to different individuals, avoiding anomalies

c. To reward and encourage high quality work and output

d. To encourage employees to develop better methods of working and their acceptance.

e. To discourage overtime working unless it is very essential.

f. To increase or maintain morale/satisfaction of employees.

Compensation Policy :-
The aim of compensation statement is to set down the company’s policy with

regard to salary. A compensation policy should aim :-

a. To recognize the value of all jobs in relation to each other within the company.

b. To take account of wage rates paid by companies of similar size, product and philosophy.

c. To ensure stable earning.

d. To enable individuals to reach their full earning as far as is reasonably practicable.

e. To ensure employees’ share in the company’s prosperity as a result of increasing efficiency.

A compensation policy of an organization should be transparent, fair, performance oriented and market

oriented. It should promise employee motivation and be aligned with enterprise strategy.

Types of Compensation :-
1. Financial Compensation

a. Direct Method

i) Basic Salary

ii) Bonus

iii) Allowances

iv) Incentives

b. Indirect method
i) Leave Policy

ii) Overtime Policy

iii) Hospitalization

iv) Insurance

v) Leave Travel

vi) Retirement Benefits

vii) Holiday Homes

2. Non Financial Compensation :-

a. Achievement

b. Recognition

c. Responsibility

d. Influence

e. Personal Growth

The following principles should be followed for an effective wage and salary administration.

1. Wage policy should be developed keeping in view the interests of all concerned parties viz.

employer, employees, the consumers and the society.

2. Wage and salary plans should be sufficiently flexible or responsive to changes internal and

external conditions of the organization.

3. Differences in pay for jobs are based on variations in job requirements such as skill,

responsibility, efforts and mental & physical requirements.

4. Wage and salary administration plans must always be consistent with overall organizational

plans and programs.

5. Wage and salary administration plans must be in conformity with the social and economic

objectives of the country.

6. These plans and programs should be responsive to the changing local and national conditions

7. Workers should be associated, as far as possible, in formulation and implementation of wage

policy.

8. An adequate data base and a proper organizational set up should be developed for

compensation determination and administration.

Factors Influencing Wage and Salary Administration :-

External Internal
1. Demand & Supply Ability to pay
2. Cost of living Job requirement
3. Trade union’s Bargaining Power Managerial strategy
4. Government Legislation The Employee( performance, Seniority,
Experience, Potential, Luck)

5. Psychological and social factors

6. Economy
7. Technological development
8. Prevailing Market Rates

Steps in Compensation Administration :-

i) Analysis of the job

ii) Evaluation of the job

iii) Developing the pay structure

iv) Survey of wages and salary

v) Pricing the job

vi) Compensation Revision and Control

Challenges in Compensation Administration :-

1. Multiplicity of compensation systems:- Some external employees are getting salary & Wages by
the agencies or the third party which may cause disparities. Internal inequity between

compensation level and structure is widely prevalent between permanent and temporary

employees.

2. Structural Inflexibility Prevents Talents Attraction:

3. Compensation is more than money :- Apart from the monetary benefits the organization should

give some other benefits like promotion, appreciation, re-assignment etc. to address the

physical, social and psychological needs of individual employees.

4. Human Capital perspectives :- Compensation is an investment on acquiring and retaining human

capital like investments made on plant, machineries and other technologies.

5. Lack of Strategic Alignment:- Unless compensation is linked to strategy, compensation cannot be

managed appropriately. The organizational strategy should determine what to pay, when to pay

and how to pay for possessing a motivating and motivated workforce.

6. Cultural Issues

7. Increased Benefits

Method of Wage Determination :-

Usually, the steps involved in determining wage and salary rates are as follows:-

1. Job Analysis :- A job analysis describes the duties, responsibilities, working conditions and

interrelationships between the job as it is and the other jobs with which it is associated. A job is

rated in order to determine its value in relation to all other jobs in the organization which are

subject to evaluation.

2. Conduct the salary Survey :- Employers use salary surveys in three ways

a. Survey data are used to price bench mark jobs that anchor the employer’s pay scale and

around which the other jobs are slotted, based on their relative worth to the firm.

b. Some jobs of an employer’s position are usually priced directly in the market place.

c. Survey on benefits like insurance, sick leave and vacations to provide a basis for
decisions regarding employee benefits.

Salary survey provide many kinds of useful information about differences in wage levels for

particular kinds of occupations.

3. Group Similar jobs into Pay Grades :- A pay grade is comprised of jobs of approximately equal

difficulty or importance as determined by job evaluation.

4. Price Each Pay Grade :- Assigning pay rates to each pay grade is usually accomplished with a

wage curve. The wage curve depicts graphically the pay rates currently being paid for jobs in

each grade. The purpose of wage curve is to slow the relationship between

a. The value of the job as determined by one of the job evaluation methods and

b. The current average pay rates for the grades.

5. Fine Tune Pay Rates :- Most employers do not pay just one rate for all jobs in a particular pay

grade. Instead, they develop rate ranges for each grade so that there might be different levels

and corresponding pay rates within each pay grade.

Concept of Wages :-
Wage is the remuneration paid by an employer under written or unwritten contract

of employment for work done or to be done, or for services rendered or to be rendered,

Wage differentials :- Wage differentials means differences or disparities in wages. Wages differ in

different employments or occupations, industries and locations and also between persons in the same

employment or grade. Wage differentials may be :

1. Occupational Differentials :- The reasons for occupational wage differentials can varying

requirements of skill, knowledge, demand, supply situation, degree of responsibilities involved

etc.

2. Inter firm Differential :- Inter firm differentials reflect the relative wage levels of workers in

different plants in the same area and occupation. The reason for inter firm differentials are

ability of employer to pay, employees’ bargaining power, degree of unionization, skills needs
etc.

3. Inter-Area Differentials :- Such differentials arise when workers in the same industry, and in the

same occupational group, but living in different geographical areas are paid different wages. In

some cases these differentials are used to encourage planned mobility of labor.

4. Inter-personal wage Differentials:- These differentials are between workers working in the same

plant and the same occupation. These may be due to differentials in sex, skills, age, knowledge

or experience.

Pay Structure :- Pay structures provide a framework for managing pay. It provides a framework
for the implementation of reward strategies and policies within an organization. These define

the different levels of pay for jobs or groups of jobs by reference to their relative internal value

as determined by job evaluation.

Factor Affecting Pay structures :-

1. Corporate Culture and values

2. Management Philosophy

3. External Economic Environment

4. External Socio-political and legal environment

Wage & Wage Theories

Several terms have acquired currency referring to the wage levels:

i. Statutory minimum wage :- A minimum wage notified by the government under the Minimum Wages
Act, 1948 for different scheduled employments.

ii. The base or base minimum wage The minimum wage, The fair wage ,
The living wage:- A minimum wage drawn by an unskilled worker in an organized industry as a result of
wage settlement which is purely the result of hard bargaining

iii. The need based minimum wage:- Need-based minimum wage determined as per the norms
prescribed by the 15th Session of Indian Labour Conference
A. Need-based Minimum Wage :-To calculate the minimum wage, the committee accepted the
following five norms and recommended that they should guide all wage-fixing authorities, Including
minimum wage committees, wage boards and adjudicators. In calculating the minimum wage, the
standard working class family should be taken to consist of three consumption units for one earner.
Minimum food requirements should be calculated on the basis of a net intake of 2,700 calories

B.Clothing requirement should be estimated at a per capita consumption of 18 yards per annum which

could give for the average workers’ family of four, a total of 72 yards In respect of housing, the norm

should be the minimum rent charged by government in any area for houses provided under the

subsidised industrial housing scheme for low-income groups. Fuel, lighting and other miscellaneous

items of expenditure should constitute 20% of the total minimum wages.

C. Fair Wage:- The Encyclopedia of Social Sciences describes a “fair wage” as one equal to that

received by workers performing work of equal skill, difficulty or unpleasantness .The Committee on Fair

Wages stated that the fair wage was something between a minimum wage and a living wage. The lower

limit of a fair wage must obviously be the minimum wage, the upper limit is equally set by what may

broadly be called the capacity of the industry to pay

D. Living Wage:- Justice Higgins defined living wage as one appropriate for “the normal needs of

the average employee, regarded as a human being living in a civilized community”. There are three

possible ways of obtaining some indication as to what constitutes a living wage: It should be sufficient to

pay for a satisfactory basic budget. It should be sufficient to purchase the minimum theoretical needs of

a typical family, calculated in accordance with some more or less scientific formula It should be

comparable with a living wage already established in similar circumstances. It is a difficult task to fix a

living wage in terms of money as it differs from country to country and from time to time, according to

national economy and social policies. It is obvious that the concept of a living wage is not a static

concept; it is expanding

E. Money and Real Wages :- Wages earned by employees are normally expressed in terms of

money.

There are two aspects of wages:

Money wage and Real wage According to Adam Smith money

wage level is determined and regulated by the interaction between supply and demand of necessaries,

on the one hand and the supply and demand of labour, on the other.

Subsistence Theory:- This theory states that in the long run, wages would tend towards that
sum which is necessary to maintain a worker and his family. While Adam Smith and David Ricardo
argued that it is the growth of population which brings down wages to the level of minimum
subsistence, Karl Marx argued that subsistence wages emerge because of the phenomenon of
unemployment and “the reserve army of labour” Malthus held that wages were bound to remain at the
subsistence level because any increase in wages would bring about an increase in population

Wage Fund Theory:- This theory stated that at any given moment, wages are determined by
the relative magnitude of the workforce and the whole or a certain part of the capital of the country.
The wages are paid from a fixed ‘wage fund’. According to John Stuart Mill, wage was a variable
dependent on the relation between the laboring population and the aggregate funds set aside by the
capitalists to pay them.

Marginal Productivity Theory. This theory focused on demand for labour. Marginal
productivity theory explains not only the general level of wages but the entire wage structure of a highly

competitive economy in terms of interaction of supply and demand. As a demand theory of wages, the

marginal productivity theory fails to make full allowance for the particular nature of supply curves for

labour

The Residual Claimant Theory:- Francis A. Walker has propounded this theory of wages as a
part of residual surplus which is left after other factor charges have been met. This theory was designed
to emphasize the interest of the working class in continual process and accumulation. It does not explain
how trade unions are able to increase the wages. This theory does not consider the aspect of labour

market and the role of labour in productivity

Bargaining Theory:- This theory was propounded by John Davidson. According to him, wages are

determined by the relative bargaining power between workers or trade unions and employers and basic

wages, fringe benefits, job differentials and individual differences tend to be determined by the relative

strength of the organization and the trade union. Bargaining has received considerable attention in view

of the fact that wages are now being determined by collective groups of workers organized into trade
unions and employers organized into employers’ association. Collective bargaining may be seen as the

process through which labour supply and demand are equated in the labour market. Walton and Mc

Kersie identified four bargaining sub-processes: Intra-organization bargaining

Distributive bargaining

Integrative bargaining

Attitudinal bargaining

Employment Theory:- There are essentially two schools of thought which propounded the
interrelationship

between wages and employment. According to Pigou, unemployment would disappear if

the workers were to accept a voluntary cut in wages. John Maynard Keynes, in his theory of

employment, advocated wage rigidity in place of wage flexibility. Voluntary of employment would not

doubt increase, if the cut in money wages is applied to a single industry

Exploitation Theory:- Adam Smith suggested the basis of an exploitation theory as the original state

of things in which the whole produce of labour belonged to the labourers and when there were no

landlords nor masters to share with them. Starting with Ricardo’s notion that labour creates all value,

Marx contended that profit, interest, and rent are unwarranted deductions from the product that labour

alone creates

Labour Theory of Value:- According to Marx, the simplest concept which related to man’s activity of

producing his means of livelihood was human labour. He considered labour as an article of commerce

which could be purchased on payment of subsistence price. The price of any product was determined by

the labour time needed for producing it. His theory is also known as surplus value theory of wages

Competitive Theory:- The competitive theorists assume that neither employers nor employees

combine together to influence demand or supply conditions and that markets are perfect. Unfortunately

these do not hold good in the case of a monopolistic world market. The forces of demand and supply

may be affected by government intervention in the regulation of wages, the application of awards, and

the statutory extension of the provision of collective agreement to employers and workers who were
not parties to them

Low-Wage Labour Market Theory:- There are several conceptual approaches which can be adopted

for analyzing the behavior of low-income labour market

Executive compensation

Executive compensation or executive pay is composed of the financial compensation and other
nonfinancial awards received by an executive from their firm for their service to the organization.

It is typically a mixture of salary, bonuses, shares of 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.

The three decades starting with the 1980s, saw a dramatic rise in executive pay relative to that of an

average worker's wage in the United States,

and to a lesser extent in a number of other countries.

Observers differ as to whether this rise is a natural and beneficial result of competition for scarce

business talent that can add greatly to stockholder value in large companies, or a socially harmful

phenomenon brought about by social and political changes that have given executives greater control

over their own pay.

Executive pay is an important part of corporate governance, and is often

determined by a company's board of directors

Executive Compensation is a broad term for the financial compensation awarded to a firm's
executives.

Executive Compensation packages are designed by a company's Board of Directors, typically by the

Compensation Committee consisting of independent directors, with the purpose of incentivizing the
executive team, who have a significant impact on company strategy, decision-making, and value

creation (Pay for Performance) as well as enhancing Executive Retention. To help accomplish these

goals, Executive Compensation has four distinct characteristics:

1. Pay Package Design: Executive pay arrangements typically consist of six distinct compensation

components: salary, annual incentives, long-term incentives, benefits, perquisites and

severance/change-in-control agreements.

2. Equity Compensation: The majority of compensation of most executive pay packages comes in

the form of company stock.

3. Performance-Contingent Pay: Executive pay packages are designed so that the bulk of an

executive's compensation is contingent on a company achieving pre-established criteria of

specific financial results and/or strategic objectives.

4. Vesting Schedules: Even after financial or strategic criteria for an award is met, full ownership of

the equity award are often conditioned on the executive's compliance with certain covenants.

Executive Compensation plan characteristics and design are heavily influenced by elements of Corporate

Management and Federal Law.