Compensation Management

COMPENSATION MANAGEMENT
COMPENSATION MANAGEMENT (MBA)
COURSE OVERVIEW
Accurate and updated information is the primary need of any management practice. Study offers one such means of gathering realistic information. A detail Study of such information and its accuracy presents the usefulness of the information. The study of essentials of management thus forms the basis of all organization designs and is one singular most important subject of study for all managers. It also develops an understanding of the built-in errors of common practice.
The aim of this subject is to develop students understanding of the concepts of management and practice. In particular the subject is designed to develop the underpinning knowledge and skills required to perform complex management functions and the roles. This subject introduces the student to the basics of management. It familiarizes the students with the practice of various management techniques and its expected results. The learner is apprised about the basic principles of management, organization design and structure, strategic management, the theory of leadership, control, decision-making and various aspects of human resource etc.
The students on completion of the course shall develop the following skills and competencies: a. Should know the nature and scope of management b. Knowledge about Planning and Strategic Planning c. Appraisal of the different types of organization structure d. Practice of controlling in organizations e. The role of human resource function f. Role of leadership in organizations
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Copy Right: Rai University
SYLLABUS
Unit : Compensation Management

Unit Value: 4 credits Unit Level: S4 Unit Code: MBAHRM-(ii)
Description of Unit
This module will develop a conceptual framework and the issues related to Compensation Management. It reviews the benefits given to the employees and highlights the latest trends in Compensation Management.The module is aimed at developing a greater understanding of its importance in todays dynamic human resource management environment. fair living wage, basic kinds of wage plans, wage differentials, elements of a good wage plan, , institutional mechanism for wage determination, legalistic framework for wage determination, importance of wage differentials, executive compensation, components of remuneration. Job evaluation and internal equity: nature and objectives of job evaluation, principles of job evaluation program, procedure of job evaluation, basic job evaluation methods, systems, packaged point plans, implementation of evaluated job structure. Principles of External and Internal Differentials Rewards and incentives: determinants of incentives, classification of rewards, incentive payments, objectives of wage incentive schemes, wage incentives in India, types of wage incentive plans, prevalent systems, guidelines for effective incentive plans, non monetary incentives, cafetaria style of compensation, problems of equity; bonus, profit sharing and stock options. Fringe benefits: features of fringe benefits, objectives of fringe benefits and services programme, history and growth factors, coverage of benefits, employee services, fringe benefits in India, benefit programmes for management, administration of benefits and services. Latest Trends in Compensation Compensation surveys, introduction and methodology, uses of compensation surveys, planning compensation for executives and knowledge workers, tax planning, comparative international compensation, downsizing and voluntary retirement scheme, pay restructuring in mergers acquisitions.
Summary of Outcomes
To achieve this unit a student must:
Examine concepts and issues in employee compensation Explain essential elements of a sound compensation
structure.
Summarise principles of external and internal
differentials of compensation
Analyse latest trends in compensation on national and
international level
Contents
Concept and Issues Role of compensation and rewards in the organisation, objectives of compensation and rewards in the organization, framework of compensation policy, labour market characteristics and pay relatives. Essential Elements Compensation structure and differentials: compensation, reward, wage levels and wage structures, wage determination process, wage administration rules, factors influencing wage and salary structure, principles of wage and salaries administration, theory of wages; subsistence theory, wages fund theory, surplus value theory, residual claimant theory, marginal productivity theory, bargaining theory, behavioural theories, minimum and
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Outcomes and Assessment Criteria

Outcomes 1 Examine concepts and issues in employee compensation Assessment criteria To achieve each outcome a student must demonstrate the ability to: Define key concepts related to compensation in a given organisation Distinguish between the economic and behavioural issues related to compensation Compare compensation policies of two different organisation Define key elements of compensation structure Relate job evaluation to internal equity Analyse the role of regulatory bodies associated with wage determination 3 Summarise principles of external and internal differentials of compensation Explain the effect of external equity on employee compensation in business organisations Analyse determination of incentives paid to employees Design performance-linked reward system for service organisation Explain effect of tax planning on compensation administration Analyse socio -economic implications of current compensation trends Assess role of M&A on compensation revisions in MNCs
Academy of Management Executive, Industrial Relations Journal, International Journal of Manpower, California Management Review, Sloan Management Review, Administrative Science Quarterly, Journal of Strategic Information Systems, International Labour Review, Journal of European Industrial Training, Human Relations, British Journal of Management, Journal of Management Development, Journal of Managerial Psychology A variety of videos, which may be useful in covering business communication topics. The business press can be a significant source of information. Companies such as Video Arts However, one of the best sources for information is the World Wide Web sites that can be used for providing information and case studies (eg http://www.bized.ac.uk/ which provides business case studies appropriate for educational purposes). Others are http:// www.businesscases.org/ www.hrmguide.net.
2 Explain essential elements of a sound compensation structure
Suggested Reading
Armstrong, M, Reward Management, Kogan Page Ltd., U.K. Bergman.T.J, Scarpello.V.G, and Hills.F.S., Compensation Decision Making, Dryden Press (1998) Bungess, L.R., Wage and Salary Administration, Charles E.Merril Pub.Co.Columbus (1984) David.B.W, Wage and Salary administration, Prentice Hall, Eaglewood Cliffs (1972) Dunn, J. D., & Rachel, F. M. Wage and Salary Administration: Total Compensation Systems. New York: McGraw-Hill. (1971) Englewood Cliff, New Jersey: Prentice Hall.(1989) Henderson, R, Compensation Management: Rewarding Performance, Prentice Hall (1996) Henderson, R. I. Compensation Management Rewarding Performance, 5th Ed. Kanungo, R N & Mendonca, M, Compensation: Effective Reward Management, 2nd ed., John Wiley & sons (1997) Mamoria.C.B., Gankar.S.V., Personnel Management Text and Cases, Himalaya Publishing House (2002) Martocchio, J. J. Strategic compensation: a human resource management approach. Milkovich, G. T., & Newman, J.M. Compensation, 6th Ed. McGraw- Hill. (1999) New Jersey: Prentice-Hall. (2000)
4 Analyse latest trends in compensation on national and international level
Guidance
Generating Evidence Evidence of outcomes may be in the form of written or oral assignments or tests. The assignments may focus on real problems or case studies. Learning and assessment can be across units, at unit level or at outcome level. Evidence could be at outcome level although opportunities exist for covering more than one outcome in an assignment.
Links
The unit is part of personnel pathway and forms a direct link with other HRM units in the MBA programme, such as, Essentials of Management, Organisational Behaviour, HRM , and other specialisation modules.. Links are also to be found with labour laws
Resources
Journals are a valuable source of information, such as: Harvard Business Review, Human Resource Management Journal, Journal of Management Studies, Personnel Review, International Journal of Human Resource Management, Organisational Dynamics, Journal of Management Sciences,
Delivery
A mixture of lectures to cover basic theory and case studies for class discussion will be used as reinforcement of key concepts
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CONTENT
Unit No. Lesson No. Topic Lesson Plan Course Requirments 1 Lesson 1 Lesson 2 Lesson 3 Lesson 4 2 Lesson 5 Lesson 6 Lesson 7 Lesson 8 Lesson 9 Lesson 10 Lesson 11 Lesson 12 Lesson 13 Lesson 14 Lesson 15 Lesson 16 Lesson 17 Lesson 18 Lesson 19 Lesson 20 Lesson 21 Introduction To Compensation, Rewards, Wage Levels and Wage Structures Introduction to Wage Determination Process and Wage Administration Rules Introduction to Factors Influencing Wage and Salary Structure and Principles of Wage and Salaries Administration Introduction to the Theory of Wages Introduction To Minimum, Fair And Living Wage Introduction To The Minimum Wage Introduction To Basic kinds of Wage Plans Introduction to Wage Differentials & Elements of a Good Wage Plan Introduction to Institutional Mechanism for Wage Determination Legalistic framework for wage determination Introduction to the Importance of Wage differentials and Wage Differentials in India Introduction to Executive Compensation and Components of Remuneration Introduction To Nature and Objectives of Job Evaluation Introduction to Principles and Procedure of job evaluation program Introduction to Basic Job Evaluation Methods/Systems & Packaged Point Plans Introduction To Implementation of Evaluated Job Introduction To Determinants Of Incentives
Page No. vi ix
Introduction to Compensation and Rewards Objectives of Compensation and Rewards Introduction to framework of Compensation Policy labor market characteristics and pay relatives
3 7 12 20
30 34 45 54 57 63 66 71 76 82 92 99 104 111 119 128 133
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CONTENT
Lesson 22 3 Lesson 23 Lesson 24 Lesson 25 Lesson 26 Lesson 27 Lesson 28 Lesson 29 Lesson 30 Lesson 31 Lesson 32 Lesson 33 Lesson 34 Lesson 35 4 Lesson 36 Lesson 37 Lesson 38 Lesson 39 Lesson 40 Introduction to Tax Planning Comparative International Compensation Introduction to Downsizing Voluntary Retirement Scheme Pay Restructuring in Mergers and Acquisitions 222 228 236 243 249 Introduction to Wage incentives in India Introduction to Types of Wage Incentive Plans Introduction to Prevalent systems & Guidelines for Effective Incentive Plans Introduction to Non-Monetary Incentives Introduction to Cafetaria Style of Compensation Introduction to Problems of Equity & Bonus Profit Sharing and Stock Options Introduction To Features of fringe benefits, Objectives of fringe benefits and Services Programme Introduction to History and Growth Factors, Coverage of Benefits Introduction to Employee services & Fringe Benefits in India Introduction to Benefit Programs for Management & Administration of Benefits and Services Introduction to Compensation surveys and Methodology Introduction to Planning Compensation for Executives and Knowledge Workers 216 203 211 193 197 188 162 168 174 178 183 146 154 Introduction to Classification of Rewards, Incentive payments and its Objectives 138
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RAI UNIVERSITY RAI BUSINESS SCHOOL
LESSON PLAN
Program: MBA Session Year 2 Semester 3
Subject Title : Compensation Management

Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n. P * G D T T L Title Name of the Book & Author Page no. Remarks
L*
T*
1 Lesson 1 Role of Compensation and Rewards in the organisation Objectives of Compensation and Rewards Introduction to framework of Compensation Policy Labor Market Characteristics And Pay Relatives Introduction To Compensation, Rewards, Wage Levels and Wage Structures Introduction to Wage Determination Process and Wage Administration Rules Introduction to Factors Influencing Wage and Salary Structure and Principles of Wage and Salaries Administration Introduction To The Theory of wages Introduction To Minimum, Fair And Living Wage Tutorial Activity Introduction To Basic kinds of Wage Plans Introduction to Wage Differentials & Elements of a Good Wage Plan 1 1.5 Personnel Management by CB Mamoria/ SVGankar 432, 433, 459, 490 & 491
Lesson 2 Lesson 3 2 Lesson 4
1 1
1.5 1.5 Course Pack
1.5 Personnel Management by CB Mamoria/ SVGankar Pg 432-458 -
Lesson 5
1.5
Lesson 6 3 Lesson 7
1.5
1.5
Lesson 8 Lesson 9 4 Lesson 10 Lesson 11 Lesson 12
1 2 1 2 2
1.5 1.5 1.5 1.5 1.5
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Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n. P * G D T T L Title Name of the Book & Author Page no.
Remarks
L*
T*
5 Lesson 13 Lesson 14 6 Lesson 15 Introduction to the Importance of Wage differentials and Wage Differentials in India Introduction to Executive Compensation and Components of Remuneration Introduction To Nature and Objectives of Job Evaluation Introduction to Principles and Procedure of job evaluation program Introduction to Basic Job Evaluation Methods/Systems &Packaged Point Plans Introduction To Implementation of Evaluated Job Structure Introduction To Determinants Of Incentives Introduction To Classification of Rewards, Incentive payments and its Objectives Introduction To Wage incentives in India Introduction To Types of Wage Incentive Plans Introduction To Prevalent systems & Guidelines for Effective Incentive Plans Introduction To NonMonetary incentives Introduction To Cafetaria style of compensation Introduction To Problems of Equity & Bonus Profit sharing and Stock options Introduction To Features of fringe benefits, Objectives of fringe benefits and Services Programme 2 1.5 Introduction To Institutional mechanism for wage determination Legalistic framework for wage determination 2 2 1.5 1.5 Course Pack Course Pack
Lesson 16
1.5
Personnel Management by CB Mamoria SVGankar Pg 403-431
Lesson 17 7 Lesson 18
1.5
1.5
Lesson 19
1.5
1.5
1.5
Personnel Management by CB Mamoria SVGankar Pg 459-489 -
Lesson 22 9 Lesson 23 Lesson 24 Lesson 25 10 Lesson 26 Lesson 27 Lesson 28 11 Lesson 29
1.5
3 3 3
1.5 1.5 1.5
3 3 3 1.5 1.5
1.5 Course Pack
1.5
Lesson 30
1.5
Course Pack
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Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n. P * G D T T L Title Name of the Book & Author Page no.
Remarks
L*
T*
Tutorial Introduction To History And Growth factors, Coverage Of Benefits Introduction To Employee services & Fringe Benefits in India Introduction To Benefit Programs For Management & Administration Of Benefits And Services Tutorial Introduction to Compensation surveys and Methodology Introduction To Planning compensation for executives and knowledge workers Introduction To Tax Planning Comparative International Compensation Introduction To Downsizing Voluntary Retirement Scheme Pay Restructuring in Mergers and Acquisitions
1.5 Personnel Management by CB Mamoria/ SVGankar Pg 490-502 -
1.5
Lesson 33
1.5
Lesson 34 13 Lesson 35 Lesson 36
1.5
4 4
1.5 1.5
Lesson 37 14 Lesson 38 Lesson 39 15 Lesson 40 Lesson 41
1.5
Course Pack
4 4 4 1.5 1.5
1.5
1.5
Handbook of Reward Management By Michael Armstrong & Helen Murlis Pg 520-524
Lesson 42 16 Lesson 43 Lesson 44 Lesson 45 17 Lesson 46 18 19 -L* = Lecture Hours
1.5
Tutorial Revision Revision Revision Preparatory Leave End term exams
1.5 1.5 1.5 1.5 1.5
T* = Tutorials Hours
P* = Practical/Studio Hours
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COURSE REQUIREMENTS
Class Participation
It forms the backbone of the system of Continuous evaluation. The students are expected to have gone through the pre-study material and come prepared for discussion. We visualize that the quantum and quality of learning through discussion would be much superior to simple delivery of the course material in the classroom. The process is intended to identify the following aspects in a student: a. Commitment to learning. b. Regularity to attend classes. c. Desire to studiously go through the study material and research books, Net, etc. to gain significant knowledge. d. Ability to present his point view systematically/logically. e. Ability to take criticism. f. Approach adopted to find solution to a given problem. g. Communication skills. d. Students may furnish additional data / information downloaded from the Internet/other literature and put up diverse views away from to syndicate solution. e. Each student is required to make self and peer evaluation in accordance with a format. This is a confidential document between the students submitting the assignment and the faculty member.
Group Presentation
Most professional courses train their students in developing presentation skills. All the members of the syndicate are expected to share the presentation of the assignment executed by them. They shall be prepared to answer queries raised by the students as well as the faculty members. The students may correct the error committed by them while submitting the assignment at the presentation stage.
Syndicate
It refers to the group of students who are assigned same tasks to be performed. In our system the assignments are executed by the Syndicates. This helps in inculcating the culture of team work. It also helps those who are not as good in the subject as some of their other colleagues are. The Syndicate accomplishes the assignment as under: a. Initial discussion to identify the job description. Completion of the assigned job within the allocated time frame. b. Integration of the inputs to an unified Syndicate solution
Group Project
This activity is also aimed at developing the culture of teamwork. The team members shall get together to decide at the share of the work. Each member of the team gathers the desired data, which is integrated together to form the project. The project report is evaluated for the following: a. Statement of the problem / issues (correctness / quality). b. Research on existing practices, if any, and their critical analysis, highlighting their advantages and defects. c. Suggested Solutions, analysis, correctness, practicability, use of technology and application of statistical tools. d. Presentation, clarity of concept, quality of presentation (Slide / Power point presentation / OHP Film), ability to respond to queries, etc. e. Recommendation. The evaluation is made on the basis of the project report and presentation.
Assignments
Each student is expected to submit two assignments per subject during the semester. The system of assignment follows the procedure given below: a. Different assignment is given to different Syndicate. b. Each member of the Syndicate is expected to participate equally to solve the given problem. c. All students of the syndicate are expected to submit the assignment individually. While they are expected to present common solution, they have the opportunity to express themselves as individuals and demonstrate their exceptional ability. They may recommend deletion/modification/ addition to the syndicate solution.
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End Semester Examination

These examinations are conducted in the usual manner. Each student is expected to meet the attendance requirement of 75% in aggregate.
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COMPENSATITION MANAGEMENT
INTRODUCTION
Human Resource Management
The most important products in todays economy are services provided by people; there is, therefore, considerable interest in the field of human resources. Indeed, it has been called the last frontier of management. By gaining an understanding of appropriate principles and procedures, strategies can be developed to meet the human resource management challenge presented by reinvention initiatives. In this endeavor it is well to remember that managing human resources is both a science and an art; there are accepted approaches to the subject, but no single right way. Those looking for neat answers to complex questions are likely to be disappointed by any source they consult. This course will be an integrative learning experience by emphasizing two related goals: First, scholastic goals which include the acquisition of a set of human resource concepts and their application to contemporary issues; and Second, personal career goals which encompass the development of the human resources of this class as well as individual career plans. This is an exciting and dynamic topic area that encompasses such issues as workforce diversity, drug testing, video display terminals, secondary smoke, AIDS, lie detectors, sexual harassment, total quality management, comparable worth, whistle blowing as well as more traditional management concerns. Subjects such as these will be briefly addressed in this course and examined in greater detail in Issues in Human Resource Management next year. Our objective will be to examine a framework for understanding the management of human resources. The cognitive map which we will jointly pursue has several critical areas: (1) the managerial environment, (2) the acquisition, allocation, development, and sanction of human resources, and (3) change and the future. Accordingly, we will initially address the professional, historical, and work context within which human resources are managed. Next, in the single largest portion of the class, personnel management will be explored as the performance of systemic functions in organizations (acquisition, allocation, development, and sanction). Finally, change and the future of human resource management in government will be probed. Do we all need rewards and incentives to be motivated for work? Ask teachers and parents what role rewards and incentives would play in the ideal teaching situation and most of them would admit that ideally they wouldnt need them at all: that their students would be so motivated to learn and so excited by the process that rewards would be entirely beside the point.
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The music itself would provide more than enough satisfaction. So most of us who use rewards do so with a hint of reluctance, regret or guilt. We wish they werent necessary. And, in addition, some of us worry about the message we are sending with our rewards. Are we reducing the enjoyment of the music and the learning process by distracting our students with extrinsic rewards? Are the children going to become more interested in the reward than the musical task undertaken to earn it? Are we turning everything, even the wonderful gift of music-making, into a carefully measured economy where every effort and accomplishment is purchased with a sticker? There is good reason to be wary of the role rewards and incentives are used. Recently good studies, articles and books have been published which call into question even our most accepted uses of incentives. But by thoughtfully considering the way in which we use rewards, we can avoid many of the most common pitfalls. First, we should think about the why we are using our reward. The most obvious, though arguably the most risky reason, is to provide a supplementary motivating drive for a student to do a particular task. We could also use rewards to express respect for the child and our appreciation of exceptionally good work. We might use a reward to publicly recognize or draw attention to good work. It might be that we wish to draw the students own attention to the magnitude of what he has accomplished, as though he has scaled a mountain and we are encouraging him to enjoy the view. And we might use a reward system to make tangible, or objectify, the process of learning. These all seem like perfectly reasonable reasons to consider rewarding a student. However, it is important to realize that the message we intend to send with our reward and the message which is actually received by the student might be very different. For instance, if we use a reward to supplement motivation, what we mean to say is this task is so important that I am giving you something special to ensure that you do it. But it is very easy for the child to get the message that this task is not worth doing on its own merit; some bonus must be included to make it worthwhile. And similarly, if we use a reward (say, a graduation award) to call public attention to an accomplishment, what we want to say is this student has accomplished something wonderful. But what might be understood by the student and others is students who have not completed this repertoire are not doing anything worthy of recognition. If we use a sticker-chart to quantify progress as a beginning student polishes up her first Twinkle Variation, we are hoping to show the student that although daily improvement might be too slight to see, as the stickers add up real learning is taking place and long-term progress will result. Instead, the
student may get the idea that the repetition and the accumulation of rewards is the primary objective, rather than the learning that this is symbolizing. Probably the easiest way to avoid sending the wrong message is to be aware of the possibility. We need to be receptive to the students possible misinterpretation of our goals in giving rewards. If we find ourselves bargaining with the student about the reward, or if we find that interest is primarily in the reward rather than the process which earns it, we need to change tactics quickly! And it certainly wouldnt hurt to be quite open and up-front with students about why we are using a reward. Even young students can benefit from the explanation that although they will receive a Book 1 graduation ribbon at the recital, what you are most proud of is not that they have finished Book 1, but that they struggled to overcome the difficulties they were having with tone, worked very hard at this, and can now play with a beautiful legato style. Or it might very well help a seven-year-old to hear that a proper bow-hold is SO important to you, and to his ultimate progress on the instrument, that you would be willing to pay him for it for a couple of weeks. This tells him why you are using the reward, prevents any misunderstandings, and encourages him to stay focused on the skill in question, rather than the gimmick used to achieve it. In the remainder of this newsletter we will look at some of the controversies involved in the use of rewards, the ways in which many of us are using rewards and incentives, and examples and comments concerning individual experiences. Read on! Do companies really motivate their employees in the real sense for target achievements? If yes then how ?
Beware of the Employee of the Month Programs
The best motivation comes from daily positive reinforcement by management of desired performance with as many employees as possible - not something that occurs once a month for a single employee. When new, an Employee of the Month program can stimulate much excitement, hovever, over time much of the thrill is often lost. Oftentimes the selection criteria for the program arent clear, and overheard are such things as Lets give it to someone in Accounting-they never get it or Sally cant get it - she already received it earlier this year. In other instances the program reaches a saturation point where so many employees have received the award that it no longer seems special. A programs reputation can also be tarnished. In one company I consulted with, management was seeking to improve the employee-of-the-month award, which many felt was ineffective. By talking with employees, I quickly learned that some employees who received the award were not considered deserving by other employees, I also learned it was a great administrative burden for managers to nominate someone for the program and a humiliating experience for both the manager and employee if corporate subsequently rejected the application. Getting More from a Program If you have to have an employee-of-the-month program, there are some things that can help it be more successful. They are as mentioned belowFirst, make sure other things are systematically being done to recognize employee performance in the workplace on a daily basis. Second, employee-of-the-month programs can be improved if nominations are open to everyone, not just management. This keeps the program from being biased to favor employees who have greater visibility with management. Third, a program can be further improved if its not limited to being given one a month - so as to seem like a quota - whenever that happens. Fourth, for best results, strive to keep the program fresh and flexible, and make changes in the program as it begins to feel stale to targeted employees. In summary, there are more effective ways to improve employee motivation, morale, and initiative than are typically obtained from employee-of-the-month programs. But if used in conjunction with other techniques - and with an awareness of the potential pitfalls - employee-of-the-month programs still have a place in motivating todays employees.
Many Companies use employee-of-the-month awards. This award may include a photograph of the honoree with an engraved nameplate in the lobby of the business, perhaps a reserved parking place and/or a small cash bonus. Variation on employee-of-the-month programs are almost endless. At Acapulco Restaurants in Long Beach, CA, the honoree also gets a paid day off. At Gregsons Foods, a retail grocery chain in Cadlsden, AL, the employee receives a silver name tag inscribed with the title, month and year of the award to wear as long as he/she works for the company. As popular as these programs are, they may not be the best for motivating todays employees. Whats Wrong with Them? Its difficult to motivate employees through a program. Programs are often too distant and formal to get excited about. Motivation is very personal and stems primarily from the interaction between an employee and his or her manager. What is motivating to an individual also varies from person to person.
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LESSON 1: INTRODUCTION TO COMPENSATION AND REWARDS

Learning Objective

UNIT I
Understand the meaning of Compensation and Rewards Know the role of Compensation and Rewards Types of Compensation and Rewards Importance and purpose of Compensation and Rewards management in organisations
by far the most important and contentious element in the employment relationship, and is of equal interest to the employer, employee and government. 1. To the employer because it represents a significant part of his costs, is increasingly important to his employees performance and to competitiveness, and affects his ability to recruit and retain a labor force of quality. 2. To the employee because it is fundamental to his standard of living and is a measure of the value of his services or performance. 3. To the government because it affects aspects of macroeconomic stability such as employment, inflation, purchasing power and socio economic development in general. While the basic wage or pay is the main component of compensation, fringe benefits and cash and non-cash benefits influence the level of wages or pay because the employer is concerned more about labor costs than wage rates per se. The tendency now is towards an increasing mix of pay element of executive compensation has substantially increased in recent years. Basic purpose for establishment of a sound Compensation and Reward administration The basic purpose of establishment of a sound compensation and reward administration is to establish and maintain an equitable compensation structure. Its secondary objective is the establishment and maintenance of an equitable labor-cost structure, an optimal balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximized and conflicts minimized. A sound wage and salary administration tries to achieve these objectives: 1. For employees: Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities. 2. The chances of favoritism (which creep in when wage rates are assigned) are greatly minimized. 3. Job sequences and lines of promotion are established wherever they are applicable. 4. Employees morale and motivation are increased because a wage programme can be explained and is based upon facts. b. To employers: 1. They can systematically plan for and control their labor costs.
In a laymans language the word Compensation means something, such as money, given or received as payment or reparation, as for a service or loss. On the other hand, the word Reward means something given or received in recompense for worthy behavior or in retribution for evil acts. The word Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organizations provide their employees. On the other hand, the word Reward or Incentive means anything that attracts an employees attention and stimulates him to work. An incentive scheme is a plan or a programme to motivate individual or group performance. An incentive programme is most frequently built on monetary rewards (incentive pay or monetary bonus), but may also include a variety of non-monetary rewards or prizes. Compensation or rewards (incentives) can be classified into: 1. direct compensation and 2. indirect compensation. Money is included under direct compensation (popularly known as basic salary or wage, i.e. gross pay) where the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options. While benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employers contribution to retirement (pensions), pay for vacation or illness, and employers required payments for employee welfare as social security. While French says, the term Incentive system has a limited meaning that excludes many kinds of inducements offered to people to perform work, or to work up to or beyond acceptable standards. It does not include: 1. Wage and salary payments and merit pay; 2. Over-time payments, pay for holiday work or differential according to shift, i.e. all payments which could be considered incentives to perform work at undesirable times; and 3. Premium pay for performing danger tasks. It is related with wage payment plans which tie wages directly or indirectly to standards of productivity or to the profitability of the organization or to both criteria. Compensation represents
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2. In dealing with a trade union, they can explain the basis of their wage programme because it is based upon a systematic analysis of job and wage facts. 3. A wage and salary administration reduces the likelihood of friction and grievances over wage inequities. 4. It enhances an employees morale and motivation because adequate and fairly administered wages are basic to his wants and needs. 5. It attracts qualified employees by ensuring and adequate payment for all the jobs. According to Beach, wage and salary programmes have four major purposes: i. To recruit persons for a firm; ii. To control payroll costs; iii. To satisfy people to reduce the incidence of quitting grievances, and fractions over pay and iv. To motivate people to perform better.
Reward employees with non-monetary rewards such as sincere praise, thanks for a job well-done, and lunches, pizza parties, cakes, etc., for achieving milestones. When a job changes significantly or you need to develop a new job, a compensation analyst can assist you to determine if an existing job title/description is suitable.
Tutorial Activity 1.5

Let us understand from the case below the role of Compensation and Rewards management with regard to HEALTH CARE PROVIDERS. The National Environmental Education & Training Foundations (NEETF) Health & Environment Program provides environmental education and training for health professionals to improve health care and public health, with a special emphasis on protecting children and other populations disproportionately effected by environmental pollutants. Given current trends in the American health care system, we believe it is also critical to form partnerships with managed care organizations to incorporate environmental measures into mainstream health care delivery systems. To further protect childrens health, in addition to working with health care providers, NEETF has initiated a healthy schools program to reduce environmental pollutants in schools. NEETFs Health & Environment Programs are designed to integrate environmental health into health care provider education and practice settings (e.g. medical and nursing schools, continuing education programs, private health care organizations) and improve environmental health conditions in the United States, with an emphasis on childrens environment. Health Care Providers: The Role of Compensation and Incentives, in Disease Control Priorities in Developing Countries, second (DCP2) Charles Hongoro and Charles Normand Section 1.0: The Nature and Role of Health Care Providers in Disease Control This section will focus on the following issues: 1.1 A brief description of health care providers and their role in health systems Health care provider problems. These will be analysed at three levels: 1. Individual health worker level-issues related to morale/ motivation, productivity, informal activities, internal capacity, remuneration, work environment, etc; 2. Organisational level (including independent individual providers)-issues related to funding methods, level of autonomy, referral hierarchy (role), accountability structures, etc; and 3. Health system level-issues related to the level of decentralisation, funding arrangements, regulations, system capacity, etc. Health care systems response to health care provider problemshealth sector reforms? Common solutions to disparate issues? Where are we getting it wrong? Section 2: Health care provider incentives

Discuss the role and importance of Compensation and Rewards.

What is the basic purpose behind the establishment of a sound Compensation and Reward administration system in the organizations?

Knowledge of the importance of compensation management makes you in becoming a hard core Human Resource manager. Throw light on the validity of this statement with the help of a corporate example.

Let us study the role of the Supervisor in Compensation Supervisors must be actively involved in discussing the institutions compensation program with employees. The supervisors role in compensation encompasses the following: Ensure employees know their job title, salary range and responsibilities. Respond to employee questions to clarify and resolve issues quickly and efficiently. Conduct a formal performance review once a year. In addition, you should communicate your expectations when employees are promoted or transferred into a new job. Remain knowledgeable of your employees salaries, skills and experience. Ensure the job descriptions are current and accurate. Develop desk or departmental job descriptions to more clearly define what is done in your particular area, unless the generic job description is a very close match. The education and experience requirements of the job description must match the generic job description. Review your staffs salaries at least once every fiscal year in order to determine and make salary changes. Use the Job Changes/ Salary Actions and Merit Program guidelines for assistance. Familiarize yourself with non-base salary benefits such as paid leave, insurance, retirement, recreational facilities, and flex schedules. Direct your questions to the Benefits Department.
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What are Incentives? This will address definitional issues based on a thorough review of literature. The focus will be on developing a common view and understanding of the meaning of incentives at both theoretical and operational levels. Formal classification of incentives: to include health system, organisational and individual incentives. The distinction between monetary and non-monetary incentives will be made for each of these categories. The links between types of incentives and disease control priorities will be explored% incentive and objective alignment. The need for aligning health system, organisational and individual incentives, and the problems associated with doing so will be highlighted. Contextual issues: The context is defined here from an individual and /or organisational view point. This will include issues on working culture, norms and regulations, health systems organisation Incentives in practice: This section will draw on empirical evidence of what matters to health care providers in developing countries. The source of information will be published and unpublished material, and a technical paper focusing on a country (Bangladesh) or region. This will include a box highlighting a success story or failure in using incentives. Section 3: Health care provider compensations The section will include a description of health care provider compensations in developing countries focussing on individuals (public health workers), organisations (public, NGOs, and private) and independent individuals (e.g. General Practitioners, and traditional healers) 3.1 Current practices on health care provider compensations: types of payments for individuals and organisations or independent private practitioners% fee-for service, capitation, case payments (e.g. DRGs, per diem, flat rate (bonus payment), salary, global budget. The interplay of mechanisms and incentives will be discussed. Problems associated with each method will be highlighted for example paying for group effort (will draw on concepts of cooperative behaviour, and the prisoners dilemma) This section will highlight what seems to work and what does not -and why using specific examples from both developing and developed countries where appropriate. The dimensions of analysis will include rationale, design, implementation, impact on incentives (incentive alignment issues) and ultimately health care provider behaviour. Two boxes highlighting a success story and a failure will be included in this section. Vertical versus integrated programmes. The key question to be addressed here is how the design of a diseases control programme influences health care provider incentives and behaviour particularly looking at effects of compensation methods, management regimes, work environment, accountability, input procurement (as a micro-system analysis of the system), etc. Examples of vertical and integrated programmes that introduced innovative compensation and incentive structures will be used to demonstrate possible effects of programme design and
implementation on health care provider behaviour and draw implications for disease control. Performance related compensations: This section will be devoted to an analysis of health care compensation methods based on some form of contractual arrangement. Theoretical and practical arguments for and against use of such methods will be discussed. Compensation methods and sustainability issues. A discussion of health systems capacity to sustain different types of compensation methods- funding arrangements, relationship with other public sector workers, labor migration etc. Formal classification (based on theory and evidence) provider compensations, predicted and observed behaviour. Material from this section will draw from literature. Example
Type of compensatio n E.g. bonus payments Rationale Increase productivity Design Based on quantitative outputs Incentives Increase volume of activity and not quality Empirical evidence E.g. confirmatory evidence but risk of opportunistic
4.0 Is there an optimal combination of health care provider compensation and incentives for DCs? This section will focus on the following issues: Cross cutting issues: linking compensation to performance, managerial autonomy over health care providers, markets or hierarchies for what types of disease control activities, National issues: diversity of perceptions of incentives coloured by contextual issues such as norms, culture, customs, religion, regulations, politics and the economy. The notion of different compensation and incentive packages for different contexts. Each package should include the core elements (see cross-cutting issues) for promoting desired performance behaviour. What Governments Must do and not do To adapt and not to imitate: To put health care provider compensation and incentives to the fore in designing disease control strategies and programmes, emphasis on strengthening health system incentives that promote appropriate health care provider behaviour. The health system should on one hand be able to support the attainment of positive outcomes of organisational and individual incentives, and on the other suppress negative or unintended outcomes. For example, promoting dual practice as an incentive to public health workers in a poorly monitored or regulated system might not help achieve public health goals. Implications of increased demand for health workers in the context of scaling up to MDGs Need for different approaches for different contexts, and the cost implications of suggested solutions to current provider compensation and payment problems.
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The R & D Agenda Based on the literature review and analysis above, this section will devoted to highlighting areas where information is absent or incomplete. The foregoing will form the basis for suggesting a research agenda that will help further our understanding of the role of health care provider compensation and incentives in disease control in developing countries. Questions: (1) Discuss the case analysis with respect to compensation and Rewards management.
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LESSON 2: OBJECTIVES OF COMPENSATION AND REWARDS

Learning Objective

Objectives of Compensation and Rewards Determinants of Incentives
Introduction to Objectives of Compensation and Rewards

After having discussed in the first Chapter the role of compensation and rewards, ij this chapter we will study the objectives of rewards. Compensation and Rewards determination may have one or more objectives, which may often be in conflict with each other. The objectives can be classified under four broad headings.
skills to benefit form the higher wages paid for skills. When an employers wages are below market rates employee turnover increases. When it is above market rates the employer attracts job applicants. When employees move from declining to growing industries, an efficient allocation of labor due to structural changes takes place. Other Objectives of Compensation: 1. Acquire qualified personnel compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others. 2. Retain current employees- Employees may quit when compensation levels are not competitive, resulting in higher turnover. 3. Reward desired behaviour- pay should reinforce desired behaviors and act as an incentive for those behaviors to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviors. Control costs- a rational compensation system helps the organization obtain and retain workers at a reasonable cost. Without effective compensation management, workers could be over paid or under paid. 4. Comply with legal regulations- a sound wage and salary system considers the legal challenges imposed by the government and ensures the employers compliance. Facilitate understanding- the compensation management system should be easily understood buy human resource specialists, operating managers and employees. 5. Further administrative efficiency- wage and salary programs should be designed to be managed efficiently, making optimal use of the HRIS , although this objective should be a secondary consideration compared with other objectives.
Objectives of Compensation
1. The first is equity, which may take several forms. They include income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power), the concept of equal pay for work of equal value compensation management strives for internal and external equity. Internal equity requires that, pay be related to the relative worth of a job so that similar jobs get similar pay. External equity means paying workers what comparable workers are paid by other firms in the labor market. Even compensation differentials based on differences in skills or contribution are all related to the concept of equity. 2. Efficiency which is often closely related to equity because the two concepts are not antithetical. Efficiency objectives are reflected in attempts to link to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills and so on. Arrangements to achieve efficiency may be seen also as being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair). 3. Macro economic stability through high employment levels and low inflation, of instance, an inordinately high minimum wage would have an adverse impact on levels of employment, though at what level this consequence would occur is a matter of debate. Though compensation and compensation policies are only one of the factors which impinge on macro-economic stability, they do contribute to (or impede) balanced and sustainable economic development. 4. Efficient allocation of labor in the labor market. This implies that employees would move to wherever they receive a net gain, such movement may be form one geographical location to another or form on job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move form a labor surplus or low wage area to a high wage area. They may acquire new
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Objectives of Rewards
The use of Incentives or Rewards assumes that peoples actions are related to their skills and ability to achieve important longer-run goals. Even though many organizations, by choice, or tradition or contract, allocate rewards on non-performance criteria, rewards should be regarded as a payoff for performance. An Incentive Plan has the Following Important Objectives 1. An incentive plan may consist of both monetary and nonmonetary elements. 2. Mixed elements can provide the diversity needed to match the needs of individual employees.
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3. The timing, accuracy and frequency of incentives are the very basis of a successful incentive plans. 4. The plan requires that it should be properly communicated to the employees to encourage individual performance, provide feedback and encourage redirection. Determinants of Incentives These feature are contingencies, which affect the suitability and design of incentives to varying degrees. The effective use of incentives depends on three variables-the individual, work situation, and incentive plan. (I and Ill) The Individual and the Incentives: Different people value things differently. Enlightened managers realize that all people do not attach the same value to monetary incentives, bonuses, prizes or trips. Employees view these things differently because of age, marital status, economic need and future objectives. However, even though employee reaction to incentives vary greatly, incentives must have some redeeming merits. For example, there might be a number of monetary and nonmonetary incentive programmes to motivate employees. Money, gift certificates, praises, or merit pay are of the continuous parade of promotion. (ii) The Work Situation: This is made up of four important elements: Technology machine or work system, if speed of equipment operation can be varied, it can establish range of the incentive. (b) Satisfying job assignments, a workers job may incorporate a number of activities that he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in hours worked, extended vacation time and other privileges that an individual values. Feedback, a worker needs to be able to see the connection between his work and rewards. These responses provide important reinforcement. Equity, worker considers fairness or reasonableness as part of the exchange (or his work) Incentives, in general, are important motivators. Their effectiveness depends upon three factors: drives, preference value, and. satisfying value of the goal objects. Misra says: Beyond subsistence level, becoming needs (selfactualization needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). Below the subsistence level, however, the reverse holds true. He makes the following generalizations: i. Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person. ii. Financial incentives relate more effectively with basic motivation or deficiency needs. iii. Non-financial incentives are linked more closely with higher motivation, or becoming needs. iv. The higher the position of a person in an organizations hierarchy, the greater is his vulnerability to non-financial incentives.
While budgetary restrictions and temporary improvements in performance place a limit on the potency of money as a motivator, non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. Monetary incentive imply external motivation, non-monetary incentives involve internal motivation. Both are important. It is a judicious mix-up of the two that tends to cement incentives with motivation.

1. Discuss the objectives of compensation and Rewards. 2. Discuss the determinants of compensation and Rewards.

Let Us Study The Reason That Why Doesnt Pay Motivate? Most companies have some form of incentive plan. However, one of the most frequent comments heard is that my employees arent performing any better with the incentive plan than they were before. Am I wasting my money? Chances are you are. To provide effective motivation, incentives must: 1. Flow from the business process 2. Provide sufficient opportunity to retain attention 3. Directly link actor and the action 4. Be timely Most plans out there violate at least one, and often all four of these rules: 1. Business Process Whether it is manufacturing the proverbial widget, processing credit card charges or overseeing a multi-product line business, those creating the compensation system must understand the customer chain, the work process, and how and where employees add value. Failure to do so results in a one size fits all mentality where all employees are treated similarly, or where we base our pay on what everyone else is doing. Although this may be seen as administration savings or being competitive in our industry, it really means we are accepting a competitive disadvantage we are actively forgoing a tool of competitive advantage. 2. Pay Opportunity Although people talk about competitive pay based on scope of job, or number of salary points, the ultimate determinant of the pay opportunity is the value created by the job. To the extent a job does not create value, employees are a drain on capital. The extent to which value is added (or lost) should be shared with employees to provide motivation. How much is to be shared is a company-by-company (or business-unit-bybusiness-unit) judgment based on three factors: a. What is the minimum amount of opportunity that must be paid to attract and retain employees both in boom and bust times? b. How much compensation is necessary to provide a meaningful link between the employee and the business goals?
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c. How much of the value added can we afford to share while maintaining a viable business with adequate shareholder return? An example of how incentives have consistently worked to the good is the steel maker Nucor. Base pay for most employees is less than competitive market levels. However, because of variable pay systems linked to the value created by the system, Nucors employees are both paid above the market and receive constant feedback as to their, and their companys performance. 3. Link the Employee and the Action By tying compensation directly to these the controllable employee actions we provide a critical feedback link. For example, a work group which is rewarded based on the number of units shipped, less a holdback for defective widgets returned will (ideally): seek ways to speed throughput and shipping; provide feedback to earlier teams to eliminate defects and, seek product improvements which will increase demand. If these are in line with the business process and the goals of the business are communicated, then, the feedback will reinforce the actors to align with the business. If there is no clear linkageno line of sight - the money spent is, at best, sub optimized, at worst, wasted. This is the flaw in program such as all employee stock options or company wide profit sharing plans. There is no direct, meaningful, measurable link between, for example, the actions of a soda truck driver and the price of the companys stock. 4. Timeliness As Pavlov demonstrated, timeliness is critical to rewards. As results become measurable, feedback pay should follow, with a minimum of administrative delay. In many broad-based incentive plans, payout happens quarterly, monthly, or even, as at Nucor, weekly. This provides rapid reinforcement feedback. As a rule of thumb, the longer the delay, the less useful the reward. In come situations, this rapidity is not possible because the process is both uncertain and long for example a researcher working on a new drug. In these cases, feedback can still be provided on a milestone basis rewards linked to clinical trials, FDA approval, sales past a profitability milestone, etc. Unfortunately, the area where there is historically the least timeliness is executive pay. Executive pay is historically focused on annual incentives: requiring executives to categorize their performance into discrete, one-year segments, regardless of business cycle. Depending upon the structure of the plan, this results in executives either setting goals which do not clearly relate to adding value, but which are measurable in a one-year time frame (e.g., by November create a training program for 1995 implementation.), or measuring financial results without regard to product cycles (e.g., we release a new edition of the product every six months, with a six month life. An annual award cycle eliminates the opportunity to provide feedback on every edition of the product.)
the company or the actions employees can actually control to achieve those goals. Compensation must be seen as part of the total business process to be successful. Ted Buyniski is a Principal with iQuantic, Inc., a compensation and strategic HR consulting firm headquartered in San Francisco. He manages the East Coast practice from Chester, NJ. Theodore R. Buyniski

From the case below let us understand the Reward system of this organization: The Employers Organization
Company Background
The Employers Organisation for local governments (EO) role is to help councils achieve the high standards of people management needed to ensure the continuous improvement of services. We offer a range of services to local authorities, from free telephone advice and specialist guides to tailor made consultancy services. Essex Our Approach to Pay Progression Essex County Council has been going through radical change. Some of that change has been structural but the more important aspect of the change is cultural. We are seeking to move the organisation to a much more customer focused and facing organisation.
Situation
One of the mechanisms to support this move has been our approach to pay strategy. We also wanted to implement the Single Status Agreement, which removes the employment conditions divide between some of our staff. The Agreement and the approach we used affected our 9,000 staff. The cornerstone of our approach was to develop the Essex Competency Framework. This sets out the skills and abilities that our staff need to deliver best quality services for the Council. We then incorporated this into our individual performance management system. This formed the foundation on which we could build our new approach. The principles of the approach are: 1. It is simple and consistent 2. A member of staff meeting the objectives of their job and their competency statements can expect pay progression 3. It fits with the service planning cycle 4. Development opportunities are available 5. Staff at their maximum pay point undergo performance review and competency development so that further development opportunities can be explored.
Process
The new system for these staff moves away from automatic service based increments, although it still uses the national pay spine up to point thirty-four. It is based on four Broad Band Grades that have been determined by using the National Job Evaluation Scheme. Within each Band the first increment is automatic, then performance is assessed against delivery of objectives - i.e. what
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Conclusion
Pay has the potential to drive performance in the best companies, it does. However, too often, pay is designed in a vacuum, without focus on either the underlying objectives of
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needs to be delivered - and the demonstration of competencies - i.e. how it needs to be delivered. Objectives come from the job profile for the individual and the service objectives for the service area. Around six objectives are required for each job and they need to be constructed in a way that is easily measurable. We provide guidance and training for managers and staff on how to do this effectively. The objectives are set at the beginning of each review year and can be reviewed and amended. We also use statements from the appropriate four Competency Headings from the Competency Framework plus the Technical Professional Competency. A statement from the Competency Framework sets out what needs to be demonstrated by the individual in their role. An example is: Seeks regular feedback from customers about services provided and uses this to recommend continuous improvements to the service. This statement comes under the Competency Heading 2 Customer/Client Orientation and is the appropriate statement for spinal column point twenty two. Each of the generic competencies has a defined and prescribed statement for every spinal column point. A few of the statements remain the same at all spinal column points; for example, those around equality and diversity, but most become more demanding the higher the spinal column point. The selection of the Competency Headings from the Essex Competency Framework may be for individual posts where there are no other similar posts but job families have commonly agreed Competency Headings across the organisation in order that we have consistent levels of service delivery for that function. There is also a Competency Heading entitled Professional and Technical so that job specific competencies are included e.g. social workers. This framework is flexible enough to cover all jobs and roles within the Council including the Member role. For jobs above spinal column point thirty-four and for Members the Competency Framework is used in a different way. Each year, the manager will identify the spinal column point for their member of staff as at the first of April. A database will produce all of the appropriate statements under the selected Competency Heading for that spinal column point. These will be recorded on the appropriate form for the individual together with their agreed objectives for the year. The professional technical statements are not prescribed because they relate directly to the area of work and the manager will draft these with the individual, although there is general guidance in place to assist the process. Questions: (1) What do you understand by the term People Management. (2) What is pay progression and discuss its relevance to this case.
Front Range Solutions

Company Information
Founded in 1989, FrontRange Solutions Inc. is a privately held company, delivering software that facilitates extraordinary relationship solutions. An international leader in business relationship software for nearly 15 years, FrontRange Solutions employs more than 500 people worldwide. FrontRange Solutions products address the needs of customer service and support (help desk), sales force automation (SFA), knowledge management and customer relationship management. FrontRanges expertise lies in delivering the highest value, industry-specific, integrated software solutions for the complete lifecycle of business relationships. And FrontRange puts its knowledge into practice by providing outstanding customer service to the over 100,000 customers and one million plus users. One result: HEAT, the service and support solution from FrontRange, has a 98% customer satisfaction rating as indicated by an independent survey. We have a reputation for providing big-company solutions at prices that dont exclude small organizations. FrontRange has earned more than 60 major industry awards, including: Software Magazine Hot 500, Windows Magazine Win 100, Call Center CRM Solutions Magazine Editors Choice, RealWare Award for CRM, WinMag.com WinList Award, Entrepreneur Magazine Best Software, Call Center Solutions Product of the Year, and InformationWeek Top 50 Application Service Providers. Rewarding Strategy of FrontRange FrontRange Solutions rewards its employees FrontRange Solutions Total Rewards Strategy contains four key components to attract, motivate and retain the best talent available in the marketplace: Compensation FrontRange Solutions offers its employees a competitive pay package that provides:

Compensation for satisfactory work (base salary, merit pay); Short and long-term incentives for achieving strategic business objectives; Rewards for specific individual or team achievements (bonuses, awards). Total compensation for an individual employee is determined by
four considerations: Internal value of an individuals position, as determined through the position evaluation process. To ensure internal equity, positions of similar or equal responsibility will be grouped in the same salary range or band. External competitiveness, as established through market surveys of companies we compete with for customers and talent. Individual performance, as measured by the annual Performance Development Process (PDP), which identifies individuals who should be considered for higher levels of responsibility and pay. Business performance, as measured through strategic business goals, such as earnings per share, profit or cash flow. Local

Let us understand the rewarding strategy of another company below-
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programs should complement FrontRange Solutions overall pay philosophy and avoid duplication of global initiatives. Benefits FrontRange Solutions aims to provide private benefits programs that supplement or enhance mandatory plans available in the various locations where we do business. Our programs serve two main objectives: 1. To protect employees from risks (sickness, accidents, disability) that may result in substantial economic loss; and 2. To provide employees with retirement benefits (pension plans, savings plans, retiree health care) that offer economic security after employment. Our goal is to give employees a variety of benefits choices and to deliver these benefits in a tax-effective, economical manner. Development We believe in helping employees develop to their utmost potential. Given the unique nature of FrontRange Solutions business, we cannot rely on external recruiting as a primary source of talent- so we have developed those critical skills internally. Workplace Environment FrontRange Solutions is committed to creating an environment that attracts and rewards talented, ambitious people. Employment with our company is an enriching experience that enables employees to achieve their highest potential. To that end, we will recognize and reward teamwork, excellence and innovation, and will provide opportunities consistent with these contributions. We also foster diversity among our employees and value the broad spectrum of thought and skills each person brings to FrontRange Solutions. Performance is measured in ways that encourage reasonable risk-taking, foster an awareness of personal accountability, and support standards and competencies consistent with FrontRange Solutions basic values. Overall, the relationship between our company and our employees is governed by respect for the individual and a sense of personal integrity. FrontRange Solutions recognizes that only when a company truly values people can it expect to be prized as an employer. To the extent permitted by applicable law, FrontRange Solutions retains employees on an at-will basis. Nothing in this website is intended to alter an employees at-will status, or create an offer or contract of employment. Questions: 1. Discuss the Rewarding Strategy of FrontRange. 2. Discuss on the nature of pay package offered by FrontRange. 3. What do you understand by the term employee benefits and throw light on the nature of benefits provided by FrontRange to its employees. 4. Discuss the importance of Workplace Environment with regard to reward management.
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LESSON 3: INTRODUCTION TO FRAMEWORK OF COMPENSATION POLICY

Learning Objective

Introduction to the concept of Framework Understanding the Framework of a Compensation Policy
Introduction to Compensation Framework and Classification A compensation framework that supports a long term strategic vision for compensation and implements new initiatives, will provide the needed direction, changes will involve moving towards solving special salary problems using innovative concepts. The way we do compensation is undergoing major change towards a more flexible and timely corporate compensation systems. The new system will have increased delegation to managers and will be driven by the business needs of Government and ministries. It will be faster, more efficient and eliminate duplication, focus on a long term approach to compensation management. Move from being highly centralized to a decentralized approach whereby deputy ministers and senior mangers will have increased authority to make decisions. Integrate compensation with the other areas of human resource management. And Emphasize transparency, monitoring, reporting and accountability. The vision for compensation will assist the pubic service in attracting and retaining key employees. Managers will have more accountability for the compensation of their employees, and will be profiled with the required tools, systems and support. Senior mangers will approve, within the framework, exceptional compensation changes, based on sound business decisions. Senior managers will also have authority to approve the classification levels of pre-identified jobs within their organization.

What do you understand by the term Framework of Compensation Policy and discuss the variables determining the framework of a compensation policy.

Achieving Fair financial and Non-Financial Rewards Employee motivation and performance management depend on good systems that offer both financial and non-financial rewards (non-monetary rewards). This performance management article applies to all organisations. Constant change and high expectations are taking their toll in some organisations, as well as in industry and government generally. Sometimes this is shown in employee turnover.
Sometimes it is hidden because of job insecurity.Many employees make a New Years resolution to seek other employment. Many are also seeking more balance in their life. Rewards and remuneration must be scrutinised. Employee motivation and performance are critical. Non-monetary rewards can be as important as monetary rewards.In some organisations, a multitude of different salary and pay arrangements exist. It is time to bring these different systems into a new framework. Employees at all levels need to have confidence in the salary administration system. Employees want the rewards to be shared fairly and equitably. If they are not, dissatisfaction can cause severe morale and performance problems. If they havent done so already, leading organisations will need to establish an improved salary administration structure. It is possible to develop a simple structure that overcomes the difficulties of the past, yet is simple enough for everyone in the organisation to understand. This structure can be tied to a completely new performance management approach, including better performance appraisal mechanisms. Some industrys remuneration systems have been dominated by the industrial relations system. Enterprise bargaining and local area work agreements, individual performance based contracts, and the effect of competition on organisational structures, have had a big impact. A good rewards and remuneration system ensures that each person receives appropriate financial and nonfinancial recognition to account for the personal contribution they are making and the overall value of their position to the organisation. This includes: Creating and maintaining an organisational structure and culture that facilitates both employee and organisational performance. Recognising and rewarding individual and team performance, financially and otherwise, in relation to the overall contribution made. Implementing compensation systems that fairly treat and recognise all employees, regardless of their level within the organisation. This is the equity issue. It involves matching remuneration with the contribution made, particularly where job requirements can change rapidly. The best performance appraisal system in the world will not work if it is linked to a rewards and remuneration system that employees do not trust or support. A motivated employee will achieve a great deal. A demotivated employee will be slow, prone to error and not likely to achieve.Motivation influences performance. It also suggests that the lack of, promise of, or receipt of either financial or non-financial rewards may also influence motivation. A feedback loop between motivation and performance exists, with each potentially impacting the other. Remuneration is a component of both financial and non-financial reward; financially, in terms of cash and benefits received; non-financially in terms of recognition, status and esteem, e.g. the status of full private use of a motor vehicle. Job evaluation is a process to determine the contribution of a position to an organisation. It needs to be seen by both the employee and organisation as fair and equitable. Good salary administration requires that
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considered along with financial rewards? The system should not be bureaucratic, but it has to be perceived as fair. It also has to be actually administered fairly. Where do you rate your system on a scale of 1 to 10? 1 Employees are showing their total disenchantment by leaving as quickly as they can. Morale and motivation are nonexistent. 2 Employees are unhappy and grumble frequently about the non-existence of a remuneration system. They openly talk about the problems instead of getting on with their work. 3 Employees are unhappy and comment frequently about the remuneration system that is supposed to be in place but doesnt work. However, a work ethic exists and they do some work. 4 Employees believe that management controls and manipulates the system. They continue on regardless, but they do not like it. 5 Employees are aware of a remuneration system but do not see it working for them. It causes some dissatisfaction. 6 Employees believe the remuneration system only works for management. 7 Some employees believe the remuneration system is working, others believe it could be better targeted to their particular situation. 8 A comprehensive system is in place. Position value and remuneration is fairly evaluated and most are well compensated. Areas for improvement are recognising individual and team contributions fairly. The system is reviewed regularly. 9 A comprehensive system is in place. Position value and remuneration is fairly evaluated and nearly all are well compensated. Individual and team contributions are recognised. Higher achievement will come from better implementation. 10 Everyone from the CEO down believes that the remuneration system is working well and being equitably administered. Individual and team contributions are recognised and rewarded accordingly. Although some would like more pay, no one is unhappy with the system. They are motivated and productive. Derek Stockley employees should receive financial recognition for the contribution that they make, and that positions of equal value should be entitled to equal compensation. If organisations handle this incorrectly, or manipulate it in some way, the impact on the employee is significant. Past pay systems often paid little attention to incentives. It is only in recent years that some systems have provided for differentiation based on performance.The concept of fair incentives should be on the agenda.An integrated system is required such as the following diagram represents. Perception is the reality. If the current system is not working as intended, then the organisation has a real problem. Some key questions: Does the documentation give a full, comprehensive description of each position? Is the evaluation system used soundly based and rigorously applied? Is consideration given to market competitiveness in setting the remuneration range? Is the performance appraisal system well designed and accepted by all employees? Is the review process conducted fairly and within agreed time limits? As well as checking goal achievement, does the review reconsider the job and changes that may have occurred? Are non-financial rewards

Let us study the case below with regard to framework of compensation policy at University at Minnesota. University of Minnesota Approved by the : Faculty Senate on February 18, 1993 Accepted and Implemented by the: Administration on April 26, 1993 Action by the: Board of Regents - no approval required Faculty Compensation Policy Background On Compensation At The University Of Minnesota Faculty are compensated for their contributions to teaching and advising, research and scholarship, and service to the institution and the state/region/nation/other nations, as well as their professions. Total compensation includes annual base salary plus fringe benefits, including retirement, health and dental coverage, and life and disability insurance. In some instances, annual base salary is augmented through internal sources, such
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as overload teaching, or from external sources in the case of approved external consulting. Initial annual base salary is negotiated at the time of hire, with floors establish for the instructor and assistant professor ranks only. Increases to annual base salary for faculty occur in the following ways: through annually determined merit increases; through acceptance of a retention offer that includes an increase; in conjunction with a promotion in rank and/or the awarding of indefinite tenure; through an augmentation attached to an administrative title or a set of administrative duties. For many faculty, annual base salary is supplemented with summer school or other internal summer employment, such as grant research. Annual base salary may also be supplemented internally during ones contract period through means such as extension teaching. Normally, new salaries go into effect for A base faculty on July 1 and for B base faculty on September 16 of each year. The salary determination process must provide an objective unbiased evaluation of each faculty member following a thorough review of his/her work. The process must encourage continued good or improved performance, which in turn, should be rewarded by the compensation system. Criteria for Annual Salary Increases and Promotion Any salary determination process at the University of Minnesota must be nondiscriminatory. Initial salary offers, periodic increases, and retention offers may not be based on considerations related to the race, color, creed, religion, national origin, sex, sexual preference, marital status, public assistance status, veteran status, or age of the person being considered. The criteria for determining salary increases must be similar to those used for promotion and tenure. The tenure and promotion regulations of the University, adopted in 1985, provide the following instructions which form the framework within which salary decisions must be made: General Criteria The basis for awarding indefinite tenure is the determination that the achievements of an individual have demonstrated the individuals potential to continue to contribute significantly to the mission of the University and to its programs of teaching, research, and service over the course of the faculty members academic career. The primary criteria for demonstrating this potential are effectiveness in teaching and professional distinction in research; outstanding discipline-related service contributions will also be taken into account where they are an integral part of the mission of the academic unit. The relative importance of the criteria may vary in different academic units, but each of the criteria must be considered in every decision. Faculty Involvement Faculty input into the discussions surrounding criteria and procedures for salary increase determination is essential to maintaining an equitable and collegial environment. With the administrator of each unit, the faculty must have the opportunity to develop the criteria for, and the format of, the process through which annual salary increases are determined.The documents that describe these criteria, formats, and processes
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shall be shared with the college dean, the appropriate vice president, and finally the Senior Vice President for Academic Affairs. This process must include the provision that the department chair (unit leader) meet with each faculty member individually, at least once per year, to review his or her performance. The sessions shall review the past years performance and offer suggestions for enhancing productivity, where appropriate. Units may choose to conduct more in depth evaluations on a periodic basis (e.g. 4 or 5 years) that would include outside evaluations. Allocation Format Each year the annual salary increase pool for meritorious performance received by the unit will be distributed based on the criteria specified in the Universitys Regulations Concerning Faculty Tenure and appropriate departmental faculty evaluation documents. Unsatisfactory performance, which shall be documented and communicated to the individual involved, shall serve as justification for withholding an individuals increase. Promotion Increases Beginning with the 1993-94 salary year, promotion from assistant professor to associate professor will be accompanied by an extraordinary $1,500 increase in base salary and promotion from associate professor to professor will be accompanied by an extraordinary $2,000 increase in base salary. It is intended that these promotional increments will be in addition to the annual salary increase award related to meritorious performance. The dean will set aside, from those funds provided to his/her unit for salary increase distribution, sufficient funds to cover these promotional increments. It is understood that the dean may also set aside funds from this overall pool to address special merit or retention purposes. It is intended that this promotion increment will receive inflation-related increases in future years. Other Recommendations A standing administrative and faculty compensation committee (including representatives of the Senate Faculty Affairs Committee) will examine and make recommendations on policies such as salary levels in the University as a whole, salary disparity among units, minimum salary levels for associate and full professors, and salary compression.

Calipers Let us analyse the Executive Compensation Framework policy with regard to the organization CALIPERS. Company Background The purpose of CalPERS policies on executive compensation is to raise the level of accountability of Boards and Compensation Committees to shareowners. CalPERS feels it will benefit shareowners in the long-term if shareowners can provide an enhanced level of oversight in relation to Compensation Committee actions. This results in more shareowner friendly compensation programs.
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Compensation programs are one of the most powerful tools available to companies to attract, retain and motivate key employees, as well as align their interests with those of shareowners. Poorly designed compensation packages may have disastrous impacts on the company and its shareowners by incentivising short-term oriented and self -interested behavior. Conversely, well-designed compensation packages may help align management with owners and drive long-term superior performance. Since equity owners have a strong interest in longterm performance and are the party whose interests are diluted by stock option plans, CalPERS believes shareowners should provide stronger oversight of executive compensation programs. In recognition of this, CalPERS believes that companies should formulate executive compensation policies and seek shareowner approval for those policies on a periodic basis. Since SECs Release #34-48108, adopted on June 30, 2003 as listing standards, for the NYSE and NASDAQ, companies must give shareowners the opportunity to vote on all equity compensation plans and material revisions (with limited exemptions). The ability to vote on these plans provides the checks and balances on the potential dilution resulting from earmarking shares for equity-based awards. With this in mind companies should design executive compensation policies to be comprehensive enough to provide shareowners with oversight of how the company will design and implement compensation programs, yet broad enough to permit the Compensation Committee flexibility in implementing the policy. CalPERS does not believe that it is optimal for shareowners to approve individual contracts at the company specific level. CalPERS developed a model policy guideline designed to assist companies in formulating executive compensation policies. This also provides a framework by which interested parties may gauge the quality of company specific executive compensation programs and practices. General Policy Guidelines Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners. Executive compensation should be comprised of a combination of cash and equity-based compensation. Direct ownership should be strongly encouraged. Executive compensation policies should be transparent to shareowners. The policies should contain, at a minimum, compensation philosophy, the targeted mix of base compensation and at risk compensation, key methodologies to ensure alignment of interest, and parameters for guidance of employment contract provisions, including severance packages. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. Executive contracts should be fully disclosed, with adequate information to judge the drivers of incentive components of compensation packages.
Executive Compensation Policies In particular, executive compensation policies should contain, at a minimum, the following components: 1. The companys desired mix of base, bonus and long-term incentive compensation. This section should include adequate detail to shareowners regarding the companys philosophy of base pay components versus pay at risk components of the program. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation. Overall targets of total compensation should also be provided.This section should also provide an overview of how the company intends to structure the compensation program, such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program. 2. The companys intended forms of incentive and bonus compensation, including what types of measures will be used to drive incentive compensation. In addition to the relative mix of base salary and any form of incentive compensation, the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. The policy should include the companys philosophy related to the major components of incentive compensation, including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners.CalPERS believes that in the case of option plans and restricted stock, a significant portion of the overall program should consist of performance-based plans. These include index-based options, premium-priced options and performance targets tied to company-specific metrics. Performance-based plans should be constructed to reward true out-performance, and should include provisions by which options will not vest if hurdles are not obtained. Timeaccelerated vesting is not considered a meaningful performance-based hurdle.The policy should include the specific drivers the company will use in constructing the performancebased components of the plan. CalPERS suggests using metrics such as Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE), and the relative mix of how performance metrics will be weighted. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. CalPERS believes that if metrics are used in combination, the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. 3. The companys intended distribution of equity-based compensation
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The policy should include the companys philosophy related to how equity-based compensation will be distributed within various levels of the company. 4. The companys philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program, the policy should articulate how the company will address the issue of dilution. For example, the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. If the company intends to repurchase equity in response to the issue of dilution, the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. CalPERS does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. 5. The parameters by which the company will use severance packages, if at all. The policy should include a definitive statement related to how the company views severance agreements. If the company will not enter into severance agreements, this should be clearly stated. In cases where the company will consider severance agreements, the policy should contain the overall parameters of how they will be used including:(a) specific detail regarding the positions within the company that may receive severance agreements;(b) the maximum periods covered by the agreements; (c) provisions by which the agreements will be reviewed and renewed; (d) any hurdles or triggers that will affect the agreements;(e) a clear description of what would and would not constitute termination for cause; and (f) disclosure of where investors can view the entire text of severance agreements. CalPERS is strongly opposed to severance agreements that allow management to benefit from under performance.The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements. 6. The parameters by which the company will utilize other forms of compensation, if at all. The policy should provide broad guidelines by which the company will use alternative forms of compensation, and the relative weight in relation to overall compensation if other forms of compensation will be utilized.The term and length for other forms of compensation should be disclosed. Other forms of compensation include but are not limited to pension benefits, deferred pay, perquisites and loans. In some cases, other forms of compensation can provide significant value to executives which are not readily comparable to more basic forms of compensation such as salary, bonus and incentive. Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. To the degree that the company will provide other forms of compensation, it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation.
Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners.Executive compensation should be comprised of a combination of cash and equity-based compensation. Direct ownership should be strongly encouraged. Executive compensation policies should be transparent to shareowners. The policies should contain, at a minimum, compensation philosophy, the targeted mix of base compensation and at risk compensation, key methodologies to ensure alignment of interest, and parameters for guidance of employment contract provisions, including severance packages. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. Executive contracts should be fully disclosed, with adequate information to judge the drivers of incentive components of compensation packages. Executive Compensation Policies In particular, executive compensation policies should contain, at a minimum, the following components: 1. The companys desired mix of base, bonus and long-term incentive compensation. This section should include adequate detail to shareowners regarding the companys philosophy of base pay components versus pay at risk components of the program. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation. Overall targets of total compensation should also be provided.This section should also provide an overview of how the company intends to structure the compensation program, such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program. 2. The companys intended forms of incentive and bonus compensation, including what types of measures will be used to drive incentive compensation. In addition to the relative mix of base salary and any form of incentive compensation, the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. The policy should include the companys philosophy related to the major components of incentive compensation, including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners.CalPERS believes that in the case of option plans and restricted stock, a significant portion of the overall program should consist of performance-based plans. These include index-based options, premium-priced options and performance targets tied to company-specific metrics. Performance-based plans should be constructed to reward true out-performance, and should include provisions by which
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options will not vest if hurdles are not obtained. Timeaccelerated vesting is not considered a meaningful performance-based hurdle.The policy should include the specific drivers the company will use in constructing the performancebased components of the plan. CalPERS suggests using metrics such as Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE), and the relative mix of how performance metrics will be weighted. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. CalPERS believes that if metrics are used in combination, the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. 3. The companys intended distribution of equity-based compensationThe policy should include the companys philosophy related to how equity-based compensation will be distributed within various levels of the company. 4. The companys philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program, the policy should articulate how the company will address the issue of dilution. For example, the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. If the company intends to repurchase equity in response to the issue of dilution, the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. Calipers does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. 5. The parameters by which the company will use severance packages, if at all. The policy should include a definitive statement related to how the company views severance agreements. If the company will not enter into severance agreements, this should be clearly stated. In cases where the company will consider severance agreements, the policy should contain the overall parameters of how they will be used including: a. specific detail regarding the positions within the company that may receive severance agreements; b. the maximum periods covered by the agreements; c. provisions by which the agreements will be reviewed and renewed; d. any hurdles or triggers that will affect the agreements; e. a clear description of what would and would not constitute termination for cause; f. and disclosure of where investors can view the entire text of severance agreements. CalPERS are strongly opposed to severance agreements that allow management to benefit from under performance. The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements.
6. The parameters by which the company will utilize other forms of compensation, if at all. The policy should provide broad guidelines by which the company will use alternative forms of compensation, and the relative weight in relation to overall compensation if other forms of compensation will be utilized.The term and length for other forms of compensation should be disclosed. Other forms of compensation include but are not limited to pension benefits, deferred pay, perquisites and loans. In some cases, other forms of compensation can provide significant value to executives, which are not readily comparable to more basic forms of compensation such as salary, bonus and incentive.Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. To the degree that the company will provide other forms of compensation, it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation. Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners.Executive compensation should be comprised of a combination of cash and equity-based compensation. Direct ownership should be strongly encouraged. Executive compensation policies should be transparent to shareowners. The policies should contain, at a minimum, compensation philosophy, the targeted mix of base compensation and at risk compensation, key methodologies to ensure alignment of interest, and parameters for guidance of employment contract provisions, including severance packages. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. Executive contracts should be fully disclosed, with adequate information to judge the drivers of incentive components of compensation packages. Executive Compensation Policies In particular, executive compensation policies should contain, at a minimum, the following components: 1. The companys desired mix of base, bonus and long-term incentive compensation. This section should include adequate detail to shareowners regarding the companys philosophy of base pay components versus pay at risk components of the program. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation. Overall targets of total compensation should also be provided.This section should also provide an overview of how the company intends to structure the compensation program, such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program.
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2. The companys intended forms of incentive and bonus compensation, including what types of measures will be used to drive incentive compensation. In addition to the relative mix of base salary and any form of incentive compensation, the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. The policy should include the companys philosophy related to the major components of incentive compensation, including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners.CalPERS believes that in the case of option plans and restricted stock, a significant portion of the overall program should consist of performance-based plans. These include index-based options, premium-priced options and performance targets tied to company-specific metrics. Performance-based plans should be constructed to reward true out-performance, and should include provisions by which options will not vest if hurdles are not obtained. Timeaccelerated vesting is not considered a meaningful performance-based hurdle.The policy should include the specific drivers the company will use in constructing the performancebased components of the plan. CalPERS suggests using metrics such as Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE), and the relative mix of how performance metrics will be weighted. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. CalPERS believes that if metrics are used in combination, the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. 3. The companys intended distribution of equity-based compensation The policy should include the companys philosophy related to how equity-based compensation will be distributed within various levels of the company. 4. The companys philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program, the policy should articulate how the company will address the issue of dilution. For example, the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. If the company intends to repurchase equity in response to the issue of dilution, the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. Calipers does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. 5. The parameters by which the company will use severance packages, if at all. The policy should include a definitive statement related to how the company views severance agreements. If the company will
not enter into severance agreements, this should be clearly stated. In cases where the company will consider severance agreements, the policy should contain the overall parameters of how they will be used including: a. specific detail regarding the positions within the company that may receive severance agreements; b. the maximum periods covered by the agreements; c. provisions by which the agreements will be reviewed and renewed; d. any hurdles or triggers that will affect the agreements; e. a clear description of what would and would not constitute termination for cause; f. and disclosure of where investors can view the entire text of severance agreements. CalPERS are strongly opposed to severance agreements that allow management to benefit from under performance.The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements. 6. The parameters by which the company will utilize other forms of compensation, if at all. The policy should provide broad guidelines by which the company will use alternative forms of compensation, and the relative weight in relation to overall compensation if other forms of compensation will be utilized. The term and length for other forms of compensation should be disclosed. Other forms of compensation include but are not limited to pension benefits, deferred pay, perquisites and loans. In some cases, other forms of compensation can provide significant value to executives, which are not readily comparable to more basic forms of compensation such as salary, bonus and incentive. Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. To the degree that the company will provide other forms of compensation, it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation. Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners. Executive compensation should be comprised of a combination of cash and equity-based compensation. Direct ownership should be strongly encouraged. Executive compensation policies should be transparent to shareowners. The policies should contain, at a minimum, compensation philosophy, the targeted mix of base compensation and at risk compensation, key methodologies to ensure alignment of interest, and parameters for guidance of employment contract provisions, including severance packages. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans.
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Executive contracts should be fully disclosed, with adequate information to judge the drivers of incentive components of compensation packages. In addition to the relative mix of base salary and any form of incentive compensation, the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. The policy should include the companys philosophy related to the major components of incentive compensation, including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners. CalPERS believes that in the case of option plans and restricted stock, a significant portion of the overall program should consist of performance-based plans. These include index-based options, premium-priced options and performance targets tied to company-specific metrics. Performance-based plans should be constructed to reward true out-performance, and should include provisions by which options will not vest if hurdles are not obtained. Timeaccelerated vesting is not considered a meaningful performance-based hurdle. The policy should include the specific drivers the company will use in constructing the performance-based components of the plan. CalPERS suggests using metrics such as Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE), and the relative mix of how performance metrics will be weighted. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. CalPERS believes that if metrics are used in combination, the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. Answer the questions below based on the above case study:

What is the purpose behind CalPERS policies on executive compensation? Based on the above case study how can you say that compensation programs are one of the most powerful tools available to companies? Discuss the components of executive compensation.
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LESSON 4: LABOR MARKET CHARACTERISTICS AND PAY RELATIVES

Learning Objective

To know Labor Market and Labour theory of value To understand Labour Market Characteristics To know Labour and Labour Welfare To understand Pay relatives
Opponents of labor market flexibility claim that labor laws that make workers feel more secure encourage employees to invest in acquiring skills that enable them to do their current job better but that could not be taken with them to another firm if they were let go. Supporters claim that it improves economic EFFICIENCY BY leaving it to MARKET FORCES to decide the terms of employment. Broadly speaking, the evidence is that greater flexibility is associated with lower rates of UNWMPLOYMENT and higher GDP per head. Pay Relatives The pay relative for each occupational group in an area expresses its average pay as a percent of the pay for a comparable occupation group. The pay relative for the United States as whole always equals 100. For example, the pay relative for all occupations in San Francisco was 119 in 1998, meaning that workers in San Francisco earned 19 percent more than the U.S. average for comparable workers. The pay relative for Houston was 104, or 4 percent more than the U.S. average. The pay relatives for each area are expressed in terms of their relation to the U.S. average. The nine occupation groups used in pay relatives are: 1. Professional specialty and technical occupations; 2. Executive, administrative, and managerial occupations; 3. Sales occupations; 4. Administrative support occupations, including clerical; 5. Precision production, craft, and repair occupations; 6. Machine operators, assemblers, and inspectors; 7. Transportation and material moving occupations; 8. Handlers, equipment cleaners, helpers, and laborers; and 9. Service occupations To facilitate pay comparisons among major metropolitan areas, the Bureau of Labor Statistics has developed pay relatives, or ratios of pay, for nine groups of occupations (as well as for all occupations combined) in each of 77 metropolitan areas. How do the earnings of workers in San Francisco or Houston compare with those of workers in the United States overall? The National Compensation Survey (NCS), which was introduced in 1997, collects earnings and other data on employee compensation covering 480 detailed occupations in 154 metropolitan and no metropolitan areas. Occupational earnings from the NCS are published annually for more than 80 metropolitan areas and for the United States as a whole. 1 These estimates are produced by surveying a randomly selected sample of occupations. In the NCS, samples of employer establishments and occupations are selected using a probability proportionate to size technique. All establishments and
Labor Market
A place where labor is exchanged for wages. These places are identified and defined by a combination of the following factors: 1. Geography (local, regional, national, international), 2. Industry, 3. Education, licensing or certification and 4. Function or occupation. Lead or Lag Policy: follow or exceed the market when adjusting pay structures. Labour Market Flexibility LABOR, One of the FACTORS OF PRODUCTION, WITH LAND, CAPTIAL and ENTERPRISE. Among the things that determine the supply of labor are the number of able people in the POPULATION, their willing ness to work, labor lows and regulations, and the health of the economy and firms, labor laws and regulations, as well as the PRICE and supply of other factors of production. In a perfect market, WAGES (the price of labor) would be determined by SUPPLY and demand, but the labor market is often far perfect. Wages can be less flexible than other prices in particular, they rarely fall even when demand for labor declines or supply increases. This wage rigidity can be a cause of UNEMPLOYMENT. Labour Theory of Value The notion that the value of any good or service depends on how much LABOUR it uses up. First suggested by ADAM SMITH, it took a central place in the philosophy of KARL MARX. Some neoclassical economists disagreed with this theory, arguing that the PRICE of something was independent of how much labor went into producing it and was instead determined solely by SUPPLY and DEMAND A flexible LABOUR market is one in which it is easy and inexpensive for FIRMS to vary the amount of labor they use, including by changing the hours worked by each employee and by changing the number of employees. This often means minimal REGULATION of the employment (no MINIMUM WAGE, say) and weak (or no) trade UNIONS. Such flexibility is characterized by its opponents as giving firms all the power, allowing them to fire employees at a moments notice and leaving working feeling insecure.
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occupations in the survey are assigned a weight to reflect the probability of their selection in the sample. These weights reflect the relative size of the occupation within the establishment and the relative size of the establishment within the sample universe. Occupations with lower weightssuch as sailors and deckhands in Phoenix-have less of an impact on the overall U.S. wage level, while occupations with higher weights-such as elevator installers and repairers in New Yorkhave more of an impact on the overall U.S. wage level. In order to facilitate comparisons of occupation pay levels across metropolitan areas, BLS has developed pay relatives, or ratios of pay, for nine groups of occupations (as well as for all occupations) in each of 77 major metropolitan areas and the United States as a whole. The pay relative for each occupational group in an area expresses its average pay2 as a percent of the pay for a comparable occupation group in the entire United States. The pay relative for the United States as whole always equals 100. For example, the pay relative for all occupations in San Francisco was 119 in 1998, meaning that workers in San Francisco earned 19 percent more than the U.S. average for comparable workers. The pay relative for Houston was 104, or 4 percent more than the U.S. average. The pay relatives for each area are expressed in terms of their relation to the U.S. average. The nine occupation groups used in pay relatives are (1) professional specialty and technical occupations; (2) executive, administrative, and managerial occupations; (3) sales occupations; (4) administrative support occupations, including clerical; (5) precision production, craft, and repair occupations; (6) machine operators, assemblers, and inspectors; (7) transportation and material moving occupations; (8) handlers, equipment cleaners, helpers, and laborers; and (9) service occupations. Table 1 presents 1998 pay relatives for each occupational group in 77 metropolitan areas. Comparability There are a number of occupational characteristics that the National Compensation Survey captures that can influence pay levels, including the mix of occupations and work levels studied, differing workweeks, and survey timing. Since the survey design calls for probability proportionate to size occupational sampling, the occupations selected in one area will not be the same as those selected in another area. In addition, occupational work levels as well as scheduled hours per week will differ between areas. Data for each NCS area are published once per year, but the publications are produced in panels every 3 months. Thus, the published average reference dates will usually differ between areas. When calculating pay relatives BLS tries to decrease the effect of these different factors as much as possible. Occupations, levels, workweeks, and reference dates are taken into account in the computation of pay relatives.
Occupations and Levels The pay relative calculation for each area uses comparable jobs at both the area and national levels. That is, occupations found in the national database that are not found in the area database are not used in the calculation of pay relatives for that area. For example, if architects are not found in the Denver survey, then national data for architects are not used in the calculation of pay relatives for Denver. Similarly, the working levels of incumbents within occupations are also comparable between the area and the national database when calculating pay relatives. These levels reflect knowledge, skills, responsibility, and other factors.3 Levels not observed within an areas occupations are not used in the national database for calculating pay relatives. For example, if the category level-13 architects are not found in the Denver survey, then level-13 architects are removed from the national estimates and are not used in the calculation of pay relatives for Denver. Workweeks In the National Compensation Survey, average rates of pay are weighted by the number of weekly hours worked. That is, rates of pay associated with shorter workweeks will not count as much in the average as rates associated with longer workweeks. The hourly wages of full-time workers count more than those of part-time workers. When determining how area earnings compare with national earnings, the average rates of pay calculated for comparable occupations within the nine occupation groups reflect a comparable composition of occupation workweeks. In order to maintain comparable workweeks, the average weekly hours of work calculated for each occupation in the area are also used in the national calculation of average hourly rates of pay for pay relative purposes. For example, if level-13 architects in Denver work an average of 38 hours per week, this will be assumed to be the national average weekly hours for level-13 architects when calculating pay relatives. Reference Month Adjustment In the National Compensation Survey, data for each area are collected once per year. The reference date for each area differs depending on when the data were collected. For example, the data used to produce the 1998 estimates for the United States as a whole were compiled from data collected from the 154 NCS localities between July 1997 and April 1999. The average reference date for these 154 areas in the United States was August 1998. Before calculating the pay relatives for each area, an adjustment was made to the U.S. wage rate to account for differences between the average reference month for each area and the reference month of August 1998 for the United States as a whole. This adjustment was based on published estimates of wage change from the Employment Cost Index (ECI). To calculate the adjustment factor, monthly indexes of wages were interpolated 4 from the published ECI quarterly indexes for all occupations and for each of the region occupation groups. The cumulative change in the wage index between August 1998
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and the reference month for a specific area was used to adjust the national wage estimate. The adjusted national wage estimate was used to calculate the pay relative for the area. For example, to adjust the national estimate of comparable wages to reflect Denvers May reference month, the interpolated wage index for all occupations in May is divided by the interpolated index for August to estimate wage change over the period. Thi etma eo c a g i t ea j s me t ECI factor, s si t f h n e s h d u t n ,o r applied to the national estimate of comparable average wages. That is, national average comparable wages are decreased to reflect what they would have been in May. This adjusted estimate is used to calculate the pay relative for Denver and for any area with a May reference month.
area survey are too small to permit estimate pay relatives for each of these determinants. Another limitation of pay relatives produced from the National Compensation Survey is that the pay relatives for two different areas are not strictly comparable. To make precise pay relative comparisons, the mix of occupations and work levels studied, the differing workweeks, and the average reference periods would need to be adjusted. Currently, such adjustments are made between each area and the United States as a whole. To compare each area to every other area would require thousands of additional calculations. Finally, pay relatives from the National Compensation Survey do not address nonwage compensation. For example, an architect in Denver may earn $25 per hour and have a health care benefit worth an additional $3 per hour, while an architect in Houston earning similar pay might not receive a health care benefit. The pay relative only includes the wage compensation.
Comparing Wages in Four Cities

Chart 1 compares four of the nine major occupational groups5professional specialty; executive; administrative support, including clerical; and service occupations-from four different metropolitan areas of the United States: Cleveland-Akron, Ohio; Houston-Galveston-Brazoria, Texas; Orlando, Florida; and San Francisco-Oakland-San Jose, California. As shown in chart, earnings in San Francisco were much higher than the national average for all four occupational groups. (The overall U.S. rate equals 100.) In Orlando, Florida, on the other hand, the pay relatives for all four occupational groups were below the U.S. average.
Parastou Karen Shahpoori

Economist, Division of Compensation Data Estimation, Bureau of Labor Statistics. Telephone: (202) 691-6290, E-mail: Shahpoori_K@bls.gov
Notes
1. The data used in this article are from 1998, the most recent data available when the article was completed. See National Compensation Survey: Occupational Wages in the United States, 1998, Bulletin 2529 (Bureau of Labor Statistics, September 2000). For more information, see the National Compensation Survey (NCS) website on the Internet at http://www.bls.gov/ncs/home.htm. 2. Hourly wages are defined as the straight-time earnings paid to employees before deductions of any type. They exclude premium pay for overtime, nonproduction bonuses, and tips. Average hourly wages also reflect the hours worked by surveyed occupations. 3. Because the ECI is published quarterly (December, May, June and September), the estimates for the months in between have to be interpolated to relate to the reference month of the area estimates.
Differences Between the NCS and Earlier Surveys

The locality wage data produced from the National Compensation Survey differ considerably from those of the surveys predecessor-the Occupational Compensation Survey. 7 For example, the NCS covers all workers and provides information on a much broader range of occupations. Occupations surveyed for the NCS are selected using probability techniques from a list of all occupations present in each establishment. The NCS classification system specifies up to 480 individual occupations. Data from the Occupational Compensation Survey, on the other hand, were limited to a preselected list of 38 occupations, which represented only a small subset of all occupations in the economy. Moreover, the former survey did not use occupational sampling within an establishment. In the Occupational Compensation Survey, pay relatives were calculated, but only when the data collected for preselected occupations were judged sufficiently representative of all occupations in the area. The NCS is designed to collect a representative sample of occupations in each area, and the calculated pay relatives reflect this. Furthermore, the former survey collected data for full-time workers only, while the NCS collects data for both full- and part-time workers.
Limitations
Pay relatives derived from the National Compensation Survey have certain limitations. For example, they do not take into account some wage determinants. There are many commonly recognized determinants of wages, including the effects on average wage rates from different methods of pay (time versus incentive), collective bargaining status (union versus nonunion), establishment size, and industry. The sample sizes in the NCS
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Table 1. Pay relatives for major occupational groups in metropolitan areas, National Compensation Survey, 1998 (For each occupational group, average pay for all industries = 100)
Table 1. Pay relatives for major occupational groups in metropolitan areas, National Compensation Survey, 1998 (For each occupational group, average pay for all industries = 100)
White collar(1) Metropolitan Total area United States(2) Amarillo, TX Anchorage, AK Blue collar(1) Machi Transp ne Han Service ortatio operat dlers n ors 100 82 101 98 98 82 96 -117 100 83 102 96 87 93 79 81 131 100 100 92 84 Profe Executiv Sale Admini ssiona Precision e s strative l 100 84 105 99 95 90 89 91 93 100 89 109 103 102 96 106 95 -100 100 96 83 100 92 123 96 92 96 93 90 102
100 87 110
111 111 99 93 101 96
119 116 101 95 94 95 96 92 85 95 93 88
Atlanta, GA 99 AugustaAiken, GA- 94 SC Austin-San 93 Marcos, TX Birmingham, 94 AL Bloomingto 91 n, IN Bloomingto n-Normal, 104 IL BostonWorcesterLawrence, MA-NHME-CT
109 93 91 88 95 92 91 92
106 106
104
105
98
101 108
103
95
108
108 112
BrownsvilleHarlingen82 San Benito, TX BuffaloNiagra Falls, 100 NY CharlestonNorth 87 Charleston, SC CharlotteGastonia11.622.1
90
86
87
78
77
71
78
72
80
97
97
90
101
103
107
102
106 107
91
88
81
86
81
82
84
87
87
94
88
98
103 97
93
99
97
98
92
23
24
ChicagoGaryKenosha, IL-IN-WI
107
102
103
105 109
112
114
117
117 110
CincinnatiHamilton, 95 OH-KY-IN Cleveland103 Akron, OH Columbus, OH Corpus Christi, TX Dallas-Fort Worth, TX 96 89 95
92 101 94 89 94 94
95 104 92 111 99 91
95
94
93 103 100 90 93 101
94 107 95 93 93 109
99 109 96 75 95 102
103 99 108 104 104 101 82 95 82 93
105 100 93 96 91 95 98 82 98 93
DaytonSpringfield, 96 OH DenverBoulder97 Greeley, CO Detroit-Ann Arbor-Flint, 110 MI Elkhart99 Goshen, IN Fort CollinsLoveland, 88 CO Grand Rapids103 MuskegonHolland, MI GreensboroWinston97 Salem, NC Greenville, SC Hartford, CT Honolulu, 93 109 107
100 101
96
99
97
99
93
87
93
102 102
110 99 92
104 96 85
107 108 88 98 98 86
112 97 86
121 104 80
116 112 85
123 106 107 97 84 91
107
98
107 97
103
111
97
103 106
93 90 115 104
102 97 99 103
106 97 99 94
93 91 103 115
95 92 100 110
96 89 106 97
99 98
95 90
106 110 105 109
107 119 105 111
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HoustonGalveston- 104 Brazoria, TX Huntsville, AL 95
106 97 97 90 93 99 93 91 86 111
113 101 98 95 91 97 88 97 88 111
100 102 93 92
104 91 104 88 83 100 97 89 87 104
99 102 103 96 85 106 105 91 89 89
94 84 103 82 82 100 100 81 90 93
97 92
94 87
Indianapolis, 99 IN Iowa City, IA 92
106 97 88 82 96 85 86 85 93 86 102 92 87 85
104 98 91 89 95 97
Johnstown, 89 PA KalamazooBattle Creek, 101 MI Kansas City, 93 MO-KS Knoxville, 90 TN Lincoln, NE 88 Los AngelesRiverside107 Orange County, CA Louisville, KY-IN 99
113 104 103 95 97 97 96 87 91 108
116 108
101
97
97
95
101
107
93
101 95
MelbourneTitusville86 Palm Bay, FL Memphis, 95 TN-AR-MS Miami-Fort Lauderdale, 96 FL Milwaukee99 Racine, WI MinneapolisSt. Paul, 104 MN-WI Mobile, AL 89 New 94 Orleans, LA New York116 Northern New Jersey-
85
92
82
86
92
80
84
85
85
91 95 94 99 90 99 120
100 102 95 97 92 104 116
111 94 103 97 89 100
95 94 102 106 92 93 113
98 84 107 115 90 87 98
93 99 108 114 82 88 111
98 95
90 95
108 103 114 112 97 88 86 88
107 106 96 94 84 89
110 117
117 122
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25
26
NorfolkVirginia BeachNewport News, VANC Oklahoma City, OK
90
89
99
91
90
89
96
77
82
87
92
88 86
95 92
97 91
88 89
93 89
103 84
103 80
91 88
85 87
Orlando, FL 88 PhiladelphiaWilmingtonAtlantic City, 108 PA-NJ-DEMD PhoenixMesa, AZ Pittsburgh, PA 96 100
109
102
111 108
104
109
108
117 109
95 101 99
102 99 98
110 96 89 99 100 102
100 98 104
88 99 98
89 100 104
86
95
110 103 102 112
PortlandSalem, OR- 101 WA ProvidenceFall River103 Warwick, RI-MA RaleighDurham95 Chapel Hill, NC Reading, PA 100 Reno, NV 95 RichlandKennewick- 99 Pasco, WA RichmondPetersburg, VA Rochester, NY 93 102
108
102
97
107
97
92
107
93
106
91 108 96 94
100 91 87 99
97 89
96 96
92 96 101 104
100 101 86 92
97 94 96 110
94
94
105 111 91 92 98 105
107 97 89 103
92 105 92 103 110 94
96 101 97 101 104 104
89 91 95
94 97 93
96 97 99 107 111 85
96 96 106 99 100 86
87 98 102 107 108 75
97
90
107 114 105 95 106 107 107 113 84 90
Rockford, IL 96 Sacramento105 Yolo, CA Salinas, CA 108 San Antonio, 92 TX
120 105 121 101 96 90
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San Diego, CA
100
105
99
101 104
97
83
95
94
102
San Francisco119 Oakland-San Jose, CA SeattleTacomaBremerton, WA Springfield, MA Springfield, MO St. Louis, MO-IL 105
122
114
111 121
118
100
116
119 124
105
96
105 106
107
105
108
104 112
105 88 96
104 87 94 81
103 91 95 84
95 91 99 82
106 81 93 81
94 89 99 78
113 94 100 83
105 92 96 72
103 114 92 87
109 96 77 83
Tallahassee, 81 FL Tampa-St. PetersburgClearwater, FL 90
89
96
94
89
87
81
84
85
89
VisaliaTulare97 Porterville, CA WashingtonBaltimore, 103 DC-MDVA-WV Youngstown -Warren, 98 OH
105
98
97
93
89
90
88
92
103
102
101
101 105
103
106
102
111 103
96
101
100 93
98
106
99
99
101
Footnotes: 1. The full titles for the major occupational groups under the white-collar category are professional specialty and technical; executive, administrative, and managerial; sales; and administrative support, including clerical. The full titles for the groups under the bluecollar category are precision production, craft, and repair; machine operators, assemblers, and inspectors; transportation and material moving; and handlers, equipment cleaners, helpers, and laborers. 2. This survey covers all 50 States. Collection was conducted between July 1997 and April 1999. The average reference period was August 1998. Note: Dashes indicate that no data were reported or that data did not meet publication criteria.
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We all know that the nature of compensation and rewards depends upon the nature of job.So with regard to this statement let us analyse the latest compensation Package with regard to Sales position. Latest Incentive Compensation Strategies for Sales Positions How to Build Effective Pay for Performance Plans For Your Direct Sales Force and Other Emerging Customer-Facing Service Positions If you are currently paying your sales reps straight commission, this is an obsolete approach to sales compensation. If you are paying your sales reps a straight salary, you are also using an old approach that is likely costing your company business sales. Over the last decade, many factors have transformed the nature of selling. Markets have changed from being stable and predictable to being in constant flux. Mass market product development has given way to customized solutions for more demanding customer expectations. Alternate distribution and ecommerce channels have changed the role of sales. All in all, it is this new state of affairs that combine to create a climate where companies need to take a closer look at sales force effectiveness and their sales compensation plans. This seminar will provide participants with the tools, process and solutions to rethink their incentive compensation plans for the evolving sales and customer facing positions. As well, we will identify and describe how to handle a broad range of challenging incentive compensation issues. The program is ideal for business owners, senior sales, marketing executives, HR and compensation specialists. Content Effective Sales Force Management Key drivers of sales force effectiveness How to align sales execution components with business objectives & strategy Sales system execution components Aligning your company culture and business planning processes are with your sales system Sales Compensation Strategies: Determining the Right Options The purpose of sales compensation - What it is and what it is not Characteristics of a dynamic sales incentive plan Why sales compensation plans fail to deliver higher results Understanding the principles of Target Total Compensation (TTC) and Setting desired pay Mix (Base Salary vs. Incentive) Determining the right leverage (upside potential) for your incentive compensation Formula Commission vs. Bonus Determining the plan qualifiers Linkage Between Sales Roles and Compensation Developing the best sales organization design
Sales role definitions Factors that drive sales role changes Measuring cost of a sales contact Customer segmentation Customer value The Engine of Change Types of selling and sales strategy Defining new sales roles Sales Performance Measurement Why performance measurement is critical to sales success Key sales compensation design factors Criteria for effective measurement of sales performance Traditional forms of measurement Defining performance measures Performance measures for new sales roles Designing Customized Compensation Plans to Meet Your Needs Creating a customized sales compensation model Organization of the compensation design team Corporate assessment of current plans and future needs Establishing guiding principles Compensation design factors Detailed plan design Plan documentation Communication and implementation considerations Incorporating sales incentive planning into your business planning process Design Issues for New or Specialized Sales Roles Emergence of new sales roles Types of new/specialized sales roles Compensating new sales roles plans and measures that work Measurement and compensation for team selling Compensating Your Sales Management Team Types of sales management roles How should sales managers spend their time Sales manager performance measures Handling difficult issues affecting sales management compensation plans Challenging Sales Compensation Concepts The importance of target setting and tracking Pooled pre-set earnings distribution Rewarding profitability Dealing with long sales cycles Account management plans Team selling Customer satisfaction ratings Call centres Life cycle changes
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Competency-based sales compensation Managing e-Sales compensation What You Will Learn What are the key drivers and operational components of an effective sales systems? What can you reasonably expect from an Incentive Compensation Plan that is aligned with the corporate objectives, strategies and the sales operational components? What are the major design factors for Incentive Compensation and how are they incorporated into the design process? How has the traditional role of sales been changing and what effect is that having on the selling system and compensation? What is changing in sales performance measurement? How to manage the redesign of your Incentive Compensation Plan(s). What is different about compensating the new emerging customer facing positions related to CRM? Critical issues in designing Sales Manager compensation. How to tackle solving your most pressing sales compensation issue and understand a number of other challenging situations?
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LESSON 5: INTRODUCTION TO COMPENSATION, REWARDS, WAGE LEVELS AND WAGE STRUCTURES

Learning Objective

UNIT II
To further understand the concept of Compensation and Reward To understand Methods of Compensation To know the concept of Wage Level and Wage Rate To understand the concept of Wage Structure Determinants of the wage structure
Salary refers to the earnings of employees whose pay is calculated on a weekly, bi-weekly, semi-monthly, or monthly basis. Commissions Sales commission plans vary greatly from company to company, but are generally based on the dollar amount of sales made during a payroll period. Commission income is considered the same as wages or salaries for withholding and reporting purposes. Commissions are usually computed on a certain percentage or commission rate. Some commissioned employees may not be exempt from the minimum wage requirement. The employer must determine the regular, hourly rate for each non-exempt salesperson during the week and make sure this rate is at least equal to the current minimum wage. Piece-Rate Plan Workers paid on a piece-rate plan receive a certain amount for each item produced. Gross earnings equal the rate per item multiplied by the number of items produced during the payroll period Combination Plan Many businesses pay sales people both a salary and a commission. Such a combination plan provides some regular income and offers an incentive for superior sales. Draws Draws are often given to salespeople who work only for commission. A draw is an advance given to a salesperson that will be collected when future sales transactions are closed. Draws will be subtracted from a salespersons commissions after any applicable taxes and deductions have been withheld. The draw is subject to all payroll withholding taxes. Other Types of Earnings Bonuses Businesses offer bonuses in many different ways. Some bonuses are based on profitable operations of the business and are paid at year-end. A common type of bonus may be offered to salespeople for selling a specific item. Another type of bonus plan, one that may be part of an employment agreement, pays managers if the yearly sales or profits reach a certain level. Profit Sharing Payments A profit sharing plan, like a bonus plan, can be structured in a number of different ways. An employer may elect to pay cash to employees, give them stock in the business, or set up a deferred compensation fund for retirement. Other Taxable Forms of Compensation Sometimes other payments to employees are required that are equivalent to wages. These include non-cash fringe benefits, reimbursed expenses, sick pay, supplemental unemployment
Introduction
It is extremely important to have a well-designed compensation system. A properly planned and administered salary system is one of the most important aspects of order management. Deciding how and what people should be paid is what is covered under salary administration. In this unit we shall pay special attention to the process offering salary levels, and designing salary structures. More dynamic aspects such as rate ranges, salary progression policies and procedures will also be examined.
Compensation and Rewards

Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organisations provide their employees. Money is included under direct compensation (popularly known as wages, i.e., gross pay); while benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employers contribution to retirement, pay for vacation or illness, and employers required payments for employee welfare as social security. A wage (or pay) is the remuneration paid, for the service of labour in production, periodically to an employee/worker. Wages usually refer to the hourly rate or daily rate paid to such groups as production and maintenance employees (blue-collar workers). On the other hand, Salary normally refers to the weekly or monthly rates paid to clerical, administrative and professional employees (white-collar workers).
Methods of Compensation
The operating companies need to develop a compensation package for their employees depending on the size and type of business, employers may choose to compensate their employees in a number of different ways. Below is given the different methods of compensation: Wages and Salaries Although we use the terms wages and salaries interchangeably, in payroll accounting, the two terms have different definitions Wages refers to the earnings of employees whose pay is calculated on an hourly basis.
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benefits, and tips. As with any form of compensation, these payments are subject to federal taxes. Non-Cash Fringe Benefits Non-cash fringe benefits must be included in an employees gross earnings. Fringe benefits include the following:

Exempt Payments Compensation not considered wages includes sickness and injury payments under a workers compensation law, and other payments that are likely to be tax deductible such as qualified moving expense reimbursements.
Wage Level
We have already discussed before that wages are something received by a worker or paid by an employer for time on the job; money received or paid usually for work by the hour, day, or week, or month; a calculation or statement of money earned for a period of time from one hour (hourly wage) up to one year (annual wages). Now let us discuss about wage level. What is a Wage Level? The wage levels represent the money an average worker makes in a geographic area or in his organization. It is only an average; specific markets or firms and individual wages can vary widely from the average. How are Wage Levels are Set? Wage levels are calculated using position importance and skill required as criteria. Consult your trade association and accountant to learn the most current practices, cost ratios and profit margins in your business field. While there is a minimum wage set by federal law for most jobs, the actual wage paid is entirely between you and your prospective employee. What is Stagnated Wage Levels? An add to Housing Woes of Poor. The continuing stagnation of the income levels for the most disadvantaged ... The continuing stagnation of the income levels for the most disadvantaged households is causing serious housing challenges for people in the lowest 20 percent of the income scale. This is one of the findings of The State of the Nations Housing 2002, issued by the Joint Center for Housing Studies at Harvard University. Furthermore, the current high home prices, while good for sellers, work against the lowest income households, driving up both purchase prices and rents for twenty million families. Although the plight of renters receives much attention, the vast majority of lowest income owners also face severe housing affordability problems, said the report. Overall, some 8.6 million renters and 6.4 million owners in this group pay more than 30 percent of their limited incomes for housing and/or live in structurally inadequate or overcrowded homes. The 2002 report, based on 2000 census data, indicates a large disparity between even middle-income and high-income households. The top category has shot up from slightly below $100,000 in 1975 to just under $150,000 in 2001, while the lowest income has stayed constant at below $20,000. Incomes at the $50,000 level in 1975 have increased but lag far behind the actual dollar and percentage increases of the highest level. The report shows that the lowest income households are white, own their own homes, and are either employed or retired. A growth in the overall percentage of homeownership somewhat offsets the negative figures. Home ownership continues to increase, especially among minority groups. Minorities accounted for 40 percent of the net new owners during the last
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Personal use of company cars Free or discounted airline flights Vacations Discounts on property or services Memberships in country clubs or other social clubs Tickets to entertainment or sporting events
Reimbursed Expenses Payments made to employees for travel and other necessary business expenses are taxable only if: The employee does not have to substantiate those expenses with receipts or other documentation. The employer advances an amount to the employee for business expenses and the employee does not return any unused amount. Travel and entertainment reimbursements, or other expense allowances, paid to an employee under a non-accountable plan are also included as wages. Under a non-accountable plan, the employee is given a certain amount of money toward expenses, but does not have to substantiate them or return any excess cash. Under an accountable plan, travel advances paid to the employee prior to travel in excess of substantiated expenses must be repaid to the employer within a reasonable and specified period of time. Sick Pay In general, sick pay is any amount paid to an employee because of illness or injury under a plan providing for such benefits. The amounts are disbursed by the insurance company or the employees trust, and are referenced as third party payments. Tips In certain businesses, employees receive compensation in the form of gratuities or tips. A tip is an additional amount from a customer for services rendered. Bartenders and restaurant servers usually receive tips in addition to wages. Hair stylists and taxi drivers also depend on tips as a major source of income. Supplemental Wages Supplemental wages differ from regular wages only in that they may be based on a different payroll period, computed on a different compensation plan or rate, or paid at a different time than regular wages. In addition, certain payments are, by their nature or timing, supplemental wages. Such payments include retroactive pay increases, severance pay, bonuses, commissions, taxable fringe benefits, awards and vacation pay on termination. The distinction between regular and supplemental wages is important because special rules apply to withholding on supplemental wages.
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five years, the report states. A large part of this may be accounted for by the increase of homeowners among immigrant populations. An expanding market for low-income borrowers has resulted in a dual mortgage market, according to the Harvard report. Higher income borrowers continue to use conventional mortgages keyed to the prime interest rate. Low-income borrowers turn more toward government-backed and subprime mortgages and to manufactured homes. Sub prime rates can be higher than conventional mortgages and often expose borrowers to greater risks. What is a Wage Rate? A wage is an amount of money paid to a worker for some specified quantity of labor. When expressed with respect to time, it is typically called the wage rate. The wage rate is the pre-tax amount of payment, usually monetary, paid per unit of labor. It is the main monetary item that the worker and the employer focus on.
Definition and Concept of Compensation Structure
Biology, the increase in size or activity of one part of an organism or organ that makes up for the loss or dysfunction of another. Psychology, behavior that develops either consciously or unconsciously to offset a real or imagined deficiency, as in personality or physical ability. Hence we can realize that compensation management is an integral part of the labor market characteristics in order to attract capable employees by respective organizations.
Determinants of the Wage Structure

Before discussing the wage determination process in detail let us first discuss the determinants of wage structure. Economic Determinants In the labor market there commonly exists, known as Occupational Wage Differentials. The reason for its existence is that in different occupations require different qualifications, different wages of skill and carry different degrees of responsibility, wages are usually fixed on the basis of the differences in occupations and various degrees of skills. Adam Smith explains occupational wage differentials in terms of : 1. Hardship, 2. Difficulty of learning the job, 3. Stability of employment, 4. Responsibility of the job, and 5. Chance for success or failure in the work. This is a theory of wage structure. But his standards of worth are equally useful in explaining the complexity of wage structure decisions. The market value of an item is the price it brings in a market where demand and supply are equal. Use value is the value an individual buyer or seller anticipates through use of the item. Use value obviously varies among individuals and over time. Job Worth These two concepts of worth and the concept of internal labor markets combine to explain important differences among employers in wage structure decisions. Organizations with relatively open internal labor markets (organizations in which most jobs are filled from outside) make much use of market value. They also make much use of wage and salary surveys in wage structure decisions. Conversely, organizations with relatively closed internal labor markets (most jobs are filled from inside) emphasize use value. Their analysis of job worth relies more heavily on perceptions of organization members of the relative value of jobs. Training Some other wage structure determinants derived from economic analysis may be noted. Training requirements of jobs in terms of length, difficulty, and whether the training is provided by society, employers, or individuals constitute a primary factor in human-capital analysis and thus job worth. The interaction of ability requirements with training requirements can yield different job values depending on the scarcity of
As it has been discussed in the earlier chapters that compensation is the act of compensating or the state of being compensated or something, such as money, given or received as payment or reparation, as for a service or loss. What is Compensation Structure? A Histogram of what people earn. Although money isnt everything, it certainly is one of the top issues potential employees look at when interviewing new companies. (Yes, face it, they are interviewing YOU.) Whether youre offering a straight basic salary structure or an incentivebased pay structure may make or break you in the eyes of top job candidates. Compensation structure consists of the various salary grades and their different levels of single jobs or groups of jobs. The term wage structure is used to describe wage/salary relationships within a particular grouping. The grouping can be according to occupation, or organization, such as wage structure of craftsman (carpenters, mechanics, bricklayers, etc.) The wage structure or grade is comprised of jobs of approximately equal difficulty or importance as determined by job evaluation. If the point method of job evaluation is used, the pay-grade consists .of jobs falling within a range of points. If the factor comparison plan is used, the grade consists of a range of evaluated wage rates (or points, if the wage rates are converted to points). If the ranking plan is used, the grade consists of a specific number of ranks. If classification system is used, the jobs are already categorized into class or grades. So the term Compensation structure means the pattern or the break up of the salary paid to the employees in their respective organization. Please remember that while determining the compensation structure of employees, it is not only the mathematics but other subjects such as biology and psychology play a major role in compensation determination.
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the ability required and the number of people who try to make it in the occupation and fail. Employee Tastes Employee tastes and preferences are another economic factor. People differ in the occupations they like and dislike. In like manner, occupations have non-monetary advantages and disadvantages of many kinds.
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LESSON 6: INTRODUCTION TO WAGE DETERMINATION PROCESS AND WAGE ADMINISTRATION RULES

Learning Objective

To know the Factors Affecting wage determination process To understand the Wage Determination Process To know the Concept of Wage Surveys To understand the Preparation of a Wage Structure
When this is hard to do directly, the person compares his or her I/O ratio with some other I/O ratio. Anything the person perceives as relevant goes into these input and output considerations. Inputs and Outputs Compensation decisions often focus upon the value of the job, both in the marketplace and within the organization. Although these are critical input factors, neither organizations nor individuals would be satisfied by making the employment exchange solely on this basis. To explain, compensation inputs can be classified into three general areas:

Introduction to Factors Affecting Wage Determination Process

Individual Wage Determination From the viewpoint of the employee, the end product of any compensation program is a paycheck. The decision regarding the type of salary administration and/or structure system to be used do not, by themselves, deliver a paycheck to the employee. The wage determination must be personalized by making a further set of decisions. The first compensation decision, the wage level, is an external organizational decision that determines the organizations competitive posture toward its human resources. The second major compensation decision is an internal organizational decision involving the structuring of the jobs within the organization. Putting these two decisions together in a wage structure provides the wage or range of wages that the organization perceives as equitable for each of its jobs. Although pay rates are determined for jobs, it is people who receive paychecks. So the next decision to be made is whether all people on a particular job are to receive the same pay or different pay; and if different, on what basis and how? These are not trivial questions. The great majority of workers are paid through systems that provide for variable payment for the jobs. Such systems reflect the realization by management and employees that it is important to reward more than just minimal performance on the job. Thus management seeks to reward performance through meritbased and incentive pay systems, while employees and their unions seek to have learning, proficiency and seniority rewarded. The Decision to Participate The decision to participate assumes maintenance of an equilibrium between the inducements the organization offers and the contributions the person is asked to make. The organization must maintain, as a minimum, a balance of these two in the mind of the person, and, more realistically, a balance in the persons favor. The ideas of J. G. March and H. A. Simon have been translated into equity theory. Pay system decisions can be regarded as focusing on individual equity. Equity theory states that a person compares his or her inputs or contributions with the outcomes from participation (I/O ratio).
34
Job; Performance; and Personal.
Pay system decisions must incorporate the performance and personal factors into compensation, in order to provide a regular paycheck perceived as equitable to the employee. Equity as a Cognitive Process Experiencing equity is a cognitive process. Peoples perceptions determine whether their pay situation is equitable. Not all individuals within an organization are likely to perceive their pay situation the same, nor is the organization (through its management) likely to see the situation the same as the employees. This makes the creation of equity in the organization a difficult and recurring problem, not one that is determined once and for all. Influence Organizations are not powerless in this cognitive process. They can influence the perceptions of the person in a number of ways. First, they can define clearly the inputs required of the person. This allows the person to accept or decline the exchange in the way that a student stays or leaves a course after the professor hands out a syllabus. Second, organizations can affect (through communication and influence) the inputs and outcomes the person focuses on. Third, they can make certain responses to inequity more likely to occur than others. If an organization wishes to retain people, it may make quitting an unattractive way to solve feelings of inequity. The Decision to Produce D. Katz claims that organizations seek three things from employees: 1. Membership, 2. Role behavior and
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3. Innovative and spontaneous behavior. Membership includes remaining with the organization and being present for work regularly. It provides consistency to the organizations labor force and reduces staffing and training costs. Role behavior consists of doing the job as it is described and/ or assigned. This is also needed for consistency and coordination of activities within the organization. To the extent that role behavior is explicitly spelled out and is seen as the basis for the persons input to the organization, this requirement is also covered under the decision to participate. However, not all required role behavior is easily spelled out in jobs, and all jobs have areas of discretion that allow the person freedom in accomplishing tasks. Innovative and spontaneous behavior addresses the organizations need for the person to adapt what he or she is doing, and how it is being done, to the constantly changing circumstances within the organization. Clearly this requirement is not covered in the decision to participate. The decision to produce, then, moves the person beyond the minimum required just to maintain membership. It is what most managers call motivating their employees. A useful framework for this decision is provided by expectancy theory. This theory has three basic parts: 1. Valence, 2. The performance-reward connection and 3. The performance-effort connection. Valence In expectancy theory valence means the strength of a reward. Does the person want the reward the organization is offering? Since our subject is pay, we can be confident that the answer is yes but not the same size yes for all people. People differ in how valuable money is to them compared with other things on and off the job. Content theories help us understand how peoples need for money may be very different. The advantage of pay as reward, though, is that it is seen as a path to many different types of need satisfaction. How much increase or difference in pay does it take to make the person respond? This is the difficult question of the proper size of a meaningful pay increase. The organization must worry not only about whether pay is a motivator but also about whether it is offering enough to make it worthwhile for the person to produce beyond the minimum. The Performance-Reward Connection This may be the most important part of the decision to produce, since if the individual does not see the rewards he or she wants as being contingent on the behaviors or outcomes the organization wants, then the organization is not likely to obtain those outcomes. This connection would seem to be obvious, but in fact it is not. Managers find it difficult to always define the results and behaviors they desire. Also, it is difficult to measure and/or
appraise whether these outcomes have occurred. In short, the definition of performance is difficult in and of itself. The individual must understand what is requested and see its connection with the reward. This, like all understanding based on communication, is hard to realize perfectly. Most organizations claim they have a merit system of pay, but most employees do not perceive that merit is the primary basis on which pay adjustments are made. In some cases this perception is valid in that the organization says it uses merit but does not; in other cases the organization is rewarding merit but is not accurately communicating this fact to the employees. The Performance-Effort Connection People must feel that their efforts will affect their performance. This connection may seem obvious but it is not. There are many jobs in which variations in performance are impossible or inconsequential. To try to connect performance to reward in such jobs frustrates the incumbent. Also, individual effort is not a useful gauge in the many jobs whose tasks take two or more people to accomplish. Finally, the effort-performance connection highlights the fact that the person must perceive that he or she can adequately perform the task. All of these subjects should be taken into account in designing a pay system (and will be taken into account in some manner, even if by the default copying of some other organizations design and definitions).
The Wage Determination Process

Usually, the steps involved in determining wage rates are: performing job analysis, wage surveys, analysis of relevant organizational problems forming wage structure, framing rules of wage administration, explaining these to employees, assigning grades and price to each job and paying the guaranteed wage.
Fig.1 Steps Involved in Determination of Wage Rate
The Process of Job Analysis

Results in job descriptions which lead to job specifications. A job analysis describes the duties, responsibilities, working conditions and inter-relationships between the job as it is and the other jobs with which it is associated.
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It attempts to, record and analyze details concerning the training, skills, required efforts, qualifications, abilities, experience, and responsibilities expected of an employee. After determining the job specifications, the actual process of grading, rating or evaluating the job specifications, the actual process of grading, rating or evaluating the job occurs. A job is rated in order to determine its value relative to all the other jobs in the organization which are subject to evaluation. The next step is that of providing the job with a price. This involves converting the relative job values into specific monetary values or translating the job classes into rate ranges.
evaluation, whether the organization would recruit new employees after revised wage structure; are the prevailing rates in industry or community inconsistent with the results of job evaluation? What will be the result of paying lower or higher compensation; and what should be the relationship between the wage structure and the fringe benefit structure? Belcher has listed 108 variables which can affect levels of compensation and the wage structure
These surveys may be carried out by Mailed questionnaire, telephone, or personal interviews with other managers and personnel Agencies. A wage survey to be useful, must satisfy these points: (a) Frequency Affected by rapidity of changes, current and contemplated. Once per year is common. (b) Scope (number of firms) Influenced by the geographic area from which people are drawn, the number of units competing for this labor, accuracy requirements, and willingness of organizations to share information. (c) Accuracy The diversity in job titles and specific job duties is staggering. The greater the accuracy and detail needed, the greater the requirements for careful description and specification and surveyors reliance on person-to-person interviewing rather than mailed questionnaires. Such wage surveys provide many kinds of useful information about differences in wage levels for particular kinds of occupations. This can have a great influence on an organizations compensation policy.
WAGE RATES
Preparation of Wage Structure

The next step is to determine the wage structure. For this, several decisions need be taken, such as: a. whether the organization wishes, or is able, to pay amounts above, below, or equal to the average in the community or industry; b. whether wage ranges should provide for merit increases or whether there should be single rates; c. the number and width of the pay grades and the extent of overlap; d. which jobs are to be placed in each of the pay grades; e. the actual money value to be as signed to various pay grades;
Wage Surveys
Once the relative worth of jobs has been determined by job evaluation, the actual amounts to be paid must be determined. This is done by making wage or salary surveys in the area concerned. Such surveys seek to answer questions like what are other firms paying? What are they doing by way of social insurance? What is the level of pay offered by other firms for similar occupations? etc, by gathering information about benchmark jobs, which are usually known as good indicators. There are various ways to make such a survey. Most firms either use the results of packaged surveys available from the research bodies, employers associations, Government Labour Bureaus, etc., or they participate in wage surveys and receive copies of results, or else they conduct their own.
WAGE LINE
Plotting jobs on a curve (Some points fall well off wage line)
f. differentials between pay plans; and g. what to do with salaries that are out of line once these decisions have been made. There are though no hard and fast rules for making such decisions, and procedure commonly used is the two-dimensional graph on which job evaluation points for key jobs are plotted against actual amounts paid or against desired levels. Plotting the remaining jobs then reveals which jobs seem to be improperly paid with respect to the key jobs and to each other. In the above figure, wage rates are shown on the vertical axis while pay grades (in points) along the horizontal axis. The wage curve shows the relationship between: i. the value of the job; and ii. the average wage rates of these grades (or jobs). The following steps are involved in drawing a wage curve: 1. Finding out the average pay rate for each pay grade, for each pay grade may have several jobs and chances are that each of these jobs is currently being paid a different rate.
Relevant Organizational Problems

In addition to the results of job analysis and wage surveys, several other variables have to be given due consideration in establishing wage structure. For example, whether there exists well-established and wellaccepted relationships among certain jobs which can upset job
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2. Plotting the wage rate for each pay grade. 3. Drawing Wage Lines through the points plotted. These lines may be straight or curved; if the pay grade comprise a single job cluster, a straight line is usually employed. 4. Pricing jobs: Wages along the wage line are target wages or salary rates for the jobs in each pay grade. It is possible that some of the plotted points may fall off the wage line. This will mean that average for that grade is too high (or too low), given the pay rates for other grade. If the plot falls below the line, raises for jobs in this pay grade may be required. Such a raise may be given either immediately or in one or two steps.7 If the plot falls above the wage line, that indicates rates are high and the over paid employees are often called red circle, flagged, or overrates. This will necessitate either: i. To freeze the rate paid until general salary increases bring the other jobs into line with it, or
or the sales girls in a department store or the stenographers in. an office (Social custom). Certain job clusters may be more closely related to some rather than to other clusters. In this sense, clerical rates as a whole may be closely related to other clerical rates than to managerial or factory rates... Livernash described that: Broad groups may be illustrated within manufacturing as: 1. Managerial- executive, administrative, professional, and supervisory; 2. Clerical; and 3. Factory, within each broad group, narrower groups are obvious. Within the factory group are maintenance, inspection, transportation and production. Within production are certain smaller groups, varying with the nature of the industry. This indicates the need for having several pay ranges for each organization. Such a range usually has several advantages: i. The management can take a more flexible stance with respect to the labour market. ii. It makes it easier to attract experienced employees from other organis9.tions. iii. It helps to ensure that there is an. overlap between the pay rates and those prevailing in the labour market. iv. It also allows the management to provide for performance differences between employees. While determining pay ranges the following consideration should be attended to: 1. It is important to keep in mind that there is an adequate differential, between superiors and subordinates - whether they are paid under the same pay plan or under different ones. 2. When the pay-range of one group is changed, equal attention must be given to the pay-level of the other. 3. Because of the continuous rise in wage and salary levels, a rise resulting from a variety of environmental pressures, considerable attention must be given to handling upward changes in wage-structure. Some firms give general percentage or across the board pay increases shortly after wage increases are negotiated. Others give increases based on merit or length of service. The sound thing is to make general adjustments in wage structure according to the price index number. 4. The existing pay structure should be regularly reviewed and revised. This will make job evaluation programme more acceptable to employees. 5. Regional differences in wages should invariably be maintained. Forces that favour regional differences are: low mobility; lower skill jobs; major cost of living differences between areas; added sources of income or characteristics (rural versus urban or industrial); seasonal occupations as in agriculture versus stable occupations. However, several forces work to level these differences. The forces that favour uniformity in wages are: High mobility
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ii. To transfer or promote the employee to a job where -he can legitimately be paid his current rate; or iii. To cut to the maximum in the pay grade. It is a standard practice to establish pay grades or equal width or point spread, i.e., each grade might include all those jobs falling between 50 to 100 points, 100 to 150 points, 150 to 200 points, and so forth. Since each grade is of the same width, it is necessary to determine how many grades there should be. In an industry, the number varies from as few as five to as high as thirty. Two points need consideration when deciding the number of grades. They are mentioned below: First, the size of the organization, i.e., if there are 1,000 jobs to be graded, more pay grades will be needed, than where the jobs are few, say 100. Second, the broadness of the grades. For instance, in the case of hourly jobs, the maximum of individual pay grades may vary from 10 to 20% above the minimums; while in case of salaried employees the maximum of pay grades may vary from 15 to 75% above the minimum. Some authorities feel that there should be only one comprehensive pay grade for each organization. But it is probably more realistic to have several pay. grades/ranges Several wage. structures are developed - one for each type of job or job cluster Dunlop describes the cluster concept as follows: A job cluster is defined as a stable group of job classifications or work assignments within a firm... which are linked together by: 1. Technology, 2. The administrative organization of the production process, including policies of transfer, lay-off, and promotion, or 3. Social custom that they have common wage-making characteristics.... Thus, the employees on a furnace or a mill and the crew of a train or a plane can constitute a job cluster (technology); so also may employees in a department (administrative organization),
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between regions and/or employees; access to timely, reliable information, wide spread unionization efforts, (often along industry/ occupational lines).
This is illustrated in figure 16-1, option a.
Rate Ranges
Rate ranges can be developed in various ways. The one usually adopted approach is to use the Wage Curve. A maximum and minimum rate for each grade, such as 15% above and below the wage line, may be arbitrarily decided. The maximum and minimum
Figure 16-1. Alternative types of rate ranges
If a job rate is used, the wage line provides the job rate. The individual is paid in accordance with the number of points assigned the job by the job evaluation system, by the competitive value discovered in a review, a salary survey, or by the competitive value provided by a research analysis product. Where the grade rate prevails, the individual is paid in accordance with the grade level assigned to the job. This type of system is useful where performance variation and/ or other personal characteristics are nonexistent or unimportant. Not all jobs allow for a significant difference in performance.
Setting of Rate Ranges
lines may then be drawn on the curve; the range may be allowed to become wider for the higher pay grades. This reflect the greater demands (and performance variability) inherent in jobs in these grades. Most organizations structure their rate range to overlap a bit. Thus, a person who has been on the job larger and is more experienced may earn more than a fresh employee in the next higher pay grade. The major way in which organizations allow for factors other than the job to enter into the determination of an individuals pay is to develop a range of pay for each job or grade of jobs. A rate range is a range of pay determined by the organization to be appropriate for anyone who occupies a particular job. A rate range consists of a minimum pay rate (the beginning hire rate), a midpoint (the market or job rate), and a maximum (the highest rate the organization is willing to pay for the job). Now let us study further single-rate wage systems, the rationale for rate ranges, two types of rate ranges, the manner in which a pay rate is set for individuals within a range, and the dimensions of range rates. Single-Rate Wage Systems Before discussing various aspects of rate ranges we should first consider situation in which there is no range. There a single rate is paid for the job and the individual receives just that rate. This pay rate is the market rate and may be paid to either a job or a pay grade.
Some assembly-line positions and lower-level service positions have very little discretion, so concern with differences in output or behavior are minimal. Other circumstances that lead to use of single-rate systems are: 1. a strict technology that controls the output and 2. jobs for which the training time is short a couple of hours or so hereby making a learning curve inoperative. The individual in this type of system is paid for his or her time on the job and for completion of the job as directed. Single-rate systems are simple to administer: once the pay rate of a persons job is identified, no further decisions need be made as to how much he or she is to be paid. The system can operate successfully if: 1. there is little variation in output and 2. it is acceptable to the parties involved. Unions often like single rates because they eliminate judgment-based differences in pay. Rationales for Rate Ranges Any time individuals on the same job differ significantly in performance or personal characteristics that are perceived as relevant to either the organization or the person, differentiation by means of rate ranges may be in order. One study reported that the rationale for rate ranges in most large organizations was the need for performance differences, but in some cases industry practice was a major reason. Thus labor-market demands may also be a significant factor. Rate ranges can serve other purposes for organizations. Retention is one of the most important of these. Experienced personnel can be made difficult to hire away by paying them above the market rate for the job. This is seen by the person as a significant reward for membership.
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Where there is a significant quality variation among people on the job, a rate range may represent an attempt by the organization to retain the best employees by paying them on the basis of quality. Although performance is the reason most often given for rate ranges, this rationale should be scrutinized. Is movement in the range in fact related to performance? One major study challenged this assumption and found that performance was a very poor predictor of pay rate. There must be more than just an actual connection between pay rate and performance: there must also be a perception by the individual that this connection exists. The need for this perception makes communication very important in pay systems. A further rationale for rate ranges is employee expectations. Few people are content to make the same wage and be dependent on changes in the total wage structure for raises. In particular, they may see that length of time on the job is an important input and expect a reward for it. But they may also see a number of factors other than performance as relevant to movement within the range. Personal factors having to do with the job are a good example. For instance, many employees who are going to school part time perceive that they should receive something for this. Employees may also perceive that they should receive more pay for a variety of non-work-related factors. Some of these factors, such as the birth of a new baby may be very important to the person but seen as irrelevant by the organization. Others, such as the persons sex, may be illegal to use as a differentiator of pay. It should also be noted that although some employees perceive the need for a rate range, they do not feel that performance should be the basis for this range. Another rationale for rate ranges may be collective bargaining. In contract negotiation the organization may agree to rate ranges or to an expansion of rate ranges as an alternative to a general increase. The union is likely to bargain for ranges in terms of movement within the range by seniority. The connection of performance and reward is not well served in this case. Finally, the Internet has produced a wide array of sources by which employees can gain access to information regarding the competitive pay for their positions. While in the 1990s employees knew little about the competitive value of their jobs, the plethora of job/career information freely available on the Internet has changed this. If there were ever a reason for organizations to have a formalized method of administering salaries, it would be to forestall the number of hours wasted by management trying to disprove inflated salary averages reported on free Internet sites. More importantly, management must protect the organizations bottom line by guarding against overpaying employees based upon the high rates reported by Internet sites focused on increasing their visitor hits to enhance their IPO values.
The future challenge of compensation managers is clear for the next ten years employees walking into their offices with salary increase requests based upon free data from the Internet.
Types of Ranges
Having made the argument that rate ranges are useful and expected, we turn to how to develop rate ranges. Step Ranges A common form of pay range consists of a series of steps, usually a specified distance apart, either in percentages or flat amounts. Step ranges may vary considerably in number of steps and the total range the steps cover. Clearly these two in combination will determine the size of each step. The point is that there are three variables present, and the determination of any two will decide the third. Two basic types of step ranges are common: The first consists of a starting rate and a job rate (assumed to be the market rate), as in the single-rate system. New employees are brought in at the starting rate and then moved up to the job rate in a series of steps. If done properly, this movement corresponds with the learning curve of the job. The market rate is the maximum, since it is assumed that once the person has learned the job, performance differentials are minimal. This kind of system is illustrated in figure 16-1, option b. In this situation there would be a number of steps, most commonly three, between the starting rate and the job rate. This type of step system is most common in semiskilled blue-collar jobs. The second type of step system places the market rate not at the top of the range but in the center of it. Other places, such as the one-third point or the two-thirds point, are also possible, but the middle is the most common. Employees are hired at the starting rate, as in the other step system, and progress to the midpoint over time is on the basis of learning job proficiency. Thus, a person at the midpoint of the range is assumed to be a satisfactory performer. Movement above the midpoint is assumed to be for performance, or other characteristics beyond the normal or average. This type of system is illustrated in figure 16-1, option c. It is used in a wide variety of office nonexempt jobs and lower-level exempt jobs where performance is important but not critical. These two types of rate ranges are not mutually exclusive in an organization. Lower-level pay grades may have the type of range that ends at the midpoint, while higher grades have ranges extending beyond. The rationale for such a system is that the discretion in higher-level jobs in the organization allows for performance differences not permitted in lower-level jobs. Movement within grades will be discussed later, but one point should be made here. A person who is moved from one step to the next usually retains the new step even when the overall wage structure is changed. In this way, adjusting the wage structure to meet labor-market changes automatically becomes a general increase for employees in a step system. There is a further consequence of this type of system: all people tend to move to the top of the grade over time. Even if movement is by performance, a person can eventually reach the
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top and stay there regardless of future performance. This phenomenon in turn has a dramatic effect on the total wage bill. In a period of normal growth and turnover the average wage for the job classification will probably match the market rate as people start to climb the ladder while others leave. But in a lowturnover, no-growth situation the organization may soon be paying above market rate even if it sets the midpoint of the range at the market, because all the employees in the job are in the top steps. Open Ranges In order to focus more clearly on performance and to avoid the problems of step ranges, more and more organizations are using an open-pay range. In this system the organization defines the midpoint, the maximum and the minimum of the range. Any one employee may be paid anywhere within this defined range. The function of the midpoint, as in the second type of step system, is that the average performer would be paid at this rate. Also as in the second step system, new employees would start at the bottom and move to the midpoint as they learned the job and became average performers. Payment above the midpoint can be reserved for above-average performance. Unlike the second step system, the persons wage is not automatically adjusted when the wage structure is adjusted. At this point, the persons performance is reviewed and adjustment is made in relation to that performance. Figure 16-1, options d and e, illustrate two types of open pay ranges. Option d has a series of steps up to the midpoint and an open range above the midpoint; option e has an open range from minimum to maximum. With the increased emphasis on performance in organizations, open-range systems are becoming more popular. They provide more flexibility than a step system in granting pay increases and are more resistant to automatic increases. Finally, open ranges not only may make it easier to reward performance but are also useful when criteria other than performance are to be used. Dimensions of Ranges Any wage structure has a number of rate ranges and pay grades. This number can be a matter of the policy of the organization. Small organizations tend to have a small number of pay grades accompanied by wide pay ranges, broad definition of job titles, a great deal of movement within pay grades, little overlap between grades and limited promotion to higher grades. Some organizations have many grades, which tends to create an opposite set of characteristics. When examining pay ranges we can determine the total wage structure with the help of three characteristics: the breadth of the rate range, the number of pay grades and the overlap (see figure 16-2). If one knows the bottom and top of the wage structure, the slope of the pay line, and any two of the three characteristics just cited, the third will be determined. Range Breadth The breadth of the rate range is the distance from the top to the bottom of the range a to b in figure 16-2. It is the vertical dimension of the range. The breadth may be stated in dollar
amounts or in percentages. The latter is more common and will be used here. The breadth of the range should vary with the criteria for movement within the range. Assuming that performance is the criterion, the breadth would represent the opportunity for performance differences in the job. Where ranges are narrow, the assumption is that performance differences are narrow and vice versa. In practice, hourly jobs have ranges of 10 to 20 percent, office jobs 15 to 35 percent, and managerial jobs 25 to 100 percent.
Fig. 16.2 Parts of a wage structure
Factors other than potential performance differences may also affect range breadth. Organizations that promote intentionally fast encourage narrow ranges, since people do not stay within one grade very long. A wide range is encouraged if adjustments need to be large to be noticed by employees. Higher grade levels tend to have broader ranges for this reason. Broad ranges can accommodate a wide variety of jobs, as well as variable starting rates among jobs. These broad ranges indicate that the process of determining the market rate is not a precise one. Establishing range maximums is particularly difficult. There is some logical maximum value for any job, regardless of how well it is performed. Ideally when this point is reached the person is promoted, either to a new job or by upgrading the tasks of the present job. Unfortunately, this may not be possible at the appropriate time. Realistically the person should be told that this is as high as he or she can go in the rate range and that any further salary adjustments will come from general increases. Some organizations provide steps beyond the maximum of the range. There are usually two rationales for this seniority and recruiting. Long-term employees who will never be promoted and whose performance remains good are sometimes granted longevity increases beyond the maximum of the range. These usually take place after five or ten years at the top of the grade. Trouble in recruiting and retaining professional and
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managerial employees can be ameliorated by starting these people quite a ways up in the rate range; in order to retain them the organization must go beyond the maximum to provide any significant movement in grade.
figure 16-2). Overlap allows people in a lower pay grade to be paid the same as or more than those at a higher grade. The rationale for such a phenomenon is that a person at a lower pay grade whose performance is very good is worth more to the organization than a new person at the higher pay grade who is not yet performing effectively. This reasoning seems to work: seldom are there complaints about overlap. As with the number of grades, overlap can be either a determining variable or the determined variable. Overlap will work well where there are many wide pay grades. A conscious decision to keep overlap to some maximum (such as 50 percent) will reduce one of the other two variables. Some overlap is desirable, but there are problems. The main one comes about in promotions. A person high up in a rate range who is promoted may start in the new rate range higher than the job rate of the new grade. But not to give the promoted person a pay raise is hardly to have promoted him or her. Organizations generally set some policy that any promotion be accompanied by some specified minimum increase, such as one step in the new rate range or a specified percentage. The designers of career paths in some organizations reduce this problem by placing the next job in the sequence more than one pay grade above the present one.
Number of Grades
The total number of pay grades in the wage structure can be a result of other calculations (mainly range breadth and overlap) or a conscious decision that forces the other two variables to adapt. The number of pay grades is reflected in the horizontal dimension of figure (a to c). At one extreme, a structure with a single pay grade would have a minimum and maximum embracing the total wage structure and would include all jobs. At the other extreme, each job evaluation point on the horizontal axis would constitute a separate pay grade. In the latter circumstance two jobs would occupy the same pay grade only if they had identical job evaluation points a situation that would assume a very accurate job evaluation plan. A large number of pay grades often coincides with a narrow range, permitting a large number of promotions and multiple classifications in job families in the organization. A small number of pay grades allows for flexibility, in that it assigns people to a wide range of jobs without changing their pay grade. Not surprisingly, number of pay grades is associated with size and number of levels in the organization. It also seems reasonable that organizations with a fluid, organic structure would have a minimum of pay grades whereas more structured and bureaucratic ones would have more. Clearly there is no optimum number of pay grades for a particular job structure. In practice, the number of pay grades varies from as few as 4 to as many as 60. But 10 to 16 seems to be most common. With few grades there are many jobs in each grade and the increments from one grade to another are quite large. The presence of many grades has the opposite characteristics. A number of considerations help to determine the appropriate number of grades. One is organization size: the larger the organization, the more pay grades. A second is the comprehensiveness of the job structure. A structure that covers the whole organization will tend to have more pay grades than one that deals only with one job cluster. Third, the type of jobs in a structure makes a difference. Production jobs whose pay policy line is relatively flat will tend to have fewer pay grades than a managerial structure that has a steep slope. The last determinant is the pay-increase and promotion policy of the organization. A large number of pay grades allows for many promotions but entails narrow ranges and a narrow classification of jobs. A small number of pay grades, accompanied by wide ranges was traditionally thought of as unreasonable in that cost control of salary administration would be lost. In the late 1980s, this reasoning was badly shaken.
Moving Employees Through Rate Ranges

Rate ranges make possible different pay rates for individuals in the same job and/or grade level. Operating such ranges calls for some method that differentiates between employees. Such a method must provide a decision framework for positioning each person within the range. Open rate ranges facilitate a pay-for-performance approach to individual pay determination. The present section will focus on movement within grades in a step system. It should be noted, though, that an open range system can also accommodate the methods of progression discussed. Step Rates Most government and some private organizations divide their entire rate range into a number of steps. (One should always be aware of the influence of government systems in compensation. For example, with half the paychecks in Canada being written by governmental agencies, one cannot overlook these step approaches). This number is a function of the breadth of the rate range, the time required to achieve proficiency in the job, whether there are to be steps beyond the market rate, and a determination of the size of a meaningful pay increase. At least three steps are almost always used. A general step system is illustrated in option c in Figure 16-1. Step rates facilitate the granting of pay increases by determining the amount that any increase will take. Of course, it may be possible to move a person two steps, but this is always done in predetermined amounts. Such increases can be considered a disadvantage as well as an advantage. Many organizations prefer to be able to grant a wide variety of increases to better relate pay to their pay-increase policy
Overlap
The final pay range determinant is the degree of overlap between any one pay grade and the adjacent grade (c to d in
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Methods of Progression
All methods of progression specify how a person moves from the bottom of the range to the top of the range. The major difference among them is the criteria for movement. The major methods are automatic progression, a combination of merit and automatic progression and merit progression. An organization does not have to restrict itself to only one method; it may use different methods for different jobs or even different methods for a single job at different parts of the rate range. Automatic Progression This type of progression (sometimes referred to as scheduled increases) consists of wage increases based automatically on length of service. In some situations, such as basic industries, there are a small number of increases often in rapid succession (every three months) to the maximum rate for the job. These are jobs in which proficiency can be gained in a short time. On the other hand, some governmental organizations may have many steps (five or more) and grant increases once a year. In these situations longevity on the job leads to higher proficiency, and the organization wishes to reward continuity of employment. A major source of variation in automatic plans is the nature of the maximum rate whether it is the market rate or an abovemarket rate. Organizations that move only to the market rate tend to have rate ranges with a small number of steps and a short time frame for progression. They are interested not so much in rewarding longevity as in encouraging learning the job. Organizations that move beyond the market rate are specifically rewarding longevity on the job; they tend to spread out the progression to the top of the grade over a long period. Automatic progression does not have to be totally automatic. A fully automatic progression plan is actually a variation of the single-rate or flat-rate system. If all employees can expect to reach the maximum of the rate range after a given period on the job, the assumption is that the maximum is the real rate for the job. Variation can be introduced in two ways: First, the time period may vary from step to step. For instance, some systems move people rapidly to the midpoint and then much more slowly; the extended steps beyond the midpoint are clearly tied to longevity. The second variation introduces a little merit into the system by either denying movement to the next step for poor performance, giving good performers a double-step jump, or shortening the time period between step increases. Merit considerations in automatic plans should not be overemphasized. The system is designed to be automatic, and variations are seen as exceptions, not the rule. In most systems that allow either movement ahead or denial of increases, these alternatives are rarely used: the problems they pose for administration of the workplace are not perceived by supervisors to be worth the advantages they offer. Unions commonly accept rate ranges but insist on automatic progression and encourage maximum rates that are above the
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market rate. Organizations make much more use of automatic progression than might be assumed. Studies indicate that in most areas of the country and in most industries, automatic progression is the norm and not the exception. But this may be changing. The emphasis on productivity in the United States is translating itself into a search for ways to make employees more productive. Focusing on performance instead of longevity is part of this trend. Combinations of Automatic and Merit Progression We have just seen that some introduction of merit is possible even in automatic progressions that focus on longevity. It is possible also to design progressions that try to balance merit and longevity. These progressions usually let employees focus on different criteria at different places in the pay range. Probably the usual combination is automatic progression to the midpoint the market rate and progression beyond the midpoint on the basis of merit. The rationale for this method of progression is that all employees can be expected to reach average proficiency within a certain time on the job; this period matches the automatic movement to the midpoint. However, not all employees exceed average performance on the job, and movement from the midpoint on should be based on performance that is above average. If the organization does a good job of matching time taken to reach the midpoint with time taken to reach proficiency in the job, then labor costs are equalized; if these are out of balance, then labor costs are higher or lower than is optimum. The rate range can take one of two forms in this case. The first looks like option c in figure 16-1, with a series of steps from bottom to top and the market rate as the middle step. The distinguishing feature of this form is how movement is determined after the midpoint has been reached. In the second form there is a series of steps up to the midpoint but an open range from that point on with movement of any degree possible and decided by merit. This form is illustrated in figure 16-1, option d. Another method is to combine longevity and merit at all points in the range. Under this arrangement all employees receive an automatic adjustment, but those with above-average performance receive more, such as a two-step jump. It is also possible to hold back those who are not performing well. The latter action is rare but can be effective in probationary situations. The areas of prevalence of these different methods are hard to determine. It appears that automatic methods are most typical of factory jobs and combination methods most typical in office situations. Automatic-progression methods are simple to administer since they are purely mechanical adjustments made by time in grade. Introducing merit complicates the pay decision by adding a judgment about how well the person is doing the job. Then a way must be developed to incorporate this judgment into a wage increase. This makes administration more complex and, if the judgments are perceived as arbitrary, raises concerns about the equity
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of the system. The advantage is that a connection is made between performance and reward, and this may be worth the trouble. Merit Progression A pure merit progression employs an open rate range with only the minimum, maximum, and midpoint defined, as in option e in figure 16-1. Movement within the range is based strictly on performance, and there are no adjustments for general increases. This pay-for-performance system requires an integration of performance appraisal with pay determination. What we cover here is movement between steps of a pay grade, as in figure 161, option c, on the basis of merit. The rationale for merit progressions is that the movement to proficiency is actually an improvement in performance and should be treated as such; people differ in their rate of improvement to proficiency, and this should be taken into account; it is performance that the organization wants and should pay for. In practice, a merit progression is usually a combination of merit and longevity. The initial decision to move a person from say, step 3 to step 4 is based on performance, but from that time on the person retains step 4 when adjustments to the wage structure are made, thereby remaining at the same relative position in the range. If step 4 is one step above the midpoint, the assumption is that this person is always above average in performance, but actually the person needs only to maintain a level of performance that will not result in termination. Further, unless the performance-appraisal system is tied consistently to the merit pay adjustments, either the system tends to be seen as arbitrary or supervisors tend to grant the same increase to all employees and thus destroy the performance-reward connection. In a Bad Economy In all step systems most employees eventually get to the top of the pay range. In a merit progression method the good performer should get there faster than the average or poor performer. This phenomenon of getting to the top of the range tends to be hidden when the organization is growing and times are good. But when growth stops, then promotions slow up, employees stay on their current job, movement to the top of the range is accelerated, and the organization finds that all employees are at the top of the range. Labor costs thus become very high at exactly the time the organization can least afford them. From the employees perspective, the only pay increases received are those that occur through wage structure adjustments, and these are likely to decrease in these circumstances. This lack of wage increases makes the potential for feelings of inequity increase considerably.
problem is compounded when management mixes up general pay increases with merit pay. Granting all employees the same pay increase and announcing it as a merit increase destroys the concept of merit. Lower-level supervisors, in particular, find it uncomfortable to deal with merit pay, which requires him or her to make competitive distinctions between employees. For these supervisors it is often cooperation and not competition that is important. Because of the inflation of the late 1970s, annual pay increases are almost institutionalized in organizations today. This makes merit progression something of a misnomer, especially where organizations simply call all pay adjustments merit increases.
Rate Ranges and Recruitment

To this point we have assumed that the organization has been hiring people who are just qualified and moving them up in the range as they learn the job. But what if it hires a person who can do the job from the beginning? Clearly this person should be hired at the market rate (the midpoint). In actuality, then, people are likely to be brought into the organization anywhere up to the midpoint of the range, based upon their qualifications. Thus a system that ends at the market rate has a flat rate for hiring fully qualified employees. The labor market may complicate the rate range when there is a shortage of applicants. When it is hard to recruit, one way organizations adjust is to raise the starting pay to wherever in the range it must go in order to obtain people. This may result in hiring rates at the top of the rate range or above. This extreme situation makes any upward movement within the grade difficult or impossible for the person. A person who is then expected to stay in the grade for three or more years before promotion can only look forward to general increases. Correcting Out-of-Line Rates The rate range defines the minimum and maximum that a person may be paid for a given job. For a number of reasons an individuals pay may be more or less than the prescribed range. The organization needs policies for dealing with these out-ofline rates. Terms of the trade Many a new compensation analyst has been tested by management with the question. Do You Know What a Green Circle Is? This question separates the college student from the practitioner. It refers to the case in which a person is paid less than the minimum of a grade. This occurs, for example, when a person is promoted into a position in a higher pay grade, but not given a pay increase (because all increases may have been frozen by top corporate management). Underpaid Employees As stated, a person paid below the minimum of the rate range for his or her job is said to carry a green-circle rate. This situation
Actual Practice
Most organizations and their management claim that they use a merit progression system. But studies show that up to 80 percent of employees are at the top of their rate range. The
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usually occurs when the wage structure is changed upward and the individual was at the bottom of the rate range. Little question exists regarding the appropriate response: the underpaid employee should have his or her pay raised to the minimum of the range, immediately if possible or in a couple of steps. If the person is performing adequately, the difference between his or her rate and the minimum of the range should be made up by the employer. Of course it is possible, for a number of reasons, that the employee is not worth the minimum of the range. Even so, there are usually adjustments that can be made. For instance, if the labor market is very tight and marginal workers must be hired and retained, a lower classification involving job redesign to accommodate the persons skills would be in order. This same reasoning could apply to older and handicapped employees who cannot fully carry out their jobs. On the other hand, redesign may be unnecessary where there is already a lower-level job to which the person can be assigned. Or a trainee rate may be appropriate if the employee is still learning the job. Usually there will be a few underpaid employees, and a policy of bringing their rates into line immediately protects the integrity of the pay system. But if many employees are underpaid, a careful review is required not only may the costs of adjustments be high but also equity between the newly raised employees and other employees on the job may require a phasing in of increases. Also, all underpay situations should be examined for racial or gender discrimination. Overpaid Employees A person paid above the maximum of the range for his or her job is said to receive a red-circle rate. Other names for this situation are ringed, flagged, or personal rates, red allowances, overrates, and personal out-of-line differentials. The variety of terminology suggests that this is a common problem in organizations, that it stems from a number of sources, and that it is more difficult to deal with than the problem of underpaid employees. Solutions to overpay vary from doing nothing to reducing the pay to the top of the range. Both approaches can cause equity problems, both in others and in the person affected. The most common solutions are the following: 1. Freeze the pay until general increases catch up with the current pay; 2. Transfer or promote the person to a job in an appropriate pay grade; 3. Freeze the pay for a limited period, such as six months. Then attempt either of the previous strategies. If this is unsuccessful, reduce the pay at the end of the period. Redcircle the job and not the person. Eliminate the differential after a period such as a year or gradually over time. A number of less common arrangements also exist. One, the adder, is a payment to the employee in quarterly installments of
the difference between his or her rate and the maximum of the range. The employee is given 100 percent of the differential the first year, 75 percent the next year, and so on until there is no differential. The advantage of the adder is that the top rate for the job is made clear and both the person and the organization are aware of the exceptional and temporary character of the differential. Another possible solution is a lump sum payment. For example, the employee may be paid the difference times 2080 hours and have his or her pay rate brought immediately into line. Any solution to overpay involves questions of equity. Overpayment is usually not the fault of employees, and any reduction in pay will be seen as unfair by them. On the other hand, there is also the perception of equity by other employees, so some action is always called for. All the actions just described try to balance these two perceptions in arriving at an equitable solution. Failure to correct red-circle rates means that range maximums are meaningless; people may be paid more than their job and performance are worth to the organization; and organizational resources are being diverted into paying these rates rather than rewarding others good performance.

Questions 1. Discuss the factors affecting wage determination. 2. Explain wage determination process in detail. 3. What do you understand by rate range? Discuss the types of rate ranges. 4. Discuss the importance of wage administration rules in organizations.
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LESSON 7: INTRODUCTION TO FACTORS INFLUENCING WAGE AND SALARY STRUCTURE AND PRINCIPLES OF WAGE AND SALARIES ADMINISTRATION
Learning Objective

To know the Factors Influencing Wage and Salary Structure To understand the Principles of Salary Administration
Factors Influencing Wage and Salary Structure

The wage policies of different organizations vary somewhat. Marginal units pay the minimum necessary to attract the required number and kind of labour. Often, these units pay only the minimum wage rates required by labour legislation, and recruit marginal labour. At the other extreme, some units pay well above the going rates in the labour market. They do so to attract and retain the highest calibre of the labour market. They do so to attract and retain the highest caliber of the labour force. Some managers believe in the economy of higher wages. They feel that, by paying high wages, they would attract better workers who will prod use more than the average worker in the industry. This greater production per employee means greater output per man hour. Hence, labour costs may turn out to be lower than those existing in firms using marginal labour. Some units pay high wages because of a combination of favourable product market demand, higher ability to pay and the bargaining power of a trade union. But a large number of them seek to be competitive in their wage programme, i.e., they aim at paying somewhere near the going rate in the labour market for the vari0us classes of labour they employ. Most units give greater weight to two wage criteria, viz., job requirements and the prevailing rates of wages in the labour market. Other factors, such as changes in the cost of living, the supply and demand of labour, and the ability to pay are accorded a secondary importance. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important. During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labour-market pressures probably force most organisations to reclassify hard-to-fill jobs at a higher level than that suggested by the job evaluation.
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The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. Mescon says: The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors. This is done for several reasons: First, competition demands that competitors adhere to the same relative wage level; Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition; Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated; Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates; Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organisations competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower. Belcher and Atchison observe: Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organisations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned. A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are: 1. The organizations ability to pay; 2. Supply and demand of labour; 3. The prevailing market rate; 4. The cost of living; 5. Living wage; 6. Productivity; 7. Trade unions Bargaining power;
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Such wage structures may be influenced by product markets, but only if labor cost is high relative to total cost. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates. Organizations in small towns, isolated locations, or nonunion communities provide examples, as do unique organizations in larger communities, and government employment. Most large, unionized organizations have what might be called union-and-product-oriented wage structures. In these organizations, wage structures represent management decisions shaped and restrained by technology, unions, and cost-price relationships, and the product market. Technology provides some uniformity in job structures in organizations engaged in common lines of production. Unions, through their insistence on traditional relationships, establish some key jobs and job clusters and provide an upward thrust to the entire structure. Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand, however, reduce competitive pressures on organizations. Organizations in many branches of manufacturing, in mining, and in some service industries are examples of organizations with union-and-product-oriented wage structures. Organizations with this kind of wage structure can eventually get into a competitive bind. Organizations with internally determined or union-andproduct-market-determined wage structures leave large portions of wage structure decisions to management. Wage structure determination in these organizations follows closely Dunlops theory of key jobs, job clusters, and wage contours. Key jobs acquire their status from labor markets, product markets, and comparisons with other organizations, often fostered by unions. Job clusters come from technologies and employee skill groupings. Wage contours originate in customary comparisons with other organizations, again often fostered by unions. Custom strongly influences all three. But although organizations can be classified as having wage structures that are oriented primarily in one of the four ways just outlined, organizations of any considerable size have job clusters that fall more comfortably into one or more of the other categories. Organizations employing artisans, unless they are members of an industrial union, are usually forced to develop a unionoriented wage structure for this job cluster. All organizations employ clerical workers, and the wage structure of the clerical job cluster is largely market-oriented. Professional employees (such as engineers and scientists) have salary structures that combine market orientation and internal determination, regardless of the major activity of the organization. Managerial salary structures are primarily internally determined except in very tight labor markets, without regard to organization type.
Fig. 16.4 : Criteria for wage Fixation
8. Job requirements; 9. Managerial attitudes; and 10. Psychological and sociological factors; 11. Levels of skills available in the market.
Description in Detail
The Organizations Ability to Pay Organization decisions on job and wage structures represent a balancing of the aforementioned forces. But the strength of these forces varies by organization type and within organizations by job clusters. Organizations made up largely of members of craft unions have wage structures almost completely determined by the union. Organizations in construction, printing and publishing, the railroads, long shoring and maritime work, and entertainment offer examples of union-oriented wage structures. Organizations whose members come largely from a wellorganized and competitive labor market but are not unionized have what might be called market-oriented wage structures. Organizations of this type have only limited choices, because jobs are easily identified and are quite uniform throughout the market. Banks, insurance companies, department stores, and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. This makes for a commonality between organizations in the design of professional jobs. Organizations having many specialized jobs, dealing in labor markets too disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally determined wage structures.
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Thus the typical organization develops and administers at least four or five of the following separate wage structures: shop, clerical, craftsmen and technicians, administrators, engineers and scientists, sales, supervision, and executives. Although, obviously, there will be relationships among these separate wage structures, the strength of these relationships varies by organization and over time. Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher wages then those which running at a loss or earning low profits because of the high cot of production or low sales. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits. or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important. During the time of-prosperity, employers pay high wages to carry on profit9ble operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profits. Supply and Demand of Labour The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labour-market pressures probably force most organisations to reclassify hard-to-fill jobs at a higher level than that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. Mescon says: The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors.
Please note that the labor market influences the wage and salary structure through the supply of labor. But organizations differ greatly on how many of their jobs are highly market-oriented, particularly in those organizations in which the labor supply is mostly provided from within the organization. As discussed earlier, most organizations replace the external labor market with an internal labor market that makes decisions by administrative means rather than according to supply and demand. These organizations have restricted ports of entry, which are highly sensitive to the labor market but rely on the organizations internal labor supply to fill most job openings. The exception occurs when there is an internal and external shortage of people to fill vacancies for specific skills. In fact, any job for which qualified people are in short supply becomes a market-sensitive job. But given relatively adequate labor supplies, the labor market determines wages only if the labor market: is structured by unions, is otherwise well organized, or is designed to fill openings from outside the organization. Shortages in the labor market provide those who are qualified to fill the jobs an opportunity to negotiate better terms of employment. A part of this negotiation is for a relative increase in pay greater than other groups are obtaining. This, of course, runs into the problem of customary relationships already discussed. But another part of the negotiations is for a better job. Workers in jobs where there is a shortage of qualified workers will demand changes in job content that will increase the jobs value to the organization and in the eyes of other workers. Computer programmers are an example of a group of workers with a skill in short supply in a new and expanding industry. The independence of action and discretion allowed this group of employees is based, at least partially, on the continuing shortage of this skill. The product market also affects wage structures through costoriented jobs. Such jobs exist where profit margins are sensitive to changes in unit labor cost. If the ratio of unit labor cost to price is critical, the jobs involved become cost-oriented jobs, and organizations will strongly resist changes in their wage rates, especially changes not made by other organizations. Organizations that compete in the same product market, those whose prices are interrelated, or those experiencing or anticipating increased competition or decreased demand may regard any increase in unit labor costs as a threat, especially when labor cost is a significant proportion of total costs. On the other hand, employees in these areas often recognize the advantageous position they are in and seek maximum advantage. Prevailing Market Rate This is also known as the comparable wage or gain wage rate, and is the most widely used criterion. An organizations compensation policies generally tend to conform to the wagerates payable by the industry and the community. This is done for several reasons:
Fig. 16.5 : Factors Affecting Compensation Plans

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First, competition demands that competitors adhere to the same relative wage level.
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Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organisations competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
operationally many problems and complications arise because of definitional measurement and conceptual issues. Trade Unions Bargaining Power Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the higher the wages. A trade unions bargaining power is often measured in terms of its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most powerful weapon used by it. Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation. However, for those remaining on the pay roll, a real gain is often achieved as a consequence of a trade unions stronger bargaining power. Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft. The limit of craft rates is the cost-price resistance of employers. Industrial unions, on the other hand, are more concerned than craft unions with employing organizations, but less concerned with product markets because they often bargain with organizations in many product markets. Thus, industrial unions may attempt to impose a common wage structure on organizations, even if the wage structure clashes with product-market realities. Within organizations, industrial unions are concerned with equalities and differentials among particular groups of jobs. They often serve to reinforce custom and tradition in jobs and wage structures, while they resist changes that might decrease employee security. If the industrial union deals with organizations in a common product market, it may attempt to impose a common job design and wage structure by comparing rates of a number of reasonably comparable jobs. But even in such cases, the influence of industrial unions on wage structure is light compared with that of craft unions. Please note that the unions also affect wage structures by resisting lower wage rates for jobs downgraded by technological change and by demanding that increased productivity arising from any source results in wage increases. Typically this means that wages of changed jobs are not cut but often increased when the changes result in increased productivity. Such job rates distort rational job and wage structures, and a series of them can so impair an organizations cost-profit position that management is forced to fight for a revised, rational wage structure. Union strategy, with respect to general increases, can also affect wage structures. Flat cents-per-hour or dollars-per-month increases maintain absolute differentials, but compress the structure in relative terms, whereas flat percentage increases maintain relative differentials and increase absolute differentials. Industrial unions especially may follow a policy of cents-perhour increases because most of their members are in lower-paid
Belcher and Atchison observe: Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organisations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned. The Cost of Living The cost-of living pay criterion is usually regarded as an auto minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living, escalator clauses are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline the management does not resort to this argument as a reason for wage reductions. The Living Wage This criterion states that wages paid should be adequate to enable-an employee to maintain himself and his family at a reasonable level of existence However, employers do not generally favour using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of -living prescribed in a workers budget is open to argument since it is based on subjective opinion. Productivity It is an another criterion, and is measured in terms of output per manhour. It is not due to labour efforts alone. Technological improvements, better organization and management, the development of better methods of production by labour and management, greater ingenuity and skill by labour are all responsible for the increase in productivity. Actually, productivity measures the contribution. of all the resource factors - men, machines, methods, materials and management. No productivity index can be devised which will measure only the productivity of a specific factor of production. Another problem is that productivity can be measured at several levels - job, plant, industry or national, economic level. Thus, although theoretically it is a sound compensation criterion,
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groups. But unions cannot maintain this strategy in the face of opposition from higher-paid groups. In fact, worker preferences and resulting labor-supply shortages force restoration of relative differentials in both union and nonunion situations. But probably the strongest influence of unions on wage structures is the quality of the union-management relationship. As mentioned, some unions take an active part in job evaluation, and their interest in a rational wage structure results in reduced grievances over wage inequities. Other unions, most of them craft unions, seek to preserve customary relationships and job security, resist changes in job content and structure, and are uninterested in the employers problems of maintaining economic efficiency. Still other unions seem totally uninterested in job designs and the wage structure of the organization and they 1. Insist on no wage cuts when job content changes, 2. Demand wage increases for all increases in job productivity, 3. Strongly resist job-content and other changes calculated to increase productivity, and Encourage wage-inequity grievances. In such cases job, and wage structures become chaotic, and correcting the irrationalities may require long and bitter strikes, which are often prolonged by political struggles within the union resulting from the wage inequities. Job Requirements Generally, the more difficult a job, the higher are the wages Measures of job difficulty are frequently used when the relative value of one job to another in an organization is to be ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job conditions required. Managerial Attitudes These have a decisive influence on the wage structure and wage level since judgment is exercised in many areas of wage and salary administration including whether the firm should pay below average, or above average rates, what job factors should be used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level- of wages are bound to bound to be affected accordingly. These matters require the approval of the top executives. Lester observes, Top managements desire to maintain or enhance the companys prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in managements wage-policy decisions. Psychological and Social Factors These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel care have an inferiority complex, seem inadequate or feel the reverse of all these.
They may not take pride in their work, or in the wages get. Therefore, these things should not be overlooked by the management in establishing wage rates. Sociologically and ethically, people feel that equal work should carry equal wages, that wages should be commensurate with their efforts, that they are not exploited, and that no distinction is made on the basis of caste, color, sex or religion. To satisfy the conditions of equity, famines and justice, a management should take these factors into consideration. Please note that people and institutions both have a hand in designing jobs and wage structures. Craft unions, for example, determine the kinds of work their members do and expect employing organizations to adjust to these decisions. Jobs for clerical workers are structured by the institutions that train them, with the result that clerical jobs are often quite similar in different organizations. Professional employees and managers insist on having a say in the design of their jobs, and the result is influenced in part by the institutions that train them. At the other extreme are semiskilled factory employees. Organizations employing these workers are subject to little influence on job design by either employees or unions, except in job-redesign decisions. Unions of semiskilled factory workers typically insist, however, on participating in the latter decisions. This participation is guided by customary relationships among and within employee groups. Custom also operates in nonunion situations, causing resistance to change in job design. A further societal influence on jobs and wage structures is the technology used by the organization and changes in that technology. But technology seldom provides rigid boundaries. It typically provides choices within which management, unions, and competitive pressures can operate in designing jobs and job relationships. Skill Levels Available in the Market With the rapid growth of industries, business trade, there is shortage of skilled resources. The technological development, automation have been affecting the skill levels at a faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level upto suit the market needs. From the last lessons, it is clear that organizations determine the pay for jobs by taking a number of considerations into account. Furthermore, they have considerable choice as to how much emphasis to place on various determinants. These choices lead in turn to variations in the wage structures that organizations create. But organizations do not have total freedom in the design of wage structures. Besides the determinants so far considered, there are a number of other influences on the design of wage structures that will be considered in this section. These influences are often indirect in that they influence the design of jobs and therefore the way the organization is likely to evaluate it in relation to other organization jobs.
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Introduction to Salary Administration

It comprehends systems and procedures designed for purposes of efficiently managing the compensation of organisational members. The wage policies of different organizations vary somewhat. Marginal units pay the minimum necessary to attract the required number and kind of labour. Often, these units pay only the minimum wage rates required by labour legislation, and recruit marginal labour. At the other extreme, some units pay well above the going rates in the labour market. They do so to attract and retain the highest calibre of the labour market. They do so to attract and retain the highest calibre of the labour force. Some managers believe in the economy of higher wages. They feel that, by paying high wages, they would attract better workers who will prod use more than the average worker in the industry. This greater production per employee means greater output per man hour. Hence, labour costs may turn out to be lower than those existing in firms using marginal labour. Some units pay high wages because of a combination of favourable product market demand, higher ability to pay and the bargaining power of a trade Union. But a large number of them seek to be competitive in their wage programme, i.e., they aim at paying somewhere near the going rate in the labour market for the vari0us classes of labour they employ. Most units give greater weight to two wage criteria, viz., job requirements and the prevailing rates of wages in the labour market. Other factors, such as changes in the cost of living, the supply and demand of labour, and the ability to pay are accorded a secondary importance. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers. In the long run, the ability to pay is very important. During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills. When prolonged and acute, these labour-market pressures probably force most organisations to reclassify hard-to-fill jobs at a higher level than that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. Mescon says: The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and
on-going wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors. This is done for several reasons:

First, competition demands that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organisations competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe: Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organisations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned.
Control or Administration of Wages and Salaries

Wage and salary administration should be controlled by some proper agency. This responsibility may be entrusted to the personnel department or to some job executive. Since the problem of wages and salary is very delicate and complicated, it is usual entrusted to a Committee composed of high-ranking executives representing major line organizations. The major functions of such Committee are: i. Approval and /or recommendation to management on job evaluation methods and findings;
ii. Review and recommendation of basic wage and salary structure; iii. Help in the formulation of wage policies from time to time; iv. Co-ordination and review of relative departmental rates to ensure conformity; and v. Review of budget estimates for wage and salary adjustments and increases. This Committee should be supported by the advice of the technical staff. Such staff committees may be for job evaluation, job description, merit rating, wage and salary survey an industry, and for a review of present wage rates, procedure and policies. Alternatively, the over-all plan is first prepared by the Personnel Manager in consensus and discussions with senior members of other departments. It is then submitted for final approval of the top executive.
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Once he has given his approval, for the wage and salary structure and the rules for administration, its implementation becomes a joint effort of all heads of the departments. The actual appraisal of the performance of subordinates is carried out by the various managers, who in turn submit their recommendations to higher authority and the latter, in turn, to the personnel department. The personnel department ordinarily reviews recommendations to ensure compliance with established rules of administration. In unusual cases of serious disagreement, the president makes the final decision. Principles of Salary Formulation The main factors affecting salary levels within an organisation are: External relativities: market rates as affected by supply and demand and general movements in pay levels. Internal relativities: salary relativities between jobs within the organisation depending on the values attached to different jobs. Individual worth: the value of the individuals performance to the organisation.
Description
External Relativities A salary is a price indicating, like any other price, the value of the service to the buyer and seller; the employer and the employed. The going rate for a job is its market rate, and many will claim that a job is worth what the market says it is worth. External equity is a fundamental aim of any salary system. If insufficient attention is given to market rates your organisation may not be able to attract and retain good quality personnel. Although internal salary structure is not directly and instantaneously responsive to market forces at all points, the general structure must reflect the changing pressures of the market. Internal Relativities The value of a job within an organisation is relative. Within your own organisation, pay levels will be affected by real or perceived differences between the value of jobs. In this sense, the value of a job is comparative. The ideal salary structure should establish and maintain appropriate differentials based on an objective system of measuring relative internal values. As we have seen in an earlier unit, we must take recourse to job evaluation to arrive at this internal relative values of jobs. However I when you design such an ideal structure you must also take account of external as well as internal pressures. Individual Worth Although the value of a job is relative to other jobs inside and outside the organisation, the value of a person in the job is something very specific to that individual. Hence, his salary should be influenced by his performance. The salary system should, as far as possible, enable the individuals to be rewarded according to the contribution and not restricted by the artificial barriers contained in a rigid salary structure.
Stage 1. Self contained model where external influence is marginal Stage2. Depicting the interplay of external and internal influence. The salary structure of an enterprise is built on the premise that each job has its own price. This is determined by the scientific job evaluation method and/or by the going rate in the area. Besides this, there are many region-cum-industry settlements like the agreement between the management and the union of an industry in a particular geographic region, which may form the basis for wage fixation. The wages that an employer is willing to pay depends on his philosophy, his capacity to pay, his competitive position and his ability to attract and retain a workforce by factors other than wages. The government has always played a significant role in the determination of wages in the organised sector. You are probably aware that there are a number of laws to ensure payment of a minimum wage and payment on time. Moreover, given the imbalanced positions of the employer and the employee, the government has had often to appoint wage boards to determine the wages in particular industries: You are also perhaps aware of the labour courts and industrial tribunals set up by the government to settle wage disputes by adjudication. In unionized industries/organisations wages/salaries can be determined through the bilateral process of collective bargaining. However, when such processes break down or reach a
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deadlock, recourse is taken to government machineries oflabour tribunals arid law courts.
Principles of Wages and Salary Administration

The generally accepted principles governing the fixation of wages and salary are: i. There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements, such as skill effort, responsibility or job or working conditions, and mental and physical requirements. ii. The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. The labour market criterion is most commonly used. The plan should carefully distinguish between jobs and employees. A job carries a certain wage rate, and a person is assigned to fill it at that rate. Exceptions sometimes occur in very high-level jobs in which the job holder may make the job large or small, depending upon his ability and contributions. Equal pay for equal work i.e., if two jobs have equal difficulty requirements, the pay should be the same, regardless of who fills them. An equitable practice should be adopted for the reorganization of individual differences in ability and contribution. For some units, this may take the form of rate ranges, with in grade increases, in others, it may be a wage incentive plan. In still others, it may take the form of closely integrated sequences of job promotion. There should be a clearly established procedure for hearing and adjusting wage complaints. This may be integrated with the regular grievance procedure, if it exists. The employees and the trade union, if there is one, should be informed of his own position, and of the wage and salary structure. Secrecy in wage matters should not be used as a coverup for haphazard and unreasonable wage programme. The wage should be sufficient to ensure for the worker and his family reasonable standard of living. Workers should receive a guaranteed minimum wage to protect them against conditions beyond their control. The wage and salary structure should be flexible so that changing conditions can be easily met. Prompt and correct payments of the dues of the employees must be ensured and arrears of payment should not accumulate. For revision of wages, a wage committee should always be preferred to the individual judgment, however unbiased, or a manager. The wage and salary payments must fulfill a wide variety of human needs, including the need for self-actualization. It has been recognized that money is the only form of incentive which is wholly negotiable, appealing to the widest possible range of seekers. Monetary payments often act as motivators and satisfiers interdependently of other job factors.
Summary of Wage Determination Process and Administration Rules Organizations wish to pay for more than just the job that the employee does. Employees contribute both in terms of membership (staying on the job) and being productive while on the job. Both of these sets of contributions need to be rewarded by the organization. Wage structures deal with rewarding these sets of contributions by establishing rate ranges for jobs. This allows for variable pay rates for employees on the same job and/or in the same pay grade. The breadth of the rate range (distance from top to bottom) is a matter of judgment for the designer of the wage structure. Further, the decision is interrelated with other factors in the wage structure, namely the distance from top to bottom of the entire wage structure, the number of pay grades, and the amount of overlap between grades. The design of rate ranges may vary from a structured set of steps a given percentage apart to an open range in which only the minimum, midpoint and maximum are defined. Picking the type of range depends largely on the factors that the organization wishes to reward. Step systems do a good job of rewarding membership and seniority. Open ranges allow the organization to more clearly recognize variable performance. There is an aspect of rewarding both in either case, so the choice is one of emphasis and not of kind. In administering the movement of employees within rate ranges, compensation specialists face a number of problems. Recruitment in the labor market may require the organization to hire new employees at advanced positions on the range. This in turn can lead to compression, as current employees are paid less than new employees. Keeping employees within the rate range is a constant problem. One of the most pervasive problems is keeping the focus of increases on performance; supervisors and employees alike are more comfortable with seniority increases. Last, while other aspects of compensation administration are often centralized in the hands of compensation staff, the determination of pay increases within grade must involve all supervisors in the organization. We have also examined a radically different type of pay system, that of skill-based pay. In this system employees are paid for the range of skills that they bring to the job that are useful in performing the job. As employees learn more skills they are paid more. These types of plans can provide the organization with a welltrained work force, flexible as to work assignments and interested in the work. It can also be more costly, require too many people in training, and be difficult to integrate with the traditional wage structure of the organization. Aims of Salary Administration The aim of salary administration is to develop and maintain a salary system of policies and procedures. A well-developed salary system will enable your organisation to attract, retain and motivate people of the required caliber and qualifications.
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Such a system should also be able to control your payroll costs. These aims and objectives have to be seen in greater depth from the point of view of the organisation, its individual staff, and. collectively. Organisational Aims The salary system should be tailored to meet the organisations special needs and should be easily capable of modification in response to change. In particular the aim of the system should be: 1. Ensure that the organisation can recruit the quantity and quality of staff it requires; 2. Encourage suitable staff to remain with the organisation; 3. Provide rewards for good performance and incentives for further improvements in performance; 4. Achieve equity in pay for similar jobs; 5. Create appropriate differentials between different levels of jobs in accordance with their relative value; 6. Operate flexibly enough to accommodate organisational changes and relations in the relative market rates for different skills 7. Be simple to explain, understand, operate and control 8. Be cost-effective in the sense that the benefits of the system are obtained without undue expense Individual Aims The individual wants to feel that he is being treated fairly, and he expects to be paid according to his own evolution of his worth. His assessment will be based on comparisons with market rates for similar jobs elsewhere and with the pay received b other staff in the organisation. Collective Aims The objective of trade unions and staff associations must be to obtain the maximum benefits for their members. They will want their members pay to keep ahead of inflation, to match or exceed market rates and to reflect any increase in the prosperity of the company. Moreover, they will also want an equitable system and may object to merit review schemes based on management discretion, because they are thought to be arbitrary and unfair.

Questions 1. Discuss the factors influencing wage and salary structure? 2. Throw light on the principles of wage and salaries administration. 3. Explain the importance of maintenance of a smooth wage and salary administration in organizations.
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LESSON 8: INTRODUCTION TO THE THEORY OF WAGES

Learning Objective
iv. Any contribution to pension, provident fund, or a scheme of social security and social insurance benefits. v. Any other amenity or service excluded from the computation of wages by a general or special order of an appropriate governmental authority. A wage level is an average of the rates paid for the jobs of an organization, an establishment, a labour market, an industry, a region or a nation. A wage structure is a hierarchy of jobs to which wage rates have been attached.
To further understand the concept of wages To understand different Theory of wages The Employees Acceptance of a Wage Level The Internal Wage Structure Wage and Salaries and Motivators To know the relation between Labour and Wages
Wages
Wages in the widest sense mean any economic compensation paid by the employer under some contrast to his workers for the services rendered by them. Wages, therefore, include family allowance, relief pay, financial support and other benefits. But, in the narrower Sense wages are the price paid for the services of labor in the process of production and include only the performance wages or wages proper. They are composed of two parts - the basic wage and other allowances. The basic wage is the remuneration, by way of basic salary and allowances, which is paid or payable to an employee in terms of his contract of employment for the work done by him. Allowances, on the other hand, are paid in addition to the basic wage to maintain the value of basic wages over a period of time. Such allowances include holiday pay, overtime pay, bonus and social security benefits. These are usually not included in the definition of wages. However, in India, different Acts include different items under wages, though all the Acts include basic wage and dearness allow come under the term wages. For example, under the Workmens Compensation Act, 1923, Section 2 (m), wages for leave period, holiday pay, overtime pay, bonus, attendance bonus, and good conduct bonus form part of wages. Under the payment of wages act, 1936 section 2 (VI) any award of settlement and production bonus, if paid, constitutes wages. But under the Payment of Wages Act, 1948, retrenchment compensation, payment in lieu of notice and gratuity payable on discharge constitute wages. The following type of remuneration, if paid, do not amount to wages under any of the Acts: i. Bonus or other payments under a profit-sharing scheme which do not form a part of the contract of employment.
Labor and Wages

The type of job one does and the financial compensation he or she receives are very important in our society. Job type is linked to status as is wealth. While the type of job one performs is arguably more important status wise then wealth, both are important to Americans. In the past we used to use other descriptions to classify workers. The terms blue collar or white collar employees were used to describe the type of vocation. Blue Collar - Manual laborers White Collar - Officer workers Pink Collar - Jobs associated with women like nursing, secretarial, etc. This being a rather sexist term, is no longer used. Today we classify our work roles into three categories called labor grades. The se labor grades are described below: Skilled Labor These are workers who have received specialized training to do their jobs. They have developed and honed a special skill and may or may not need to be licensed of certified by the state. Some examples of skilled labor are: carpenters, plumbers, electricians, business executives and managers, artisans, accountants, engineers, police, mechanics, etc. These may be blue or white collar workers. Unskilled Labor These are workers who have received no special training and have few specific skills. As our society has grown into an increasingly technological one, the members of this group have developed more and more skills. A mechanic, for example, used to be considered unskilled labor. Today that is no longer the case. Mechanics require a great deal of skill and training to work with todays modern engines. Examples of unskilled laborers are construction workers, sanitation and custodial workers, painters, factory assembly line workers, etc. These are blue collar workers. Professionals Arguably the elite of the labor grades, these are those workers who need an advanced degree to do their jobs. The three primary groups of professional are doctors, lawyers and teachers. These are white collar workers.
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ii. Value of any house accommodation, supply of light, water, medical attendance, traveling allowance; or -payment in lieu thereof or any other concession. iii. Any sum paid to defray special expenses entailed by the nature of the employment of a workman.
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These labor grades are often said to be non competing labor grades because workers rarely move from one grade to another and do not compete salary wise with each other. There are reasons why they do not compete with each other. The cost of education and training may be a significant obstacle. They might lack the opportunity to make such a move and they might also have a lack of initiative.
malnutrition, disease, cold, etc. and many would not marry, when that happened the wage rates would go up. In economics, the subsistence theory of wages states that wages in the long run will tend to the minimum value needed to keep workers alive. The justification for the theory is that when wages are higher, more workers will be produced, and when wages are lower, some workers will die, in each case bringing supply back to a subistence-level equilibrium. The subsistence theory of wages is generally attributed to David Ricardo, and plays a large role in Marxist economics. Most modern economists dismiss the theory, arguing instead that wages in a market economy are determined by marginal productivity 2. Wages Fund Theory This theory was developed by Adam Smith (1723-1790). His basic assumption was that wages are paid out of a predetermined fund of wealth which lay surplus with wealthy persons - as a result of savings. This fund could be utilized for employing laborers for work. If the fund was large, wages would be high; if it was small, wages would be reduced to the subsistence level. The demand for labour and the wages that could be paid them were determined by the size of the fund. 3. The Surplus Value Theory of Wages This theory owes its development to Karl Marx (1818-1883). According to this theory, the labour was 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. The labourer was not paid in proportion to the time spent on work, but much less, and the surplus went over, to be utilized for paying other expenses. Marx himself considered his theory of surplus-value his most important contribution to the progress of economic analysis (Marx, letter to Engels of 24 August 1867). It is through this theory that the wide scope of his sociological and historical thought enables him simultaneously to place the capitalist mode of production in his historical context, and to find the root of its inner economic contradictions and its laws of motion in the specific relations of production on which it is based. 4. Residual Claimant Theory Francis A. Walker (1840-1897) propounded this theory. According to him, there were four factors of production/ business activity, viz., land, labour, capital and entrepreneurship. Wages represent the amount of value created in the production, which remains after payment has been made for all these factors of production. In other words, labour is the residual claimant. 5. Marginal Productivity Theory This theory was developed by Phillips Henry Wicksteed (England) and John Bates Clark (USA). According to this theory, wages are based upon an entrepreneurs estimate of the value that will probably be produced by the last or marginal worker. In other words, it assumes that wages depend upon the demand for, and supply of, labour.
Theory of Wages
There are two key theories that explain why salaries are the way they are in a particular field. These two theories are: Traditional Theory of Wage Determination In this theory the law of supply and demand dictates salary. These days programmers are in short supply and are in great demand thus they will command a higher salary. Likewise doctors and lawyers whose specialized skills people need command a high wage. If you looked at the bill my electrician gave me you would know he is in demand! Theory of Negotiated Wages Those employees who work in unions where the union negotiates salary on behalf of all workers fit into this theory. Since I am a teacher my salary is set by collective bargaining with my union. I may be the best teacher in the world sought after by many students and parents but it wouldnt matter. However, different methods of wage payment are prevalent in different industries and in various countries. There may be payment by time or payment by results, including payment at piece rates. Wages are fixed mainly as a result of individual bargaining, collective bargaining or by public or State regulation. How wages are determined has been the subject of several theories of wages. The main elements in these theories may be summed up as follows: Below is mentioned the theory of Wages: 1. Subsistence theory 2. Wages fund theory 3. The surplus value theory of wages 4. Residual claimant theory 5. Marginal productivity theory 6. The bargaining theory of wages 7. Behavioural theories Now let us discuss the theory of Wages in detail: 1. Subsistence Theory This theory, also known as Iron Law of Wages, was propounded by David Ricardo (1772-1823). This theory (1817) states that: The laborers are paid to enable them to subsist and perpetuate the race without increase or diminution. The theory was based on the assumption that if the workers were paid more than subsistence wage, their numbers would increase as they would procreate more; and this would bring down the rate of wages. If the wages fall below the subsistence level, the number of workers would decrease - as many would die of hunger,
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Consequently, workers are paid what they are economically worth. The result is that the employer has a larger share in profit as has not to pay to the non-marginal workers. As long as each additional worker contributes more to the total value than the cost in wages, it pays the employer to continue hiring; where this becomes uneconomic, the employer may resort to superior technology. 6. The Bargaining Theory of Wages John Davidson propounded this theory. Under this theory, wages are determined by the relative bargaining power of workers or trade unions and of employers. When a trade union is involved, basic wages, fringe benefits, job differentials and individual differences tend to be determined by the relative strength of the organization and the trade union. 7. Behavioural Theories Many behavioral scientists - notably industrial psychologists and sociologists like Marsh and Simon, Robert Dubin, Eliot Jacques have presented their views or wages and salaries, on the basis of research studies and action programmes conducted by them. Briefly such theories are:
The Employees Acceptance of a Wage Level
This type of thinking takes into consideration the factors, which may induce an employee to stay on with a company. The size and prestige of the company, the power of the union, the wages and benefits that the employee receives in proportion to the contribution made by him - all have their impact.
The Internal Wage Structure
Social norms, traditions, customs prevalent in the organization and psychological pressures on the management, the prestige attached to certain jobs in terms of social status, the need to maintain internal consistency in wages at the higher levels, the ratio of the maximum and minimum wage differentials, and the norms of span of control, and demand for specialized labour all affect the internal wage structure of an organization.
Wage and Salaries and Motivators
Money often is looked upon as means of fulfilling the most basic needs of man. Food, clothing, shelter, transportation, insurance, pension plans, education and other physical maintenance and security factors are made available through the purchasing power provided by monetary income - wages and salaries. Merit increases, bonuses based on performance, and other forms of monetary recognition for achievement are genuine motivators. However, basic pay, cost of living increases, and other wage increases unrelated to an individuals own productivity typically may fall into maintenance category.

Questions 1. Explain the importance of the theory of wages. 2. State the difference between blue collar, white collar and pink collar employees. 3. What are the different types of theory of wages. Explain in detail.
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LESSON 9: INTRODUCTION TO MINIMUM, FAIR AND LIVING WAGE

Learning Objective
These issues are very difficult to decide. Moreover, since the cost of living varies with the price level, it follows that this index should be periodically reviewed and modified. However, the principles for determining minimum wages were evolved by the Government and have been incorporated in the Minimum Wages Act, 1948, the important principle being that minimum wages should provide not only for the bare sustenance of life but also for the preservation of the efficiency of the workers by way of education, medical care and other amenities.
To know the concept of Statutory, Bare or Basic Minimum

Wage
To understand Fair Wage To understand Living Wage The Need-Based Minimum Wage
Some new terms have gained currency in India after independence. There are:
Statutory Minimum Wage

It is the wage determined according to the procedure prescribed by the relevant provisions of the Minimum Wages Act, 1948. Once the rates of such wages are fixed, it is the obligation of the employer to pay them, regardless of his ability to pay. Such wages are required to be fixed in certain employments where sweated labour is prevalent, or where there is a great chance of exploitation of labour. Bare or Basic Minimum Wage It is the wage, which is to be fixed in accordance with the awards and judicial pronouncements of Industrial Tribunals, National Tribunals and Labour Courts. They are obligatory on the employers. Minimum wage, and fair wage and living wage are the terms used by The Report of the Committee on Fair Wages, set up by the Government in 1948 to determine the principles on which fair wages should be based and to suggest how these principles should be applied. According to this Committee, the minimum wage should represent the lower limit of a fair wage. The next higher level is the fair wage, and the highest level of the fair wage is the living wage. A Minimum Wage It has been defined by the Committee as the wage, which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the worker. For this purpose, the minimum wage must provide for some measure of education, medical requirements and amenities. In other words, a minimum wage should provide for the sustenance of the workers family, for his efficiency, for the education of his family, for their medical care and for some amenities. The question of determining the minimum wage is a very difficult one for more than one reason. Conditions vary from place to place, industry to industry and from worker to worker. The standard of living cannot be determined accurately. What then should be the quantum of the minimum wage? What is the size of the family it should support? Who should decide these questions?
Living Wage
This wage was recommended by the Committee as a fair wage and as ultimate goal in a wage policy. It defined a Living Wage as one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the more important misfortunes, including old age. In other words, a living wage was to provide for a standard of living that would ensure good health for the worker, and his family as well as a measure of decency, comfort~ education for his children, and protection against misfortunes. This obviously implied a high level of living. Such a wage was so determined by keeping in view the national income, and the capacity to pay of an industry. The Committee was of the opinion that although the provision of a living wage should be the ultimate goal, the present level of national income did not permit of the payment of a living wage on the basis of the standards prevalent in more advanced countries. The goal of a living wage was to be achieved in three stages. In the first stage, the wage to be paid to the entire working class was to be established and stabilized. In the second stage, fair wages were to be established in the community-cum-industry. In the third stage, the working class was to be paid the living wage. The living wage may be somewhere between the lowest level of the minimum wage and the highest limit of the living wage, depending upon the bargaining power of labour, the capacity of the industry to pay, the level of the national income, the general effect of the wage rise on neighboring industries, the productivity of labour, the place of industry in the economy of the country, and the prevailing rates of wages in the same or similar occupations in neighboring localities.
Fair Wage
According to the Committee on Fair Wages, it is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage; the upper limit is set by the capacity of the industry to pay.
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Between these two limits, the actual wages should depend on considerations of such factors as: a. The productivity of labour; b. The prevailing rates of wages in the same or neighbouring localities; c. The level of the national income and its distribution; and d. The place of industry in the economy of the country.
Labour Bureau Government of India

Report Onevaluation studies on implementation of The minimum wages act, 1948 In bidi making establishments in Madhya pradesh
The Need-Based Minimum Wage

The Indian Labour Conference, at its 15th session held in July 1957, suggested that minimum, wage fixation should be needbased, and should meet the minimum needs of an industrial worker. For the calculation of the minimum wage, the Conference accepted the following norms and recommended that they should guide all wage-fixing authorities, including the Minimum Wage Committee, Wage-Boards, and adjudicators: i. The standard working class family should be taken to consist of 3 consumption units for the earner; the earnings of women, children and adolescents should be disregarded;
Wages, Earnings and Hours of Work

5.1 Introduction 5.1.1 The Minimum Wages Act, 1948 is both a protective and beneficial legislation guaranteeing the payment of minimum rates of wages to the workers in the various Scheduled Employments scattered over different parts of the country. Although the Act does not provide for registration of establishments, yet it is applicable to employments where the workers are particularly vulnerable to exploitation, due to ignorance, poverty, illiteracy and lack of bargaining power. The workers in bidi industry are scattered over large areas and do not have collective bargaining power. Therefore, they are in need of protection. The Act empowers both the Central and the State Governments to fix and revise the minimum rates of wages in the Scheduled Employments falling under their respective jurisdictions. The bidi making establishments fall under the Scheduled Employment Tobacco (including Bidi Making) Manufactories in the State Sphere. Therefore, the responsibility for implementation of the provisions of the Minimum Wages Act, 1948 rests with the State Governments. They notify the minimum wages for bidi workers within their jurisdiction. 5.1.2 In Madhya Pradesh, the rates of minimum wages for Bidi Rollers are fixed on a piece rate basis (number of bidis rolled), the traditional measure being per thousand bidis. However, fixation and revision of minimum wages is of no consequence unless these are actually paid to them. The problems of the bidi workers continue to be a cause of concern for the labour administrators and enforcement authorities as the workers often complain of the unfair treatment at the hands of manufacturers, Contractors and agents in matters of rejection of finished products, issue of inadequate quantity and poor quality of raw material (tendu leaves, tobacco, thread, etc.) as well as the violation of the provisions of the Bidi and Cigar Workers (Conditions of Employment) Act, 1966, the Minimum Wages Act, 1948 and the Equal Remuneration Act, 1976. The Regional Labour Ministers Conference held during 1994-95 had endorsed the recommendations of the Ministry of Labour for the Constitution of a Tripartite Standardisation and District Level Vigilance Committee and had made the following recommendations in respect of bidi workers:-
ii. The minimum food requirements should be calculated on the basis of the net intake of 2,700 calories, as recommended by Dr. Akroyd, for an average Indian adult of moderate activity. iii. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum, which would mean, for an average workers family of four, a total of 72 yards; iv. In respect of housing, the norms should be the minimum rent charged by the Government in any area for houses provided under the Subsidized Housing Scheme followincome groups; and v. Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum wage. Ever since the I.L.C. made its recommendations on the needbased minimum wage, attempts were made by several government and private agencies and trade union organizations to work out is monetory equivalent. These estimates have varied considerably.

Questions 1. What are the different types of wages? 2. What is the difference between minimum wage, living wage and fair wage? 3. What do you understand by the term need-based minimum wage and explain the importance of it in compensation management? 4. Identify an organization, study its compensation package and find out the kind of wage level offered by it to its employees.

Now let us study from the notification below The minimum wages notified by the Government of Madhya Pradesh and the employees covered under it.
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The minimum quantity of raw material to be issued should be 800 grams of tendu leaf of standard average quality and 300 grams of tobacco for 1000 bidis of standard size. The wage loss due to rejection should not be more than 2.5 percent instead of 5 percent. Alternatively, the rejected bidis should be returned to workers after deducting proportionate cost of tendu leaf and tobacco issued to them at the rates to be fixed by the State Governments from time to time alongwith wages. The State Governments as well as Welfare Commissioners have been requested to give wide publicity to the statutory provisions of the Bidi and Cigar Workers (Conditions of Employment) Act, 1966, pertaining to rejection of not more than 2.5 percent bidis of sub-standard quality and ensure that employer/ Contractor supplies tendu leaf of the optimum quality to the workers. * * Annual Report 1999-2000, Ministry of Labour, Government of India, 5.2 Prescribed Rates of Minimum Wages Tobacco (including bidi making) Manufactories is a Scheduled Employment originally included in Part-I of the Schedule appended to the Act. The minimum wages applicable to the bidi workers at the time of the Study were notified by the State Government of Madhya Pradesh as provided under Section 3(1)(b) and Section 5 of the Minimum Wages Act, 1948.Prior to 1953, Minimum Wages were fixed at Re. 0.62 to Rs. 1.37 per thousand bidis. These wages were revised to Rs. 2.00-2.25 for the first time in 1966.Since then they have been revised several times. The latest wage revision, which was in force at the time of the study, had become effective from 1st October, 2000 vide notification No. 1/9/A/5/97/32759-33288 dated 12-10-2000. The minimum rates of wages for various categories of employees in Tobacco (including Bidi Making) Manufactories appearing in Part I of the Schedule were linked to the Consumer Price Index Numbers (Industrial Workers).The revised rates of minimum wages applicable during the period of study are given below:Prescribed Minimum rates ofWages for piece rated employees Class of Employees Minimum Wages ( in Rs.) 1. Bidi Rolling 36.17(per thousand bidis) 2. Wrapping/Packing/Labelling Rs. 19.65 per thousand bundles (a) Pasting of Slips on bidi bundles Rs. 22.00 perthousand bundles (i) Labelling, Puda Making etc. Rs. 15.85 per thousand bundles (ii) Labelling on both sides of bundles Rs. 11.26 per thousand bundles (b) Wrapping and Labelling Rs.4.76 per thousand bundles (i) Thin paper labelling Rs.5.01 perthousand bundles (ii)Thin paper sticking Rs. 68.35 perlakh bidis (iii)Labelling Rs. 81.05 perlakh bidis (iv)Puda Making Rs. 81.05 per lakh bidis ( c) Wrapping on 1000 bundle (each bundle of 25 bidis) (i) Wrapping of Horizontal & Vertical Strips (ii)Wrapping/Pasting of paper (iii)Wrapping and Pasting of Trade Mark
In bidi making industry all the time-rated (monthly/daily paid) workers other than the above mentioned piece rated categories have been classified into three broad categories as Skilled, Semiskilled and Unskilled workers. The occupations which comprise these three skill categories are as under: 1. Skilled : 2.Semi-Skilled : 3.Unskilled: Driver (Heavy Vehicle), Accountant, Munim, Cashier, Store Keeper, Head Clerk, Godown keeper Sorter/Checker, Bhattiwala, Driver (Light Vehicle), Typist, Billman, Clerk Loader, Un-loader, Chowkidar. Puda Maker and
Prescribed rates of Minimum Wages (including V.D.A.) for time rated employees were as below:
Sl. No. 1. 2. 3. Skill Category Skilled Semi-Skilled Unskilled. Monthly Wages (Rs.) 1995.44 1828.30 1662.80 Daily Wages (Rs.) 76.75 70.32 63.95
N.B.- The wages include the variable dearness allowance. 5.2.1 These wages have been linked to 1206 points of the Labour Bureau Series of All-India Consumer Price Index Numbers for Industrial Workers (Base 1960=100).The Variable Dearness Allowance (VDA) is payable at the rate of 1 paisa per point for an increase of 930 points over 1206 points upto 30.09.2001. 5.2.2 The revised rates of minimum wages are subject to the following conditions:The variable dearness allowances shall be calculated on 1st October of every year on the basis of the average indices for twelve months i.e., July to June of the preceding year. The revised rates of daily wages are to be worked out by dividing the monthly rates by 26 days. Wherever the prevailing wages are higher, the revised wages will not have adverse effect on any employee in any case and the higher rates shall continue to be paid. An employee shall be entitled to a guaranteed minimum wage of Rs.178.00 in case the employer fails to supply sufficient quantity of raw material for rolling 5600 bidis per week. The guaranteed wage will include the actual number of bidis made by an employee during a week from the raw material supplied to him. An employee shall not be entitled to the guaranteed wages if he fails to make full use of the raw material supplied to him while the raw material so supplied is sufficient for rolling 5600 bidis per week. In case an employer fails to supply raw material due to certain conditions like fire, distress, epidemic etc., which are not under his control, an employee shall not be entitled to the guaranteed wages.
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5.3 Mode of Payment 5.3.1 Section 3(2) of the Minimum Wages Act, 1948 empowers the Appropriate Governments to fix the minimum rates of wages either for time rated work or for piece-rated work. In bidi making establishments employers have adopted both the systems of payment of wages i.e., time rate and piece rate. Wages for bidi rolling, wrapping, packing and labelling operations are paid on piece rate basis while those in all other operations on time rate basis.The stratum-wise system of payments is shown in Table 5.1. Table 5.1 Percentage Distribution of Employees by Stratum and System of Payments
Sl. No. 1 2 3 4 5 All Strata Stratum/ District Stratum I Sagar Stratum II Jabalpur, Satna Stratum III Gwalior, Datiya and Vidisha Stratum IV Balaghat Stratum V Bhopal, Indore, Devas, Ujjain& Hoshangabad Percentage of employees paid on the basis of Time-rate Piece-rate 16.0 84.0 17.4 19.2 24.1 20.8 18.5 82.6 80.8 75.9 79.2 81.5
5.4 Wage Period 5.4.1 Section 3 (3b) of the Minimum Wages Act, 1948 provides for different wage periods ranging from hour to month. The minimum wages notified by the Government of Madhya Pradesh for different types of operations were either time rated or piece rated. The wage periods adopted by the bidi manufacturers for different categories of employees covered by the study are presented in Table 5.3. Table 5.3 Percentage Distribution of Bidi Employees According to Wage-periods
Sl. No. 1 2 3 4 5. Categories of Employees Wrapper/Labeller/Packer Taraiwala (Sorter)/ Checker Furnaceman (Bhattiwala) Clerk Raw Material Distributor Percentage of Employees paid Monthly Weekly Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 26.5 100.0 73.5 100.0 100.0 100.0 100.0
6 Bidi Roller All Categories
5.4.2 It will be seen from the Table that all the factory workers and office staff viz., Wrappers, Labellers, Raw Material Distributors, and Clerical Staff, etc., were paid on monthly basis.On the other hand all the Bidi Rollers were paid on weekly basis. As such the overall proportion of bidi employees paid on weekly basis worked out to 73.5 percent, as against 26.5 percent of other workers who were receiving wages on monthly basis.It was observed that in operations like bidi rolling, wages were calculated on the basis of daily production and payments were made on weekly basis or adjusted on a monthly basis. It was also observed that because of these adjustments after a week or a month, the Bidi Rollers did not have a clear idea about their actual earnings. 5.5 Hours of Work The working hours in the Scheduled Employment Tobacco (including Bidi Making) Manufactories are governed by the Bidi and Cigar Workers (Conditions of Employment) Act, 1966.The Act restricts the hours of work to nine per day and forty eight per week with a maximum spread over of 10.30 hours per day. Under the Act no employee can be made to work beyond five hours without a rest interval of at least half an hour. An adult employee can work in excess of the prescribed hours of work subject to the payment of over time wage rate. However, the period of work should not exceed 10 hours in a day and 54 hours in a week, inclusive of overtime work. The payment for overtime work has to be made at twice the ordinary rate of the wages or the average daily full time earnings in case of piece rate workers. The Minimum Wages Act, 1948 on the other hand only provides for fixation of normal hours of work, a weekly day of rest and payment of overtime wages in the Scheduled Employments by appropriate Government. However, all these and similar provisions of the Act are of little consequence to a major proportion of the employees in this industry comprised of a sizeable number of Bidi Rollers who roll bidis within the four walls of their houses.
5.3.2 It is evident from the Table that major proportion (81.5 percent) of employees were paid on piece rate basis and only 18.5 percent were paid on time rate basis. The proportion of employees paid on piece rate basis in different Strata oscillated between 84.0 percent and 75.9 percent the former being in Stratum I and the later in Stratum IV. Inter-stratum variation was attributed to the fact that Stratum-I was the largest bidi producing area dominated by the smaller establishments of agents and middlemen engaged in getting the bidis rolled for passing on to bigger or Trade Mark Establishments for wrapping, packing and marketing. 5.3.3 The category-wise system of payment of wages is given in Table 5.2.It will be seen from the Table that all the Bidi Rollers, Packers, Labellers and Wrappers were paid on piece rate basis.All other workers, like,Sorters, Furnace Men, Raw Material Distributors, Clerks, etc., were paid on time rate basis. Table 5.2 Percentage Distribution of Bidi Employees by their Categories and by the System of Payments:
Sl. No. Categories of Employees Percentage of Employees paid on the basis of Time-rate Piece-rate 100.0 100.0 100.0 100.0 100.0 100.0 18.5 81.5
1. Wrapper/Labeller/Packer 2. Taraiwala (Sorter)/Checker 3. Furnaceman (Bhattiwala) 4. Clerk 5. Raw Material Distributor 6. Bidi Roller All Categories
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These home workers do not have any prescribed hours of work as they roll bidis as and when they are free from their domestic chores. The premises/factory workers, however, are the real beneficiaries of these provisions. As far as the Trade Mark Establishments and the medium sized establishments are concerned, the provisions of the Act, relating to hours of work, rest interval, weekly holidays, etc. were being implemented. The time rated employees were usually working as Clerks, Raw Material Distributors, Taraiwalas, etc. 5.6 Wages and Earnings 1.6.1 During the course of Study, it was observed that although the big manufacturers were keeping records of the wages paid to premises workers and the Bidi Rollers who were directly employed by them, yet the records for Bidi Rollers engaged by the Contractors were not maintained correctly as they showed only production.As the payments were made through Contractors, there were, therefore, chances of exploitation of the Bidi Rollers at the behest of the former. 1.6.2 The employees in bidi making industry constitute a heterogeneous lot with various categories of bidi workers on the one extreme and the Bidi Rollers (home workers) engaged either directly or through the Contractors on the other.The dependants of the home workers rendering effective assistance in rolling bidis constitute a large segment of Bidi Rollers who could not be treated as employees for want of an established employer-employee relationship. Hence for properly analysing the earnings of the Bidi Rollers (home workers), it is necessary to identify and isolate the contribution of this hidden segment of Bidi Rollers.During the study, an effort was made to separate the estimated earnings of these workers from those of the registered or the identified Bidi Rollers.
5.6.2 Bidi Workers
5.6.2.2 The above table reveals that the average daily earnings of Clerks were Rs. 89.32 per day, far above the prescribed wages in the Trade Mark Establishments, in keeping with the requirements of management and responsibilities assigned to them.For the purpose of the study, Managers have been clubbed with the clerks because wages had not been notified for the managerial staff. The average daily earnings of Clerks worked out to be the highest (Rs.122.60) in Stratum III and the lowest (Rs.76.71 per day) in Stratum II.Overall average daily earnings of Raw Material Distributors and Furnacemen worked out to Rs. 61.62 and Rs. 67.96 respectively.The average earnings of Raw Material Distributors were the lowest (Rs.57.69 per day) in Stratum III which were attributed to low wage paid areas of Datiya and Vidisha dominated by Contractors, Sattedars and Sub-Contractors. They were not only distributing raw materials but also were actively involved in collecting the bidis.Surprisingly, a system of obtaining commission from the Bidi Rollers by the Sattedars to compensate the low wages paid to them by the Trade Mark Establishments and Contractors was in vogue.For piece rated workers viz., Wrappers/Labellers/Packers the average daily earnings worked out to Rs.62.33.
5.6.3 Bidi Rollers and Helpers
5.6.3.1 In Madhya Pradesh Bidi Rollers constituted the largest segment among the bidi employees. They collected the raw material from the Employers or Contractors and rolled the bidis in their dwellings. They get a lot of assistance from their family members in rolling bidis. It is a fact that most of these helping dependants, who were skilled rollers, did not have registration in any bidi factory as the manufactures avoided registration of a large number of Bidi Rollers to evade the fringe benefits due to them .The employers met their requirements of daily production by giving huge amounts of raw material to the registered Bidi Rollers for rolling bidis with the help of their dependants. The average daily earnings of the Bidi Rollers and their helping dependants are given in Table 5.5.
5.6.2.1 The bidi workers constituted 26.5 per cent of the employees covered by the Study. Average daily earnings of different categories of bidi workers are given in Table 5.4. Table 5.4 Average Daily Earnings of Bidi Workers (in Rupees)
Sl. No. 1 2 3 4. 5
Categories Wrapper, Labeller, Packers. Taraiwala/Sorter/ Checker Furnaceman (Bhattiwala) Raw Material Distributor Clerk All Categories
Average daily earnings in Stratum-I Stratum-II 63.69 66.64 69.29 67.93 63.96 89.82 71.31 72.89 68.29 65.23 76.71 69.36
Stratum-III 62.67 51.83 66.62 57.69 122.60 69.08
Stratum-IV 65.22 85.17 67.13 80.40 75.14
Stratum V 50.53 69.98 68.89 61.11 86.54 65.23
All Strata 62.33 68.98 67.96 61.62 89.32 69.36
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Table 5.5 Average Daily Earnings of Bidi Rollers and their Helping Dependants(in Rupees)
Sl. No. Stratum/ District 1 2 3 4 5 Stratum I Sagar Stratum II Jabalpur,, Satna Stratum III Gwalior, Datiya and Vidisha Stratum IV Balaghat Stratum V Bhopal, Indore, Devas, Ujjain&Hoshangabad All Strata Average daily earnings of Bidi Rollers 20.36 24.76 26.16 18.88 20.46 22.04 Helping Dependants 14.21 19.52 20.99 17.17 14.66 16.62 Overall 17.77 22.31 23.76 18.01 18.00 17.88
The Bidi Rollers did not get regular employment in bidi making establishments also.They had always remained an exploited lot in the hands of petty Contractors who did not even keep the records and registers of the Bidi Rollers.The employment opportunities in agriculture had also not been encouraging enough for the Bidi Rollers to lean on. 5.6.3.3 The above table also reveals that the average daily earnings of the registered Bidi Rollers were substantially higher than their helping dependants in all the Strata except Stratum IV where it was marginally higher. It shows that these helping dependants of Bidi Rollers made a significant contribution towards the production of the bidi industry, yet they constituted a neglected lot, deprived of the benefits of various labour laws. With the modern salesmanship entering the bidi industry the margin of profit in the bidi industry is quite lucrative for the brands established in the market. There is, therefore, an urgent need for bringing this hidden work force under the labour laws with a well defined employer-employee relationship for effective enforcement of the minimum wage legislation.
EXHIBIT 8
Average Daily Earnings of Bidi Rollers and their Helping Dependants (Table 5.5)
5.6.3.2 It emerges from the Table that in all the five Strata the wages paid were below the prescribed wage levels. The average daily earnings of the Bidi Rollers worked out to Rs. 22.04 per day. The average daily earnings were highest in Stratum III (Rs. 26.16 per day) followed by Stratum II (Rs. 24.76 per day), Stratum V (Rs. 20.46 per day), Stratum I (Rs. 20.36 per day) and the lowest in Stratum IV (Rs.18.88 per day). In Stratum III the highest average daily earnings of Bidi Rollers were attributed to the non-availability of Bidi Rollers ( whose average daily earnings were lower than those of Bidi Workers) in the districts of Gwalior, Datiya and Vidisha where the average daily employment in the establishments was the lowest. Moreover, in the absence of any trade unions the Bidi Rollers were not strong enough to bargain for the prescribed wages. The other important reasons for low earnings were malpractices in matters of rejection of finished bidis on the ground of not conforming to quality standards, issue of inadequate quantity and poor quality of tendu leaf and tobacco by the employers or their Contractors or agents.The workers in these areas accepted whatever wages the employers gave.
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LESSON 10: INTRODUCTION TO THE MINIMUM WAGE

Tutorial Activity
Asian Labor Update home-workers, women, children and indigenous workers judged to be particularly vulnerable. A number of developing countries also carried out experiments with minimum wage regulation to protect categories of workers judged to be particularly vulnerable. For instance, Sri Lankas Minimum Wage Ordinance was promulgated in 1927, while Argentina introduced the Home Work Act in 1918 with a view to protecting low paid home-workers. However, with the exception of a few countries, minimum wage fixing remained a rarely used and limited instrument of government policy in both industrialised and developing countries before the Second World War. Towards the end of the economic depression of the 1930s and after the Second World War, the number of countries adopting minimum wage regulation grew rapidly. There was also a trend towards extending wage protection to more and more groups of workers and in many cases was more universal. The early development of minimum wage regulation and subsequent expansion since the 1920s are well reflected in a series of International Labour Conventions on minimum wage regulation by the International Labour organisation (ILO): Minimum Wage Fixing Machinery Convention (No. 26) 1928, the Minimum Wage Fixing Machinery (Agriculture) Convention (No. 99) 1951, and the Minimum Wage Fixing Convention (No. 131) 1970. In spite of impressive development of the minimum wage system in many countries, however, it should be noted that as with industrial relations, both the exact nature and the scope of minimum wage protection reflect the particular historical and institutional development of the country concerned. Some countries in Asia, for example Thailand, Indonesia, China, and Japan, have decentralised minimum wage systems, while others like South Korea and Vietnam have a single minimum wage for the entire country. Cambodia has minimum wage fixing machinery only for the countrys garment and textile sector. As seen above, minimum wage regulation had been adopted by more and more industrialised and developing countries as a major social policy tool to protect low-skilled workers by establishing a minimum wage floor under which no payment should be made. But the usefulness of a minimum wage is now under question by policy-makers and economists, as both developing and developed countries have faced a serious under-employment and unemployment crisis since the 1980s. The standard argument against the minimum wage system was based on the assumption that a minimum wage above a certain level will cause unemployment and therefore inadvertently work against poverty reduction. In the specific context of
Learning Objective
To study about minimum wage policy Does a minimum wage policy protect workers who are
under pressure in the race to the bottom of labor standards in a globalising world economy?
The role of Trade Union

Virtually everywhere in the world, there is on-going debate on the usefulness of minimum wage regulation. Since structural adjustment programmes were introduced in the 1980s to many developing countries, minimum wage regulation has been under attack on several grounds: proponents of the structural adjustment programme argued that minimum wage regulation did not help the poorest of poor workers, i.e. those in the informal sector, as the regulation covered only formal sector workers; furthermore, if a minimum wage is set at an unreasonably high level, it would have a negative impact on employment and therefore make its overall effect on income distribution at best ambiguous. Particularly, as the accelerating process of globalisation forces nation states to compete against each other to attract more foreign investment, minimum wage regulation is seen as a possible barrier to more investment. Before looking at the current debate on minimum wage policy, it is useful to have a brief look at the definition, aim, and history of minimum wage regulation. A minimum wage is a minimum level of payment established by law for work performed. Its purpose is to protect vulnerable low wage workers from exploitation. It is a time-based wage that usually applies to unskilled adults entering work for the first time. As a minimum wage is established by a law, it is legally enforceable. The key purpose of a minimum wage system is social to prevent labor exploitation and poverty. This means the minimum wage should provide sufficient purchasing power to enable a worker to have a basic standard of living. The minimum wage may also have an economic objective - to motivate workers, enable them to enjoy the benefits of economic growth, and contribute to the economy. It is generally considered that minimum wage regulation was first developed in New Zealand (1896) followed by Australia (1899), and later Britain (1909). As the main objective of minimum wage regulation was the elimination of sweating, that is the payment of exceptionally low wages, its application was usually restricted to a limited number of particularly lowpaying sectors or to selected categories of workers, such as
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informalisation in developing economies, a minimum wage system in the formal sector was blamed for crowding out formal sector jobs into the informal sector. But empirical [= practical, as opposed to theoretical] research undertaken recently did not show a negative effect on employment by moderate increases in the minimum wage. Also, recently the ILO undertook a multi-country statistical analysis of the effect of minimum wages on poverty, employment, and informalisation in developing countries. The study found that if other things were equal, the level of the minimum wage has an insignificant effect on the level of employment. Also, the study concluded, after analysing economic data in Latin American countries, that changes in the ratio between the minimum wage and the average wage exert no significant impact on the share of the informal economy in South and Central America. This result supports the view that labour market rigidity, and more specifically low wage rigidity, is not the major factor behind the informalisation of Latin American economies. Regarding the effect of minimum wage on poverty, ILO analysis found that for a constant level of GDP per capita and average wage in manufacturing, in one locality, a higher minimum wage is associated with a lower national level of poverty. In sum, the research findings strongly support the idea that the minimum wage may bring positive results in poverty alleviation by improving the living conditions of workers and their families while having no negative results in terms of employment. Also, no evidence indicated that the level of the minimum wage relative to the average wage affected the size of the informal economy in Latin America. The above studies suggest that the argument against a minimum wage system in developing countries on the grounds of employment and poverty is not convincing. Let us examine another important argument against minimum wage regulation which is often put forward in the context of globalisation and competitive edge. Often it is alleged that a high minimum wage is responsible for weakening competitiveness of industries. But is it really true? Take the case of Thailand. At the peak of the Asian financial crisis in 1997 - 1998, there was a heated debate on the role of the minimum wage in Thailand. One view argued that the minimum wage was one factor responsible for falling competitiveness of Thai industries which triggered the crisis. The ILO conducted research to investigate relations between wages and other economic variables. The ILOs research revealed that it was not primarily the level of the minimum wage but other macroeconomic factors such as a fixed exchange rate and falling productivity of Thai industries which caused falling competitiveness, eventually leading to the economic crisis. At the same time, however, it should be emphasised that without developing a sound enterprise wage structure, which encourages a cycle of skill development and productivity enhancement, there could be a minimum wage trap for both employers and workers.
During the pre-crisis period in Thailand, the ratio of minimum wage to average wage in non-metropolitan regions was extremely high (around 70 percent). Because of this Thai trade union officials complained that workers, often with several years experience and skills, were stuck on the minimum wage. Available evidence confirmed this to be the case. For such workers, the minimum wage had thus drifted from its usual intent - to provide a wage floor for unskilled, new entrants to the labour market. But there are other possible consequences. For one, the function of the wage to motivate is disrupted when the link between pay and performance is weakened. While minimum wage increases might be seen as rewarding workers with seniority, it remains possible that the motivation of the wage is disturbed when there is no obvious link between pay and performance after years on a job. On the contrary, it is possible that higher increases in the minimum wage than in average wages could reduce the incentive to improve skills. If either is true, labour productivity could suffer. Thai employers, on the other hand, argued the complete opposite - that generous increases in the minimum wage had deprived them of the ability to control their own wage structures and to devise wage policies suited to the enterprise. There is some evidence to support this view; employers often abandon their own wage decisions to the governments annual announcement of the minimum wage adjustment. Efforts to link wages more closely to enterprise performance were frustrated. The example of Thailand illustrates the importance of developing a sound enterprise wage structure through enterprise pay negotiations and a good human resource management policy, which should activate a cycle of pay increases, more motivation, skill development, and higher productivity. Actually, when workers have no bargaining power at enterprise level, there is a real danger that a legal minimum wage turns into an effective maximum wage. In Cambodia for example, the majority of workers in garments and textiles receive just a minimum wage, which is currently US$45 per month. As trade unions are very weak at the enterprise level, the fragmented trade union movement tends to concentrate efforts on increasing minimum wages through tripartite negotiation with the National Labour Council. It may be an inevitable, logical choice for an emerging trade union movement which has very weak roots in the work place. However, it is very clear that unions should make great efforts to improve pay bargaining capacity at the enterprise level to achieve settlements above the level of minimum wages. Otherwise there is a real danger that minimum wage effectively becomes maximum wage and union organisations in the workplace will find it difficult to recruit rank-and-file workers and convince them of the value of union membership. This situation may suggest that the most appropriate role for a minimum wage is to provide a defined floor to the wage structure to provide a safety net protection for the lowest income groups.
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For this reason, an ILO publication suggests that the economic impact of minimum wages should ideally be only a slight upward pressure at the bottom end of the wage structure, with little effect on average wages and inflation. Of course there is the opposite case, too. In Korea, for example, the minimum wage accounts for only around 30 percent of average wage and therefore covers less than two percent of the total workforce. At this low level of minimum wage relative to average wage, we could say that the minimum wage system has failed to meet its original goal of protecting low-wage unskilled workers. If minimum wages are too low the objective of poverty reduction will not be achieved. People will continue to work because they have no alternative but the result is a society of working poor. Therefore, minimum wage determination is a delicate issue, which should be seen in a broader context of interplay between market forces and collective bargaining power at various levels of economies, not in isolation from other forces at work. In this regard, the fact that minimum wage fixing through tripartite discussion - either negotiation or consultation - is common in many countries is important. This introduces an element of negotiation between government, workers, and employers in the wage setting process. Where there is good quality information and the parties genuinely desire a commoninterest outcome, tripartite deliberation could offer a mutually beneficial compromise. But trade unions and other parties to consultations in many developing countries face a number of problems. As illustrated above, in a number of countries where trade unions at the workplace have very weak bargaining power, national trade union centres tend to concentrate excessive effort on the minimum wage fixing process, unintentionally resulting in further weakening trade union organisations and collective bargaining in the workplace. Another typical problem in least developed countries is that there is often no reliable data on economic variables to be taken into account for minimum wage fixing and adjustment. Even if there are economic data for it, trade unions often lack the capacity to analyse them and engage in meaningful joint discussions. Developing power and abilities of trade unions at both workplace and national levels is an urgent task in many countries. After years under attack for alleged negative effect on low-paid employment, the minimum wage regulation seems to be back in favour as a means of providing unskilled workers with decent living conditions. Several factors are responsible for the renewed interest in the minimum wage as a tool of market policy. First, several studies in the 1990s showed that the minimum wage had little, if any, effect on creating unemployment. Second, there is a new human rights approach that focuses on the right to have decent employment. In developing countries, policy makers are not only concerned with the impact of the
minimum wage on employment, but also with its impact on the level of poverty. However, trade unions in many Asian countries face an uphill battle to win a minimum wage system, as the globalisation process and mobility of capital put great downward pressures on working conditions and in particular on minimum wage systems. This is a battle for decent work for all working men and women, which will continue. By Chang-Hee Lee, Industrial Relations Specialist, East Asia Multidisciplinary Advisory Team, ILO, Bangkok
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LESSON 11: INTRODUCTION TO BASIC KINDS OF WAGE PLANS

Learning Objective
a regular and stable income to the worker and he can, therefore, adjust his budget accordingly. This system is favored by organized labour, for it makes for solidarity among the workers of a particular class. It requires less administrative attention than others because the very basis of the time wage contract is good faith and mutual confidence between the parties. Demerits The main drawbacks of this system are: i. It does not take into account the fact that men are of different abilities and that if all the persons are paid equally, better workmen will have no incentive to work harder and better. They will therefore be drawn down to the level of the least efficient workman. Halsey observes: Matters naturally settle down to an easygoing pace in which the workmen have little interest in their work and the employer pays extravagantly for his product. Taylor says: The men are paid according to the position which they fill and not according to their character, energy, skill and reliability.
To know concept of Wage Plans To understand the different Types of Wage Plans
Interaction
There are two major kinds of wage and salary payment plans: those under which remuneration does not vary with output or the quality of output, but depends on the time unit consumed in performing work. These are known as time wage plans. The time unit may be the day, week, fortnight or month. Time plans are non-incentive in the sense that earnings during a given time period do not vary with the productivity of an employee during that period. The second kind is concerned with the output or some other measure of productivity during a given period of time. To earn more, an employee is required to put in more labour and produce more. This Kind is known as the piece or output wage plan. It is a direct financial incentive plan, Thus, the time and the output wage plan are the two basic systems. All the other plans are simply variations of these two.
Types of Wage Plans

After understanding above the concept of wage plans no let us understand in details below the different types of wage plans: Time Rate This is the oldest and the most common method of fixing wages. Under this system, workers are paid according to the work done during a certain period of time, at the rate of so much per hour, per day, per week, per fortnight or per month or any other fixed period of time. The essential point is that the production of a worker is not taken into consideration in fixing the wages; he is paid at the settled rate as soon as the time contracted for is spent. Merits The merits of the system are: 1. It is simple, for the amount earned by a worker can be easily calculated; 2. As there is no time limit for the execution of a job, workmen are not in a hurry to finish it and this may mean that they will pay attention to the quality of their work; 3. As all the workmen employed for doing a particular kind of work receive the same wages, ill will and jealousy among them are avoided; 4. Due to the slow and steady pace of the worker, there is no rough handling of machinery, which is a distinct advantage for the employer; 5. It is the only system that can be used profitably where the output of an individual workman or groups of employees cannot be readily measured. The day or time wage provides
ii. The labour charges for a particular job do not remain constant. This puts the authorities in a difficult position in the matter of quoting rates for a particular piece of work. iii. As there is not specific demand on the worker that a piece of work needs to be completed in a given period of time, there is always the possibility of a systematic evasion of work by workmen. iv. This system permits many a man to work at a task for which he has neither taste nor ability, when he might make his mark in some other job. v. As the employer does not know the amount of work that will be put in by each worker, the total expenditure on wages for turning out a certain piece of work cannot be adequately assessed. As no record of an individual workers output is maintained, it becomes difficult for the employer to determine his relative efficiency for purposes of promotion. Piece Rate Under this system, workers are paid according to the amount of work done or the number of units completed, the rate of each unit being settled in advance, irrespective of the time taken to do the task. This does not mean that a worker can take any time to complete a job because if his performance far exceeds the time, which his employer expects he would take, the overhead charge for each unit of article will increase. There is indirect implication that a worker should not take more than the average time. If he consistently takes more time than the average time, he does it at the risk of losing his job.
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Under this plan, a worker, working in given conditions and with given machinery, is paid exactly in proportion to his physical output. He is paid in direct promotion to his output, the actual amount of pay per unit of service being approximately equal to the marginal value of his service in assisting to produce that output. This system is adopted generally in jobs of a repetitive nature, where tasks can be readily measured, inspected and counted. It is particularly suitable for standardized processes, and it appeals to skilled and efficient workers who can increase their earnings by working to their full capacity. I In weaving and spinning in the textile industry, the raising of local in the mines, the plucking of leaves in plantations, and in the shoe industry, this system can be very useful. But its application is difficult where different shifts are employed on the same work or where a great variety of different grades of workers are employed on different and immeasurable services, as in the gas and electricity industries. A workers earnings can be calculated on the basis of the following formula: WE=NR, where WE is the workers earning, N stands for the number of pieces produced and R for the rate per piece. Merits This system has many advantages: i. It pays the workman according to his efficiency as reflected in the amount of work turned out by him. It satisfies an industrious and efficient worker, for he finds that his efficiency is adequately rewarded. This gives him a direct stimulus to increase his production. ii. Supervision charges are not so heavy, for workers are not likely to while away their time since they know that their wages are dependent upon the amount of work turned out by them. iii. Being interested in the continuity of his work, a workman is likely to take greater care to prevent a breakdown in the machine or in the workshop. This is a point of considerable gain to the management, for it reduces plant maintenance charges: iv. As the direct labour cost per unit of production remains fixed and constant, calculation of costs while filling tenders and estimates becomes easier. v. Not only are output and wages increased, but the methods of production too are improved, for the worker demands materials free from defects and machinery in perfect running conditions. vi. The total unit cost of production comes down with a larger output because the fixed overhead burden can be distributed over a greater number of units. Demerits The demerits of the system are: i. In spite of the advantages accruing to the management as well as to the workmen, the system is not particularly favoured by workers. The main reason for this is that the fixation piece rate by the employer is not done on a scientific basis.
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In most cases, he determines the rate by the rule-of-thumb method, and when he finds that the workers, on an average, get higher wages compared to the wages of workers doing the same task on a day-rate basis, pressure is brought to bear upon the workers for a cut in the piece rate. Halsey observes: cutting the piece price is simply killing the goose that lays the golden eggs. Nevertheless, the goose must be killed. Without it, the employer will continue to pay extravagantly for his work; with it he will stifle the rising ambition of his men. ii. As the workers wish to perform their work at breakneck speed, they generally consume more power, overwork the machines, and do not try to avoid wastage of materials. This results in a high cost of production and lower profits. iii. There is a greater chance of deterioration in the quality of work owing to over zealousness on -the part of workers to increase production. This over-zealousness may tell upon their health, resulting in a loss of efficiency. iv. It encourages soldiering; and there arises a system of hypocrisy and deceit, because to escape further cuts they begin to produce less and also regard their employers and their enemies, to be opposed in everything they want. v. Excessive speeding of work may result in frequent wear and tear of plant and machinery and frequent replacement. Trade unions are often opposed to this system, for it encourages rivalry among workers and endangers their solidarity in labour disputes. Balance or Debt Method This method is a combination of time and piece rates. The worker is guaranteed an hourly or a day-rate with an alternative piece rate. If the earnings of a worker calculated at the piece rate exceed the amount which he would have earned if paid on time basis, he gets credit for the balance, i.e., the excess piece rate earnings over the time rate earnings. If his piece rate earnings are equal to his time rate earnings, the question of excess payment does not arise. Where piece rate earnings if less than time rate earnings, he is paid on the basis of the time rate; but the excess which he is paid is carried forward as a debt against him to be recovered from any future balance of piece work earnings over time work earnings. This system presupposes the fixation of time and piece rates on a scientific basis. Let us suppose that the piece rate for a unit of work is Re. 1.00 and the time rate Rs. 0.37V2 an hour, the weekly work hours are 40 and the number of units to be completed during these 40 hours is 16. It will be seen that the debit during the second week completely eliminated the edit of Re. 1.00 obtained during the first week. The worker will be paid his guaranteed time rate, in this case Rs.15.00, in the first week and the same amount in the second eek, although his earnings during the first week are Rs.16.00 and during the second eek they are Rs.14.00. An adjustment will be made periodically to find out the balance be paid to him.
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The obvious merit of this system is that an efficient worker has an opportunity to increase his wages. At the same time, workers of ordinary ability, by getting the guaranteed time wage, are given a sufficient incentive to attain the same standard, even though the excess paid to them is later deducted from their future credit balance. Table 16 : Balance Method of Wage Payment
Total Total Earnings Units of Earnings Under Completed Under Piece Rate Rate 16 Rest. 16/-
while expressing benefits in terms of a current lump sum, which mobile employees can access when they leave their employer. (See the appendix for a comparison of cash balance plans and pension equity plans.) When designing retirement benefits, todays employers may face different issues than were faced in the past. Consider some of the needs of todays employers.
The ability to recruit new employees that are well into their
careers
Credit Debit Balance Name of Worker
Sohan first week) Sohan Second week)
Rest. 15/- Rest. 1/-
Nil
Rest. 1/
The ability to provide predictable retirement benefits The ability to accommodate early retirement The ability to provide portable benefits upon employment
termination or retirement
The ability to provide benefits that keep up with inflation

14 Rest. 14/Rest. 15/- Rest. Nil Nil Rest. 1/
Questions 1. What do you understand by the term wage plan? 2. What are the basic kinds of wage plans? 3. What proper administration of wage plans is required in compensation management?
To meet these needs, new, hybrid forms of pension plans including pension equity plans and cash balance planshave been developed. Such plans are referred to as hybrids because, even though they are defined benefit plans, they combine the features of both defined benefit and defined contribution plans. A defined benefit plan typically includes a formula for computing benefits at retirement. Benefits are often based on salary and length of service; employers are required by law to place sufficient funds in the plan to pay for future benefits. The Federal government guarantees benefit payments, within limits. In contrast, a defined contribution plan specifies contributions, or ranges of contributions, from employers and employees. The contribution is often stated as a percentage of the employees salary; all funds go into an individual account designated for the employee. The fund balance, including investment earnings, is paid to the employee at retirement. Unlike a defined benefit plan, the risk of investment loss in a defined contribution plan is borne by the employee. Hybrid plans began to emerge in the late 1980s with the introduction of cash balance plans. Hybrid plans generally specify contributions to an account (or balance) like a defined contribution plan, but guarantee final benefits like a defined benefit plan. Such plans grow throughout an employees career and allow employees to see that growth through an account balance. The key difference between defined contribution plans and hybrid plans is that defined contribution plans establish an actual account for each participant while hybrid plans use a theoretical account that does not actually accrue funds. A defined contribution account accumulates the actual funds contributed by the employee and employer, and the account changes with investment earnings and losses. The account in a hybrid plan is theoretical and is not actually funded by employer contributions. The employee receives credits each year and the account balance grows, but the employer contributes to the plan as a whole (covering all workers in the plan) to ensure that sufficient funds will be available to pay all benefits. The employers contribution in a given year may be more or less than what is credited to an individual employees account. Among the first pension equity plans was the plan designed for RJR Nabisco and introduced in 1993. BLS data indicate that, of

Let Us Understand What is a Pension Equity Plan? To meet the needs of workers who hold a number of jobs throughout their lives, employers continue to seek new kinds of retirement income plans; pension equity plans, like cash balance plans, let employees know the lump-sum value of their pension while they are still working. Traditional defined benefit pension plans have been described as golden handcuffs, providing generous (golden) retirement income to workers who remain with the same employer (the handcuffs) throughout their work life. Such plans, which often base benefits on earnings in a workers last years with the company, may provide lower benefits for those employees who work in multiple jobs throughout their lifetimes. In January 2002, employees had worked for their current employer for an average of 3.7 years; those aged 45 to 54 had worked for their current employer an average of 7.6 years.1 These data suggest workers may be accumulating retirement benefits from several jobs; employers have attempted to deal with these changing needs by seeking alternative approaches to providing retirement income. The different career plans of the younger generations have led many employers to conclude that their retirement plans were not beneficial to these younger, more mobile workers. This was not conducive to attracting potentially valuable employees that could help increase efficiency. One new approach is the pension equity plan, which is a defined benefit plan that builds cash value throughout a persons working life. Much like cash balance pension plans,3 which have received considerable attention in recent years, pension equity plans offer the guaranteed benefits of a defined benefit plan
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the 22 percent of full-time private industry workers with a defined benefit pension plan in 2000, 3 percent participated in pension equity plans. In 1997, about 1 percent of full-time workers in larger private companies with a defined benefit pension plan were in a pension equity plan. While the incidence of pension equity plans remains very low, other hybrid plans have grown rapidly, perhaps suggesting that more pension equity plans will be seen in the future. In 2000, for example, 1 in 4 full-time private industry workers with a defined benefit pension plan was in a cash balance plan, up from 1 percent in 1988 and 6 percent in 1997.7
the company with the same final average earnings (as defined by the plan), but the amount of their actual lump-sum benefit and consequently their annuity value - differs considerably because of differences in their ages and lengths of service. Because the benefit credits accumulate more quickly for older workers, employee 1 with 15 years of service at age 40 has a smaller lump-sum benefit than does employee 3, who has 15 years of service at age 65. The employee with 30 years of service who retires at age 65 has the greatest accumulation, reflecting both long service and nearness to retirement age. Employers may use alternative approaches to determining credits under a pension equity plan. For example, an employer with multiple lines of business can adjust the percents to accommodate many different types of workers. Table 2 shows an example of this flexibility. In this example, the plan includes three different schedules of percents for three different occupational groups within the same company. Pension equity plans can vary their accrual rate based on both age and service, and they can provide different accruals for those earning more than the Social Security taxable wage base. For example, an employer can provide a standard age-based accrual and add to that a smaller accrual based on service. Employees with 10 to 20 years of service might receive an additional service accrual of 2 percent per year, while those with more than 20 years of service might receive an additional 3 percent per year. Defined benefit pension plans are also allowed to integrate benefits with Social Security; such a provision takes into account the employer funding of Social Security benefits up to an annual threshold (the Social Security taxable wage base). A pension equity plan might vary its accruals for those earning less than or more than the wage base. For example, a plan that accrued 3 percent of earnings per year for those aged 31 to 40 might increase that accrual to 5 percent per year for those earnings that exceed the wage base.
Plan Design
A pension equity plan is a defined benefit plan that provides an annuity or lump-sum benefit at the termination of a participants employment. Pension equity plans define benefits in terms of a current lump-sum value. Annual credits can be based on age, service, or a combination of both. The plan determines the total benefits by providing a schedule of percents that are accumulated throughout the work life of the employee. When an employee leaves the employer, either at retirement or at any time once vested, the accumulated percentage is applied to final earnings (defined by the plan) to determine a lump-sum benefit. Appendix: The following tabulation shows an example of how a pension equity plan might accumulate percents of earnings strictly on the basis of age:
Age
Percent of earnings accumulated
29 and younger 30 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 and older
2.5 3.0 4.0 5.0 6.5 8.5 10.5 13.5
Distributions
While pension equity plans identify their benefits in terms of a lump sum (a percent multiplied by final earnings), as a defined benefit plan they must make benefits available in the form of an annuity. In practice, this annuity requirement is typically only applicable to workers who are nearing retirement age. By law, defined benefit plans with a value of $5,000 or less can, without the consent of the covered employee, pay the employee a lump sum and not offer an annuity option. In a traditional defined benefit plan, such value is determined by the present value of future benefits. In a hybrid plan, the value is the actual account balance. Workers whose account value is greater than $5,000 must be offered the option of an annuity; in fact, the standard form of benefit for a married employee must be a joint-and-survivor annuity. Only if both the employee and spouse waive the right to a joint-and-survivor annuity can the benefit be paid out in another way, such as a lump sum. While hybrid plans are designed to allow workers to know the value of their retirement benefits at any time, and to have easy access to the lump-sum value of those benefits should they leave their employer, receipt of retirement benefits prior to
Employees receive a percent of earnings credits for each year of service, which are accumulated throughout the employees career with the employer. The total percent (shown as a credit in some plans) is multiplied by the employees final average earnings. Final average earnings generally are defined as an annual average of the highest earnings over a specific number of yearsfor example the average of the highest 3 years of earnings. Table 1. Illustrates how three different workers would accumulate benefits under a pension equity plan. Each employee leaves
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retirement age can have adverse tax consequences. Such distributions are considered taxable income in the year they are received. The distribution may also be subject to a 10-percent Federal tax penalty for early receipt of retirement benefits, depending upon the employees age. To avoid such taxes, the employee terminating employment and moving on to another job can roll over the lump-sum benefit into an Individual Retirement Account (IRA) or a retirement plan sponsored by a future employer.
While this early retirement reduction is considered a penalty by some, it is in fact merely an adjustment based on life expectancy. (Some employers subsidize that adjustment by making the reduction less than a true actuarial reduction.) No such adjustment occurs in a pension equity plan. Because benefit accruals typically rise with age, however, the pension equity plan formula already has adjustment for age built into the accrual formula. While pension equity plans and cash balance plans share methods of accumulating value, a major difference is the earnings used to determine the benefit. Cash balance plans specify a credit each year, based on that years earnings. By contrast, in a pension equity plan, the credits are applied to final earnings. This feature provides built-in inflation protection. Regardless of whether an employee has just a few years of service required for vesting or has worked under the plan an entire career, benefits are based on earnings at the end of the employees career. Through its annual benefits survey, BLS has tracked the change in retirement plans over time, from traditional defined benefit to defined contribution to hybrid plans. BLS will continue to monitor and report on the incidence of pension equity plans. Comparison of features of Pension Equity Plans and Cash Balance Plans
Pension Equity Plan Advantages

The ability of employees to know the current value of their plans at any time is one of the advantages of pension equity plans. Another perceived advantage is that there is no reduction in benefits due to early retirement. This means that if a worker terminates his or her employment before normal retirement age, but has fulfilled the vesting requirements, the benefit will reflect the length of time worked. In contrast, a traditional defined benefit pension plan specifies periodic pension distributions as the amount available at normal retirement age. Employees receiving benefits before that age typically receive lower benefits to account for receiving benefits over a longer expected lifetime.
Feature Benefit formula
Pension Equity Plan Percent of earnings, may vary by age, service, or earnings Percent of earnings, as determined by the benefit formula, are accumulated each year, but the final benefit is not determined until employee leaves the plan
Cash Balance Plan Percent of earnings, may vary by age, service, or earnings Dollar amount (benefit formula times earnings) placed in hypothetical account each year; interest on account balance also credited each year Percent applied to each years earnings
How benefits are accumulated
Definition of earnings
Total accumulated benefit applied to final earnings, as defined by the plan; final earnings typically those in last 3-5 years before retirement Employees can multiply their accumulated percent of earnings times their final earnings as defined by the plan to determine their current benefit Specified as a lump sum, but can be converted to an annuity
How to determine value of benefits for current employees Distribution
Account balance is the current benefit
Specified as a lump sum, but can be converted to an annuity By L. Bernard Green
He is a graduate student in economics at Florida State University. During 2001 and 2002, he worked as an intern in the Division of Compensation Data Analysis and Planning, Bureau of Labor Statistics.
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LESSON 12: INTRODUCTION TO WAGE DIFFERENTIALS & ELEMENTS OF A GOOD WAGE PLAN
Learning Objective
Description of each wage differential in detail: i. Occupational Differentials These indicate that since different occupations require different qualifications, different wages of skill and carry different degrees of responsibility, wages are usually fixed on the basis of the differences in occupations and various degrees of skills. The basis functions of such differentials are: a. To induce workers to undertake more demanding, more agreeable or dangerous jobs, or those involving a great chance of unemployment, or wide uncertainty of earnings. b. To provide an incentive to young person to incur the costs of training and education and encourage workers to develop skills in anticipation of higher earnings in future. c. To perform a social function by way of determining the social status of workers. In countries adopting a course of planned economic development, skill differentials play an important role in manpower and employment programmes, for they considerably help in bringing about an adequate supply of labour with skills corresponding to the requirements of product plans. Inter-occupational differentials may comprise skilled, unskilled and manual wage differentials; non-manual and manual (white and blue-collar); and general skill differentials. Occupational wage differentials generally follow the changes in the relative supplies of labour to various occupations. ii. Inter-firm Differentials Inter-firm differentials reflect the relative wage levels of workers in different plants in the same area and occupation. The main causes of inter firm wage differentials are: a. Difference in the quality of labour employed by different firms; b. Imperfections in the labour market; and c. Differences in the efficiency of equipment, supervision and other non-labor factors. Differences in technological advance, managerial efficiency, financial capacity, age and size of the firm, relative advantages and disadvantages of supply of raw materials, power and availability of transport facilities - these also account for considerable disparities in inter-firm wage rates. Lack of coordination among adjudication authorities, too, are responsible for such anomalies. iii. Inter-area or Regional Differentials Such differentials arise when workers in the same industry and the same occupational group, but living in different geographical areas, are paid different wages. Regional wage differentials may be conceived in two senses. In the first sense, they are merely a part of inter-industry differentials in a particular region.
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To learn the meaning and definition of wage differential To understand the concept of wage differential To know the types of wage differential To understand the reasons for wage differential To know the need of a good wage plan To understand the essentials of a good wage plan
Wage Differentials
Definition The word differential means relating to, or showing a difference, or making use of a specific difference or distinction. Wage differential is an element of location selection that is a wage scale reflecting the average schedule of workers pay in an area that takes into account the performance of related tasks or services. Wages differ in different employments or occupations, industries and localities, and 0 between persons in the same employment or grade. One therefore comes across the terms as occupational wage differentials, inter-industry, inter-firm, interarea or geo graphical differentials and personal differentials. Wage differentials has been classified into three categories:
First
The differentials that can be attributed to imperfections in the employment markets, such as the limited knowledge of workers in regard to alternative job opportunities available elsewhere; obstacles to geographical, occupational or inter-firm mobility of workers; or time lags in the adjustment of resource distribution and changes in the scope and structure of economic activities. Examples of such wage differentials are inter-industry, inter-firm, and geographical or inter-area wage differentials.
Second
The wage differentials which originate in social values and prejudices and which are deeper and more persistent than economic factors. Wage differentials by sex, age, status or ethnic origin belong to this category.
Third
Occupational wage differentials, which would exist even if employment markets were perfect and social prejudices were absent. In other words, wage differentials may be: i. Occupational differentials or differentials based on skill; ii. Inter-firm differentials; iii. Inter-area or regional differentials; iv. Inter-industry differentials; and v. Differentials based on sex.
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The industry mix varies from one area to another, and for this reason alone, the general average of wages would be expected to vary. In the second sense, they may represent real geographical differentials, resulting in the payment of different rates for the same type of work. In both cases, regional differentials affect the supply of manpower for various plants in different regions. Such differentials are the result of living and working conditions, such as unsatisfactory or irksome climate, isolation, sub-standard housing, disparities in the cost of living and the availability of manpower. In some cases, regional differentials are also used to encourage planned mobility of labour. iv. Inter-industry Differentials These differentials arise when workers in the same occupation and the same area but in different industries are paid different wages. Inter-industry differentials reflect skill differentials. The industries paying higher wages have mostly been industries with a large number of skilled workers, while those paying less, have been industries with a large proportion of unskilled and semi-skilled workers. Other factors influencing inter-industry differentials are the extent of unionization, the structure of product markets, the ability to pay, labour-capital ratio, and the stage of development of an industry. v. Personal Wage Differentials These arise because of differences in the personal characteristics (age or sex) of workers who work in the same plant and the same occupation. Equal pay for equal work has been recommended by the I.L.O. Convention (No. 100), as also by Industrial Courts, Labour Tribunals, the Minimum Wages Committee and the Fair Wage Committee. But in practice this principle has not been fully implemented because in occupations which involve strenuous muscular work, women workers, if employed, are paid less than men workers. Lack of organization among women employees, less mobility among them, their lower subsistence and their weak constitution are other reasons which bring them lower wages than their male counterparts receive. Elements or Ingredients of a Good Wage Plan Before going ahead with the plans and elements of a good wage plan, first let us discuss why a good wage plan is required? Ans. A good wage plan is a more or less a mandatory requirement by the oprating firms in order to attract the most creamy work force. Also it helps in tackling retention management and employee motivation problems to a great extent. So below is mentioned the following features of a good wage plan: i. It should be easily understandable, i.e., all the employees should easily understand what they are to get for their work. They should be instructed in how the wage plan works.
iii. It should be capable of effectively motivating the employees, Le., it should provide an incentive for work. If both the quality and quantity of work are to be stressed at the same time, a plan should be selected that will not unduly influence the worker to work too fast or to become careless of quality. iv. It should provide for remuneration to employees as soon as possible after the effort has been made. Daily or weekly payment of wages would be preferable to induce employees to work. v. It should be relatively stable rather than frequently varying so that employees are assured of a stable amount of money.
Latest Updates In Labor Welfare Laws

India Calls For New Standards In Labour Welfare Laws Employment Generation Be Given Continued Priority In Ilos Agenda Says Dr. Jatiya Labour Minister Addresses ILC Session In Geneva India has urged the International Labour Organisation (ILO) to explore new methods of standards setting concerning labour welfare laws. It should have a discussion on the standard setting agenda in a two tier and a double discussion procedure, one at the regional level and the other at the International level. This will give more opportunities to reflect the regional positions and better understanding and appreciation at the international level. This suggestion was made by the Indian Labour Minister, Dr. Satyanarayan Jatiya while addressing the 87th Session of the International Labour Conference in Geneva, today. He said many of the ILO conventions have been adopted ignoring realities of the situation obtaining in the developing countries and this two tier discussions will help remove the regional imbalances. Turning to unemployment and under employment, Dr. Jatiya called for analysing and addressing effectively the present employment scenario so as to achieve socio-economic progress. The worsening employment situation all over the world demands urgent attention and a plan of action to find solution. He stressed that employment generation must be kept on the top of the agenda of the ILO for the next decade. Any measures for employment should also be full, freely chosen and productive in terms of the Copenhagen Declaration, he averred. The Labour Minister pointed out that every worker as human being deserves to be treated with dignity, equality and respect and these should be integrated in the employment and wage policies of the Governments. This is necessary to create a balance between employment generation on the one hand leading to the decent income, livelihood, equality of life and unavoidable corollary of the income generation, on the other. Referring to social protection, Dr. Jatiya stated that it assumes vital importance for those unfortunate sections of the society and the working class discriminated and economically exploitated for a long period. Among them are, bonded, contract, migrant and casual labourers.
ii. It should be capable of easy computation, i.e., it should be sufficiently simple to permit quick calculation. Mathematical tables may be supplied, be reference to which calculations can. be quickly made.
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Their protection has been a major commitment of the Indian Government, he said. Equally significant has been, Indias commitment, to the ethos and culture of tripartism through social dialogue. In India all important policy decisions on Labour, including legislation are taken only after taking into confidence, the social partners namely, the State, Employers and Employees, as also after obtaining consensus through various tripartite fora. The Labour Minister Dr. Jatiya also reiterated Indias commitment to the principles in the ILO Constitution and the Philadelphia declaration. He expressed Indias appreciation for the comprehensive report Decent Work of Dr. Juan Somavia, Director General of the ILO and said it provides the right direction and thrust for the policies and programmes of the ILO in the changing context of the social and economic environment, globally as well as nationally. India also welcomes the strategic objective approach set in the report taking into account the economic, employment, emerging social conditions as well as the rapid technological changes. These are already embodied clearly and forcefully in the Constitution of India, Dr. Jatiya added. Full Text Of The Speech Of Dr. Satyanarayan Jatiya, Union Labour Minister, Government Of India While Addressing The Plenary Of The International Labur Conference In Geneva On 9th June 1999 I join distinguished speakers to congratulate you on your election as the President of the 87th Session of the International Labour Conference. I would also like to take this opportunity to place on record our appreciation for the very comprehensive report of Dr. Juan Somavia, Director General of the ILO captioned Decent Work which provides the right direction and thrust to the policies and programmes of the ILO in the changing context of the social and economic environment globally as well as nationally. His report has adopted a strategic objective approach taking into account the economic, employment, emerging social conditions as well as the rapid technological changes. We welcome the dominant theme of Decent Work which is the corner stone of the strategic objective and which also has been embodied clearly and forcefully in the Constitution of India in the Directive Principles of State Policy. The most important manifestation of the phenomenon of globalisation is widespread unemployment and under employment. If the goal of achieving social progress has to be achieved parallel to economic progress, the present employment scenario has to be analysed and addressed effectively. The DG has candidly noted that globalisation has brought prosperity as well as inequalities which are testing the limits of collective social responsibility. He has, therefore, rightly identified Creation of greater opportunities for women and men to secure decent employment and income as one of the strategic objectives of the organisation in coming years. We consider it as the most important strategic objective and the progress on all other objectives is contingent upon the progress achieved in this core objective. The worsening employment situation all over the world demands urgent action.
The Asian region in the recent past experienced a major financial crisis as a result of which over 20 million people lost their jobs. There was runaway inflation and a consequential fallout adversely affecting wages of the workers. Logically, therefore, employment generation should be on the top of the agenda of the ILO in the coming decades. Such employment should also be full, freely chosen and productive in terms of the declaration adopted at Copenhagen in which the present DG of ILO had played an important role. In other words , the dignity, equality and respect with which every worker as a human being deserves to be treated should be integrated in the employment policy and wage policy so that there is employment generation leading to decent income, livelihood and quality of life as the logical corollary. Till recently the multi-lateral agencies dealing with social issues and economic issues were acting independently and were giving different policy prescription to national governments without trying to harmonise the conflicting positions. The ILO should, therefore, have a view on the design of the macro economic policies at the international level. We, therefore, welcome the consensus emerging in the ILO constituents for more effective and substantive relationship with the Bretton Wood institutions as they now greatly influence employment policy, social security, labour laws, labour market relation, etc. at the national level. Social protection assumes importance for those unfortunate sections of the society and working class in particular, who have been victims of social discrimination and economic exploitation for generations. Among them are the special victims of social exclusion such as bonded labour, contract labour, migrant labour, casual labour and indentured labour. Their protection has been an article of faith and commitment for my national government. Equally significant has been out commitment to the ethos and culture of tripartism through social dialogue. In India, all important policy decisions on labour, including legislation are taken only after taking into confidence the three social partners and after obtaining a consensus through various tripartite fore. Mr. President I take this opportunity to reiterate our commitment to the principles enshrined in the ILO constitution and the Philadeplphia Declaration. The recently adopted Declaration on Fundamental Principles and Rights at work and its follow up is aimed at achieving economic progress accompanied by social justice. Fundamental priciples at work place identified for promotion should be considered in the context of the broader framework for development at the national and international level. We are again happy to note that the DG has underlined the promotional nature of this Declaration and the importance of technical cooperation as one of the means to achieve this goal. Our submission is that the Declaration should not be used for intrusive monitoring of national economic and social policies and for developing non-tariff barriers in international trade.
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We apprehend that the proposals for voluntary code of conduct can easily be distorted and utilised for unilateral action in trade and investment. Therefore, the ILO should not become a forum for institutionalising such arrangements. We need to seriously consider the efficacy of the standard setting activity. Many of the Conventions adopted over a period of time are now found unsuitable to meet the requirements of the present conditions. We welcome the suggestion of the DG that we should explore new methods of standard setting. The organisation should consider discussion on the standard setting agenda in a two-tier and double discussion procedure, one at the regional positions and laer their understanding and appreciation at the international level. Many of the Conventions have been adopted ignoring realities of the situation obtaining in the developing countries and the two-tier discussions will rectify the situation
Since Narayankhed town is very near to the village, people mostly go there for all their needs. There is a hospital and both primary and high schools in Narayankhed.
Family Details
Prabhakar is now around 40 years of age. He has been staying in this village from his childhood. His family consists of his wife, three sons and one daughter who are dependent on him. His parents stay in the neighbouring village. His children go to school and his wife looks after affairs of the house. The main income source for the family is earnings from the labour contract. The family has three acres of agricultural land the value of which would be Rs. 45,000. Jowar and pulses are cultivated in this land during the kharif season. The family also has one cent of residential land with a house. The value of this property would be about Rs. 75,000.

Questions 1. What do you understand by the term wage differential and state the reasons for the existence of it? 2. What are the elements or ingredients of a good wage plan?
Diversification History
Prabhakars father used to work as a daily wage labourer. He often had to go out of his village in search of wage labour in the lean season. In this process, he came across a private sugar factory newly established near Narayankhed. The only other sugar factory existent at that time in Narayankhed was the Nizam Sugars Public Limited. He got in touch with the owner of the sugar factory and got a contract of drying the sugarcane Bagas 1 which was used as fuel for the boilers for heating the sugarcane juice. This contract gave them work for additional three to four months during the lean season often from December to February. Prabhakar assisted his father for four years in this business and learnt the required skills. From the income earned from this source, he and his father could acquire three acres of land and a residential house. Prabhakar was married by this time to Saraswati. The income from agriculture was meagre as small surpluses were left after own consumption. All expenditure of the house had to be met from the profits from the above contract. In order to increase the familys income, he decided to try and get similar contract elsewhere, instead of assisting his father. Around 18 years ago, he got his first contract from the Sri Srinivasa Sugar factory in Ramayampet for the drying of bagas. He is still continuing with the same contract. From these earnings, he could buy another house. He also invested some amount in digging a bore well. However, this was not successful. When he got the contract, he started engaging labourers from his village by paying some advance wages to them. He in turn got an advance from the owner of the sugar factory. This advance payment to the labourers was necessary, as they had to support their families in their absence. He gradually started using his labourers in the manufacturing process of sugar in addition to bagas drying. At present, he employs about 100 workers, of whom nearly 30 are working in the processing of sugar. The workers are divided into various categories at the beginning and wages are paid according to the kind of work they do. The
Tutorial Activity 1.2 Case Study

Micro-Diversification Study A Case of a Labour Contractor at Dharmaram
Introduction
This case focuses on the migration of labourers in search of daily wage during the dry season. Mr Prabhakar is one such labour contractor who has a tie up with a sugar factory. In addition to earning for himself, he provides daily wages to nearly 100 labourers during the lean season.
The Village Context

Paidipally is a small village in the Narayankhed mandal of Medak district. It is situated five Kms away from the town of Naryankhed. The village has more of a Kannada influence as it lies very near to the state of Karnataka. The town of Bidar in Karnataka is only 60 Kms away from Paidipally. Paidipally has nearly 300 households with around 1,000 people. Most of the people are engaged in agriculture. Majority of the people are small and marginal farmers who practice traditional agriculture. As agriculture is dependent on rainfall, often uncertain, people migrate to other places in search of wage labour. The soil is black cotton type. People mostly grow jowar and pulses. Only one crop is grown due to scarcity of water. There is lack of irrigation facility and people mostly have to depend on rainfall which is less than 600 mm per year. Few farmers have bore-well and are engaged in cultivation of vegetables. It is well connected with buses to Narayankhed every hour. The supply of electricity is very erratic although everybody has connections.
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wage varies from Rs. 18 to Rs. 100 per day. The person at the boiler will get Rs. 100, labourer using his own bullocks for drying bagas will get Rs. 90 whereas a person engaged in drying the bagas will get Rs. 18. Prabhakar explained that the income from this activity is mostly dependent on the amount of sugarcane supply to the factory for crushing. Higher the inflow of sugarcane in the factory, greater is requirement of bagas and therefore a higher income in the season. He would incur losses if the factory does not run for the full season completely (i.e. for nearly three months) as the advance given to the workers could not be taken back for lack of any work. Prabhakar suffered a heavy loss last year due to inadequate supply of sugarcane to the factory. The factory has a capacity to process 100 bags per day. Last year, it ran for a month. For the rest of the two months, it was not operating. Due to this, he suffered a loss of Rs 30,000. He had to sell off one his house to recover this loss. Out of the sale proceeds, he had partly repaid this loss to the sugar factory and the rest was given as credit by the factory owner. Thus was possible because of his association for the last 18 years. Often he has been supported by the factory owner in the event of any unforeseen circumstances.
Future Plans
Prabhakar is not very sure about his future plans. He wants to continue to do this business as it is providing wages to more than 100 families. The factory owner had offered him a job on several occasions but he is not keen on taking it as it is against his dignity. He could have earned Rs. 4,000 per month easily as supervisor in the factory. He has plans to invest in a bore well again. He wants his children also to get into this business.
Answer the Questions Below Based on the Case Study Above
1. What is the author trying to highlight with the help of this case? 2. What kind of contractual arrangements exist in the processing sector? 3. Is temporary migration a common phenomena in dryland regions? If so then when?
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LESSON 13: INTRODUCTION TO INSTITUTIONAL MECHANISM FOR WAGE DETERMINATION

Learning Objective
To know the Institutional Factors Influencing or

determining Wage Rates
tion - the impact they can make on the end results of their section, department or the organization as a whole. Responsibility involves the exercise of discretion in making decisions which commit the use of the organizations resources. Rates of pay are therefore influenced not only by the scope of the job in terms of its impact on. results but also by the size of resources controlled, the amount of authority job holders possess, the degree of freedom they have to make decisions and to act, and the extent to which they receive guidance or instruction on what they should do. Perception about the intrinsic value of jobs will be influenced not only by the outputs .of job holders but also by the impact they can make on the results achieved by the organization as a whole. The scope or size of jobs and their rates of pay are therefore related to the accountability of job holders for achieving results. The intrinsic value of jobs may also be related to the input and process factors of knowledge and skills and competencies. Knowledge, and skills refer to what job holders need to know and are able to do to meet the requirements of their jobs. Competencies are the behavioral characteristics which demonstrably differentiate between levels of performance in a given role. Internal Relativities The problem with the concept of intrinsic value is that it does not take account of the other factors affecting value. It can be argued that there is no such thing as absolute value. The value of anything is always relative to something else and is affected by external economic factors as well as internal relativities. Within an organization, job values will be determined by perceptions of the worth of one job compared with others. Internal differentials reflect these perceptions, which may be based on information relating to the inputs made by jobholders as reflected by the requirement to use different levels of knowledge or skill. Or more importance may be attached to outputs- the added value they create. internal differentials will be strongly influenced by differentials established in the external market from which the organization recruits and to which existing employees may be tempted to return. The organization structure will clearly influence differentials and methods of payment. A hierarchical structure with well-defined layers of responsibility will provide a clear indication of the pattern of differentials and produce a pay structure with fairly narrow bands. A flatter, more flexible, structure will make it hard to establish a rigid rank order and differentials will be more fluid within broader pay bands and will depend more on relative levels of competence and contribution.
To understand the Role of Wage Board To learn the concept of Wages and Social Security
Interaction
Reward management involves the development of pay structures of varying degrees of formality which define the rates of pay for jobs, the pay relativities between jobs and the basis upon which job holders are paid. Pay structures are designed by reference to judgments about job values as expressed by relativities with other jobs and external (market) rates of pay for comparable jobs. These judgments are made against the background of the factors which influence job values. Bearing these in mind, steps can be taken to establish internal job values by using some form of job evaluation. External values are also established by surveying and analyzing market rates, and the information gained from job evaluation and market rate surveys is combined when developing the pay structure. This chapter deals with the factors influencing job values and relativities and the basis upon which the rates of pay for individual jobs and job holders are determined. The Institutional Factors Influencing or determining wage rates are:
Intrinsic value, Internal relativities, External relativities and market practice, Inflation, The circumstances of the firm and trade union pressures, Job evaluation Performance management Legislation Wage Boards
Intrinsic Value The concept of intrinsic value is based on thee apparently reasonable belief that the rate for a job should be determined by reference to the amount of responsibility involved or the degree of skill or level of competence required to perform it. The responsibilities of a job are the particular obligations that have to be assumed by any person who carries out the job. Responsibility is exercised when job holders are accountable for what they do. The level of responsibility is related to the outputs job holders are expected to achieve and their contribu-
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External Relativities A salary or wage is a price which, like any other price, represents the value of the service to the buyer and the seller: the employer and the employed. The external value of a job - the market rate - is primarily determined by the laws of supply and demand. However, all the market does is to allow us to assume that people occupying equal positions tend to be paid equally and as Kanter puts it: The process is circular... we know what people are worth because thats what they cost in the job market, but we also know that what people cost in the job market is just what theyre worth. The market rate concept is in any case an imprecise one. Market rate surveys always reveal a considerable range of rates which reflect the special circumstances of the organizations, including the level of people they employ and their policies on how they want their levels of pay to relate to market rates - their market stance or pay posture. There will, however, be trends in market rates to which internal pay structures must respond if they are to remain competitive. Individual rates and differentials have to be adjusted in the light of changing market pressures if the organization needs good quality staff. This will be particularly important at the intake points in a structure and in respect of individuals whose market worth is high and who are therefore vulnerable to the attractions of better paid jobs elsewhere. It is also important to bear in mind the concept of individual market worth. In effect, this says that any employable individual has a price which is related to what other organizations are prepared to pay for his or her services. Organizations ignore at their peril the individual market worth of any employees they wish to retain whose talents are at a premium in the market place. Inflation and Market Movement Inflationary pressures clearly affect general trends in rates of pay and earnings. They underpin pay market movements. Organizations have been accustomed to taking into account inflation when adjusting their pay structures although, if their managements have any sense, they have refused to commit themselves to any semblance of index linking. They have had to be prepared to increase rates by less than inflation in hard times and they have reserved the right to restrict increases to individuals to below the rate of inflation if their performance does not justify the retention of their real level of earnings. Increasingly, however, employers are basing pay reviews on movements in market rates, which are, in any case, responsive to the rate of inflation. Business Performance and/or Financial Circumstances The business or strategic aims of the organization and .its plans for achieving those aims will provide the basis for developing pay strategies and policies. The resulting business performance and/or the financial circumstances of the organization will influence the amount it can afford to pay and its pay policies on
such matters as how it wants to relate pay to performance and market rates. Trade Union Pressures Depending on their bargaining power, trade unions will attempt to pressurize managements into increasing pay by at least the amount of inflation. They will press for higher rates on the grounds of the organizations ability to pay and trends in market movement and the going rate for specific jobs, and they may attempt to restore lost differentials. Factors influencing pay levels for individuals The pay levels of individual job holders will be influenced by three factors in addition to the rate for their job: 1. their market worth as mentioned above; 2. the level of skills or competence they possess - their inputs; 3. their level of performance in the job - their outputs and the overall contribution they make to organizational success. The amount of influence these factors exert will depend on the job and the internal environment of the organization. In a non-bureaucratic and flexible firm, where the level of technology is high and a large proportion of the staff are knowledge workers, individual worth will be more important than position in a job hierarchy. As Kanter has stated: Major employing organizations are rethinking the meaning of worth itself. And as they are doing this, they are gradually changing the basis for determining pay from position to performance, from status to contribution. How rates of pay for individual jobs and job holders are determined. Overall levels of pay will be affected by business aims, plans and performance, external economic and union influences, reward policies and market rates. These general considerations will, of course, affect individual rates for jobs and job holders. These rates will be determined by market relativities, the size of the job within the structure, as measured by job evaluation, and individual levels of performance. The latter will determine rates of pay above the base rate either by a performance management process or a pay for-performance scheme. This process of individual pay determination takes place within the framework of job and role analysis and, apart from business and market rate considerations, is largely influenced by the interrelated processes of job evaluation and performance management for those in receipt of performance-related pay. Job Evaluation Job evaluation is used to measure relativities and determine where the job should be placed in a pay structure (the rate for the job). Relative job size is assessed in terms of inputs (knowledge and skills), process (behavioral requirements involving the use of competences) and outputs (the level of responsibility for results and the impact the job makes on team or organizational performance). The Bureau of Labour Statistics, U.S.A., says that job evaluation is the evaluation or rating of jobs to determine. their
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position in the job hierarchy. The evaluation may be achieved through the assignment of points or the use of some other systematic method for essential job requirements, such as skills, experience and responsibility.
Objectives of Job Evaluation
For those on an incentive or payment by results scheme, pay will be determined by reference to job evaluation and the quantified results achieved by job holders. It has been very rightly said that Performance management is an ongoing communication process that involves both the performance managers (viz., Political and Sr.Civil Service Executives, Deputy Commissioners) and the employee in
The general purpose of job evaluation may include a number of more specific goals: 1. To provide a basis for a simpler, more rational wage structure; 2. To provide an agreed-upon means of classifying new or changed jobs; 3. To provide a base for individual performance measurements; 4. To reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes; 5. To provide incentives for employees to strive for higherlevel jobs; 6. To provide information for wage negotiations; To provide data on job relationships for use in internal and external selection, personnel planning, career management, and other personnel functions. Performance Management Performance management assesses the individuals performance in the job and in a performance-related pay environment, determines the rate of pay for that individual in the job whether he or she is positioned within a pay range or on a pay scale. Performance management is a strategic and integrated approach to delivering sustained success to organizations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors. As a manager one of our most important responsibilities to our organization is to manage performance well. We need to manage not only our performance but also the performance of the many individuals we supervise and develop over the years. Our ability to manage performance effectively will contribute to our organization? Success and will positively affect the people who work in our organizations. This programme aims to equip the participants with understanding and skills so that they can motivate the employees to contribute their best to the organization The performance management process will be based on precisely the same factors used in evaluating the job as recorded in a job description or role definition derived from job or role analysis: namely skills, competences and results. The starting point of performance management is an agreement on skill and competence requirements and on the principal accountabilities or main tasks of the job. This leads to agreements on specific standards of performance, targets and work plans and personal development plans which form the criteria on which performance is reviewed and assessed.
Identifying and describing essential job functions and

relating them to the mission and goals of the organisation.
Developing realistic and appropriate performance standards

(i.e., a written statement describing how well a job should be performed.) to assess the progress toward determined goals. Giving and receiving feedback about performance and use of information either to confirm or change current policy or programme directions to meet those goals and report on the success in meeting goals.
Writing and communicating constructive performance

appraisals. Planning, education and development opportunities to sustain, improve or build on employee work performance.
Legislation
Minimum Wages Act,1948 Background A tripartite Committee viz.,The Committee on Fair Wage was set up in 1948 to provide guidelines for wage structures in the country. The report of this Committee was a major landmark in the history of formulation of wage policy in India. Its recommendations set out the key concepts of the living wage, minimum wages and fair wage besides setting out guidelines for wage fixation. Article 39 - The State shall, in particular, direct its policy towards securing (a) that the citizen, men and women equally shall have the right to an adequate livelihood and (b) that there is equal pay for equal work for both men and women. Article 43 - The State shall endeavour, by suitable legislation or economic organisation or in any other way, to give all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure, and social and cultural opportunities. Enactment of the Minimum Wages Act
Historical Backdrop
The initiative started with the resolution placed by one Shri

K.G.R.Choudhary in 1920 for setting up Boards for determination of minimum wages in each industry.
The International Labour Conference adopted in 1928

Convention No.26 and Recommendation No. 30 relating to wage fixing machinery in trades or parts of trades. On the recommendation of the Standing Labour Committee and Indian Labour Conference, a Labour Investigation Committee was appointed in 1943 to investigate into the question of wages and other matters like housing, social conditions and employment.
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A draft bill was considered by the Indian Labour

Conference in 1945.
The 8th meeting of the Standing Labour Committee

recommended in 1946 to enact a separate legislation for the unorganised sector including working hours, minimum wages and paid holidays.
Revision Revise the Minimum rates at an appropriate interval of not exceeding five years.
Procedure for Fixation/Revision

In Section 5 of the Minimum Wages Act,1948, two methods have been provided for fixation/revision of minimum wages. They are Committee method and Notification method. Committee Method Under this method, committees and sub-committees are set up by the appropriate Governments to hold enquiries and make recommendations with regard to fixation and revision of minimum wages, as the case may be. Notification Method In this method, Government proposals are published in the Official Gazette for information of the persons likely to be affected thereby and specify a date not less than two months from the date of the notification on which the proposals will be taken into consideration. After considering advice of the Committees/Sub-committees and all the representations received by the specified date in Notification method, the appropriate Government shall, by notification in the Official Gazette, fix/revise the minimum wage in respect of the concerned scheduled employment and it shall come into force on expiry of three months from the date of its issue. Variable Dearness Allowance (VDA) It was recommended in the Labour Ministers Conference held in 1988, to evolve a mechanism to protect wages against inflation by linking it to rise in the Consumer Price Index. The Variable Dearness Allowance came into being in the year 1991. The allowance is revised twice a year, once on 1st April and then on 1st October. In the State Sphere, 22 States/Union Territories have provisions for Variable Dearness Allowance, at present. Enforcement Machinery The enforcement of the provisions of the Minimum Wages Act in the Central Sphere , is secured through the officers of Central Industrial Relations Machinery. In so far as State Sphere is concerned, the enforcement is the responsibility of the respective State Government/Union Territory. National Wage Policy Though it is desirable to have a National Wage Policy it is difficult to conceive a concept of the same. The National Wage Policy has been discussed on many occasions in different fora. Because fixation of wages depends on a number of criteria like local conditions, cost of living and paying capacity also varies from State to State and from industry to industry, it would be difficult to maintain uniformity in wages. The Indian Labour Conference, held in November, 1985 expressed the following viewsTill such time a national wage is feasible, it would be desirable to have regional minimum wages in regard to which the Central Government may lay down the guidelines. The Minimum Wages should be revised at regular periodicity and should be linked with rise in the cost of living
A Minimum Wages Bill was introduced in the Central

Legislative Assembly on 11.4.46 to provide for fixation of minimum wages in certain employments. It was passed in 1946 and came into force with effect from 15.3.48. Under the Act, Central and State Governments are appropriate Governments to a. notify scheduled employment b. fix/revise minimum wages The Act contains list of all these employments for which minimum wages are to be fixed by the appropriate Governments. There are two parts of the Schedule. Part I has non-agricultural employments whereas Part-II has employment in agriculture.
Criteria for Notification of Scheduled Employment

The appropriate Government fixes the minimum wage in respect of only those scheduled employments where the number of employees is 1000 or more. Fixation/Revision of Minimum Wages
Norms
The norms include those which were recommended by the Indian Labour Conference in its session held in 1957 at Nainital. i. 3 consumption units for one earner. ii. Minimum food requirements of 2700 calories per average Indian adult. iii. Clothing requirements of 72 yards per annum per family. iv. Rent corresponding to the minimum area provided for under Governments Industrial Housing Scheme. v. Fuel, lighting and other Miscellaneous items of expenditure to constitute 20% of the total Minimum Wages.
Other Parameters
i.
Children education, medical requirement, minimum recreation including festivals/ceremonies and provision for old age, marriage etc. should further constitute 25% of the total minimum wage. This judgment was delivered by the Supreme Court of India in 1991 in the case of Reptakos Brett and Co.Vs.its workmen.
ii. Local conditions and other factors influencing the wage rate.
Methods for Fixation/Revision of Minimum Wages

Fixation Section 3 empowers appropriate Government to fix the minimum rates of wages in the scheduled employments.
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Accordingly, the Government issued guidelines in July, 87 for setting up of Regional Minimum Wages Advisory Committees. These Committees renamed subsequently as Regional Labour Ministers Conference, made a number of recommendations which include reduction in disparities in minimum wages in different states of a region, setting up of inter-state Coordination Council, consultation with neighbouring States while fixing/revising minimum wages etc. Scheduled employments for which central government has fixed minimum wages under the Minimum Wages Act,1948 Sl. Name of Employment NO. 1. Agriculture 2. Construction or maintenance of roads or building operations. 3. Stone breaking or stone crushing. 4. Maintenance of buildings. 5. Construction and Maintenance of Runways. 6. Gypsum mines. 7. Barytes mines. 8. Bauxite mines. 9. Manganese mines. 10. China Clay mines. 11. Kyanite mines. 12. Copper mines. 13. Clay mines. 14. Stone mines. 15. White Clay mines. 16. Ochre mines. 17. Fire Clay mines. 18. Steatite (Soapstone and Talc) mines. 19. Asbestos mines. 20. Chromite mines. 21. Quartzite mines. 22. Quartz mines. 23. Silica mines. 24. Magnesite mines. 25. Graphite mines. 26. Felspar mines. 27. Redoxide mines. 28. Laterite mines. 29. Dolomite mines. 30. Iron Ore mines. 31. Granite mines. 32. Wolfram mines. 33. Magnetite mines. 34. Rockphosphate mines. 35. Hematite mines. 36. Loading, unloading in Railways goods shed
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37. Ash Pit Cleaning in Railways. 38. Marble and Calcite mines. 39. Uranium mines. 40. Mica mines. 41. Employment in Lignite Mines. 42. Employment in Gravel Mines. 43. Employment in laying down of underground electric wires, radio, television, telephone, telegraph and overseas communication cables and similar other underground cabling work. 44. Employment in the Slate Mines. 45. Security Services
50.33 54.28 54.28 54.28 54.28 54.28 54.28
Minimum Wages per day (in Rs.) 86.63 54.28 70.27 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 50.33
54.28 54.28
Wage Board
In the 1950s and 60s, when the organized labour sector was at a nascent stage of its development without adequate unionisation or with trade unions without adequate bargaining power, Government in appreciation of the problems which arise in the arena of wage fixation due to absence of such bargaining power, constituted various Wage Boards. The Wage Boards are tripartite in character in which representatives of workers, employers and independent members participate and finalise the recommendations. The utility and contribution of such boards in the present context are not beyond question. Except for the Wage Boards for Journalists and Non-journalist newspaper and News-agency employees, which are statutory Wage Board, all other Wage Boards are non-statutory in nature. Therefore, recommendations made by these Wage Boards are not enforceable under the Law. The importance of the non-statutory Wage Boards, has consequently declined over a period of time and no nonstatutory Wage Board has been set up after 1966, except for sugar industry, where last such Wage Board was constituted in 1985. The trade unions, having grown in strength in these industries, are themselves able to negotiate their wages with the management. This trend is likely to continue in future.
Wages and Social Security

The Government has assumed responsibility for securing a minimum wage for certain sections of workers, in industry and agriculture, who are economically weak and stand in need of protection. Towards this end the Minimum Wages Act provides for the fixation and revision of wage rates in these occupations. These measures have not proved effective in many cases. For better implementation of the law, the machinery for inspection has to be strengthened. Wage determination in major industries is left to the process of collective bargaining, conciliation, arbitration and adjudication. The Second Plan recommended the setting up of Wage Boards as the most suitable method of settling wage disputes where large areas of industry are concerned. This has so far been applied to the cotton and jute textiles, cement, sugar and plantation industries; and will be extended to other industries according to circumstances.
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It has been decided to appoint a Board soon for the iron and steel industry. The representatives of employers and workers have agreed that unanimous recommendations of a wage board should be implemented fully. An encouraging trend has been noticed in the coal mining industry where employers and workers have agreed to set up a bipartite committee to examine the entire question of wage revision in the industry; alternative wage-fixing machinery will be considered only if the bipartite committee fails to arrive at a settlement. Some broad principles of wage determination have been laid down in the Report of the Fair Wages Committee. On the basis of agreement between the parties, the Indian Labour Conference had indicated the content of the need-based minimum wage for guidance in the settlement of wage disputes. This has been reviewed and it has been agreed that the nutritional requirements of a working class family may be re-examined in the light of the most authoritative scientific data on the subject. Apart from the minimum wage, care should be taken in fixing fair wages for different classes of workers, that adequate incentives are provided for the acquisition and development of skills and for improvements in output and quality. There are, however, wide disparities between the wages of the working class, on the one hand, and the salaries at the higher management levels, on the other. Owing to the uncertainty attaching to it, the question of bonus has become a source of friction and dispute. It has been decided to appoint a Commission which will include representatives of both parties to study the problems connected with bonus claims and to evolve guiding principles and norms for the payment of bonus.
Notes:
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LESSON 14: LEGALISTIC FRAMEWORK FOR WAGE DETERMINATION

Learning Objective
ii. The Minimum food requirement should be calculated on the basis of a net intake of calories, as recommended by a doctor of the committee, for an average Indian adult of moderate activity. iii. Clothing requirements should be estimated at per Capita consumption of 18 yards per annum which would, for the average workers family of four, a total of 72 yards. iv. In respect of housing, the rent corresponding to the minimum area provided for under Government Industrial Housing scheme should be taken into consideration infixing the minimum wage. v. Fuel, lighting and other miscellaneous items of expenditure should constitute 20% of the total minimum wages. Keeping in view the socio-economic aspect of the wages structure, the Supreme Court added the following additional component as ab1lide for fixing the minimum wage in the industry:vi. Children education, medical requirement, minimum recreation including festivals, ceremonies and provision for old age, marriages, etc. should further constitute 25% of the total minimum wages. The wage which approximately answers the above six components in nothing more than a minimum wage at subsistence level. The employees are entitled to the minimum wage at all times and under all circumstances An employer who cannot pay the minimum wage has no right to engage labour and no justification to run the industry. The Concept of Minimum Wages The Act does not define minimum wages. It is only through the definition of wages as defined in the Act that the concept of minimum wages can be deduced Wages as defined in the Act means all renuneration, capable of being expressed in terms of money which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or work done in such employment, and includes house rent allowances, but wages do not include: i. The value of a. b. any house accommodation, supply of light, water, medical attendance; or
Minimum Wages Act, 1948 Payment of Wages Act, 1936 Payment of Bonus Act, 1965
Interaction
With regard to legalistic framework for wage determination in respect to Indian economy we will discuss the laws relating to Wage and Salary Administration and they are - Minimum Wages Act-1948, Payment of Wages Act 1936 and Payment of Bonus Act, 1965.
Minimum Wages Act, 1948

Object and Scope The level of wages payable to workers is determined by the forces of demand and supply. In a welfare state the protection of the interests of workers is one of the aims of any legislation which is enacted in the labour field. The Indian Labour class besides being illiterate is by and large not organized to protect its interest in a competitive market where supply of labour is always in excess of demand. Under such conditions the Indian Parliament enacted the Minimum wages Act, 1948. The Minimum wages Act was enacted to secure the welfare of the workers in a competitive market by providing for a minimum limit of wages in certain employment. This is the preamble of the Act. The Act purports to achieve the prevention of exploitation of labour and for that purpose authorizes the appropriate government to take steps to prescribe minimum rates of wages in scheduled industries. It is only with regard to certain specified industries that the payment of statutory minimum wages have been laid down. The object of the Act is to do social justice to workers employed in the scheduled employments by prescribing minimum rates of wages for them. The concept of locus standi has also been enlarged with a view to ensure the application of the law. The Act contemplates that minimum wages rates must ensure not the mere physical need of the worker which could keep him just only his subsistence and that of his family but also preserve his efficiency as a workman. It should also provide for some measure of education, medical requirements and amenities. The Directive Principle of state policy as enshrined in Articles 43 of the constitution also adheres to this principle The Tripartite committee of the Indian labour Conference held in New Delhi in 1957 declared the wage policy which was to be followed during the 2nd five year plan. The five norms of Fixations of Minimum Wages are:i. The standard working class family should be taken to consist of three consumption units for the one earner, the earnings of women, children and adolescents should be disregarded.
any other amenity or any service excluded by general or special order of the appropriate government; ii. any contribution paid by the employer to any pension fund or provident fund or under any scheme of social insurance; iii. any traveling allowance or the value of any traveling concession; iv. any sum paid to the persons employed to defray special expenses entailed on him by the nature of his employment;
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v. any gratuity payable on discharge. It was held in Manganese ore (India) Ltd V. Chadilalsaha, 1991 L.I. C 524 S.C when the attendance bonus is an additional payment made to the workmen as a means of procuring their regular attendance with the object of increasing production then the bonus is in the nature of extra remuneration to regular attendance which is not payable to all the workmen at the time of joining the employment but is payable to a workmen who has put in continuous service for the specified period then the attendance bonus would be held to be only an incentive and not a wage and hence it is not treated as minimum wage fixed under the Act. Broadly speaking the wages can be classified into following categories: a. The Living Wage The concept of living wage is the wage rate which prevails in most of the economically advanced countries. The living wage must provide not merely for absolute essentials such as food, shelter, clothing, frugal comfort, provision for evil days etc. as well as regard for the special skill of an artisan if he is one. b. Fair Wage It was held in Express News papers (p) LTD. Vs. Union of India 1961 I.L.L.J. 339 SC that Fair Wage is a mean between the living wage and the bare minimum wage. In All India Reserve Bank of India 1965 LL.L.J 175 SC, A fair wage is thus related to fair workload and the earning capacity It is a step 100ver than the living wage W11ile the lower limit of fair wages must obviously be minimum wages, the upper limit is equal1y set by what may broadly be called the capacity of industry to pay. The factors which determine the capacity to pay will be: 1. the productivity of the labour; 2. the prevailing rates of wages in the same Or similar industries in the same or neighboring localities;. 3. the present economic position of the industry, its prospects in the near futures. The fair wages win grow with the growth and development of the national economy and the progress made by the industry must be approximate to the capacity of the industry to pay. c. Minimum Wage The minimum wage is the lowest wage in the scale below which the efficiency of a worker is likely to be impaired. The minimum wage, includes not only the bare physical necessities but also a modicum of comfort otherwise known as conventional necessities. The minimum wage must, therefore, provide not merely for the bare subsistence of life but also for the preservation of the efficiency of worker. For this purpose the minimum wage most also provide for some measure of education, medical requirements and amenities. It is in light of the above discussion there is a difference between minimum wage and fair wages. In Sangam Press. Vs. Its Workmen, the Supreme Court observed that in case of fair wage, besides the principle of industry cum region, the companys capacity to bear the financial burden must receive due consideration. But mere hopeful observation made in the directors annual report cannot be the basis for awarding
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increased, wages because such observations are sometimes made to inspire hope and confidence in shareholders and they cannot be a substitute for actual audited figures. The minimum wage as defined means 1. Any minimum rate of wages fixed or revised by the appropriate government in respect of scheduled employments may consist of i. A basic rate of wages and a special allowance at a rate to be adjusted at such intervals and in such manner as the appropriate government may direct to accord as nearly as possible with the variation of cost of living index number applicable to such workers; A basic rate of wages with or without the cost of living allowance, and the cash value of allowance in respect of essential commodities at concession rate where so authorized; An all inclusive rate allowing for the basic rate, the cost of living allowance and the cash value of concession, if any.
ii.
iii.
2. The cost of living allowance and the cash value of the concession in respect of supplies of essential commodities at concessional rates shall be computed by the competent authority at such intervals and in accordance with such directions as may be specified or given by the appropriate government. The Act does not define minimum wages presumably because it would not be impossible to lay down a uniform minimum wage for all industries throughout the country on account of different and varying conditions prevailing from industry to industry and from one port of the country to another The legislature also thought it inexpedient not to apply the Act to all industry at a time.
The Payment of Wages act, 1936 (IV OF 1936)

Background Before this enactment, in the Payment of Wages Act, 1936 the employer could decide on the wages of employees according to his own whim and fancy. Employer also used to deduct sums from wages as fine. The position of employees was weak and their conditions deplorable. In this backdrop, Royal commission on Labour was appointed in 1929, which gave the Report on the basis of such report, The Payment of Wages Act, 1936 was enacted. This Act regulates the payment of wages to persons employed in any factory and in Railway administration. The State Government, after giving three months notice may extend the Act to any class of persons employed ill any Industrial establishment. The Act shall not be applicable in case if the average pay in respect of a wage period exceed Rupees one thousand six hundred a month or more. Object Act The main objects of the Act are: i. to pay the wages to the employees ii. to pay the wages at proper times as specified in the Act. iii. to prevent unauthorized deductions
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The preamble to Act clearly states the object: Whereas it is expedient to regulate the payment of wages to certain class of employed persons. This act is a piece of legislations inclined towards social justice.
employed by him of all wages required to be paid under this Act. Fixation of Wage Periods See 4 provides that every person responsible for the payment of Wages shall fix periods in respect of which such wages shall be payable, and such period is called wages period No wage period shall exceed one month. Rule Making Power Under Section 26 Rule making powers are given to State Government to regulate the procedure to be followed by the authorities and Courts referred to in Sections 15 and 17. Section 26(2) the State Government may be notification in the official Gazette make rules for the purpose of carrying-into effect the provisions of this Act. Section 26(3) In particular and without prejudice to the generality of the foregoing power, rules made under SubSection (2) may a. Requires the maintenance of such records, registers returns and notices as are necessary for the enforcement of the Act, prescribe the form thereof and the particulars to be entered in such registers of records; b. Require the display in a conspicuous place on premises where employment is carried on of notices specifying rates of wages payable to persons employed on such premises; c. Provide for the regular inspection of the weights, measures and weighing machines used by employers in checking or ascertaining the wages of persons employed by them; d. Prescribe the manner of giving notice 9f the days on which wages will be paid; e. Prescribe the authority competent to approve under subsection (l) of Section 8 acts and omissions in respect of which fines may be imposed; f. Prescribe the procedure for the imposition of fines under Section 8 and for making of the deductions referred to in section 10; g. Prescribe the conditions subject to which deductions may be made under the provision to sub-section (2) of Section 9; h. Prescribe the authority competent to approve the purposes on which the proceed of fines shall be expend and; i. Prescribe the extent to which advances maybe made and the installments by which they may be recovered with reference toc1ause (b) of section 12;
Definitions
Sec 2 of the Act dea1s with definitions Sec 2 (vi) of the Act defines wages. Wages means all remuneration (whether by way of salary, allowance or-otherwise) expressed in terms of money or capable of being so expressed which would if the terms of Employment express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment and also includes. a. any remuneration payment under any award or settlement between the parties or order of a court; b. any remuneration with respect to overtime work or holidays or any lease period; c. any additional remuneration payable paid as bonus under the terms of employment d. any sum which by reason by the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum but does not provide for the time within which the payment is to be made. e. any sum to which the person employed is entitled, under any scheme framed under any law for the time being in force. But it does not include 1. Any bonus which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of court; The value of any house accommodation or of the supply of light, water, medical attendance or other amenity or of any service excluded from computation of wages by a general or special order of the State Government. Any contribution paid by the employer to any pension or provident fund and the interest which may have accrued thereon. Any traveling allowance or the value of any traveling concession. Any sum paid to the employed person to defray speci1l1 expenses entailed on him by the nature of his employment. Any gratuity payable on the termination of employment in cases other than those specified in sub clause(d)
2.
3.
4. 5.
6.
ia. Prescribe the extent to which loans may be granted and the rate of interest payable thereon with reference to section 12A; ib. Prescribe the powers of Inspection for the purpose of this Act. j. Regulate the scales of costs which may be allowed in proceedings under this Act;
See 2 (1) of the Act defines employed person which includes the legal representative of a deceased employed person. Sec 2 (a) of the Act defines employer which includes the legal representative of a deceased employer. Responsibility For Payment of Wages Sec 3 of the Payment of Wages Act, 1936 provides that every employer shall be responsible for the payment to persons
k. Prescribe the amount of Court fees payable in respect of any proceedings under this Act; l. Prescribe the abstracts to be contained in the notices required by section 25.
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la. Prescribe the form and manner in which nominations may be made for the purpose of sub section (1) of Sec. 25-A the cancellation or variation of any such nomination, or the making of any fresh nomination in the event of the nominee predeceasing the person making nomination and other matters connected with such nominations; lb. Specify the authority with whom amounts required to be deposited under clause (b) of Sub Section (1) of Section 25A shall be deposited, and the manner in which such authority shall deal with the amount deposited with it under that clause; m. Provide for any other matter which is to be or may be prescribed. Sub Section (4) in making any rule under this Section the State Government may provide that a contravention of the rule shall be punishable with fine which may be extended to Rs. 200/ Sub Section 5 provides that all rules made under this section shall be subject to the condition of previous publication, and the date to be specified under clause (3) of Section 23 of General clauses Act 1897 (10 of 1897) shall not be less than three months from the date on which the draft of the proposed rules was published. Sub Section 6 provides that every rule made by the Central Government under this section shall be laid, as soon as may be after it is made, before, each House of Parliament while it is in session on for a total period of30 days which may be comprised in one session or in two or more successive sessions and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both houses agree in making any modification in the rule or both houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.
additionally on certain grounds of attendance and efficiency being, maintained.
Kind of Bonus
The Supreme Court in New Maneck Chowk Spinning and Weaving Company Vs. Textile Labour Association 1961 I LLJ 521 at 526 suggested four types of Bonus, namely i. Production Bonus; ii. Bonus as an implied term of contract between the parties, iii. Customary bonus in connection with some festival and iv. Profit bonus Profit Bonus Profit bonus has been given statutory recognition in the payment of Bonus Act, under this the quantum of bonus depends on the extent of profit obtained in the relevant year. This is subject to a statutory minimum and maximum bonus. Production Bonus The payment of production bonus depends upon Production and is in addition to wages. It is an incentive to greater effort on the part of the labour for more production. 1976 amendment by Section 31 recognizes production bonus. There are good will bonus, customary bonus etc. Bonus Commission Government of India in 1961 setup a commission for considering all questions relating to bonus. The recommendations were accepted and an ordinance was issued by the Government in 1964 which was replaced by the payment of Bonus Act, 1965, which was assented by the President on 25.09.1965. Under the Bonus Act, liability to pay Bonus has become a statutory obligation imposed upon the employer covered by the Act.
Object
Article 43 (Directive Principles of state policy) of the constitution of India expects living wage for all the workers, and to achieve it directs the Government to make legislations. The preamble of the Act explains the object: An act to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production and for matters concerned therewith The essential factors for a successful industry are i. Labour and ii. Capital. The General Motors (India) Ltd., Vs. Its Workmen explained; It is universally accepted principle now that profits ate made possible by the contributions that profits are made possible by the contributions that both capital and labour make in any particular industry, and it is concealed1hat labour has a right to share in increased profits that are made in any particular period. The distribution of increased profits is made by payment of Bonus than by increase in wages. Wages must be fixed on normal conditions. Thus it ensures the peace, amicable relations between employee and employer, and the prosperity of the concern.
The Payment of Bonus Act 1965 (ACT 21 OF 1965)

Definition, Scope, Applicability and Extent of Bonus Act Meaning: Bonus is an Extra Payment made out of Profits.
Definition
It is surprised to note that the most important term Bonus which is the oxygen of the payment of Bonus Act, 1965, has not been defined in this Act or any other labour and industrial legislation. The Bonus Commission explained. It is difficult to define in rigid terms the concept of bonus but it is possible to urge that once profit exceed a certain base, labour should legitimately have a share in them. It is proper to construe the concept of bonus as sharing by the workers in the prosperity of the concern in which they are employed. New English Dictionary defines, A boon or gift over and above what is normally due as remuneration to the receiver and which is therefore, something wholly to the good. The term bonus is applied to a cash payment made in addition to wages. It generally represents the cash incentive given-
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Scheme of the Act

The Act is designed i To impose statutory liability upon the employer of every establishment covered by the Act to pay bonus to employees in the establishment.
Salient Features of the Payment of Bonus Act, 1975 1. The payment of Bonus Act, 1965 (Act No. 21) has 40 sections and four schedules. 2. The payment of Bonus rules have been framed in 1945 which have only 5 rules and 4 norms. 3. Two sections 33 and 3 7 were repealed from the Act 21 of 1975. Two sections 31-A, and 34-A are newly incorporated in the Act. 4. This Act applies to every factory and every other establishment in which twenty or more persons are employed on any day of the Accounting year. 5. Bonus Win be payable within 8 months from the closure of Accounting year. 6. Bonus will be payable only cash 7. Bonus will be paid from the balance known as Available Surplus. 8. It applies only to private sector. 9. The provisions of this Act apply from the accounting year commencing on any day in the year 1964. 10. The term Bonus has no definition in the payment of Bonus Act, 1965. 11. It is regarded as Deferred Wages payable to employees. It is the right accrued to them by the Act, and not a charity on the employer. It is not an ex-gratia, but paid in addition to wages. 12. Lord Birkenhead opines: It differs from wages, in that it does hot rest on contract, but still payments for Bonus are made because legally due, but which the parties do not contemplate to continue indefinitely. 13. The Supreme Court of India while disposing Mill Owners Association Vs. Rashtriya Mill Mazdbor Sangh (1950) expressed. When the goal of living wages has been attained, bonus like profit sharing, would present more as the cash incentive to greater efficiency and production. 14. The responsibility is imposed upon the Employer to calculate bonus & distribute it within 8 months from the closure of accounting year. He must maintain registers. If the Provisions of Act 21 of 1965 are contravened, the punishment is imprisonment for a term which may extend to six months or with fine which may extend to Rs. 1000/or with both.
ii. To define the principles of payment of bonus according to the Prescribed formula iii. To provide for payment of minimum and maximum bonus and linking payment of bonus with the scheme of set off and set on.
Application of the Act

Under Section 1(3), the Act applies to every factory and every other establishment in which ten or more persons are employed on any day during the accounting year. Thus the Act applies to shops, offices, mines etc. if minimum of 10 persons were employed an any day of the accounting year. The Act is a comprehensives and exhaustive law, dealing with bonus in all its aspects. An employee of an establishment to which the Act does not apply cannot claim bonus under the Act. The Mill Owners Association, Bombay Vs. The Rashtriya Mill Mazdoor Sangh Bombay 1950 (z) LLJ124 7. The Industrial Court went elaborately into the matter in this case and laid down certain principles and awarded to the workmen bonus equivalent in amount to 3/8th of the total basic earnings of each workman subject to certain conditions. This decision is known as the Full Bench Formula, a leading decision in the payment of Bonus case- laws. Principles 1. Bonus is paid to employees in cash. It is not ex-gratia. If the employer refuses to pay bonus, the employee can rise Industrial dispute. 2. Capital & labour contribute to the earning of the concern so it is fair that labour should derive some benefit if there is surplus after meeting prior charges. 3. Bonus is like profit sharing. It renders cash incentive to labour which would encourage for a better efficiency and production. Where the industry does not have the capacity to pay living wage, bonus must be looked upon as a temporary satisfaction, wholly of partly, to meet the needs of labour. 4. The decision of the award of bonus is based on two fold objective. i. Recognition of the fact that the labour contributed for the profit earned by industry & so it has a right to claim a share in it. It is intended to bridge or narrow down the gap as may be reasonably possible between the living wage to which the labour is entitled and the actual age received.
Eligibility for Bonus

Under Section 8 every employee is entitled to bonus in any accounting year if he has worked in the establishment for not less than 30 working days in that year. Section 2 (13) provides that the employee shall be entitled to get Bonus, if his salary or wages does not exceed Rs.2500/- per men sum in any industry to do any skilled, unskilled manual, supervisory, managerial, administrative, technical or clerical work for hire or reward whether the terms of employment be express or implied.
ii.
5. Social Justice: Payment of bonus is rendering social justice to the poor and hard working labor.
Disqualification for Bonus

Under Section 9 an employee is disqualified from receiving the bonus if he is dismissed from service for fraud, riotous or
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violent behavior while on the premises of the establishment or for committing theft, miss-appropriation or sabotage of any property of the establishment. A dismissal based on the above mentioned guilt is subject to the review of the tribunals under Section 10. Section 10-A of the Industrial Disputes Act and by the High Court under Articles 226 and 227 and Supreme Court under Article 136 of the Constitution. If the dismissal of the employee is based on any other ground it will not disqualify him from claiming the Bonus Disqualifications. a. Fraud An employee is disqualified to receive bonus if he is dismissed from service for Commission of fraud. Fraud is an act of missconduct under the Model Standing Orders, 1946 punishable with dismissal. The standing orders to the establishment in question should-have provided fraud as a ground for dismissal so as to attract the disqualification under Section 9(a). Examples 1. A - an employee working in XYZ Chit funds pvt Ltd. if he advertises against that company and induces the customers of his company to join another LMN Chit Funds Pvt. Ltd., it is a clear example of fraud. A - an employee of XYZ co. Ltd. obtained the property of the company by playing fraud and deceitful means. He was convicted by the Court. He is disqualified far bonus.
Minimum Bonus and Maximum Bonus

Minimum Bonus Scope: Section 10 explains about the payment of Minimum Bonus. Section 10: Payment of Minimum Bonus Subject to other provisions of this Act, every employer shall be bound to pay to every employee in respect of accounting year commencing on any day in the year 1977 and in respect of every subsequent accounting year a minimum bonus which shall be 8.33% of the salary or wage earned by the employee during the accounting year or one hundred rupees, which ever is higher, whether or not the employer has any allocable surplus in the accounting year. Provided that where such employee has not completed fifteen years of age of the beginning of the accounting year the provisions of this section shall have effect in relation to such employees as if for the words one hundred rupee the words Sixty rupees were substituted. Important Points on Section 10 1. Minimum Bonus 8.33%- every employee is entitled to get a minimum bonus which shall be 8.33% of the salary or wage earned by him during the accounting year or Rs. 100/which ever is higher, 2. Section 10 has been substituted by Act 66 of 1980 with effect from 21.08.1980. The provisions of Section 10 newly inserted came into force with effect from the accounting year 1979 previously it was only 4% of Rs. 40 which ever was higher. It is now enhanced to Rs. 100 or 8.33 of salary whichever is higher. 3. In case of employee having not completed 15 years of age at the beginning of accounting year, the minimum bonus is reduced to Rs. 65. 4. It is well settled law that minimum bonus has to be paid even if the company is in loss. Whether or not the employer has allocable surplus in the accounting year, minimum bonus shall be payable irrespective of allocable surplus. Claim of Minimum Bonus - Not an Industrial Dispute Claim for Minimum bonus under Section 10 does not constitute on industrial dispute within Section 22 of the Bonus Act It is not necessary that it should be referred for adjudication to the Industrial Tribunal Labour Court is competent to entertain application under Section32 (2) of the Industrial Disputes Act and determine the amount of minimum bonus. No minimum bonus is payable when an establishment is exempt under section 16 of the Act. Maximum Bonus Set off and set on Section 11 explains about maximum bonus. Section 11: payment of Maximum bonus 1. Where in respect of any accounting year referred to Section 10, the allocable surplus exceeds the amount of minimum bonus payable to the employees under that Section, the employer shall in lieu or such minimum bonus, be bound to pay to every employee in respect of that accounting year
2.
b. Riotous or Violent Behavior An employee who is dismissed an ground of riotous or violent behavior is disqualified to receive bonus. Such riotous or violent behaviors must have been committed by the employee on the premises of the establishment. The expression riotous and violent behavior is wider in scope that riotous and disorderly behavior used in the Model Standing orders. Hence dismissal on ground of disorderly behavior will not disqualify to receive bonus unless such disorderly behavior is of violent nature. c. Theft, Misappropriation or Sabotage Dismissal of the employee for commission of theft, misappropriation or sabotage of any property of the establishment will disqualified such employee from receiving bonus. Theft - Section 378 of the Indian Penal Code defines theft Every employee must perform his duties with loyalty and faithfulness. If the commits any theft, he is liable far criminal proceedings. He is also disentitled for bonus. Misappropriation - Section 408 of IPC defines Misappropriation. An employee, if dishonestly misappropriates or converts to his awn use any movable property which belongs to the employer, shall be liable far criminal proceedings far his misappropriation and may be dismissed from service disentitled far Bonus. Sabotage Can notes devices adopted by the employee obstructing or interfering with the process of industry with a view to reduce the profits of the employer. The eligibility to bonus to employees is revised up to Rs. 3500/ - per month from Rs. 2500/- with effect from 1.4.1993. The extent of benefit also is raised to Rs.2500/- from Rs. 1600/- is by the 1995 Amendment
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bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to maximum of 20% of such salary wage. 2. In computing the allocable surplus under this section, the amount set on the amount set off under the provision of section 15 shall be taken into account in accordance with the provisions of that section. Under Section 15 the excess amount after giving the maximum bonus under Section 11 may be set on for the succeeding year. Similarly the deficiency to pay even the minimum bonus under Section 10 may be set off in the succeeding year if there is excess after meeting the minimum bonus in that succeeding year. Set on and Set off Allocable Surplus Section 15 explains about set on and set off of allocable surplus. A fair reading of this section and fourth schedule gives a clear picture & understanding. Section 15, set on and set off allocable surplus. 1. Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under Sec. 11, then the excess shall, subject to a limit of 20% of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilized for the purpose of payment of bonus in the manner illustrated in the fourth schedule. 2. Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employee in the establishment under section 10, and there is no amount or sufficient amount carried forward and set on under section (i) which could be utilized for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiently, as the case maybe, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the fourth schedule. 3. The principle of set on and set off as illustrate in the Fourth schedule shall apply to all other cases, not covered by sub section (1) or sub section (2) for the purpose of payment of bonus under the Act. 4. Where in any accounting year any amount has been carried forward and set on or set off under this section then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the ear list accounting year shall first be taken into account.
Proportionate Reduction of Bonus in Certain Cases
Computation of Number of Working Days Under Section 14 an employee shall be deemed to be working in an establishment in any accounting year also on the days on which he has been laid off or has been on leave with salary or wage or has been absent due to temporary disablement or the employee has been on maternity leave with salary or wages. Special Provisions Regarding Certain Establishments Section 16 of the Act provides some benefits to newly set up establishment by exempting them from the obligation to pay bonus under the Act. A more charge in the location, management, name or ownership will not make the establishment a newly set up establishments shall be entitled to bonus under the Act in the following manner: 1. For the first five accounting years following the year in which the employer sells goods produced in such establishment, bonus shall be payable only for such accounting year in which the employer derives profits from such establishment such bonus shall be calculated under the Act for that year and that too without applying the scheme of set off and set on under Section 15 of the Act 2. To an establishment mentioned in (i) above the provisions of Section 15 shall apply with some modification for die sixth and seventh accounting years. The modification are: a. For the sixth accounting year, the set on and set off principle will be applicable as against the allocable surplus of the fifth, sixth accounting year. b. For the seventh accounting year the set on or set off principle will be applicable in respect of the allocable surplus of the fifth, sixth and seventh accounting year. 3. From the eight accounting year following the accounting year in which the employer starts selling goods produced in such establishment, the provision of Section 15 shall apply to such establishment as they apply to any other establishment. Production or manufacture of goods during the trial running of any factory or during the prospective stage of any mine or any oil field shall not be treated as production or manufacture of goods under the provisions of section 16 the appropriate government will decide disputes on this after giving reasonable opportunity to the parties to represent their case and the decision of the government shall be final and not questionable before any court or other authority. However in case of the employer of an existing establishment with different branches, department etc. has been paying bonus to employees of all such departments or undertaking or branches on the basis of consolidated funds or profile of such branches then the employer shall be liable to pay bonus in accordance with the provisions of the Act for all the employees on the basis of the consolidated profits. Non-Statutory Bonus Under Section 17, if in a particular accounting year an employer has paid to an employee: a. Puja Bonus or other customary bonus b. interim bonus (ie) part of the bonus payable under this a act before the date on which such bonus becomes payable
Under Section 13 where an employer has not worked for all the working days in any accounting year, the minimum bonus ofRs.1001- or Rs.60/- as the case may be, if such bonus is higher than 8 1/3 percent of salary or wage for the days he has worked in that accounting year, shall be proportionately reduced.
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he shall be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employees under this act in respect of that Accounting year & the employee is entitled to receive only the balance. In case of customary or contractual bonus, the liability depends exclusively on the express or the implied contract and its terms are governed by the custom or contract under which a claim thereto arrives. Deduction of Certain Amount from the Bonus Payable Under the Act Section 18 empowers an employer to deduct the amount of financial loss from the bonus payable to an employee in a particular accounting year provided that the following conditions are satisfied. i. The misconduct of the employee should have caused financial loss to the employer. ii. The employee should have been found guilty of such misconduct by holding a domestic enquiry. iii. The financial loss should have been caused in the accounting year, from the bonus pertaining to which the deduction is sought to be made.
Such disputes are deemed to be industrial disputes as defined in Section 2(k) of the Industrial Disputes Act & in such cases settlement method under Industrial Disputes Act or under any corresponding law in the state will apply. When a dispute between an employer and its employees in a beedi factory regarding payment of bonus arose, it was held that Section 22 of the Bonus is Act is clearly applicable. Therefore, the reference of such a dispute under U.P. Industrial Dispute Act is quite valid as it is a corresponding law relating to the investigation & settlement of industrial disputes in force in a state as envisaged under section 22 of payment of Bonus Act.
Appropriate Forum
Section 22 envisages that where any dispute arises between an employer and its employees with respect to the bonus payable under the Act, then such a dispute ought to be deemed to be an industrial dispute and it has to be dealt with under the industrial law as an industrial disputes. When the dispute results in an award or settlement or an agreement, the employee can recover all the bonus due from the employer as per section 21 of the payment of Bonus Act. Therefore a claim made under the Act in a Civil Court could not be sustained.
Payment of Bonus
Under Section 19, the payment of bonus must be only in cash. If there is dispute as to liability to pay bonus then the bonus must be made within one month from the date of award of such authority. In all other cases bonus must be paid within 8 months from the date of closing of the accounting year. However, on sufficient reasons, the government may extend the period of payment of bonus beyond the eight months, provided in any case it must not exceed two years. Such extensions permissible on satisfaction of the following conditions i. Employer should give application to the appropriate government.
Duty of the Tribunal

In a dispute referred under section 22 of the Act regarding the bonus payable under the Act, the tribunal is under a duty to decide the rate of bonus payable by the employer. In the absence of the rate being specified, the employer would be handicapped in carrying out the directions contained in the award. Presumption as to Balance Sheet, Profit and Loss Section 23 raises a rebut table presumption about the accuracy of the settlement and particulars contained in the balance sheet, profit and loss account for corporations and companies produced before the said authority. The presumption is not hard and fast presumption, incapable of being rebutted a presumption juries dejure. The presumptions not conclusive but rebut table. If the said authority is satisfied that the statements and particulars contained in the balance sheet and the profit and loss account of the corporation or the company are not accurate it may take such steps as it thinks necessary to find out the accuracy of such statements and particulars. The satisfaction of the authority is subjective satisfaction, which cant be called in question in judicial review. The authority may therefore, on being satisfied about the in accuracy of the statement or the particulars, call for the proof of the statements and particulars. Application for Clarification Section 23 (2) entitles trade unions or where there are not trade unions the employees who are party to the dispute to seek clarification relating to any item in the balance sheet or the profit and loss account by making an application to the adjudicating authority upon such application being made the authority has to satisfy itself whether such clarification is necessary. If satisfied the authority has to give an opportunity to the employer of being heard in opposition to the Application After hearing the parties the authority is enjoined to make an order directing the corporation or company as the case may be to give the trade
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ii. Application should disclose sufficient reasons iii. Government should hear the parties. Application of the Act to establishment in public sector Under Section 20, the provisions of this Act shall apply in relation to an establishment in public sector like an establishment in private sector if: i. In any accounting year such establishment in public sector sells any goods produced or manufactures by or renders any services in competition with an establishment in private sector. ii. The income from such sale or service or both is not less than twenty percent of the gross income of the establishment in public sector for that accounting year. Reference of disputes under the Act Section 22 contemplates two types of disputes under the Act. i. Dispute with respect to bonus payable-under the act. ii. Dispute with respect to the application of the act to on establishment in public sector between the employer & his employees.
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union or the employees such clarification within a time to be specified in the direction. Such order of the authority shall be binding on the corporation or the company. Hence Section 23 gives power and jurisdiction to the tribunal to direct corporations and companies concerned to furnish clarification relating to any item in their balance sheet, Profit & loss account. The section does not limit the power of the Tribunal to give such directions only after a hearing or after evidence is adduced: Such clarification can be given or furnished by making further discover or giving further particulars. Maintenance of Registers, Records etc. Section 26 of the Act enjoins on every employer to prepare and maintain such registers, records and other documents in such form & in such manner as may be prescribed by the rules under the Act. It is a mandatory provision and the employer is under the duty to produce them when called upon by an Inspector to do so. Violence of this is an offence under the Act.
The new section applies to all agreements or settlements whether entered into before or after 25.9.1975 being the date when the amending ordinance came into force. Section 31-A relates to bonus linked with production in lieu of bonus based on profits: It does not speak about other kinds of bonus therefore, the provision does not affect customary or traditional or contractual bonus. Penalty: Section 28 prescribes a penalty of imprisonment for a term of six months or, a fine up to one thousand rupees or both imprisonment and fine against a person who contravenes any of the provisions of this Act or any rule made there under or who fails to comply with a direction or requisition under this act or any rule made there under or who fails to comply with a direction or requisition under this Act. Offences by Companies Section 29 of the Act deals with offences committed by companies. Clause 1 of Section 99 imposes an absolute liability on the offences: But liability of a less strict nature is contemplated. Under Section 29(2) where an offences under the Act is committed by a company the officer who was in charge of and was responsible to the company for the conduct of business of the company shall be deemed to be guilty of the offence shall be liable to be proceeded against and punished as if he has committed the offence. Proviso to Section 29(i) says that a person charged of an offence under Sub section (i) has the following defenses.
i. Want of Knowledge
Machinery and Miscellaneous Matters

Machinery Section 27 empowers the appropriate government to appoint Inspector for implementing the Act The Inspectors are given power to: i. Require an employer to furnish necessary informations. ii. Enter any establishment or premises for inspection iii. Examination of accounts registers, other documents of salary, wages or bonus. iv. Discovery of documents etc. Inspectors are deemed to be public servants under the penal code. Any person required to furnish information or to produce documents, if fails to do so will be contravening the law attracting the penal provision under Section 28 of the Act.
Mens has been made an ingredient of the offence. But the burden of proof has been cast on the person charged with the offence. In other words the person charged with an offence under Sub section (i) has to prove that the offence was committed without his knowledge, and not for the prosecution to prove that he had the knowledge.
ii. Due Diligence
Production Bonus
1976 Amendment- By 1976 amendment Section 31-A is added to link payment of bonus with production or productivity under this, where an agreement or settlement has been entered in to by the employees with their employer before this amendment or where the employees enter into any agreement or settlement with their employer after the commencement of this amendment for payment of annual bonus linked with production instead of bonus based on profit than such employees shall be entitled to receive bonus due to them. Under such agreement or settlement. However, such agreement or settlement whereby the employees relinquish their right to receive minimum bonus under Section to shall be null and void in so far as it deprives them to such right. It is also provided that such employees shall not be entitled to be paid such bonus in excess of 20 percent of the salary or wage earned by them during the relevant accounting year. Section 31-A is given over riding effect. However, it is subject to the statutory minimum and maximum bonus. This for the first time production bonus is statutorily recognized even though it is based on the agreement between parties.
The second defense open to the accused is that even if he had the knowledge of the commission of the offence he exercised all due diligence to prevent the commission of the offence. Section 29(2) includes more persons In the list of offenders for the offence committed by the comp_. In addition to such person any director, manager, secretary or other officer of the company may also be deemed to be guilty of the offence under this Act if the offence has bee n committed. i. with his consent or connivance. ii. is attributable to any neglect on his part. From the language of this provision it is clear that the burden of proof is on the prosecution. It is for the prosecution to prove that the offence has been committed with the consent or connivance or is attributable to any neglect on the part of the director manager, secretary or other officer of the company, before a person can be deemed to be guilty of the offence. Cognizance of Offence A court can take cognizance of the offence punishable under the Act only on a complaint made by or under the authority of appropriate Government. Any offence punishable under the
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Act can be tried only by a court not inferior to a presidency or a Magistrate of the first class. Immunity to acts in good faith; Section 31 confers immunity to Government and officers of Government, against legal proceedings in court of law by way of suit or prosecution or otherwise, for all acts done in good faith or intended to be done in good faith provided the act is done under the Act. Act not to apply to certain classes of employees. Section 32 of the A ct makes it clear that the provisions of this act will not be applicable to following clause of empl6yees. i. employees employed by the Life Insurance Corporation of India.
of its power by the Government under section 36 of the Bonus Act.
Rule Making Powers

Under Section 58 the Central Government is vested with the power to frame rules to carry into effect the provisions of the Act. The rules may provide for: a. The authority for granting permission under the provisions to sub-clause (iii) of clause (i) of Section 2. b. The preparation of registers, records and other documents and the form and manner in which such registers, records and documents may be mentioned under Section 26. c. The powers which may be exercised by an Inspector under Clause(e) of Sub-section (2) of Section 27. d. any other matter which is to be or may be prescribed. Rules Must be laid before the Houses of Parliament Subsection (3) prescribes that every rule made under this section shall be laid with maximum expediency before each house of Parliament while it is in session for a period of 30 days. The period of 30 days may be comprised in one session or in two successive sessions. If before the expiry of the session in which the rules is to be laid down or the session immediately following both the Houses agree in making any modification in the rules or both the Houses agree that the rules should not be made, the rules shall thereafter have effect only in such modified form or be of no effect as the case may be. However, any such modification or annulment shall be without prejudice to the validity of anything previously done under any of these rule.
ii. Seamen defined in clause (42) of section 3 of the Merchant shipping act 1958 (44 of I958) iii. employees registered or listed under any scheme made under the Dock Workers (Regulation of employment) Act 1948 (9 of 1948) and employed by registered or listed employers. iv. employees employed by an establishment engaged fin any industry carried on by or under the authority of any department of the Central Government or State Government of a local authority. v. Employees employed by: a. b. c. The India Red Cross Society or any other Institution of alike nature (including its branches) Universities and-other educational institutions. Institution (including hospital, chambers of commerce and social welfare institutions established not for purposes of profit)
Conclusion
The payment of Bonus Act 1965 is designed to make the proper distribution of profits between the employer and employees and to upgrade the wages to Living Wages Standards. It does not interfere with customary, contractual bonus, beside the right to ask the statutory bonus under Act 21 of 1965. Therefore, the payment of Bonus Act, 1965 is a step forwarded to achieve the target fixed by the Article 43 of the constitution, and to bridge the gap between the wages and the living wages, and to give the social security to the employees.
Under entry V(s) two requirement must be satisfied namely: i. that is an institution and ii. it is establishment not for the purpose of profit. Unless, both these conditions are cumulatively satisfied the employers of such institution will not be exempted from Bonus Act under Section 32. Thus is Workmen of Tirumale Tirupathy Devasthanam Vs the Management The tribunal was required to adjudicate on the issue whether the Transport department operating under the Devasthanam is excluded under entry V (c) of Section 32 the question arose when the employee of the above transport department claimed bonus under the Act. Without taking evidence to show that the institution was not for purpose of profit the Tribunal gave this award. This part of the award was set aside by the Supreme Court directing the Tribunal to decide the issue de novo after taking evidence and considering the dominant purpose of the institution. Coffee Board set up under Coffee Act only aids the marketing of coffee and helps the registered owners to earn profits. The board does not earn profits to itself and it is not an institution formed for earning profits and therefore, falls with in the exception under section 32(v) (c) of the payment of bonus Act. The fact that the management might have made some profits in the past, & not a relevant consideration in the matter of exercise
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LESSON 15: INTRODUCTION TO THE IMPORTANCE OF WAGE DIFFERENTIALS AND WAGE DIFFERENTIALS IN INDIA
Learning Objective
d. Differences in the nature of employment and occupations. The nature and the extent of wage differentials are conditioned by a set of factors such as the conditions prevailing in the market, the extent of unionization and the relative bargaining power of the employers and workers. The rate of growth in productivity, the extent of authoritarian regulations and the centralization of decision-making, customs and traditions, the general economic, industrial and social conditions in a country, and a host of other subjective and objective factors operating at various levels. The prevailing rates of wages, the capacity of an industry to pay, the needs of an industry in a developing economy, and the requirements of social justice also directly or indirectly affect wage differentials. Wage Differentials in India Due to the paucity of relevant data on wage differentials, it is not possible to analyze them in India; yet the main features of the Indian wage structure may be stated thus: As a characteristic of the unorganized labor market, personal differentials because of job selling, individual bargaining and wage discrimination have tended to persist in India, especially in the unorganized sector of the economy, and even in the organized and unorganized sections in industry. The tendency appears to be towards the elimination of wage differentials because of government interference through the fixation of the minimum wages and, of late, through the appointment of Wage Boards and pressures from trade unions. Wage differentials by, sex are quite common despite the fact the Constitution of India enjoins upon the State to direct its policy towards securing equal pay for equal work for men and women, awards of some industrial Tribunals provide for different wages for men and women workers, not on the ground that the work done is unequal but on the ground that the wages of women workers support a smaller family, that the cost of employing women workers is higher. As regards inter-firm and inter-industry differentials in India, the former were quite important and frequent in the past, particularly in the jute mill industry. Of late, however, there has been a tendency towards the elimination of inter-firm differentials. The forces, which tend to eliminate inter-personal differentials in the country operate in this case as well.
To know the importance of Wage Differential To understand the reasons for Wage Differential Prevalence of Wage Differential in India and the reasons for
it
Introduction
Wage differentials have a great economic and social significance, for they are directly related to the allocation of the economic resources of a country, including manpower, growth of the national income, and the pace of economic development. Social welfare activity depends, in a large measure, on such wage differentials as will: a. Cause labour to be allocated among different occupations, industries and, geographical areas in the economy in such a manner as to maximise the national product b. Enable full employment of the resources of the economy to be attained; and c. Facilitate the most desirable rate of economic progress. Wage differentials reflect difference in the physical and mental abilities of workers, differences in productivity, in the efficiency of management and in consumer preferences, and act as sign posts for labour mobility. By providing an. important incentive for labour mobility, they bring about a re-allocation of the labour force under changing circumstances. Under competitive conditions, wages are determined by conditions of demand (which reflect the productivity of workers) and conditions of supply (which reflect the attractiveness of jobs). The level of wages would depend upon the relative scarcity of supply in relation to demand. Scarcity differentials (which may be due to specific skills and mental abilities) produce wage differentials; and as long as the former as inevitable, the latter, too, would be so. In other words, wage differentials reflect the different degrees of scarcity of the different categories of labour; and since different categories cannot be reduced to the same degree of scarcity in the market, wage differentials are inevitable.
Reasons for Wage Differential

Wage differentials arise because of the following factors: a. Differences in the efficiency of the labour, which may be due to inborn quality, education, and conditions under which work may be done. b. The existence of non-competing groups due to difficulties in the way of the mobility of labour from low paid to high paid employments. c. Differences in the agreeableness or social esteem of employment.

Questions 1. Discuss the reasons and importance of wage differential. 2. Recent trends in wage differential in India.
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Latest Updates on Rural Labor Conditions

Rural Labour Enquiry Report on Wages & Earnings of Rural Labour Households (55th round of N.S.S.) 1999-2000 Scope and Method of Enquiry
understand the rural situation should be continued and intensified. The second National Commission on Labour (1999) has recommended that the Rural Labour Enquiries should be conducted more frequently. The results of the latest Rural Labour Enquiry, the seventh in the series, for which the field work was undertaken by the NSSO during its 55th Round Survey (July, 1999 to June, 2000), are being published in the following five reports; i. ii. iii. iv. General Characteristics of Rural Labour Households; Indebtedness among Rural Labour Households; Wages and Earnings of Rural Labour Households; Employment and Unemployment of Rural Labour Households; and
Introduction
1.1 About two-third of the total labour force in the country lives in rural areas.Wage paid employment is the main source of their livelihood. It has been the endeavour of the Government of India to alleviate the poverty, particularly in the rural areas, by formulating and implementing various target oriented anti-poverty rural development programmes. Sound data base is of utmost importance for formulating such action programmes. With this end in view, the first Agricultural Labour Enquiry (ALE) was conducted in 1950-51, followed by the second in 1956-57. The scope of the subsequent enquiries was enlarged to cover all rural labour households instead of agricultural labour households alone covered in the first two enquiries. Hence, the third enquiry in the series known as the first Rural Labour Enquiry (RLE) was conducted in 1963-65 followed by the second in 1974-75, the third in 1977-78, the fourth in 1983, the fifth in 1987-88, the sixth in 1993-94 and the seventh in 1999-2000. With a view to narrowing down the gap between the successive rounds of the Enquiry, the RLE was integrated with the General Employment & Unemployment Survey of the NSSO in 1977-78 and all subsequent enquiries are now being conducted quinquennially to provide continuous data in the form of time series. 1.2 During the course of the Rural Labour Enquiries (RLE) data on various socio-economic aspects viz, Employment & Unemployment, Consumption Expenditure, Wages & Earnings and Indebtedness of rural and agricultural labourers are collected. The RLE is also aimed at throwing up data on household consumption expenditure of the rural/agricultural labourers for drawing weighting diagrams for updating the series of the Consumer Price Index Numbers for Agricultural/Rural Labourers. Under these enquiries, the data are collected and analysed for rural labour as a whole. However, in order to enable comparison with the previous enquiries as also to understand problems of this segment which constitutes bulk of the rural labour, the analysis is presented for agricultural labour separately. 1.3 The usefulness of the data thrown up by the Rural Labour Enquiries has been acknowledged by various Committees and Commissions from time to time. The National Commission on Labour (1969) and the National Commission on Rural Labour (1991) have recommended that the periodic surveys undertaken by the Government to
v. Consumption Expenditure of Rural Labour Households.
Objectives
1.4 The main objectives of the enquiry are i. To provide upto date serial data on demographic structure, extent of employment & unemployment, wages and earnings, household consumption expenditure, indebtedness, etc. for building up of reliable estimates of important socio-economic characteristics of rural labour in general and agricultural labour in particular. To provide data relating to consumption expenditure for derivation of weighting diagram for updating the series of CPI numbers for agricultural and rural labourers.
ii.
Scope
1.5 The Enquiry relates to all rural labour households. However, provision has been made in the tabulation plan to get separate estimates for agricultural labour households.
Geographical Coverage
1.6 The survey covered the whole of the Indian Union, excepting (i) Ladakh and Kargil districts of Jammu & Kashmir, (ii) 768 interior villages of Nagaland situated beyond 5 Kms. of the bus route, and (iii) 172 villages in Andaman & Nicobar Islands which are inaccessible throughout the year. A few other areas of Jammu & Kashmir were also excluded from the survey coverage due to unfavourable field conditions.
Sample Design
1.7 A stratified multistage sampling design was adopted for selection of the sample units for the survey. The first stage units (FSU) were the census villages (panchayat wards for Kerala). The ultimate statge units (USU) were the households. 1.8 Sampling frame for first stage units : The list of census villages as per 1991 population census (list of Census villages as per 1981 Census for the State of Jammu & Kashmir) constituted the sampling frame for selelction of sample FSUs for most of the states. For the rural areas of
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Kerala, however, the list of panchayat wards was used as the sampling frame for selection of panchayat wards. For Nagaland, the list of villages located within 5 Kms. of a bus route constituted the sampling frame, whereas, the list of accessible villages constituted the sampling frame for Andaman & Nicobar Islands. All the uninhabited villages of the country, as per 1991 Census, were left out of the purview of the survey. 1.9 Stratification of the first stage units : From the list of villages of each State/Union Territory (U.T.), initially, two special strata were formed by considering villages (a) with very small population and (b) with very high population as stated below:Stratum 1: all FSUs with population between 1 to 100. Stratum 2: FSUs with population more than 15,000 The above two strata were spread across a given State and were not confined to any particular administrative division within the State. Each of the above two strata was formed if at least 50 such FSUs were there in the respective frames. Otherwise, these villages were included in the general strata. While forming general strata, efforts were made to treat each district with population less than 2 millions as a separate stratum. If limitation of sample size did not allow forming so many strata, smaller districts within a particular NSS region were merged to form a stratum. Each district with rural population of 2 million or more as per 1991 Census (1.8 million or more as per 1981 Census in case of Jammu & Kashmir) was as usual split into a number of strata. 1.10 Allocation of first stage units : At the all-India level, a total number of 10,384 FSUs (6208 villages and 4176 urban blocks) was selected for survey in the central sample in the 55th round. The actual State/UT level allocation of FSUs in the rural sector is given in Statement- I. State/UT level rural sample size was allocated among the rural strata in proportion of population. Sample size for the whole round for each State/UT was allocated equally among the 4 subrounds. Stratum level allocation for both rural and urban areas of a sub-round were made in even numbers in order to facilitate selection of FSUs in the form of 2 independent sub-samples. Sub-sample numbers were 1 and 2 for subround 1; 3 & 4 for sub-round 2; 5 & 6 for sub-round 3; and 7 & 8 for sub-round 4. One salient feature of the 55th round was the rotation sampling scheme which was adopted for the first time in the NSS for the purpose of collection of employment-unemployment data from central sample only. Under this scheme, 1 sub-sample of the sampled first stage units (FSUs) of each sub-round was revisited in the subsequent sub-round. From each such FSU, sample households visited in the previous sub-round for collecting data on employment-unemployment were revisited in the subsequent sub-round for collecting employmentunemployment details. 1.11 Selection of FSUs : For each sub-round, sample first stage units from each stratum were selected in the form of 2 independent sub-samples by following circular systematic sampling with (a) probability proportional to population
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for all rural strata other than stratum 1, and (b) equal probability for rural stratum 1. 1.12 Selection of hamlet-groups (hgs) : Depending upon the values of approximate present population (P) and approximate total number of non-agricultural enterprises (E) of the villages, the FSUs were further divided into a fixed number of hamlet-groups (hgs) as stated below:
Value of P No. of hgs formed in the FSU as per population criterion 2 1 5 6 7 8 Value of E No. of hgs formed in the FSU as per enterprise criterion 4 1 5 6 7 8
1 Less than 1200 1200-1999 2000-2399 2400-2799 2800-3199 and so on
3 Less than 100 100-249 250-299 300-349 350-399 and so on
However, for rural areas of Himachal Pradesh; Sikkim, and Poonch, Rajouri, Udhampur and Doda districts of Jammu & Kashmir, the number of hamlet-groups formed in the village as per population criterion was: 1 for P<600; 5 for P=600 to 999; 6 for P=1000 to 1199; 7 for P=1200 to 1399; 8 for P=1400 to 1599, and so on (procedure remaining unchanged as per enterprise criterion). Further, the higher of the two values obtained, as per population and enterprise criteria was taken as the number (D) of hamletgroups to be formed in the FSU. In cases where hgs were formed in the sample FSU, the same was done by more or less equalising the population of the different hgs of the FSU. 1.13 Formation of segments within FSU : The hamlet group having maximum concentration of non-agricultural enterprises was selected with certainty for listing of households. This hamlet-group was referred to as segment 1. From the remaining (D-1) hgs of the FSU, 2 more hgs were selected circular systematically and these 2 selected hgs together were referred to as segment 2 for doing a combined listing of households. The listing of households was done only in segments 1 and 2 of the FSU. The FSUs not requiring hg formation were treated as segment 1 for the purpose of data collection and estimation. 1.14 Sampling frame of households : All households of segments 1 and 2 of the FSU were listed independently and this list of households of the segments 1 and 2 constituted the sampling frame for the purpose of selection of sample households from the corresponding segments. 1.15 Stratification of households : All the households listed in a segment were stratified into two second stage strata, viz., affluent households which formed second stage stratum 1, and the rest which formed second stage stratum 2. A household was classified as affluent if the household owned certain items like motor car/jeep, colour TV,
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telephone, etc. or owned land/livestock in excess of certain limits. 1.16 Selection of households : Sample households were selected from the respective frames by circular systematic sampling with equal probability. For the purpose of systematic sampling, households in the frame of second stage stratum 2 were arranged by means of livelihood by land possessed classes for rural samples. Two households from second stage stratum 1 and ten households from second stage stratum 2 were selected from FSUs with no hg formation. In the case of FSUs with hg formation, one household from second stage stratum 1 and three households from second stage stratum 2 were selected from segment 1 and one household from second stage stratum 1 and seven households from second stage stratum 2 were selected from segment 2.
22 23 24 25 26 27 28 29 30 31 32
Tamil Nadu Tripura Uttar Pradesh West Bengal A & N Islands Chandigarh D & N Haveli Daman & Diu Delhi Lakshadweep Pondicherry
352 86 791 384 24 16 16 15 16 7 24 6,046
4173 1031 9432 4550 273 180 192 180 187 84 288 71,385
17338 4853 57397 23508 1514 654 914 821 982 363 1222 3,74,856
All-India
Period of Survey
1.18 The enquiry was integrated with the 55th round of the N.S.S. during the period July, 1999 to June, 2000 which was divided into 4 sub-rounds of three months duration each.
Sample Size
1.17 A total of 3,74,856 persons spread over 71,385 rural households in 6046 villages were surveyed. The number of sample villages and sample rural households and persons surveyed in different States/Union-territories and all-India for rural sector are set out in the following statement:
Concepts and Definitions

1.20 The important concepts and definitions adopted for the survey are as follows : i. Household A household is a group of persons normally living together and taking food from a common kitchen. A boarding and lodging house, a hotel or a hostel is treated as a cluster of households where each individual boarder(with his dependants or guests) forms a separate household. Households maintained and fed directly by institutional bodies such as those in prisons, police quarters, cantonments, hospitals, asylums, relief camps are, however, excluded from the scope of the survey. ii. Household Members Any person who is a normal resident of the sample household is considered to be a member of the household. The members of a household may or may not be related by blood to one another. Accordingly, any person who usually lives and takes the principal meals with the household is also considered a member of the household. iii. Household Size The number of normally resident members of a household formed the size of the household. It included temporary stayaways but excluded temporary visitors and guests. iv. Rural Labour Household A household was classified as rural labour household if its major source of income during the last 365 days preceding the survey was more from wage paid manual labour (agricultural and/or non-agricultural) than either from paid non-manual employment or from self-employment. Rural labour households include agricultural labour households also. v. Agricultural Labour Household Of the households which are initially classified as Rural Labour Households, those deriving 50 percent or more of their total income from wage paid manual labour in agricultural activities are treated as agricultural labour households.
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Statement - I
Number of villages, rural households and persons surveyed under central sample Sl.No. State/U.T. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 2. Andhra Pradesh Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim No. of villages 3. 432 74 291 611 16 208 96 140 131 232 240 432 352 64 80 39 40 293 184 272 88 No. of households 4. 5181 827 3462 7311 192 2479 1132 1634 1472 2763 2604 5144 4121 738 933 428 480 3477 2152 3229 1056 No.of persons 5. 22600 4314 19272 40109 944 12807 6502 7793 8322 14154 12324 28816 20399 3997 4901 2276 2441 17059 12067 19021 5173
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vi. Rural Labour Households with Cultivated Land A household with cultivated land, either owned or taken on lease, was treated as household with land. Cultivated land was taken to mean the net area sown during the last calendar year (i.e. January to December, 1998) preceding the year of enquiry and included orchards and current fallows. vii. Land Possessed Land possessed means land owned (including land under owned-like possession) (+) land leased in (-) land leased out (+) any land held by the household which is neither owned nor leased in (e.g. encroached land etc.). viii. Manual Work A job essentially involving physical labour is considered as manual work. However, jobs essentially involving physical labour but also requiring a certain level of general, professional, scientific or technical education are not to be termed as manual work. On the other hand, jobs not involving much of physical labour and at the same time not requiring much educational background, are to be treated as manual work. Thus, engineers, doctors, dentists, midwives, etc. are not considered as manual workers even though their jobs involve some amount of physical labour. But, peons, chowkidars, watchmen, etc., are considered as manual workers even though their work may not involve much physical labour. ix. Wage Paid Manual Labour A person who does manual work in return for wages in cash or kind or partly in cash and partly in kind (excluding exchange labour) is a wage paid manual labour. Salaries are also to be counted as wages. A person who is self-employed in manual work is not treated as a wage paid manual labour. x. Rural Labour Rural labourer is defined as one who does manual work in rural areas in agricultural and/or non-agricultural occupation in return for wages in cash or kind, or partly in cash and partly in kind. The term wages included salary also. Any person who was self employed, though in manual work, was not treated as a wage paid manual rural labourer. Exchange labour was also excluded. xi. Agricultural Labour A person was treated as an agricultural labourer if he/she followed one or more of the following agricultural occupations in the capacity of a labourer on hire, whether paid wholly in cash or kind or partly in cash and partly in kind; a. farming including cultivation, tillage, etc. b. dairy farming; c. production, cultivation, growing and harvesting of any horticultural commodity; d. raising of livestock, bee-keeping or poultry farming; e. any practice performed on a farm as incidental to or in conjunction with farm operations (including any forestry or timbering and the preparation for market and delivery to storage or to market or to carriage for transportation to market of farm products). It might be noted that manual work in fisheries was excluded from the purview of the category of agricultural labour.
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Further, carriage for transportation coming under the category (e) above referred only to the first stage of transportation from farm to the first stage of disposal. xii. Activity Status It is the activity situation in which a person was found during a reference period with regard to the persons participation in economic and non-economic activities. According to this, a person could be in one or a combination of the following three broad activity statuses during a reference period: i. working or being engaged in economic activity (work), ii. being not engaged in economic activity ( work) but either making tangible efforts to seek work or being available for work if the work is available, and iii. being not engaged in any economic activity (work) and also not available for work. Broad activity statuses mentioned in (I) and (ii) above are associated with being in labour force and the last with not being in the labour force. Within the labour force, broad activity status (I) is associated with employment and that of (ii) with unemployment. Identification of each individual into a unique situation could pose a problem when more than one of the three broad activity statuses listed above were concurrently obtained for a person. In such an eventuality, the identification uniquely under any one of the three broad activity statuses was done by adopting either the major time or priority criterion. The former was used for classification of persons according to the usual activity status approach and the latter for classification of persons according to the current activity status approach. Each of the three broad activity statuses was further sub-divided into several detailed activity categories. If a person categorised as engaged in economic activity by adopting one of the two criteria mentioned above was found to be pursuing more than one economic activity during the reference period, the appropriate detailed activity status code related to that activity in which relatively more time had been spent. A similar procedure was adopted for assigning detailed activity code for persons categorised as engaged in non-economic activity and pursuing more than one non-economic activity. The detailed activity categories under each of the three broad activity statuses used in the survey are stated below:
Working (Or Employed)

1. worked in a household enterprise (self-employed) as an own-account worker; 2. worked in a household enterprise (self-employed) as an employer; 3. worked in a household enterprise (self-employed) as helper; 4. worked as a regular salaried/wage employee; 5. worked as a casual wage labour in public of works; 6. worked as a casual wage labour in other types of works; 7. did not work due to sickness though there was work in household enterprise;
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8. did not work due to other reasons though there was work in household enterprise; 9. did not work due to sickness but had regular salaried/wage employment; 10. did not work due to other reasons but had regular salaried/ wage employment, Not Working But Available For Work (Or Unemployed) 11. sought work, 12. did not seek but was available for work. Neither Working Nor Available For Work (Or Not In Labour Force) 13. 14. 15. attended educational institutions; attended domestic duties only; attended domestic duties and was also engaged in free collection of goods (vegetables, roots, fire-wood, cattlefeed, etc.,) tailoring, weaving etc., for household use. not able to work due to disability; others; did not work due to sickness (for casual workers only)
in work in subsidiary capacity may arise out of the two following situations i. a person may be engaged for a relatively longer period during the last 365 days in economic/non-economic activity and for a relatively shorter period in another economic activity and
ii. a person may be pursing one economic/non-economic activity almost through out the year in the principal usual activity status and also simultaneously pursuing another economic activity for a relatively shorter period in a subsidiary capacity. xv. Current Weekly Activity Status The current weekly activity status of a person is the activity status obtaining for a person during a reference period of 7 days preceding the date of survey. It is decided on the basis of a certain priority cum major time criterion. According to the priority criterion, the status of working gets priority over the status of not working but seeking or available for work which in turn gets priority over the status of neither working nor available for work. A person is considered working (or employed) if he/she, while pursuing any economic activity, had worked for at least one hour on at least one day during the 7 days preceding the date of survey. A person is considered seeking or available for work (or unemployed) if during the reference week no economic activity was pursued by the person but he/she made efforts to get work or had been available for work any time during the reference week though not actively seeking work in the belief that no work was available. A person who had neither worked nor was available for work any time during the reference week, is considered to be engaged in non-economic activities (or not in labour force) . Having decided the broad current weekly activity status of a person on the basis of priority criterion, the detailed current activity status is again decided on the basis of major time criterion if a person is pursuing multiple economic activities. xvi. Self-Employed Persons who operated their own farm or non-farm enterprises or were engaged independently in a profession or trade on ownaccount or with one or a few partners were deemed to be self-employed in household enterprises. The essential feature of the self-employed is that they have autonomy (i.e., how, where and when to produce) and economic independence (i.e., market, scale of operation and money) for carrying out their operation. The fee or remuneration received by them comprised two parts - share of their labour and profit of the enterprise. In other words, their remuneration was determined wholly or mainly by sales or profits of the goods or services which were produced. Self-employed persons were categories as follows: i. Own-account workers: those self-employed persons who operated their enterprises on their own account or with one or a few partners and who, during the reference period, by and large, ran their enterprise without hiring any labour. They could, however, have had unpaid helpers to assist them in the activity of the enterprise;
16. renters, pensioners, remittance recipients, etc., 17. 19. 20. 18. beggars, prostitutes etc;
(Sl.No. 7,8,9,10,12and 20 are applicable only in the case of current weekly and current daily status approaches.) xiii. Usual Activity Status The usual activity status relates to the activity status of a person during the reference period of 365 days preceding the date of survey. The activity status on which a person spent relatively longer time (major time criterion) during the 365 days preceding the date of survey is considered the principal usual activity status of the person. To decide the principal usual activity of a person, he/she is first categorised as belonging to the labour force or not, during the reference period on the basis of major time criterion. Persons, thus, adjudged as not belonging to the labour force are assigned the broad activity status neither working nor available for work. For the persons belonging to the labour force, the broad activity status of either working or not working but seeking and/or available for work is then ascertained again on the basis of the relatively longer time spent in the labour force during the 365 days preceding the date of survey. Within the broad activity status so determined, the detailed activity status category of a person pursuing more than one such activity will be determined again on the basis of the relatively longer time spent. xiv. Subsidiary Economic Activity Status A person whose principal usual status is determined on the basis of the major time criterion may have pursued some economic activity for a relatively shorter time (minor time) during the reference period of 365 days preceding the date of survey. The status in which such economic activity is pursued is the subsidiary economic activity status of the person. In case of multiple subsidiary economic activities, the major two activities and their statuses based on the relatively longer time spent criterion will be considered . It may be noted that engagement
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ii. Employers: those self-employed persons who worked on their own account or with one or a few partners and, who, by and large, ran their enterprise by hiring labour; and iii. Helpers in household enterprise: those self-employed persons (mostly family members) who were engaged in their household enterprises, working full or part time and did not receive any regular salary or wages in return for the work performed. They did not run the household enterprise on their own but assisted the related person living in the same household in running the household enterprise. xvii. Earnings Earnings meant payments received in cash or kind or both cash as well as kind or those that are receivable for the work done during the reference week. The kind wages were evaluated at the current retail prices. Bonus and perquisites evaluated at retail prices were also included in earnings. Amount receivable as over-time for the additional work done beyond normal working time was also included in the earnings. xviii. Indebted Households A household is considered as an indebted household if it has taken loan from others and part or whole of which had remained outstanding on the date of survey. Loan included borrowings in cash and/or kind and credit purchases made by the households. If the nature, source and purpose of two or more loans are similar, they are treated as a single loan. Borrowings in kind are evaluated at the retail prices prevailing in the local market at time of borrowing. An advance payment received for forward delivery of goods is also regarded as a loan. The dues on time of credit purchases, like newspaper, milk, services of dhobi, etc., are also treated as loans. xix. Household Consumption Expenditure The expenditure incurred by a household on domestic consumption during the reference period is the households consumer expenditure. The household consumer expenditure is the total of the monetary values of consumption of various groups of items, namely, (i) food, pan (betel leaves), tobacco, intoxicants and fuel & light, (ii) clothing and footwear, and (iii) miscellaneous goods and services and durable articles. For groups (i) and (ii), the total value of consumption is derived by aggregating the monetary value of goods actually consumed during the reference period. An item of clothing and footwear is considered to be consumed if it is brought into maiden or first use during the reference period. The consumption may be out of (a) purchases made during the reference period or earlier; (b) home grown stock; (c) receipts in exchange of goods and services; (d) any other receipt through gift, charity, borrowing; and (e) free collection. Home produce is evaluated at the ex farm or ex factory prices. For evaluating the consumption of the items of group (ii), i.e., items categorised as miscellaneous goods and services and durable goods, a different approach is followed. In this case, the expenditure made during the reference period for the purchase of goods and services is considered to be consumption. It is pertinent to mention here that the consumer expenditure of a household on food items relates to the actual consump-
tion by the normal resident members of the household and also by the guests, whether during ceremonies or otherwise. To avoid double counting, transfer payments like charity, loan, advance, etc., made by the household are not considered consumption for items of groups (i) and (ii), since transfer receipts of these items have been taken into account. However, the item cooked meals is an exception to the rule. xx. Children Persons below 15 years of age have been treated as children
Present Report
1.21 This is the first report in the series of five reports to be brought out on the basis of seventh RLE covering different aspects of rural labour. It presents analysis of data on the wages and earnings of rural labour households. It contains the basic results on wages and earnings of workers of Labour Households at state and all-India level. It gives (a) earning strength and the number of wage earners in the average size of Labour Households; (b) data on wages and earnings of agricultural labour households workers in agricultural and non-agricultural operations; (c) earnings of workers (men, women and children) of agricultural labour households and rural labour households in different agricultural operations; (d) level of real earnings in agricultural operations during 1999-2000; and (e) comparison of wages of agricultural labour household workers with Minimum Wages fixed by the State Governments for agricultural operations as well as with wages paid to workers in organised sector (viz factories, mines & plantations).
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LESSON 16: INTRODUCTION TO EXECUTIVE COMPENSATION AND COMPONENTS OF REMUNERATION

Learning Objective
To understand the meaning and concept of Executive

Compensation
To know the unique features of Executive Remuneration To know the various components of Executive
Remuneration To read articles on Executive Compensation
There are almost as many bonus systems as there are companies using this form of executive remuneration. If bonus constitutes short-term benefit, stock options are long-term benefits offered to executives. Stock options are attractive to shareholders too. Perquisites contribute a major source of income for executives. Straight salaries, bonuses, stock purchase plans and profitsharing are used to compensate major executives. Of these, the straight salary is the most common method. The salary is determined by mutual agreement between the individual and the employer. The sales effected, the cost of production, reduction in expenses and the profits made are also taken into account. Bonuses related to performance are also aid to executives at a certain percentage of the profits. The bonuses may average from 30 per cent- to 50 per cent of the basic salary. These bonuses operate most effectively in increasing motivation when the following conditions exist: The amount paid is closely related to the level of individual performance; The amount paid after taxes represents a clearly noticeable rise above the base salary level. The amount paid is closely related to the level of company performance; The amount paid is tied into the base salary in such a way that the combined earnings are equitable both in relation to internal and external standards; The amount paid is reduced drastically whenever an individual experiences a real and continuing decrease in performance effectiveness; The amount paid is based on an easily understandable system of allocation, and the individual is provided with complete information on the relationship between bonus and performance. Moreover, executives are compensated for the various expenses incurred by them, for taxation takes away a major portion of their salary. Such payments are in the form of: a. Medical care; b. Counsel and accountants to assist in legal, tax and financial problems; c. Facilities for entertaining customers and for dining out; d. Company recreational area (swimming pool and gymnasium); e. The cost of the education and training of executives, scholarships for their children, and allowances for business magazines and books; and
Executive Compensation
Introduction For the higher management, salaries are influenced by the size of a company performance of the company, by the specific industry, and in party by the contribution of the incumbent to the process of decision-making. The more profitable the organization is the firm, the better is the compensation paid to the executives. The industries that are more highly constrained by governmental regulation (banks, life insurance, railroads, public utilities) pay relatively less than those that are more free to carry on their business (private firms). Executive remuneration has certain unique features, such as: 1. It cannot be compared to the wage and salary schemes meant for other employees in organizations; 2. Executives are denied the privilege of having unionized strength; 3. Secrecy is maintained in respect of executive remuneration; 4. Executive pay is not supposed to be based on individual performance measure but rather on unit or organizational performance. 5. Executive remuneration is subject to statutory ceilings in some respects
Components of remuneration
See - rewards management by Armstrong Introduction Write Executive remuneration generally comprises four elements: i. Salary and allowance, ii. Bonus, iii. Incentives, iv. Perquisites. Description of Each Element Salary is the first component of executive remuneration. Salary is supposed to be determined through evaluation and serves as the basis for other types of benefits. Bonus plays an important role in todays competitive executive payment programmes.
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f. Free well-furnished accommodation, conveyance and servants. All these go under the head of perquisites. Based upon his research findings on managerial pay, Megginson offers the following generalisations: Satisfaction with pay is a function of comparison with anothers pay, with downward comparisons having the greatest impact. A managers satisfaction with his income and its motivational effect appear to be directly related to anticipated pay raises. Those managers who expect large increases in future apparently are less satisfied with their existing level of income; those expecting little or no increases are more satisfied. The choice of merit, as opposed to seniority, as the basis for determining salary rates tends to increase with education and position. The actual determinants of pay differentials seem to be job level supervisory experience and professional experience. Managerial incentive compensation has tended to become flexible. If the various compensation media are to be used to motivate managers, there must be a return to a greater flexibility.
follow in terms of creation of infrastructure, communication, training the work force, continuing education and many such issues. Creating and identity of purpose and shared vision for the employees was critical as also the building of a number of assets. Given the expediencies of the trail-blazing phase in the 70s and the 80s, profit maximisation was not the only goal. The company, nevertheless, was profitable. In the 90s, with the globalisation of Indian software, there was a spurt of competitors with operational excellence as their capability. In this phase too, TCS continued to grow, but it had to grow higher than the competition, which was no longer small. It needed to go ahead and start looking at itself all over again. Evolution of EVA The current operating environment is characterised by players who are increasingly moving into globalisation and towards a more perfect market place. The industry is faced with stiff competition, consolidation, rapid technological advancement and obsolescence, high R&D costs and talent retention. As a strategy-focused organisation, TCS was looking at growth beyond competition, defining for themselves and expansion path that would sustain their leadership in a world shaped by continuously evolving market forces. They thus had to think above operational excellence into product innovation to evolve projections for multi-year growth framework. EVA seemed to provide the tool for this self-propelling growth model. The search lights now beamed on a different set of focus paths: How to grow at a rate higher than just the increase in numbers? How to sell competency and value rather than skills? How to manage commitment without over-committing? How to reduce wastage and increase efficiency to avoid the trappings of a very high cost organisation? The answer translated to measures at all levels. The total pre-occupation with customers satisfaction had to be re-turned to introduce an element of profit orientation. This needed a system of efficient resource management, better control of outstanding, performance evaluation that would link reward to revenue generation. The company had to make sure the operational and tactical levels were aligned with the strategic, so that customer satisfaction was reflected through higher revenues, and sales officers were responsive to selling the more valuable services of TCS rather than just meeting targets. To take proactive steps to enhance value for themselves as well as their customers, in around 1996, the company organised its structure into a three dimensional model (Exhibit) defined along industry practices (which are verticals like engineering, transportation, telecom), service practices (assignment themes such as eBusiness, outsourcing, architecture and technology consulting), and geographies (which are regional groupings). The TCS business units now belongs to one cell or span across multiple cells in this cubic grid. Each is a revenue generating unit outside the grid, which do not have a direct revenue earning capability. These include the corporate office support functions and R&D, which contribute in an indirect way towards the organisations earnings.

An Article on Empowerment and Growth The EVA story at TCS
-By S.Mahalingam
Tata Consultancy Services (TCS) employs over 15000 professionals, has offices in 23 countries and projects in 50 countries across the world, and revenues around $700 million. Among its clientele are number of Fortune 500 companies and it is in the league of 30 top IT consulting firms in the world. TCS today is an Indian enterprise with a global reach its hiring and people care practices are in line with the industry practices and the compensation model has been traditional. The company has now set its sights on becoming a truly global organisation. Its vision is to be among the top 10 IT consulting organisations in the world, a global employer of choice. It is looking towards institutionalising leading edge practices in hiring, training, and people care, with and innovative EVA based compensation model. The target model will be one that offers a high growth, high performance internal environment to empowered, proactive, high-brand consultants operating in a dynamic external environment. One important factor in understanding the context of TCS growth is that the company veritably set up the industry in India and metamorphosed in phases from an industry-builder to a lead-player in the industry it created. In the new market place it has defined for itself, it has to run alongside the new breed of competitors in the country on the one hand, and on the other, the established giants in the global league it is breaking into, as a logical culmination of its growth. In the initial phase, the mission within TCS, right from 1968 when the organisation came into being, appeared to the creation of the industry and the setting standards. The expansion of the market took place in the 70s and 80s when the company grappled with issues of fixing rates in different countries and the cost structure of the company was being formed internally. It was also part of a group which had its own tradition to
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The EVA Model In giving shape to the EVA model, an organisation needs to keep its focus towards the ultimate goal of aligning its people to the corporate mission, creating an entrepreneurial culture through an empowered work force, and building ownership with accountability. TCS worked out a EVA framework to align corporate value with the performance of the constituent business units and the individuals who comprised these. It translated to a compensation model, where the employee had a share in the corporate pie with add-ons from the profits of the Business Unit and the Individual Performance Factor. At the individual level, an employee needs to know the drivers to tweak to enhance the EVA of the company, of the business unit, and his own contribution towards all these. There are three basic drivers - revenue, cost, and capital charge. Revenue is driven by the r ate or license price put into the product, sales, billable hours, response time, and domain skills. On time delivery obviously has an impact on revenue because better delivery cycles improve the turnaround to the customers. Cost is managed through productivity, is affected by sales and marketing costs, recruitment and others. Receivables and training are the bulk of the capital charge. These are a representative list, and there are many others. The individual works towards the improvement of the benefit package, which essentially has three components - the Corporate EVA, the Business Unit EVA, and the Individual Performance Factor. Out of the total EVA payment a certain percentage goes to each employee on the basis of corporate EVA improvement. Secondly, if your business unit did better than another business unit, then automatically you got more than the other business unit. Again it is a team reward concept. The third one depends on the evaluation of individual performance. Strategic Benefits With the introduction of EVA, yet another plank has fallen in to place in the systemic efforts towards optimisation. Activity Based Costing, implemented 1992 onwards, was a major factor facilitating the smooth transition to EVA. Balance Scorecard was another adaptation in the journey towards excellence. TCS also participated in the Tata Business Excellence Model, (TBEM), which is really an adaptation of the Malcolm Baldridge award, for the Tata companies. Initiatives such as the process map, a metrics definition, a number of data collection points are other enablers in data driven management. With the introduction of EVA, the company has to take a fresh look at the integrated system in a holistic perspective, and evolve ways and means of optimising it. Implementation of EVA requires the integration of the planning and the tracking process. TCS sought to achieve this through a home grown tool called e-pilot, which essentially drills down from strategy to day-to-day activity. This facilitates the integrated planning approach, in defining the corporate EVA, linking it to the business unit/cell, and further to various components down the line, all the way to the drivers connected to each activity. With the drill-down of targets, the tracking becomes automated.
Incentive scheme A comprehensive EVA - based Incentive Compensation Plan has been designed for the employees. Building the incentive scheme requires a detailed exercise in arriving at the target EVA. The TCS model was defined backed by a market analysis and a study of 24 competitors, largely outside India. The framework had specifications for target EVA, with carefully defined EVA intervals and provision for the positioning of zero EVA. The gradation continued through incentives corresponding target attainment, the double incentive. Implementation now covers the whole consulting organisation. TCS is also implementing the bonus bank at the individual level. This exercise begins with a target bonus being earmarked for allocation on corporate target realisation, with a built in multiplication factor for exceeding the targeted EVA. When the corporate target is exceeded, a potential bonus is declared. This accrues to the bonus bank of the individual as two components: Component A, the result of the share in the corporate pie; Component B, a composite factor depending on the business unit and individual performance. The accruals are cumulated over the years and the pay out each year is decided as a portion of this cumulative balance, leaving a surplus in the bonus bank. This concept of bonus bank allows an unlimited multi-year decision horizon, replacing the traditional thresholds and caps. It demands sustainable performance improvements, and maintains the important cumulative relationship between pay and performance. The firsthand experience was a revelations, as we saw how we actually get paid out from the increases, demonstrating the dictum that EVA pays for itself. The reward is that the size of the pie could become different as its gets enlarged and the individual and the corporation appears to benefit considerably. It ensures the channelisation of information across levels and each entity can see how it fares against targets. It enhances the sense of participation through the realisation of the share in the larger pie, and provides the motivation to contribute to enlarge the pie. EVA really forces the organisation to adopt a proper business planning approach, gets a focus on strategies, and helps monitor the accountability of people. In a nutshell, it gives a barometer on how the organisation is being run and mandates critical stocktaking to evolve on a continuous improvement path.

An Article on Human Capital -by S. Mahalingam
Originally published in Praxis (Business Line), May 2001. Pundits of Today Assert That it is the Human Capital That Energises the Creation of Wealth
We, the people of the modern ICE age, seem to have come full circle, to taking a look at ourselves. Management theories are veering round to a re-evaluation of that invaluable human factor and its critical contribution to the creation of wealth. In fact, they have gone one step further to stress that people are the wealth. Pundits of today assert that while the other forms of
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capital, including material, equipment, tools and technology, only represent inert potentialities, it is the human capital that converts this potential and energizes the creation of wealth. Let us take a peep into this fascinating attempt at pricing the priceless, or what was hitherto considered priceless simply because not many serious attempts were made at its valuation. What makes the challenge more interesting is that this form of capital is floating rather than fixed. No organization can own its human capital the way it owns its other assets. And, inevitably, there is a constant flight of capital. Here we have all the trappings of perpetual dynamics when compared to static assets whose tenure can be safely projected. Today, there is nothing sacrosanct about employer-employee relationships and a professional parting of ways is an accepted way of life. For instance, the only loyalty the silicon generation exhibits is to the Silicon Valley itself, not to any individual organization within its bounds. The imperatives of attrition have to be accorded due recognition, and this is the other dimension an organization has to focus on. Employers have to understand the value that is lost when a key employee leaves. So, we will also examine the cause of attrition in the new knowledge-oriented organization and what can be done to motivate loyalty. Capital Redefined An organization is made up of competencies which we can loosely call capital. Its key components are customer capital, structural capital and human capital. Broadly a companys strength arises out of its customer base which purchases its products. This customer capital triggers a number of key decisions such as new product and service packages, new designs in anticipation of customer preferences and new locations from which a number of customers could be profitably served. We have heard of a company being acquired purely because of the strength of its customer base. Besides customers, the strength of an organization arises out of the efficiency of its operations. This is characterized by the manner in which its processes are designed and operated. We can call this the structural capital. But the key strength comes out of its human capital. It is the expertise of its employees which ensures that customers are acquired and retained, and the processes work efficiently to satisfy the customers needs. We can say that human capital is the basis for the creation of customer and structural cap-ital. The accounting system does not capture the values of these forms of capital. Indeed, even a management information system hardly captures the accretion or depletion of these critical components in the functioning of an organization. For a Knowledge Base on the Knowledge Worker In the information technology (IT) industry, we started examining the issues relating to the human capital of an organization. If people hold the key to prosperity anywhere, it is more so in the IT industry which employs knowledge workers. Here, human capital is not merely one component of capital; it is the critical component that forms the basis for other forms of capital: People with their expertise are the sole creators
of value to the customer and people through their effort are the key to the optimization of its process efficiency. Perhaps the natural corollary to this is the high attrition rate in the IT industry. So IT organizations have a critical need to know the value they would forego when they are about to lose a person. This knowledge is important in taking appropriate action, in making counter-offers, in keeping up a constant preventive effort to fine-tune the compensation structure. All these should always be in line with the value being pro-vided by the employees. Bundle of Competencies An employee has a bundle of competencies, each of which needs to be valued. In the computer software field, with which I am most familiar, we classified competencies under five major heads - domain, technology, project management, initiative and leadership. A software project attempts to computerize applications such as production scheduling in a manufacturing organization, trade settlement in a stock exchange or recoveries for an insurance company. An analyst developing the requirements for the system must have expertise in the specific business area such as manufacturing, securities trading or insurance. We call this business knowledge the domain expertise. A software designer must be knowledgeable about the technology that provides the platform for the system and makes it work. Similarly, project management is an essential area of expertise for a person leading a part or whole of a project, to ensure that resources are marshaled to yield effective results in the required time. Besides these, what makes a person valuable to the organization is the consummate acumen for enterprise and execution - the generation of ideas and the speed of implementation. These come under the umbrella of initiative. Finally comes the quality of being an inspiration to others: Is a person a thought leader? The ability to apply a new technology in ways unanticipated is one example of displaying thought leadership. The Depth Dimension We have defined different categories in which the skill-level of a person can be classified. This will bring out the breadth of expertise. We need to also know the depth of experience. There are four levels of expertise that are termed exposed, experienced, expert and excellent. A person who has merely gone through a training programme is only exposed to the technology. If he has practiced that skill in one or more projects for an acceptable minimum period, he becomes experienced. An expert is one who is recognized by his peers to be knowledgeable, to whom they turn for resolution of complex problems. Excellence is attained and proclaimed when an outside committee of experts in the field recognizes a persons expertise. This level is usually reached when a person passes an examination or is invited to become a member of an exclusive club of experts. Now for the verdict... Therefore, a persons competency can be judged by looking at both the breadth and depth of his skills. The all-important question now is whether these skills are of value. For example,
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expertise in an old computer language, which has become obsolete, has little market value. However, before January 1, 2000, this rare skill was of great importance to people who still had running systems that used these obsolete languages. The value therefore is contingent upon the use to which the expertise is put. In the soft-ware field, as in most others, there is value to a skill so long as it is usable and there is effective demand for people possessing that skill. Is there a Magic Formula? Once we have determined that there is value, we need to establish its quantification. A skill has a value so long as it can fetch a return. One method is to look at possible returns over the next five years and thereafter discount the amount by an accepted percentage to arrive at the current value. This will require us to forecast the revenue that can be generated each year over the next five years for a person (for instance, a Java programmer). The attempt is to calculate the value of a competency at a point in time. Therefore, we do not bother about the additional value that may accrue to a person as he moves up the competency ladder A person has a set of competencies and a value is assigned to each of these competencies. The sum total of it is the value of an employee and the sum total of the value of all employees is the human capital of the organization. This human capital, together with the customer and structural capital produces the revenue. To Retain Ms High Value When an employee leaves, an organization loses that much of capital as determined by the valuation given above. The organizations response to this situation should be guided by the value being lost. Unfortunately, there may be no escalation when a valuable employee leaves. The senior management gets into the act only when a very experienced employee leaves, irrespective of whether he has a higher or lower value than a less experienced person. An organization needs to look for a system for the scientific computation of employee values, stored in a constantly updated data-base, with triggers for intimation to top management based on employee valuation. Management can then be made to sit up and take notice whenever high-value employees leave, irrespective of the years of service. In fact, compensation across the board can be structured to be in line with this valuation system. Why do employees leave an organization? Compensation is only one of the factors and, unfortunately, that is the only factor looked into. In my organization, we did a detailed survey on what would result in increased commitment to the organization, which intrinsically meant reduction in attrition. We realized that increase in job satisfaction as well as increase in opportunities at higher levels of value had a positive influence. These resulted in a person moving up the expertise ladder. There are supplementary factors too, such as improvement in the work environment and elimination of irritants largely brought about as a result of bureaucracy. What kind of effort is needed to enhance satisfaction levels as well as eliminate irritants? It again depends on the potential value created or lost.
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A major factor for a persons loyalty to an organization is the compensation structure. The value of a person can certainly be a guiding factor in arriving at the appropriate compensation level. Miles to go... Organizations are getting differentiated on the basis of the knowledge each possesses. In a world of constant technological changes, an organization prospers from the quality of its people. People who are relevant for todays work may not be able to meet the challenges of tomorrow. We need to get them to forget some aspects of todays competency and build the requirements of the future into them. Increasingly, the investment decisions of top management will not be restricted to the acquisition of brick-and-mortar assets, but of building additional competencies in people. Human resources valuation has remained an academic exercise and largely ignored even in industries where the expertise of employees is the key differentiating factor. The process of valuation is complex and challenging. But unless we adequately assess the value of human resources, we will not be able to respond to future needs.
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LESSON 17: INTRODUCTION TO NATURE AND OBJECTIVES OF JOB EVALUATION

Job Evaluation and Internal Equity
Learning Objective

value by comparing the duties of different s in terms of their different responsibilities and other requirements. It is the quantitative measurement of relative job worth for the purpose of establishing Consistent wage rate differentials by objective means. It measures the differences between job difference between job requirements, the objective being the setting of pay for wage administration purposes. It does not set the price of a job; it merely fixes its relative worth. It presents an effort to determine the relative value of every job in a plant, and to determine what the fair wage for such a job should be. It is not evaluating the merit of the worker who is the work. It rates the job and not the qualities of the individual worker on the which is the task of employee rating.
To know the definition and concept of job evaluation To understand the need for job evaluation To know the objectives of job evaluation To study the prevalence of job evaluation To understand the responsibility of job evaluation and the various bodies responsible for it To analyse the relationship between job evaluation and job analysis
Interaction
Job evaluation is the process of methodically establishing a structure of jobs within an organization based on a systematic consideration of job content and requirements. The purpose of the job structure or hierarchy is to provide a basis for the pay structure. The job structure, as seen in previous lessons, is only one of the determinants of the wage structure. But it is an important one often used.
Conceptual Discussion
Job evaluation developed out of civil service classification practices. Job analysis applied to time study and selection, and some early employer job and pay classification systems. Whether formal job evaluation began with the United States Civil Service Commission in 1871 or with Frederick W. Taylor in 1881, it is about 100 years old. The first point system was developed in the 1920s. Employer associations have contributed greatly to the adoption of certain plans. The spread of unionism has influenced the installation of job evaluation in that employers gave more attention to rationalized wage structures as unionism advanced. The War Labor Board during World War II encouraged the expansion of job evaluation as a method of reducing wage inequities. Job evaluation has received a good deal of attention in recent years as a result of social concern regarding discrimination. A study of job evaluation as a potential source of and/or a potential solution to sex discrimination in pay was made by the National Research Council under a contract from the Equal Employment Opportunity Commission. The study suggested that jobs held predominantly by women and minorities may be undervalued. Such discrimination may result from the use of different plans for different employee groups, from the compensable factors employed, from the weights assigned to factors, and from the stereotypes associated with jobs. Although the preliminary report failed to take a position on job evaluation, the final report concluded that job evaluation holds some potential for solving problems of discrimination. Why to do Job Evaluation? Organizations usually begin the process of designing a wave structure by determining their job structure. Two often-cited principles of compensation are (1) equal pay for equal work and (2) more pay for more important work. Both imply that organizations pay employees for contributions required by jobs.
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Definition of Job Evaluation

Below are given some important definitions of job evaluation: The I.L.O. defines job evaluation as an attempt to determine and compare demands which the normal performance of a particular job makes on normal workers without taking into account the individual abilities or performance of the workers concerned. The Bureau of Labour Statistics, U.S.A., says that job evaluation is the evaluation or rating of jobs to determine. their position in the job hierarchy. The evaluation may be achieved through the assignment of points or the use of some other systematic method for essential job requirements, such as skills, experience and responsibility. In the words of the Netherlands Committee of Experts on Job Evaluation, job evaluation is a method which helps to establish a justified rank order of jobs as a whole Being a foundation for the setting of wages. Job evaluation is the only one of the starting r establishing the relative differentiation of base wage rates. Kimball and Kimball define job evaluation as an effort to determine the relative every job in a plant to determine what the far basic wage for such a job should be. According to Wendell French, job evaluation is a process of determining the worth of the various jobs within the organisation, so that differential wages may to jobs of different worth. The relative worth of a job means value produced factors as responsibilities skill, effort and working conditions. We may define job evaluation as. a process of analyzing and describing positions, g them and determining their relative
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Most organizations utilize job assignment as a major determinant of employee contributions. A formal wage structure, defined as a rate or range of rates established for job classifications, seems to be standard organization practice, except in very small organizations. Formal job evaluation or informal comparison of job content is the almost universal base of pay rates. Job evaluation is concerned with jobs, not people. A job is a grouping of work tasks. It is an arbitrary concept requiring careful definition in the organization. Job evaluation determines the relative position of the job in the organization hierarchy. It is assumed that as long as job content remains unchanged, it may be performed by individuals of varying ability and proficiency.
vii. To provide information for work organization, employees selection, placement, training and numerous other similar problems. In fact, the primary purpose of job evaluation is to set wages and salary on the basis the relative work or jobs in the organisation. It goes this by providing a ground for the following matters: a. Equity and objective of salary administration, i.e., paying the people whose work is alike the same wages, and establishing appropriate wage differentials between jobs calling for different skills and responsibilities; b. Effective wage and salary control; c. Union-management negotiations on wages; and d. Comparison of wage and vary rates with those of other employees. Besides setting wages, job evaluation also helps in: a. b. c. Providing standardization of, and improvement in, working conditions; Clarifying the functions, authority and responsibility of employees; Establishing references for the settlement of grievances arising out of individual rates and for negotiations with a trade union on internal wage structure and differentials; Developing machinery for a systematic reviewing of job rates as job contents change; and Developing personnel statistics.
Objectives of Job Evaluation

The general purpose of job evaluation may include a number of more specific goals: 1. To provide a basis for a simpler, more rational wage structure; 2. To provide an agreed-upon means of classifying new or changed jobs; 3. To provide a base for individual performance measurements; 4. To reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes; 5. To provide incentives for employees to strive for higherlevel jobs; 6. To provide information for wage negotiations; 7. To provide data on job relationships for use in internal and external selection, personnel planning, career management, and other personnel functions. Also, says an I.L.O. Report, the aim of the majority of systems of job evaluation is to establish, on agreed logical basis, the relative values of different jobs in a given plant or machinery, i.e., it aims at determining the relative worth of a job. The principle upon I all job evaluation schemes are based is that of describing and assessing the value jobs in the firms in terms of a number of factors, the relative importance of which varies from job to job: i. To secure and maintain complete, accurate and impersonal descriptions of each distinct job or occupation in the entire plant; ii. To provide a standard procedure for determining the relative worth of each job in a plant; iii. To determine the rate of pay for each job which is fair and equitable with relation to other jobs in the plant, community or industry; iv. To ensure that like wages are paid to all qualified employees for like work; v. To promote a fair. and accurate consideration of all employees for advancement and transfer; vi. To provide a factual basis for the consideration of wage rates for similar jobs in a community and in an industry; and
d. e.
Prevalence of Job Evaluation

Job evaluation is used throughout the world. Although recent evidence is not available, it appears that job evaluation is more prevalent in the United States than elsewhere. However, a 1982 International Labor Office publication states that in centrally controlled economies or in economies where wage or income controls exist, job evaluation is frequently used Holland has had a national job evaluation plan since 1948 as a basis for its national wages and incomes policy. Sweden and Germany have a number of industry-wide plans. Great Britain, like the United States, usually employs job evaluation at the plant or company level. Australia and some Asian countries have installed some forms of job evaluation. Russia and some of the Eastern European countries make wide use of job classification. The evidence on use of job evaluation in the United States shows that smaller companies are somewhat less likely to use job evaluation. Almost all government jurisdictions, however, employ some form of job evaluation. In the past twenty years job evaluation has come under attack in the United States. This has come about from a change in the American economy and the type of organizations that dominate the new economy of today. Job evaluation works best in large bureaucratic organizations. In the past twenty years these behemoths of the American economy have faced increasing problems remaining competitive.
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The result is that they have downsized greatly and removed many layers of organization. Vertical movement within organizations has slowed down and employees increasingly move to jobs in other organizations rather than stay with their current employer. The new companies gaining a foothold in the economy are smaller and organizationally flexible. There has also been a demise of unions; individuals now bargain for their own wages. Lastly, organizations are putting more emphasis on employee skills and performance, as opposed to the job. All this does not mean that organizations ignore the job as a determinant of wages. What has happened is that wage systems have become more flexible and weight skill and performance more heavily. The use of market wage data for more and more jobs is increasing and made more practical as data has become readily available on the Internet. Within organizations, job evaluation systems have become simpler, less formal and have reduced their complexity. A major trend in this direction has been broadbanding. In broadbanding, the number of levels in the job evaluation plan is reduced, and the width of the grade levels increased dramatically. This allows employees to receive wage increases without having to move up to a new grade level that is tied to a higher organizational level.
the compensable factors, determines weighting, chooses the method of comparing jobs, and evaluates jobs. The chair of the committee is usually a compensation professional, although a consultant, if employed, may assume the chair for part of the work. Other members are typically other managers selected for their analytical ability, fairness, and commitment to the project. Representation of broad areas of the organization aids in communication and in gaining acceptance. But job evaluation committees should be kept small to facilitate decision making. Five members may be optimum, ten a maximum. A common procedure is to invite supervisors to committee meetings when jobs in their department are under study. In union-management installations, union members are regular members of the committee. Where the union is not involved employee representation is often rotated. Employee representation in committees seems to aid in securing acceptance and in communication. Committee job ratings are a result of pooled judgments. This usually means either that ratings made individually are averaged or a consensus is reached as a result of discussion. Committee members must be trained. Much of this training involves following the steps in the process. But it is advisable to train committee members how to guard against personal bias and the common rating errors. Consultants Consultants are sometimes employed to install job evaluation plans. Successful consultants are careful to ensure that organization members are deeply involved in installing the plan and are able to operate the plan on their own. Consultants are most likely to be employed in small organizations where no member has the necessary expertise. They are also more likely to be employed when a complex rather than a simple plan is to be installed. Consultants often have their own ready-made plans. Sometimes consultants are brought in to insure objectivity in union-management installations. It is also common to hire consultants to evaluate management jobs, because the objectivity of committee members rating jobs at levels higher than their own may be questioned. Compensation Department Involvement It is quite possible for the organization to assign installation and operation of a job evaluation plan to the compensation department. Sometimes the compensation professional heading the unit and a number of job analysts carry out the task. Those who favor this last approach emphasize the technical nature of the task. They may also be reacting to the difficulty of getting operating managers to devote the time that the program requires. While they may recognize the education and communication advantages of committees, they believe these advantages can be provided in other ways. It is doubtful that this position can be justified, though.
Responsibility for Job Evaluation

The installation and operation of job evaluation involves certain responsibilities. Several possibilities for implementing the process are apparent. One or more committees may be selected, a department may be set up or an existing one assigned, or a consulting organization may be brought in. These possibilities are not mutually exclusive. Support for the program is essential because installation of it involves commitments of time, effort, and money. Such support is usually obtained by securing top management approval and the collaboration of other managers and organization members. Often this approval is obtained through a committee set up for this purpose. Hence, let us study below the various bodies involved with the responsibility of Job evaluation: The Committee Approach This committee is given an explanation of job evaluation, the purposes it is expected to accomplish, a rough time schedule, and perhaps an estimate of the cost of the program. The committee makes the decision to install job evaluation, decides on the scope of the project, and assigns responsibility for the work. The actual work of job evaluation is usually done in committee in both large and small organizations, whether the task is accomplished by organization members alone or with the help of a consultant. Committees have the advantage of being able to pool the judgment of several individuals. The committee usually selects
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Input by operating managers and perhaps employees during job evaluation installation is probably essential to acceptance of the results. Once the program is installed, however, there seems to be no reason why a department cannot operate it with proper provision for settling grievances. Union Involvement in Job Evaluation Union involvement has the same rationale as that offered in our discussion of job evaluation committees. Acceptance and understanding are the expected results of involvement. In practice, union participation in job evaluation has varied greatly. Some unions profess to formally evaluate an organizations jobs independently and then use the information as an aid in collective bargaining. Some job evaluation plans have been installed and maintained as a joint venture. A well-known union-management job evaluation plan exists in the steel industry. Less well-known is the joint plan in the West Coast paper industry. There is evidence that joint plans are more successful than unilateral plans. But this is not always the case. Many unions in organizations with job evaluation plans review the findings after installation by management and either present grievances on individual jobs or insist on bargaining the wage structure. In the latter case, the bargained wage structure may follow the job structure resulting from job evaluation or represent a compromise. Some unions have ignored job evaluation plans installed unilaterally by management. Some employers prefer this response, believing that job design and evaluation are management prerogatives. Other employers invite union participation in the hopes of obtaining understanding and acceptance of the plan. If a union rejects an invitation to participate in job evaluation and ignores the plan, the employer installs the plan unilaterally, recognizing the need for a logical hierarchy of jobs. The findings are used in negotiating the wage structure. Unions have criticized job evaluation on several grounds: 1. that it restricts collective bargaining on wages, 2. that wages shouldnt be based solely on job content, 3. that supervisors do not or cannot explain the plan to employees, 4. that management doesnt administer the plan the way it explained it, and 5. that it is subjective. Employee Acceptance of Job Evaluation Job evaluation is usually judged successful when employees, unions, and organizations report satisfaction with it. Most surveys report organization satisfaction levels at 90 percent or better. Employee acceptance is the primary criterion organizations use in determining the success of a job evaluation plan. This is reflected in the increasing use of employees on job evaluation committees and in the communication steps accompanying job evaluation installations.
Relationship Between Job Evaluation and Job Analysis Job evaluation is the output provided by job analysis. As seen earlier, Job analysis describes the duties of a job, authority relationships, skills required, conditions of work, and additional relevant information. Job evaluation on the other hand, uses the information in job analysis to evaluate each job valuing its components and ascertaining relative job worth. It involves, in other words, a formal and systematic comparison of jobs in order to determine the worth of one job relative to another, so that a wage or salary hierarchy results. So it is a process by which jobs in an organisation are evaluated. When jobs are evaluated, the relative worth of a given collection of duties and responsibilities to the organisation is assessed. This process is adopted to help a management to maintain high levels of employee productivity and employee satisfaction. If job values are not properly studied, it is very likely that jobs would not be properly realized, i.e, high valued jobs may receive less pay than low-valued jobs. When employees realise that this is happening, they become dissatisfied. They may leave the organisation, reduce their efforts or perhaps adopt other modes of behaviour detrimental to the organisation. Therefore, in modern society, a great deal of attention is paid to the value of a job. What a particular job should be paid is greatly influenced by the value of judgement about the worth of a job. In other words, a person is paid for what he brings to a job his education, training and experience provided that these are related to the requirements of the job which he is assigned.
Summary
The discussion in this chapter showed that the development of a wage structure is the result of a number of influences. These factors vary from ones over which management has a great deal of control to ones in which management must simply be responsive. Given the variety of influences, it is also not likely that organizations will always be able to develop optimum structures and that current structures will need adapting in the future. While the economics of the labor market is a major consideration, it is not the only determinant to influence the design of wage structures. Most organizations also must consider laborcost ratios, product market competition, and union demands, when determining their wage structure. Furthermore, many labor markets are abstractions that do not provide a close fit for an organizations jobs or wage-paying ability. Wage structures have to do with the internal alignment of jobs in a wage hierarchy. To do this there must be a hierarchy or structure of jobs within the organization. Determining the internal job structure is the task of job evaluation. This process compares jobs, not people, in terms of a set of criteria, called compensable factors, to establish the job hierarchy. Job evaluation is a major tool that organizations use to make job comparisons when determining the relative equity of jobs
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within the organization. In job evaluation there is an interesting conflict. On one hand, like wage surveys, this process requires technical expertise of a compensation professional. On the other hand, acceptability of job evaluation results relies on the perceptions of management and workers so that their participation would seem to be a necessity in job evaluation.
Electronic mail systems: e-mail e-mail with multimedia Videoconferencing: Desktop video Room based video conferencing Though most of these technologies have been available for quite sometime, few have considered the impact of communication technologies on managing personnel. This leads us to a few questions. What skills are required when employees communicate within the organization via telephone and not face-to-face? Can one asses job applicants through videoconferencing? How can one train, monitor, motivate and control employees through electronic mail? Some of these critical questions have been dealt with in the later part of this essay. Implications of ECS on HRM practices Employee selection and recruitment A distance spanning medium like ECS introduces new changes in the way job interviews are conducted. Media transferring aural and visual data such as telephony and videoconferencing can provide low cost alternatives for interviewing reducing the nagging costs of travel, accommodation and incidentals. The increasing use of such technologies in the US has led to decreasing costs which have made it more accessible. It has also been observed that the candidate provides more candid responses in interviews conducted via such new channels. Also it has been found that telephone eliminates visual cues and screens off information which may be irrelevant such as sex, age, style of dressing etc. thus the focus is on interview content and fosters the selection of a more diversified workforce. The choice of the medium for interview may also have a symbolic meaning for applicants. Firms conducting interviews by telephone might be perceived as cost effective or videoconferencing may impress upon technological sophistication. On the other hand, companies may be viewed as being disinterested or in deep financial straits. Performance Evaluation ECS has transformed the way data is observed and information is collected. The filtering out of stereotypes and biases by such systems has benefited the process of performance evaluation. With the much discussed flattening of organizations and diffused job specifications, it has become difficult for managers to observe what their subordinates actually do. ECS has proved to be an effective tool in collecting and collating vital information about employees from subordinates, peers and customers. Recently conducted research has revealed that groups have been more productive in generating ideas through electronic communication as compared to face-to-face interaction. This productivity is attributed to large number of people participating simultaneously and its associated advantages.

The Lmpact of Electronic Communication Systems on HRM Practices such systems has benefited the process of performance evaluation. ... technologies opens up new fronts in job training methods ... Article by Abhishek Dasgupta of XLRI. ... We are all living in a world where technology is changing practically every instance. The place we go to work is also experiencing radical changes due to similar reasons. Every organization is trying its very best to capture market shares using cutting-edge customized solutions. This trend has also affected the way organizations are structured especially in the US, which is the hub of such expertise. Recent trends in organization structure suggest that they will become increasingly distributed, flexible and responsible to environment and market changes. The networked organizations emphasize on the multidisciplinary work arrangements linking people across organizational boundaries, less clearly defined authorities and multidirectional communication patterns. What is ECS? The technology fueling these type of new organization structures are the computer based communication technologies or Electronic Communication Systems. This includes electronic mail, computer conferencing and video conferencing which facilitate rapid, multidirectional communication flow.They also enable multimedia document exchange and storage, and exchange of information across organizations. The use of ECS has been expanding at an explosive rate e.g the number of e-mail messages sent in the US alone has grown from 776 billion in 1994 to 2.6 trillion in 1997 and is projected to reach 6.6 trillion this year.Revenues for the videoconferencing industry were to the tune of $15 billion in 1999. Corporations are setting up videoconferencing rooms at a fast pace and using it as lower cost substitution for air travel.
The Technologies Under ECS Include
Audio Systems: Telephone Audio conferencing Voice mail World Wide Web phone systems Chat Systems: Internet relay chat Web chat Conferencing: Computer conferencing Web conferencing
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The provision of a shared screen system in the organization encourages members to associate the ideas as ours or the groups. This is attributed to feeling of depersonalization and anonymity. The delivery of feedback, extremely critical in performance appraisals is facilitated by such technologies in a much better way. There is evidence to show that willingness to give feedback increases when the feedback need not be delivered face-to-face. It also reduces the concerns associated with delivery of bad news to the appraisee. The only hindrance lies in the fact that such communication is not free from tampering and secrecy is in question. Hacking of such data can be tremendously damaging to the organisations interests. Training and Development This topic brings us to the question - What are the job skills required to perform a job that relies on ECS? Well, technical knowledge is important but more important is the ability to convey ideas and information in writing rather than oral communication e.g. e-mail. The availability of new technologies opens up new fronts in job training methods. Remote sites for videoconferencing, computer managed games and simulations, videotaped lectures and interactive video training are relevant in providing just in time training. Employee-employee interaction is enhanced by ECS, which promote development of the organization through mutual information exchange especially in large organizations. The exchange of information increases the personal self-esteem, identification with the organization and feeling of our group. In Conclusion Till now we have analysed the importance and impact of new technologies on the organizations of today. We have tried to identify its possible implications on managing personnel. However most of the studies referred to belong to specific contexts and the generalisability of these practices is in question. The media effects on various HR practices has been taken more or less in as positive developments, but more needs to be done to assess its full implications. They could be negative or unprofitable in the long run. Also the cost effectiveness and relevance outside the US in underdeveloped economies like India needs to be explored. Whatever may be the case, ECS is here to stay, may not be in the form as suggested above. It could be a combination of manual and new media to produce the eclectic mix. What we need to do is to focus on the fact. The fact that ECS has opened up a number of possibilities - it is up to our imagination to maximize its benefits through customization in the Indian environment.
India as a country is less systems-driven and more relationshipdriven. Consequently every employee has high expectations from the HR department. However, due to their administration-heavy roles, HR managers are unable to meet the needs of some or several employees, and land up displeasing many, says TV Rao. Today in India and in other Asian countries, there are plenty of HR or HRD managers. They inhabit every corner of an organisation. Even a small-scale industry nowadays thinks of HR manager. Organisational life without them seems incomplete. In the IT sector, it is almost a norm to have one HR manager for every 50 IT professionals. In one of the audits of an IT company, the author found that there were 11 HR managers to handle 300 IT staff. They were all assigned to 30 IT professionals each. Their job descriptions have indicated that they should socialise every new recruit, mentor them, explain to them the detailed process of their work, performance appraisal, reward system and keep in touch with them so as to enable them to contribute their best. Fresh graduates from the schools of social work were recruited and placed as HR managers. The audit revealed that they are hated most by the IT professionals of the company. They were considered inaccessible, unsympathetic, putting hurdles all the time, lacking an understanding of IT basics, insensitive to trends in the changing pattern of compensation and excessively concerned with monitoring the performance of new recruits. Shrinking Roles While the number of HR managers have grown dis-proportionately in the last few years, their knowledge-base has remained very poor. Their credibility has shrunk, along with their roles and in some cases they have become power brokers. Some of the relatively good HR managers have saved their image by restricting themselves to training and organisation development. Those in charge of performance appraisals have also suffered a great deal of image bashing, as they could not satisfy most line managers who thought they are excellent performers. In the last decade with globalisation and economic liberalisation, Industrial Relations (IR) jobs have become redundant. As a result, most organisations have diverted a large number of their IR managers to the HR side as HR managers. Thus, there is a new breed of HR managers in some organisations trying to find out how they can do an HRD-oriented IR. Competence mapping, job evaluation and classification, reward systems management and performance appraisal and training have become the preoccupation of many of them. They were ill prepared for this jump. Outsourcing came to their rescue and they kept themselves busy, trying to find out agencies to whom they can outsource compensation surveys, employee satisfaction surveys, organisational climate surveys, etc. Results of Surveys There are very few scientific studies available on HRD managers of today. The author has been involved in the HRD audit of several companies.

HR Managers and Employee Expectations Competence mapping, job evaluation and classification, reward systems management and performance ... These two case studies are good indication of the nature of HR ...
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The following descriptions taken from some leading industries of India depict the situation. One of the organisations, which employs nearly 16 HRD staff, was examined. The HRD department is separate from the personnel administration and industrial relations departments of the company, which have 30-odd staff. The 16 HRD staff examined were found to have the following profile: An average age of 44 years with about a third of them over 50 years of age. Imagine the nature of qualifications they had acquired 25 years ago when no HRD existed. None of them had any professional qualification in HRD. Two of them had qualifications in personnel management and four were trained in training and development. Put together, they had experience as shown in the table. They have, in all, attended a total of 171 training programmes in the last five years, accounting for about 556 man days training. A few of them did not attend any programme after joining the company. Of the 556 man-days of training, only 45 man-days dealt with HRD-related themes. Only three of them were found to be members of appropriate professional bodies in HRD. The line managers of this company, however, felt that the importance given to HRD function by the top management is very high. 66 percent rated this as very high. In another study of a professionally managed company, a total of 11 staff manned the corporate personnel function. They included four senior managers at general manager/deputy general manager level. The chief of personnel was estimated to spend less than 29 percent of his total time on HRD activities. Only two of them had professional qualifications in HR. The only area where they had a reasonable degree of proficiency was found to be in performance management. This is a clear indication of the gross neglect of the HRD function. This case study is a good indication of the nature of HR and some common areas HRD managers are weak in.
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LESSON 18: INTRODUCTION TO PRINCIPLES AND PROCEDURE OF JOB EVALUATION PROGRAM

Learning Objective

organizations job hierarchy, but they also serve to inform job incumbents which contributions are rewarded. The third step in job evaluation is to select a method of appraising the organizations jobs according to the factor(s) chosen. The method should permit consistent placement of jobs containing more of the factors higher in the job hierarchy than jobs involving lesser amounts. The fourth step is comparing jobs to develop a job structure. This involves choosing and assigning decision makers, reaching and recording decisions, and setting up the job hierarchy. The final step is pricing the job structure to arrive at a wage structure. Strictly speaking, this step is not part of job evaluation. As seen earlier in this chapter, many wage structure determinants are used by organizations. The job structure is only one of these. This view of job evaluation implies that its major purpose is to classify jobs and establish a job hierarchy based on job content. Other perspectives are that job evaluation 1. links external and internal markets, and 2. is a process used to gain consensus and acceptance of a pay structure. Perhaps these views could all be accommodated by the recognition that job structures and wage structures are separate concepts and that the relationship between them is a decision that varies among organizations. Basic Procedure of Job Evaluation The basic procedure of job evaluation is to compare the content of jobs in relation to one another, in terms of their skills or responsibility or some other requirement. The job contents may be decided upon in two ways, i.e., Either by making an intuitive overview i.e., by deciding that one job is more important than another, and not going any deeper in why - in terms of specific job-related factors; or by comparing one job to another by focusing on certain basic factors, which may be common in each job. Such factors are called compensable factors - which determine the definition of job content; that determine how the jobs compare to each other; and they also help determine the compensation paid for each job. The organisation might develop its own compensable factors or use those factors adopted by others. For example, the Equal Pay for Equal Work Act (in USA) focuses on four factors: skills, efforts, responsibility and working conditions. While some other system (say Hay system in the States) focuses on know-how, problem solving and accountability. Often several basic factors are chosen initially and then subdivided into sub-factors. For example, refer to the following table
To learn the Details of the Principles of Job Evaluation To understand the Concept of Job Evaluation procedure To learn the Sequential procedure of Job Evaluation
Interaction
There are certain broad principles, which should be kept in mind before putting the job evaluation programme into practice. According to Kress, these principles are: i. Rate the job and not the man. Each element should be rated on the basis of what the job itself requires. .
ii. The elements selected for rating purposes should be easily explainable in terms and as few in number as will cover the necessary requisites for every job without any overlapping. iii. The elements should be clearly defined and properly selected. iv. Any job rating plan must be sold to foremen and employees. The success in selling it will depend on a clearcut explanation and illustration of the plan. v. Foremen should participate in the rating of jobs in their own departments. vi. Maximum co-operation can be obtained from employees when they themselves have an opportunity to discuss job ratings. vii. In talking to foremen and employees, any discussion of money value should be avoided. Only point values and degrees of each element should be discussed. viii.Too many occupational wages should not be established. It would be unwise to adopt an occupational wage for each total of point values.
Introduction to Procedure of Job Evaluation

After studying the principles of job Evaluation it is important to know the process and procedures involved in job evaluation, it is useful at this point to understand the steps in the process. The first step is a study of the jobs in the organization.Through job analysis, information on job content is obtained, together with an appreciation of worker requirements for successful performance of the job. This information is recorded in the precise, consistent language of a job description. The second step is deciding what the organization is paying for - that is, what factor or factors place one job at a higher level in the job hierarchy than another. These compensable factors are the yardsticks used to determine the relative position of jobs. In a sense, choosing compensable factors is the heart of job evaluation. Not only do these factors place jobs in the
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Table 1.1 : Compensable Factors Universal Factors Knowledge Sub-factors Education Experience Skill Interpretation Compliance Communication Interpersonal Managerial Asset No. of Degrees 8 8 8 8 8 8 8 8
Why were the Standards Revised? The major reasons for the year 2000 revisions of the standards include:

emphasizing the need to monitor customer satisfaction, meeting the need for more user-friendly documents, assuring consistency between quality management system requirements and guidelines, promoting the use of generic quality management principles by organizations, and enhancement of their compatibility with ISO 14001.
Problem-Solving
Decision-Making
When compensable factors are available, jobs can be evaluated more systematically. Each job is compared with all the others using the same factors, sub-factors, and number pf degrees. Sometimes job specifications are based on these factors, stating the human requirements of the job in terms of condensable factors like education, skills problem solving, and decisionmaking. In India, the National Institute of Personnel Management, has laid down the following steps which should be taken to install a job evaluation programme: Analyse and Prepare Job Description This requires the preparation of a job description and also an analysis of job requirements for successful performance. Select and Prepare a Job Evaluation Plan This means that a job must be broken down into its component parts i.e., it should involve the selection of factors, elements needed for the performance of all jobs for which money is paid, determining their value and preparing written instructions for evaluation. Classify Jobs This requires grouping for arranging jobs in a correct sequence in terms of value to the firm, and relating them to the money terms in order to ascertain their relative value. Install the Programme This involves explaining it to employees and putting it into operation. Maintain the Programme Jobs cannot continue without updating new jobs and job changes in obedience to changing conditions and situations.
In addition, the year 2000 revision of the ISO 9000 standards gives users the opportunity to further increase value to their activities and to improve their performance continually by focusing on the major processes within the organization. Extensive surveys have been performed on a worldwide basis to understand the needs of all users of the quality management system standards. The new revisions take into account previous experience with quality management system standards (1987 and 1994 editions) and emerging insights into generic management systems. They result in a closer alignment of quality management systems with the needs of organizations and better reflect the way organizations run their business activities. ISOs rules of procedure (the ISO/IEC Directives) also specify that standards be periodically revised to ensure that those standards are current and satisfy the needs of the global community. [FAQ 001, March 2001] Who is Responsible for Revising the Standards? The revision process is the responsibility of ISO Technical Committee (TC) 176 and is conducted on the basis of consensus among quality and industry experts nominated by ISO Member bodies, and representing all interested parties.[FAQ 002, March 2001] Will the Year 2000 Revision Affect my Organizations Current Quality System Registration/Certification? Yes. The strategy adopted by your organization to meet the requirements of ISO 9001:2000 should include an appropriate timing for upgrading your organizations registration/ certification. It is expected that the process of upgrading registration/ certification will be a smooth transition that is incorporated into the applicable Registration or Certification Bodys regular audit routine. The International Accreditation Forum (IAF has already established a set of guidelines for Certification Bodies/ Registrars to follow, and this includes a transition period of up to three years after the 15th of December 2000. You are advised to contact your registration/certification body to negotiate a suitable transition time frame for the assessment of your own organization. [FAQ 003, March 2001] How Much is the Transition to the New Standards Going to Cost? One of the goals of ISO/TC 176 is to produce standards that will minimize any potential costs during a smooth transition. Any additional costs may be considered as a value-added investment.
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Frequently Asked Questions (FAQs) This list of Frequently Asked Questions (FAQs) has been updated after publication of the ISO 9000:2000 family of International Standards . Input has been obtained from experts and users of the ISO 9000 standards, expressed during seminars and presentations around the world. The list will be reviewed and updated on a regular basis to maintain its accuracy, and to include new questions where appropriate. It is intended that this list will also provide a good source of information for new users of the standards.
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The cost of implementing any necessary changes in order to meet the new requirements of ISO 9001:2000 will vary from one organization to another, depending on various factors such as the actual state of implementation of the quality management system, the size and complexity of the organization, the attitude and commitment of the top management, etc. It is expected that the benefits to all organizations will outweigh eventual costs associated with the transition. Regarding the costs of upgrading the certification, the International Accreditation Forums (IAF) guidelines provide for the incorporation of audits to the new standard into surveillance visits for existing (1994) certifications, wherever possible. [FAQ 004, March 2001] Where can My Organization Obtain Copies of the Revised Standards? Copies of the revised standards may be purchased from National Standards Bodies. Many countries may have these available in local-language versions (see ISO Online) for a listing of member body, i.e. national standards bodies, contact details). [FAQ 005, March 2001] Where can I Obtain Information on the Revised Standards? There are a number of sources of information on the revision of ISO 9000 quality management system standards, including, of course, this web site, which carries detailed information on the revised standards and is updated on a regular basis. ISO Central Secretariat in Switzerland is also maintaining a web site at http://www.iso.ch that carries general information on the revised standards. Your National Standards Body should be able to provide copies of the revised standards and registrars/certification bodies will be able to provide guidance on transitional registration arrangements (see the ISO web site for a listing of the member bodies, i.e. the national standards bodies, contact details). [FAQ 006, March 2001] Where Does My Organization Go If It Needs Clarification or Interpretation of the Revised Standards? The starting point for any individual request for an interpretation should be with the enquirers national standards body. ISO central secretariat and TC 176 cannot accept direct requests from individuals for interpretations of the ISO 9000 standards. Instead, ISO/TC 176 has established a Working Group for interpretation, with a formal procedure to provide answers to the questions that are forwarded by the national standard bodies.(See the ISO web site http://www.iso.chfor a listing of the member bodies, i.e. the national standards bodies, contact details). [FAQ 007, March 2001] Will My Organization Need a Full Reassessment for the Revised Standards? This is primarily an issue between your organization and your registration/certification body. It is expected that conformity to the new ISO 9001:2000 standard will be evaluated by certification bodies during regular surveillance visits, and that full reassessment will only take place once current certificates expire. [FAQ 008, March 2001]
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Will My Organization Have to Change Its Quality System and, if So, When? It is not the intention that you should have to change the whole structure of your system or re-write all your procedures; however, the revised standards include some new requirements and you should consider addressing them in your system at an appropriate opportunity. A joint group from the International Accreditation Forum, ISO/TC 176 and ISO/CASCO have agreed that there should be a 3 year transition period during which accredited certification to the 1994 standards and ISO 9001:2000 may continue to coexist. This transition period will end on 15 December 2003. By that date, all organizations wishing to retain accredited certification will have to have migrated their quality management system to being compliant with ISO 9001:2000. ISO/TC 176/SC2 has published a Transition Planning Guide to assist organisations in their migration. [FAQ 09, March 2001] Will My Organization Have to Re-write All its Documentation? No. If your current quality management system is successfully implemented, satisfies the needs and objectives of your organization, reflects the way your organization works, addresses all of the new requirements, no changes are required. However, if your current documented system does not address all of the new requirements, additional documentation may be necessary. The International Standard ISO 9001:2000 has clarified the need for required documentation. Only 6 documented procedures are required by the standards for administration of the system; however, other documented procedures may be required by your organization in order to manage the processes which are necessary for the effective operation of the quality management system. This will clearly vary depending on the size of the organization, the kind of activities in which it is involved and their complexity. [FAQ 010, March 2001] Are the Revised Standards More Compatible with National Quality Award Criteria? The quality management principles are now the basis for the revised standards, which are better aligned with the philosophy and objectives of most quality award programs. These principles are:

Customer focus, Leadership, Involvement of people, Process approach, System approach to management, Continual improvement, Factual approach to decision making, and Mutually beneficial supplier relationships. [FAQ 011, March 2001]
Does the Revised Standards Address Financial Issues? Financial issues are not addressed in the ISO 9001:2000 standard. The ISO 9004:2000 guidance standard emphasizes the
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financial resources needed for the implementation and improvement of a quality management system. [FAQ 012, March 2001] What are the Benefits of the Revised Standards? There are a number of major benefits with the revised quality management systems standards. Among them are: Applicability to all product categories, in all sectors and to all sizes of organizations Simple to use, clear in language, readily translatable, and easily understandable Significant reduction in the amount of required documentation. Connection of quality management systems to organizational processes Provision of a natural move towards improved organizational performance Greater orientation toward continual improvement and customer satisfaction Compatibility with other management systems such as ISO 14000 Provision of a consistent basis to address the needs and interests of organizations in specific sectors (e.g. medical devices, telecommunications, automotive, etc) The concept of the consistent pair - ISO 9001 covering the requirements and ISO 9004 for going beyond the requirements in order to further improve the performance of the organization. Consideration of the needs of and benefits to all interested parties. [FAQ 013, March 2001] What are the Main Changes to the Standards? The main changes that have been introduced in the consistent pair of quality management system standards are: A new process-oriented structure and a more logical sequence of the contents A continual improvement process as an important step to enhance the quality management system Increased emphasis on the role of top management, which includes its commitment to the development and improvement of the quality management system, consideration of legal and regulatory requirements, and establishment of measurable objectives at relevant functions and levels. The concept of Application of the standard has been introduced (in clause 1.2) as a way to cope with the wide spectrum of organizations and activities. A requirement for the organization to monitor information on customer satisfaction as a measure of system performance. Significant reduction in the amount of required documentation. Terminology changes/improvements for easier interpretation. Increased compatibility with the environmental management system standard ISO 14001 Specific reference to quality management principles. Consideration of the benefits and needs of all interested parties.
Addition of the concept of organizational self-assessment as a driver for improvement (ISO 9004:2000) .[FAQ 014, March 2001] What New Requirements Have Been Introduced Into The Revised ISO 9001 Standard? The main new requirements include: Continual improvement Increased emphasis on the role of top management. Consideration of statutory and regulatory requirements. Establishment of measurable objectives at relevant functions and levels. Monitoring of information on customer satisfaction as a measure of system performance. Increased attention to resource availability. Determination of training effectiveness. Measurements extended to system, processes, and product. Analysis of collected data on the performance of the quality management system [FAQ 015, March 2001] Why Has the Requirement for Monitoring of Customer Satisfaction Been Included in ISO 9001? Customer satisfaction is recognized as one of the driving criteria for any organization. In order to evaluate if the product meets customer needs and expectations, it is necessary to monitor the extent of customer satisfaction. Improvements can be made by taking action to address any identified issues and concerns. [FAQ 016, March 2001] Will the Revised Standards Improve Customer Satisfaction? The quality management system described in the revised standard is based on quality management principles that include the process approach and customer focus. The adoption of these principles should provide customers with a higher level of confidence that products will meet their needs and increases their satisfaction. [FAQ 017, March 2001] What is a Process? Any activity or operation, which receives inputs and converts them to outputs, can be considered as a process. Almost all activities and operations involved in making a product or providing a service are processes. For organizations to function, they have to define and manage numerous inter-linked processes. Often the output from one process will directly form the input into the next process. The systematic identification and management of the various processes employed within an organization, and particularly the interactions between such processes, may be referred to as the process approach to management. The revised quality management system standards are based on just such a process approach, in line with the guiding quality management principles. [FAQ 018, March 2001] What is Meant by Continual Improvement? Continual improvement requires an organization to focus on continually increasing the effectiveness and/or efficiency of its processes, to fulfill its policies and objectives. Continual
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improvement (where continual highlights that an improvement process requires progressive consolidation steps) responds to the growing needs and expectations of customers and ensures a dynamic evolution of the quality management system. [FAQ 019, March 2001] How Will the Implementation of the New Standards Help My Organization to Improve its Efficiency? ISO 9001:2000 aims at guaranteeing the effectiveness (but not necessary the efficiency) of the organization. For improved organizational efficiency, however, the best results can be obtained by using the new ISO 9004:2000 in addition to ISO 9001:2000. The guiding quality management principles are intended to assist an organization in continual improvement, which should lead to efficiency throughout the organization. [FAQ 020, March 2001] How Will the Revised Standards Improve the Perception of ISO 9001 Certification/Registration? By demonstrating to organizations that the process of certification based on the new ISO 9001 standard adds value to their own business goals, a market-wide improvement in the perception of ISO 9001 certification should be developed. The rationale behind the revision process places great emphasis on making quality management systems closer to the processes of the organization and on continual improvement. As a result, the revised standards (ISO 9001:2000 and ISO 9004:2000) are directed to the achievement of business results, including satisfaction of customers and others. There is confidence that management of the organization will be able to adopt the quality management system standards not only for certification purposes, but also as a profitable investment. [FAQ 021, March 2001] What Will Happen to the Guideline Documents (e.g., ISO 9000-3, ISO 9004-2) in the ISO 9000 Family? The revised ISO 9001 and ISO 9004 quality management system standards have been prepared taking into account these and other guideline documents of the former ISO 9000 family. The revised standards are intended to be sufficiently generic so as to eliminate the need for specific guidance on their application. It is intended that the responsibility for some of the guideline standards (such as ISO 9000-3 and 9000-4) will be transferred to other ISO/IEC Technical Committees. It is proposed that standards such as ISO 9004-2 and ISO 9004-3 be withdrawn and other documents (e.g. ISO 10013) may become technical reports at their next revisions. ISO 10012 will remain as an international standard. This situation is currently under review by ISO/TC 176. [FAQ 022, March 2001] What Will Happen to ISO 10012-1 and ISO 10012-2? Current plans are to maintain these measurement systems standards as part of the year 2000 ISO 9000 family. A work item has been approved for the merger of 10012-1 and 10012-2 into one standard. The new ISO 10012 standard is targetted for publication in early 2002. [FAQ 023, March 2001]
What Happened to ISO 8402 and ISO 9000-1? The terms and vocabulary previously found in the ISO 8402 standard are addressed in the ISO 9000:2000 (Quality Management Systems: Fundamentals and Vocabulary) standard. The quality management concepts in ISO 9000-1 have been integrated into the ISO 9000:2000 standard. [FAQ 024, March 2001] Which Standard Will My Organization be Registered/Certified to? All organizations will be registered/certified to ISO 9001:2000. The scope of registration/certification will need to reflect clearly the activities covered by the organizations Quality Management System, and any exclusion to non-applicable requirements of the standard (through 1.2 Application) documented and justified in the quality manual. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1.2 Application.) [FAQ 025, March 2001] What Happened to the 1994 Versions of ISO 9001, 9002 & 9003 ? The year 2000 publications have superseded corresponding 1994 versions of the standards. However, noting the IAF-ISO/ CASCO-ISO/TC 176 agreement that accredited certification to the 1994 editions should remain possible for up to 3 years after the publication (i.e. until 15 December 2003) of the revised standards, copies of the 1994 editions will still be available on request from ISO and the national standards bodies during that period. [FAQ 026, March 2001] My Organization is Currently Registered/Certified to ISO 9003. What do We Need to do? There are significant differences between the ISO 9003 standard and the revised ISO 9001:2000 standard, notably in the product realization activities. You should perform a gap analysis based on the standard to determine what areas in your organizations quality management system already comply with the revised requirements. Where your current system does not address the applicable ISO 9001:2000 requirements, development and implementation of processes to ensure compliance will need to be made. [FAQ 027, March 2001] What Will Happen to My Organization if it is Currently Registered/Certified to ISO 9002:1994? The organization is not obliged to include within the scope of its certification all the products that it provides. (Note that the ISO 9000:2000 definition of Product includes services!). However, for those products that are included in the certification scope, all applicable requirements of ISO 9001:2000 will need to be addressed. The standard allows for the exclusion of some requirements (via clause 1.2 Application), but only if it can be shown that these requirements are not applicable to the organization. Exclusions are limited to Section 7 (Product Realization), and requirements may only be excluded if it can be shown that they do not affect the organizations ability to provide product which meets customer and applicable statutory/regulatory requirements. If design activities are required to demonstrate your organizations capability to meet customer or statutory/ regulatory requirements for products covered by the quality
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management system certification, then these design activities must be included in the scope of your registration/certification to the ISO 9001:2000 standard. If design activities are not required to demonstrate your organizations capability to meet customer and applicable statutory /regulatory requirements, or if your product is provided on the basis of established design, you will still be registered to ISO 9001:2000. In this case, you will need to justify the exclusion of the design and development requirements in your quality manual. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1.2 Application.) [FAQ 028, March 2001] Can Organizations Remain Certified/Registered to the 1994 Version of ISO 9001, 9002 and 9003? Although organizations are encouraged to make the transition to ISO 9001:2000 certification as soon as possible, according to the IAF/ISO-CASCO/ISO-TC 176 Communiqu on transition policy, organizations may choose to continue or even seek new certification/registration to the 1994 versions of ISO 9001, ISO 9002, and ISO 9003. Any accredited certificates issued or renewed will, however, only remain valid for a maximum of three years after the publication of ISO 9001:2000 (i.e. until 15 December 2003). [FAQ 029, March 2001] What does My Organization Need to do if it is Currently Registered/Certified to ISO 9002:1994 or ISO 9003:1994? Since publication of ISO 9001:2000, ISO 9002 and ISO 9003 are superseded. You will need to evaluate which specific requirements of ISO 9001:2000 are applicable to the nature of your business and the extent to which your present QMS meets those requirements. Provisions have been made to exclude nonapplicable requirements within Section 7 of the standard through clause 1.2 Application. If, for example, the nature of your products does not require you to perform design activities or if your product is provided on the basis of established design, you will need to discuss and justify the exclusion of these requirements with your certification/registration body. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1.2 Application.) [FAQ 030, March 2001] Will I be Able to Certify/Register My Organization to ISO 9004:2000? No. As ISO 9004:2000 is a guidance standard, it is not intended to be used for third party certification purposes. A key element in the new ISO 9004 is the ability to perform self-evaluation. Third party QMS certifications/registrations are performed to ISO 9001:2000, which has consolidated the previous ISO 9001, 9002, and 9003 standards. [FAQ 031, March 2001] How Do Certificates to the Revised ISO 9001:2000 Identify the Scope of the Quality Management System? It has always been necessary to define clearly the scope of registration/certification. The merging of ISO 9001, 9002, and 9003 into a single requirements standard (ISO 9001:2000) requires more emphasis for the scope to define the products,
services and processes covered by certification/registration. [FAQ 032, March 2001] How Will the Consistent Pair of Standards Affect a Registered/Certified Organization? The idea of a consistent pair of standards is the very core of the revision process. The aligned structure of ISO 9001:2000 and ISO 9004:2000 will encourage organizations not only to look at their activities from a process standpoint, but also to look beyond certification to a system which will be truly beneficial in improving operational performance. [FAQ 033, March 2001] What Should I do Now? You should contact your National Standards Body to obtain information. (See the ISO web site http://www.iso.ch for a listing of the member bodies, i.e. the national standards bodies, contact details). You should be careful with the information that you receive from sources other than your National Standards Body, professional associations, or ISO member organizations. It is recommended that your organization familiarize your personnel with the quality management principles, analyze the changes in the revised standards, and consider how those changes may affect your activities and related processes. [FAQ 034, March 2001] How Should My Organization Deal With the Transition to the Year 2000 Standards? Consultation on transition arrangements between ISO TC 176, ISO CASCO, and the International Accreditation Forum (IAF) in September 1999 resulted in the following agreements: Accredited certificates to ISO 9001: 2000 shall not be granted until its publication as an International Standard. Certification/registration body assessments to the latest draft of the revised standard may begin prior to publication of ISO 9001: 2000 as an International Standard. Certificates issued to the 1994 editions of ISO 9001, ISO 9002, or ISO 9003 shall have a maximum validity of three years from the date of publication of ISO 9001: 2000. ISO 9001: 2000 will require auditors and other relevant certification body personnel to demonstrate new competencies. Certification bodies will need to take particular care in defining the scope of certificates issued to ISO 9001: 2000 and the permissible exclusions to the requirements of the standard. [FAQ 035, March 2001] My Organization is Applying Now for ISO 9001 Certification/Registration. What Should I do? Continue with your plans to implement your system and to apply for certification. We strongly recommend that you read the new standards, particularly ISO 9004 in conjunction with ISO 9001, and ensure that your quality management system effectively adds value to your organizations activities. [FAQ 036, March 2001]
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How Does ISO 9001:2000 Relate to the Needs of Specific Business Sectors? The text of ISO 9001:2000 is more generic than the 1994 version in order to be applicable to different types of product and to organizations of different sizes. Due to this generic nature it may be that some industrial or commercial sectors will identify additional requirements to attend to their specific needs. To assure consistency between the ISO 9001 requirements and sector requirements, a pilot study has been conducted using the development of an automotive industry document as the test vehicle. The pilot project has successfully achieved the publication of an ISO technical specification (ISO/TS 16949). The full results of the pilot scheme, and the working methods employed, will be reviewed in due course. [FAQ 037, March 2001] How Will Interested Parties Benefit by the Organization Adopting the New ISO 9004? If the system is appropriately implemented, utilizing the eight Quality Management Principles, all the interested parties will benefit from ISO 9004. Customers and users will benefit by receiving the products (see ISO 9000:2000) that are: Conforming to the requirements Dependable and reliable Available when needed Maintainable People in the organization will benefit by: Better working conditions Increased job satisfaction Improved health and safety Improved morale Improved stability of employment Owners and investors will benefit by: Increased return on investment Improved operational results Increased market share Increased profits Suppliers and partners will benefit by: Stability Growth Partnership and mutual understanding Society will benefit by: Fulfillment of legal and regulatory requirements Improved health and safety Reduced environmental impact Increased security [FAQ 038, March 2001] How Will a Small Organization be Able to Adapt the Requirements of the Standard? What Flexibility Will be Allowed? The requirements of the revised ISO 9001 are applicable to small, medium, and large organizations alike. ISO 9001:2000 provides some flexibility, through clause 1.2 Application, on
the exclusion of certain requirements for specific processes (i.e. those covered by clause 7, such as design activities) that may not be performed by the organization. However, the individual organization will still need to be able demonstrate its capability to meet customer and applicable statutory or regulatory requirements for its products, and will need to consider this when determining the complexity of its quality management system. [FAQ 039, March 2001] What Will Happen to the ISO Handbook: ISO 9000 for Small Businesses? The small business handbook was published by ISO in 1996 and was intended to provide guidance from ISO/TC 176 for the 1994 versions of ISO 9001, ISO 9002, and ISO 9003. ISO 9001:2000 applies a more generic approach, devoid of the hardware and manufacturing bias of the current standard, and is designed to be much more user-friendly for smaller organizations. ISO/ TC 176/SC2 will be revising the Small Business Guide during 2001. [FAQ 040, March 2001] Whats the Relationship Between the Revised ISO 9001 and ISO 14001? The revised ISO 9001 has been developed to enhance compatibility with ISO 14001 Environmental management systems, particularly with regard to terminology and content. There is close collaboration between the technical experts of ISO/TC 176 and ISO/TC 207 (the Technical Committee responsible for the ISO 14000 series of standards). A recent review of ISO 14001 and ISO 14004 by ISO/TC 207/ SC 1 has led to the initiation of a revision of those standards. This will provide the opportunity for further enhancement of the compatibility between the ISO 9000 and ISO 14000 standards. [FAQ 041, March 2001] Are There Any Guidelines Covering Joint Implementation of ISO 9001 and ISO 14001? It is expected that the revisions of the two standards will be compatible in terminology and content. It is not expected that an ISO guideline will be prepared on this subject at the present time. If the need for such a document arises, ISO will consider the request as a new project. For the quality and environmental auditing guidance standards (ISO 10011 and ISO 14010/14011/14012), the two responsible ISO technical committees (TC 176 and TC 207) are preparing a single common auditing standard (ISO 19011), scheduled for publication in the third quarter of 2002. [FAQ 042, March 2001] Will There be a Common Guideline Standard for Auditing QMS and EMS According to ISO 9001 and 14001? Yes. A specific agreement between the two ISO Technical Committees (TC 176 and TC 207) has set up a joint working group to prepare a single standard on auditing activities, both for quality management and environmental management systems. This new standard (ISO 19011) will replace the existing ISO 10011 and ISO 14010/14011/14012 documents. The planned publication date for this standard is the third quarter 2002. [FAQ 043, March 2001]
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My Organization Provides Services. How are the New Standards Applicable to Us? The standards are applicable to all types of organizations. The language in the revised standards is simpler, more user-friendly, and with less manufacturing bias. The new standards are equally appropriate to all sectors, including service providers. (Note: the definition of the term product in ISO 9000:2000 also includes services. ISO 9001:2000 and ISO 9004:2000 have been written to reflect this definition.) [FAQ 044, March 2001] I am a Qualified Quality Management Practitioner (Consultant, Auditor, or Trainer). What do I Need to do? As a minimum, you should familiarize yourself not only with the requirements of the new ISO 9001:2000, but also with the content and philosophies of ISO 9000:2000, ISO 9004:2000 and the quality management principles. You must clearly understand your clients activities and processes and appropriately interpret the requirements of the standards to add value to their operations. [FAQ 045, March 2001] My Organization is a Regulatory Body. What do We Need to do? You should review the regulations currently in effect and ensure that any references to the quality management system standards are appropriate. You should then examine the revised standards and determine if the changes are relevant to the regulations that you have issued and make recommendations to the legislative body. [FAQ 046, March 2001] What Needs to be Done to Ensure that Auditors are Ready to Work to the Revised Standards? Auditors, whether external or internal, will have to demonstrate their competence not only on the structure, content and terminology of the revised standards, but also on the underlying quality management principles. The revised standards require that auditors are able to understand the organizations activities and processes and appropriately audit against the requirements of the standard in relation to the organizations objectives. According to the IAF/ ISO-CASCO/ ISO TC 176 Transition Policy, auditors must demonstrate competency in: The requirements of the ISO 9001:2000. The concepts and terminology of the ISO 9000:2000. The eight Quality Management Principles A general understanding of the performance improvement guidelines of ISO 9004:2000 Familiarity with the latest draft of the auditing guidance standard (ISO 19011). [FAQ 047, March 2001] Where can I Find a Competent Speaker to Make a Presentation on the Revised Standards? ISO cannot provide speakers for individual organizations, but has a register of experts, with language skills, who would be willing to make presentations to industry groups, regional conferences, etc. based on the remuneration of expenses only. You should contact the Secretary of ISO/TC 176/SC2 (charles_corrie@bsi-global.com) for further information. [FAQ 048, March 2001]
Notes:
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LESSON 19: INTRODUCTION TO BASIC JOB EVALUATION METHODS/SYSTEMS &PACKAGED POINT PLANS
Job Evaluation and Internal Equity According to this method, the ranking for a university may be like thus. Table 1.2 : Ranking of University Personnel Ranking Order Professor Associate Professors Assistant Professors Registrar Dy. Registrar Assistant Registrar Clerk Grade I Clerk Grade II Class Four Servants Pay Scale Range Rs.5000-8000 Rs. 4000-7000 Rs.35006000 Rs. 4000-7000 Rs.3500-5000 Rs. 3000-4500 Rs. 1000-2500 Rs. 900-1800 Rs. 500-800
Learning Objective

Introduction to Basic Evaluation Systems To know Four Basic, Traditional Systems of Job Evaluation To understand the Ranking System To understand the Grading or Job Classification System To understand the Point System To understand the Packaged Point Plans To understand the Factor Comparison System
Basic Job Evaluation methods/systems:

Write Introduction Four Basic, Traditional Systems Of Job Evaluation There are four basic, traditional systems/mehtods of job evaluation: 1. The ranking system; 2. The grading or job classification system; 3. The point system; and 4. The factor comparison system. The first two systems are popularly known as the non-analytical or non-quantitative or summary systems, because they utilize non-quantitative methods of listing jobs in order of difficulty and are, therefore, simple. The last two systems are called the analytical or quantitative systems, because they use quantitative techniques in listing the jobs. They are more complex and are time consuming. The principal differences between these methods reflect: 1. Consideration of the job as a whole, versus consideration of compassable factors; and 2. Judging and comparing jobs with each Other rather than assigning numerical scores on a rating scale. The Plans commonly used today represent variations of these basic methods:
After ranking, additional jobs between those already ranked may be assigned an appropriate place/wage rate. Generally speaking, the following five steps are involved in system: Step 1: Preparation of job description, particularly when the ranking of jobs is done by different individuals and there is a disagreement among them. Step 2: Selection of Raters, jobs may be usually ranked by department or in Clusters (i.e., factory workers, clerical workers, menials, etc). This eliminates need for directly comparing factory jobs and clerical jobs. Most organizations use a committee of raters. Step 3: Selection of rates and key jobs, usually a series of key jobs or bench-mark jobs (10 to 20 jobs, which include all major departments and functions) are first rated; then the other jobs are roughly compared with these key jobs to establish a rough rating. Step 4: Ranking of all jobs. Each job is then compared in detail with other similar jobs to establish its exact rank in the scale. For this each rater may be given a set of index card, each of which contains a brief description of a job. These jobs are then ranked from lowest to highest or from highest to the lowest are ranked first and then the next highest and next lowest and so forth until all the cards have been ranked. Step 5: Preparation of job classification from the rating: The total ranking is divided into an appropriate number of groups or classifications, usually 8 to 12. All the jobs within a single group or classification receive the same wage or range of rates. The ranking system of job evaluation usually measures each job in comparison with other jobs in terms of the relative importance of the following five factors:
The Ranking System

Mechanism: Under this system, all jobs are arranged or ranked in the order of their importance from the simplest to the hardest, or in the reverse order, each successive job being higher or lower than the previous one in the sequence. It is not necessary to have job descriptions, although they may be useful. Sometimes, a series of grades or zones are established, and all the jobs in the organization are arranged into these. A more common practice is to arrange all the jobs according to their requirements by rating them and then to establish the group or classification. The usually adopted technique is to rank jobs according to the whole job rather than a number of condensable factors.
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i.
Supervision and leadership of subordinates;
ii. Co-operation with associates outside the line of authority; iii. Probability and consequences of errors (in terms of waste, damage to equipment, delays, complaints, confusion, spoilage of product, discrepancies, etc.); iv. Minimum experience requirement; and v. Minimum education required; Merits i. The system is simple, easily understood, and easy to explain to employees (or a union). Therefore, it is suitable for small organisations with clearly defined jobs.
After establishing the grade level, each job is assigned to an appropriate grade level on the basis of the complexity of duties, non-supervisory responsibilities and provisory responsibilities. iii. Selection of grades and key jobs. About 10 to 20 jobs are selected, which elude all the major departments and functions and cover all the grades. iv. Grading the key jobs. Key jobs are assigned to an appropriate grade level and their relationship to each other studied. v. Classification of all jobs. Jobs are classified by grade definitions. All the jobs in e same grade receive the same wage or range of rates. For example, menials may be put into one class; clerks in another; junior officers in a higher class; and the top executive in the top class. Table 1.3 gives us the gradations of five classes designed by a title label and increasing in value. Table 1.3 Grades Clerk Grade III Description of Job Classification Pure routine concentration, speed and accuracy, works under supervision; may or may not be held responsible for supervision. No supervision by others, specially skilled for the job by having an exhaustive knowl edge of the details. Must have the characteristics of a second class clerk and assume more responsibility. Technically varied work, occasionally indepen dent thinking and action due to difficult work which require exceptional clerical ability and extensive knowledge of principles and fundamentals of the business of his department. Not charged with the supervi sion of others to any extent; works subject to a limited check; dependable, resourceful and able- to take decisions. Those handling or capable of taking a major decision on the work they do; complicated work requiring much independent thinking; able to consider details outside the control.
ii. It is far less expensive to put into effect than other systems, and requires little effort for maintenance. iii. It requires less time, fewer forms and less work, unless it is carried to a detailed used by company. Demerits i. As there is no standard for an analysis of the whole job position, different bases of comparison between rates occur. The process is initially based on judgment and, therefore, tends to be influenced by a variety of personal biases.
ii. Specific job requirements (such as skill, effort and responsibility) are not normally analyzed separately. Often a raters judgment is strongly influenced by present wage iii. The system merely produces a job order and does not indicate to what extent lore important than the one below it. It only gives us its rank or tells us that it is r or more difficult than another; but it does not indicate how much higher or more lit.
Clerk Grade II
Clerk Grade I
Job Classification or Grading Method

Under this system, a number of pre-determined grades or classifications are first established by a committee and then the various jobs are assigned within each grade or Grade descriptions are the result of the basic job information which is usually ed from a job analysis. After formulating and studying job descriptions and job specifications, jobs are grouped into classes or grades which represent different pay levels ranging from low to high. Common tasks, responsibilities, knowledge and experience can identified by the process of job analysis. Certain jobs may then be grouped together a common grade or classification. General grade descriptions are written for each classification, and finally these are used as a standard for assigning all the other jobs particular pay scale. Mechanism: The following five steps are generally involved: i. The preparation of job descriptions, which gives us basic job information, usually derived from a job analysis. ii. The preparation of grade descriptions, so that different levels or grades of jobs IY be identified. Each grade level must be distinct from the grade level adjacent to it; the same time, it should represent a typical step in a continuous way and not a big jump or gap.
Senior clerk
Head clerk
Merits i. This method is simple to operate and understand, for it does not take much time or require technical help.
ii. The use of fully described job classes meets the need for employing systematic criteria in ordering jobs to their importance. Since many workers think of jobs in, or related to, clusters or groups, this method makes it easier for them to understand rankings.
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iii. If an organization consists of 500 people holding to different jobs, the jobs might be broken up into perhaps 5 classes, arranged in order of importance from high to low, and described class by class. This class description broadly reflects level of education, mental skill, profit impact or some combination of these. iv. The grouping of jobs into classifications makes pay determination problems administratively easier to handle. Pay grades are determined for, and assigned to, all the job classification. v. It is used in important government services and operates efficiently; but it is rarely used in an industry. Demerits This system suffers from the following defects: i. Although it represents an advance in accuracy over the ranking method, it still leaves much to be desired because personal evaluations by executives (unskilled in such work) establish the major classes, and determine into which classes each job should be placed.
Table 1.4 : Clustering of 22 Occupations on the basis of Common Factors in Five Groups (after Gonyea and Lunneborg) A Business group Includes buyer, office manager, personnel manager, interior decorator, Insurance salesman, accountant, and secretary. Includes aviator, automobile mechanics, surveyor, radio opera tor, policeman and engineer. Artist, writer, interior decorator. Policeman, social worker, lawyer, physician, personnel counseller. Medical lab technician, chemist, physician, engineer, auto mechanic and wire less operator.
B- Masculine group
C- Aesthetic Group D- Service group
E Scientific Group
ii. Since no detailed analysis of a job is done, the judgement in respect of a whole range of jobs may produce an incorrect classification. iii. It is relatively difficult to write a grade description. The system becomes difficult to operate as the number of jobs increases. iv. It is difficult to know how much of a jobs rank is influenced by the man on the job. v. The system is rather rigid and unsuitable for a large organisation or for very varied work.
Step 2: For the purpose, a pre-determined number of factors are arbitrarily selected by raters. The number of factors used varies a great deal from company to company, ranging from as few as 3 to as many as 50, although most companies use less than 15. Sometimes, only three factors Gob conditions, physical ability and mental requirements) be used. Another company may use 4 factors (skill, effort, responsibility and job conditions). As far as possible, the factors selected are such as are common to all the jobs. The common factors are: Education and training; experience; physical skills and t; planning for the supervision of others; external contacts, internal contacts; confidential information and working conditions. Moreover, the factors which overlap in their meaning avoided and factors which are unique and relative to each other described in terms of varying degrees. They should also be so defined and described that everyone associated with the plan gets the same meaning of the words that are used. Step 3: The next step is to break down each factor into degrees or levels, and to assign a point value to each level or degree. For example, experience, which is one of the most commonly used job factors, may be sub-divided into 5 degrees. The first degree, three months or less may be assigned 5 points; the second degree, 3 to 6 months, given 10 points, the third degree, 6 to 12 months, assigned 15 points; the fourth degree 1 to 3 years, assigned 20 points; and the fifth degree is over 3 years, and is assigned 25 points. This same procedure is followed for each factor at each level or degree represented by an appropriate number of points. The point to note is that the major factors are assigned total points and that each of these factors is broken up into sub-groups (with written definitions for each), and these sub-groups are
The Points System

This method is the most widely used type of job evaluation plan. It requires identifying a number of compassable factors (i.e., various characteristics of jobs) and then determining degree to which each of these factors is present in the job. A different of points is usually assigned for each degree of each factors. Once the degree factor is determined, the corresponding number of points of each factor are added and overall point value is obtained. The point system is based on the assumption possible to assign points to respective factors which are essential for evaluating individuals job. The sum of these points gives us an index of the relative significance of the jobs that are rated. Mechanism: This system requires a detailed examination of the jobs. The steps in this method followed are: Step 1: The jobs have to be determined first which are to be evaluated. They are clustered. The jobs which require: i. similar activities, ii. the same workers characteristics or traits (corresponding machines, tools, materials and instruments) and n the same kind of material (say wood or metal are placed in the same cluster or family. Gonyea and Lunneborg have clustered 22 occupations in five groups, based 11m on factors in five groups.
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assigned points within the total established for the major group. Le Tourneau has given an example of job work point rating scale. Chart 1.5
Some Items from the rating system developed by Le Tourneau with the scale values assigned to different factor (indicated by numbers) Rated by........ Job .............................. Department ........................... Factor I. Education School Check the Correct Item for Each Factor College 5 II. Experience. Over 12 Months 12 III. Learning Period Over 3 yrs. 10 IV. Mental Effort Very High 5 V. Mechanical Ability Very High 5 VI. VII. Physical Effort Job Conditions A,B,C,D 10 A 10 VIII. Hazards IX. Responsibility Equipment x. xI. XII XIII Responsibility Responsibility Complexity Effect on Attention to operations Know other operation Coordination Very High 5 Over $ /----50 M 5 Over 16 Persons Over $60M 5 very High 5 very High 5 Very High 5 Very High 5 Very High I 5 High 4 9 to 12 Months 12 1 to 3 yrs. 8 High 4 High 4 E,F,G 8 B,C 8 High 4 $ 50 M 4 11 to 15 5 Elem. Maths 3 6 to 9 Months 9 6 months to 1 yr. 6 Average 3 Average 3 H,I,J 6 D,E 6 Average 3 Addl Subjects 2 3 to 6 Months 6 3 months to 6 months 4 Below Average 2 Below Average .2 K,L 4 F,G 4. Below 2 $1 M to $1OM 2 2 to 5 3 $ 1M to $10 M 2 Below Average 2 Below Average 2 Below Average 2 Below Average 2 Below Average 2 1 M 2 H,I 2 Slight 1 Less $ 1M 1 1 2 Less $ 1 M Slight I Slight 1 Slight 1 Slight 1 Slight 1 1 Slight Read & Write 1 1 to 3 Months 3 1 to 3 months 2 Low/Slight Date... ...... ...........
$ 25 M to $ 10 M to $ 25 M 3 6 to 10 4 $10 m to $25 M to $ to 25M M4 5 High Average 4 3 High 4 High 4 High 4 High 4 Average 3 Average 3 Average 3 Average 3
XIV XV XVI
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Generally speaking, the four job factors common to the point method of job rating Ire skill, effort, responsibility and job conditions. The relative values of these are skill, 50 per cent; effort, 15 per cent; responsibility, 20 per cent; and job conditions, 15 per cent. Step 4: Determination of relative values or weights to assign to each factor. For each job or cluster of jobs some factors are more important than others. For example, or executives, the mental requirements factor would carry more weight than physical requirements. The opposite might be true of factory jobs. Step 5: The next step is to assign money values to points. For this purpose, points Ire added to give the total value of a job; its value of a job; its value is then translated into, terms of money with a pre-determined formula. Table 1.6 shows the job points translated into job rupees. Point Range 101-150 165-200 201-250 251-300 301-350 351-400 401-450 451-500 Hourly Basic Rate Range Rs. 6 to 10 Rs. 8 to 12 Rs. 10 to 15 Rs. 15 to 20 Rs. 20 to 25 Rs. 25 to 30 Rs. 30 to 35 Rs. 35 to 45 Job Grade 1 2 3 4 5 6 7 8
Table 1.7 Job Elements and Degree Value Points Assigned to Each Factor and Key to Grades (for Machine Operators) Factors 1. Skill: (i) Education (ii) Experience (iii) Initiative and Ingenuity 2. Effort: (iv) . Physical demand . (v) Mental/ visual demand 3. Responsibility: (vi) Equipment/process (vii) Material or product (viii) Safety of others (ix) Work of others 4. Job Conditions: (x) Working conditions (xi) Hazards No. of Points 250 70 110 70 75 50 25 100 25 25 25 25 50 25 14 22 14 10 5 5 5 5 5 10 5 28 44 28 20 10 10 10 10 10 20 10 42 66 42 30 15 15 15 15 15 30 15 56 88 56 40 20 20 20 20 20 40 20 70 110 70 50 25 25 25 25 25 50 50 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
Table 1.8 Scale of Value for Education Factor in NMTA Point System
14 28 42 56 Equivalent 4 yrs H.S. +4 Yrs Trade Training 70 Equivalent 4yrs University Training
Equivalent Read, write Equivalent 4yrs add and to 2 yrs H.S. +2 subtract High School to 3 yrs Training
Sample definition of factors used in points system Packaged Point Plans Developing a point plan for an individual organization is a time-consuming process. Hence, often those evolved by famous group5 (as in America) are adopted for use. These contain ready-made factor and degree definitions and point assignments for a wide range of jobs, which can be used with little or no modification. One of the most widely accepted point systems in NMTA (National Metal Traders Association of the U.S.A.) utilizes the factors. In the NMTA point system for hourly rated jobs, skill has been given 50 per cent weight age, responsibility 20 per cent and job conditions 15 per cent. Each factor has again been divided into sub-factors, and the points allotted to each factor as distributed among the sub-factors on the basis of their relative importance in job performance. For example, the skill factor has been assigned 250 points. Out of these, its sub-factors education, experience, initiative and ingenuity - have each been assigned 70, 110 and 40 points respectively. Moreover, measurement scales have been constructed which give points and definitions of the degree of particular factor. Thus, 70 points allocated to education, have been spread over five degrees in an arithmetic progression of 14 points (Tables 1.7 and 1.8) Skill A. (acquired) Facility in muscular co-ordination, as in operating machines; repetitive Movements, careful co-ordination, dexterity, assembling, sorting etc. B. (acquired) Specific job knowledge necessary for the muscular co-ordination acquired by the performance of a job and not to be confused with general education or specialized knowledge. It is very largely training in the interpretation of sensory impressions. Examples i. In operating an adding machine, the knowledge of which key to depress for a sub-total would be a skill.
ii. In automobile repairs, the ability to determine the significance of a certain knock in the motor would be a skill. iii. In a hand firing boiler, the ability to determine from the appearance of the firebed how coal should be shovelled over the surface would be a skill. Education relates to the schooling requirements, which are essential for a satisfactory Performance of the job. The experience factor pertains to the extent of job training, which is necessary for I before he gains a satisfactory proficiency. Initiatives and ingenuity appraise the independent action, exercise of judgment, the of decisions or the amount of planning that a job requires.
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Effort In some jobs, particularly factory and other manual work more physical efforts are while in higher jobs, more of mental requirements is a must.
Physical Requirements
Consideration will have to be given to the presence, relative amount and continuity of exposures to dust, dirt, heat, fumes, cold, noise, vibrations, wetness or other unpleasant conditions. 1. Environmental influences, such as atmosphere, ventilation, illumination, noise, congestion, fellow-workers, etc. 2. Hazards from the work or its surroundings. 3. Hours. Table 1.9 gives us the points assigned to the factors in National Office Managers Association Plan. In the case of evaluation for managerial positions, the factors and sub-factors given in Table 1.10 have been used in a number of companies in the U.S.A Table 1.9 : Points Assigned to the Factors in National Office Managers Association Plan 1. Elemental - 250 points 2. Skill - 500 points a. General of special education b. Training time on job c. Memory d. Analytical ability e. Personal contact f. Dexterity g. Accuracy 3. Responsibility - 200 points a. For company property b. For procedures c. Supervision 4. Effort - physical work - 50 points a. Place of work b. Cleanliness of work c. Position d. Continuity of work e. Physical or mental strain 5 5 10 15 15 75 125 50 160 40 40 95 35 80 50
Physical efforts; sitting, standing, walking, climbing, pulling, lifting; both the amount exercised and degree of continuity should be taken into account. :) Physical status, including age, height, weight, sex, strength and eye-sight.
Mental Requirements
Either the possession of and/or the active application of the following: 1. (inherent) Mental traits, such as intelligence, memory, reasoning, facility for verbal expression, ability to get along with people and imagination. 2. (acquired) General education, such as knowledge of grammar and arithmetic; general information as to sports, world events, etc. 3. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc. Responsibility The responsibility factor, for different items, measures responsibility for preventing damage to machinery or equipment which may result from error or negligence, and also measures the probability of damage to materials, parts in process or finished goods. For raw materials, processed materials, tools, equipment and property.

For money or negotiable securities. For profit or loss, savings or methods improved. For public contacts. For records. For supervision. Primarily, it means the complexity of supervision given to subordinates; the number of subordinates is a secondary feature. Planning, direction, coordination, instruction, control and approval characterize this kind of supervision.
i.
ii. The degree 9f supervision received. If jobs A & B gave no supervision to subordinates, but job A receives a much closer immediate supervision than B, then B would be entitled to a higher rating than A in the supervision factor. To summaries the four degrees of supervision: Highest degree High degree Low degree Lowest degree Gives much, gets less. Gives more, gets much. Gives none, gets little. Gives none, get much.
Table 1.10 : Factors and sub-factors used in Companies in the USA i. Know-how Requirement of duties Knowledge Planning required Mental application Understanding required ii. Responsibilities Initiative Accountability For personal relations For making policies For policy interpretation
Working Conditions The working conditions factor appraises the surroundings or physical conditions under which a job must be done and the extent to which such conditions make the job disagreeable.
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Administration Original thinking Creative ability Managerial techniques iii. Relationships Supervision exercised Demand for leadership Influence on policy-making Influence on method Table 1.11 : In U.K., the Factors Used by Imperial Chemical Industries Ltd.
Mental Requirement Good memory Ability to reason Speed of reaction Even temperature. Perseverance Mechanical sense Initiative Disparate attention Ability to visualize Physical Strength Muscular strength stamina agility sensory accuracy Acquired skills and Knowledge Education Training Experience Working Conditions (a) Physical: vibration, position, Fumes, Small, Dust, Dirt, Heat, Cold , Change Wetness, Clothing & Equipment, poor Light Exposure
III.Factors Special to Jobs Predominantly Intellectual: 13. Responsibility for mistakes 14. Responsibility for judgment lV. Supplementary Factors for Management Jobs: 15. Responsibility for authority 16. Human responsibility V. Factors Relating to Environmental Conditions: 17. Factors of environment
Source: I.L.O. Job Evaluation
For German Democratic Republic and Federal Republic of Germany, the factors used are: Table 1.13 :
German Democratic Republic Federal Republic of Germany
1.Knowledge and experience 2.Mental effort 3. Physical effort 4. Responsibility for others 5. Responsibility for equipment 6. Job conditions: (a) temperature (b) water, oil, grease, dust, etc (c) gas, acid, poison, etc (d) noise, glare, etc.
1. Training and experience 2. Skill, dexterity 3. Bodily strain 4. Mental strain 5. Nervous strain 6. Responsibility 7. Job Conditions: (a) temperature oil, grease, dirt,dampness, etc. (b) dust (c) accident hazards (d) gas, noise, cold, darkness, etc 8. Unsupervised work.
Sense of responsibility
(B) Mental: Noise, height, below Ground isolation, Monotony, nervours Tension, accident Risk Disease Risk
(e) risk of accident
(Source: I.L.O. Ibid., pp. 137-139).
Merits The system enjoys the following, merits: 1. It gives us a numerical basis for wage differentials; by analysis a job by factors it is usually possible to obtain a high measure of agreements on job value. 2. Once the scales are developed, they can be used for a long time. 3. Jobs can be easily placed in distinct -categories. 4. Definitions are written in terms applicable to the type of jobs being evaluated, and these can be understood by all. 5. Factors are rated by points which make it possible for one to be consistent in assigning money values to the total job points. 6. The workers acceptance of the system is favorable because it is more systematic and objective than other job evaluation methods. 7. Prejudice and human judgment are minimized, i.e., the system cannot be easily manipulated. 8 It has the ability of handling a large number of jobs and enjoys stability as long as the factors remain relevant. The availability of a number of ready-made plans probably accounts for the wide points plans in job evaluation.
In France, the factors used for job evaluation scheme for manual workers at Telemecanique Electriue Plant, Nanterre, are: Table 1.12 I. Factors Common to all Jobs: 1. Training 2. Adaptation 3. Difficulties of the Job 4. Physical Effort 5. Mental Tension 6. Job Risks 7. Discretion 8. Human Contacts within the Company 9. Human Contacts outside the Company II. Factors Special to Jobs Predominantly Manual: 10. Responsibility for tools 11. Responsibility for products 12. Responsibility for the Safety of others
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Demerits The drawbacks of the system are: 1. The development and installing of the system calls of heavy expenditure. 2. The task of defining job factors and factor degrees is a timeconsuming and difficult task. 3. If many rates are used, considerable clerical work is entailed in recording and summarizing the rating scales. 4. It is difficult to determine the factor levels within factors and assign values to them. It is difficult to explain to supervisors and employees. Workers find it difficult to fully comprehend the meaning of concepts and terms, such as factors, degrees and points. Inspite of these drawbacks, this system is used by most organizations because its greater accuracy possibly justifies the large expenditure of time and money.
These key jobs serve as standards against which all other jobs are measured. They are selected in such a way that they cover the range from the low to the high paid jobs. Besides, such jobs must be those on the pay of which analysts and executives do not disagree. Again, they should be definable in accurate and clear terms. Usually 10 to 30 jobs are picked up as key jobs. Step 3 Ranking of Key Jobs: Several different members of the job Evaluation Committee rank the key jobs on each of the five factors (mental requirements, physical requirements, skill, responsibility, and working conditions). Ranking is made individually and then a meeting held to develop a consensus (among raters) on each job. Mental requirements involve inherent mental trait (such as memory, intelligence, reasoning, ability to get acquired education, and acquired specialization of education or knowledge). Physical Requirements consist of physical effort (climbing, pulling, walking and lifting); and physical conditions (age, height, weight, sex, eye-sight and strength); skill requirements are concerned with acquired facility in muscular co-ordination, assembling, sorting, and dexterity of fingers; and acquired job knowledge for an effective performance of the job. Responsibility involves responsibility for raw and processed materials, tools, equipment and property; money securities; profit and loss; supervision; and maintenance of records. Working Conditions include atmospheric conditions (illumination, ventilation, noise, congestion); hazards of work and its surroundings; and hours of work. Step 4 Valuing the Factors: The basic pay for each key job is allocated to each factor. Pay for such jobs should range from about the lowest to, at or near the highest, and there must be complete agreement on job selected. Usually, 15 to 20 jobs are chosen against which to evaluate all the other jobs. Step 5 Comparing all. Jobs with Key Jobs: All the other jobs are then compared with the key jobs, factor by factor, to determine their relative importance and position in the scale of jobs, to determine also their money value. This identical process is repeated for all the other factors. The pay rate assigned to a job is obtained by adding the determined amounts as indicated by the money values shown in the five scales that individually set a job money value in relative comparison to fixed key jobs. Step 6 Establishing the Monetary Unit Value for all Jobs: Monetary values are assigned to each factor of every key job. This should reflect a range from the lowest to the highest.
The Factor Comparison Method

Under this system, jobs are evaluated by means of standard yardstick of value. It entails deciding which jobs have more of certain condensable factors than others. Here analyst or the Evaluation Committee selects some key or benchmark jobs for which there are clearly understood job descriptions and counterparts in other organisations, and for which the pay rates are such as are agreed upon and are acceptable to both management and, labour. Under this method, each job is ranked several times once each condensable factor selected. For example, jobs may be ranked first in terms of factor skill. Then, they are ranked according to their mental requirements. Next they ranked according to their responsibility, and so forth. Then these ratings are combined for each job in an over-all numerical rating for the job.
Mechanism
The major steps in this system consist of the following: Step 1 Clear-cut job descriptions are written and job specifications then developed: Preferably in terms of condensable factors. The people writing job specifications are generally Provided with a set of definitions which have been used in each of the condensable factor selected. Usually five factors are used: 1. Mental requirements, 2. Physical requirements; 3. Skill requirements; 4. Responsibility and 5. Working conditions. These factors are universally considered to be components of all the jobs. Step 2 Selecting of Key-Jobs: Such jobs are those jobs which represent the range of jobs under study; and for which pay is determined to be standard or reference points and for which there is no controversy between the management and the employees.
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Table 1.14 : Factors used in a Typical System

Cents per hour 200 180 160 140 120 100 60 50 25 Mental Requirement Toolmaker* Toolmaker Skill requirements Labourer Physical requirement Electrician Toolmaker* Machinist Electrician! Assembler! Inspector Labourer! Responsibility Working conditions
iii. Money rates, when used as a basis of rating, tend to influence the actual rate more than the abstract point. iv. The system is complex and cannot be easily explained to, and understood by, every day non-supervisory organizational employee. v. The use of five factors is a growth of the technique developed by its originations. Yet using the same five factors for all organizations and for all jobs in an organization may not always be appropriate.
Inspector* Toolmaker * Toolmaker* Inspection Electrician Machinist! Assembler! Labourer!
Electrician* Machinist! Assembler! Inspector Labourer!
Machinist* Inspector Assembler!
Machinist Electrician Assembler! Labourer!
* !
Indicates key job Indiactes non-key or unanalyzed job
The following example will clearly show how the system works: Suppose job E and job A are similar in skill (Rs. 3.00); job B in responsibility (Rs.85); job C in effort (Rs. 1.40); and job D in working condition (Rs. 1.20); then its correct rate of pay will be Rs. 6.45, i.e., the sum total of all. Table 1.15 : Key Jobs, Job Factors and Correct Rates of Jobs
Job factor 1. Skill 2. Effort 3. Responsibility 4. Working Conditions Job A correct Rate:Rs 20 10 5 3 2 Job B correct Rate:Rs 16 8 3 1 4 Job C correct Rate:Rs 14 7.50 4 1 1.50 Job D correct Rate:Rs 12 5 4 1 2 Job E correct Rate:Rs 24 11 6 4 3
This system is usually used to evaluate white collar, professional and managerial positions. Merits This system enjoys the following benefits: i. It is a systematic, quantifiable method for which detailed step by step instructions are available.
ii. Jobs are compared to other jobs to determine a relative value. iii. It is a fairly easy system to explain to employees. iv. There are no limits to the value which may be assigned to each factor. v. The plan does not require a translation from points to money. It involves a comparative process wherein jobs are priced against other jobs rather than against some established numerical scale. vi. The reliability and validity of the system are -greater than the same statistical measures obtained from group standardized job analysis plans. vii. The limited number of factors (usually 5) tends to reduce the possibility of overlapping and over-weighting of factors. Demerits The system suffers from the following shortcomings: i. It is costly to install, and somewhat difficult to operate for anyone who is not acquainted with the general nature of job evaluation techniques. ii. Wage levels change from time to time, and their minor inconsistencies may be adjusted to bring all the jobs into alignment. Jobs in which discrepancies are too wide are discarded as key jobs.
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LESSON 20: INTRODUCTION TO IMPLEMENTATION OF EVALUATED JOB


To understand the Essentials of Success of Job Evaluation Programmes To know the Advantages of Job Evaluation To learn the Limitations of Job Evaluation To understand the Implementation of the Evaluated Job Structure To know the Suggestions for improving of the Job Evaluation Programs
According to the findings of the International Relations Sections of the Princeton University, the following conditions are necessary for the successful operation of a job valuation programme: a. It must be carefully established by ensuring that: i. The managements aims are clear to all concerned and that not only the manual workers but also all levels of supervision and management employees fully understand its implications; and
Essentials of Success of Job Evaluation Programs

When it is finally decided to install a formal system of job evaluation irrespective which system is decided upon, the utmost care must be exercised to ensure that Human as well as technical aspects are taken into account. In order that a job evaluation system works efficiently, it is necessary that all those to are concerned with job evaluation should be fully conversant with the techniques d implications of the different available systems. Otherwise, the chances of success are doubtful. The following measures may be adopted: i. Supervisors should have full knowledge of the system. They should understand it, and be able to explain to their workers the purpose of the plan and how it works. They must accept the desirability of the plan, for if they are not convinced that it is useful, they will certainly not be able to convince the employees. ii. Supervisors as a group should receive a thorough training in advance of the actual introduction of the plan to enable them to explain the policies, principles and procedures to anyone who wants to understand them. iii. The management must give the widest publicity to every phase of the programme, utilizing employee publications, notice boards, departmental meetings and letters to employees homes. iv. Separate pay structures should be maintained for major groups of employees. For example, it would be difficult to work out a plan equally applicable to factory workers, office workers, salesmen, and departmental heads. The wages that are offered must be at or about the prevailing rate in order that there may be a successful competition for capable people. v. Whatever plan or system is selected for each group will arouse some fears or apprehensions. To overcome these, the details of the administration of the plan should be as simple as possible, and the management should endeavor to involve a broad range of employees from a number of departments.
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All the relevant internal and external factors have been taken into account in arriving at the final form of the scheme. b. It must have the full approval and continued support and backing of the top management. c . It must have obtained the acceptance of trade unions. d. Adequate administrative control must be set up to ensure: i. ii. iii. iv. a centralized coordination of the scheme; the evaluation of new and changed jobs; a proper control of individual rate ranges; and the conduct of wage surveys to provide the necessary information about the intra-plant ranges.
ii.
e. The importance of factors, other than job content, in wage rate determination (employment market conditions, sex, wage differentials, geographical wage differentials, and the relative bargaining power of the management and the trade union) must be recognized and taken into consideration while launching a job evaluation programme. f. Before launching a job evaluation programme, certain issues should be decided beforehand. There are: i. which category of employees are to be covered (i.e., whether hourly paid job or salaried job employees) and up to what range? who will evaluate a job outside consultants or trade analysts or the personnel of the personnel department? How will the employees be consulted in regard to the method of putting the programme through? and does a proper atmosphere exist for launching of the programme?
ii.
iii. iv.
Advantages of Job Evaluation

Knowles and Thomson state that job evaluation is useful in eliminating many of the evils to which nearly all systems of wage and salary payments are subject. These are: i. Payment of high wages and salaries of persons who hold jobs and positions not requiring great skill, effort and responsibilities;
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ii. Paying beginners less than they are entitled to receive in terms of what is required of them; iii. Giving a raise to persons whose performance does not justify the raise; iv. Deciding rates of pay on the basis of seniority rather than ability; v. Payment of widely varied wages and salary for the same or closely related jobs and positions; and vi. Payment of unequal wages and salaries on the basis of race, sex, religion or political differences. It may, however, be noted that a job evaluation system does not accomplish all the purpose; rather it facilitates them. Basically, it provides a systematic catalogue of the jobs in an organisation, which is indispensable for management purposes. I.L.O., Publication Claims Following Advantages for Job Evaluation i. Job evaluation is a logical and, to some extent, an objective method of ranking jobs relative to one another. It may help in. removing inequalities in existing wage structures and in maintaining sound and consistent wage differentials in a plant or industry. In the case of new jobs. the method often facilitates fitting them into the existing wage structure.
iii. A job evaluation frequently favours groups different from those, which are favoured by the market. This is evident from the observations of Kerr and Fisher. They observe, the jobs which tend to rate high as compared with the market are those of janitor, nurse and typist, while craft rates are relatively low. Weaker groups are better served by an evaluation plan than by the market; the former places the emphasis not on force but on equity. iv. Job factors fluctuate because of changes in production technology, information system, and division of labour and such other factors. Therefore, the evaluation of a job today is made on the basis of job factors, and does not reflect the time job value in future. In other words, continuing attention and frequent evaluation of a job are essential. v. Higher rates of pay for some jobs at the earlier stages than other jobs or the evaluation of a higher job higher in the organizational hierarchy at a lower rate than another job relatively lower in the organizational hierarchy often give rise to human relations problems and lead to grievances among those holding these jobs. vi. When job evaluation is applied for the first time in any organization, it creates doubts and often fear in the minds of those whose jobs are being evaluated. It may also disrupt the existing social and psychological relationships. vii. A large number of jobs are called red circle jobs. Some of these may be getting more and others less than the rate determined by job evaluation. viii.Job evaluation takes a long time to install, requires specialized technical personnel, and may be costly. ix. When job evaluation results in substantial changes in the existing wage structure, the possibility of implementing these changes in a relatively short period may be restricted by the financial limits within which the firm has to operate.
ii
iii. The method helps in removing grievances arising out of relative wages; and it improves labour-management relations and workers morale. In providing a yardstick, by which workers complaints or claims can be judged, the method simplifies discussion of wages to be explained and justified. iv. The method replaces the many accidental factors, occurring in less systematic procedures, of wage bargaining by more impersonal and objective standards, thus establishing a clear basis for negotiations. v. The method may lead to greater uniformity in wage rates, thus simplifying wage administration. vi. The information collected in the process of job description and analysis may also be used for the improvement of selection, transfer and promotion procedures on the basis of comparative job requirements. vii. Such information also reveals that workers are engaged in jobs requiring less skill and other qualities than they possess, thereby pointing to the possibility of making more efficient use of the plants labour.
Implementation of the Evaluated Job Structure

The evaluated job structure has to be translated into a structure of wage rates. This depends upon: i. The range of wages to be paid, i.e., what should be the maximum and minimum wages for the grade.
ii. Should there be any overlapping between pay ranges for adjacent pay grades? If so, by how much? iii. How many grades should be used? iv. On what basis will an individual employee be advanced in wages through the established pay range for the grade? These issues are inter-related, and a change in any of these calls for a change in at least one or the other issue. As far as the first issue is concerned, it may be noted that the difference between the maximum and the minimum is referred to as the wage range or wage differential. While evaluating a wage structure, it should be seen that the range is not too high and that the job evaluated wage curve does not have too many deviations from the existing industry wage line. This should be done to prevent the turnover of workers and avoid dissatisfaction amongst them.
Limitations of Job Evaluation

These are: i. Though many ways of applying the job evaluation techniques are available, rapid changes in technology and in the supply and demand of particular skills have given rise to problems of adjustment. These need to be probed.
ii. Substantial differences exist between job factors and the factors emphasised in the market. These differences are wider in cases in which the average pay offered by a company is lower than that prevalent in other companies in the same industry or in the same geographical area.
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A wage range can be made with or without an overlap. Theoretically, there should be no overlap because, in that case, an employee near the top of a lower grade gets higher wages than the employee in the higher grade. Too great an overlap may cause dissatisfaction amongst employees and minimize the rewards for superior performance. However, though a too great overlap should be avoided, there should be some overlapping between the grades so that employees in the lower grades may, following an excellent performance, get higher wages than an employee working in a higher grade but showing a poor performance. As regards the number of grades to be adopted in many wage structures, the accuracy may be secured up to six grades; 12 or more grades result in a higher accuracy. Generally, the number of grades considered are between 6 to 11. If more grades are adopted, the overlapping between them would be greater
8. A scheme which provides for single rates and for definite ratios between the rates for classes of workers (A, B,C etc.) within a job grade is easier to administer than one which establishes rate ranges and has no fixed ratios. 9. A scheme is better administered by the Industrial Relations staff of a company than by the Industrial Engineers who may have developed it. The essence of successful administration of a scheme is flexibility, and this is better .understood by those engaged in industrial relations work than by Industrial Engineers. 10. The better the state of industrial relations the easier it is to intr0duce a job evaluation scheme.
Tutorial Activity 1.1 Write-intro Factors Used in Rating Jobs

The factors usually considered in any rating procedure are education, training, experience, mental effort, physical effort, visual attention, initiative, responsibility, working conditions, and physical hazards. These factors are sub-divided into degrees - usually six; and points are allocated to these. 1. Education This factor appraises the educational background of an individual to determine whether he do the job satisfactorily.
First Degree
Suggestions for Improving Working of Job Evaluation Programs

We suggest the following measures and steps for improving the working of evaluation programmes: 1. A job evaluation scheme should be chosen cautiously. It should be devised and administered with due regard to the conditions of the employment market, which cannot be ignored if the scheme is to be successful. It should, therefore, reflect those forces which are important in the market, e.g., relative supply of and demand for labour, bargaining power of the parties and job conditions. 2. The details of a scheme should be drawn up in such a way that they do not conflict with other provisions of a Collective Agreement such as, for example, seniority clauses and grievance procedure. 3. The scheme should be introduced on a plant-to-plant basis than applied to a whole industry. This is because it is difficult to standardize jobs throughout an industry unless the plants in it are so familiar that they can be treated as being virtually a single firm. 4. The scheme should be sold to all concerned and suggestions sought. If the workers in a plant are unionized, it is highly desirable that any scheme adopted should be agreed to and, if possible; developed jointly by the company and the trade unions. 5. It is of major importance that-the number of job titles and classifications be kept to a minimum. If they are not, a scheme becomes too inflexible because of the narrow coverage of the job descriptions. Promotions within a grade become more serious. Moreover, workers tend to feel more insecure and cling to their present jobs because they may not have the qualifications for another job. 6. Any anticipated changes in methods should be carried out before a scheme is installed and all modifications in it should be resisted until it becomes fully established. 7. In preparing job descriptions it is a sound practice to emphasize in them the things which make one job different from another rather than to find a comprehensive statement of all the duties of the jobs.
Ability to read, write and follow simple written or oral instructions.

Second Degree
Basic school education or its equivalent to do small arithmetical calculations involving addition, subtraction, division and multiplication of decimals and fractions.
Third Degree
High school education to determine knowledge of elementary accounting or general shop practice and manufacturing methods.
Fourth Degree
Intermediate education to determine the ability to understand and perform work calling for a knowledge of general engineering principles, commercial theory, principles of advanced drafting, knowledge of general accounting fundamentals and of complicated shop procedures and processes, etc.
Fifth Degree
Graduation to determine the ability to understand and perform work of a specialized or technical nature, knowledge of finance, business administration, chemistry, physics, journalism or any other technical or specialized field.
Sixth Degree
Post-graduate research experience in any technical or specialized field. 2. Training This factor appraises the period of training needed by an average individual to perform his efficiently.
First Degree
Upto 6 months;
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Second Degree
Third Degree
6 to 12 months;
Third Degree
Continuous physical activity required.

Fourth Degree
12 to 15 months;
Fourth Degree
heavy physical activity required.

Fifth Degree
15 to 18 months;
Fifth Degree
Great physical effort to lift or push heavy objects.

Sixth Degree
18 to 21 months;
Sixth Degree
Extremely arduous physical effort required. 6. Visual Attention This factor appraises the extent and continuity of the visual attention needed on a job.
First Degree
Over 21 months. 3. Experience This factor appraises the length of period needed by an average employee with a previously specified educational standard to be able to perform the job satisfactorily.
First Degree
Minimum visual attention required.

Second Degree
Ordinary visual attention required.

Third Degree
Upto 3 months;
Second Degree
Fairly close attention required.

Fourth Degree
3 to 6 months;
Third Degree
Close visual attention required to check the quality of products.

Sixth Degree
6 months to 2 years;
Fourth Degree
2 to 4 years;
Fifth Degree
Extremely close work with intense and constant visual attention. 7. Initiative This factor appraises the capacity for independent decision or action required of an individual.
First Degree
4 to 6 years;
Sixth Degree
Over 6 years. 4. Mental efforts This factor appraises the mental effort required of an individual to perform his job satisfactorily.
First Degree
Elementary type of job. The employee receives detailed instructions and is expected to perform the job exactly, as indicated, without deviations.
Second Degree
Minimum mental effort required to do a simple rating job.

Second Degree
Repetitive type. of job. Requires a close following of instructions and procedures.

Third Degree
Some mental effort required.

Third Degree
Considerable mental effort needed.

Fourth Degree
Requires more frequent simple decisions on the part of the employee, but only when definite clear-cut precedents are available.
Fourth Degree
Considerable organizing ability required.

Fifth Degree
Sustained and diversified mental effort required.

Sixth Degree
In addition to frequent simple decisions, the job calls for occasional decisions or actions following only general procedures in the absence of clear-cut procedures.
Fifth Degree
Sustained and diversified mental effort required, as also clarity Of concepts and ideas. 5. Physical Efforts This factor appraises the physical effort needed from an employee for a satisfactory performance of a job.
First Degree
Difficult and complex type of job. Requires independent and original action to achieve the desired results.
Sixth Degree
Extremely difficult and complex type of job requiring independent and original action to achieve the desired results. 8. Responsibility This factor appraises the responsibility, which goes with the job for preventing damage to tools, equipment or materials used in the performance of a job.
Very light physical effort required.

Second Degree
Light physical effort required, as in an office job.
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First Degree
Tutorial Activity 1.2 Intro - Write

Pay Surveys and Job Evaluation External relativities are established by pay surveys and research which analyze and compare market rates in order to achieve external competitiveness. Internal relativities are assessed by job evaluation which considers the relative value- or size of jobs and sometimes generic roles within an organization as a oasis for achieving internal equity. There may be tension when the often competing claims of external competitiveness and internal equity pave to be reconciled, particularly in pay markets under pressure through skills shortages. Pay Structures Pay surveys and job evaluation provide the data for the design and management of pay structures. They provide frameworks within which levels of pay for jobs and the differentials are described or defined in the form of grades, bands, scales or spot rates (individual job rates). Pay structures also define the limits within which the pay of employees can progress within their grades or bands and how this progression takes place. This can vary in accordance with assessments of performance, competence or skill. Progression may be up a fixed incremental scale or spine which defines the predetermined pay increases that employees can receive year by year on the basis of their time in the job. But this approach is becoming much more rare. Progression in a pay structure can also be along a pay or maturity curve which relates increases in pay to competence growth and/or higher levels of performance. Pay structures may cover all or only part of the organization. There may, for example, be one structure for staff on salaries and another one for manual workers on wages (although this often invidious distinction is progressively disappearing). Different structures may exist for separate job families (groups of jobs where the work is similar), or market groups jobs in which rates of pay are influenced by market pressures so that to attract and retain people they have to be paid more than those in otherwise comparable jobs). Structures may consist of an extended hierarchy of relatively narrow and / grades or a fairly small number of broad band (broadbanding). Pay structures are designed by reference to data from job evaluation, competence analysis and analysis of market practice by external benchmarking (pay surveys). The design process is not a scientific one Much judgment has to be exercised.
Probable damage to tools up to Rs. 100 for an average mishap.

Second Degree
Probable damage to tools between Rs. 100 and Rs. 200.

Third Degree
Probable damage to tools between Rs. 200 to Rs. 500.

Fourth Degree
Probable damage to tools up to Rs. 5,000 per mishap.

Fifth Degree
Probable damage to tools, equipment and materials not to exceed Rs. 10,000 per mishap.
Sixth Degree
Probable damage exceeding Rs. 10,000 per mishap. 9.Working Conditions This factor appraises the physical environment under which a job is performed. Physical envorment includes heat, cold, dampness, darkness, glare, dust, fumes, noise, etc.
First Degree
Excellent working conditions.

Second Degree
Occasional exposure to dust or fumes.

Third Degree
Constant exposure to one or more unpleasant conditions.

Fourth Degree
More disagreeable conditions.

Fifth Degree
Continuous exposure to disagreeable conditions.

Sixth Degree
Continuous exposure to various intensely disagreeable conditions. 10. Physical Hazards This factor appraises the accident or health hazards, which exist even though safety devices have been installed.
First Degree
No hazard exists.
Second Degree
Minor injuries may be sustained if an accident takes place.

Third Degree
If an accident takes place, an employee would receive severe cuts or burns. Fourth
Fourth Degree
The job is quite risky and the employee may catch some industrial disease. Fifth
Fifth Degree
There may be loss of some part of the body in the accident.

Sixth Degree
If an accident takes place, the employee is more likely to be killed or permanently ed by injuries.
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LESSON 21: INTRODUCTION TO DETERMINANTS OF INCENTIVES

Principles of External and Internal Differential Rewards and Incentives incentives depends on three variables - the individual, work situation, and incentive plan. (i and iii) The Individual and the Incentives Different people value things differently. Enlightened managers realize that all people do not attach the same value to monetary incentives, bonuses, prizes or trips. Employees view these things differently because of age, marital status, economic need and future objectives. However, even though employee reaction to incentives varies greatly, incentives must have some redeeming merits. For example, there might be a number of monetary and nonmonetary incentive programmes to motivate employees. Money, gift certificates, praises, or merit pay are of the continuous parade of promotions. (ii) The Work Situation This is made up of four important elements: a. Technology, machine or work system, if speed of equipment operation can be varied, it can establish range of the incentive. b. Satisfying job assignments, a workers job may incorporate a number of activities that he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in hours worked, extended vacation time and other privileges that an individual values. c. Feedback, a worker needs to be able to see the connection between his work and rewards. These responses provide important reinforcement. d. Equity, worker considers fairness or reasonableness as part of the exchange for his work. Incentives, in general, are important motivators. Their effectiveness depends upon three factors: drives, preference value, and, satisfying value of the goal objects. Misra says: Beyond subistence level, becoming needs (self-actualization needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). Below the subsistence level, however, the reverse holds true. He makes the following generalizations: i. Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person.
Learning Objective

To know the Meaning of Rewards and Incentives To know the Features of the Incentive Plans To understand the Determinants of Incentives
Meaning of Rewards and Incentives

An incentive or reward can be anything that attracts a employees attention and stimulates him to work. In the words of Burack and Smith, An incentive scheme is a plan or programme to motivate individual or group performance. An incentive programme is most frequently built on monetary rewards {incentive pay or monetary bonus}, but may also include a variety of non-monetary rewards or prizes. On the other hand, French says, the term incentive system has a limited meaning that excludes many kinds of inducements offered to people to perform work, or to work up to or beyond acceptable standards. It does not include: i. wage and salary payments and merit pay; ii. over-time payments, pay for holiday work or differential according to shifts, i.e., all payments which could be considered incentives to perform work at undesirable times; and iii. premium pay for performing danger tasks. It is related with wage payment plans which tie wages directly or indirectly to standards of productivity or to the profitability of the organization or to both criteria. The use of incentives assumes that peoples actions are related to their skills and ability to achieve important longer-run goals. Even though many organizations, by choice, or tradition or contract, allocate rewards on non-performance criteria, rewards should be regarded as a payoff for performance. An Incentive Plan has the following important features: 1. An incentive plan may consist of both monetary and nonmonetary elements. Mixed elements can provide the diversity needed to match the needs of individual employees. 2. The timing, accuracy and frequency of incentives are the very basis of a successful incentive plans. 3. The plan requires that it should be properly communicated to the employees to encourage individual performance, provide feedback and encourage redirection.
ii. Financial incentives relate more effectively with basic motivation or deficiency needs. iii. Non-financial incentives are linked more closely with higher motivation, or becoming needs. iv. The higher the position of a person in an organizations hierarchy, the greater is his vulnerability to non-financial incentives. While budgetary restrictions and temporary improvements in performance place a limit on the potency of money as a
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Determinants of Incentives
These features are contingencies, which affect the suitability and design of incentives to varying degrees. The effective use of
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motivator, non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. Monetary incentive imply external motivation, non-monetary incentives involve internal motivation. Both are important. It is a judicious mix-up of the two that tends to cement incentives with motivation.
motivation, which English and English describe as the general name for the fact that an organisms acts are partly determined in direction and strength by its own nature...and/or internal state. What is motivating to an individual is, then, determined by the individual. What is achievement to an individual is shaped by external forces - the supervisor, the company, for example. And how does the individual know he has achieved? He may have a sense of achievement, but it is the external reward for attaining the desired end that overtly tells him that others recognize his achievement - an essential condition to his internal motivation. In other words, objectives setting without tangible rewards is MBO in a vacuum. Rewards are tangible things by which the employee can measure whether or not, and how much, he has achieved, grown, and been recognized. Motivation depends on how well an individuals needs are met. If achievement is one of those needs, the employee may be motivated by his own sense of achievement, but if his sense of achievement depends on confirmation by the rewards he receives for meeting objectives, then he will need the rewards, both as a confirmation and as a device to measure how well he has achieved. To put it a little more simply, if an individual has the need to achieve something and he accomplishes that something, he will be motivated. However, if he is told to do something, set dates for reaching objectives, and he does what he was supposed to do in a timely fashion, then unless he is rewarded, there is no inherent motivation in reaching the goal. In other words, even with mutually agreed upon goals, the employee must receive a raise, a private office, a company car, a bonus (ugh...but thats later), or a pat on the back, the latter probably the only true motivator. What is needed is a greater incentive for the individual to set and meet objectives, to be fully involved in MBO as a process. MBO is usually thought of as a program, and a program has a beginning and an end. The fact that most MBO programs do have an end - die a natural death - may point to the underlying flaw in hypotheses companies have about management by objectives and what the employee will attain from them. The incentive should meet the individuals needs, the driving forces that propel (motivate) an employee toward a goal that is most often self-centered, rather than company-oriented. Because motivation is internal, it is difficult to ascertain, but achievement is external to the individual, and achievement can be measured. Although I dont believe that a primary goal of MBO was to measure achievement, it can certainly be used to do so. By itself, it may satisfy only the companys needs. It aids in planning and control. It helps in assessing productivity, costs, overhead, and so on. If it doesnt satisfy the individuals needs, however, in the long run MBO wont work for the organization either. MBO with a reward system is a viable approach to meeting corporate and individual needs, to meeting terms of the employer-employee psychological contract.

This Article below is to understand that aside from the external determinants of productivity - the market, raw materials, and ... could not control, the employers reaction to MBO/Rewards would become ...
Objectives, Expectations, Rewards

By E. A. Winning
Management and Employee Relations Consultant, E. A. Winning Associates, Inc.
An Article Reprinted with permission from E.A. Winning Associates, Inc Motivation comes from within: the only thing that a manager or management can do is to provide an atmosphere in which the individual can be motivated. Since 1968 I have used a modified Management by Objectives (MBO) process, as opposed to a program, to generate the communications necessary in achieving results desired and stated by various structured and healthy companies. MBO has primarily been used as a tool for individuals to make the process successful, and these employees want to know what good its going to do for them by following what could become an unwieldy procedure. As I asked in a 1974 article about MBO, whats in it for the individual? Many organizations that have implemented management by objectives have assumed that achievement of objectives is motivating for the employee, but this assumption has been the downfall of many MBO programs. An awkward number of individuals still ask, Whats in this for me? For that reason, I believe that management by objectives is not a motivator unless it is linked to a reward system. This will appear contrary to many managers to whom Ive told over the years that you cannot motivate an employee. Motivation comes from within: the only thing that a manager or management can do is to provide an atmosphere in which the individual can be motivated, hence, the rewards which Ill address in this chapter. The rationale of organizations adopting MBO is this: Achievement is a motivator; meeting objectives is achievement; therefore, meeting objectives is a motivator - something satisfying to a person. The problem lies with defining achievement and motivation. In their dictionary of psychological and psychoanalytical terms (no longer in print), English and English defined achievement as success in bringing and effort to a desired end. In this case, just who is stating what the desired end is? Usually, it is the organization, the company, the manager; even when the individual has a say in the definition of the goal, it is external to that person. And achievement has quite a different base from
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In an MBO/Rewards System, What Rewards? There are, of course, a number of incentive or reward plans, the success of which is dependent on the type of organization involved. One of these incentive systems, piecework or commission, predates MBO in its present form by a century. Another, the bonus, goes back at least as far as Bob Cratchits Christmas turkey. Last, we have a percentage system; it may be a percentage of salary increase based on merit (i.e., productivity), or a percentage based on sales, or profits. The idea behind piecework was to get the employee to produce more by paying him in terms of the number of items he produced. It is still a common practice, especially in textile, electronics, and other assembly line industries. The commission, one step above piecework, is usually paid in sales areas, the sales person reaping a percentage of the sales he has generated. One step further is, of course, salary-plus-commission. These three (two-and-one-half?) systems have one common underpinning: the individual is rewarded, or paid, according to his own productivity. Is the piecework or commission system a good one? To the extent that both have at times excluded other motivational factors, no. To the extent that both place the responsibility for productivity on the individual, yes. The individual sets his own pace and in doing so has set certain objectives within corporate standards to be met. Both systems are MBO approaches without being labeled as such. Further, piecework and commissions standards are relatively contractual in favor of the employer, thereby making it easier to either reward the employee or dismissing him fairly. The bonus is probably the oldest form of incentive system and has been popular at upper-management levels for the past 20 years. The bonus is usually based on the individuals present salary, his status in the organization, his productivity, and/or the companys profit picture. It is an incentive, but it loses much of its motivational impact because it is too far separated in time from performance, or it may be given across-the-board without regard for individual productivity. Moreover, its impact is limited; it does not reach far enough down into the company to affect the middle- or lower-level employee. The lower-level employee who gets no bonus feels that he is doing the real work, while upper-management reaps a percentage of the profits the employee has been instrumental in attaining. If such is the case, why should the lower-level employee write objectives and try to meet them? He may do it because he has been told to, but he will really want to write and meet objectives only if there is something in it for him, a tangible reward when the goal has been reached. If the bonus is given once a year, then how does one sustain the momentum to reach the desired goal? Perhaps the bonus will have to be a large one, or perhaps it should be given out several times a year - for instance, at the end of every objectivesreview period. If a bonus system is used, it should be related to objectives and based upon productivity. For that matter, all
incentives should be based on productivity, or value to the company. If bonuses are handed out across-the-board, they will satisfy only a few, and may actually de-motivate those who feel that they have been more productive than others who are receiving the same reward. Some of the defects of a bonus system may be avoided in a percentage system, which, all in all, is probably the most palatable and most productive when combined with MBO. The percentage of salary would be entirely an individual matter. The employees performance, and only his performance, would be the basis for such a reward. His performance would be measured by how well he met the objectives he was committed to and had contracted for with his supervisor. Since objectives can be set for anyone at any level in the company, all employees could benefit from such a program. Moreover, since a manager is supposed to be in control of his organization and his subordinates reaching or not reaching their objectives will reflect on his abilities, it is a fair system to use in both the evaluation of the managers performance and his reward. A percentage increase of salary can be seen as a type of bonus, but it is more specific and does not have some of the drawbacks of other bonus systems. It is related only to the individuals performance and on what he has agreed to attain, and the distance-in-time objection can be eliminated if it is tied to fairly short-term objectives, if, for example, objectives are set on a quarterly basis, and percentage increases are given (or not given) at those intervals.
The Problems of an MBO/Rewards System

There is no question that there are negative aspects in all incentive systems, and they are complicated by problems inherent in MBO (which, I hope I made clear is not a panacea for all rewards and motivational problems). The first question that comes up is that of the negative incentive, the reduction in salary or the loss of a bonus because the employee hasnt met objectives. In theory, if an employee is to be rewarded for meeting objectives, then there should be a reduction or withdrawal of the reward for not meeting them. Years ago, I felt that the system should bend to some extent so that effort toward meeting objectives should be rewarded, at least minimally. In keeping with the loftier principle of never confusing effort with results, I must retrench. If the employees performance is based solely on meeting or not meeting objectives, then effort would mean nothing. However, employees are evaluated on a number of criteria, and therefore effort is only one of the factors involved. There are still some who would go so far as to give an individual a decrease in salary depending on the degree to which objectives were missed, and in an entrepreneurial context, this might be acceptable: If the individual has total control over his environment, the staffing, the budget, and the way the organization operated, like the self-employed business person, he should expect to reap the profits, but he should also expect to take any loss too.
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Setting objectives is a tricky business, however. Control of conditions is difficult enough at upper levels and sometimes nonexistent at lower ones. Aside from the external determinants of productivity - the market, raw materials, and the like much of an individuals achievement may be contingent on that of others inside his company. If a reduction in salary were to be imposed, in part because of factors he could not control, the employers reaction to MBO/ Rewards would become evident in a number of ways: He would set easily attainable goals; he would argue that no objective can be counted on as being attainable in present-day circumstances; he would set objectives having due dates months past the times when they can be achieved; he might reduce the number of objectives; or he might just plain balk. Overcoming the Drawbacks in an MBO/Rewards System: Assuming that an MBO/Rewards system is decided on (and certainly not as the sole evaluation/rewards system), how can these problems be solved? First, as is customary in MBO, objectives are set by the supervisor and employee together to reflect the unit or corporate objectives. Ultimately, its the boss responsibility to see that objectives are reasonable and feasible, with dates that are neither too far off or too close, and that the number of objectives is realistic. Second, the number of objectives, their timing, and their rationale should be open to later negotiation and adjustment. Since it is difficult to fix objectives because of the control factor, the objectives should be flexible; the MBO process should allow for the changing of objectives that are too easy, but he should not agree to too-difficult objectives, either. To sum up, the points made here are these: MBO without an incentive program is a system without sound foundation. The individual is self-centered and needs a reward in order to meet managements expectations of him. There are three types of incentive systems that may work along with MBO and make MBO a stronger tool. The positive aspects of MBO/Rewards outweigh the negative. The negative aspects can be handled. A crucial step in the MBO process is the discussion between supervisor and subordinate in setting objectives, a discussion that should include both the definition of responsibilities and a definition of expectations. Expectations are more than objectives. They are statements of desired behavior of both supervisor and subordinate. While the supervisor has expectations of the employee in terms of productivity and performance, the employee has expectations of the supervisor in terms of direction, support, training, and so on. If he is to achieve objectives that are aligned with corporate or department goals, then he must be given the opportunity to explain what he needs from his supervisor in order to meet those goals. And the expectation of the company that he will meet those goals will be considerably more realistic if the employee himself has the expectation of a tangible reward if he does meet them. Whats there in it for me? is a very human question.

A Case Study on TERI Rewards Corporate Efforts
The Annual Awards Recognise the Efforts of Corporates in Environmental Management and Sustainable Initiatives
In order to encourage environmental management and protection in the corporate sector, TERI instituted the Corporate Environmental Awards last year. Encouraged by the response and interest shown by corporates, TERI has decided to confer the awards annually. The objective of the awards is to recognise the leadership efforts of corporates in environmental management and sustainable initiatives, recognise innovative practices that promote sustainable development and further encourage and provide momentum to environmental initiatives. The awards are divided into three categories: Category 1: companies with a turnover of less than or equal to Rs 100 crore per annum; Category II: companies with a turnover of between Rs 100 crore and Rs 500 crore per annum; and Category III: companies with a turnover above or equal to Rs 500 crore per annum. The application fee for category I is Rs 500 per application; category II, Rs 2,000, and category III, Rs 5,000. Says R K Pachauri, director general, TERI, The TERI Corporate Environmental Awards help corporates and Indian society in general in two major ways. Firstly, the awards recognise good practices and excellence in protecting the environment on the part of deserving corporate organisations. Secondly, the awards help to focus on the responsibility of business in protecting the environment and conserving our natural resources. Even those organisations that do not participate in the process will get to know about these awards and feel motivated to do their bit in the same cause. Overall, these awards will help to prepare businesses for the coming era when the corporate sector will have to face very stringent environmental standards to be imposed by the public at large and governments in particular. The bottomline of a company that prepares effectively for such a future will be healthier than that of one that does not. Out of 110 applications received by TERI this year, 18 companies were shortlisted and the final awards will be given on June 17. The selection of the awards are based on a questionnaire filled by the company and a case study on the environmental initiative undertaken. After shortlisting the companies, experts from TERI visit the site to check on the authenticity of the environmental initiative. The case studies were evaluated on the basis of a few pre-set parameters, like pollution prevention - proactive practices, process improvements and modifications undertaken resulting in environmental improvement, waste reduction and energy or resource conservation. Scientific research and technological innovation - research or technological innovations that have been implemented or demonstrated for addressing environmental issues. Environmental benefits - success and effectiveness of the programme, both in terms of environmental and economic benefits. Potential model for business commitment - the replicability or
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transferability of the practices, outcomes or experience of the project. The jury members for selecting the awards are Justice J S Verma, former-chairperson, National Human Rights Commission and former chief justice of India; Vishwanath Anand, vicechairperson, National Environment Appellate Authority; Suman K Bery, director-general, National Council of Applied Economic Research; Sanjaya Baru, chief editor, The Financial Express; and R K Pachauri, director general, TERI. In Category I, five companies were shortlisted: M K Electric; Chemfab Alakalis Ltd; Shriram Alkali and Chemicals; The OrchidAn Ecotel Hotel and Hitech Arai. In Category II, five companies were shortlisted: Andhra Paper Mills Ltd; Sanghi Spinners India Ltd; Shree Cements Ltd; Star Paper Mills Ltd and Samcor Glass Ltd. In Category III, eight cases were shortlisted: Orient Paper Mills; Grasim Industries Ltd; Bharat Petroleum Corp. Ltd; Hindustan Lever Ltd; Chennai Petroleum Corp. Ltd; Harihar Polyfibres; Hindalco Industries Ltd and Hero Honda Motors Ltd. How are the TERI Corporate Environmental Awards different from other similar awards? Mr Pachauri explains, I am not aware of any other award dealing with environmental performance where such rigorous evaluation and objective scrutiny is carried out in determining the winner. Not only is the technical and economic evaluation of each entry carried out by a team of researchers from TERI, but the final decision is taken by a very eminent panel of judges chaired by a former chief justice of India. It is the result of the objectivity and rigour of the process that has given these awards the prominence they have attained in a short period of time. Another feature of the award, which is worth mentioning, is the subdivision of companies on the basis of turnover. Hence, the performance of a small unit is not evaluated against that of a large enterprise, which may have very different managerial and technological capabilities. The awards are differentiated on the basis of size of the enterprise. Last year, TERI received some 89 entries; this year, it is 110. Mr Pachauri does not think the numbers are low. Firstly, a jump of over 25 per cent in the entries received in merely a year is a very encouraging development, but the figure of 110 entries consists of very serious contenders. We accept entries only with a modest processing fee. This eliminates those who may not be serious and those who have only trivial achievements to claim. Besides, the process is made known to all potential contenders, who would be persuaded that this is a high calibre process of selection signified by the very choice of the judges who form the selection panel. Also, the companies are aware that any claims that they make in their entries will be carefully investigated by TERI researchers by site visits and on-the-spot evaluation for all shortlisted candidates. This helps further to eliminate doubtful claims and trivial entries. Last year, the Phulpur plant of Indian Farmers Fertiliser Cooperative Ltd (IFFCO) won the first award in category III of TERI Corporate Environmental Awards for setting up effluent projects for not only recycling, but also for zero liquid discharge. Says C P Srivastava, joint general manager, Projects, IFFCO, We
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feel proud to be awarded as it recognises our efforts to keep the environment clean. Please answer the questions below based on the case study above: 1. What is the objective of the case? 2. Discuss the objective of rewards. 3. Discuss the 3 categories of awards mentioned in the case. 4. What is the another important feature of the award apart leadership from efforts mentioned in the case?
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LESSON 22: INTRODUCTION TO CLASSIFICATION OF REWARDS, INCENTIVE PAYMENTS AND ITS OBJECTIVES
Principles of External and Internal Differential Rewards and Incentives Money may potentially be an effective motivator, regardless of the level one has attained and the organization or the amount of money he is earning. Money does appear to have a good deal of symbolic value, and it does mean different people having differing biographies or backgrounds of training and experience. For some people, money can be instrumental in satisfying esteemed and recognition need as well basic physical needs. Motivating people with financial rewards is not a pickers game. A company must be willing and able to give certain employees very large raises and/or bonuses if pay is to motivate performance. If a company cannot afford to do this, or is not willing to do so, it should probably forget about using pay to motivate performance. Pay in one form or another is certainly one of the mainsprings of motivation in our society. The most evangelical human relationist insists it is important while protesting that other things are too (and are perhaps in his view) nobler. It would be unnecessary to belabor the point if it were not for a tendency for money drives to slip out of focus in a miasma of other values and other practices. As it is, it must be repeated: Pay is the most important single motivator used in our organized society. Contrary to these observations, Allen Port observes: Money incentives alone do not bring the desired motivation. Employees in an industry are not economic men so much as they are ego men. What they want, above all else, is credit for work done, interesting tasks, appreciation, approval and congenial relations with their employers and fellow-workers. These satisfactions they want even more than high wages or job security. Workers will normally respond to monetary incentives only to a certain point. Beyond that point money becomes ineffective as an inciter of action. This is for two reasons: i. Money is not foreseen as having the ability to satisfy an urgent need.
Learning Objective

Introduction to classification or types of Rewards To understand classification of Rewards or Incentives To understand Incentive Payments To learn classification of Incentive Schemes To know wage Incentives To learn the objectives of wage Incentive Schemes
Introduction to Classification or Types of Rewards

As we all know that reward management is concerned with the development of appropriate organizational cultures, underpinning core values and increasing the motivation and commitment of employees. So now let us study below the classification or types of Incentives/Rewards. Classification of Rewards or Incentives i. Direct compensation, and ii. Indirect compensation. Direct compensation includes the basic salary or wage that the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options, etc. Indirect compensation includes protection programmes (insurance plans, pensions), pay for time not worked, services and perquisites. But these are maintenance factors rather than reward components. Since they are made available to all employees, irrespective of performance, they will tend to retain people in the organization but not stimulate them to greater effort and higher performance. Sometimes, the rewards are also termed as Intrinsic rewards and Extrinsic rewards. The former are those that an individual receives for himself. They are largely a result of the job that the worker does. The techniques of job enrichment, shorter work weeks, flexible work hours, project structures, and job rotation can offer intrinsic rewards through providing interesting and challenging jobs, and allowing the worker greater freedom. On the other hand, the latter rewards refer to direct compensation, indirect compensation, and non-financial rewards. Fig. 17.1 gives structure of rewards. Controversy prevails over the issue of money only motivates the individual. The supporters of the view say that money is potentially an effective motivation. For example:
ii. The worker may respond to money as a motivator if he believes the benefits will be greater than the expenses incurred by him. If the benefits perceived are less than the personal cost he will not respond to money as an incentive any further. In effect, a break-even point is reached in which additional money earnings become marginal or even undesirable because of the efforts and conditions demanded to earn the added income. Using money as a motivator may decrease intrinsic motivation. To use money and other extrinsic reward as effective motivators, they must be made contingent upon performance.
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It may be summed up that a more reasonable interpretation would be that intrinsic motivation is increased by money if two conditions are met: i. The monetary reward closely follows performance so as to be reinforcing, and
Incentive Payments
Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. The International labour organization (ILO) refers to incentives as payment by results. But it is appropriate to call them incentive systems of payments emphasizing the point of motivation, that is, the imparting of incentives to workers for higher production and productivity. The primary advantage of incentives is the inducement and motivation for higher efficiency and greater output. But with fixed remuneration, it is difficult to motivate employees. Increased earnings would enable the employees to improve their standard of living and help the organization to improve their production capacity. They also help in reduced supervision, better utilization of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover and increased output. Classification of Incentive Schemes It has been classified into four categories by ILO. They are mentioned below as: 1. Schemes in which earnings vary in proportion to output, 2. Schemes where earnings vary proportionately less than output, 3. Schemes where earnings vary proportionately more than output, and 4. Schemes where earnings differ at different levels of output. Wage Incentives The term wage incentives has been used both in the restricted sense of participation and in the widest sense of financial motivation. It has been defined differently by different authors. We give below a few of these definitions. It is a term which refers to objectives in the external situation whose function is to increase or maintain, some already initiated activity, either in duration or in intensity. According to Hummel and Nickerson: It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job. Florence observes: It refers to increased willingness as distinguished from capacity. Incentives do not create but only aim to increase the national momentum towards productivity. In the words of Scott, it is any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity Output. According to the National Commission on Labour, wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvements in the present or targeted results. A wage incentive scheme is essentially a managerial device of increasing a workers productivity. Simultaneously, it is a method of sharing gains in productivity with workers by rewarding them financially for their increased rate of Output.
ii. The monetary reward is perceived by the employee to be a function of his work behavior. Further, it may be fair to conclude that pay holds motivational properties. However, the issue is considerably more complex than merely stating money motivates.
Fig. 17.3 Break Even Analysis of Perceived Personal Cost

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According to Suri, this definition is based on the principle that an offer of additional money will motivate workers to work
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harder and more skillfully for a greater part of their working item, which will result in a stepped-up rate of Output.16 We may define a wage incentive as a system of payment under which the amount payable to a person is linked with his output. Such a payment may also be called payment by results. The term incentive has gradually acquired a wide connotation and includes all the possible factors, besides economic gains, which can possibly motivate human beings towards better and. greater performance. Objectives of Wage Incentive Schemes Wage incentive schemes aim at the fulfillment of one or more of the following objectives: i. To improve the profit of a firm through a reduction in the unit costs of labour and materials or both; ii. To avoid or minimize additional capital investment for the expansion of production capacity; iii. To increase a workers earnings without dragging the firm into a higher wage rate structure regardless of productivity; and iv To use wage incentives as a useful tool for securing a better utilization of manpower, better production scheduling and performance control, and a more effective personnel policy.
The process of motivation can be initiated by someone recognizing an unsatisfied need. A goal is then established which, it is thought, will satisfy the need, and a course of action is determined which is expected to lead towards the attainment of the goal. Alternatively, someone can be presented with a goal and if it is expected that achieving this goal will meet an unsatisfied need, action is taken to reach the goal and thus satisfy the need. People can be motivated by rewards and incentives which will enable them to satisfy their needs or will provide them with goals to attain (as long as those goals are worthwhile and attainable). But the needs of individuals and the goals associated with them vary so widely that it is difficult if not impossible to predict precisely how a particular reward or incentive will affect individual behavior. The social context will also affect the level of motivation. This context will consist of the organization culture generally, but it also includes management style (the way in which individuals are managed) and the influence of the group or team in which the individual works. Types of Motivation Motivation at work can take place in two ways:
1. Intrinsic Motivation
Tutorial Activity 1.1 Motivation and Financial and NonFinancial Rewards

The Objective of the Tutorial Activity To understand that the development of reward management policies, structures and practice will be underpinned by assumptions about how people can best be motivated to deliver high levels of performance. These assumptions may not be articulated but the reward philosophies and policies of an organization can be no better than the motivational theories and beliefs upon which they are based. In this activity we therefore examine motivation theory under the following headings:

This is derived from the content of the job. It can be described as the process of motivation by the work itself in so far as it satisfies peoples needs or at least leads them to expect that their goals will be achieved. Intrinsic motivation is self-generated in that people seek the type of work that satisfies them, but management can enhance this process through its empowerment, development and job design policies and practices. The factors affecting intrinsic motivation include responsibility (feeling the work is important and having control over ones own resources), freedom to act, scope to use and develop skills and abilities, interesting and challenging work and opportunities for advancement. The concept of empowerment is strongly influenced by this aspect of motivation.
2. Extrinsic Motivation
the process of motivation; types of motivation; the six basic concepts of motivation relating to needs, goals, reinforcement, expectations, attribution theory and selfefficacy; the implications of motivation theory for those concerned with the design and management of financial and nonfinancial reward policies and practices.
This is what is done to and for people to motivate them. It arises when management provides such rewards as increased pay, praise, or promotion. When the motivating impact of payfor-performance schemes is discussed, this is the type of motivation to which people are referring. The extrinsic motivators can have an immediate and powerful effect, but this will not necessarily last for long. The intrinsic motivators, which are concerned with the quality of working life, are likely to have a deeper and longer-term: effect because they are inherent in individuals and not imposed from outside, although they may be encouraged by the organization. The effectiveness of pay as an extrinsic motivator is a matter for continuing debate, as discussed below.
The Process of Motivation

Motivation theory is concerned with what determines goaldirected behavior. It is about: how behavior is initiated by needs and by expectations on the achievement of goals which will satisfy those needs; how the achievement of goals and/or feedback on their achievement reinforces successful behavior; how belief in ones ability to carry out a specific task will actuate behavior which is expected to achieve the successful performance of that task.
Basic Concepts for Motivation

The framework for non-financial motivators is provided by those concepts of motivation which are concerned with needs, goals, reinforcement, expectations (expectancy theory), attribution theory and self-efficacy.
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Needs Needs theory states that behavior is motivated by unsatisfied needs. The key needs associated with work are those for achievement, recognition, responsibility, influence and personal growth. Goals Goal theory was developed by Latham and Locke! on the basis of a 14-year research programme into goal-setting as a motivational technique. They claimed that the level of production in the companies they studied was increased by an average of 19 per cent as a result of goal-setting processes with the following characteristics:

they have control they are more likely either to repeat their successful behavior (this is a form of reinforcement) or, alternatively, take steps to behave in ways they believe are more likely to succeed. Managers can do a lot to influence attributions through feedback, communication, appraisal and guidance, thus creating a social context which is more likely to foster high motivation. Self-efficacy Self-efficacy is the belief in ones ability to perform a specific task. Those with high self-efficacy will have the capacity to see a link between their own effort and performance and their rewards. They are therefore more likely to take action, to persist in the action and, in the face of failure, to try alternative courses. of action rather than give up trying. Self-efficacy is socially learned and developed from personal experience and performance feedback, which creates a sense of competence and reinforces peoples belief in themselves. Implications of Motivation Theory Motivation theory conveys two important messages. First, there are no simplistic solutions to increasing motivation. No single lever such as performance-related pay exists which is guaranteed to act as an effective motivator. This is because motivation is a complex process. It depends on:

the goals should be specific; they should be challenging but reachable; the goals are seen as a fair and reasonable; individuals participate fully in goal-setting; feedback ensures that people get a feeling of pride and satisfaction from the experience of achieving a challenging but fair goal; feedback is used to gain commitment to even higher goals.
Reinforcement Reinforcement theory suggests that successes in achieving goals and rewards act as positive incentives and reinforce the successful behavior, which is repeated the next time a similar need arises. Expectancy Theory Expectancy theory as originally developed by Vroom states that for there to be a heightened motivation to perform, individuals have to:

individual needs and aspirations which are almost infinitely variable; both intrinsic and extrinsic motivating factors, and it is impossible to generalize on what the best mix of these is likely to be; expectations about rewards, such expectations will vary greatly amongst individuals according to their previous experiences and perceptions of reward processes; equity and fairness - the felt-fair principle applies to levels of pay in comparison with others in accordance with what people believe to be the relative size or importance of jobs and their perceptions of relative levels of performance or contribution. Pay-for-performance schemes, for example, will only be accepted as fair and may therefore only act as effective motivators if they are based on acceptable performance measures which are applied consistently; attributions - the subjective and often distorted explanations people make of their successes or failures; self-efficacy - the differences in the degree to which people believe in themselves; the social context where the influences of the organization culture, managers and co-workers can produce a wide variety of motivational forces which are difficult to predict and therefore to manage.
feel able to change their behavior; feel confident that a change in their behavior will produce a reward; value the reward sufficiently to justify the change in behavior.
Expectancy theory applies just as much to non-financial as to financial rewards. For example, if people want personal growth, they will only be motivated by the opportunities available to them if they know what they are, if they know what they need to do to benefit from them (and can do it) and if the opportunities are worth striving for. Expectancy theory explains why extrinsic motivation - for example, an incentive or bonus scheme - works only if the link between effort and reward is clear and the value of the reward is worth the effort. It also explains why intrinsic motivation arising from the work itself can sometimes be more powerful than extrinsic motivation. Intrinsic motivation outcomes are more under the control of individuals, who can place greater reliance on their past experiences to indicate the extent to which positive advantageous results are likely to be obtained by their behavior. Attribution Theory Attribution theory is concerned with how people interpret and explain their success or failure. If they can attribute their achievement or lack of achievement to something over which
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The second key message provided by motivation theory is the significance of expectations, goal-setting, feedback and reinforcement as motivating factors. The implications of these two messages are considered below. Creating the Right Climate It is necessary in general to create a climate which will enable high motivation to flourish. This is a matter of managing the organization culture. The aims would be, first, to reinforce
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values concerning performance and competence; second, to emphasize norms (accepted ways of behavior) relating to the ways in which people are managed and rewarded; and third, to demonstrate the organizations belief in empowerment providing people with the scope and space to exercise responsibility and use their abilities to the full. Without the right climate, quick fixes designed to improve motivation such as performance-related pay are unlikely to make much of an impact on overall organizational performance, although they may work with some individuals. Flexibility It should be remembered, in the words of McDougall, that: attempts to apply a standardized, across-the-board system of remuneration, on the assumption of homogeneity of values and motives amongst those it is intended to reward, are unlikely to meet the needs of many of them. There appears to be a strong case for flexibility, both in terms of the mechanisms and administration of remuneration systems and in the form in which individuals receive their remuneration. Recognizing Complexity Motivation policies should recognize the complexity of the motivation process and not attempt to adopt simplistic solutions to motivational problems. The organization should provide for a mix of various types of intrinsic and extrinsic motivation and make use of both financial and non-financial incentives. But it should be borne in mind that the social context and the ways in which these incentives are managed for individuals will be key factors influencing their effectiveness. Goal-setting, Feedback and Reinforcement Provision should be made for goal-setting, feedback and reinforcement to be major features of the management and reward processes. Performance management processes as described in Chapters 18 and 19 can fulfil this purpose well. Managing Expectations It is necessary to manage expectations. No reward offered through an incentive, bonus or performance-related pay scheme will be effective as a motivator unless individuals believe it is worthwhile and they can reasonably expect to obtain it through their own efforts. We discuss these implications as they affect financial and nonfinancial reward policies and practices below. Financial Rewards Financial rewards need to be considered from three points of view: 1. The effectiveness of money as a motivator; 2. The reasons why people are satisfied or dissatisfied with their rewards; 3. The criteria which should be used when developing a financial reward system. Money and Motivation The general theory of motivation described above has produced the following explanations of the relationship between money and motivation: the economic man approach, Herzbergs two
factor model, instrumental theory, equity theory and expectancy theory. The Economic Man Approach According to this view, which is based on reinforcement theory, people are primarily motivated by economic rewards. It assumes that they will be motivated to work if rewards and penalties are tied directly to the results they achieve. Pay awards are contingent upon effective performance. Motivation using this approach has been and still is widely adopted and can be successful in some circumstances. But it is based exclusively on a system of external controls and fails to recognize a number of other human needs. It also fails to appreciate the fact that the formal control system can be seriously affected by the informal relationship existing between employees. Herzbergs Two Factor Model Herzbergs two factor model of motivation was developing following an analysis of anecdotes of unusually satisfying or unusually dissatisfying job events provided by 200 engineers and accountants. He claimed that money is a so-called hygiene factor which serves as a potential dissatisfier if not present in appropriate amounts, but not as a potential satisfier or positive motivator. A further reason given by Herzberg for regarding salary as a hygiene factor, that is, a factor which prevents disease rather than promotes health, was because its impact on favorable feeling was largely short term, while its impact on unfavorable feelings was long term extending over periods of several months. But, as Opsahl and Dunnette point out, Herzbergs argument that money acts as a potential dissatisfier is mystifying. In all of the definitions of unusually good job feelings, salary was mentioned as a major reason for the feelings 19 per cent of the time. Of the unusually good feelings that lasted several months, salary was reported as a causal factor 22 per cent of the time; of the short-term feelings, it was a factor 5 per cent of the time. In contrast, salary was named as a major cause of unusually bad job feelings only 13 per cent of the time. Of the unusually bad job feelings lasting several months, it was mentioned only 18 per cent of the time (in contrast with the 22 per cent of long-term good feelings mentioned above).
They Concluded that,
these data seem inconsistent with the interpretations and lend no substantial support to hypotheses of a so-called differential role for money in leading to job satisfaction or job dissatisfaction. Herzbergs two factor model does not therefore provide a reliable basis for developing pay policies. Instrumental Theory This theory states that money provides the means to achieve ends. It is an instrument for gaining desired outcomes and its force will depend on two factors: first, the strength of the need and, second, the degree to which people are confident that their behaviour will earn the money they want to satisfy the need. The instrumental role of money has been stressed by Gellerman,6 who suggested that money in itself has no
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intrinsic meaning and acquires significant motivating power only when it comes to symbolize intangible goals. Money acts as a symbol in different ways for different persons, and for the same person at different times - a mans reaction to money summarizes his biography to date, his early economic environment, his competence training, the various non-financial motives he has acquired, and his current financial status. Money is therefore a powerful force because it is linked directly or indirectly to the satisfaction of all the basic needs. But the effectiveness of money as a motivator depends on a number of circumstances, including the values and needs of individuals and their preferences for different types of financial or nonfinancial rewards. Equity Theory Equity theory, as developed by Adams, argues that satisfaction with pay is related to perceptions about the ratio between what one receives from the job (outcomes in the form of pay) to what one puts into it (inputs in the form of effort and skill) compared with the ratios obtained by others. Equity theory is related to discrepancy theory which, as stated by Lawlers indicates that satisfaction with pay depends on the difference between the pay people receive and what they feel they ought to receive. Equity theory, however, emphasizes that these feelings are based on comparisons. The significance of equity was also emphasized by Jaques.9 He stated that: 1) there exists an unrecognized system of norms of fair payment for any given level of work, unconscious knowledge of these norms being shared among the population engaged in employment; and that 2) an individual is unconsciously aware of his own potential capacity for work, as well as the equitable pay level for that work. Jacques called this the feltfair principle, which states that, to be equitable, pay must be felt to match the level of work and the capacity of the individual to do it. Application of Expectancy Theory Expectancy theory as described earlier in this chapter, states that motivation will be strong if individuals can reasonably expect that their efforts and contributions will produce worthwhile rewards. This theory was developed by Porter and Lawler into an expectancy model which suggests that there are two factors determining the effort people put into their jobs: 1. The values of the rewards to individuals in so far as they satisfy their needs for security, social esteem, autonomy, and self-actualization. 2. The probability that rewards depend on effort, as perceived by the individual - in other words, his or her expectations about the relationships between effort and reward. Thus, the greater the value of a set of awards and the higher the probability that receiving each of these rewards depends upon effort, the greater the effort that will be put forth in a given situation. But mere effort is not enough. It has to be effective effort if it is to produce the desired performance. The two variables additional to effort which affect task achievement are:
1. Ability - individual characteristics such as intelligence, manual skills and know-how; 2. Role perceptions - what the individual wants to do or thinks he or she is required to do. These are good from the view Point of the organization if they correspond with what it thinks the individual ought to be doing. They are poor if the views of the individual and the organization do not coincide.
Conclusions on the Role of Money as a Motivator
Money is important to people because it is instrumental in satisfying a number of their most pressing needs. It is significant not only because of what they can buy with it but also as a highly tangible method of recognizing their worth, thus improving their self-esteem and gaining the esteem of others. Pay is the key to attracting people to join an organization, although job interest, career opportunities and the reputation of the organization will also be factors. Satisfaction with pay amongst existing employees is mainly related to feelings about equity and fairness. External and internal comparisons will form the basis of these feelings, which will influence their desire to stay with the organization. Pay can motivate. As a tangible means of recognizing achievement, pay can reinforce desirable behavior. Pay can also deliver messages on what the organization believes to be important. But to be effective, a pay-for performance system has to meet very stringent conditions as defined by expectancy theory. To achieve lasting motivation, attention has also to be paid to the non-financial motivators.
Causes of Satisfaction or Dissatisfaction with Pay

Reactions to reward policies and practices will depend largely on the values and needs of individuals and on their employment conditions. It is therefore dangerous to generalize about the causes of satisfaction or dissatisfaction. However, it seems reasonable to believe that, as mentioned above, feelings about external and internal-equity (the felt-fair principle) will strongly influence most people. Research by Porter and Lawler and others has also shown that higher paid employees are likely to be more satisfied with their rewards but the satisfaction resulting from a large pay increase may be shortlived. People tend to want more. In this respect, at least, the views of Herzberg have been supported by research. Other factors which may affect satisfaction or dissatisfaction with pay include the degree to which:

individuals feel their rate of pay or increase has been determined fairly; rewards are commensurate with the perceptions of individuals about their ability, contribution and value to the organization (Out this perception is likely to be founded on information or beliefs about what other people, inside and outside the organization, are paid); individuals are satisfied with other aspects of their employment - for example, their status, promotion prospects, opportunity to use and develop skills and relationships with their managers.
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Financial Rewards Criteria The criteria for assessing the effectiveness of financial reward practices as means of motivation are that:
they are, as far as possible, internally equitable as well as externally competitive (although there will always be a tension between these two criteria- paying market rates may upset internal relativities); pay-for-performance systems are, created in the light of an understanding that direct motivation Only takes place if the rewards are worthwhile, if they are specifically related to fair, objective and appropriate performance measures: if employees understand what they have to achieve, and if their expectations on the likelihood of receiving the reward are high; employees understand how the financial reward system operates, how they benefit from it, and how the organization will help them to develop the skills and competences they need to receive the maximum benefit.
pay-for performance schemes. The importance of recognition can be defined as a key part of the value set of the organization and this would be reinforced by education, training and performance appraisals. Responsibility People can be motivated by being given more responsibility for their own work. This is essentially what empowerment is about and is in line with the concept of intrinsic motivation based on the content of the job. It is also related to the fundamental concept that individuals are motivated when they are provided with the means to achieve their goals. The characteristics required in jobs if they are to be intrinsically motivating are that first, individuals must receive meaningful feedback about their performance, preferably by evaluating their own performance. and defining the feedback they require, second, the job -must be perceived by individuals as requiring them to use abilities they value in order to perform the job effectively and third, individuals must feel that they have a high degree of self-control over setting their own goals and over defining the paths to these goals. Providing motivation through increased responsibility is a matter of job design and the use of performance management processes. The philosophy behind motivating through responsibility was expressed as follows in McGregors theory Y: The average human being learns, under proper conditions, not only to accept but also to seek responsibility. Influence People can be motivated by the drive to exert influence or to exercise power. McClellands research established that alongside the need for achievement, the need for power was a prime motivating force for managers, although the need for affiliation, i.e. warm, friendly relationships with others, was always present. The organization, through its policies for involvement, can provide motivation by putting people into situations where their views can be expressed, listened to and acted upon. This is another aspect of empowerment. Personal Growth In Maslows hierarchy of needs, self-fulfillment or selfactualization is the highest need of all and is therefore the ultimate motivator. He defines self-fulfillment as the need to develop potentialities and skills, to become what one believes one is capable of becoming. Ambitious and determined people will seek and find these opportunities for themselves, although the organization needs to clarify the scope for growth and development it can provide (if it does not, they will go away and grow elsewhere). Increasingly, however, individuals at all levels of organizations, whether or not they are eaten up by ambition, recognize the importance of continually upgrading their skills and of progressively developing their careers. This is the philosophy of continuous development. Many people now regard access to training as a .key element in the overall reward package. The availability of learning opportunities, the selection of individuals for high prestige training courses and programmes and the emphasis placed by the organization on the acquisition of new
Non-financial Rewards Non-financial rewards can be focused on the needs most people have, although to different degrees, for achievement, recognition, responsibility, influence and personal growth. Achievement Research carried out by McClelland of the needs of managerial staff resulted in the identification of three major needs, those for achievement, power and affiliation. The need for achievement is defined as the need for competitive success measured against a personal standard of excellence. Achievement motivation can be increased by organizations through processes such as job design, performance management, and skill or competency-related pay schemes. Recognition Recognition is one of the most powerful motivators. People need to know not only how well they have achieved their objectives or carried out their work but also that their achievements are appreciated. Praise, however, should be given judiciously - it must be related to real achievements. And it is not the only form of recognition. Financial rewards, especially achievement bonuses awarded immediately after the event, are clearly symbols of recognition to which are attached tangible benefits, and this is an important way in which mutually reinforcing processes of financial and non-financial rewards can operate. There are other forms of recognition such as long service awards, status symbols of one kind or another, sabbaticals and work-related trips abroad, all of which can be part of the total reward process. Recognition is also provided by managers who listen to and act upon the suggestions of their team members and, importantly, acknowledge their contribution. Other actions which provide recognition include promotion, allocation-to a high-profile project, enlargement of the job to provide scope for more interesting and rewarding work, and various forms of status or esteem symbols. The recognition processes in an organization can be integrated with financial rewards, through performance management and
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skills as well as the enhancement of existing ones, can all act as powerful motivators.
Questions for Discussion

1. Do you think that non-financial motivators can work more effectively when integrated with financial rewards in a total reward process? 2. Do you agree that the needs of individuals vary almost infinitely depending upon their psychological makeup, background, experience, occupation and position in the organization. Therefore it is dangerous to generalize about which mix of motivators is likely to be most effective in individual cases. Hence one cannot rely on nostrums such as performance-related pay, skill-based pay, job enrichment or performance management to work equally well for every person or in every organization. These processes need to be customized to meet the needs of both the organization and the people who work there. But this customization win take place more effectively only if judicious use is made of achievement bonuses, pay increases related to the acquisition of specific skills and a performance management and reward process which concentrates on identifying individual needs and gaining the joint commitment of employees and their managers to satisfying them.
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UNIT III LESSON 23: INTRODUCTION TO WAGE INCENTIVES IN INDIA

Principles of External and Internal Differential Rewards and Incentives iv. A proper application of wage incentive schemes can so affect the prices that the community would be benefited. v. In the national interest, it is felt that wage incentive schemes should be applied to all economic activity.
Learning Objective

To understand the Prevalence of Wage Incentive Schemes in India To know the Need for introducing Wage Incentive Schemes in India
Tutorial Activity 1.1 Scenario

Agriculture still provides the bulk of wage goods required ... Moneylenders, banks, government incentive schemes, friends, relatives ... and analysis of case studies of successful ... AGRICULTURE has always been INDIAS most important economic sector. In the mid-1990s, it provides approximately one-third of the gross domestic product (GDP) and employs roughly two-thirds of the population. Since independence in 1947, the share of agriculture in the GDP has declined in comparison to the growth of the industrial and services sectors. However, agriculture still provides the bulk of wage goods required by the nonagricultural sector as well as numerous raw materials for industry. Moreover, the direct share of agricultural and allied sectors in total exports is around 18 percent. When the indirect share of agricultural products in total exports, such as cotton textiles and jute goods, is taken into account, the percentage is much higher. Dependence on agricultural imports in the early 1960s convinced planners that Indias growing population, as well as concerns about national independence, security, and political stability, required self-sufficiency in food production. This perception led to a program of agricultural improvement called the Green Revolution, to a public distribution system, and to price supports for farmers. In the 1980s, despite three years of meager rainfall and a drought in the middle of the decade, India managed to get along with very few food imports because of the growth in food-grain production and the development of a large buffer stock against potential agricultural shortfalls. By the early 1990s, India was self-sufficient in food-grain production. Agricultural production has kept pace with the food needs of the growing population as the result of increased yields in almost all crops, but especially in cereals. Food grains and pulses account for two-thirds of agricultural production in the mid1990s. The growth in food-grain production is a result of concentrated efforts to increase all the Green Revolution inputs needed for higher yields: better seed, more fertilizer, improved irrigation, and education of farmers. Although increased irrigation has helped to lessen year-to-year fluctuations in farm production resulting from the vagaries of the monsoons, it has not eliminated those fluctuations. After independence in 1947, the cropping pattern became more diversified, and cultivation of commercial crops received a new
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Prevalence of Wage Incentive Schemes in India

In a country like India, the role of financial incentives as a primary tool for motivating workers cannot be over-emphasized. Besides, the necessity of raising the productivity of Indian labour is also getting due attention. In this context, the First Plan recommended the introduction of incentive schemes to promote a more efficient working of industries with due safeguards for the interests of workers through the guarantee of a minimum wage and protection against fatigue and undue speed-up. The Second Plan recommended that the earnings beyond the minimum wage should be related to results, and that workers should be consulted before a system of payment by results was introduced in an establishment. The Third Plan emphasized the need for higher productivity and reduction in the unit cost of production. It put the responsibility on management to provide the most efficient equipment, correct conditions and methods of work, impart training and create suitable psychological and material incentives for workers. The Study Group of the National Commission on Labour has recommended that under our conditions, a wage incentive is concerned with an effective utilization of manpower which is the cheapest, quickest and surest means of increasing productivity. The only practicable and self-sustaining means of improving manpower utilization is to introduce incentive schemes and stimulate human efforts to provide a positive motivation to greater Output. Need for Introducing Wage Incentive Schemes in India The need for introducing wage incentive schemes in India has been felt on the following grounds: i. The efficiency of the Indian worker is very low, and needs to be raised. Wage incentives can play an important part improving his efficiency.
ii. The average Indian worker is financially very poor. Financial incentives therefore are likely to tempt him to work better. iii. India is at a low level of technology, and wage incentives can help in promoting the use of electronic devices.
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impetus in line with domestic demands and export requirements. Nontraditional crops, such as summer mung (a variety of lentil, part of the pulse family), soybeans, peanuts, and sunflowers, were gradually gaining importance. There are large disparities among Indias states and territories in agricultural performance, only some of which can be attributed to differences in climate or initial endowments of infrastructure such as irrigation. Realizing the importance of agricultural production for economic development, the central government has played an active role in all aspects of agricultural development. Planning is centralized, and plan priorities, policies, and resource allocations are decided at the central level. Food and price policy also are decided by the central government. Thus, although agriculture is constitutionally the responsibility of the states rather than the central government, the latter plays a key role in formulating policy and providing financial resources for agriculture. Agricultural Structure of India Field crops are planted on about 45 percent of the total landmass of India. Of this cultivated land, almost 37 million hectares were double-cropped, making the gross sown area equivalent to almost 173 million hectares. About 15 million hectares were permanent pastureland or were planted in various tree crops and groves. Approximately 108 million hectares were either developed for nonagricultural uses, forested, or unsuited for agriculture because of topography. About 29.6 million hectares of the remaining land were classified as cultivable but fallow, and 15.6 million hectares were classified as cultivable wasteland. These 45 million hectares constitute all the land left for expanding the sown area; for various reasons, however, much of it is unsuited for immediate cropping. Expansion in crop production, therefore, has to come almost entirely from increasing yields on lands already in some kind of agricultural use. Topography, soils, rainfall, and the availability of water for irrigation have been major determinants of the crop and livestock patterns characteristic of the three major geographic regions of India - the Himalayas, the Indo-Gangetic Plain, and the Peninsula - and their agro-ecological subregions. Government policy as regards irrigation, the introduction of new crops, research and education, and incentives has had some impact on changing the traditional crop and livestock patterns in these subregions. The monsoons, however, play a critical role in determining whether the harvest will be bountiful, average, or poor in any given year. Problem Definition The farm management is the field closely related to agroeconomics. There is no doubt that farmers adopting new technology are quite conscious about the management of their farm. However, there is general apathy about the farm management amongst the farmers, Agro-scientists and the policy makers. Being a relatively young since, no much attention is post to it. There may be some sound reasons for this. However, with changing scenario in agriculture, the need for guiding farmers in management of their farms assumes significance.
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In any business proposition, management has to play a significant role. In other sectors of the economy, management has become a catchword. In recent years, the irritations giving training in management are increasing by leaps and bounds. There is good demand for managers trained in these institutions. Now, the technical persons having engineering and other vocational background are turning towards MBA and allied courses. However, with rare exceptions, there are no such Institutions for training persons in farm management. One of the reasons for this may be that our farming is relatively a small-scale farming and the scattered one. In agriculture sector, there is need for guiding the farmers in this economic aspect. Aim The aim of our project is to design and develop an agricultural information system, which will provide an optimum production plan for a given farm taking into account the resources and the limitations in which it is being operated.
Objectives
The main objectives of the project are as follows:

To provide information to the farmers related to agriculture and farm management To develop a centralized, systematic and a single system to provide all kinds of information needed by farmers To help farmers in decision making in farming business To provide a geographical view of the various agricultural lands in the country to facilitate easier information retrieval To focus and provide various decision making tools for production of crops
Requirement Analysis
Our agricultural scene is a changing rapidly since the mid-sixties when we experienced the Green Revolution. It was followed by the White Revolution, which brought in the flood of milk in the country. Now, we are on way to Yellow Revolution i.e. revolution in fruit production. An important fact behind these revolutions is the economic consideration. Farmers have been adopting the new technology in agriculture and related fields mainly because of these innovations pay more all compared to their tradition crops. If we analyze, this changing scene in agriculture, we can notice that the traditional agriculture. Which was a way of life for our farmers is now becoming a business proposition. In the traditional farming there was no much change in the cropping pattern, cultivation practices etc. It was based on the experiences transmitted from father to the son. However, with the developments taking place due to five-year plans and technologies developments in agriculture, traditional farming is changing into modern farming. Traditional farming is slowly becoming obsolete and uneconomic. Traditional farming was more or less self-sufficient. Now farming is becoming market oriented. The needs of the farmers are increasing. He has to purchase many things such as high yielding seeds, fertilizers, pesticides, machinery etc. from
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the market. As a result, his investment and financial needs are increasing. Naturally, he has to produce and get income to meet the costs and also to make some profit. Thus, the costs, returns, markets, and profits of the enterprise become significantly important. The considerations of cost of production, income and profitability are summing significance. This is nothing but Agro-economics. With increasing population, rapid urbanization and growing export markets, the demand for farm products is increasing and is likely to increase in the near future. However, the competition is also likely to increase. The consideration of economic aspects in the production process is inevitable.
What to produce ? i.e. selection of crops and live-stock activity. Whether to have dairy, goat keeping or poultry or their combination. How to produce ? Adoption of suitable technology ; whether to continue old technology or use new technology or combination of both. How much to produce ? To consider family requirements in respect of foodgrain, vegetable, spices, fruits, milk, etc and also think of producing marketable surpluses. In that case, think of demand supply position availability of market and prevailing prices. This will also apply to production of cash/commercial crops. Acquiring inputs: In modern commercial farming, wide range of inputs are required. They include seeds of high yielding and hybrid varieties, fertilizers, pesticides, plant growth regulators (hormones), improved implements and machinery, etc. There are commercial and specialized agencies dealing in these inputs. The farmer has to take decision and make choices relating to From whom to buy ? At what price to buy ? How much to buy? Whether to buy on cash or on credit ? Obtaining credit: Although the farm family supplies some finance, it is not adequate considering larger financial requirements of modern agriculture. Therefore, farmer has to borrow from outside sources. In this connection he has to take following decisions. There is risk in borrowing. How much to borrow ? From whom to borrow ? There are some alternative sources viz. Moneylenders, banks, government incentive schemes, friends, relatives, traders, etc. He has to make right choice At what rate to borrow ? What security/mortgage to offer ? How repayments to be made ? How to face risk situation ? Marketing the produce: When surplus produce is obtained or created, its disposal or marketing advantageously becomes necessary. Following decisions are involved in the marketing of farm produce. Where to sell ? This is the most important decision because in rural areas big, wholesale and organized markets are limited. As far a individual farmer is concern, his produce is of small quantity, he has no transport facility, there are no good roads to go to distant markets. The farmer has to make choice within limited alternatives. Whom to sell ? There are various types of agencies such as villager trader, wholesale cum commission agents, co-operatives, government (for selected commodities ). He has to make choice from among them. When to sell ? Immediately after harvest when pries are the lowest or wait for better prices. He is also constrained by cash requirements for family expenditure. He has to take decision under most unfavourable situation.
Decision Making in Farming Business

Decision making in any business largely depends on the nature of business. To understand decision-making in farming, it is necessary to know the nature of Indian farming. Nature of Indian Farming Indian farming is basically a subsistence farming. But due to new technological developments in all the areas of production, productivity of crops and livestock has increased substantially, total production has increased several times and marketable surpluses with the farmers have also increased. As a result farming has assumed commercial proposition. Indian farming is a diversified and mixed type of farming. The farmers grow 5-6 crops or even more on their farms.
1. To meet their Family Requirements
To suit their soils on the farms and considering availability of resources including irrigation and market facilities. They also follow mixed farming, that is they keep few milk animals and follow dairy and also undertake sheep or goat keeping poultry keeping, etc. to supplement incomes from crop production. Therefore decision making on such farms is more difficult and complex than on specialized farming. Indian farming is a family type farming. Farm family provides major part of labour and also provides some capital.
2. Role of Farmers
Indian farmer plays following four rules simultaneously: He is an entrepreneur He is a Manager He is a Financer He is a Labourer or Worker, He takes decisions in two capacities as an entrepreneur and a manager.
3. Area of Decision Making
There are four major areas of decision making: Production of crops and livestock. Acquiring inputs. Obtaining credit. Marketing his produce. Production: The decisions related to production activity are:-
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At what price to sell ? Here the position of farmer is very vulnerable. He has almost no choice. Prices in organized markets (Regulated markets ) are fixed by open auction and he has to accept the price quoted by the highest bidder even this price may not be remunerative. In unorganized markets, prices are fixed by traders and farmer is hardly consulted. He has very limited scope for decision making. Problems Faced by Farmers As indicated above, there has been a technological breakthrough in agriculture in recent years. New non-traditional crops, new varieties of crops, new methods of cultivation are coming in very fast and farmers are adopting the same. A large number of farm products are being produced for exports. However there are specifications about the size, color, quantity, taste, packaging etc. Which farmers should know. Farmer has to consider all these aspects and consider the costs and returns before entering into the venture. Farmer has several enterprises (such as crops, dairy, and poultry) on the farm. He has to consider the economics of each enterprise separately also of the farm as a whole. It helps in decision-making and proper planning of the farm. Now, the time has come that every activity on the farm has to be viewed from the perspective of economics. Along with the adoption of new technology in farming, the problems faced by the farmers fare also increasing. There are problems of soil and water management, choice of crops, technical know-how, pests and diseases, natural hazards, marketing, finance, surplus production, price fluctuations and so on. In finding the solutions for these problems, economic criteria are to be applied.
Entity FARMER CROPS SOIL IRRIGATION FACILTIES WEATHER CONDITIONS
India is a vast country with varied climate, soils, and ecological conditions. In addition to this, individual farmer is having his own set up of resources and socio-economic situation. In solving the problems of individual farmers all these situational factors are to be taken into account. An important ray of hope, which one can notice in this complex changing scenario of agriculture, is that new generations of farmers who are more educated, young and energetic have taken up to this enterprise. In addition, many nonfarming community entrepreneurs are also attracted towards agriculture. They are very keen on getting more knowledge about the new technology. Many of them are innovative and experimenting of their own. Naturally, they are more economics oriented. Our System as a Solution to the Above Problems We propose an agriculture information system for guiding the farmers in this economic aspect. The subject matter covers several aspects such as decision-making, farm planning, resource planning (land, labour, capital), farm costing, farm accounting, marketing, and analysis of case studies of successful farmers. The use of efficiency measures to evaluate the enterprise is also an important aspect of our system. The statistical tools such a production function, linear programming are being used to get an idea about the resource. We intend to provide an optimum plan for a given farm taking into account the resources and the limitations in which it is being operated.
Basic Components identified
The various components/entities that we identified after our requirement analysis phase are described below in common language.
Functions A farmer is involved in the activities of agricultural production, marketing, farm, soil and water management Decision-making is involved as to where which crop should be sown. Decision making is involved as to in which soil which crop should be sown Decision-making is involved as to in which area for which crop what irrigation facilities are to be used. Decision making is involved as to in which climatic conditions which crop should be sown It enhances the fertility of soil and thus results in increased production. It helps the farmers in various agricultural tasks It harms the crop and decreases the over all production. It removes the pests, insects etc that attack the crops It helps farmers to increase their income level.
Brief description An individual person who cultivates land for his source of income Farmers grow different crops. Various types of crops are sown all over India depending on a number of circumstances Crops are sown in the soil. Various types of soil are found all over India like alluvial soil, clay soil etc. They are used to grow crops. Farmers employ different irrigation facilities depending on number of circumstances There are different weather conditions like temperature, humidity etc. in different parts of the country depending on the geographical situations. This entity is used by the farmers to increase their productivity The farmers to make farming more convenient use this entity. The plants suffer from this entity resulting in less production. This entity is used by the farmers to get rid of various crop diseases and pests The government for various types of crops makes this entity for the goodwill of the farmers.
FERTILIZERS AGRICULTURAL TECHNOLOGIES DISEASES PESTICIDES & INSECTICIDES AGRICUTURAL POLICIES AND SUBSIDIES
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Relationships Farmers sow crops Farmers buy fertilizers, agricultural technologies, pesticides & insecticides ,irrigation facilities to enhance his production Crops require a particular type of soil, weather conditions, fertilizers, insecticides & pesticides, irrigation facilities and agricultural technologies. Crops suffer from diseases. Pesticides & insecticides remove diseases. Farmers use agricultural policies and subsidies. There are different policies for different types of crops
Tutorial Activity 1.1 Rewards and Incentives

What are Strategic Rewards? Let us study in detail about the same in the case below that they are not just about money any more. In todays competitive employment market, employers know that finding, hiring, and keeping skilled workers is not just about money any more. To attract, manage and retain an effective and efficient workforce, Federal employers are learning to think in terms of broader strategic rewards. This means rethinking how we can offer talented and highly-skilled employees the rewards that will help keep them engaged and focused on meeting strategic objectives. What are strategic rewards? How does performance management fit into a strategic rewards framework? What agencies are using a strategic rewards perspective? What are strategic rewards? Strategic rewards embrace everything that employees value in the employment setting, and the term refers to the complete bundle of all employee reward elements. What makes these rewards strategic is the care employers must take to align their design and effects with strategic objectives. One view of Strategic Rewards as depicted here shows four quadrants of a strategic rewards framework:
Compensation Base Salary Variable Pay Job Evaluation Performance Management Paid Time Off Development and Learning Training Career Development Learning Experiences Succession Planning Benefits Health Care Retirement Savings Other Insurance
Software Development Methodology

We plan to carry the design and implementation of this project in a completely step-by-step manner. The entire project is divided in the following phases Phase 1
Study and Analysis Phase
In this phase we shall visit various websites related to agriculture in India and make a thorough study of several books on agriculture. we also plan to interact with farmers so as to know their problems and to collect information regarding our project. We shall study the complete agricultural production process and analyze the drawbacks of the existing system and propose our system as a solution to them.Also we shall study the concept of databases and other material required to design and develop our system Phase 2
Design Phase
Identification of entities and their relationships Development of logical n conceptual models Development of ER model for the proposed system Defining hardware and software requirements Phase 3
Coding phase
Work Environment Work/Life Balance Leadership Performance Support Organizational Climate
Implementation of system through actual code Phase 4

Implementation and Testing
This phase will involve implementation of our system and testing it with various test cases n data sets. We shall follow the SDLC model for the development of the proposed system.
Gantt Chart
(14 WEEKS)
The top two quadrants, compensation and benefits, cover the areas that we traditionally think of as rewards the employer provides. These are sometimes referred to as transactional rewards because they include the tangible results of the agreement between the employee and employer. In this agreement, or transaction, the employee agrees to provide time, labor and skills in return for salary and benefits. Therefore, these rewards are readily viewed in terms of having a monetary value, such as the employees base salary or the Federal Employees Health Benefits Program. Transactional rewards play an important part in an employees decision about where to work and whether to stay with an organization.
ANALYSIS AND STUDY (4 WEEKS) DESIGN (4 WEEKS) CODING (3 WEEKS) IMPLEMENTATION & TESTING (3 WEEKS)
The bottom two quadrants, development and learning and the work environment, cover areas that are increasingly recognized as critical contributors to employee satisfaction. They are sometimes referred to as relational rewards because they tend to represent the relationship (vs. the transaction) between the
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employee and employer. They are important additional rewards that can significantly enhance an employees desire to remain with an organization. These rewards:

groups reported high levels of agreement with the following statements: I know what is expected of me at work. (planning)

can emphasize the importance of the employee to the organization; can influence the employees sense of loyalty;
In the last 6 months, someone at work has talked to me about my progress. (developing) In the last 7 days, I have received recognition or praise for doing good work. (rewarding)
Are rarely seen in terms of their cash value, but can have an equally important impact when an employee is trying to decide whether to accept other employment or remain with an agency. Represent those program areas where agencies have the greatest amount of flexibility to design programs specific to the needs of their employees. To many employees, a supportive and engaging work environment is at least as important as health care benefits and pay. For example, dependent care support, flexible work schedules, opportunities to telecommute, flexible leave programs, meaningful employee involvement, and well-trained supervisors providing quality leadership may make all the difference in the world when a person with a hard-to-find skill is considering your job offer or when an employee with valuable institutional experience is considering a competitors offer. How does performance management fit into a strategic rewards framework? The performance management policies, programs, and practices that agencies carry out play an essential role in strategic rewards. Of course, in the Federal Government, performance management includes not only planning, monitoring, and rating performance, but also developing and rewarding performance. Performance management is listed specifically in the compensation quadrant to signify that credible measures of performance and using monetary rewards to reinforce results achievement are essential parts of effective performance-oriented pay. In addition, our General Schedule pay system includes a pay progression feature where within-grade pay increases are contingent on acceptable performance and where exceptionally high performance can be recognized with a quality step increase. Good performance management practice also plays a vital role in relational rewards. For example, one of the strategic reward quadrants is also one of performance managements key processesdevelopment. If managers do not develop employees, they are not effectively managing employee performance and are not making best use of strategic rewards. Through monitoring performance, providing feedback, coaching for improvement, and identifying developmental needs, managers create a learning environment that can be enriching and rewarding for employees. Performance management also plays an important role in the work environment quadrant. Studies conducted by the Hay Group, the Gallup organization, and others, show that good performance management practices create rewarding experiences for employees. For example, when surveyed about work environment issues, employees in highly-productive work
What agencies are using a strategic rewards perspective? Many agencies have adopted this approach to help them manage their workforce. The Defense Contract Audit Agency (DCAA) and the National Credit Union Administration (NCUA) use strategic rewards to help attract and retain skilled employees. As the Defense Departments audit agency, DCAAs human resources managers were faced with the challenge of hiring 600 entry-level auditors within 1 years. To make the agency more attractive to potential hires, managers reinvented the way they recruit. In addition to streamlining their recruitment process, they also put emphasis on the training new hires will receive, the tuition reimbursement program, recruitment bonuses, and a 3to 5-year career ladder. In addition to actively recruiting new employees, DCAAs managers worked to retain its current workforce. To do this, it created a work environment of trust, teamwork, and mutual respect by using effective communication and leadership at all levels. NCUA implemented a merit pay system that links annual pay raises directly with employee performance appraisals. The agency uses a variety of awards to recognize its employees for their contribution to its organizational goals and objectives. Using the strategic rewards approach, NCUA has created programs that allow its employees to work from home, receive reimbursement for certain home-office expenses, participate in one of three flexible work schedules, and receive travel bonuses (i.e., a cash award to recognize employees who volunteer to be in a travel status for more than 50 days a year). NCUA uses its strategic rewards as part of its recruitment program. The agency works hard to create a work environment that is family-friendly as well as challenging. For additional information on NCUAs strategic rewards programs. These are only two examples of the ways that Federal agencies are reexamining the way they think about, design, and deliver the wide variety of things about the work situation that employees find rewarding.
Tutorial Activity 1.2 Incentives for Inclusion

By Lalitha Sridhar Under the Icebreaker scheme, an employer hiring a person ... can get the persons wage paid for ... to all businesses, why not disability incentives and reservations ... At least 7 million disabled Indians are waiting for a job. But only 0.4% of employees in Indias top 100 corporate houses are disabled. Indias first Draft Incentives Policy for the Disabled has just been presented to the government. It demands serious
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attention from the public and private sectors to the question of incentives and subsidies for the support and employment of the disabled. A host of NGOs, senior bureaucrats, representatives from industrial associations and chambers, financial and corporate taxation experts and mediapersons recently congregated for the first time in order to present a Draft Incentives Policy for the Disabled to the Government of India. Key organisations and activists from the disability sector have come together to place the pioneering document before the government, in time to lobby for its adoption by the Union Budget of 2004-2005. To prepare the ground, two critical research studies were commissioned. Firstly, incentive policies in select European countries to promote the employment of disabled people were analysed. Secondly, existing incentive policies in the Indian corporate sector promoting social and economic causes other than disability were studied. While 5-6% of Indias population is disabled, less than 1% of children with disability receive education of any kind. Even though the first Special Employment Exchange (SEE) for the physically disabled was established in Mumbai in 1959, and in 1977 the Government of India reserved 3% of vacancies in identified jobs in government and the public sector, since the setting up of the first SEE more than 40 years ago, only about 1,00,000 disabled persons have been employed. Says Javed Abidi, Director of the National Centre for Promotion of Employment for Disabled People (NCPEDP), the leading advocacy group credited with moving a recalcitrant government to include disability in the 2001 Census, There has been a sustained and overall neglect of the needs of disabled people in India. This Incentives Policy initiative is being spearheaded by the three Disability Legislation Units set up in Chennai, Mumbai and Guwahati by the NCPEDP, which also oversees the National Disability Network to advocate better employment, awareness, legislation, education and access for disabled people. Asks Rajul Padmanabhan, Deputy Director of Vidya Sagar (formerly the Spastics Society of India, Chennai), When tax benefits can be given for exports, for infrastructure, for setting up new units in backward areas etc, why can tax benefit not be given for employment of persons with disability? According to the Persons with Disability Act, 1995, the government should give incentives to employees both in public and private sectors to ensure that at least 5% of their workforce is composed of persons with disabilities. But the implementation of this well-intentioned piece of legislation leaves much to be desired. Weighted deduction is allowed for employment-generation and scientific research, subsidies are given to sugar, fertiliser, horticulture and plantations - but not for employment of disabled persons. Rebates on interest on loans, various subsidies, duty exemptions, reservations in land allotment and waiver of charges like electricity are other areas where disabled people can benefit from incentives, recommend the studies. In developed countries, disability is tied to the longevity of the population. In the EU, for example, the vast majority of
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disabilities have been acquired in middle or old age - 63% of people with disabilities are aged 45 or more; almost 40% of them are age 55 or older. In India, on the other hand, one in every 10 children is disabled. Nevertheless, some problems appear to be universal. As many as 52% of people with disabilities are economically inactive in the EU, as compared with only 28% of non-disabled people. Activists believe it is necessary to understand established models that can be replicated in India. Unlike many people in developing and transition countries, the majority of workers in Europe are engaged in formal employment. Benefit systems involve major investments in funds and manpower of the kind hardly available in India. There are important lessons we can learn from Europe. For example, even though Denmark does not define what constitutes the disabled population, it focuses on compensation for individual needs. Persons with disabilities have access to a large number of measures to support them in the event of unemployment and to encourage them to re-enter the job market. Disability counsellors are assigned to each regional employment agency in an effort to better match disabled individuals with jobs in the open labour market via guidance, training and recruitment. The Dutch concept of Flexjobs allows for 33, 50 or 67% subsidy of wages in the event of a disabled employee taking leave from work. This not only encourages workers to undertake continued education or rest, if necessary, but provides temporary employment for (disabled) substitutes. The subsidies are provided by the State to multiply jobs of this nature rather than put jobseekers on disability pension. Lenient jobs is another supplementary employment scheme: a disabled person with 33% working ability, for example, receives 1/3 of the minimum wage. Under the Icebreaker scheme, an employer hiring a person with severe disability can get the persons wage paid for during the first 6-9 months. Overall, the report says, the emphasis is on mainstreaming and that is what we need to emulate. In India, the Persons with Disabilities Act has completely left out the private sector. Experts ask that when taxes and other laws are uniformly applicable to all businesses, why not disability incentives and reservations? But, says Ravi Shankar, Vice-President of Flash Support, an organisation that hires disabled people, I dont mean to demean incentives but the disability sector can and should identify areas where their services are most suited and become available for them in a proactive way. Industries in recession will not appreciate carrot-and-stick policies. Companies in the IT (Information Technology), telemarketing and BPO (Business Process Operations) sectors are particularly suited for employing disabled persons. Many offer work-fromhome options. A particular strength of the disabled is that they are loyal employees. The IT industry has attrition (turnover of personnel) rates of 30-40%, a problematic issue for corporates. Adds Anuradha Parakkat, Director of the Confederation of Indian Industry (CII), Corporates will be more interested in
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those who can deliver. One good disabled recruit makes a far better impact than any number of policies. Countered Poonam Natarajan, Director of Vidya Sagar, We all know about recession but let not the disabled be the last in the queue. I wouldnt aspire to be a singer because I cannot sing. Similiarly, the fact that we have to match our ability to the available job opportunities is true for all of us - not just the disabled. Also, if somebody gives me an opportunity, I can find ways and means of doing what is required of me. An example can be found in Varada Kutti, a chartered accountant who was rejected when he applied for a job as a clerk by the State Bank of India, and now runs a firm that audits some of their branches. Activists express concern that persons with mild disability are being neglected. Also, the vast population of the rural disabled do not have access to technology and jobs that involve its application. The governments policy of categorising disabled people draws criticism too. Says Padmanabhan, A person with cerebral palsy cannot be slotted into particular options and slotted into can do or cannot do generalisations. It doesnt work like that at all. The abilities of disabled individuals - even within victims of cerebral palsy - are often unique. Individualising is happening at NGO levels anyway. Incentives provide a larger, broader access. The next generation of corporate managers can be sensitised by introducing disabilities as a section in human resource management studies. Two things are necessary: shift focus to employability of the disabled and, at the same time, provide industry with incentives to hire them. Says Giridhar, wheelchair-bound advocate with the Forum for Just Law, Percentages mean nothing! Three per cent of 20 posts? Disabled people fall out of the net because the number is not even tangible. An absolute number of positions is what is required, with options of either that number or a certain percentage, whichever is lower perhaps. As a disabled person, I even have to pay a higher insurance premium! Recommends Prakash Kuruvilla, Regional Head of HSBC (the Hongkong and Shanghai Banking Corporation), The Apprentices Act can be explored and amended to include the disabled too. There is tremendous demand for people who can be hired with no strings attached. Many companies file nil returns in the Compulsory Notification of Vacancies Act because they are afraid of the kind of pressure employment exchanges will exert on them. Headhunters assume we wont be interested in the disabled but many who join as apprentices prove themselves very well. We have to accept the reality that with outsourcing, very few permanent jobs are coming out. A 1999 study of 100 top corporate houses in India showed that the average percentage of employees with disabilities is a dismal 0.4%. The National Sample Survey of 1991 (results last available) itself said that there are 7 million employable disabled people waiting to get a job. If the Draft Incentives recommendations are accepted in whole, or part, by the government, some urgently needed difference could be made.
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LESSON 24: INTRODUCTION TO TYPES OF WAGE INCENTIVE PLANS

Principles of External and Internal Differential Rewards and Incentives of work for a fixed wage; two, the fixing of a rate of percentage by which bonus would be earned by a worker over and above his set wage, if the standard time is saved or the standard output is exceeded. Merits The chief advantages of an incentive-wage plan are: i. When well-designed and properly applied, payment by results may generally be relied upon to yield increased output, lower the cost of production, and bring a higher income to the workers. ii. A works study associated with payment by results is a direct stimulus to workers to improve the organisation of work and to eliminate lost time and other waste. iii. Labour and total costs per unit of output can be estimated more accurately in advance. iv. Less direct supervision is needed to keep output up to a reasonable level. v. The conflicting interests of employers and employees are unified. Increased. efficiency and smooth working can therefore be promoted and sustained. Demerits The plan suffers from the following defects: i. Quality tends to deteriorate unless there is a stricter system of checking and inspection. ii. Payment by results may lead to opposition or restriction on output when new machines and methods are proposed or introduced. This is because of the fear that the job may be restudied and earnings reduced. iii. When paid by result, workers tend to regard their highest earnings as norms, and therefore, press for a considerable higher minimum wage. iv. The amount and cost of clerical work increases, if done manually. v. There is a danger of disregarding safety regulations and thereby increasing the rate of accidents. vi. Jealousies may arise among workers because some are able to earn more than others or because fast workers are dissatisfied witJ:l the 310wer or older workers in the group. vii. It is difficult to set piece or bonus rates accurately. If they are too low, workers may be under pressure to work too hard and become dissatisfied; and if too high, they may slacken their efforts to avoid a revision of rates. A Successful Wage Incentives Plan Should Consist of the Following Key Points i. The management should recognise that the effectiveness of an incentive depends on the total situation, which includes worker-management confidence, relations with the trade
Learning Objective

Introduction to wage Incentive Plans To know the Incentive Plans For Blue-Collar Workers: For Individuals To understand what successful wage Incentive Plan consists of To learn important wage Incentive Plans To understand Group Incentive Plans
Introduction
Write Wage Incentive Plans may be discussed as (i) plans for bluecollar workers; (ii) plans for white-collar workers; and (iii) plans for managerial personnel - because each of these categories of employees have separate and distinct I needs and specific plans tailored for each category may prove beneficial. Incentive Plans for Blue-Collar Workers: For Individuals a. Short-Term Plans b. Long Term Plans Description
Short-Term Plans
These systems may be broadly classified into three categories: a. Systems under which the rate of extra incentive is in proportion to the extra output; b. Systems under which the extra incentive is proportionately at a lower rate than the increase in output; and c. Systems under which the rate of incentives is proportionately higher than the rate of increase in output. Every employer wants his workmen to do the maximum work they are capable of doiri3. On the other hand, there is a feeling among the workers that an increase in effort benefits only the employer even when they are employed on a piece-rate basis. The result is that they never produce to their full capacity, and; in most cases, put in the minimum necessary work. This feeling on the part of workers may be removed either through fear or through expectation of gain. It has been found that fear can never produce the desired effect; but a hope of earning a bonus does induce them to work harder and produce more. Incentive plans are, therefore, known as premium plans because they offer a premium for outstanding performance. All bonus of premium plans relate to two factors: one, they set a standard time for the completion of a definite output or piece
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union, the quality of communication and of supervision and the traditions in an industry. ii. Management should not introduce an incentive system until it has taken action to ensure full understanding of what is involved. This may call for procedures for the participation of employees and negotiations with the trade union. iii. The management should avoid any action that may ire interpreted unfair. There must be a proper machinery for handling grievances. The management should avoid action that resemble rate cutting because of the need to change method and rates from time to time. iv. It is essential that the management pay in proportion to output, once this output has risen above that required amount for guaranteed pay. v. The management should train supervisors all the way down the line so that foremen and department managers are able to deal with problems within their own departments. vi. Great care should be taken in setting up standards to avoid rates that are too loose or too right.
Some Important Wage Incentive Plans
Then, the working of the scheme will be: 14 Time taken (hrs)... 6 No. of hrs saved...Rs. 3.50 Amount of wages recvd... Re. 0.75 Amount of bonus... Re.0.75 Total earnings...Rs.4.25 Example If 8 hours is the standard time of a job, and Re. 0.50 is the guaranteed wage per hour, the worker, if he takes 8 hours to perform the work, receives Rs. 4.00. If he performs the task in less than 8 hours he receives an extra premium on the time saved (i.e., for 2 hours). Table 1 Premium (Half of the Time Saved)
If the work is completed -do-do-do in 6 hours 0.66 in 4 hours 2.00 in 2 hours 6.00 in 1 hour 14.00
Total Wages Rs.

4.66 6.00 10.00 18.00
The chief incentive plans are: i. Halsey Premium Plan. ii. Halsey Weir Premium Plan. iii. Rowan Premium Plan. iv. The 100 Per cent Premium Plan. v. The Bedeaux Point Plan. vi. Taylors Differential Piece Rate Plan. vii. Merries Multiple Piece Rate Plan. viii.Gnatt Task Plan. ix. Emerson Efficiency Plan. x. Co-Partnership System. xi. Accelerating Premium Systems. xii. Profit Sharing.
formula: Bonus = 1/2 of Merits The merits of this plan are:
Timesaved Daily wage Time taken
a. It guarantees a fixed time wage to slow workers and, at the same time, offers extra pay to efficient workers. b. The cost of labour is reduced because of the percentage premium system; the piece rate of pay gradually decreases with increased production. c. The plan is simple in design and easy to introduce. d. As the wages are guaranteed, it does not create any heartburning among such workers as are unable to reach the standard. Demerits The disadvantages of the plan are: a. It depends upon past performance instead of making new standards. b. The workers can beat the game by spurting on certain jobs to capture a premium and soldiering on other jobs to rest under the protection of the guarantee of day wages. c. From the point of view of the administration, the policy is one of drift, for, in this plan, the worker is left alone to decide whether or not to produce more after the standard has been reached. Halsey-Weir Premium Plan This plan is similar to the Halsey Premium Plan except that 50 per cent of the time saved is given as premium to worker. Bonus = 1/2 Time Saved Hourly Rate Rowan Premium Plan This plan differs from the Halsey Plan only in regard to the determination of the- bonus. In all other respects, the two are
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Description of Each Wage Incentive Plan

Halsey Premium Plan This is a time-saved bonus plan which is ordinarily used when accurate performance standards have not been established. Under this plan, it is optional for a workman to work on the premium plan or not. His days wage is assured to him whether he earns a premium or not, provided that he is not so incompetent as to be useless. A standard output within a standard time is fixed on the basis of previous experience. The bonus is based on the amount of time saved by the worker. He is entitled to a bonus calculating on the basis of 331/3 per cent of the time saved. He thus gets wages on the time rate basis. If he does not complete the standard output within the stipulated time, he is paid on the basis of a time wage. The plan is a combination of the day wage and the piece wage in a modified form. Example Suppose the standard time is 20 hours, the number of units to be completed is 10, and the hourly rate is 25 paise.
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the same. In the Rowan Plan, the time saved is expressed as la percentage of the time allowed, and the hourly rate of pay is increased by that percentage so that total earnings of the worker are the total number of hours multiplied by the increased hourly wages. The plan aims at ensuring the permanence of the premium rate, which is often cut by the employer when the workers efficiency increase beyond a certain limit. The premium is calculated on the basis of the proportion which the time saved bears to standard time. Example If 8 hours are the standard time for doing a job and Rs. 4.00 per day wage, the premium and total wages would be as follows: Table 2
Premium Rs. If the job is completed -do-do-do in 5 hours 0.66 in 4 hours 2.00 in 3 hours 6.00 in 1 hour 14.00 Total Wages Rs. 5.66 6.00 7.00 7.50
Weir or the Rowan Plan is equal; but above 50 per cent of the time saved, the Rowan Plan pays more than the Halsey Plan. However, under, the Rowan Plan a worker gets his maximum bonus when he completes the task in half the standard time allowed. If he saves more than 50 per cent of the time, the bonus he earns decreases, and his increase in wage is at a diminishing rate. But under the Halsey and Halsey-Weir Plan, it is progressively higher. The 100 Per Cent Premium Plan Under this plan, task standards are set by time study or work sampling, and rates are expressed in time rates rather than in money (e.g., 0.20 hour per piece). A definite hourly rate is paid for each task-hour of work performed. The plan is identical with the straight piece-rate plan except for its higher guaranteed hourly rate and the use of task time as a unit of payment instead of a price per piece. The worker is paid the full value of the time saved. If he completes the tasks of 10 hours and if the hourly rate is Re. 0.50, his total earnings will be Rs. 8 x 0.50 + (10 - 8) x 0.50 = Rs. 4.00 + 100 = Rs. 5.00. The Bedeaux Point Plan This plan is used when careful assessed performance standards have been established. It differs from the 100 per cent plan in that the basic unit of the time is the minute termed as B. Every job is expressed in terms of Bs (after Bedeaux), which means that a job should be completed in so many minutes. If a particular work is rated at 60 Bs (or one B hour), the worker is allowed one hour for its completion and receives a bonus of 75 per cent for the number of Bs, i.e., time, saved. Suppose a worker earns 600 Bs in a day; if the rate per point is Re. 0.01, his total earnings would be: Rs. 4.80 x 0.01 + 3/4 (600 - 480) x .01. = Rs. 480 + Re. 0.90 = Rs. 5.70. The chief advantage of this plan is that it can be applied to any kind of a job. It is particularly suitable for plants in which workers are assigned diverse kinds of jobs, shifted from one job or department to another. All the points which a worker earns in a day are recorded, and the bonus is calculated on that basis. Taylors Differential Piece-Rate Plan This system was introduced by Taylor with two objects: First, to give sufficient incentive to workmen to induce them to produce up to their full capacity; and second, to remove the fear of wage cut. There is one rate for those who reach the standard; they are given a higher rate to enable them to get the bonus. The other is the lower rate for those who are below the standard, so that the hope of receiving a higher rate (that is, a bonus) may serve as an incentive to come up to the standard. Workers are expected to do certain units of work within a certain period of. time. This standard is determined on the basis of time and motion studies. Such scientific determination ensures that the standard fixed is not unduly high and is within the easy reach of workers. On a proper determination of the standard depends the success of the scheme.
Formula: Bonus =
Time saved Time taken Hourly rate Time Allowed
The Rowan Plan has all the merits and demerits of the Halsey Plan except that, because of the limitation on earnings, it does not provide an incentive for maximum productivity. Moreover, the complex method of premium calculation is generally unintelligible to the worker. He cannot, therefore, be expected to take much interest in the plan. These premium plans may be classified as differential piecework systems and have been evolved with a view to giving the benefit to both parties. They are based on the fundamental principle that a workers earning should increase when his production rises above a pre-determined target. As his extra earning is not in proportion to his usual wage rate, the overall production cost per piece falls when the output increases. The bonus paid and the total earnings under each of these three schemes are given in Table 3 Table 3
Plan Halsey Halsey-Weir Rowan
B=
Bonus (B) B = 1/3 (Hs - Ha) Rh B = (Hs Ha) Rh

(Hs Ha) Ha. Rh Hs
Total Earnings (E) E= Ha. Rh + 1/3 (Hs - Ha). Rh. = (Hs + 2 Ha) Rh. E= Ha. Rs + 1/2 (Hs - Ha). Rh. = 1/2 (Hh + Ha) Rh.
E = Ha Rh + ( Hs Ha) Ha.Rh Hs
Ha = (2 Hs.Ha ) Rh Hs
Hs = the hour allowed or standard time. Ha = the actual time taken on a job. Rh = the worker rate per hour. It will be seen that, for a little time saving Rowan Plan gives more bonus than the Halsey or the Halsey-Weir Plans. Up to 50 per cent of the time saved, the bonus earned under the Halsey156
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This system is designed to encourage the specially efficient worker with a higher rate of payment and to penalise the inefficient by a lower rate of payment. In practice, this plan is seldom used now. Example Let the standard time for the completion of 10 pieces of a job be 8 hours and the piece rate be Re. 1.00. Then the basic hourly rate comes to 12.5 paise. The one who completes the work within the allotted time is paid wages at a rate which is 320 per cent higher than the basic one. Table 4 (Amount in Rs.)
Worker A B C D E No. of units completed in Allotted time 10 9 8 11 12 % of efficiency 100 90 80 110 120 Total Amt. Received 1.20 0.90 0.80 1.32 1.44 Basic Piece Rate 0.1 0.1 0.1 0.1 0.1 Effective piece Rate 0.12 0.10 0.10 0.12 0.12
ii. at the standard performance, this wage + 20% of time-rate will be paid as a bonus; and iii. when the standard is exceeded, a higher piece rate is paid but there is no bonus. Example If the standard task for a day is 8 units and the day wage is Rs. 4, the bonus at 50 per cent and the total wages would be: Example: If the standard task for a day is 8 units and the day wage is Rs. 4, the bonus at 50 per cent and the total wages would be: Table 5
Unit of work If 6 units are completed in a day If 8 units are completed If 10 units do If 12 units do Task Wages (Rs.) 4.00 4.00 4.00 4.00 Bonus (Rs.) Nil 2.00 2.50 3.00 Total Wages (Rs.) 4.00 6.00 7.50 9.00
It is evident that workers A, Band C are better off, and for them the system is good; but for D and E, who are more than 100 per cent efficient, the effective piece rate remains the same when compared with that of A, who is just 100 per cent efficient. Merries Multiple Piece Rate System This system, too, is based on the principle of a low piece rate for a slow worker and a higher piece rate for higher production; but the plan differs from Taylors Plan in that it offers three graded piece rates instead of two. i. Up to, say 83% of standard output a piece-rate + 10% of time rate as bonus;
This system is most profitable for workers whose efficiency is very high. The basic wages rise proportionately as under ordinary piece wage system, and the bonus is allowed on the increased wage. In addition to this workers with lower efficiency are not penalized, as they are in Taylors Differential Piece Rate. Emerson Efficiency Plan Under this system, a standard time is established for a standard task. The day wage is assured. There is no sudden rise in wages on achieving the standard of performance. The remuneration based on efficiency rises gradually. Efficiency is determined by the ratio between the standard time fixed for a performance and the time actually taken by a worker. Thus, if the period of 8 hours is the standard time for a task and if a worker performs it in 16 hours, his efficiency is 50 per cent. He who finishes the task in 8 hours has 100 per cent efficiency, at which stage he receives a nominal bonus. This bonus goes on increasing till, when he achieves 100 per cent efficiency, the bonus comes to 20 per cent of the guaranteed wage. At 120 per cent efficiency, a worker receives a bonus of 40 per cent and at 140 per cent efficiency the bonus is 60 per cent of the day wage. Co-Partnership System This system tries to eliminate friction between capital and labour. Under this system, not only does a worker share in the profits of the undertaking but he also takes part in its control and, therefore, shares responsibilities. There are different cases; but in a complete co-partnership system, the following factors are present: a. The payment of the existing standard wages of labour; b. The payment of a fixed rate of interest on capital; c. The division of the surplus profit between capital and labour in an agreed proportion; d. The payment for a part of the workers labour by the allotment of a share in the capital;
ii. Above 83% and up to 100% of standard output ~ same piece rate + 20% of time rate; and iii. Above 100% of standard output - same piece rate but no bonus. Such a scheme is usually introduced in an organisation where the performance level is already high and management is aiming at 100% efficiency. Management has some discretion in distributing the 20% of time rate over 17% of production above 83%. The Gnatt Task and Bonus Plan This plan has been devised by H.L.Gnatt and is the only one that pays a bonus percentage multiplied by the value of standard time. Under this system, fixed time rates are guaranteed. Output standards and time standards are established for the performance of each job. Workers completing the job within the standard time or in less time receive wages for the standard time plus a bonus which ranges from 20 per cent to 50 per cent of the time allowed and not time saved. When a worker fails to turn out the required quantity of a product, he simply gets his time rate without any bonus. Under this plan, there are also three stages of payment: i. Below the standard performance, only the minimum guaranteed wage is to be paid;
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e. The sharing in the control of the business by the representatives of labour. The system arouses and sustains the interests of the workers in their work. By giving them a voice in the management of the factory it raises their status as well. As they have become partners in the business, they try to make it a very profitable enterprise. Accelerating Premium Systems There are the system which provide for a guaranteed minimum wage for output below standard. For low and average increases in output above the standard, small increment in earnings are allowed. Increasingly large earnings are conceded for above average output, the increment being different for each 1% increase in output. Very significant increases in earnings are given for really high output. In this system, the production is pushed up higher and higher by discouraging low output and rewarding at an increasingly effective rate higher outputs. Such schemes are generally adopted when much higher outputs than what are currently obtained are to be achieved. Long -Term Wage Incentive Plans Under such plans, each member of the group receives a bonus based on the output of the group as a whole. There are several reasons for adopting such a plan. Sometimes (as on assembly lines) several jobs are inter-related. Here one workers performance reflects not only his own effort but that of his co-workers too. In such cases, group incentive plans are advantageous. Secondly, such plans also encourage co-operation among group members. There tends to be less bickering among group members as to who has tight production standards and who has loose ones. Thirdly, the groups can bring pressure to bear on their members (through badgering, ostracism, etc.) and help keep shrinkers in line. This, in turn, can help eliminate some of the need for close supervision. Fourthly, group production levels tend to be more stable than individual ones; and group incentive payments vary less than individual ones. Finally, group incentive plans also facilitate on-the-job training, since each member of the group has a vested interest in getting a new group member trained as well as quickly as possible. The chief disadvantages of the group plans are: i. Each workers rewards are no longer based solely or directly on his own efforts. To the extent that person does not see his effort leading to the desired reward a group plan is probably not as effective as an individual plan.
Group incentive Plans are usually applied to small work groups, for example, 5 or 6 people who must assemble a component together. The incentives usually take three forms. a. A standard output, i.e., target production, may be laid down for a month or a larger period and bonuses are paid if this is achieved; and b. A standard output per man-hour is laid down for a department or for the plant as a whole, and the bonus is paid in proportion to which the actual output per manhour exceeds the standard, the other conditions of work remaining the same. 2. The Value added by manufacture at factory cost leading to cost reduction forms the basis for calculating the bonus. If the actual cost of production is lower than the standard cost to the extent the workers are able to influence such reduction - by harder working, saving in materials, fuels, lubricants, etc. - a bonus whose money value is a percentage to the cost reduction is paid. 3. Bonus can also be calculated on the increased value of sales where this result is obtained by increased production. The Group Incentive Plans are usually: i. The Profit-sharing schemes, and ii. The Scanlon Plan.
Profit-Sharing
Profit-sharing is regarded as a stepping stone to industrial democracy. Prof. Seager observes: Profit-sharing is an arrangement by which employees receive a share, fixed in advance of the profits. The International Co-operative Congress held in Paris in 1889 considered the issue and defined profit-sharing as an agreement (formal or informal) freely entered into, by which an employee receives a share fixed in advance of the profits. Profit-sharing usually involves the determination of an organizations profits at the end of the fiscal year and the distribution of a percentage of the profits to workers qualified to share in the earnings. The percentage to be shared by the workers is often predetermined at the beginning of the work period and is communicated to the workers so that they have some knowledge of their potential gains. To enable the workers to participate in profit-sharing, they are required to work a certain number of years and develop some seniority. The theory behind profit-sharing is, that management feels its workers will fulfill their responsibilities more diligently if they realize that their efforts may result in higher profits, which will be returned to the workers through profit-sharing. Features of Profit-sharing The main features of the profit-sharing schemes are: a. The agreement is voluntary and based on joint consultation made freely between the employers and the employees. b. The payment may be in the form of cash, stock of future credits of some amount over and above the normal remuneration that would otherwise be paid to employees in a given situation.
ii. There is unevenness of performance of different members of the group and this may have resentment of active members against mere passengers. iii. Ill-feeling may be generated among the groups themselves where the technology is such that one groups earnings depend on the performance of another group.
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c. The employees should have some minimum qualifications, such as tenure or satisfy some other condition of service which may be determined by the management. d. The agreement on profit-sharing having been mutually accepted, is binding and there is no room on the part of the employer to exercise discretion in a matter which is vital to the employees. e. The amount to be distributed among the participants is computed on the basis of some agreed formula, which is to be applied in all circumstances. f. The amount to be distributed depends on the profits earned by an enterprise. g. The proportion of the profits to be distributed among the employees is determined in advance. It should be noted that profit-sharing is not a system of wage payment as such; it is something else. Profit-sharing and bonus (also known as Profit-Sharing bonus) are two different things, for the former sharing implies sharing on an equal footing rather than yielding on the part of a management to a persistent demand. Profit-sharing bonus on the other hand refers to the distribution of profits on the basis of a certain percentage of ones monthly wages. Moreover, it is not voluntary and is not based on agreement. Profit-sharing is a distinctly progressive measure towards industrial harmony. It may be considered as a step short of joint consultation or co-partnership schemes. Wage business affairs are managed and shared on a footing of equality. Essentially this means the creation of a mental climate in which a strong sense has to grow that the business is the business of all, since it is the joint effort of the workers and the management and since the one cannot carry on a business without the help of the other. This is the inner essence of profit-sharing which has often been overlooked. There are three main characteristics of labour remuneration in the form of profit-sharing, which distinguish it from gainsharing and from an ordinary system of wage payment. These features are: a. A share in profits is payable at long intervals when the final accounts of a firm are prepared and its profit or loss ascertained. b. The payment is of an uncertain nature because of the uncertainty of profits. Sometimes there may be no profits or very high profits; in other cases, there may actually be some losses. c. The payment is not based on individual work, efficiency or merit, but is a remuneration for collective effort, the total remuneration due to workers being equally divided among them or in some agreed proportion. d. The payment is sometimes regarded as windfall gain or as something to which a worker is entitled and not as something in recognition of his efficiency. Types of Profit-Sharing
Employee profit-sharing is often regarded by employers as a supplementary benefit programme. Although plans differ widely as to specific details, three basic types of profit-sharing plans are in use: a. Current (cash) profits are paid directly to employees in cash or by cheque or in the form of stock as soon as profits are determined (e.g., monthly, quarterly, biannually or annually). b. Deferred profits are credited to employee accounts to be paid at the time of retirement or in particular circumstances (i.e., disability, death, severance or under withdrawal provisions during employment). c. Combination by which a part of the profits is paid in cash and a part is deferred and placed in the employees account in a trust fund. Objectives of Profit-Sharing Profit-sharing is more than just another employee benefit. It may be the most important part of a progressive personnel policy. It may incorporate incentive features and produce results not possible by the implementation of other programmes. Companies which offer this incentive have realized higher profits and increased efficiency, and have created a climate for better employee relations. The critical ingredient in profit-sharing is the desire of the employees and the management to ensure the success of a programme. The programme is formulated at the top because profit-sharing is first and foremost, a principle and technique of leadership. The real objective of profit-sharing is to foster the unity of interest and the spirit of co-operation. From the point of view of the employees, profit-sharing may serve a multiple of objectives, depending upon the type of plan which is adopted. A cash plan contributes directly to an employees immediate economic gain. Deferred plans and combination plans contain features very similar to benefit plans which provide for retirement benefits and against loss of income following disability, for benefits to dependants in the event of the death of an employee, and for other related benefits. From the view point of the organization, employee productivity is the overriding objective of profit-sharing. At the same time, it may contribute to employee satisfaction because profitsharing provides for rewards which are related to employee needs. A profit-sharing scheme is generally introduced to achieve the following objectives: a. To promote industrial harmony and stabilization of the work force; b. To eliminate waste in the use of materials and equipments; c. To instill a sense of partnership among employees and employers and to increase employee interest in the company in which he works; d. To attract desirable employees and retain them, thereby reducing the rate of turnover; e. To encourage employee thrift; f. To provide a group incentive for a larger output;
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g. To ensure employee security; and h. To demonstrate some measure of social justice to employees. The purpose of profit-sharing is the achievement of industrial harmony. Forms of Profit-Sharing Profit-sharing may be on Industry Basis
Until these essentials have become permanent features in an industry, unless working conditions in a business have been stabilized, the purchasing power of the people has considerably increased, and profits are sufficiently high to ensure their distribution between workers and shareholders, no profitsharing scheme would be sound or anything more than a paper scheme.
Computation of Surplus Profit
Here the profit of a number of industrial units in the same industry may be pooled together to determine the share of labourers. Such a scheme has the advantage of putting the whole labour force in a particular industry on a uniform basis. Moreover, if a certain industrial unit somehow shows a loss in a particular year, its workers are not deprived of their remuneration because other units have made a good profit.
Locality Basis
The computation of surplus profit for distribution should be arrived at by deducting from it normal and additional depreciation and initial or development rebate, so that the replacement or modernization cost of plant and equipment is properly provided for. Losses, when they occur, should also be deducted before the profits for the subsequent year are declared. If additional bonus is to be paid, its payment will have to be made out of the balance left over after the above deductions. The margin of profits should be adequate and substantial so that, after providing for all these expenses, there must be a surplus of a sizable amount to be distributed among the workers.
Fair Return on Capital
Industrial units in a particular locality may pool their profits to determine labours remuneration by way of profit-sharing. However, if there are heterogeneous industrial units in a locality, where labours work is for a widely divergent nature, there may be great difficulties in bringing about an adjustment in their share.
Unit Basis
This is the simplest way of giving a labourer a share in the profits of the individual undertaking in which he is employed. This mode of profit-sharing establishes a close relationship between the efforts of labour and rewards it receives. In the first two schemes, the reward of workers depends on the combined efforts of all in a number of units.
Department Basis
The return on the capital invested in an enterprise should be that which would encourage partnership investment. It should be at least 6 per cent on paid-up capital, with a charge of 10 per cent to be made for reserves.
The Scanlon Plan

This plan was developed in 1937 by Joseph Scanlon, a lecturer at the Massachusetts Institute of Technology and a trade union leader in a steel mill. The plan was designed t to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity. The plan has two basic features: 1. Financial incentives aimed at cutting cost and thereby increasing efficiency are installed. 2. A network of departmental and plan screening committees are set up to evaluate employee and management costcutting suggestions. The plan is essentially a suggestion system and assumes that efficiency requires company-wise/ plant-wise co-operation. Usually all employees in the plant participate in the plan. Workers, supervisors, and managers make cost-cutting suggestions that are screened and evaluated by the various screening committees. If a suggestion is implemented and successful, all employees usually share in 75% of the savings, and the rest 20% is set aside for the months in which labour costs exceed the standard. The Scanlon plan has been successful where adopted. It tends to encourage a sense of partnership and sharing among workers, less over-time and employee insistence on efficient management.33 Certain conditions need be fulfilled to make the plan successful: i. They are more effective where there is a relatively small number of participants, generally less than 1,000.
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Sometimes the various departments of an industrial unit may have their separate profit-sharing schemes. The workers in a particular department share in the profits made by that department. This aims at bringing about an even closer relationship between a workers efforts and the reward he receives.
Individual Basis
A worker receives a proportion of the profit which may have been earned by a business through the efforts of that particular worker. This aims at bringing about a direct and most intimate relationship between individual effort and reward. In practice, it is impossible to determine such profits. Requisites for Profit-Sharing To be effective, profit-sharing schemes should be based on the following considerations:
Profitability of Industrial Units
Industrial units should be profitable for, without profitability the profit-sharing scheme would not succeed. No scheme should be launched until business conditions are favorable. A business or any industry may be stabilized by an expansion in production, by the adoption of sound distribution methods and by keeping constant vigilance over its functioning. In other words, there should be comprehensive and flexible schemes for incentives and other kind of bonus which promote productivity.
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ii. It is more successful where there are stable product lines and costs. iii. There should be good supervision and healthy labour relations. iv. There should be a strong commitment to plan on the part of management particularly during the confusing phase in period. Summary of Wage Incentive Schemes A critical analysis and practical realities of the wage payment system The Extremes: Day work Worker is paid the same constant hourly rate (guaranteed minimum wage - GMW, regardless of performance. Piecework (incentive with 100% participation) Worker is paid directly for each piece produced (i.e. directly proportional to performance). At first glance this appears to produce no benefit for the company. However, this is not true, since overhead is a constant and will decrease as it is normalized per unit production. Also note, that true piecework is not legal, as there is a guaranteed minimum wage (in 1997 GMW =$5.25/hr) under U.S. law. This means that a worker will typically receive a base rate times the hours worked. Any benefits above standard performance, will then be paid directly to the worker. Standard hour plan Day work up to 100% performance, piecework (or a sharing plan) above 100% performance. Measured day work A progressive record of a workers performance is used determine base pay for the next pay period. Regardless of the persons performance during that period, that person will receive the new base rate. Example Worker performance = actual output/expected output = 175/ 160 = 1.09 new base rate = base rate 1.09 = $10.00 1.09 = $10.90 If the workers performance deteriorates, the new base rate also drops. However, some companies will maintain a lower threshold (at least the GMW), below which the base rate can not drop. With this plan, day-to-day pressures are taken off the worker. However, the incentive is not as strong as for other plans, and it requires extra bookkeeping. Gain Sharing plans - (incentives with other than 100% participation) These are practically always less than 100% participation and are called sharing plans. (Plans with more than 100% participation is negative sharing and the company would typically loose money). The most common plan is Improshare, a fifty-fifty sharing plan that gained in popularity in the 1970s. With this plan standards are frozen in a base period and any increased productivity is shared with no attempt to pinpoint whether employees and managers created the savings. If based
on total budget: sales, costs, profits, etc. = Scanlon and Rucker plans), not IE work measurement based. Some odd variations include: extra incentive in the form of a kicker, a flat section so that company doesnt lose money known as a leveler, a 2-piece plan is known as a Taylor plan, a 3piece plan is known as a Merrick plan. Group incentive schemes Group output is measured and used to determine each group members pay. This is especially useful for work cells or situations where individual performance cant be easily measured (e.g. shipbuilding, construction, etc.). These schemes have advantages in allowing greater flexibility, reducing competition and encouraging group spirit. On the other hand, the individual incentive is reduced (lab groups) and better workers may become discouraged
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LESSON 25: INTRODUCTION TO PREVALENT SYSTEMS AND GUIDELINES FOR EFFECTIVE INCENTIVE PLANS
Principles of External and Internal Differential Rewards and Incentives First, incentive earnings, as a percentage of the total wages of workers covered under the incentive plans, are very low. In 1961, it was 10.9 per cent. There may be several reasons for this situation: either the norms of standard work are fixed high and it is not possible for a worker to exceed them by a sizable percentage; or the fall-back on time rate wage is sufficiently high and workers do not have much inducement to put in greater effort beyond the standard norms; or the rate structure of incentive wage is not adequately progressive. In any case, this situation reflects the relative ineffectiveness of incentive plans. Moreover, the percentage of workers paid by results is around 31 in India as compared to 42 per cent in the U.K., 45 per cent in the U.SA and 77 per cent in USSR for iron and steel industry. For cotton textiles, the percentage of workers paid on piece-rate in India is 70 against Britains 63, Americas 36, and Russias 87. Second, a number of units may have unnecessarily complex incentive plans, probably transplanted from European firms, which are not easily comprehensible to illiterate or semi-literate workers on the one hand, and which do not have a direct relationship between effort and wages on the other. In addition to numerous slabs in the rate structure, there are often changing bases of calculation and distinctions between different types of employees - permanent, temporary staff, workmen, etc. Third, in cases where group incentive plans are in vogue, a system becomes difficult to operate effectively, for the direct link between effort and earnings is lost. Fourth, while there is no need for the rate structure of incentive wages to be progressive from the beginning, it needs to be so when workers show high levels of productivity. Some of the incentive plans actually turn out to be regressive in practice in these final stages. These maladies of the incentive plans betray a lack of wage to make them an effective tool of increasing productivity. Precautions Against Ill Effects of Incentive Systems Experience has shown that incentive schemes are not an unqualified blessing in themselves. They are fraught with some dangers that have to be guarded against during the course of their evolution and implementation. First, there is a tendency amongst workers to sacrifice quality for quantity. This calls for a strict system of checking and inspection. Second, incentive schemes bring about a certain fixity in the operations and undermine flexibility, which is an essential requirement in view of the rapid progress in technology. Such changes in technology, methods, machines and materials involve a revision of norms and rates. The incentive schemes
Learning objective

To know the Prevalent Systems of wage Incentives in India To understand the Precautions against ill effects of Incentive Systems To learn the Prerequisities of a Good Wage Incentive Scheme To know the reasons of the failure of Incentive Plans Requisites or guidelines for effective Incentive Plans
Interaction
Before discussing the prevalent systems & guidelines for effective incentive plans Let us first discuss that can workers be motivated with wage incentives? - Yes/No/Depends What do blue collar and white collar employees hunt in motivating jobs? 1. Blue collar: pay, job security, interesting work 2. White collar: interesting work, pay, job security What Else they All Look for? Direct financial plans - wage incentives, pay proportional to output Indirect financial plans - fringe benefits, vacation, promotions; stimulates morale, but could be taken for granted The Prevalent Systems in India The most widely prevalent incentive scheme in Indian industries is the piece-rate system. In industries like iron, steel and chemicals, however only a small percentage of workers are paid on piece-rate basis. Another incentive system that is prevalent in Indian industries is the payment of production bonus usually at a differential rate for the output produced in excess of the normal output for a unit of time. The norms are generally fixed on the basis of job anaylsis and/or time studies. The incentive scheme operates on a group or individual basis, depending on the measurability of the work of individual workers and the inter dependence of their output performance. Engineering and chemicals have mostly the group system, while textiles have mainly the individual system of incentives. The group incentive system is more widely prevalent in the Indian industry than the system of individual incentive or a combination of both. Wage incentive plans, other than the piece-rate system, bristle with some problems in their operation.
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should, therefore, be adequately provided with such revision in case of significant changes. Thirdly, there is a .danger that safety regulations would be disregarded by workers and this may result in higher accident rates. This may be solved by greater vigilance on the part of workers concerned. Fourthly, there is a danger that workers would tend to overwork and undermine their heal. This may be checked by fixing a ceiling on incentive earnings. Finally, incentive schemes sometimes lead to jealousies and misunderstanding among the workers because the difference in their earnings. However, differences in earning will differ for workers according to the differences in their abilities and efforts. Moreover, trade unions discourage ill feelings or jealousies amongst its members. Prerequisities of a Good Wage Incentive Scheme The installation of an incentive scheme presupposes the existence of certain prerequisities, which are, more often than not, ignored. Quite often, incentive payments are just taken to be necessary part of the total wage packet, and hastily conceived schemes are introduced primarily because of pressures from workers and trade unions. such schemes naturally result in a number of personnel problems which may, in fact, be impediments to improve productivity. It is, therefore, advisable to ensure that a proper climate exists for the introduction of such schemes. Some important considerations, which should ordinarily be taken into account while choosing a particular type of wage incentive scheme, are: i. The management should strive to create a proper climate by adopting sound policies of recruitment, promotion, trading etc., right from the inception of an enterprise. Unless there is mutual understanding and concern for improving productivity, even a well-conceived incentive scheme may not yield the optimum results. Therefore, the management must concentrate on creating a proper industrial relations climate before introducing incentive schemes.
incentive payments at a lower level of the performance are allowed only for limited time periods. The quantum of incentive paid at the low levels of production and efficiency should be such as to ensure that earnings continuously increase when the targets are raised. iv. The scheme chosen should be one which would result in overall economy for the establishment. Incentives should not only increase production but also result in higher productivity and lower cost per unit; and the gains of increased productivity should be shared both by the employer and the employed. v. The scheme should not be very costly in operation, i.e., it should not involve the maintenance of very elaborate records, complicated calculations, and too much material handling. vi. The scheme should be based on a work study, and the work contents of various jobs should be stabilised. vii. In principle, each individual or group should be paid according to effort and productivity, for disparity in earnings may create discontent. Unless the scheme i.e. welldefined, it may turn out that indirect groups may receive higher incentive earnings than the main production group. viii.The scheme should have elasticity to take care of technological and other changes taking place from time to time and rectify errors that may have crept in at the time of its initial introduction. ix. The scheme should not undermine co-operation amongst the workers. It should rather stimulate co-operation with a view to achieving the common objective of increasing the well-being of the business and, therefore, of the workers in general. x. Performance standards and norms for incentive payments should be set up at the average performance level of the employees, i.e., they should not be too high nor too low. Such performance standards should be set as are within the control of employees. The adoption of objective assessment procedures and the use of functional responsibility are to be advocated in addition to such indices of productivity as wage cost per unit sale, salary savings on inventory, etc. xi. To make the scheme effective, a climate should be created in which the employees feel that the management is fair and just in its dealings with them on wage incentive matters. For this purpose, mutual discussions and appropriate management action would be called for. xii. Incentive payment should be made as soon as possible after a job is completed. Any hastily conceived or haphazardly introduced incentive scheme does more harm than good. Therefore, it should be introduced after a proper consideration of the various preparatory measures.
ii. The objectives of the scheme must be clear, and these should be well understood at the levels of management and of workers. Certain specific factors may be selected as the basis for a scheme. Too many factors selected at a time may make it complicated. The scheme should suit both the particular enterprise and its workers. At every stage, right from the conception of the scheme to conducting studies, etc., all the workers and supervisors should be consulted so that they understand the objectives and benefits of the scheme and may contribute to its success. iii. Incentive schemes should be installed only when production has reached 60 per cent of the rated capacity. Care should be taken to provide a suitable gestation mechanism in the scheme on a time-bound basis so that
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Incentive Plans for White Collar Workers/ Salesmen

The salesmen are usually given incentives in the form of sales commissions. One study reported that almost 75% of the
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rganisations surveyed paid salesmen on some type of incentive basis. This is due to three factors: i. The unsupervised nature of most sales work; ii. Tradition in the market and iii. The assumption the incentives are needed to motivate salesmen. The are several incentive plans, each appropriate for different markets, products, etc., but all plans are basically variations of three types of plans: straight salary, straight commission, and combination plans. Table 17.6 : Firms Using Incentive Plans for Salesmen37
% of Companies Industrial Other Products Commerce and Industry 1. 2. 3. 4. 5. 6. 7. 8. 9. Straight salary Straight commission Draw straight commission Salary + commission Salary + Individual bonus Salary + group bonus Salary + commission + individual bonus Salary + commission + group bonus More than one method of payment Total 20.1 2.1 7.5 19.2 21.3 8.5 7.5 1.1 12.7 100.0 t25.6 1.3 1.3 21.1 10.8 4.4 5.3 0.6 22.4 100.0 56.5 2.2 13.0 8.7 ----------6.5 2.2 10.9 100.0 27.6 1.5 20.1 17.7 17.7 5.4 5.4 0.6 19.3 100.0
Under this, salesman not only get a fixed salary but also a commission in proportion to the sales effected. The advantages of this method are: i. Since salesmen are assured of minimum earnings, they are re!ieved of financial worries.
ii. The company has more control over its salesmen, as there is sizable salary component in most combination plans. So that it can direct salesmans activities by detailing what services and salary component is being paid for. But the main disadvantage is that salary is not related to performance; only incentive value of money is being traded off for its security value. Such plans also tend to become very complicated, and misunderstanding often results in frustration. In spite of these disadvantages, these plans are widely used with several basic variations, like: Salary Plus Commission Commission Plus Drawing Account where not only commission is paid but the salesman is also allowed to draw on future earnings to get him through low sales period; commission plus bonus, where salesmen are paid primarily on the basis of commission but they are also given a bonus for activities like slow moving items; and salary plus bonus, wherein salesmen are paid a basic salary; and also given a bonus for carrying out specified activities.
Incentive Plan
Consent Products
All Industries
Incentives for Management Employees

In many orgnisations, the managers are paid bonus. There are two types of bonus plans: one determined by formula (i.e., some criteria like increased sales) and two, determined by some discretion used in allocation of bonus (i.e., paid on more or less permanent basis). The bonus plans are generally reviewed annually to make them more effective. For top level management, bonuses are generally tied to overall corporate results. The size of bonus is much higher for top level executives, and lower for the lower level executives. Failure of Incentive Plans Many of the incentive plans, aimed at increasing the motivation of employees, often fail to have their desired impact. This is due to several reasons, most of which become apparent when it is considered that for motivation to take place, the worker must believe that his effort will lead to rewards and that he must want that reward. In most cases incentives plans fail because one or both of these facts are not met. The principal reasons of failure are: 1. Unfair Standards are a great hindrance in the way of motivating employees. In order to motivate them, the standards must be viewed as fair and attainable. 2. Fear of Rate Cut: There is fear in the minds of the employees that standards will be raised high or rates will be cut if they earn too much. 3. Group Restrictions: Peer pressure is a double-edged sword when it comes to incentive plans. If the group views the plan as fair, it can keep Loafers in line and maintain high production. If the group feels that plan is not in its interest it will through education, ostracism, or punishment - see that
Straight Salary Method Is not an incentive plan; the salesman is simply paid on weekly, monthly, or on yearly basis. The advantages of this method are that: i. The salesmen know in advance what their income will be; ii. The expenditure on salesmen is known beforehand. The disadvantage are: (i) This method tends to shift salesmans emphasis to just making the sale rather than prospecting and cultivating long-term customer; and (ii) Pay is not related to results. This lack of relationship reduced salesmens performance.
Straight Commission Basis

Under this method the salesmen are paid on the basis of sates effected, i.e., they are paid for results and only for results. Therefore, high performance salesmen are generally attracted. But the disadvantages are: i. Salesman focusses on making a sale on high volume items. Cultivating dedicated customers and working to push hard-to-sell items are often neglected,
ii. Salesmen tend to be less company-oriented and more money-oriented, and the company has less control over them; iii. Salesmens income generally fluctuates widely. Combination Method of Salary and Commission Basis
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production levels of group members is kept at a minimum. 4. Employees do not understand the Plan: This happens when either the details of the plans are not communicated to employees or if communicated, the employees do not clearly understand them. If employees cannot understand how performance will lead to rewards, the plans would not prove fruitful in motivating them. 5. Lack of Require Tools, Training, Equipment etc: The lack of required machines and tools, equipment and absence of a sound organisation structure often break the effort reward link; and without that link, incentive plan fails. 6. Other Causes: The inequitable wage structure with the organisation and the inter-group conflict also lead to noncooperation of the employees. When to Use Time or Output Basis as an Incentive Plan? The employees may be paid on a time basis under following circumstances: 1. When units of output are difficult to measure; 2. When employees have little control over the quantity of the output, such as on much-paced assembly lines; 3. When there is no clear direct relationship between the workers effort and his output, such as when jobs are highly interrelated; 4. When delays in the work are frequent and beyond employees control; 5. When quality is a primary consideration as with engineering and other professional personnel; and 6. When precise advance knowledge of unit labour costs is not required by competitive conditions. On the other hand, payment on output basis would be preferable if: 1. Units of output can be measured. 2. There is a clear relationship between employee effort and quantity of output. 3. The job is standardised, the work-flow is regular, and delays are few or consistent. 4. Quality is less important than quantity or, if quality is important, it is easily measured. 5. Competitive conditions require that unit labour costs be definitely known and fixed in advance of production.
Several authors have suggested a list of requisites that monetary incentive plans should meet if the incentive method is to be attractive to the employee; and at the same time administratively sound. Some of the more important requisites/ specific guidelines for developing effective incentive plans are: Insure that Efforts and Rewards are Directly Related The incentive plan should reward employees in direct proportion to their performance and increased productivity. Employees must also perceive that they can actually do the tasks required. This standard set has to be attainable; necessary tools, equipment, training etc. should be timely provided and the employee should have adequate controls over the work process. The Reward Must be Valuable to the Employees Increased monetary earnings must have the potential to satisfy the existing needs of the worker if the worker is to be attracted to them. In other words, the monetary incentives offered must be relative to current or visible future needs. The Reward Must be Clearly Identifiable Individuals or groups contributions and efforts must be clearly identifiable, if rewards are to be given for specific performance. . Methods and Procedures Must be Carefully Studied Since effective incentive plans are generally based on a meticulous work methods study, the services of an Industrial Engineer or other Methods expert should be obtained who may through careful observation and measurement, define fair performance standards on which the. plan is to be based. The Plan Must be Understandable and Easily Calculable by the Employees The incentive plan should be easily understood by the workers so that they can easily calculate personal cost benefit for various levels of effort put by them. Effective Standard Must be Set The standards of which the plan is to be based should be effective, i.e., they should satisfy these conditions: i. Standards are viewed as fair by the subordinates; ii. They should be set high, but reasonable (i.e., there should be about a 50-50 chance at reaching it); iii. They should be specific; and iv. They should be complete. Do not just focus on quantity and disregard quality, unless that is the intention. Standards Must be Guaranteed The standard should be viewed as a contract with the employees. Once the plan is operational, great caution should be used before decreasing the size of the incentive in any way. An Hourly Base Rate Must be Guaranteed At least the plant employees should be guaranteed the base rate. Moreover, there should be one base rate for a job regardless of whether or not it is on incentives. Clear Policies and Rules Must be developed Specific policies and rules concerning how employees will be paid, and the rules for attaining the standard (and incentives) should be clear to both manager and employees.
Requisites or Guidelines for Effective Incentive Plans

Monetary incentive plans do motivate employees. Robert Opsahl and Marvin Dunnettee have concluded: There is considerable evidence that installation of such plans usually results in greater output per man hour, lower unit cost, and higher wages in comparison with outcomes associated with the straight payment systems. But these plans will not be effective unless a careful planning is done and the plans properly implemented.
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Rewards Must be Consistent with Government Regulations The incentives offered must govern regulations regarding compensation. The level of the reward and the frequency of it must meet minimum wage guidelines. Rewards Must be Granted Promptly The incentive plan should provide for rewards to follow quickly after the performance that justifies the reward. The Plan Must be within the Financial and Budgetary Capacity of the Organisation It must be compatible with the financial resources available. Additional Reinforcement Must be Provided The incentive plan can be more effective if high performance is encouraged and reinforced by management and subordinates. Reinforcement, in terms of points accumulated or incentives given, should be as frequent as possible preferably daily, or (at least) weekly. It Must Minimise Frictions between Workers Ideally, the plan encourages workers to support each other rather than to be non-eo-operative. Employee Participation May be Useful for Increasing the Effectiveness of Incentive Plans In sum, it may be said that each incentive method must be weighed to determine its ability to meet the criteria stated above. Some piece-rate methods meet most of these requirements successfully. Others do not. Bonus paid after a period often fails to meet criterion 11 - in many cases there is a time lag between the performance bonuses. The cause-effect relationship may become muddled and confused, and the desired reinforcement effect can be lost. Profit sharing programmes also suffer weaknesses at times, particularly in meeting criteria 1, 3, 5 and 11. Often a worker sees little relationship between his own efforts and the rewards he receives. He also feels, that there are many things affecting profits that are outside his realm of control.
The Magnitude of the Problem Approximately 4 lakh girl children (between the ages of 7 14) are hired to work in cottonseed fields. Out of which, 2.5 lakhs are employed in Andhra Pradesh. This figure surpasses the total number of children employed in industries such as the carpet, glass bangles, gem polishing and limestone. Moreover, girls form 85-90% of the workforce employed in cottonseed fields which exceeds the girl: boy employment ratio of any other industry. What is even more startling is the fact that even the industries that are most likely to employ children dont have more than 25% of their workforce belonging to that age group. Furthermore, even in this figure of 25%, the bulk of the children employed are girls, making the Hybrid Cotton Seed Industry literally one of a kind where child employment is concerned. This industry depends practically entirely on girl children for its perpetuation. How Children Get Involved and Become Bonded Labour The production of Hybrid Cottonseeds is extremely labour intensive and capital intensive as well. Ergo, demand for labour is immense. Local farmers who produce the seed, enter into contracts and agreements with big seed companies through middlemen called seed organizers. The contracts are framed in such a way that the local farmers are under a great deal of pressure to execute production while exerting a great deal of control over the labour process. This accounts for the practice of hiring young children in this industry. Most of the children employed in this industry belong to the Scheduled Caste/Scheduled Tribe families; 60% of whom could be classified as landless/marginal farmers who possess two acres of land or less. Being economically at a disadvantage, many farmers are thus forced to take loans and advances from seed producers treating their children literally as collateral. This is evident in the fact that 95% of children employed in the area of study were bonded labourers working laboriously to pay off their parents debts. Debt bondage, although generally binding for one crop season only, still manages to extend into years at a time till the loan is repaid. This is reflected in the fact that:


We all know that Indian economy is still a developing economy so with regard this particular topic, let us go through the case study below on a prevalent system of wage structure and wage level. Girl Bonded Labour in Hybrid Cottonseed Production Davuluri VenkateswarluCotton production in India underwent a revolution with the introduction of hybrid seeds in the fag end of the sixties. Not only did these seeds improve the quality and production of cotton but also created many more jobs relating to agriculture, this being a highly labour intensive activity. However, here a devastating irony raises its head: how something so beneficial could give rise to an exceedingly harmful practice of labour Girl Child Bonded Labour. Girls are hired on the basis of a long-term agreement in return for loans advanced to their parents by local seed producers in the employ of large national and multinational seed companies.
70% of the children employed currently were working in the same fields as the year before Out of the above, 57.5% have been employed for the last 2 years and 12.5% have been employed by seed producers for the last five years.
How and Why Female Children are Involved In the Production Process To begin with, there is a perception that the work of hybrid seed production can only be done by girl children. Largely the farmers are the main cause for such perceptions claiming that it was not fitting for adult males, boys and adult females to work in hybrid seed fields. In fact, they even claim that a menstruating woman was found to be unfavourable or inauspicious for doing the work.
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The reality however is an altogether different story. Employers have a strong bias towards the employment of girl children as the wages that are needed to be paid to them, as compared to boys and adults, are much lower. They also get the added benefit of more hours of work that these girls put in. Ultimately, thus, the local farmers get the advantage of cheap labour that translates into larger profit margins for them. Moreover, girls arent rebellious, do not raise issues about the working conditions and can be kept in check by employers. Such are the motives behind the employment of girls which in reality has nothing to do with the ability to perform the task. It was found that even adults and boys performing the same tasks could deliver the same results. Recruitment, Wage Rates and Working Hours The process of recruitment of girls for Hybrid Cotton Seed Production entails prospective employers scouting around villages to find out whether there are prospective girls who could be employed. Based on the findings, employers then cultivate in the area/village where the supply of young female labour is abundant. They then proceed to enter into contracts with the parents of these girls to ensure themselves of a regular labour supply. The areas of Kurnool and Mahaboobnagar in Andhra Pradesh have been witness to elaborate methods of recruiting children. Here, the employers are known to invite children from other areas for a labour camp and enforce a 12 hour workday. The most attractive prospect of hiring girls is undoubtedly the fact that their remuneration can be fixed at a rate lower than that of any adult or boy. These wage rates, fixed either monthly or daily are deducted from loans extended to their families. The wage rate currently hovers at around 70% of the adult female wage. The working hours arent specific although they average out to approximately nine to nine and a half hours a day, peaking at 11-12 hours during the winter Recruitment, Wage Rates and Working Hours The process of recruitment of girls for Hybrid Cotton Seed Production entails prospective employers scouting around villages to find out whether there are prospective girls who could be employed. Based on the findings, employers then cultivate in the area/village where the supply of young female labour is abundant. They then proceed to enter into contracts with the parents of these girls to ensure themselves of a regular labour supply. The areas of Kurnool and Mahaboobnagar in Andhra Pradesh have been witness to elaborate methods of recruiting children. Here, the employers are known to invite children from other areas for a labour camp and enforce a 12 hour workday. The most attractive prospect of hiring girls is undoubtedly the fact that their remuneration can be fixed at a rate lower than that of any adult or boy. These wage rates, fixed either monthly or daily are deducted from loans extended to their families. The wage rate currently hovers at around 70% of the adult female wage. The working hours arent specific although they average out to approximately nine to nine and a half hours a day, peaking at 11-12 hours during the winter season when the work is maximum.
Health Hazards Girls who work in the cottonseed fields are exposed to numerous health risks and complications, which include exposure to pesticides that cause severe headaches, weakness, convulsions and respiratory depression. Impact of Education on These Children Education for these girls has taken a back seat, as 60% of the girls currently employed in cottonseed fields are school dropouts (taking into account the area under study). There is also a rising trend of girls abandoning their studies for more permanent employment. Possibility of Adults Replacing Children Most employers are of the opinion that replacing child labour with adult labour would lead to escalating production costs and an ultimate increase in the market price of the product. However, according to the various surveys conducted, the rise in cost of production would not be phenomenal and could be borne by various people together: seed producers, organizers and seed companies could all reduce their margins of profit by a bit to accommodate these increased costs.Moreover, poverty is not the only driving force behind parents who send their children to the cotton fields. The income that is brought by these young girls can be done away with, especially in the light of the fact that it is used for alcohol by adult males who are generally under employed and while away their time. If underemployed adults would be taken on at appropriate wages, it would totally obviate the need for girls to work.Thus, for every problem, a solution poses itself. However, the issue of girl child labour is yet not receiving its due attention. If more NGOs would get into the fray, it would definitely be a step in the right direction. The girl child would then use her hands to write instead of using them to perpetuate an existing and discriminatory system of labour. Answer the Following the Questions Based on the Above Case Study 1. What do you understand by the term bonded labor? 2. How do children get involved and become bonded labor? 3. How and why female children are involved in the production process?
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LESSON 26: INTRODUCTION TO NON-MONETARY INCENTIVES

Principles of External and Internal Differential Rewards and Incentives

To understand what are Non-Monetary Incentives? To know examples of Non-Monetary Incentives To understand the Aims of Reward Management
5. Persons interested in enhancing their reputations and receiving recognition in the eyes of others may respond to verbal praise or two publicized awards. 6. Persons proud pf their long service may be attracted by awards recognising their seniority. 7. Workers in safety minded organisation are often attracted by competition on awards for best safety performance records. 8. Individuals proud of their past accomplishments may feel recognised and rewarded if their superiors extend opportunities for participation on more complex and more important job assignments. In short, management may look to many non-monetary incentives for effective motivation of those who are most needconscious. In many cases, these non-monetary incentives might stimulate even more attention than the monetary ones.
What are Non-monetary Incentives? While monetary incentives often appear as important motivators, many factors unrelated to money can also serve as attention-getters and encouragers of action. The classification of such non-financial incentives tends to a smorgasbord of desirable things that are potentially at disposal of the organisation. The creation of such rewards is only limited by managers ingenuity and ability to assess payoffs that individuals within the organisation find desirable and which are within the managers jurisdition. As the old proverb goes: One mans food is another mans poison certainly applies to rewards. What one employee views as something I have always wanted, another finds superfluous. Therefore, care must be taken in providing the right reward for each person. Some examples of non-monetary incentives: The need-motives for affiliation, power and recognition in particular can be appealed to by such incentives. For example, 1. A person with strong need for affiliation may respond readily to job assignments that provide with opportunities to relate to socially attractive and satisfying individuals or groups. 2. The opportunity to communicate with and relate to others is a factor many workers emphasize and seek. 3. Persons who are very status conscious, can be motivated with the availability of a panelled office, a carpeted floor and wall paintings, a large desk and aristocratic furniture or a private bathroom, impressive job title, their own visiting cards, their own secretary and telephone, or a well located parking place with their name clearly painted underneath the Reserved sign - all of which are status symbols. 4. An employee with high-level desires for power may respond easily to opportunity whereby he can gain leadership and administrative responsibilities. He may be stimulated by participative or free rein leadership in the decision-making process. The use of job enlargement provide added incentive to some employees because they feel capable of controlling wider sets of activities than they previously performed.
Aims of Reward Management

Reward management aims to: 1. To support the achievement of the organizations strategic and shorter term objectives by helping to ensure that it has the skilled, competent, motivated and committed workforce it needs; 2. To help to communicate the organizations values and performance expectations; 3. Support culture management and change by matching pay culture to organization culture and ensuring that reward management underpins the existing or desired organization culture and helps the organization respond to change. But pay itself, as Flannery state: cannot drive change or lead the change process. It cannot define what the change should be. It cannot establish values. It cannot replace effective leadership, drive and support desired behaviour by indicating what sort of behaviour will be rewarded and how this will be done through performance or variable pay and performance management processes; 4. Encourage value-added performance by focusing performance pay and gain sharing schemes on areas where the maximum added value can be achieved; 5. Promote continuous development through competencerelated and skill-based pay schemes, broad banding and effective performance management; 6. Compete in the employment market by paying competitive rates which attract and retain good-quality employees; 7. Motivate all members of the organization from the shopfloor to the board room through the judicious use of a combination of financial and non-financial rewards; 8. Promote teamwork through the use of team pay, the encouragement of multiskilling and by rewarding collaborative behaviours;
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9. Promote flexibility by replacing unduly hierarchical and rigid pay structures with more flexible and, typically, broad banded structures, treating job evaluation as a process which can be adjusted to meet specific needs rather than a package which has to be applied rigidly, avoiding the use of overmechanistic pay-for-performance schemes, making greater use of variable or at risk pay and allowing employees more choice over the benefits they receive; 10. Provide value for money by evaluating the costs as well as, the benefits of reward management practices and ensuring that they are operated cost effectively. 11. Achieve fairness and equity by rewarding people consistently according to their competence and contribution. 12. Pay can play a significant part as an investment which will support the long-term success of the organization. As Flannery points out: Organizations are beginning to understand that pay should no longer be considered? Only in terms of specific jobs and current financial results. Compensation must inextricably be tied to people, their performance and the organizational vision and values that their performance supports. It is an important tool for communicating and reinforcing new values and behaviours, supporting accountability for results and rewarding the achievement of, new performance goals.
1.
Are the Fundamental Principles on Which the System and its Development is Based Linked to:
a. the organizations current needs and goals; b. HR management strategy (see also 3 below); c. policy on pay levels needed to recruit and retain high-quality and committed staff (see also below); d. policy on assessing the pay market practice needed to achieve recruitment and retention:

locally (for locally recruited staff); regionally (for regionally recruited staff); nationally (for nationally recruited staff);
internationally (where the, market is for specific worldclass individuals); e. equal pay for work of equal value; f. avoidance of discrimination other than differences warranted by job/role size, responsibility, complexity and valid responses to market pressures?
2. Have these Principles Been Developed:
a. in consultation with key stakeholders (management, staff, unions); b. on the basis of current and future business strategies; c. by reference to any projected changes in the culture of the organization?
3. Is there a Clear and Articulated Link Between Reward Strategies and HR Strategy On:
Tutorial Activity 1.1 Evaluating Reward Process

The Objective of the Tutorial Activity To understand that the evaluation of reward processes is best carried out by a diagnostic review which, as set out below, could cover the following areas: Basic philosophy and strategic principles;

a. organization design: the structures and processes needed to deliver organization strategy and the levels and distribution of work needed to do this; b. recruitment: a reasonably attractive total package; c. training: rewarding skills acquisition and use; d. development: rewarding the behaviours or competences associated with good performance and continued learning; e. performance improvement: delivering an effective and efficient personal contribution; f. effective team/group working; g. promotion: rewarding the acceptance and successful delivery of greater responsibilities; h. reinforcing loyalty, integrity and commitment?
4. Is there a Strategy for Ongoing Reward Management Which:

Overall reward policies; Individual reward policy and practice areas; Cost considerations; Overall reward management; Overall perceptions; communications.
The diagnostic review should be carried out by examining written strategy and policy statements, details of structures, procedures, processes and schemes, any reports and records on reward matters and discussions with managers, HR staff, employees and union representatives. It is also highly desirable to conduct an attitude survey (as illustrated in Appendix A); this can be supplemented by focus group discussions with managers and employees to understand views in greater depth.
a. is based on the organizations: mission; culture; operating values; current and future needs;
Reward Management: Diagnostic Checklist

Basic Philosophy and Strategic Principles These questions deal with the high level, strategic issues facing organizations.
b. staff at all levels understand, at least in outline, and believe to be fair and rational;
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c. provides for a flexible response when different parts of the organization have different needs or face different pressures?
5. Does the Strategy Provide a Sound Basis for the Development of Reward Policies, Systems and Procedures, i.e:
d. Have other strategies, such as improved performance management and development or improved working conditions, been tried? e. At what stage are specific market responses or market premiums paid? f. Is it clear to staff that market premia can go down as well as up? g. Is this specifically communicated with market adjustments? h. If not, how will the cost implications be managed when the market declines?
9. Are, or Should, Reward Levels be Linked to the Organizations Performance?
a. provision for proper responses to changing circumstances;, b. management of the system to protect its integrity and validity; c. monitoring and management of the cost of managing the system with a focus on:

cost effectiveness; avoiding duplication of effort; using new technology, notably IT support to enable greater efficiency?
a. Are there identifiable performance measures for the organization? b. Can these be tracked without undue effort? c. Are they subject to external or political influences in the short, medium or long term that take sensitive handling? d. Would better performance actually generate more money for rewards? e. Is there scope for rewarding specific individual or team achievements? f. Would this be culturally appropriate? g. Who will assess and manage performance? h. Are they close enough to employees - especially those out in the field - to be able to judge performance effectively? i. j. Is there trust in the current performance management processes? Are people given the training and development needed to help improve performance?
6.
Is the Strategy Congruent with the Culture of the Organization?
a. Are there any conflicts between practice and organization values, e.g.:

rewarding service and experience rather than continuous performance improvement; providing long-term benefits when shorter term contracts are becoming more common; becoming increasingly complex or cumbersome when the organization is trying to simplify the way it manages itself in other ways; focusing too much on equity beyond what is feasible within the judgmental frameworks on which effective reward management depends?
Overall Reward Policies

These questions focus on the articulation of overall reward policies.
7. What is the policy on levels of rewards, e.g.:
10. What is the Policy on Equity?
a. How important is equity in the organizations culture? b. Is there a focus on complete equal treatment for similar jobs/jobs of the same size? c. Or, is there a preference for equal treatment in relation to contribution and performance? d. How is equity measured and tracked? e. Does this ensure reasonably fair and equal treatment:

1. The chosen place in a well defined, surveyed and comparable pay market for-different grades, levels and specialisms; 2. The need to attract and retain high quality staff; 3. The need for stability and sustained staff commitment?
8. What is the Policy On-market Rates and Responses to Market Pressure?
by location; by region; across the whole organization?
a. Is the organization subject to skill shortages and areas of market pressure? b. How are these tracked, eg through:

Individual Reward Policy and Practice Areas

These questions concentrate on specific areas of reward policy and practice. Job evaluation
11. Is a Formal System of Job Evaluation Used to Determine Internal Relativities? If not, How are They Determined?
analysis of leavers or exit interviews; analysis of recruitment issues; analysis of where people come from and where they go; pay surveys; other market intelligence?
c. Are pay responses the only way to retain people at risk?
a. Is this analytical? b. Is it related to skill sets/competences?
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c. Is it defined in terms of relevant factors?

12. Are the Factors Used for Job Evaluation
a. relevant to the organization; b. relevant to the jobs they cover; c. unbiased in terms of sex, race or disability; d. relevant individually and not subject to double counting (looking at the same areas from a different angle)?
13. Is the Scoring System
b. provide a logical framework or system for enabling consistent and defensible decisions to be made on the levels of pay and differentials of all the employees to be covered by the structure; c. make provision for the reasonable and sometimes inevitable fact that external market rate considerations may have to prevail over the requirements of strict internal equity, especially in the areas of skill shortage?
17. Is the Grade Structure Designed and Administered Properly?
a. weighted effectively to reflect organizational values; b. able to provide sensible grade breaks between distinct levels of work? c. Do grade breaks fall into natural gaps in job scores? Pay Structure
14. What is the Overall Policy on the Pay Structure?
a. Are the grades clearly defined? Do they fit the way work is currently organized (eg) the number of levels in the organization)? b. Are the pay ranges wide enough to allow scope for pay progression in accordance with service (where relevant), competence and performance? c. Is there an adequate differential (say 15 to 20 per cent) between grades? d. Is there an overlap between grades to provide some flexibility and recognize the fact that an experienced individual at the top of one grade may be of more value to the organization than a newcomer in the grade above? e. Are consistent methods used to allocate jobs into grades, including decisions on recruitment, promotion and upgrading because of greater responsibility? f. Is there any evidence of inequities in the pay structure because of wrongly graded jobs? g. Are pay scales regularly reviewed against external data? If not, what are the factors which are used to determine annual adjustments in pay scales? Are these factors consistent across grades? h. Is there a balanced and cost-effective approach to the provision of employee benefits with status distinctions dictated only by good market practice? i. j. Is there a consistent and fair basis for allocating benefits? Is there any evidence of salary levels falling ahead of or behind the market rates?
a. What is the rationale for the current pay/grade structure? b. Did it/does it reflect practice in comparable organizations in terms of:

actual levels of work performed; the needs of any specialist/professional groups which are different in character from the mainstream of staff, if these exist; union bargaining units, if relevant; the need to progress staff spending several years in grade to reflect experience, performance and service in grade? the current pattern of career development and promotion;
c. Is the structure- flexible enough to cater for:

changes in pay/job market conditions? d. Or are there: too many people with no further progression or promotion opportunities, stuck on the grade maximum (even if well paid); few opportunities to respond to changes in market circumstances?
15. What Type of Specific Pay and Grade Structure or Structures Exist in the Organization?
k. If so, what are the causes and are they short term or long term in nature?
18. Is the System Regularly Maintained and Updated:
a. Graded salary scales? b. Pay spines? c. Spot rates? d. Pay curves?

16. Is the Pay Structure Relevant to the Needs of the Organization as a Whole or the Part of the Organization in Which They Operate, i.e. do they:
a. to take account of new jobs; b. to take account of the structural change in the organization?
19. Is Grade Drift: a Problem (Are People Always Trying to Get Jobs Upgraded to Improve Pay Levels Without Sufficient Reason)?
a. How is this controlled? b. Are the controls adequate or are inconsistencies emerging? Pay Progression These questions consider all types of pay progression schemes within a graded structure, up a pay spine or along a pay curve.
a. fit the circumstances and culture of the organization, in that it is flexible in organizations subject to rapid change or well defined and rigorously applied where order and predictability are of paramount importance;
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20. Is There a Consistent Method of Progressing Pay, eg According to:
Total Remuneration and Employee Benefits

24. What is the Policy on the Structure And Balance of the Reward Package?
a. length of service; b. experience (how is this assessed?); c. performance or contribution; d. work level;
21. Is the Rate of Progression Based on Fair and Consistent Methods of Assessment?
a. What is the mix between: base salary;

other cash rewards, eg bonuses (if paid); allowances of various kinds to compensate for specific circumstances; benefits, eg pensions and related relevant provisions, loans, mortgage assistance, moving allowances; sick pay and long-term disability provisions; medical provisions; leave; meals; employee advisory services, other non-cash items? Why? Is this cost effective? Do staff like having a choice over their package to meet personal requirements?
a. Are there effective links between performance-based progression and .the performance management and any competency framework that exists and related development planning? b. Does the approval process for any service-based progression ensure that under-performers do not get undeserved increments?
22. If a Performance-related Pay System is in Use
a. Is the relationship between contribution, effort and reward clearly defined and understood? b. Is there a credible, well-established and managed process of performance management to support pay decisions, as well as deliver the organizations performance goals? c. Is the amount of performance-related pay sufficient to recognize the contribution not only of high-flyers but also of the reliable core performers on whom most organizations depend? d. Do employees have a reasonable degree of control over the results which determine their reward levels? e. Do bonus earnings (if any) fluctuate too much or too little? f. Is the system easy to understand and administer? g. If it is causing problems, how are these being addressed? Pay Reviews
23. How are Pay Reviews Conducted?
b. Are any choices over the mix available?
c. Is the balance between different elements felt by management and staff to be: about right;
in need of change?
Pensions
25. Does the Pension Scheme Properly Reflect Current:
a. employment patterns and demography; b. levels of employee mobility; c. comparable practice in similar organizations?
26. Can Pensions be Topped Up Where Individuals Have Insufficient Service or Previous Provisions?
a. What arrangements are made for cost of living awards? b. To what extent are pay levels reviewed on the basis of market rate movements? c. Are there satisfactory arrangements to track market rates, both generally and for specific occupations? d. How much money, in terms of payroll percentage, has been and is likely to be made available for pay reviews? e. What arrangements are made to provide guidance on individual reviews related to performance or competence (if applicable)? f. How are budgets for pay reviews set and controlled? g. Are the budgeting arrangements satisfactory? h. What freedom do managers have to make their own pay decisions or recommendations at the annual pay review? i. How is consistency and equity achieved?
a. Do the mechanisms reflect good market practice? b. Do they make sound financial sense for both employer and staff?
27. Are there Provisions for Partners/Dependants?
a. How do these compare against the market? b. Are the rules concerning their entitlements regularly reviewed? c. How is this communicated alongside the overall pension scheme?
28. Is the Pension Scheme Cost-base Sound or Will Demographic Change or Changing Employee Profiles Put Pressure on Affordability?
a. How are changes in this area being tracked? b. Who will decide on change and how?
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Cost Considerations These questions focus on the way costs are understood and managed.
29. What is the Level of Employment Costs and How are Costs Managed?
j.
How well or regularly is information gathered on this?
k. Is there a sensible level of information sharing between comparable organizations? Overall Perceptions and communications These questions focus on perceptions and understanding.
31. Management Perceptions
a. What proportion of operating costs are employment costs? b. How does this compare to other comparable organizations in terms of magnitude? c. Are equivalent costs increasing? Why? Is this acceptable and defensible in current circumstances? d. How are pay budgets for the organization and its constituent parts compiled and agreed? e. Are effective costing/modelling procedures in place? f. Is there IT support for this so that what ifs can be tested? g. How are the costs of benefits/allowances monitored? h. How are approvals given for progression/promotion? i. j. l. Which elements of the system have to change with any pay adjustment? How complex is this change process? How often are changes in the system required and what does the process of change cost in (if known):

a. Does top/operational management believe that the pay system is:

effective; supporting the way people are recruited, managed and developed; giving the right messages to staff and potential recruits?
b. If not, what changes would they want to see and why?

32. Staff/Union Perceptions
a. Do staff-and or unions like and wish to keep the current reward system? b. Do they find it motivational in most aspects? c. Has the organization tracked/measured these perceptions recently through:

k. Could it be simplified without causing undue inequity?
attitude surveys; interviews; focus groups; informal testing of views? What do they want to change? Why? Is this realistic, given current affordability/financial circumstances? How is the organization planning to respond?
man hours; computer time; communications to staff?
d. If they do not like the current system:
Ongoing Reward Management

30. How Well is Reward Management Carried Out?
a. Are responsibilities for elements of the system properly distributed and managed within the pay management department? b. Do the people who operate the pay system fully understand its purpose and operating principles and methodologies? c. Are full records/definitions of practice kept? d. Are decision-making processes about updating or changing the system straightforward and designed to produce robust and acceptable results? e. Are the right checks and balances in place at top executive levels and through the organization? f. Are computers effectively used to increase responsiveness, accuracy and effective modelling of policy changes? g. Are sound cost-management processes in place for pay budgeting, monitoring spend and controlling outcomes centrally and in local offices, where needed? h. Could any of the processes be simplified or made more efficient? i. What lessons are available from improvements already achieved in comparable organizations?
Communications
33. How Well are Reward Policies Communicated to Employees?
a. How well are managers briefed on current reward practice? b. Are staff aware of the total value of their pay and benefits package? c. What improvements in communication would they like to see?
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LESSON 27: INTRODUCTION TO CAFETARIA STYLE OF COMPENSATION

Principles of External and Internal Differential Rewards and Incentives average employee in the organisation, by giving the employee the option to develop his own flexible compensation package, each package should be ideally tailored to the needs of the employee. In other words, cafeteria compensation can make maintenance items motivators. While adopting the programme, the management should remember that the most of younger employees are more concerned with take-home pay than with retirement benefits. On the other hand, older employees are more concerned about retirement and pension programmes. One of the major problems with compensation programme is that employees tend to think in the short rather than the long term. Hence, the management may be forced to pressure workers to make a decision that directly affects theirtake-home pay. Robert Good has observed: If an employee selects the wrong benefits package, the motivational purpose for the company is defeated. Moreover, even just a few bad choices can put the company at severe risk. It is a crushing de-motivator throughout the company when the news spread that X was laid up for weeks without pay or that Y is destitute because Z choose cash over survivors benefits. Even though the employees made these choices themselves, the company simply cannot allow such situation to come about. If a company undertakes the heavy and costly administration burden of installing a cafeteria compensation programme, it will be forced to step in and rectify inequities even though the circumstances were created by the employees own free choice. For an effective and successful working this programme requires more information to be provided to employees by management so that they will have adequate data with which to make their decision. This might increase administrative cost. Further, each employees benefits have to be carefully priced out and updated periodically. This programme has not gained much success even where it has been introduced.
Learning Objective

To know the concept of Cafeteria Style Compensation Features of a Cafeteria Style Compensation An Article On Cafeteria Plans Grow in Popularity
Cafeteria Style Compensation

It is a type of compensation which refers to compensation programmes that allow employees to choose what type and how much of each reward is desired during the coming year. This programme is based upon the assumption that every employees needs are different and he has flexible arrangements that meet individual needs, and for that he is permitted to select that combination of rewards that is most attractive to him. Cafeteria benefit plan also called smorgasbord benefits plan is any program that permit employees to choose their fringe benefits within the limits of the total benefits dollars for which they are eligible. This helps each employee to have, in effect, his own individualized benefit program An organization might run what has been called a cafeteria system, whereby a range of benefits are on offer, and employees can choose from among them up to their allowed budget. This offers the clement of choice and may increase the value of the benefit to the individual, since it answers his real needs or wants. According to an article in Personal management in December 1994, The number of firms offering their employees flexible benefits has risen by more than 50% in the last year, with perks ranging from childcare vouchers to personal pensions. A scheme at Admiral Insurance, for example, allows employees to spend a sum worth up to 13% of the basic salary on benefits from a menu including an extra days annual leave (valued at 9.32 per month), members of a sports club (20 per month) or vouchers: unspent allowance can be taken in cash. All staff receive care benefits, including 20 days holiday discounts on motor insurance, death-in-service and sickness benefits, interestfree seasons ticket loans and loans for work-related training. Features of a Cafeteria Style Compensation Under this programme, the employee is told that his total compensation is made of say Rs. 2000/- and that he can choose a mix of salary life insurance, deferred compensation, and other benefits that suit his particular needs. Each of these options carries a price and the employee can select upto Rs. 2000/- of salary - those items that he feels best suit his personal needs. The philosophy of this approach is that workers will be more highly motivated if they can select those rewards that have the greatest payoff for them. If the organisations benefit programmes are such because they have been designed for the
Tutorial Activity 1.1 An Article on Cafeteria Plans Grow In Popularity

Warner Norcross and Judd, LLP By Sue O Convoy Since their introduction in the early 1980's, cafeteria plans (also called flexible benefits plans or Section 125 plans) have become a popular method for employers to provide health and other benefits in a way that results in employee choice as well as tax savings for both the company and its workers.
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Types of Cafeteria Plans The two most popular types of cafeteria plans are pre-tax premium conversion plans and flexible spending arrangements (FSAs). Many employers combine both in their plan design. A third type, the full-flex plan, offers true cafeteria-style choices that may include multiple health plan options, different levels of life and disability insurance coverages, vacation days or cash. Because the full flex plan is administratively complex and generally used only by larger companies, it is not discussed here. Premium Conversion Premium conversion, the simplest type of cafeteria plan, permits employees to pay their share of premiums for health coverage, life insurance and other qualified benefits such as disability insurance on a pre-tax basis. The plan converts what would otherwise be after-tax employee contributions to pre-tax contributions by means of an employees election, prior to the beginning of the year, to reduce pay and to have the company contribute the amount of the reduction to pay for the coverage selected by the employee. Flexible Spending Arrangements Flexible spending arrangements (FSAs) are also popular. FSAs enable employees to set aside money on a pre-tax basis to pay medical and dependent care expenses. Prior to the beginning of the plan year, employees decide whether and how much to contribute to an available FSA based on the expenses they anticipate during the upcoming year. These are two types of FSAs health and dependent care. Health FSA. Employees may set aside money in a health FSA to pay health plan deductibles and co-payments as well as other uninsured medical care expenses, such as dental or vision expenses, on a pre-tax basis. Under IRS rules, the full amount elected for the plan year must be available to reimburse the employees medical expenses at all times during the year (less any amount already reimbursed). This is the uniform reimbursement rule. In addition, the elected amount cannot be changed during the plan year unless the employee experiences a change in status (such as the birth or death of a dependent, marriage, divorce, etc.) and the plan permits the change. Finally, unused funds remaining in an employees account at the end of the plan year may not be refunded to the employee or carried over to the next year. This is the use it or lose it rule. Dependent Care FSA. Employees may be reimbursed under this FSA for dependent care expenses that enable the employee (and spouse) to work. Dependent care FSAs are not subject to the uniform reimbursement requirement. However, they are subject to the use it or lose it and change in status rules. Legal Requirements Section 125 of the Internal Revenue Code contains the legal requirements for a cafeteria plan. There must be a written plan document meeting specified requirements and all participants must be employees. For employees to obtain maximum tax advantages, the plan must not discriminate in favor of highly compensated persons as to eligibility to participate, employer contributions or benefits. In addition, each cafeteria plan must file an annual informational report (Form 5500) with the IRS.
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Pros and Cons of a cafeteria plan Pay Less Tax: Employers do not pay FICA or FUTA taxes on salary reductions amounts. Employees do not pay federal income tax, FICA tax, and, in Michigan and most other states, state and local income taxes on their salary reduction amounts. Address Employee Needs: Employees can choose benefits that meet their individual needs and adjust those choices annually as needs change. Cost Control: Cafeteria plans help employers control costs by ensuring that money is not spent on benefits that employees neither want nor need. Competitive Benefit Program: By offering more flexible cafeteria-type benefits, employers gain an edge in attracting and retaining valuable employees. Improve Employee-Employer Relationship: Giving employees control over their benefits promotes goodwill and creates a partnership in the benefit program between employer and employee. Respond to Work-Force Diversity: Cafeteria plans address the wide variation in benefit needs of diverse employees. Better Understanding of Benefits: A better understanding of the benefits package results when employees are actively involved in the selection process. While cafeteria plans are advantageous to both employers and employees, some drawbacks exist. The uniform reimbursement rule can put the employer at risk if an employee in a health FSA quits before contributing the full amount for which she has been reimbursed, and, under the use it or lose it rule, an employee must forfeit unused FSA contributions. However, with proper planning and good communication, the effect of any disadvantages can be greatly minimized. Conclusion The advantages of establishing a cafeteria plan are many for both employer and employee and significantly outweigh any perceived disadvantages. Employees can receive the benefits they want while at the same time lowering their and their employers tax liability and helping to control benefit costs.
Tutorial Activity 1.2 An Article on the benefits of Employees

By Michelle Collins Cash is not enough today to recruit and retain top talent for your business. Providing an attractive benefits plan is just as important. While the costs can be exorbitant and the choices overwhelming, you can and should find ways to build a benefits program that works for your company. Heres help. Find out what your employees want. Its critical to recognize just how important a competitive benefits package can be in recruiting the best staff possible. Gone are the days when salary in and of itself was lure enough. Competitive organizations, whether they are big or small, with benefits programs will be able to attract employees away [from you] - especially if you dont provide the most fundamental
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programs such as health care, disability insurance and things like that. Its almost mandatory, says Lloyd Foight, a benefits consultant with the Ross Companies in New York. The next step in providing a winning benefits program is to find out what your group is looking for. Its possible that subsidized or free parking could be more important to them than life insurance. Go to your employees and find out what they want, says Fred Lange, president of HR Architect in Los Angeles. Give them a list of a dozen or so things that they can choose, and leave them room to fill in things. Youll find those unique quirky things that are related to your population. The two essentials for every plan: While you might be faced with a variety of requests, experts say that there are two essentials for every plan: medical coverage and a retirement plan. Other coverage such as dental, disability and life insurance often are considered extras. Most people want to know that theyre covered when they go into the hospital. So thats one of the things on the top of our list, says Larry Landes, president of Garden State Brickface, Windows & Siding in Roselle, N.J. Meanwhile, retirement plans offer an opportunity to hang onto valued employees. You should offer to match or contribute some additional portion to what your employees put in, with the stipulation that the money will mature over a certain period of time. The longer that people stay, the more likely they are to stay, Foight says. The chance of them leaving a year from now is less than it is today. Who Pays for All of This? One way or another, someone has to foot the bill for your employee benefits. However, it doesnt have to be you who picks up the entire check. You could even pass on the entire cost to your employees. Here are three other options: 1. High Deductible Plan Offer to help with medical costs once they go beyond a certain dollar amount, such as $2,000. Foight says this approach will cut down on the administration expenses and reduce the overall costs of the plan. 2. Cafeteria-style Benefits Here, employees pay for the benefits that they want on a pretax basis. The only costs that you will have to deal with are administrative. 3. Split the Cost Another effective strategy is sharing the cost of essentials - such as medical care and retirement - between the company and its employees. Extra coverage such as disability and life insurance are available at the employees expense. Communication matters, too Once youve arrived at a plan that suits both you and your employees, let your people know about it. People need to know that youre spending money on these things. They need to realize that and know that it is a benefit for them even if they
choose not to participate in it, says Bruce Wynn, a compensation and benefits lawyer in Atlanta. Lange recommends taking this level of awareness a step further and providing an itemized list with yearly tax statements. This way, the employees will know just what theyre getting and what youve spent on them. Michelle Collins is a staff writer at CanadaOne.com, Canadas premier business channel on the Internet, with articles, tools and other resources.
Tutorial Activity 1.3 An Article on Challenges of People Management

In many Indian organisations, government- or privatelyowned, the most difficult decisions pertain to people-related issues. While similar issues may be prevailing in other countries, in my perception the problem is more pronounced here. For example, whenever I ask my clients to put together a group of people that would serve as a crack team for participating in an exercise on thinking about the future of the company, the discomfort is palpable. The concern is not about the availability of such people but about the criteria for inclusion. Considerations of seniority, competence, commitment and acceptability come into play and create problems for the decision maker. Usually a compromise is struck and we end up having a team significantly larger than it should have been. Surprisingly, the top man also agrees that some of those who have been included ought not to have been. Of course, how the brainstorming exercise progresses is another matter. Similarly, compromises are made in respect of decisions pertaining to performance management, identification of non-performers, and even for rewarding exceptional performance. It is compromise all the way. It is popularly believed that private sector organisations are objective and clear in their people management decisions and it is the public enterprises that suffer from this malaise. I do not think the difference is significant and the reasons for such behaviour are common to managers across all ownership patterns of business. The promotion of personnel to top management positions in many public enterprises is done based on interviews and other evaluation methods. Most of these officers are those who have served in these organisations for two decades or more and yet need to be assessed by measures such as these! It appears that the performance and exhibited competencies of these individuals have little or no bearing on their career mobility. Assessment techniques used for relatively junior personnel are used for evaluating the suitability of senior managers for top management positions. In many private sector organisations, too, one finds that there is an apparent clamour for objectivity in appraising senior level personnel. Usually this objectivity takes the form of a battery of tests and interviews. The curious aspect in this whole exercise is the implicit naivete that most organisations display in equating quantification of
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subjective aspects with objectivity. Relying on assessments made in a few days in preference to performance of large number of years is a pervasive organisational pathology. Why is this so? In my view, a majority of Indian managers avoid confronting the reality of making choices. As choice-making and accountability are two sides of the same coin, it is indeed a difficult task. More so if such choices deal with people. Whether it is a recommendation for a specific prestigious assignment or promotion, most managers find it difficult to stick their necks out for their juniors. They are more comfortable if the whole process is system driven. But without making a choice and taking sides, managers can neither drive their organisation in a specific, desired direction nor make their team members do so. It is exactly this behavioural aspect that people in organisations perceive as unfair performance management processes. It has to be realised that any people management process is one of engagement. Whether it is performance management or career planning of people, it is necessary for senior management personnel to accept ownership for their actions. Avoiding the discomfort of confronting affected employees cannot be termed as responsible managerial behaviour. To avoid such eventualities it is necessary for senior managers to realise that they have to be transparent and consistent in their people-related interactions and actions at all times. The engaging relationship of people management demands such effort and sensitivity. It has to be understood that performance management is not a year-end effort when the whole organisation goes into a tizzy and somehow gets over it leaving some happy and many unhappy, but everybody guessing. Specifically, at the senior levels of management, it is essential that there is continuous and credible sharing of expectations and feedback on performance throughout the year. Only through such an engagement can it be expected that managers will own up their decisions on people, which the assessed will also accept.
Notes:
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LESSON 28: INTRODUCTION TO PROBLEMS OF EQUITY & BONUS

Principles of External and Internal Differential Rewards and Incentives only is it one of the most complex duties, but it is also one of the most significant to both the organization and the employee. It is important to the organization, because wages and salaries often constitute the greatest single cost of doing business; in 1929 employee compensation amounted to 58 percent of the nations income, as compared with 75 percent in recent years. It is important to the employee because the paycheck often is the sole means of economic survival: it is also one of the most influential factors determining status in society. As far as the organization is concerned, employee compensation programs are designed to do three things: 1. to attract capable employees to the organization, 2. to motivate them toward superior performance, 3. to retain their service over an extended period of time. As a consequence, our discussion is divided into three chapters with the first subject being that of determination of base pay. Though no science of pay exists, systems of job evaluation are widely used to make this first important decision. When coupled with surveys of rates paid by competing firms; the organization can establish a pay policy that will meet its desired goal of attracting sufficient personnel to accomplish work tasks. In many cases, organizations prefer that their employees perform at a rate higher than average. In the following chapter, we shall examine methods of varying individual through merit evaluation and incentive pay plans, as well as systems of promoting group productivity through profit sharing and production bonuses. Finally, the third chapter in this part will deal with the fastestgrowing segment of total compensation, the provision of all types of supplementary pay or fringe benefits. Such programs are more effective in maintaining a work force that they are in motivating higher levels of performance. Significant Factors Affecting Compensation Policy Though a considerable amount of guesswork and negotiation areinvolved in salary determination, certain factors have been extracted as having an important bearing upon the final dollar decision. Among these factors are the following: 1. Supply and demand for employee skills, 2. Labor organizations, 3. The firms ability to pay, 4. Productivity of the firm and the economy, 5. Cost of living, and 6. Government. Each of these will be discussed briefly in order to demonstrate the exceedingly complex nature of compensation. Perhaps a
Learning Objective

Introduction To Compensation Policy To understand the Base Compensation Job To know significant Significant Factors Affecting Compensation Policy To learn Equity and Compensation
Introduction to Compensation Policy

It is a general practice all over that employees make comparisons between themselves and their co-workers. They perceive what they get from a job situation (outputs) in relation to what they must put into it (inputs). They also compare their output-input ratio with the output-input ratio of their fellow-workers. If a persons ration and that of others are perceived to be equal a state of equity is said to exist. If they are unequal, inequity exists i.e., the individual considers himself as under rewarded or over-rewarded when an employee envisions an equity, he may choose anyone or more of five alternatives: i. distort either his own or other inputs or outputs; ii. behave in the same way as to induce others to his own inputs or outputs; iii. behave in some way as to change his own inputs or outputs; iv. choose a different comparison referent; and v. leave the job. Equity approach recognises that individuals are concerned not only with the absolute amount of money they are paid for their efforts but also with the relationship of this amount to what others are paid. They make judgement as to the relationship between their inputs and outputs with those of the others. Based on ones inputs such as effort, education and competence - one compares outputs - such as salary levels, raises and other factors. When people perceive an imbalance in their input output ratio relative to others tension is created. It may result in lower productivity, more absenteeism, etc. This tension provides the basis for motivation, as one strives for what he perceives as equity and fairness. To get relief, the employee may decrease his inputs while holding his output constant, or increase his outputs while holding inputs constant - possibly resulting in fighting the system, increased absenteeism, or other undesirable behaviours. Base Compensation - Job One of the most difficult functions of personnel management is that of determining rates of monetary compensation. Not
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realization of these complexities will lead to a greater appreciation and acceptance of job evaluation despite its arbitrariness and scientific failings. Supply and demand through the commodity approach to labor, as discussed earlier, is not completely correct, it is nevertheless true that a wage is a price for the services of a human being. The firm desires these services, and it must pay a price that will bring forth the supply, which is controlled by the individual worker or by a group of workers acting in concert. The primary practical result of the operation of this law of supply and demand is the creation of the going-wage rate. It will be demonstrated later how the wage and salary survey of this going rate is incorporated into a job evaluation approach to wage determination. We shall discuss the charges of certain groups that the market going rate reflects fundamental biases towards female employees. This simple statement of the effect that the demand and supply of labor have on wages belies its complexity. It is not practicable to draw demand-and-supply curves for each job in an organization, even though, theoretically, a separate curve exists for each job. But in general, if anything works to decrease the supply of labor, such as restriction by a particular labor union, there will be a tendency to increase the compensation,. If anything works to increase the employers demand for labor, such as wartime prosperity, there will be a tendency to increase the compensation. The reverse of each situation is likely to result in a decrease in employee compensation, provided other factors, such as those discussed below, do not intervene. Figure 12-1 : Labor Union and Earnings
Median Weekly Earnings $289 433 423 422 414 410 407 114 170 174 185 188 189 Percent Represented by a Union 29 36 36 82 50 37 63 1 27 8 24 18 4 Percent Who are Women 39 20 15 7 23 22 15 90 79 55 61 59 16
substitution of capital for labor through technology, and controlled entry into apprenticeship programs. All compensation must come from products sold in a market that is usually competitive in nature. Inequitable compensation to any or all will create trouble in maintaining the health of the organization. The increase in the strength of labor unions is due, in part, to the fact the employees interests had not been receiving attention equal to that given to other components of the enterprise. The impact of this strength is shown in Figure 12-1. In the six highest-paying industries, approximately half of the full-time workers are organized. In the six lowest-paying industries, only 14 per cent are recognized. It should also be noted that the percentage of female employees is lowest among the highestpaying industries. Ability to pay Labor unions have often demanded an increase in compensation on the basis that the firm is prosperous and able to pay. However, the fundamental determinants of the wage rate for the individual firm issue from supply and demand. If the firm is marginal and cannot afford to pay competitive rates, its employees will generally leave it for better-paying jobs. Admittedly, this adjustment is neither immediate nor perfect because of problems of labor immobility and lack of perfect knowledge of alternatives. If the firm is highly successful, there is little need to pay far more than the competitive rate to obtain personnel. Such a firm, however, may choose to adopt a policy of paying above the competitive rate in order to attract a superior calibre of personnel. If firms in general are prosperous and able to pay, the tendency is to bid up the price of labor as a whole. Productivity Beginning with the famed General Motors Contract with the United Automobile Workers (UAW) in 1948, much attention has been paid to the effect of general productivity increases in the economy upon the specific compensation of huge aggregations of employees. In the battle against inflation, representatives of the federal government have attempted to use computed productivity gains as guidelines in the settlement of wage disputes between managements and unions. Between 1947 and 1966, the computed average annual productivity increases in manufacturing was set at 2.9 per cent, leading to the establishment of a noninflationary guideline for wage increases of 3.2 percent. With growing inflation, resulting briefly in short-term wage and price controls, the validity of this guideline suddenly vanished. With inflation reaching double digit levels, the government approach of jawboning to influence negotiated settlements has been placed under serious handicaps. An even more serious problem is that the average annual productivity increase in the United States during a recent 11-year period has sunk to 1.9 percent as compared with 9 percent In Japan, 5.5 percent. In West Germany, 5.1 percent in France, and 2.8 percent in Great Britain.2 During this same period, however, hourly pay has increased over 100 percent. A part of this problem of pay speedup and productivity slowdown is characteristic of a maturing economy; service businesses now account for 70
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All full-time workers Highest-paying industries Petroleum and coal products Mining Railroad transportation Aircraft and parts manufacture Ordnance Motor vehicle and equipment manufacture Lowest-paying industries Private households Apparel manufacture Eating and drinking places Leather and leather products Personal services Agriculture
Labor Unions In the structure of economic relationships, the labor union attempts to work primarily on the supply side. In a strike for higher wages, the employers demand for labor to meet a market need is pitted against a supply withheld by the union. Union leaders are often very adroit in selecting the appropriate time to strike as judged by the markets for the employers products. To strengthen their control over the supply of labor, unions seek such goals as union or closed shops, regulated or restricted
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percent of an jobs. Productivity advances in services are more difficult to effect than in manufacturing. Though some have hailed the widespread use of productivity index as a major breakthrough in compensation, these are several serious drawbacks to its use. Among these are the following: 1. there is no precise and accurate measure of productivity acceptable to all; 2. the reported percent increases are generally a long-term average and are not achieved each year; 3. not all industries participate equally in productivity gains and 4. use of any index does not materially reduce controversy in bargaining since the index is used as the base from which to bargain. Cost of living Another formula hailed by many as the answer is the cost-ofliving adjustment of wages. Among the problems engendered by this approach are the following: 1. no cost-of-living formula will indicate what the base compensation should be- it merely indicates how that rate should vary; 2. this approach tends to vary monetary income but freeze real income, a result with which labor is not content; and 3. as in the case of productivity indexes, there are certain measurement problems in ascertaining cost-of-living increases. The Consumer Price Index of the Bureau of Labor Statistics, however, is widely accepted and followed by many employers and labor organizations. Cost-of-living adjustment of compensation constitutes no fundamental solution to equitable compensation to employees. It is useful as a stopgap device in times of inflation when labor is pressed to keep up with the rise In prices. It is an essential ingredient of long-term labor contracts unless provision is made to reopen the wage clause periodically. The United Auto Workers agreement, for example, provides for quarterly cost-of-living adjustments amounting to a I-cent increase for every 0,3 percent advance in the Consumer Price Index. Government Our varying levels of government often have very specific things to say about wages and salaries despite the theoretical and nebulous nature of equitable compensation. There are at least three major federal laws that deal directly with the subject of compensation. The Fair Labor Standards Act, often called the Wage and Hour Law, specifies a minimum hourly wage and a standard workweek for all firms engaged in interstate commerce. Since the laws inception in 1938, the minimum wage has moved from 25 cents to 53.35 per hour in 1982. The law applies to enterprises engaged in interstate commerce with gross annual volumes of sales of at least $362,500. Over 50 million employees are covered.
The Equal pay Act of 1963 is an amendment to the Fair Labor Standards Act and specifies that equal work requiring equal skill, effort, and responsibility under equal working conditions shall be accorded equal pay, regardless of sex of employee. Any differences must be rationally justified through systematic study, usually in the form of a job evaluation plan. Adjustment of differences cannot take the form of reducing pay of the higher-paid person.4 One airline has been ordered to pay about $25 million in back wages to stewardesses who since 1968 were paid less than male employees doing the same work. Hours worked in excess of 40 per week must be compensated at the regular rate plus a penalty of half time. Thus, if an employees rate is $4 an hour, a 50-hour workweek would result in straight-time pay of $200 (50 x $4) and overtime pay of $20 (10 x $2) for a total of $220. Employees assigned to executive, administrative, or professional positions are usually excluded from coverage by the act. Labor organizations constantly press for increases in the minimum wage, decreases in the standard workweek, and increases in the penalty for overtime hours, all in the interest of increasing total compensation for labor. The Walsh-Healey and Davis-Bacon Acts apply to employees dealing with the federal government as contractors, the former applying to those with contracts whose value is in excess of $10,000 and the latter to those having public works contracts with values in excess of $2,000. Under these two acts, the minimum wage is a rate established by the Department of Labor; it has been higher than that set by the Fair Labor Standards Act. The prevailing minimum wage is paid to a majority of workers in a particular craft in a specific geographic area. If there is no prevailing wage for a majority, the amount is determined on a weighted-average basis.5 The standard straight-time period is the 8 hour workday rather than the week. Hours worked in excess of this standard must be compensated with the halftime penalty. In addition to these three acts, there are numerous state laws specifying minimum wages. Usually these rates are lower than those placed in federal legislation, but some 20 states have minimums of $3.35 or higher. It can also be contended that the federal government is instrumental in salary determination through its insistence upon collective bargaining with organized labor as required by the Wagner and Taft-Hartley Acts.
Equity and Compensation

If our first goal of attracting capable employees to the organization is to be achieved. personnel must perceive that the compensation offered is fair and equitable. Equity is concerned with felt justice according to natural law or right. Homanss exchange theory predicts greater feelings of equity between people whose exchanges are in equilibrium. When an employee receives compensation from the employer, perceptions of equity are affected by two factor: 1. the ratio of compensation to ones inputs of fort, education. training, endurance of adverse working conditions, and so on
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2. the comparison of this ratio with the perceived ratios of significant other people with whom direct contact is made. Equity usually exists when a person perceives that the ratio of outcomes to inputs is in equilibrium both internally with respect to self and in relation to others. In Figure 12-2, nine different situations are proposed. Equity theory would hypothesize that the correlation of pay and contribution that exists in cells 3, 5, and 7 would result in feelings of equity. In all other cells, feelings of dissonance are likely to exist. Research conducted with respect to under-reward situations (6, 8, and 9) clearly indicates that employee satisfaction is lower than in either the equity or over-reward situations. Employee contributions exceed their outcomes of money. Resulting dissatisfaction often leads to efforts to reestablish equilibrium, such as borrowing from the supply room to increase rewards, trying to adversely affect the effort and pay of others, convincing self that pay is not out of line, quitting or frequently absenting oneself from the organization, promoting labor organization, and so on. Concerning the over-reward situations (cells I, 2, and 4), original research conducted by Adams suggested - that feelings of discomfort and guilt resulting from inequitably higher pay would lead-.to actions to reduce dissonance. He led an experimental group of employees to believe that the pay allocated was significantly in excess of their qualifications. Figure 12.2 : Equity in Compensation
Gross Over reward (1) Moderated Over reward moderated over award (2)
Equity
Other research has not demonstrated the same strength of impact upon an overpaid group as for an underpaid one. For example, a second study supported hypotheses with respect to underpaid personnel; they tended to decrease inputs over a period of time in comparison with those equitably paid as well as with those overpaid. The overpaid group however, tended to parallel the equity group in output. Concerning satisfaction, however. overpaid did express more overall dissatisfaction than did those from equitably paid groups. Thus, there is some indication of guilt from receiving more compensation than deserved, but such feelings were not translated into action. It has been observed that many organizations pursue a pay increase policy characterized by cells 4, 5, and 6. The employee of average contribution is accorded an average increase in pay, but those above and below average are allocated compensation amounts not significantly different. Thus superior personnel are moderately under-rewarded, leading to lower contributions or withdrawal from the firm. Inferior personnel are moderately over-rewarded, leading to little or no change in behavior but effecting acceptable levels of employee satisfaction. It is this condition that led Herzberg to conclude that pay cannot be; an effective motivator of employee behavior. 10 Figure 12-2 and equity theory would suggest that the problem may be one of improper design of compensation systems, rather than the fundamental inability of pay to motivate. To cope with possible feelings of inequity, various organizations follow a practice of imposing secrecy with respect to compensation received. This is particularly true for salaries of executives and other personnel not covered by union contracts. Research has shown that personnel often underestimate pay of higher-level managers and overestimate the pay of both peers and those one level below. Thus even if conditions exist that would favor equity, it will not be perceived if compensation is kept secret. On the other hand, if a firm desires to go public with its salaries, it had better be able to evaluate performance levels in an objective manner. There are many situations where job outputs are both intangible and intertwined in a dependent fashion with other jobs. Unless some form of acceptable objective assessment can be developed, public pay systems may well lead to lower performance and morale, accompanied by strained relationships between superiors and subordinates.
Equity
(3) moderate under reward
(4)
Equity
(5)
(6)
Moderate under reward
gross Under reward (9)
(7)
(8)
(output background etc) ( line of equity) In one experiment, the overpaid group, compensated on an hourly basis, produced a quantity significantly in excess of an appropriately paid control group. In a second experiment under a system of incentive piecework, the overpaid group tended to reduce dissonance by restricting output so that total pay was more in line with equity expectations. And in a final experiment, the overpaid group restricted its quantity but increased its quality in order that total pay received might be in line with contributions.
Tutorial Activity 1.1 An Article on Pay Equity

For all the problems of pay equity today there were similar schemes in operation in the British Civil Service, Post Office and Schools by the end of the Second ... Incomparable Worth: Pay Equity Meets the Market Equal pay for equal value, or comparable worth, or pay equity, as it is variously called, is becoming increasingly common in a world where any kind of administered intervention in the workings of the free market are regarded as inherently suspect. Steven Rhoads attempts to demonstrate in this book why the
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market is right and pay equity wrong. Based on case studies in England, Australia and particularly Minnesota, Rhodes argues that the arbitrariness of all pay equity systems inevitably dooms them in the same way that the Soviet command economy was doomed - they both proved to be uneconomic and, in the long term, destroyed the interests not just of those administering the schemes but also those for whom the schemes were designed. For those suffering from pay equity the result may appear to be a sudden boost in wages as the scheme drags the wages of women up to the level of men but, in the long term, it merely means that employers of female labour up sticks and go elsewhere in search of the cheap labour they originally had. For those readers whose comparisons extend beyond pay equity there is a strong historical resonance here: all institutions that interfere with the workings of the free market allegedly pose problems for all involved. Trade unions were similarly accused of boosting wages beyond the going rate to the extent that employers would simply go elsewhere for labour. If governments tried to intervene and stop children working for long hours then factories and mines would be uneconomic and close down. Wage councils provide pay in excess of market conditions and the result is catastrophic for the very workers that councils seek to protect. In sum, pay equity, here, becomes just another interference with efficiency. The question arises, but is not directly asked by Rhoads and therefore not answered by him: to what extent is pay equity itself a particular problem or just another alleged example of the Canute-like exercise by some to hold back the unstoppable sea of the free market? Rhoads work is primarily based on a series of case studies of existing pay equity schemes, examined through documentation and interviews, and it is, therefore, difficult to compare the specific effects of pay equity with other forms of market intervention. One might want to take this issue further since it seems that the argument rests on the less than ideal nature of these schemes against two mythical alternatives: the perfect equity scheme which does not and probably cannot exist, and the perfect market - which is similarly problematic. In the absence of any examples of that most elusive creature, the perfect market, one is surely right to remain sceptical of the claims that pay equity schemes (albeit flawed schemes) interfere with normality. That said, Rhoadss argument is not without its merits. His review does indeed suggest that pay equity schemes are likely to go astray (as indeed are all pay schemes eventually), and he is surely right to question the utility of job evaluation consultants who seem to operate on faith rather than science. On the other hand, his claim that the problem lies in the absence of objective criteria for job evaluation is double edged. It is the case that no consensus exists on what to measure, let alone how to measure. Yet the subjectivity of evaluation should not be counterpoised to the objectivity of the free market operations. If economics was an objective exercise in mapping and measuring it is doubtful whether our collective economies would be in such a dire state.
And it cannot be claimed that free markets generate objective criteria for rewards - or are we back to the functionalist arguments many of us thought we had left many years ago? The point is not that administered markets are subjectively governed and free markets objectively governed but that both forms are social constructions, the whim of politics and power as much as demand and supply. One might also want to suggest that a little history might not go astray here. For all the problems of pay equity today there were similar schemes in operation in the British Civil Service, Post Office and Schools by the end of the Second World War, and in the Post Office case by the end of the First. These may not have been perfect but they certainly provided equitable pay without self-evidently undermining any of the institutions involved. In sum, this is an interesting book and one well worth reading for those researching or implementing or suffering from pay equity; but like the topic it covers, it is not without problems. Keith Grint Templeton College, Oxford.
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LESSON 29: PROFIT SHARING AND STOCK OPTIONS

Principles of External and Internal Differential Rewards and Incentives Inspite of the above associated demerits, this option is being increasingly used by companies to command loyalty in industries marked with high managerial mobility as the scheme links a managers reward to his efficiency. How is ESOP a Tool of Employee Motivation? The option of providing an employee with this benefit is done in two ways: A stock option is a right issued by a corporation to an individual or an entity to buy a given amount of shares of company stock at a stated price within a specified period of time. Employee stock options are options issued to employees as a form of incentive compensation. A stock option gives an employee the right to purchase a set amount of shares at a fixed price for some years into the future. Generally speaking, the rules for who gets options and how much they get are much looser than for ESOPs. In the past, companies usually gave stock options only to key employees. Nowadays, more and more companies give options to most or all employees. Until a few years back, the general idea amongst employees was to get a good job, preferably in an MNC, stay around till retirement and lead a happy life. It was a situation like Employment for Life ( or imprisonment for life, depending on how one views it ! ). Employees were loyal to the Company they served and Companies, by and large did not retrench employees. Suddenly, in the last few years, lots of things have changed. No longer are employees willing to stay in the same company for life unless they are satisfied with the returns they get from their jobs. This could range from better remuneration to growth prospects to a better working environment. Employers, also do not want to be stuck with inefficient employees but would like to have the best people around. They have been forced to find innovative ways to attract and retain good people. Companies, particularly new economy companies have been forced to rejig their work culture to become more employee-friendly, or as one may put it, finding ways to get with it . One of the most common employee motivation and retention methods is through ESOPs or Employee Stock Options. An ESOP is nothing but an option to buy the companys share at a certain price. This price which could be the market price or some other price. Normally, to make an ESOP attractive, the option price is lower than the market price. The option to acquire shares is generally exercisable over a period of time, known as vesting period ( generally ranging from 1 to 5 years ). The first options are exercisable generally after a year. Since options lapse if the employee leaves employ-
Learning Objective

To know the concept of Profit Sharing How is Stock Option a Tool of Employee Motivation? Kinds of ownership
Profit Sharing
This method of profit sharing is usually applied only to managerial and executive personnel to avoid dealing with vast numbers. ...
Human Resource Management Approach

Stock option is a right issued by a corporation to an individual or an entity to buy a given amount of shares of company stock at a stated price ...
Introduction
Stock ownership plans enables employees to acquire company stock often at concessional rate. Companies set limits to the amount of stock that employees can buy, which is usually related to the wage or salary earned by the employees or it may be restricted to above certain wage levels. There may be certain conditions with regard to the resale of the stock also - such as agreeing to sell to the issuing company first until a stated period or until he is no longer with the firm. The cost of shares is usually deducted from the pay at source. Sometimes, the workers share of profits is utilized to pay for the stock purchases. This method of profit sharing is usually applied only to managerial and executive personnel to avoid dealing with vast numbers. This method of profit sharing comes with its own merits and demerits. They merits are:

Links compensation package closely to performance. Offers a way for an organization to retain the best of the employees. Motivates recipients to perform even better. Inculcates a sense of ownership and responsibility. Establishes importance of team effort among employees. Only profitable companies can use the tool. Stock prices do not always reflect fundamentals of an organization. Falling share price could mean losses for employees The inability to cash in quickly can dampen the interest. Lack of transparency can earn accusations of favoritism.
The demerits associated with the scheme are:
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ment before the vesting period is over, ESOPs work as an incentive for the employee to stick around for that time. ESOPs are a good motivation tools. The knowledge that if he does well, the company will prosper and eventually the shares will yield a higher return motivates the employee to put in more efforts. This has a multiplier effect since with highly motivated employees, the chances of the company doing well are extremely high. Efficiency enhances, productivity increases & profits rise. It is a win-win situation for all. ESOPs are good tools for companies at the growing stage to attract good employees. Typically, new companies do not have much resources and paying ability. ESOPs make a lot of sense to such companies to get good employees since there is no cash outlay involved for the company. While the major beneficiaries are employees of software and internet companies who get the shares of a company at a comparatively lower rate, other sectors are gradually becoming aware of the benefits of ESOPs. In fact, even companies like ICICI and Hindustan Lever have an employee stock option plan.
vidual participants. The ESOP can acquire both new and existing stock. The trust can borrow money to purchase the stock, with the company repaying the loan by making tax-deductible contributions to the ESOP. ESOPs can be used for a variety of purposes, such as: Broadly most companies follow two models. Beneficial Ownership Under this scheme, the company allocates a number of shares to an employee at a price, which is the 52-week average of the market price. This generally comes at a 10 to 15 percent discount over the market value. The shares are, however, held by a trust. The employee has rights over the shares only after a lock-in period of one year. After 12 months, most companies allow the employees to either sell 25 percent of their shares and pocket the difference or the employees can buy those shares from the trust at the price quoted when the shares were first allocated. Or else the trust continues. Such schemes generally extend over a period of five years. Each year, a certain percentage of shares is freed up for employees to exercise their options which are three: sell, buy or instruct the trust to hold them. At the end of the five-year term, the employee will have to either offload all the shares or buy them from the company at the original price. If the employee resigns before the one-year lock-in period, the employee forfeits all the shares. If he resigns after one year, he can exercise his option of selling or buying 25 percent of the shares. Similarly, after two years there are other alternatives and so on and so forth . Most companies do not allow the employees who have left them to hold such shares beyond five years. They have to sell them back to the trust at a price that is an average of the eight preceding weeks. Shadow Ownership This second scheme is offered by multinationals in India. Under this scheme, staff are allocated shares of the parent company which may be listed abroad - usually Wall Street or the London Stock Exchange. But here, the stocks are never transferred in your name because Indians are not allowed to hold foreign stocks in their name. Under this too, staff are allotted many shares through a trust with lock-in periods between one and five years. The only option an employee can exercise is to sell the shares at the end of the lock-in period and encash the difference.
Kinds of Ownership
There are two main types of stock options: Incentive Stock Options (ISOs) They must satisfy the conditions of the Internal Revenue Code for preferential tax treatment. An ISO generally allows the employee to defer taxation until the date the shares bought with the option are sold and to pay tax at the applicable capital gains tax rate rather than the (higher) ordinary income tax rates. The company does not get a tax deduction. Nonqualified Stock Options (NSOs) They are options that do not satisfy the Internal Revenue Codes conditions for preferential tax treatment. When the employee exercises the option by buying the stock, he or she pays ordinary income tax on the spread between the value of the stock and the price paid for it. However, the company receives a tax deduction on the spread. Unlike ISOs, NSOs can be given to non-employees.
Other Types of Stock Options

Phantom Stock This is another kind of stock option. This is a bonus that rewards employees based on the increase in value of the companys stock, the dividend performance of the stock, or both. Stock Appreciation Rights (SARs) They are similar, and in effect consist of phantom stock without phantom dividends. Employee Stock Ownership Plans (ESOPs) Employee stock ownership plans (ESOPs), are retirement plans in which a trust funded by the employer owns company stock and employees cash out after they leave. The ESOP is the most tax-advantaged mechanism for companies to share ownership with employees. An ESOP is an employee benefit plan operating through a trust that accepts tax-deductible contributions from the company to accumulate company stock, which is then allocated to accounts for indi184
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The two approaches help an organization in different ways. They are

ESOP Selling of Ownership An ESOP allows owners of closely held companies to sell to an ESOP and reinvest the proceeds from the sale on a tax -deferred basis, providing the ESOP owns at least 30% of the company and certain other rules are met. The company can use tax-deductible dollars to make the purchase. It is very rarely practical for ESOPs to allow employees to purchase shares through the plan. An ESOP can borrow money to buy newly issued shares. The company uses these funds to buy other companies, buy new equipment, or any other corporate purpose. The company repays the loan in pretax dollars by making contributions to the ESOP. There is considerable research linking employee ownership to substantially improved corporate performance, provided that companies make financially significant contributions to the ESOP (at least 5% of pay per year), share corporate performance information, and get employees involved in decisions at the work level. An ESOP does not allow for discretion in who gets how much ownership. Allocation of shares must be by relative pay or some more level formula. It cannot be based on individual merit. STOCK OPTION Stock options do not work for this purpose. Employees are buying either new shares of stock issued by the company or existing shares at a bargain price. If they are buying existing shares, the price would rarely be acceptable to the seller. The exercise of an option brings cash into the company if new shares are bought, but the shares are bought at a discount. Stock options bring an infusion of cash when employees exercise their options, but only if the employees are buying newly issued shares. That, however, dilutes other owners. Many companies buy back existing shares equal to the number of options exercised, bringing in no new capital. There is not any research on how employees react to options, although there is a great deal of anecdotal evidence that options do motivate people. There is good theoretical reason to think that options would have the same effect as ESOPs, but there is no hard evidence yet. Options allow you to provide however much ownership you want to whomever you want. In many industries, offering options has become a prerequisite to getting good people, or sometimes any people.
Requirement of Employees to Invest in the Company Finance Growth
Motivation of Employees
Attraction/Retention of Selected Employees
Implementation of a stock option plan
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Latest Updates on Profit-sharing, Dividend Norms for Undertakings may be Revamped by Santanu Saikia New Delhi, June 3: The finance ministry wants a revamp of the profit sharing and dividend paying policy in all undertakings in which the Government has substantial shareholding. These include the three development financial institutions, General Insurance Corporation (GIC) and its subsidiaries, all nationalised banks and central public sector undertakings (PSUs). It has rooted for a switch to a sector-wise profit-sharing formula and segmented dividend payment criteria for all PSUs. In a meeting with top North Block officials presided over by finance secretary Vijay Kelkar last week, the ministry has decided to ask for maximum 25 per cent share in the profit after tax of PSUs as standard payout criteria. But sector-wise profit sharing norms, depending upon profits generated, are also to be laid down. The ministry plans to fix a Rs 1000-crore additional mobilisation target for the next fiscal by demanding higher payouts from its undertakings. The estimated profit and dividend income in the current year,including surplus profits of the RBI, is Rs 9482 crore. While profit sharing is the norm with banks, GIC and its subsidiaries and the three DFIs, PSUs share their profits with the Government by way of dividends. The ministry claims that the percentage profit share can be translated in terms of dividend on a proportional basis on equity held by the Government. The ministry is willing to grant exceptions to the 25 per cent ceiling on a a sectoral and case-by-case basis. Since the payout policy of an individual corporate entity is not always a function of profit after tax, North block is willing to accept a lower return on equity in case internally generated funds are required to finance genuine expansion projects. Similarly, certain sectors may not be able to provide the high 25 per cent share. The ministry is expecting opposition from PSUs and administrative ministries to its new proposal. The argument against laying down a specific dividend payment criteria is that a corporate entity should be providedthe freedom to chose its own payout policy without having to think of contributing to the governments resource kitty. The ministry claims that the payout policy of several public sector banks, FIs and a host of PSUs, some operating in the infrastructure sector, is not aligned with their profitability patterns and the anamoly needs to be rectified even though the aggregate figures do show that gross payout is roughly 20 per cent of the overall net profit. Public sector banks provide a measly 384 crore share of total profits while LIC and GIC contribute only 264 crore. North block sources said that the proposals would be discussed with other ministries and taken to the cabinet, if necessary. A cabinet nod is, however, not a requirement for laying down a new dividend policy. An administrative fiat is enough.
Move may Boost Revenues Increasing the dividend payout from Government companies is a thinly veiled attempt at raising flagging Government revenues. The idea may sound good on paper, but the companies paying up will be the exception rather than the norm as most, with the exception of wholly-owned entities such as the insurance companies, will seek an exemption under the proposed norms. In case of listed Government companies with a minority shareholder interest, a dividend payout becomes a sensitive corporate finance tool, where the company signals its immediate potential. By being forced to hike its dividend payout it could send out wrong signals to minority shareholders. Taxation of ESOPs Until last year ( F.Y. 1999-2000), income tax on ESOPs was levied at the time of issue of shares to the employee. As such ESOP was considered as a perquisite forming part of salary and was taxed as salary income at the time of exercising the option. Section 17(2)(iiia) of the Income Tax Act, 1961 provided that, the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person, shall be treated as a perquisite. This implied that the difference between the market price of such shares at the time of their issue to the employees and option price ( price at which the employee is entitled to get the shares ) was treated as a perquisite in the hands of employees at the time of exercise of the option and the employee had to pay income tax on this perquisite. E.g. if the market price at the time of exercising the option was Rs.100/- per share and the option price is Rs.75/-, Rs.25/- will be treated as taxable perquisite on which income tax has to be paid. Since tax was imposed at the time of acquisition of shares, most employees had to sell the shares to pay the income tax. This lead to situation where a part of the option shares, had to be sold just to pay the tax. Besides, when the employee had to sell the shares, the difference between his sales proceeds and the market price at the time of issue of shares to him was treated as capital gains on which he has to pay capital gains tax. Continuing the above example, if the employee actually sold the said shares later at Rs. 150, he would have to pay capital gains tax on Rs.50/-. Besides, the employee was not entitled to any relief, if after paying income tax at the point of subscription, the value of shares went below the option price and he made a loss on sale of the shares. E.g., having paid the tax on Rs.25/-, suppose the employee could sell the shares for Rs.80/- only. Though his gain was only Rs.5/-, tax on Rs.25/- would already have been paid by him. And what if the employee can sell the shares at a price below Rs.75/-. In such cases, he would have paid tax on Rs.25/- even when he has actually made a loss. Most employees were not happy with this scheme of things. Industry made representations to the Finance Minister to change the said provisions and provide for levying income tax at
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one point only, i.e. at the time of actual sale on the difference between actual sale price and the option price. i.e. no taxation at the time of exercising of options but only on final sale. E.g., if the shares were sold for Rs.150/-, the employee would be liable for tax on Rs.75/- (Rs.150/- less Rs.75/-) and not at the time of exercising the option. Considering the facts of the case, Finance Minister Yashwant Sinha conceded the industrys long pending demand for taxing ESOP at the time of sale, rather than imposing the levy of tax at the time when the shares are issued to the employees. Instead of considering ESOP as a perk and imposing tax on it, the government will w.e.f. F.Y. 2000 - 2001 only impose capital gains tax at the time of sale of shares by the employee. The taxable capital gains would be the difference between the sale price and the issue price and such tax liability would be discharged from the sale proceeds of shares so sold. Moreover, the rate at which tax liability would be calculated depends upon whether it is a long-term capital gains or a short term capital gains. In case of long term capital gains, such gains shall be taxed at the rate of ten percent without indexation or at the rate of 20 % with indexation of acquisition price. Can ESOPs be Gifted? The answer to this is, Yes. The employee who is entitled to the ESOP may gift the options to any person. However, the donor will have to pay income tax on the notional gains on the date of gift i.e. he will have to pay capital gains tax on the difference between the fair market value of the gifted shares / warrants on the date of gift and the option price, if it has already been paid. The donee, if and when he actually sells the shares will have to pay capital gains tax on the difference between the actual sale proceeds and the fair market value on the date of gift. The reason for having this provision is that, in the past, many employees gifted the option shares / warrants to relatives / friends without paying any tax. These friends / relatives sold the shares / warrants and either, gifted back the sale proceeds to the employee, or in case of a close relative such as spouse, let the money remain with the spouse. Demerits With so many merits, are ESOPs the ultimate tool for company prosperity? Do ESOPs have no demerits ? Like most things in life, excess of anything has its own problems. When ESOPs are exercised, it leads to a further issue of equity shares of the company. This means that the equity of the company is being diluted further and has an adverse effect on the EPS (Earning Per Share). Besides, ESOPs are nothing but an alternative employee remuneration plan for employees. The difference between market price and the option price is nothing but a cost to the company and should be charged to the profit and loss account. However, there are no Indian Accounting Standards which require the company to treat the option cost as any expenditure. The US GAAP has recognized that the option price is nothing but part of manpower costs and should be charged to the profit & loss account over the vesting period of the ESOPs.
Conclusion In a nutshell, Employees Stock Option Scheme helps a company to enter into a strategic and robust relationship with their employees on a voluntary basis and in a gracious manner for their genuine benefit and thereby encouraging other sectors also to utilise this option. Properly used, this tool can be used for creating a win-win situation of all concerned.
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LESSON 30: INTRODUCTION TO FEATURES OF FRINGE BENEFITS, OBJECTIVES OF FRINGE BENEFITS AND SERVICES PROGRAMME
Principles of External and Internal Differential Fringe Benefits number of benefits - paid vacation, pension, health insurance plans, etc. which usually add up to something more than a fringe, and is sometimes applied to a practice that may constitute a dubious benefit for workers. The International Labour Organization has defined fringe benefits as under: Wages are often augmented by special cash benefits, by the provision of medical and other services, or by payments in kind that form part of the wage for expenditure on the goods and services. In addition, workers commonly receive such benefits as holidays with pay, low-cost meals, low-rent housing, etc. Such additions to the wage proper are sometimes referred to as fringe benefits. Benefits that have no relation to employment or wages should not be regarded as fringe benefits, even though they may constitute a significant part of the workers total income. This is fairly obvious in the case of public parks, sanitation services, public and fire protection. The United States Chamber of Commerce includes five categories of services and benefits under the term fringe benefits. These are: i. Legally required payments - old-age pension, survivor benefits, disability pension, health insurance, unemployment insurance, separation pay, and payments made under the Workmens Compensation Act;
Learning objective

Introduction to the concept of Fringe Benefit To know the Terminology and Meaning of Fringe Benefit To learn Special Features of Fringe Benefit and Service Programmes Objectives of Fringe Benefit and Service Programmes
Introduction to the Concept of Fringe Benefit

Management is concerned with attracting and keeping employees, whose performance meets at least minimum levels of acceptability; and at keeping absenteeism and turnover to tolerable levels. The provision of benefits and services can be and are important in maintaining the employees and reducing or keeping turnover and absenteeism low. It is important to note that financial incentives are paid to specific employees whose work is above standard. Employee benefits and services on the other hand, are available to all employees based on their membership in the organization. The purpose of such benefits and services is to retain people in the organization and not to stimulate them to greater effort and higher performance. They foster loyalty and act as a security base for the worker. Terminology and Meaning These benefits are usually known as fringe benefits - as they are offered by the employer to the employee as a Fringe. Different terms have been used for these benefits, such as Fringe Benefits,. Welfare Expenses, Wage Supplements, Subwages; or Social Charges, Perquisites other than Wages, or Transpecuniary Incentives. The other terms used are: Extra Wages, Hidden Payroll, Non-Wage Labour Costs or Selected Supplementary Compensation Practices. It is difficult to define what a fringe benefit is, for there is no agreement among the experts on its precise meaning, significance or connotation. The chief area of disagreement is between wages and fringe on the one hand and between fringes and company personnel services on the other. There are also differences on whether the benefits which have been legally provided for should be included among the fringes. The Glossary of Current Industrial Relations and Wage Terms has defined fringe benefits as Supplements to wages received by workers at a cost to employers. The term encompasses a
ii. Pension and group insurance; and welfare payments; iii. Paid rest periods, waste-up time, lunch periods; iv. Payment for time not worked - vacations and holidays, for example; and v. Christmas bonus. Belcher defines these benefits as any wage cost not directly connected with the employees, productive effort, performance, service or sacrifice. According to the Employers Federation of India, fringe benefits include payments for non-working time, profits and bonus, legally sanctioned payments on social security schemes, workmens compensation, welfare cess, and the contributions made by employers under such voluntary schemes as cater for the post-retirement, medical, educational, cultural and recreational needs of workmen. The term also includes the monetary equivalent of free lighting, water, fuel, etc., which are provided for workers, and subsidized housing and related services. Cockman views employee benefits as those benefits which are supplied by an employer to or for the benefits as those benefits which are supplied by an employer to or for the benefits of an employee, and which are not in the form of wages, salaries and time-rated payments. We may define fringe benefit thus:
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It is a benefit which Supplements the employees ordinary wages, and which is of value to them and their families in so far as it materially increases their retirement benefit. Fringe benefits help build up a good corporate image. Schemes like housing, educational institutional and recreational activities bring benefits to the society at large. An organization with the introduction of Fringes seeks to enhance employee morale, remain cost effective, and introduce changes without much resistance. Special Features of Fringe Benefits It will be noted that there is some difference between wages and fringe benefits. Firstly, wages are directly related to the work done and are paid regularly - usually weekly, fortnightly or monthly. Fringe benefits, on the other hand, are those payments or benefits which a worker enjoys in addition to the wages or salary he receives. Secondly, these benefits are not given to workers for any specific jobs they have performed but are offered to them to stimulate their interest in their work and to make their job more attractive and productive for them. They boost the earnings of the employees, and put extra spending money in their hands. Thirdly, fringe benefit represents a labour cost for the employer, for it is an expenditure which he incurs on supplementing the average money rates due to his employees who have been engaged on the basis of time schedules. In the circumstances everything which a company spends over and above straight time pay should be considered a fringe benefit. A labour cost is a fringe only when it is an avoidable factor; that is, when it can be replaced by money wages without determent to a workers productive efficiency. Only the legal or union-imposed or voluntary non-wage costs, which can be computed into money wages, are considered to be fringes. Fourthly, a fringe is never a direct reward geared to the output, effort or merit of an employee. It is offered, not on the basis of the hard work or long hours of work put in by an employee but on the basis of length of service, his sickness, sex, the hazards of life he encounters in the course of his work, etc. For example, maternity benefits are offered to female workers who have put in a prescribed period of service with a particular employer. Sometimes, the longer an employees period of service, the larger the fringe benefits he enjoys. But wages are always fixed and paid regularly. Fifthly, to be termed a fringe benefit, a labour cost should be intended by an employer as a benefit desired by his staff. It is a fringe benefit when it is enjoyed by all the employees. For example, a fringe benefit - subsidizing non-vegetarian meals taken in the factory canteen - is not a fringe benefit for vegetarian employees. Sixthly, a fringe must constitute a positive cost to the employer and should be incurred to finance an employee benefit. If the benefit increases a workers efficiency, it is not a fringe; but if it is given to supplement his wages, it is. For example, the expenditure incurred on providing better lighting arrangement with a view to increasing a workers efficiency is not counted as expenditure incurred on fringe
benefits, even though the workers may gain financially as a result of their increased efficiency flowing from the provision of better lighting facilities. Subsidized meals, however, definitely constitute a fringe benefit. Though these benefits are known as fringes, they are not merely so but are a substantial part of the expenditure incurred on wage and salary administration. They are better known now as Benefits and services rather than as Fringe Benefits. But since the terms are also used interchangeably, they are synonymous. The word Benefit applies to those items for which a direct monetary value to the employee can be easily ascertained, as in the case of holiday pay, pension, medical insurance or separation pay. The word Services, on the other hand, refers to such items as athletics, company purchasing service, workers medical examination, legal aid, housing, etc. Objectives of Fringe Benefit and Service Programmes An organization designs and establishes a benefit-and-service programme to achieve the following ends: a. To keep in line with the prevailing practices of offering benefits and services which are given by similar concerns; b. To recruit and retain the best personnel; c. To provide for the needs of employees and protect them against certain hazards of life, particularly those which an individual cannot himself provide for; d. To increase and improve employee morale and create a helpful and positive attitude on the part of workers towards their employers; e. To make the organization a dominant influence in the lives of its employees with a view to gaining their loyalty and cooperation, encouraging them to greater productive efforts; f. To improve and furnish the organizational image in the eyes of the public with a view to improving its market position and bringing about product acceptance by it; g. To recognize the official trade unions bargaining strength, for a strong trade union generally constrains an employer to adopt a sound benefits-and-services programme for his employees. In other words, fringe benefits satisfy three goals, viz: 1. Social Goal Human resource is the most precious of all resources. In the words of the Philadelphia Charter, 1944, Labour is not a commodity. It is entitled to a fair deal as an active participant in any programme of economic development and social reconstruction. Article 43 of the Constitution of Indian provides: ... All workers should be given a living wage, conditions of work ensuring decent standard of life and fuller enjoyment to ensure social and cultural opportunities. The fringe benefits act as a social lever in helping conservation of this precious resource, by guarding against its unnatural erosion and providing the climate for its development in a working environment.
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2. Human Relations Goal The management, through motivation, tries to develop and maintain human relations, i.e., mutual interest, individual differences, motivation and human dignity. The management provides with an environment which will reasonably meet the economic, social and psychological needs of the employees so that their cooperation could be obtained and productivity of the organization enhanced. 3. Macro-Economic Goal For maintaining the growth and stability in the economy of a country, ideal utilization of the non-human and human resources is imperative. Fringe benefits do provide protection, during periods of contingencies of life, for training and development of the employees, and for good working conditions and assistance to supplement their main income, opportunities for social interaction through cultural recreational facilities, etc.
Emphasize how long youve been there, as well as the direct benefits your training will provide the company - not just vague Ill be a smarter, better worker, but the sort of knowledge base youll acquire and the kinds of projects youll be able to work on. And, yes, there could be a better chance if you could work it into your benefits package - this might mean a reduction in salary, but it would also lock in the tuition assistance. Go into it with several options and a willingness to compromise, and you should get something of what youre after. Good luck, HR Guy
Tutorial Activity 1.2 Health Insurance: Fringe Benefit or Dead Weight

By Mark Battersby Although health care costs may continue to rise, there are some steps you can take to offset some of this necessary burden. It is a sad reality that few sign shops or sign-related businesses can afford to offer their employees healthcare insurance. Double-digit increases in the cost of medical insurance are driving others to severely limit this popular fringe benefit, if not discarding it altogether. A Tillinghast-Towers Perrin survey showed that in 2002, a whopping 88 percent of the corporate respondents predicted even more large increases in employee health care costs through 2006. That means that by 2007, many companies, large and small, will be looking at health care costs almost double of what they were at the start of the century. What can any sign professional or sign business owner or manager do to fight this tide? Clearly there is no silver bullet. No one wants the government to step in with convoluted solutions. Fortunately, several unique strategies developed in recent years, combined with our tax laws, may help make healthcare insurance an affordable option for many sign businesses - and their owners. Instead of focusing on making the system cut costs through managed care of HMOs alone, many large companies are focusing on making the consumer more cost sensitive and health-conscious. In other words, many companies are beginning to empower their employees to take charge of their own health care as youll see. Contain the Costs As many sign professionals are all-too-aware, insurance carriers that write policies for small businesses tend to charge very high premiums. Often they demand extensive medical information about each employee. If anyone in the group has a pre-existing condition, the carrier may refuse to write a policy. Or, if someone in the sign business becomes seriously ill, the carrier may cancel the policy the next time it comes up for renewal. Fortunately, many states are trying to ease this burden by passing laws that make it easier for small businesses to get health insurance and to prohibit insurance carriers from discriminating against smaller firms. However, until such time as more of these favorable laws are passed, there are a number

Can college tuition be a fringe benefit? Ask HR Guy ... Hello HR guy, I was wondering if tuition could be treated as a fringe benefit for working for a company. ... Can College Tuition be a Fringe Benefit? Ask HR Guy Hello HR guy, I was wondering if tuition could be treated as a fringe benefit for working for a company. I have been working for the same research and development company for almost five years now and now have applied to go to graduate school. I will continue to work at the company while in school at a reduced percentage. I would like to ask the company if it would consider paying for my tuition since what I would be studying would be parallel with my work. Of course I must consider the companys position of not having a lot of extra money for G and A (general and accounting) funds and none of the projects have the funds for my tuition right now. So I was wondering if tuition could be a fringe benefit. In addition, what other options could I suggest? Thank you, James James, The short answer is: It depends on the company - and even, sometimes, the individual situation. Many firms will cover courses taken that have direct relevance to the job description, especially if youre in a tech-related field. But its different if youre working on a degree, as there are many non-course expenses involved. Nevertheless, its always in a companys best interests to invest in their employees, though theres usually a catch: Employers are afraid to see such employees leave after their studies are complete. After all, if it pays for your degree only to see you go to another employer soon after graduation, its suddenly lost an enormous investment. So to boost your chances of getting tuition assistance, suggest drawing up a contract that commits you to working for the firm for X years after graduation. Also, be willing to negotiate on how much the firm chips in - with this economy, youd be very lucky to get it to cover everything, but with some good negotiating, you might be able to get a good chunk of your expenses covered.
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of cost-cutting options that every sign professional should explore. A growing number of small businesses are, for example, banding together with other businesses to enjoy economies of scale and gain more clout with insurance carriers. Many business leagues, trade organizations and groups offer health insurance plans for small business owners and their employees at lower rates. Your sign business may have only a few employees, but united with other members of a group or association and their employees, youve got substantial clout. The carrier issues a policy to the whole association, your businesss coverage cant be terminated unless the carrier cancels the entire association. Associations are able to negotiate lower rates and improved coverage because the carrier doesnt want to lose such a big chunk of business. This way even the smallest one-person company can choose from the same menu of healthcare options that big companies enjoy. Associations arent the only route to take. In some states, business owners or groups have set up health insurance networks among businesses that have nothing in common but their size and their location. Chambers of commerce, tenants and merchants associations, etc. are among the possibilities that every sign professional should explore. Consumer-driven Health Care A few, larger sign businesses are experimenting with so-called defined contribution products. These plans typically grant employees an annual cash allotment, called a persona account or something similar, to spend as they please for health. If that money is used up, employees face a fairly high deductible before more conventional medical coverage kicks in. In many of these plans that are offered by insurance companies, trade-groups and others, any unused portion rolls over and is added to the following years allotment. In some areas and some fields they are already available to small businesses. Employers hope to see savings from employees who, when confronted with the real price tag for their medical services, decide to shop for better value. Under todays systems, the employee pays his or her $15 co-pay and the doctors and hospitals have an employers blank check from there on in. One midwest company added just such a personal health account plan last year. Single workers pay about $450 to participate in the plan provided by a private administrator, one of a growing number of companies offering defined contribution products to employers. Participants buying coverage for one person have a yearly allotment of $750. If their medical spending exceeds that, they are responsible for the next $500. Once the employee hits $1,700 in annual health care expenses, a more traditional managed care plan kicks in, generally, giving full coverage to those who use in network medical services. Carrots and Sticks One employer recently dangled a temporary monetary incentive in front of employees willing to make staying healthy a priority. For those who stopped smoking, received regular screenings for breast and prostate cancer and took other common sense health
measures, the company agreed to pickup 75 percent of their health insurance tab, compared with 60 percent for others. That offer prompted 90 percent of the companys employees to opt for health. Although this was a large business, the payoff with this strategy also applies to smaller sign businesses, even those with only a few employees. In this situation, the operations workers compensation bill was close to 10 percent lower that it was less than a decade earlier. Whats more, even in todays environment of steadily escalating costs, the company faces only a three percent increase in health care premiums instead of the commonplace multi-year, double-digit hikes that others face. Would a similar strategy, worked out with the help of competent advisers or your insurance company, be just as effective in your workplace? Uncles Helping Hand Although tax deductible by a sign professional, contributions made by the business to provide (through insurance or otherwise) accident and health benefits are not taxable to the employees. An employers deduction for contributions to a funded welfare benefit plan for sickness, accident, hospitalization or medical benefits is governed by the tax law Group health plans that fail to provide continuing coverage to qualified beneficiaries may subject employers to an excise tax. In fact, any group health plan that fails to satisfy the continuation coverage requirements or which discriminates in favor of key- or highly-compensated employees may be subject to penalties in the form of an excise tax - or denied a tax deduction. If the sign businesss so-called welfare benefit plan involves self-insurance, amounts added to a self-insurance reserve account are not currently tax deductible. Actual losses charged to that reserve account are, of course, deductible. Under our income tax laws, self-employed sign professionals may deduct 100 percent of any amounts paid for health insurance coverage for themselves, spouses and dependents. This deduction is limited to the actual income earned from the sign business and reduced by a deduction for contributions made by the self-employed professional to a retirement plan. Only those benefits received by employee-shareholders owning two percent or less of an S corporations stock are tax deductible by the corporation as a business expense. Employee-shareholders owning more than two percent of the S corporation stock are treated in the same manner as partners in a partnership. Today, an employee-shareholder who owns more than two percent of the S corporations stock and who is thus treated as a partner, is entitled to deduct 100 percent of the amount paid for medical insurance for himself, his spouse and dependents. For purposes of this deduction, a two percent plus shareholders wages from the S corporation are treated as the shareholders earned income derived from the trade or business with respect to the plan providing the health insurance coverage is established. Finally If sign business owners and managers are waiting for Washington to solve their health care problems, many experts say that
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the wait may be a long one. Health care continues to be the subject of vigorous debate on Capitol Hill. Some Democrats are talking about universal health care although the plans are short on detail and few of them offer much hope for smaller businesses. Congress may consider passing legislation that will create tax credits for uninsured individuals. Other items on the agenda include expanding medical savings accounts and increasing prescription drug coverage for seniors. All of which puts the question of health care insurance or coverage squarely back on the shoulders of every sign shop owner and manager. The self-employed sign business owner, partners and shareholders in sign businesses operating as S corporations can today deduct 100 percent of the amounts they spend on health care insurance for themselves, their spouse and dependents. The business itself, may claim a tax deduction for amounts spent on healthcare for employees. Employees, of course, can safely ignore health care payments made by their employer for tax purposes. But, the question remains, can anyone really afford healthcare protection and, if they can, for how long? Notes:
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LESSON 31: INTRODUCTION TO HISTORY AND GROWTH FACTORS, COVERAGE OF BENEFITS

Principles of External and Internal Differential Fringe Benefits Since it was workers who were responsible for production, it was held that employers should accept responsibility for meeting some of the needs of their employees. As a result, some benefits-and-services programmes were adopted by employers. vi. The growing volume of labour legislation, particularly social! security legislation, made it imperative for employers to share equally with their employees the cost of old age, survivor and disability benefits. vii. The growth and strength of trade unions has substantially influenced the growth of company benefits and services. viii.Labour scarcity and competition for qualified personnel has led to the initiation, evolution and implementation of a number of a compensation plans. ix. The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go, at least partly, to the employees who are responsible for it, so that they may be protected against the insecurity arising from unemployment, sickness, injury and old age. Company benefits-and-services programmes are among some of the mechanisms which managers use to supply this security. A tripartite concept of individual protection has developed in recent years. First, every individual is expected to be at least partially responsible for his own present and future well-being. Second, industry is now expected to protect its workers from the hazards of life. Finally, the government is involved in supporting and financing worker assistance programmes. The contribution of these three parties varies in accordance with the nature and purpose of the various employee benefits-andservices programmes. A number of factors influence the decision to set up a particular employee benefits and services programme. According to Nielson, the criteria governing such a programme are: a. Cost; b. The ability to pay; c. The needs of the employees; d. The bargaining strength of the trade union; e. Tax considerations; f. Public relations; g. Social responsibility; and h. The reactions of the employees. The following table summarizes the factors, key forces and their potential impact on benefits:
Learning Objective

History And Growth factors of Fringe Benefits Contribution Of Other Factors On The Concept Of Fringe Benefits Coverage of benefits
Interaction
After studying rewards and incentives in detail now let us study further the growth of Fringe benefits.
History and Growth Factors of Fringe Benefits

Belcher says that A Fringe is a catchword attributed to the Regional Director of the War Labour Board (USA) during World War II. The idea caught on and is now widely used in spite of its limited value in describing the present practice. It sprang up as off-shoot of the industrial wage system. In the U.K., fringe benefits germinated as the byproduct of Industrial Revolution. In member countries of the I.L.O., the Philadelphia Declaration did influence the origin of these benefits. In India, the Directive Principles of State Policy enshrined in the Constitution and the subsequent Five Year Plan documents laid considerable emphasis on improvement of wages, social security benefits and other welfare measures, for it was rightly recognized in the words of Peter Drucker, Larger part of the industrial growth is obtained not from more capital investment but from improvements in men. We get from men pretty much what we invest in them.
Contribution of Other Factors on the Concept of Fringe Benefits

For instance, i. Rising prices and cost of living has brought about incessant demand for provision of extra benefits to the employees. ii. Employers too have found that fringe benefits present attractive areas of negotiation when wage and salary increases are not feasible. iii. As organizations have developed more elaborate fringe benefits programmes for their employees, greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees. iv. Recognition that fringe benefits are non-taxable rewards has been a major stimulus to their expansion. v. Rapid industrialization, increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments.
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Table 1 : Factors Likely to Shape Future Benefits and Their Relative Impact
Relative Impact of Forces on Benefits Some Moderate Strong 1. Better labour-force edu cation 1.Rise in individual 1. More leisure time, 2. Growth in white-collar influence vacations, holiday versus-blue-collar occupations 3. Relative growth of minorities 2. Extension of 2. Pressure from and increased participation in unionization, new unions established unions work force 4. Growth in relative 3. Medical advances (e.g. 3. New public welfare youthfulness of work force transplants, life extension) programme 5. Growth in female component of work force 4. Participative planning 4. Minority, frustrations 6. More technological changes with institutional members and pressures. 7. More urbanization
contract terms. Additional holiday entitlements may be regarded as a fringe benefit, including sabbaticals and long-service leaves. Other benefits which may be offered include the following: Company Cars It is a highly-regarded benefit in the UK, especially among managerial staff for whom they have connotations of status, despite the reduction in tax incentives over the years - and those whose work requires extensive road travel (eg. sales and service staff). Transport Assistance Examples may include loans for the purchase of annual season tickets, or bulk buying of tickets by employers for distribution to staff. Housing Assistance, Perhaps in the Form of Allowances to staff who have been transferred or relocated removal and traveling expenses, lodging, convincing fees and so on or assistance with house purchase bridging loan, preferential mortgage terms. Medical Benefits Say private medical and/or dental insurance. Some medical services may also be provided at the workplace: for example eye and hearing tests (where relevant to the industrial context). Catering Services Most commonly, subsidized food and drink at the workplace or Luncheon Vouchers. Recreational Facilities It is a subsidy and organization of social and sports clubs or provision of facilities such as a gymnasium or bar. Allowances For telephone costs, professional subscriptions or work related reading matter. Discounts or preferential terms on the organizations own products services. Bank employees, for example, may receive: a mortgage subsidy: discounts on unit trusts or insurance products; bonus interest on accounts or savings plans; or reduced interest rates on overdrafts and loans. Educational Programmes In-house study opportunities, or sponsorship of external study (not necessarily work-related). Family-friendly Policies Such as workplace nurseries, term-time hours contracts, career break schemes. It has been recognized that certain benefits must be supplied by the organization for its employees, regardless of whether it wants to or not. With few exceptions, the hiring of any employee requires the organization to pay social security premiums, workmens compensation, etc. Similarly, the payment of these costs by the organization provides the employee with financial protection at retirement, termination, or as a result of injury, and it also provides to the workers dependants in case of the employees death.
Coverage of Benefits
Benefits consist of items or awards which are supplementary to normal pay. Some such as pensions and sick pay - are essential entitlements, so the common term fringe benefits is perhaps misleading. Certain provisions of the maintenance of adequate standards of living have been underwritten by the state, which has legislated for employees and employers alike to, bear some of the cost. They are awarded to anyone who meets certain qualifying conditions and as such are independent of the employers discretion and performance considerations. Other benefits such as cars, medical insurance and perks, are more in the nature of optional extras and as such may be part of the recruitment retention and incentives strategies of the organization, Entitlements include the following: Pension Provisions Pensions are generally regarded as the most important benefit after basic pay: they are a kind of deferred pay, building up rights to a guaranteed income on retirement (or to dependants, on death) They are financed by contributions from the company, with facilities for contribution by employees as well. Sick Pay It is understandable that sickness or other enforced absence from work would haunt workers with the prospect of lost earnings, unless there was some son of provision for genuine sufferers. Many employers supplement the state benefit by additional sick pay schemes, which may be tailored to the organizations particular objectives (looking after long serving employees, or generosity from the outset to attract recruits Maternity Leave and Maternity Pay Benefit given to the female employees of the organization. Holidays This is a benefit which is very much taken for granted, but it was only recently working Time Regulations 1998) that any formal entitlement to annual leave was formulated. Employees who have been continuously employed for 13 weeks are entitled to 15 days leave per annum, rising to 20 days for leave commencing after November 1999. There is no statutory right to customary holidays (public holidays, Christmas etc) although these may be granted by
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The National Association of Manufacturers has indicated the following classification of fringe benefits: a. Premium Payments for the period of time a worker has worked; for example, payment on daily or weekly basis, holidays, overtime pay, shift differentials, the cost of living bonus, bonus in lieu of vacation. b. Payment for special duties, such as working on grievance redressal procedures and labour contract negotiations. c. Payment for health and security benefits: These include retirement plans, social security payments, savings plans, profit-sharing plans, group life insurance, medical, surgical and hospital insurance, accident and sickness insurance, supplemental employment benefits, payments under the Workmens Compensation Act, disability insurance, old age and survivor insurance, and unemployment compensation. d. Payment for time not worked, which includes payment for sick leave and for time during which an employee is under medical care, payment for holidays, vacations, witness time, voting time, excused absence, lunch periods, rest periods, work-up time, reporting pay, severance pay, payment for callall-time, call-back time, dressing time, portal-to-portal time and wet-time. e. Payment for employee services, including cafeteria subsidies, union credit, house financing, parking space operations, etc. f. Other expenditure, such as that incurred on making Christmas gifts or offering Christmas bonus, on educational reimbursements, employee uniforms, work clothes, safety equipment or allowance, laundry allowance, supper money or meal allowance. The United States Chamber or Commerce classifies benefit items into five categories. These are: a. Payments that have to be made under any specific legislation; b. Pensions and such other payments as have been agreed upon; c. Paid rest period, lunch periods, wash-up time, travel time, time taken to change clothing, and get-ready time; d. Payments for time during which an employee has not put in any work at all; and e. Other items, including profit-sharing payments, bonus, etc. Cockman, however, has made a two-fold classification of fringe benefits: i. Those which are offered on the basis of status - car, entertainment facilities, holiday, foreign travel, telephone, security - insurance and medical benefits, childrens educational facilities; and work benefits - office accommodation, secretarial services, management training, company scholarships; and ii. Those which are key benefits, that is, share schemes, profit sharing, retirement, benefits, counseling services, and house purchase facilities. On the basis of their identification, however, benefits may be classified as under:
a.
Employee Security Payments: These include:
i.
Employers contribution stipulated in legal enactments: old age, survivor, disability, health and unemployment insurance; Payments under the Workmens Compensation Act; Supplemental unemployment benefits; Accident insurance; Pensions; Contributions to saving plans and health and welfare funds.
ii. iii. iv. v. vi.

b.
Payment for Time not Worked
Under these are included call-back and call-in pay; clean-up time; health-in-the-family leave; family allowance; holiday pay; layoff pay; medical time; paid lunch periods; portal-to-portal time; pay for religious holidays; reporting pay; pay for rest periods; severance pay; paid sick leave; payment for time spent on collective bargaining and on the redressal of grievances; vacation pay; pay for the time spent in offering evidence in a court of a law or other statutory bodies; and payment for the time spent on casting ones vote at election time. Rest Period: Among office jobs and those jobs requiring heavy exertion, high repetition, or diligent concentration, certain breaks - popularly known as a Rest period or a Coffee beak - are allowed during the day to allow the worker to rest. The idea is to allow the worker some mental and physical diversion from his job. Holidays: Certain days in the year are stipulated as paid holidays. In Western, Countries like USA, USSR and U.K., Christmas, New Years, Thanks giving, Labour day, are particularly included, on which the employees are paid and they do not have to work. In India, Independence Day, Republic Day, Gandhi Jayanti, Deepavali, Dashara, Holi, Id, Christmas, Gurunanak Jayanti, Mahaveer Jayanti are gazetted holidays. Vacations: Paid vacations vary from 15 days to 1 month in a year. These are given to the employee after he has put in a specific period of time. The rationale behind the paid vacation is to provide a break in which the employee can refresh himself. Sick Leave: provides an employee pay when he is out of work due to illness. Full pay for a specified number of permissible sick days are granted to the employees. Severance Pay: This provides a one-time payment when an employee is terminated. This is done on humanitarian ground. Leave of Absence: This covers leave of absence for which pay is provided. Educational leave is given to managers or management trainees during the training period. Pension Programmes: A pension represents a fixed payment, made regularly to a former employee or his surviving dependants, provided an employee has fulfilled specific conditions of employment for a specific length of time. Insurance: Which may be life, health and accident. It may be for individual or the group.
c. Bonus and Awards
These consist of such financial amenities and advantages as holiday, over-time and shift premiums; attendance bonus;
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Diwali bonus; bonus for good quality workmanship; safety awards; profit-sharing bonus and service bonus; suggestion awards; waste elimination bonus; and year-end bonus.

(Exercise: 15 minutes) There are a number of reasons why organizations offer benefits packages. Which, of all the benefits mentioned below would you think were the most important to people? 1. To attract and retain staff by the generosity and/or relevance of benefits offered, and buy facilitating career longevity (eg. by allowing career breaks and sabbaticals). 2. To encourage commitment to, and consumption of the organizations own products (at a discounted rate) by employees. 3. To demonstrate care for people and social responsibility (by giving above statutory sick pay, paternity leave, pensions and so on). 4. To encourage desirable behaviors/values in employees (by subsidizing clothing, fitness programmes, education and so on). 5. To offer rewards of perceived high value to the employee with discounted or marginal cost to the employer. It must always be recognized, nevertheless, that however generous they are (benefits) can never be an adequate substitute for an Inadequate base rate or an illogical salary structure or for tangible recognition of the effect of inflation.
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LESSON 32: INTRODUCTION TO EMPLOYEE SERVICES & FRINGE BENEFITS IN INDIA

Principles of External and Internal Differential Fringe Benefits xi. Outplacement services, which include contacts with other employers in the area, help in writing up resumes, and secretarial assistance. xii. Flexitime: The workers are permitted to build up their flexible work day around a core of mid-day hours (such as 11.00 to 2.00). It is called flexitime because the workers themselves determine their own starting and stopping time. For example, they may opt to work from 7.00 to 3.00 or 11.00 to 7.00.
Learning Objective

Introduction to the Concept of Employee Services Special Features of Employee Service Programme Drawbacks of Employee Service Programme Fringe benefits in India
Introduction to the Concept of Employee Services

In addition to the above fringe benefits, organizations also provide a wealth of services that employees find desirable. These services are usually provided by the organization at no cost to the. employee or at a significant reduction from what might have to be paid without the organizations support. These services are provided at the discretion of the management and are generally of some concern to trade unions when they engage in collective bargaining with the employees. These services include: i. Services related to the type of work performed, including subsidies for the purchase and upkeep of work clothing and uniforms and of the various types of tools used by a worker in the course of his work;
Special Features of Employee Service Programme

1. Since less time is lost due to tardiness, the ratio of manhours worked to man hours paid increases. 2. Absenteeism is reduced and sick-leave cut down. 3. The hours actually worked seems to be more productive, and there is less slowing down toward the end of the work day. 4. It reduces the tedium associated with the timing of the employees work and democratizes the work. 5. The distinction between the management and professional workers is reduced and more authority is delegated by supervisors.
ii. Eating facilities, which include the provision of company restaurants, cafeterias, canteens, lunchrooms, vending machines, and fully or partially subsidized food; iii. Transportation facilities, including parking lots and bus services; iv. Child care facilities, comprising nurseries and day care centers for children; v. Housing services, including company-owned housing projects and subsidized housing; vi. Financial and legal services, including sponsoring of loan funds, credit unions, income-tax service, legal aid, saving plans, and group insurance plans; vii. Purchasing services, such as company-operated stores and discounts on company products and services; viii.Recreational, social and cultural programmes, including athletics, beauty parlors, social clubs, recreational areas, orchestras, entertainment programmes, parties, picnics, libraries and reading rooms; ix. Educational services, which include sponsorship for off duty courses, educational leave, tuition fee refunds, and scholarships for employees and their children; x. Medical services, including plant infirmaries, clinics and hospitals, counseling services and referrals to community social services;
Drawbacks of Employee Service Programme

i. Flexitime is complicated to administer and may be impossible to implement where large group of workers must work independently.
ii. It requires the use of time-clocks or other time records, which might irritate the workers. iii. Cafeteria Services: one of the recent developments in this field has been the formulation of the cafeterial compensation concept or what is known as smorgasbord. Depending on their age, their educational and income levels, their life styles and other forms of preference, different categories of employees need and demand different combinations of benefits and services. It may be pointed out here that no company provides all these benefits and services. Those that are provided are determined by the needs of employees and the preferences of a company. Among the benefits and services which are most commonly offered are life insurance, health insurance, pension, unemployment compensation, protective clothing and equipment, rest periods and vacations. Some benefits, such as holidays, vacation and pension, enable employees to meet their self-actualization needs; they make it possible for them to be away from their job, participate in other
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activities and share in other experiences even while they continue to receive their wages or salaries. These benefits, moreover, satisfy ones need for esteem in that they are often looked upon as indicators of ones personal worth. For example, a typical young man generally desires to have direct wages and educational assistance, while an older employee often opts for pension and health insurance services. The cafeterial compensation concept generally involves the idea that each employee ought to design and tailor his own indirect compensation programme by personally picking and choosing the benefits and services he would desire to have from among the many such benefits and services provided by his company. Choice and decision generally depend upon the discretion of each individual employee and not on a management fiat or a centralized collective bargaining agreement. Fringe Benefits in India When the Employers Federation of India conducted a study of fringe benefits in this country, it was revealed that, in 1960,981 companies, which were included in the survey, paid a little over Rs. 2,148.3 million in wages and fringe benefits, and that the latter was about 21.3 per cent of their total wage bill in that year. The fringe benefits were high in the mining (24.84 per cent of the wage bill) and plantations industries (24.3 per cent of the wage bill), and were comparatively low in the manufacturing sector (19.99 per cent of the wage bill). In each of these three sectors, however, variations were considerable. In the mining industry, the percentage of fringe benefits varied from 24.5 to 27.88, while in the manufacturing sector it varied between 13.42 and 32.11, followed by the cigarette industry (31.42) and aluminum, brass and copper industries (30.56). A break-up of fringe benefits by types revealed that, of the total amount paid on fringe benefits, that which was paid for the time not worked and for profits and bonus was the highest, accounting for a little more than 9 per cent of the total wage bill. Payments which had to be made under legislative enactments were between 6.1 per cent and 7.5 per cent of the total, while voluntary welfare schemes accounted for 5.36 per cent of the wage bill. In the plantation industry, however, these welfare schemes formed 9.4 per cent of the wage bill, while in the other two (mining and manufacturing industries), they respectively accounted for 4.12 per cent and 3.4 per cent of the total wage bill. A considerable proportion of fringe benefits was in the shape of monetary bonus and constituted about 5 per cent of the wage bill. The bonus was of various kinds - profits bonus, attendance bonus, service bonus, gratuity payments, etc. The quantum of the bonus varied from sector to sector. Payments for Time not Worked These payments were fairly substantial in the manufacturing industry (5.35 per cent), the mining industry (4.81 per cent) and plantations (3.24 per cent). In the manufacturing sector, the
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percentage of expenditure on this item varied between 3.06 and 10.42. Industries which spent a relatively larger sum on this item were cigarette manufacturing and distributing (10.42 per cent), petroleum refining and selling (7.15 per cent), chemicals and allied industries (7.11 per cent) and shipbuilding (6.60 per cent). Statutory Fringe Benefits These benefits are generally social security, and include gratuity and pension payments, the employers contribution to the employees provident fund account and health insurance scheme. The employers contribution to statutory provident fund constitutes by far the largest item of expenditure, accounting for 4.23 per cent of the total wage bill in the plantations, mining and manufacturing industries put together. The expenditure on employees state insurance contributions by the manufacturing industries was 0.36 per cent, while that on gratuity account was 0.59 per cent. The other expenditure incurred under statutory regulations and tribunal awards was on compensation paid to workers, welfare cess payments in the coal mining industry and on the supply of protective clothing in the plantations industry. The expenditure on maternity clothing in the manufacturing and mining industries. Voluntary Benefits Retirement benefits, medical care, compensation for injuries and disablement, subsidized food and housing, educational and cultural facilities, payment on life insurance premia, the maintenance of canteens, cafeterias, assistance to co-operative societies these are some of the benefits accounted for 9.40 per cent of the total wage bill in the plantations industry against 3.74 per cent and 4.12 per cent in the mining and manufacturing industries respectively. The social security benefits voluntarily provided by companies include provident fund, gratuity and pension. The medical assistance schemes voluntarily provided by employers were the largest single item of expenditure, and accounted for 1.80 per cent of the total expenditure of 5.36 per cent voluntarily incurred by them. The plantations industry spent 4.78 per cent of its total wage bill on this particular voluntary service against only 0.84 per cent spent by the manufacturing industries. The latters expenditure on canteens, however, was about 0.70 per cent of its total wage bill against that of 0.07 per cent spent by the mining industries. In the manufacturing industries, nearly two-thirds of the benefits were in the form of profit and bonus, of payments for time not worked and of contributions by employers to social security benefits. In the plantations and mining industries, however, this percentage was 57 and slightly more than 50 respectively. Apart from the general fringe benefits for employees, there was a wide range of other benefits as well. Some of these benefits are: Rifle allowance to watchmen, cycle allowance to peons, free driving licences for drivers, compensation for a waiting period of three days, free quarters, water and
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electricity; free uniforms to certain categories of employees, conveyance allowance when no transport is provided by the company, travel concessions, assistance to buy spectacles, provision of snacks during night shifts, shoe allowance of 20 paise and an allowance of 37 paise per hour if a worker attends education classes; sale of company products at concessional rates, benevolent fund assistance if a worker is struck down by tuberculosis or cancer, scholarships to employees children; employees tours of government projects, study leave, gift of a wrist watch after a meritorious service of ten years, presents to employees on the occasion of their marriage, co-operative bank facilities, festival allowance, free libraries and facilities for inpatient hospital accommodations.
activities would detract from or interfere with the fulfillment of her responsibilities or duties under this Agreement or require substantial time or services on the part of the Executive. The Executive shall not serve as a director (or the equivalent position) of any company or other entity and shall not receive fees or any other remuneration for work performed either within or outside the scope of her employment without prior written consent of the President/CEO of the Company. This consent shall not be unreasonably withheld. 2. Term of Employment The Executives employment by the Company under this agreement shall commence on the date of this Agreement and subject to earlier termination pursuant to Clause 5 or 7, shall terminate on (specify date). This Agreement may also be extended as needed by a written amendment as discussed in Clause 8. 3. Compensation As full compensation for all services rendered by the Executive to the Company under this Agreement, the Company shall pay to the Executive the compensation set forth in Schedule A attached hereto. This schedule may be amended from time to time in writing by the Company and the Executive. 4. Fringe Benefits; Expenses a. The Executive shall be entitled to receive all health and pension benefits, if any, provided by the Company to its employees generally and shall also be entitled to participate in all benefit plans, if any, provided by the Company to its employees generally. b. The Company shall reimburse the Executive for all reasonable and necessary expenses incurred by her in connection with the performance of her services for the Company in accordance with the Companys policies, upon submission of appropriate expense reports and documentation in accordance with the Companys policies and procedures. The Company will reimburse the Executive for the expenses involved with her acquisition and business-related use of a portable cellular telephone. c. The Executive shall be entitled to Three (3) weeks paid vacation annually, to be taken at times selected by her, with the prior concurrence of the General Manager to whom the Executive is to report. 5. Disability or Death a. If, as the result of any physical or mental disability, the Executive shall have failed or is unable to perform her duties for a period of Sixty (60) consecutive days, the Company may, by notice to the Executive subsequent thereto, terminate her employment under this Agreement as of the date of the notice without any further payment or the furnishing of any benefit by the Company under this Agreement (other than accrued and unpaid basic salary and commissions and expenses and benefits which have accrued pursuant to any plan or by law). b. The term of the Executives employment under this Agreement shall terminate upon her death without any further payment or the furnishing of any benefit by the

Free Job Descriptions Good Interview Questions The Executive shall be ... salary and commissions and expenses and benefits which have ... entity) which engages anywhere in India in a ... Free Psychometric test examples Sample Employment Agreement for Executives Employment Agreement for Executives This Agreement (hereinafter referred to as the Agreement) made and executed at [Place] this [Date], by and between [Companys Name] a company incorporated under the Companies Act, 1956 and having its registered office at [address](hereinafter referred to as the Company, which expression shall, unless it be repugnant to the context or meaning thereof, be deemed to mean and include its successors and assigns) of the ONE PART AND [Employees Name], Indian Inhabitant residing at [address](hereinafter referred to as the Executive, which expression shall, unless it be repugnant to the context or meaning thereof, be deemed to mean and include its successors and assigns) of the OTHER PART. WHEREAS the Company is desirous of employing the Executive and the Executive wishes to accept employment with the Company, on the terms and subject to the conditions set forth in this Agreement. Now it is agreed by and between the parties hereto as follows: 1. Employment The Company shall employ the executive and the Executive shall serve the Company, as a (specify the category of employment/service) of the Company, with such duties and responsibilities as may be assigned to the Executive by the President/CEO of the Company and as are normally associated with a position of that nature. The Executive shall devote her best efforts and all of her business time to the performance of her duties under this Agreement and shall perform them faithfully, diligently and competently and in a manner consistent with the policies of the Company as determined from time to time by an officer of or President/CEO of the Company. The Executive shall report to the General Manager, (specify) Office of the Company. The Executive whilst working in the Company shall not engage in activities outside the scope of her employment if such
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Company under this Agreement (other than accrued and unpaid basic salary and commissions and expenses and benefits which have accrued pursuant to any plan or by law). 6. Non-competition; Confidential Information; Inventions a. During the term of the Executives employment under this agreement, the Executive shall not, directly or indirectly, engage or be interested (as a stockholder, director, officer, employee, salesperson, agent, broker, partner, individual proprietor, lender, consultant, or otherwise), either individually or in or through any person (whether a corporation, partnership, association, or other entity) which engages anywhere in India in a business which is conducted by the Company on the date of termination of her employment, except that she may be employed by an affiliate of the Company and hold not more than 2% of the outstanding securities of any class of any publicly held company which is competitive with the business of the Company. b. The Executive shall not, directly or indirectly, either during the term of the Executives employment under this Agreement or thereafter, disclose to anyone (except in the regular course of the Companys business or as required by law), or use in any manner, any information acquired by the Executive during her employment by the Company with respect to any clients or customers of the Company or any confidential or secret aspect of the Companys operations or affairs unless such information has become public knowledge other than by reason of actions (direct or indirect) of the Executive. Information subject to the provisions of this paragraph shall include, without limitation: i. procedures for computer access and passwords of the Companys clients and customers, program manuals, user manuals, or other documentation, run books, screen, file, or database layouts, systems flowcharts, and all documentation normally related to the design or implementation of any computer programs developed by the Company relating to computer programs or systems installed either for customers or for internal use; lists of present clients and customers and the names of individuals at each client or customer location with whom the Company deals, the type of equipment or computer software they purchase or use, and information relating to those clients and customers which has been given to the Company by them or developed by the Company, relating to computer programs or systems installed; lists of or information about personnel seeking employment with or who are employed by the Company; prospect lists for actual or potential clients and customers of the Company and contact persons at such actual or potential clients and customers;
v.
any other information relating to the Companys research, development, inventions, purchasing, engineering, marketing, merchandising, and selling.
c. The Executive shall not, directly or indirectly, either during the term of the Executives employment under this Agreement or for a period of One (1) year thereafter, solicit, directly or indirectly, the services of any person who was a full-time employee of the Company, its subsidiaries, divisions, or affiliates, or solicit the business of any person who was a client or customer of the Company, its subsidiaries, divisions, or affiliates, in each case at any time during the past year of the term of the Executives employment under this Agreement. For purposes of this Agreement, the term person shall include natural persons, corporations, business trusts, associations, sole proprietorships, unincorporated organizations, partnerships, joint ventures, and governments, or any agencies, instrumentalities, or political subdivisions thereof. d. All memoranda, notes, records, or other documents made or composed by the Executive, or made available to her during the term of this Agreement concerning or in any way relating to the business or affairs of the Company, its subsidiaries, divisions, affiliates, or clients shall be the Companys property and shall be delivered to the Company on the termination of this Agreement or at any other time at the request of the Company. e. i. The Executive hereby assigns and agrees to assign to the Company all her rights to and title and interest to all Inventions, and to applications for Indian and foreign patents and Indian and foreign patents granted upon such Inventions and to all copyrightable material or other works related thereto. ii. The Executive agrees for herself and her heirs, personal representatives, successors, and assigns, upon request of the Company, to at all times do such acts, such as giving testimony in support of the Executives inventorship, and to execute and deliver promptly to the Company such papers, instruments, and documents, without expense to her, as from time to time may be necessary or useful in the Companys opinion to apply for, secure, maintain, reissue, extend, or defend the Companys worldwide rights in the Inventions or in any or all Indian patents and in any or all patents in any country foreign to the Indian, so as to secure to the Company the full benefits of the Inventions or discoveries and otherwise to carry into full force and effect the text and the intent of the assignment set out in Clause 6E(i) above. Notwithstanding any provision of this Agreement to the contrary, the Company shall have the royalty-free right to use in its business, and to make, have made, use, and sell products, processes, and services to make, have made, use, and sell products, processes, and services derived from any inventions, discoveries, concepts, and ideas, whether or not patentable, including, but not limited to, processes, methods,
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ii.
iii.
iii.
iv.
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formulas, and techniques, as well as improvements thereof and know-how related thereto, that are not inventions as defined herein, but which are made or conceived by the Executive during her employment by the Company or with the use or assistance of the Companys facilities, materials, or personnel. If the Company determines that it has no present or future interest in any invention or discovery made by the Executive under this paragraph, the Company shall release such invention or discovery to the Executive within Sixty (60) days after the Executives notice in writing is received by the Company request ing such release. If the Company determines that it does or may in the future have an interest in any such invention or discovery, such information will be communicated to the Executive within the 60-day period described above. iv. For purposes of this Clause 6E, Inventions means inventions, discoveries, concepts, and ideas, whether patentable or not, including, but not limited to, processes, methods, formulas, and techniques, as well as improvements thereof or know-how related thereto, concerning any present or prospective activities of the Company with which the Executive becomes acquainted as a result of her employment by the Company.
e. The Executives failure, refusal, or neglect to perform her duties contemplated herein within a reasonable period under the circumstances after written notice from the General Manager, or the President of the Company, describing the alleged breach and offering the Executive a reasonable opportunity to cure same; f. Repeated violation by the Executive of any of the written work rules or written policies of the Company after written notice of violation from the General Manager or the President of the Company; g. Breach of standards adopted by the Company governing professional independence or conflicts of interest. If the employment of the Executive is terminated for cause, the Company shall not be obligated to make any further payment to the Executive (other than accrued and unpaid base salary and commissions and expenses to the date of termination), or continue to provide any benefit (other than benefits which have accrued pursuant to any plan or by law) to the Executive under this Agreement. 8. Miscellaneous a. This Agreement shall be governed by and construed in accordance with Indian laws, applicable to agreements made and performed in Indian, and shall be construed without regard to any presumption or other rule requiring construction against the party causing the Agreement to be drafted. b. This agreement contains a complete statement of all the arrangements between the Company and the Executive with respect to its subject matter, supersedes all previous agreements, written or oral, among them relating to its subject matter, and cannot be modified, amended, or terminated orally. Amendments may be made to this Agreement at any time if mutually agreed upon in writing. c. Any amendment, notice, or other communication under this Agreement shall be in writing and shall be considered given when received and shall be delivered personally or mailed by Registered AD Post with, Return Receipt to the parties at their respective addresses set forth below (or at such other address as a party may specify by notice to the other): (specify addresses) d. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. e. The invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of the remaining terms or provisions of this Agreement which shall remain in full force and effect and any such invalid or unenforceable term or provision shall be given full effect as far as possible. If any term or provision of this Agreement is invalid or unenforceable in one jurisdiction, it shall not affect the validity or enforceability of that term or provision in any other jurisdiction.
f. The Executive acknowledges that the agreements provided in this Clause 6 were an inducement to the Company entering into this Agreement and that the remedy at law for breach of her covenants under this Clause 6 will be inadequate and, accordingly, in the event of any breach or threatened breach by the Executive of any provision of this Clause 6, the Company shall be entitled, in addition to all other remedies, to an injunction restraining any such breach. 7. Termination The Company shall have the right to terminate this Agreement and the Executives employment with the Company for cause. For purposes of this Agreement, the term cause shall mean: a. Any breach of the Executives obligations under this Agreement; b. Fraud, theft, or gross malfeasance on the part of the Executive, including, without limitation, conduct of a felonious or criminal nature, conduct involving moral turpitude, embezzlement, or misappropriation of assets; c. The habitual use of drugs or intoxicants to an extent that it impairs the Executives ability to properly perform her duties; d. Violation by the Executive of her obligations to the Company, including, without limitation, conduct which is inconsistent with the Executives position and which results or is reasonably likely to result (in the opinion of the President of the Company) in an adverse effect (financial or otherwise) on the business or reputation of the Company or any of its subsidiaries, divisions, or affiliates;
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f. This Agreement is not assignable by either party except that it shall inure to the benefit of and be binding upon any successor to the Company by merger or consolidation or the acquisition of all or substantially all of the Companys assets, provided such successor assumes all of the obligations of the Company, and shall inure to the benefit of the heirs and legal representatives of the Executive.
Note:
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LESSON 33: INTRODUCTION TO BENEFIT PROGRAMS FOR MANAGEMENT & ADMINISTRATION OF BENEFITS AND SERVICES
Principles of External and Internal Differential Fringe Benefits them as well. Credit unions and severance pay are examples of benefits which were once considered to be novel but are now commonplace in industry. iv. Maintenance of the Least Productive Workers With an increase in benefits and services, employees, particularly when they are not very productive, tend to stick to their jobs, and are not interested fn changing them. v. Neglect of Other Personnel Functions When a management becomes more concerned about the provision and administration of benefits and services, it often pays very little attention to other aspects of personnel programmes. Over-emphasis on these benefits and services may often develop a concern among the employees for their future security rather than for their present productivity. The relationship between a companys benefits-and-services programmes and employee motivation for increased production is what weak.
Learning Objective

To know Benefit Programmes for Management To understand problems raised by Benefit Programmes To learn administration of Benefits and Services
Introduction to the Concept of Benefit Programmes for Management

Special considerations and policies apply to the benefit programmes for the management, for which a different benefit structure is provided because of the fact that many legal considerations do not operate in their case. For example, management personnel do not receive overtime allowance or payment; nor are they governed by trade union considerations or agreements. Managers generally are not entitled to, nor do they expect, many of the benefits and services to which employees in general are entitled. However, management personnel are generally required to contribute in part to their insurance, gratuity, pension and provident fund. Tax exemptions become more important and meaningful for them as they advance in the management hierarchy. The personnel department is generally responsible for the coordination of the plans for the administration of these benefits and services. For this purpose, it seeks the advice of the various departments, calls for their suggestions and anticipates the emergence bf possible problems. The final approval of the plans formulated for the management personnel, however, is the preogative of the top authority of an organization.
Administration of Benefits and Services

Organizations fumble while administering employee benefits and services. Organizations have seldom established objectives, systematic plans and standards to determine the viability of the programmes. The main problem is the lack of employee participation. Managers, too, take little interest in the benefits programme and trade unions are almost hostile to the schemes. Managers are not even aware of the organizations policy towards benefits and their contribution to the quality of corporate life. Trade unions entertain a feeling of alleviation as the benefits are likely to erode their base. These problems can be avoided if steps are taken: i. to establish benefit objectives; ii. to assess environmental factors; iii. to assess competitiveness; iv. to communicate benefit information; v. to control Future Trends in Reward Management The considerable developments in reward management that have taken place recently are associated with changes in the economic and competitive environments in which businesses operate and the ways in which they respond to these external challenges. Reward management strategy is an extension of the organizations business strategy. trends in reward practices can only be forecast in the light of predictions on how business strategies and the programmes flowing form them are likely to develop. There is no doubt that changes in reward management over the last decade have been in response to changes in
Problems Raised By Benefit Programmes

Many problems arise when these programmes are adopted and administered. These are: i. Charge of Paternalism When too many benefits and services are offered to employees, a feeling develops that employers are playing the role of parents and the workers are looked upon as their children. Moreover, the latter sometimes develop the feeling that these benefits and services are their right - which is not really so. ii. Excessive Expenditure The administration of these benefits and services is a fairly costly affair, involving large outlays of direct and indirect financial expenditure, and often involves a great deal of paper work. iii. Fads Become Fashionable With the introduction of these benefits and services in one company, other concerns vie with one another to introduce
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business strategies and practices which in turn have responded to changes in the competitive environment. These changes have been well summarized by Rosabeth Moss Kanter when she defines her model of the post entrepreneurial corporation as a leaner organization with fewer extraneous staff which focuses on doing only those things in which it has competence she suggests that the post entrepreneurial compotation represents a triumph of process over structure in contexts requiring speed and dexterity, what is important is not how responsibilities are divided but how people can pull together to pursue new opportunities. Increasingly, people have had to learn how to function in constantly changing roles; indeed, how to carry out simultaneously a number of different roles. They have to achieve a balance between concentrating on their own areas of skill and responsibility and working together with others. Businesses have had to look very hard at the ways in which they employ people, using value-added analysis techniques to ensure that each step carried out in a work process and decision sequences augment the previous step. In developing business strategies and the HR and reward strategies that flow from them, organizations have been driven by the need to satisfy demands for flexibility, continuous development and team work. To make the best use of their distinctive competences they have had to attract, retain motivate and develop distinctive people. And, importantly, they have to ensure that they get value for money from their reward practices. It is these business trends which., have .governed the most important reward management developments in recent years, namely: a more strategic focus, a more flexible approach to job evaluation, greater focus on external relativities, job family modelling, broad banding, the assessment of inputs (competences) as well as outputs in performance management processes, competence-related pay, team pay and flexible benefits. So far as business change is concerned, there is no evidence that there will be any significant future difference in its nature or direction, at least in the short to, medium term. Of course the pace of change will vary; governments and recessions will come and go; and the ED and the possible single currency will make a difference. And, following the change in Government, there may be changes in the attitudes to corporate governance and an increased emphasis on the responsibility of businesses to their stakeholders. It is interesting to remember the CBI/Hay 1995 survey findings2 that almost half the 480 UK organizations surveyed had changed some aspect of their pay strategy or policy in the previous two years. The areas most affected were pay structure, pay progression and the introduction of profit related pay. For these organizations, the emphasis in the next few years is more likely to be on consolidating and testing innovations rather than on seeking new nostrums. This will particularly apply to such developments as broad banding, competencerelated pay and team pay. The CBI/Hay survey established that the most significant factor driving change in pay and benefit policy are the need to
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strengthen the link to business performance, cost control, support for organizational change, and recruitment and retention pressures... The need for more flexibility in pay and benefits is likely to become more urgent. Businesses which are still contemplating the changes required to improve the effectiveness of their reward processes will be taking account of these factors. The CBI/Hay survey found that: 13 per cent of responding organizations planned to introduce team pay; 30 per cent were making changes in their benefits packages, mainly to allow more flexibility; 17 per cent planned to introduce a broad banded pay structure; 13 per cent intended to introduce a formal performance management process. The 1996 IRS survey of 270 private sector companies3 found that 54 per cent intended to revise their reward practices in the next 12 months. The initiative most often mentioned was PRP, cited _y 36 per cent of those contemplating a change, followed by competence-related pay (33 per cent). So the future does not necessarily include any quantum leaps in reward management policy and practice. But environmental and organizational demands are encouraging developments such as those set out by Murlis. Well-developed career management programmes that enable employees to see how they can manage their own progression in an environment where promotion is rarer and more significant when it happens, and when building experience in different roles is the way to progress; Well-designed and implemented performance management processes that often embrace the use of competences and so support development, as well as the achievement of objectives, and which link credibly to performance-related pay progression and other variable pay schemes; Line management skilled in interpreting market data, making local pay decisions and operating and communicating the policies needed for this new environment; Well-validated salary market anchors for the new roles, which managers can review and use as background for pay budgeting and pay progression decisions; Strong, locally based financial control and modelling systems to support decision making and help ensure the prevention of pay drift.

Thermax India A small fringe of dubious, irresponsible entrepreneurs and ... in authority, political or administrative, does not ... anticipate and adapt his management style, can ... Neuroses of Growth This paper, presented at the Ahmedabad Management Association in 1976, is trying to get back to a stage in our companys growth when we were moving into adolescence with all its anguish and angularities. The backdrop to this setting is the controlled economy with a marginal income tax rate of 77 per
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cent at the corporate and 85 per cent at the individual tax level, and many an entrepreneur would ask the basic question: Why grow at all? When you asked me to talk of building an enterprise, my immediate reaction was one of surprise. You have, in Ahmedabad, a concentration of entrepreneurs of all shapes and sizes, perhaps unsurpassed anywhere in the world. Why would you want to import a half-baked product from Pune? They say when a child is born in Ahmedabad, he lisps percentages before he can say mamma, he can multiply in fractions of halves, quarters, 1/8ths and 1/16ths when his counterparts elsewhere are still learning that 2+2 make 4, that he has internalised the marginal costing principle long before most of us are initiated into the basics of accounting and that he is trained to smell an unwary buyer or an anxious seller with almost the same sureness as my pet Labrador puppy can sniff adrenalin. Being the seasoned, natural entrepreneurs that you are, I hope you will extend your indulgence to a somewhat raw amateur at the game. I call my paper The Neuroses of Growth. Psychologists define neurosis as a functional derangement arising out of a series of unresolved conflicts between an organism and its environment. The theme of my paper is quite simply this: as an industrial unit grows, a number of conflicts and contradictions emergeconflicts between the entrepreneur and the organisation and between the organisation and the environment-which, unless resolved, can lead to problems of maladjustment and erratic behaviour, and perhaps threaten the growth and survival of the organisation. I shall attempt to explore some of these conflicts and hopefully draw conclusions which rnay be of help to policy planners in Delhi and corporate head shrinkers in Ahmedabad. As a small industrial unit grows in terms of turnover, number of employees, complexity of manufacture, diversity of products and markets and levels of organisational hierarchy, the entrepreneur who started it all suddenly face to face with four basic issues. Has this activity helped him fulfil his personal objectives? If not, would future growth enable him to find fulfilment? I call this the Sour Grapes Syndrome and I will shortly explain why. If the organisation grows, it needs more funds. If he borrows more, he is enlarging his risks beyond what he considers a desirable level. If he does not borrow more, he must be prepared to dilute his ownership and control. Let us call this the Generation Gap. As the unit grows, the leadership style which gave the organisation its earlier vitality, drive and singleness of purpose, now becomes ill-adjusted to the needs and concerns of a complex organisation. The entrepreneur is faced with the difficult choice of allowing the situation to drift into chronic maladjustment or consciously reorient his style or pass on leadership to an individual more in tune with the changed situation. This is an exceedingly traumatic experience for any entrepreneur, almost of the magnitude of an Identity Crisis.
And finally, in desperation he turns from consultant to consultant who promise the ultimate solution-18 holes of golf a day and complete control on the enterprise-only to find that it replaces old problems with new ones. This we shall call the Doctors Dilemma. Lets examine each of these crises in some detail. The first concerns values, the second resources, the third management style and the fourth information and control systems. The Sour Grapes Syndrome First of all, why does a person start an industry? The usual answer is that he comes from a family or community of entrepreneurs or traders or that he has surplus funds and would like a fling or that he has access to a technology he would like to exploit. These, however, are merely facilitating factorsthey are not the motivators. The basic motivation for any one entering industry is very simple and clear. In doing so, he hopes to earn a better reward for his talents and resources than by putting them to any alternative use. The reward can take many forms: the satisfaction of being ones own boss, increased ownership of assets, increased control over assets, power over other people, a status in society. Assuming our entrepreneur is successful and the pleasant euphoria that accompanies success gradually subsides, he begins to ask himself some very searching questions. Has he fulfilled, is he in the process of fufilling or is he ever to fulfil any of the personal objectives that led him to be an entrepreneur? Lets look at this a little closely. He had hoped to build some assets he could call his own. I do not think he ever aspired to become a millionaire, that would have been a foolish pipe-dream. But at least he wanted to provide security and comfort for himself and his family, to generate resources that would nourish the growth of his enterprise and provide a cushion for lean years. In fact, he soon finds that this is impossible with corporate tax at a marginal rate of 77 per cent and personal taxation at a marginal rate of 85 per cent. What is worse, if he continues to be successful and grow, the nominal value of his shares keeps rising with all the attendant liabilities of wealth tax and estates duty without any personal assets which are either liquid or which can be easily liquidated to meet these liabilities. Income Taxes In the current year (1992-1993) are 57.5 per cent for corporations and 56 per cent for personal incomes. Even more annoying is that his plans and policies begin to be dictated not by the needs of the market or by compulsion of technology, but by the clever machinations of his tax consultant-the deployment and distribution of resources in a manner designed to extract the last little ounce of benefit from the plethora of punitive tax legislation. If he is denied ownership, does he at least have control over assets? Control over assets implies freedom to use these assets. If our entrepreneur has been an honest tax payer, he has no personal assets worth talking about. So let us consider the corporate assets. If they are productive assets, their use requires three other inputs: raw material, labour and working capital. And a conflict emerges.
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With raw material availability being uncertain and outside his control, with labour laws being what they are, and constraints on retrenchment and layoffs, with credit restrictions and options for converting loans to equity, does it make sense to enlarge the use of productive assets? If they are non-productive assets-perhaps a well-laid out garden or a comfortable executive office or a holiday home at Mahabaleshwar-he is conditioned to feel guilty for indulging conspicuous consumption. Consider the satisfaction of being his own boss. How very illusory! His salary requires the sanction of an authority that cannot be expected to know the degree of his contribution; he cannot take a personal loan from his company without such borrowings being treated as dividends; his raw material and credit allocation is done on ground rules that change frequently and unpredictably and by people who can exercise discretion without being accountable except in an ultimate sense; he cannot employ a relative (and there are 22 relationships defined in the Companies Act) without invoking Section 314 (1) (b) of the Companies Act, and so on. Status in society: the most painful thing for any sensitive entrepreneur (and I dont know how many there are) is that he is always expected to prove his Innocence. A small fringe of dubious, irresponsible entrepreneurs and populist political statements have conspired to create an atmosphere where every entrepreneur is suspect, is considered an asocial (if not antisocial) profit-making machine. Hardly a day goes by when someone in authority, political or administrative, does not admonish entrepreneurs like errant school children. With all this one wonders why entrepreneurs continue to remain in business and grow, why companies vie with each other in comparing turnover and growth rates. I think part of the answer lies in what I call the Sour Grapes Syndrome. You have all heard of Aesops fable of the Fox and the Sour Grapes. What is more interesting and insightful is the sequel to the fable. The poor fox is being teased by his friends every day about the sour grapes until he develops an inferiority complex. While his friends are relaxing, playing or feasting on fat chickens, our poor fox sweats and struggles with climbing lessons till one day he manages to reach the grapes only to find that they really are sour. But he dare not tell this to anybody. Day after day he continues to jump and eat the sour grapes until he finally dies of gastric ulcers. I sometimes wonder if the growthmanship game in industry is not an exercise in self-deception of a similar kind. We sweat and struggle at growing bigger only to find that we are nowhere near the fulfilment of our objectives. But we dare not tell this to anybody. We dare not face it ourselves. And we continue playing the game with all its fret and fury without realising why. The Generation Gap As the organisation grows, so does the need for funds. But the interesting point is that this growth in the requirement of funds is not linear. One of the main arguments in favour of the small-scale industry as a sector, is the supposedly high output to capital ratio and the supposedly low capital-labour ratios.
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For example in the engineering industry, according to some statistics compiled by the Association of Indian Engineering Industry (now CII), the ratio of gross output to fixed capital is 3.7 for small-scale units as against 1.8 for large units (more than double), the ratio of value-added to fixed capital is 0.9 for small-scale units against 0.5 for large units (a little less than double) and the fixed capital per employee is Rs 3,623 in small scale units against Rs 12,095 in the large units (less than a third). It is often deduced from this that small-scale units are more efficient in the utilisation of fixed capital resources than their larger counterparts. Nothing could be more fallacious. One can have other indices of efficiency. What these figures reveal is that small units are involved in a technology which lends itself to higher output to capital ratios, for example the assembly of radios as distinct from making transistors. The point at issue is that as an industrial unit grows, the need for funds increases in quantum jumps as the technology changes from one of simple assembly to progressive manufacture. On the other hand, the meagre plough back of around 25 per cent of profits (allowing for corporate tax at 77 per cent and a modest dividend equal to about 5 per cent of the profits), while it may sustain the linear growth, is totally inadequate for the quantum jumps. And this question of plough back of resources becomes even more serious when one considers the enactment which requires compulsory distribution of 40 per cent of the profits in closelyheld companies. This would reduce the plough back to about 18 per cent of the profits. (For purposes of this calculation I am ignoring depreciation.) Here is a striking example of a conflict of objectives in the body politic. If I were the finance minister, I would be hard put to reconcile the conflicting objectives of my revenue department and my department of economic affairs. My revenue department, being concerned single-mindedly with amassing revenue, tells me about those wily capitalists who escape its net by not giving themselves a dividend. So I say, make it compulsory for closely-held companies to distribute 40 per cent of their profits. My department of economic affairs, concerned primarily with containing inflation, says we must have a dividend freeze if we are to have a wage freeze, so I restrict dividends to 12 per cent of the paid-up capital. And my task is not rendered easier when my banking division, whose prime objective is to ensure optimal utilisation of credit, announces a policy of less dependence by industry on bank credit and a greater reliance on self-generated resources. As the unit grows and reaches a level where the resources generated cannot sustain the next jump in turnover, the entrepreneur has two options; increase the debt-equity or obtain outside equity finance. Most small entrepreneurs opt for the first alternative because taking outside equity finance has many other repercussions. This is the main reason for a high debtequity in the small and medium sector. In an article in the Financial Express recently, the chairman of one of our nationalised banks writes: The poor equity base of the small-scale units and their high debt-equity ratio have been diagnosed as the important reasons
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for their financial troubles and their relatively high mortality. Taking advantage of the liberal credit facilities available to them, a number of small units and also medium-size projects have recourse to large borrowings. I would like to ask this chairman: where else can a small or medium unit turn? It has no recourse to the capital market, an efficient tax harvesting machine ensures inadequate plough back-so what alternative other than borrowing. In the last one year. there has been a sea-change: small companies can have recourse to the capital market and closely-held companies can go public with a share premium that recognises their real worth. The same article goes on to say that the interest burden becomes too heavy for such units to achieve viability. This I dont think is true, because in most industries interest is a small part of the total cost. But what is more important is that the increase in debt-equity compounds the risk factor very substantially. The survival of an industrial unit, in the last resort, is a matter of solvency not on paper, but in terms of meeting its obligations as they arise. And a high gearing, particularly where the maturity of borrowings do not coincide in time with cash inflows through the application of these borrowings, can be disastrous. We have a classic case in Pune, not very far from where we are located, of a highly successful medium-sized industrial unit which financed its growth in fixed assets through short-term fixed deposits at attractive rates, reached an impasse when these deposits matured, had a sudden run through loss of confidence of the depositors and ended by becoming a subsidiary of a large business house. So when our entrepreneur has to take resort to borrowings, he encounters a distinct conflict between growth and the level of risk he feels comfortable with. Take the alternative: widening the equity base. If our entrepreneur has been honestly paying his taxes, he has no personal assets worth the name except the paper assets represented by the notional value of his shares. So he has to invite outside participation. Outside participation through a small number of large shareholders requires that he barter his independence. On the other hand, a public issue which would ensure a large number of small shareholders can only be justified, in terms of the cost of managing and underwriting the issue, if it is of a magnitude of at least Rs 2.5 million. However, the important point is this: the moment our entrepreneur decides to invite outside participation, he will never get the book value of his shares, because the guidelines on issue of bonus shares will always ensure a substantial reserve, which no outside subscriber will be prepared to compensate. The recent revision of the guidelines permitting issue of bonus shares in excess of 1: 1 and reducing the time lag between two consecutive issues from 40 to 24 months is an exceedingly welcome step. (But I may add by way of a personal note: when we approached the Controller of Capital Issues-this anachronism called the Controller of Capital Issues has since disappeared for capitalisation of reserves in excess of 1: 1, we were told that this would be considered favourably only if we
intended to invite public subscription.) In summary, then, as he grows, our entrepreneur faces a situation where ploughbacks will not finance further growth. Further borrowings compound risks beyond a desired limit; and outside participation, apart from compromising his independence, will not compensate him for his present worth. The Identity Crisis The entrepreneur who starts a company is usually technically or entrepreneurially oriented. His entire focus of attention is on making and selling a product, communication is informal and control is exercised through an immediate feedback either from the shopfloor or the market. As the organisation grows production becomes more complex; a batch or assembly line replaces the one of item. A production plan with manufacture in anticipation of orders replaces the earlier method of manufacture against orders. Marketing becomes more complex as business has to be anticipated and competition becomes keener with a larger output. As the number of employees increase, so do the levels of hierarchy. New employees are not motivated by the same dedication to the product or organisation as the original small team that founded the organisation. Back of the envelope accounting gets replaced by systems that must reckon with product diversity and overheads. What Happens in this Process? The entrepreneur begins to get more and more remote from the scene of action. His decisions tend to become less sure. While he delegates out of necessity, he still keeps a number of key areas under his control. This results in delays in decision making as no action can be taken without his final seal of approval. Internal politics begin as each of the senior managers tries to get the ear of the boss. Our entrepreneur finds that he is spending a disproportionate amount of time resolving interdepartmental conflicts. He finds that he is called upon to manage people instead of doing things-something that he is not equipped by temperament or training to do. And the unkindest cut of all. The personal patronage which built up a small well-knit team is replaced by an objective system of rewards that leaves him out in the cold. There is a theory about organisation growth which all entrepreneurs may well ponder on: Growing organisations move through distinguishable phases of development, each of which contains a relatively calm period of growth that ends with a management crisis. Organisations go through relatively quiet periods of evolution where only marginal adjustments are needed for maintaining growth under the same overall pattern of management. Then suddenly there are periods of turbulence when traditional management practices, which were valid for a smaller size, begin to be questioned by frustrated top managers and disillusioned subordinates. Prof. Larry Greiner of the Harvard Business School postulates that organisations go through five phases of growth and
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tabulates the organisational practices during each of these phases as follows.

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
quality if marketing would absorb additional costs and recover higher prices. His finance manager tells him that it is difficult to control overheads because every departmental head appears to have valid reasons for side-stepping the budget. At this stage he gets back to the marketing manager with a plea for production runs and higher prices only to be told what competitors are offering in terms of price and delivery. A second round with the production manager on the scope for cost reduction and faster process time, only to be informed that we have no record of man-hours per product because labour costs are a small part of the total costs and the cost of installing and maintaining a system would far outweigh the benefits. A circular issues from the fountainhead that budgets are sacrosanct and no deviation will be permitted without prior sanctions. And a whole series of meetings begin to discuss and permit exceptions to this fiat. As the boss is reminiscing about the good old days when life was simpler and wondering why his managers cant see each others point of view, he comes across a little brochure announcing an advanced management programme at Srinagar, which says that the programme is intended for senior managers who are specialists in their functional areas to understand and appreciate other disciplines. Here at last is the solution. So he sends his managers to Srinagar. They return with their vocabularies enriched. They are now able to talk each others jargon, but the problem of communication persists. Sadder and wiser, our poor entrepreneur is wondering if it is perhaps a more deep-seated personality problem when, lo and behold! a circular arrives announcing a sensitivity training programme in Mussoorie which says that if only individuals can see themselves in a group as the group sees them, all would be bliss. This must be the answer. So a whole round of exposures to experiments in behaviour. They return with a beatific look on their faces and for some time all is sweetness and light. But alas! Habits die hard and soon the old games reappear. And now, enter the consultant. The boss narrates his woes about how all his time is taken in resolving interdepartmental transactions, leaving him no time to plan the organisations future. Each manager complains to the consultant about the other departments failing and the chiefs indecision. And the financial controller bemoans the erosion of all financial discipline. The consultant has the ultimate solution. The boss has too wide a span of control. So he must be insulated with one more level in the hierarchy. Three persons reporting to him and controlling the ten who originally reported to the boss. What happens? The boss gets more remote and less sure of himself as the data fed to him passes through yet one more filter. Meetings get fewer but longer. If the organisation survives all this and still grows (and organisations like the human organism, can take a surprising amount of abuse), it will no doubt encounter a second consultant whose ultimate solution is the division of the organisation into profit centres with the head of each centre responsible for a certain quantum of profits or return on
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Management Make Efficiency Expansion of Consolidation Problem Focus and sell of market of organisation solving and operation innovation Organisation Informal Centralised Decentralised Line staff and Structure and and production functional geographical groups Control Systems Market Standards Reports and Plans and results and cost profit centres investment centres centres Matrix of teams
Mutual goal setting
The moral for entrepreneurs is simply this: there is no single management style that is appropriate for all sizes of the organisation and at all stages in the organisations growth. The forceful leadership style that creates an organisation may have to give way to a management style that directs without being too involved, which in turn may have to yield to a system of delegation with accountability for results. This is the moment of truth-and anguish-for most entrepreneurs. The enlightened entrepreneur may ponder over an important point. In a controlled economic environment like ours, where outside forces operate with almost equal distribution on all organisations, the future of an organisation may be determined less by outside forces than by its own history. And an entrepreneur with a sense of his organisations history, who can anticipate and adapt his management style, can have a headstart over his counterpart who does not. The Doctors Dilemma There was a time when the organisation started when our entrepreneur could walk down the shopfloor and have a reasonably accurate feel about productivity of labour and machines and quality of work. The cost of manufacture was simple arithmetic. His customers were his friends and pricing of the product was a matter of covering all costs and a little besides. Then he begins to grow. And he finds that he has no time to walk down the shopfloor. And even when he does, he sees unfamiliar faces. He has no time to meet customers except those who insist on meeting him to complain about his products. Pricing of products, which was a simple matter of adding raw material, labour, overheads and profits, is now compounded by such things as distribution of overheads over different products, cost-volume analysis, machine utilisation and the like. At this stage, he is likely to encounter some of the following phenomena. His marketing manager will complain that he could sell more if only the factory would produce more, give better deliveries and pay attention to quality. His production manager will grumble that he can produce more if only marketing could give him a firm long-term programme and not quote unrealistic deliveries. He could also build in
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investment. At last the entrepreneur will realise one of his lifes ambitions: the leisure to play 18 holes of golf every alternate day. Perhaps this is an oversimplified model of the dynamics of change. The point at issue is simply this: in a large number of growing organisations, the basic problem I find is one of having the right information at the right place at the right time and the solution is in the area of initiating and improving the system of information gathering and information flow rather than in reorienting managers and restructuring organisation charts. Where do we go from here? From this rather impressionistic sketch of a growing organisation, let us draw some tentative conclusions. Can we rethink our values and objectives so that we are more in line with the social and political environment in which we live and operate? What I had in mind were some of the following: The satisfaction of a job well-done, the yearning for thoroughness and excellence. The joy of a repeat order from a happy customer the focus on quality and service. The thrill of exporting successfully against global competition. The glow of seeing members of the corporate family improve their standard of life. The fulfilment that comes from sharing ones time, energy and resources for larger causes. Can we learn to become aware of our leadership style so that we are more in tune with the changing needs of our growing organisation? To bankers and financial institutions, I have one suggestion to offer. It seems fashionable these days to talk of bank lending being directed towards the most productive use of assets than being dictated by considerations of security. Operationally, however, it makes little difference because banks still insist, and rightly so, on adequate margins. My suggestion is that when lending to the small and medium sector, the only real security is a periodic cash flow that establishes the continued solvency of the unit. If I were a banker, I would ask my client to give me a monthly revolving projection of their funds flow for the next six months, instead of statements of raw materials and work-inprogress and finished goods and book debts, and if I am convinced that the client knows his cash management, I should completely relax on margins and put into effect my stated objective of directing credit towards the most productive use of assets. To management consultants and thinkers, a humble plea. Please try and understand the entrepreneurs dilemma and help him in the process of adjustment towards a more complex organisation, not merely by courses in general management and behavioural sciences, nor by restructuring organisation charts, nor even by importing systems tailored for large organisations which need an infrastructure that smaller organisations cannot support, but by developing insights on information nerve
centres, information channels and norms of control appropriate to the size and befitting the style of smaller organisations. To the policy planner, be he a politician or an administrator, I would appeal for an understanding of the motivations and climate that make and nourish entrepreneurs. I understand, marvel at and sympathise with the tremendous conflicting pressures under which the policy planner in Delhi must operate. I would, however, like him to reflect on the following. Biology provides a better guide to the understanding of longterm forces in society than mechanics. If I wish to divert the flow of water in a certain direction, I can obstruct its present course and channelise it in the direction I choose but the water will still continue to flow. But if I obstruct penguins from flying for whatever short-term reason and tenaciously pursue this, I shall create a generation of penguins who will have wings but cannot fly. We have in our country a long rich tradition of entrepreneurship. In the process of controlling and directing it, please ensure that you do not dry up the resource. Figuratively speaking, penguins have lost the power of flight during the course of evolution. When drawing up an industrial policy, consider the wisdom of motivating the strongest rather than protecting the weakest. The paternalistic policy of protecting the weak is perhaps necessary when you are dealing with the deprived or handicapped sections of society such as landless labour or scheduled castes or hill tribes. But when it comes to industry only the strongest deserve to survive in the national interest. For example, why should certain industries be reserved for the small-scale sector? As I mentioned earlier, the scale of operations is determined by the logic of technology which permits of a small capital investment and a high output to capital ratio. In such an operation, an efficient small-scale unit will beat a large one hands down. I say this from personal experience. And if it cannot, a policy that protects it and allows it to survive inefficiently can only be at the cost of the countrys economic growth. Or again, why have preferential rates of interest? Or a price preference on governmental purchases? When the minimum wages legislation was extended to the engineering industry in Maharashtra all the small-scale sector units in Pune rose up in arms and said they should be exempt from the operation of the Minimum Wages Act or they will not survive. I strongly believe that any industry which cannot pay for its borrowings or make a product at a competitive price, or give its workers a fair wage, has no business to be in business whether small or large. On the other hand, think of positive motivators. For example, accessibility to loans on a proven cash flow basis, or a tax rate that permits adequate ploughback to finance growth or a capital market that gives the small entrepreneur an opportunity to liquidate his assets. Psychology can provide you better clues for manipulating behaviour than jurisprudence. There is a well known school of thought which believes that behaviour in an individual or group reflects the expectations of those with whom the individual or group interacts and has demonstrated that by
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changing expectations you can influence behaviour. If you dub every businessman a callous profiteer and develop sharper and more sophisticated legislation to correct his errant ways, you reinforce precisely the sort of behaviour you would like to correct. If, on the other hand, you recognise that enterprise is a good thing: that our economic growth requires nurturing of this talent: that a reasonable profit is a just compensation for services rendered and risks taken; that private ownership of assets is not a crime provided it is legally acquired and in return for a contribution to society; that all businessmen are not black marketeers any more than all politicians are power-hungry and corrupt or all administrators, time-serving bureaucrats: that entrepreneurs can make a contribution outside their organisation-not in terms of donations, but in terms of their leadership skills and organising abilities. Then you will generate behaviour that is responsive, socially conscious and politically sensitive and the megawatts of human energy that are used today in breaking and making laws or in pleading for favours and distributing patronage will be directed towards the more constructive business of building our nation.
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LESSON 34: INTRODUCTION TO COMPENSATION SURVEYS AND METHODOLOGY

Latest Trends in Compensation Management component. The variable component is linked, through a formula, to the performance of the company, of the group or team with which the individual works, and of the individual. Organisations may have a variant of this system but the concept is the same - individual compensation is linked to the performance of the group and company in addition to her or his performance. The pay-for-performance concept as manifested in the variable pay system is posited on certain behavioural assumptions regarding the company and its people. The primary assumption is that the variable pay model is very transparent and consistent. As the compensation is linked to the performance of the company, it is very important that there is a clear understanding of which performance parameters will be considered for the purpose of evaluation. This has to be temporally consistent. Another important behavioural aspect is that any variable pay system has an inherent potential to reduce the pay of an individual as much as it can increase. This is something that most employees would not be prepared for, given their earlier experience of a fixed pay system. The fall in pay has led to serious critiquing of this system by HR practitioners and academics in the US over the two years or so. It is very much like the stock markets, which come under intense public scrutiny only when there are steep falls. Yet, there are lessons to learn from these critiques. A key lesson has been that the sharing of data with individuals on their, and company, performance is either infrequent or done only at the end of the year. This defeats the purpose of the payfor-performance concept which seeks to enhance the performance of the individual by engaging her or him in the companys performance. For this, frequent sharing of performance is an essential pre-requisite. Most companies do not realise this. There is adequate evidence of companies in the US and in India of sharing bad news about variable pay cuts in an abrupt and non-transparent manner without adequate warning to the individual, which leads to the individual feeling short-changed. Such surprises undermine the trust in the process and the organisation completely. Although nobody likes a pay cut, being forewarned about it dampens the adverse effect. Mutuality, trust, transparency, and engagement are the cornerstones of the pay-for-performance concept. Indian corporations should assess themselves on these sensitive aspects before adopting such a concept; otherwise they may face a disaster on the human resource front.
Learning Objective

To know the Concept of Compensation Survey To understand the Pay-for-Performance Model To study an Article on WageAccess To know Compensation Survey Methodology
Introduction to the Concept of Compensation Survey

Salary survey provides employers with the current and accurate compensation information needed to attract and retain quality employees. The survey allows competitors to share current wage information with each other while maintaining complete participant confidentiality.
Management Matters The Pay-for-Performance Model

During the last 15 years there has been increased debate about refining the role of employee compensation in ensuring performance. Practitioners and academics have been working on various models and innovative ideas relating to compensation methodologies. The profession of compensation experts has seen its custom build rapidly. In order to build databases and provide benchmarks for corporations, compensation surveys have become very common and are sold for a price. Human Resource departments of most mid-sized and large corporations have worked hard to enhance their knowledge and skills in designing appropriate compensation models. The key question they have been trying to answer is: What would be the appropriate basis for rewarding a person? The concern has shifted from paying enough to rewarding right. The increasing marketisation of economies has had an impact on the labour market and its reward systems, too. Compensation systems have started reflecting higher levels of discrimination, and large variation in pay packages are now accepted by managers in many corporations and professions. Growth of the people-intensive service industry has furthered fuelled this process. Expectedly, Indian corporations have also been affected significantly. Compensation systems are getting rigorous attention in many Indian corporations. One outcome of this continuous search for an appropriate compensation concept has been the pay-for-performance system. This system is gaining popularity in India in the more knowledge-intensive firms such as consultancy, investment banking and IT. Others in the old economy businesses are attempting to change over to it too. Pay-for-performance is essentially trying to move away from the seniority-based compensation system that has prevailed in the corporate world. Its main payment logic is variable pay. The compensation package is divided into a fixed and a variable
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Wage Access
What it is? The WageAccess Compensation Survey is an Internet-based multi-industry salary survey that provides employers with the
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current and accurate compensation information needed to attract and retain quality employees. WageAccess provides employers with the current and accurate compensation information needed to make critical wage-related decisions. Finally, theres a wage survey that delivers the results youve been looking for...

Survey data is compiled each quarter of the year and combined with data collected in previous quarters for calculation of annualized results. An aging factor is applied to all previously collected data to adjust for the movement of salaries through the year. This aging process provides users with a much more accurate representation of current pay levels than conventional paper surveys. Since survey data is collected year-round and previously collected data is appropriately aged, survey results are effectively never more than 90 days old. WageAccess is Accurate All survey participants are required to provide actual pay information in addition to salary grade ranges. This allows for an accurate and detailed picture of current wage levels for the job market. To assure the validity of the survey results, participants are encouraged to review the job descriptions and provide survey data for only those positions that match their own with at least 75% accuracy. At the close of each quarterly collection period, an extensive review and audit of the raw survey data is conducted to ensure its accuracy and consistency. WageAccess is Convenient Companies can participate in the survey by clicking on the Sign-Up Now button at the top of the page and providing some basic information. Participants will then receive an e-mail containing a login ID and password to get started with the survey. All survey data entry can be completed at any computer with access to the Internet. The survey does not need to be completed in one session; the survey entry function is designed to allow participants to start, stop and restart the process without losing previously input data. WageAccess is Confidential Participants can be assured that the WageAccess survey results are reported maintaining complete confidentiality. Individual participant data is never displayed as part of the survey results nor is raw survey data transmitted over the Internet during the reporting process. The WageAccess Internet web servers, databases and networks are designed to ensure the reliability, performance and security necessary to provide survey data when and how you want it, and to ensure that the transmission of your sensitive and confidential compensation data is protected. For More Information Synergy Management Solutions, Inc. is dedicated to providing a quality survey results that can be relied on, year after year. You will find that our attention to detail and data quality is unparalleled in the industry. Please feel free to browse through the web site and learn more about WageAccess and the invaluable information the service provides. You are encouraged to view the fully-functional demonstration of WageAccess capability by clicking on the Demo button at
Comprehensive Current Accurate Convenient Confidential
...the way surveys should be done. WageAccess is Comprehensive The WageAccess survey contains over 500 benchmark positions. Each position includes a detailed job description to ensure a comparable match is made during the survey data entry process. Custom Results Survey results are calculated based on the criteria selected and are displayed as mean, weighted mean, median, average low and average high rates of pay. The results also include summary statistics on a number of useful job parameters such as pay type and FLSA status, as well as average compensation for bonuses, commissions and tips. The innovative WageAccess Internet-based reporting feature allows users to create customized reports from current or historical survey data. Users may select and filter results by using any combination of the following criteria:

Geographic Location (region, state and metropolitan area) Industry Annual Revenue Number of Employees
Quartile Analysis Participants have the opportunity to run a personalized quartile analysis against the survey results and obtain a detailed report of their organizations wage level percentile ranking against comparable companies in the selected market. Pay Practices The pay practices report allows users to analyze formal pay grade data collected through the survey. These results offer users a direct comparison of their own pay grade start rates and rate ranges to the pay grade levels reported in the survey results. Summary Report The WageAccess survey results also include a summary report on trends in turnover, merit increases and pay grade level movement. WageAccess is Current Survey participants may contribute data to the survey at any time during the year. All data is collected confidentially though the WageAccess web site. Upon completion of their survey, participants may immediately access results from data collected in previous quarters of the survey.
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the top of this page. The demo will lead you through the process of entering salary information into the database and allow you to retrieve fictional survey data using the WageAccess state-of-the-art custom results. Our next survey deadline is . So, dont hesitate... sign up today!
of the year. An aging factor is applied to all previously collected data for the year to adjust for the movement of salaries through the year. Since the survey data is collected from each participant annually, previously collected data is never aged past one year. The aging factor is proprietary to Synergy. It is derived from a combination of statistical metrics, including the Consumer Price Index (CPI) as reported by the Bureau of Labor Statistics (BLS), BLS-reported annual changes in national salary data, actual reported WageAccess salary data trends and other economic parameters. For example, assume that the aging factor is calculated at 4% for the current year. All data previously collected during the first quarter of the year would be increased by 1% before it is combined with the data collected in the second quarter of the year. This aging process provides participants with a much more accurate picture of the markets current level of pay, thus resolving the stale data problem that occurs with most surveys. Calculating the Results WageAccess state-of-the-art Internet-based reporting feature allows participants to create custom reports from current and historical survey data. Users may select and filter data by using any combination for the following factors:

Survey Methodology
The WageAccess Compensation Survey is designed to be easy to use and provide the most accurate and valid results possible. The survey methodology details the special attention given to how survey data is collected and audited, and how the survey results are calculated, analyzed and presented. Collection of Data Survey data is collected from participants annually and may be submitted to the survey via the Internet web site at www.wageaccess.com at any time during the calendar year. Participants are required to report accurate and actual rates of pay to the survey. A key factor for ensuring the collection of valid survey data is the requirement that participants calculate and submit the actual average rates of pay for employees in a position as well as the highest and lowest rate of pay. Estimates are not acceptable. At the end of each calendar quarter (March 31, June 30, September 30 and December 31), survey data that has been collected during that quarter is compiled for reporting purposes. It takes approximately one month to audit, validate and calculate the survey data before the results become available on the WageAccess web site. The results for that collection period are available on the first day of the month following the close of the calendar quarter (February 1, May 1, August 1 and November 1). However, once a participant has signed up for membership and submitted their survey data, they will have immediate access to survey results collected in the previous quarterly collection period. Quality Match Rating A rating scale is used to identify job matching errors and reveal discrepancies in position responsibilities and functions. Participants are asked to rate by percentage of accuracy how their position matches the survey job description (75%, 85%, 95% and 100% accuracy). Participants should only report data to a particular position in the survey if they feel their position matches the survey job description with an accuracy of least 75%. Auditing Since data is submitted to the survey directly by the participants, it is assumed that the participants have completed the survey in an accurate and thorough manner. However, occasionally errors in input may occur. Once survey data has been collected, it is reviewed by the Synergy staff and a thorough statistical analysis and auditing process is performed to identify any discrepancies in the data. Individual participants may also be contacted to verify the accuracy of this data. Aging the Data New survey data is compiled quarterly and combined with previously collected data to calculate the results for each quarter
Geographic Location (Region, State and Metropolitan Area) Industry Annual Revenue Number of Employees
After executing the query, the names and locations of the corresponding companies are displayed to allow users to validate their selection. If the selection yields fewer than five companies, for confidentiality and statistical accuracy, the data will not be made available and the user must broaden the selection. Based on the users selections, the following statistical calculations are available: General Survey Results The survey results allow participants to view the survey data based on the selected criteria through a number of commonly used descriptive statistics. Mean The mean is the calculated average of pay for a position as reported by the selected group of companies. This calculation is obtained by dividing the sum of the average rates of pay for the selected position from each company by the number of companies. The mean is generally the preferred measure of central tendency in that each company is treated with equal weight and it reflects the value of each average rate of pay in the sample. Median The median is the midpoint or center rate in a series of average of rates of pay as reported by the selected group of companies that have been organized from lowest to highest rate. The median is also a good representative of central tendency,
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however, it is not affected by extremely high and low rates of pay for a position. Weighted Average The weighted average is another type of calculated average of pay for a position as reported by the selected group of companies. The weighted average is obtained by first multiplying the number of incumbents in the position by the average rate of pay at the company and then dividing the sum of that product by the total number of incumbents at all selected companies. This measure is useful in that it provides a higher weighting to larger companies employing larger quantities of employees in a position. Average Lowest Rate of Pay The average lowest rate of pay is the calculated average of lowest pay for a position as reported by the selected group of companies. The calculation is obtained by dividing the sum of the lowest rates of pay for the selected position from each company by the number of companies. Average Highest Rate of Pay The average highest rate of pay is the calculated average of highest pay for a position as reported by the selected group of companies. The calculation is obtained by dividing the sum of the highest rates of pay for the selected position from each company by the number of companies. Average Start Rate The average start rate is the calculated average starting rate of pay for a position as reported by the selected group of companies. The calculation is obtained by dividing the sum of the highest rates of pay for the selected position from each company by the number of companies. Average Rate Range Min The average rate range minimum is the calculated average minimum rate of pay in a structured pay grade system for a position as reported by the selected group of companies. The calculation is obtained by dividing the sum of the highest rates of pay for the selected position from each company by the number of companies. Average Rate Range Max The average rate range maximum is the calculated average maximum rate of pay in a structured pay grade system for a position as reported by the selected group of companies. The calculation is obtained by dividing the sum of the highest rates of pay for the selected position from each company by the number of companies. Job Data Parameters Job data parameters are reported as the percentage of the selected companies whose employees in this position normally match the following parameters:

Commission Rate Received Receives Tips Average Tip Rate Per Hour Received (of those who receive tips) Supervisory Position Union Position
Quartile Analysis The quartile analysis allows users to make a direct comparison of their own data to the survey results, including a detailed report of their companys percentile ranking in the selected market. Percentile Percentile is calculated as follows: in a series of average of rates of pay that have been organized from lowest to highest rate, a percentage of the average rates of pay will fall below this number and the remaining percentage will fall above this number. Based on the selection criteria, the quartile analysis will show average rates of pay for the position at the 10th, 25th, 50th, 75th and 90th percentiles. Pay Practices The pay practices section allows users to compare their own methods of compensating employees through a formal pay grade system to the methods of other survey participants in the selected group of companies. Compa-ratio The compa-ratio is a tool that is used to compare average rates of pay with the midpoint of a rate range. A score of 1.0 indicates that the average rate of pay for this position is the same as the midpoint of the rate range. A score that is greater than 1.0 indicates the average rate of pay exceeds the midpoint of the rate range. Likewise, a score of less than 1.0 indicates the average rate of pay is lower than the midpoint of the rate range. Rate Range Comparison These results offer a direct comparison of the participants own pay grade Start Rates, Minimum, Midpoint and Maximum rates to the pay grade levels reported in the survey results. Data Quality The WageAccess Compensation Survey has been designed to ensure the collection of quality survey data, which will, in turn, yield extremely accurate and valid results. Auditing A thorough statistical analysis and auditing program is run on all survey data submissions to flag possible errors due to data entry, incorrect position matches and outliers. Survey participants may be contacted to verify the accuracy of this data. In addition, audit control procedures are employed to eliminate any possibility of system errors, calculation errors or data corruption. Job Descriptions The WageAccess survey contains over 500 benchmark positions. Each position includes a detailed job description, including levels of responsibility, autonomy and knowledge required, to
Pay Type (Hourly or Salary) FLSA Status (Exempt or Nonexempt) Eligible for Bonus Average Bonus Percentage Received (of those eligible for bonus) Receives Commission
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ensure a comparable match is made during the survey data entry process. Match Quality To assist in the validity analysis, a rating scale is used to help identify discrepancies in position responsibilities and functions. Participants are asked to rate, by percentage of accuracy, how their position matches the survey job description (75%, 85%, 95% and 100% accuracy). Participants should only report data to a particular position in the survey if they feel their position matches the survey job description by at least 75% accuracy. Participant Education Throughout the WageAccess survey, participants are provided with detailed instructions, examples and tools to assist them in accurately completing the data entry process. Participant Responsibility Finally, survey participants are reminded that it is their responsibility to ensure that the data they provide is accurate. Other participating companies have put a lot of time and effort in contributing to this survey and expect that the information they receive will be based on quality data. It is imperative that participants report actual and accurate rates of pay to the survey. To achieve accurate results that reflect the current market trends, participants must do the calculations and report actual average rates of pay. It may seem like more work, but the results are worth it! Uses of Compensation Surveys Write Intro

Companies who are innovative where retention strategies are concerned finally emerge as winner. The Survey A survey conducted by AIMA (The All India Management Association) on retention served to identify the most prevalent practices in retention management. Companies that have a turnover of 25 crore with an employee strength of 50 were chosen and grouped into 4 categories, manufacturing, marketing, services and hi-tech. The Results
Out of 135 companies that participated, one in four software companies and one in two manufacturing companies admitted to facing a problem related to employee retention. Career shift is a common feature in the junior management of every organisation. The turnover may be as high as 7% in hi-tech firms and may figure around 7% in manufacturing companies. Vibrant work atmosphere, dress code and flexi timings are some popular factors that favour employee retention.
Retention Strategies that Work

Providing in-house training facilities, change management coaching, and leadership skills and personal development plans for key employees. Providing performance bonuses Providing memberships at health clubs, and organising social events at regular intervals, conduct sporting events sponsored by the company. Providing subsidised food Increasing organisational transparency to allow employees to understand the importance of different roles in the organisation. Granting periodical promotion and adequate salary raise to motivate and enthuse employees. Provide Employee Stock Options (ESOPS) to encourage joint ownership in the organisation. Human capital is the most important resource of any company and high flyers play a big role in its success and effective retention management is the only way to ensure you have the best minds on working for you!
To know what the competitors are paying; Development of more integrated pay structures covering all categories of employees; Extend flexible benefit schemes; Align pay strategy more systematically with business strategy; Treat employees as stakeholders who have the right to be consulted on and involved with any reward management developments; Achieve the integration of reward and other HR processes and practices for example, human resource development; Use variable pay rather than consolidated pay increases; Examine more rigorously the cost effective schemes of payment;
Tutorial Activity 1.1 Nightmare No More !

A survey conducted by AIMA (The All India Management Association) on retention served to identify ... Granting periodical promotion and adequate salary raise to ... High employee turnover is every managers nightmare, especially when trained manpower is hard to get. There may not be a quick-fix to this problem, but implementing a good number of retention strategies can definitely work for you. Career counselling, conflict resolution and employee welfare programmes are some benefits being offered to employees.
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LESSON 35: INTRODUCTION TO PLANNING COMPENSATION FOR EXECUTIVES AND KNOWLEDGE WORKERS
Latest Trends in Compensation Management
Learning Objective

To understand who are Executives and knowledge workers? To know What is Knowledge-Work? To understand the Total Compensation Approach To Link Pay to Business Objectives To know Sales Management & Selling Skills
So who are the knowledge workers? To equate the terms with specific professions like IT professionals or consultants is too limiting and narrow a definition. On the other hand, using it to describe anyone who uses brain instead of muscles to do work - as Drucker did - is too general (obviously, a software programmer or an investment analyst cannot be put in the same basket as an accountant who only totals up the ledger).
What is Knowledge-work?
It may be more appropriate to first define and understand what knowledge-work is all about in order to understand those who do it, and the implications for managing them. There are three key features, which differentiate knowledge-work from other forms of conventional work. Firstly, while all jobs entail a mix of physical, social and mental work, the basic task in knowledge-work is thinking - it is mental work, which adds value to work. Unlike the salesman who interacts, negotiates and persuades to achieve his targets, or the shop floor operator who performs physical operations (does things), the knowledge worker adds value to work through mental activities. Knowledge-work involves activities such as analyzing and solving problems, deriving conclusions, and applying these conclusions to other situations. Naturally, the effectiveness of the knowledge worker would depend on the mental skills and mastery of certain intellectual discipline and expertise (e.g., knowledge of theoretical frameworks, model-building, problem-solving techniques, etc.). This is a key factor, which distinguishes a punch-key operator sitting in front of a PC terminal from a software programmer. Secondly, the kind of thinking involved in knowledge-work is not a step-by-step linear mental work. For instance, the accountant who calculates the payroll knows the exact mental steps to follow to achieve the desired results. Payroll calculation involves thinking, but only to the extent of processing information; it is not knowledge-work. But this may not be true of the work of a consultant, who has to be creative and non-linear in his thinking (i.e., work out how to think) to develop solutions for the client. The third distinctive feature of knowledge-work is that it uses knowledge to produce more knowledge. When the software professional uses his knowledge of writing codes to increase the efficiency of the programme, or when the investment analyst uses his knowledge of markets to develop an investment strategy, they are creating new ways of applying knowledge. Thus, knowledge-work is more than mere application of known knowledge; the outcome of knowledge-work is creation of new knowledge.
Interaction
Human Resources Management This activity of the HR person deals with the design of a remuneration system. There are various factors affecting this such as the size and structure of the organisation and the industry in which it operates, strength of employee unions, the position of the person and his importance to the organisation, the demand of particular skill sets in the industry and above all the profits of the company. The aim of the HR person would be to formulate a remuneration policy in such a way that employees give optimal performance and feel they get a fair deal, new employees are attracted to the organisation, and the organisation is able to retain existing employees. It is also designed in such a way that it serves as a motivation tool for employees to perform better. In order to arrive at a value for a job, companies carry out an exercise called as job evaluation. Job evaluation tries to address the following issues: 1. What is the value of the job to the organisation? 2. How to arrive at this value in a fair manner so that it is accepted by employees? The job analysis and performance appraisal, which we have discussed earlier, also contributes a lot to the job evaluation process.
Who is an Executive?
A person or group having administrative or managerial authority in an organization.The chief officer of a government, state, or political division.
Who are Knowledge Workers?

As we enter the knowledge-era, one of the critical challenges for HR professionals would be to design practices and systems for managing the Knowledge Workers. However, even after forty years when Peter Drucker had coined the term, the definition of knowledge worker - and the understanding of the professionals it describes - remains far from clear. More so, because it is loosely used to describe a wide array of people ranging from a software professional to the operator who works with a CNC machine. It is not surprising that many consider it just another buzzword popularized by the skilled and tech-savvy, upward mobile professionals to enhance their own market value.
A Total Compensation Approach

Executive Compensation and knowledge workers needs a range of compensation planning, and services in such vital
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areas as salary administration, organisation structure, short and ... Companies of all size may wonder about the direction that executive pay will take over the coming years, and what trends will emerge that could impact not only on corporate success, but survival as well. An organisation understands that effective compensation and benefits plans are critical to success in todays highly competitive business environment. A shortage of qualified talent and demands for more stringent executive accountability and longterm commitment, conventional has quickly become obsolete, requiring a more creative approach as well as new compensation techniques and vehicles. As HR professional, needs to recognise the trends, develop effective programmes to meet executive compensation objectives and build company value. Compensation package combines typically two distinct disciplines, Executive Compensation and Executive Benefits. Executive Compensation needs a range of compensation planning, and services in such vital areas as salary administration, organisation structure, short and long term incentive plan design sales compensation, executive perquisites, and retirement benefits. Executive Benefit practice focuses on design, funding and implementation of nonqualified executive benefit plans. Before revising the existing benefit programme, HR team provides a critical analysis of current programmes to identify potential cost savings and ways to improve benefit design. HR team quantifies executives perceptions of various benefits so that corporate funds are used in the most efficient, meaningful and motivating manner possible. HR team also needs to look at offering significant wealth accumulation strategies and programmes without seriously impacting corporate finances. A six-step process method to deliver and administer executive benefits more effectively:
in compensation programmes. Based on these recommendation, HR Team designs specific, strategic changes to existing programmes and implements. Begin with Objective Review The compensation design process must include an objective review of existing practices. Invariably, some plans should be retained as is, because they are working well and serving a useful purpose. But there will be others that should be axed, because they no longer fit your needs, or are being abused. And there will third group, namely whose practices that serve good purpose, but may require re-design. Perhaps their objectives can be achieved in a different way, or at a lower cost or by combining them with other programmes.
Link Pay to Business Objectives

Once this review is complete, the next step is to develop a series of pay programmes linked to specific business programmes linked to specific business objectives. This will send a clear message about the firms direction and performance expectations throughout the management structure. At the same time, it will also reassure even the most daring and productive executives who also appreciate financial security and stability. This is a fundamentally shift in thinking and it gains ground, it promises to result in equally fundamental shift in the competitiveness of Industries worldwide. A Company that is in short term financial trouble or heading toward bankruptcy needs effective short-term solutions to enhance the likelihood of survival. Some value added compensation plans actually undermine a troubled companys survivability because they encourage management to take on debt. Since debt is often available at a cost below that of equity, the formulas underlying assumption is that good management will use that capital to create returns that exceed the associated interest of debt. However, a company in trouble is often overleveraged, and additional debt could force into bankruptcy. Other value-added compensation plans measure only long-term results. Whatever management does over the short term has little effect on the plans measurement criteria. But it is over the short term that the companys fate hangs in the balance. So for the financially troubled companies, the compensation programme should encourage the companys short-term survival. Once that is ensured then the company can adopt a value added compensation plan that will improve long term results. Hence, Executive pay is a discipline that requires a concentration of creative energies, not unlike those invested in the development of a product line. In fact, one should think of pay programmes as a product they require constant new thinking to keep up with the competition; they must be sold to customers and they have varying shelf lives.
Discussion of objectives of the executive benefit programme Planning the preliminary design Exploring funding and security alternatives Developing a final plan Analysing and selecting funding vehicles Developing Implementation Plans and Executing Effective Plan Administration
The HR team member together weighs the tax and accounting effects, as well as the cost and benefit tradeoffs of each plan, resulting in a total executive compensation programme that is strategically, economically and culturally sound. Results of these studies are then combined to create strategic recommendations in such areas as pay positioning relative to the competitive environment, the right mix of salary, benefits and incentives and the timing of short vs. long term incentives; linkage of incentives to corporate, business unit and individual performance; the relationship between performance and incentive plan payouts; and the role of benefits and perquisites
Sales Management & Selling Skills

The Best Laid Plans Sales Compensation is what its all about!...
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When it comes to paying sales professionals, there is no onesize-fits-all. Some companies pay commission based on sales, while others blend in stock options, incentives and special bonus plans. Options abound, yet the common thread that runs through all successful sales compensation plans are the corporate goals. Sizing It Up Sales managers must consider many variables when tailoring a compensation plan. Compensation plans must take into consideration the overall industry and the companys position. Are your sales goals based on orders or bookings? Are you a start-up? Is your objective to secure new clients, increase average order size or reduce selling expenses? Do you want to introduce new products, focus on existing profitable products or increase activities like cold calling? The compensation plan to adopt would depend on your answers. Cost of Sales Calculating the Cost of Sales (COS) is an important part of planning a compensation package. For a quick COS ratio, simply take the salary plus commissions earned and potential bonus opportunities, and divide by the revenue generated by the sales professional. Examining the Styles Compensation plans can be based on a periodic review of results, but must include several measurements of revenue and profitability. All compensation plans should include accelerators such as increased commission rate when salespeople achieve target levels. Here are a few examples: Profit-Based Plans Commission rates change as profit levels increase. These may be based on invoice, product or monthly averages. Revenue Quota or Unit Placements Plans: Compensation is based on sheer volume achieved over the previous sales period or on a percentage of quota achieved. Break-Point Plans Break points or target levels are based on attaining specified levels of production. Balanced Plans: Compensation based on profit, revenue and growth is provided in these plans. Customer Service and Customer Satisfaction These plans are based on improvement as shown in customer surveys and account growth. Third Party or Distribution-Supported Sales Compensation Most of these plans include a base salary with a limited commission linked with revenue growth over previous periods. Choosing the Best Match With these compensation options in mind, lets look at some scenarios to see what type of plan works best: 1. If your company has high revenue growth objectives with little competition, use Break-Point plans or programmes with high base salaries and low commission plans. 2. If your company has a protect and grow revenue objective, slow growth and many competitors, use a profit-
based plan and ensure that compensation accounts for growth, with bonuses being provided for new accounts. 3. If your companys goal is to maintain revenue and focus on new account conversion programmes, focus on growth or quota-based compensation. Remember that compensation includes not just salary or commission, but the overall package of benefits. A good package may include profitsharing, stock options, vacation, insurance and other company-sponsored plans. Organisations in transition or positioned for high growth should develop programmes based upon a six-month period. This time length allows management to test theories, make adjustments and still protect the company. This also protects the salesperson from unrealistic programs that limit their income opportunity. Dont ask salespeople to do too many things at once. Most compensation and incentive plans link rewards to only two or three aspects of job performance. They should be linked to the firms highest-priority sales and marketing objectives. Get input from your sales team prior to the rollout of the new plan.This will ensure their buy-in and raise questions and concerns. Taking time to create an effective plan that fits properly and pays off in earned commission and achieved corporate goals.

The performance management system at Enron allowed executives, managers and ... Compensation and incentives. Having a percentage of your pay based on ... by Dr John Sullivan Did HR Cause the Downfall of Enron? HR professionals continually claim that they are strategic and that they have business acumen but almost universally, the response of HR professionals to the collapse of Enron has been silence. Why the silence? What current business issue could have more strategic relevance then one of the top10 biggest firms in the world declining into bankruptcy? The failure of Enron not only resulted in a decrease in shareholder value but essentially in the elimination of it! Employees have lost most if not all of their retirement funds, job security (and maybe their jobs,) and possibly part of their employability due to the tainted reference of being associated with the Enron debacle. Maybe HR professionals failed to see the impact that HR had on the failure? This article is designed to make you think You wont agree with everything in this think piece but that is not the goal. If you only take away a few new thoughts, then it has served its purpose. . Are you are one of the few HR executives that upon hearing the story of Enrons collapse immediately thought about the significant role (and responsibility) the HR team could have played? If so then you are clearly already a strategic HR thinker. If your next thought was I need to re-look at my own people systems within my own organization to identify and prevent similar problems, then you need to read no further. If however your thoughts were then (and maybe still are now) that this was an accounting and vendor problem then you should read
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further and hopefully begin to think differently. This article is an outline of how HR failures, omissions and a narrow tactical view of the HR role contributed to a catastrophic company failure. Bad people management practices caused the biggest bankruptcy in U.S.history... about that, there can be no doubt Im still not buying into HR taking responsibility! Now before you dismiss this notion take a step back and think. Did Enron fail because of bad equipment, actions by the competitors or a collapse in the financial markets or the economy? The answer, of course, is no. Did the collapse come from: A one time slip in judgment A few unrelated mistakes or A pattern of unethical and possibly illegal acts coupled with a series of deceptions that can only indicate that the culture and values of Enron had degenerated A pattern of errors this broad could only result from management systems with serious flaws. Ok, if you are not buying into HRs responsibility then answer the question who is responsible for developing systems to build and maintain a companies value and culture? Since there is no values and culture department the answer lies with the only department with company wide responsibility for developing systems to measure and reward behaviors, values and performance...HR. And yes, of course other functions contributed (for example accounting and finance) but such a wide spread series of errors in judgment can only result from poorly designed or implemented reward, training and performance management systems. Wide spread errors like these can only be caused by badly designed people processes and systems If you think of HR in the more traditional backroom overhead role with no direct responsibility then now might be the time to re-think that attitude and approach. If a large number of people in many different departments makeindependent errors (and when those errors have similar characteristics) the cause cant be random. A large volume of similar bad judgments and violations of company values can only be as a result of bad processes and systems. In this case, the only systems that can cause this wide of a range of similar errors can only be reward, performance appraisal, communications, hiring and training. What did HR do Wrong? HR took too narrow of a view of its job. Just talking about the culture and values is not the same role as developing people management systems that actively reinforce those values through metrics, rewards and punishments. It developed human resource systems within Enron that: Measured and incented the wrong things. Its benefits systems failed to meet its fiduciary duty to protect its employees retirement earnings. Its performance management system did not punish (and may even have encouraged) workers, managers and executives who took unreasonable risks.
In brief, Enron failed because of the people it hired (or failed to terminate) and the HR systems it implemented that incorrectly appraised and incented risky and unethical behavior. The failure occurred because the different departments within HR failed to follow through with their jobs as stewards of the company (A more detailed list of each HR failure is found later in this article). How HR Could Have Saved Enron ? Enrons fall was not really a rapid one. The stock had dropped from 80 to 10 over the course of several months (prior to the ultimate crash), so there was time for managers and HR to identify problems and act to correct them. Obviously I dont have time to go into the hundreds of possible errors that can cause a companys downfall, but given what we currently know from public information, here are some likely failures and missteps by the HR function. Its important that you look at these failures not just because they happened at Enron, but also because they could help identify similar problems at your own organization. Because not all of the evidence against Enron is in yet (and I have not been a consultant to Enron) I have made estimates about what happened. However, I believe that you will find that the following list is a reasonable estimate of what HR did wrong and what you might be able to do to prevent such catastrophe at your organization. Benefits Mis-management The most obvious mis-management error is the appearance of inequity by setting retirement fund rules that restricted employees from selling holdings in Enron stock, while allowing senior management to sell large volumes of theirs. It is also clear that the message sent to employees (by HR and the executives) about the need to diversify their 401(k)s was clearly ineffective because some employees had Enron stock as a majority of their 401(k) portfolios. Because HR has a fiduciary responsibility to adequately represent and protect the interests of shareholders, many of whom were employees and retirees, benefits departments need to take a more active role in ensuring that the message gets through. This means benefits must proactively run the numbers to monitor the percentages of their own companys stock that is held in 401(k)s until average holdings fall below 20 percent, and where necessary, strengthen the message that is sent to employees outlining the negative consequences of holding too much of any companys stock in 401(k) portfolios. The Company Culture and Values HR often assumes the role of the builder and maintainer of the culture and the organization that is responsible for maintaining values and ethical behavior within the company. Clearly the Enron culture got out of hand and HR failed to keep it within reasonable parameters. The new culture that evolved (grow the business at any cost) from their original mission clearly killed the company. HR must realize that when the size of new hire group in a rapid growth company exceeds the size of the long tenure group, the companys culture (which originally made the company strong) will invariably become diluted due to an over-abundance of outside influences.
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Performance Management and Appraisal The performance management system at Enron allowed executives, managers and employees (who made major errors) to go unidentified and unpunished. HR developed a performance appraisal system that filed to immediately identify potential problems and it failed to put teeth in its performance management systems that would severely punish (or fire) individuals that kept secrets, took excessive risks or that violated the companys values or ethics. As a result, HR inadvertently sent a message to employees and managers that results, regardless of how they are obtained, are all that matters. ?Blind faith and a reliance on value statements and a once a year performance appraisal system must be supplemented by safeguards and precision performance monitoring systems when the companys business model shifts from a normal risk to a high-risk one. HR leaders in companies operating SPEs (special purpose entities) and trading derivatives cant be naive about the risks involved. Performance management and monitoring systems must be designed to fit the level of risk thats established in the companys business model. Compensation and Incentives Having a percentage of your pay based on performance is an excellent practice. However making the rewarded percentages too high can essentially over incent employees to take unreasonable risks. The large incentives for rapid growth, stock price growth and short-term gain drove behavior beyond reasonable limits at Enron. Employees must be able to make mistakes and then to report them rapidly. Thats how organizations learn. In reverse, having large penalties for failure can encourage secrecy and the hiding of mistakes, so that no one learns from them. Its also highly likely that the executive compensation packages at Enron (especially the CFO) were so large and focused on short-term results and stock price increases that they incented (or even hiding) risks that would not have occurred without such benefits. HR should have known that risks could be outrageously high in the derivative trading and offshore investment business. As a result, they should have taken a conservative approach toward incenting and rewarding risk taking and results (regardless of how you got them). Senior executives were continually telling employees (erroneously) about the high likelihood of large stock price growth and HR clearly failed to recognize and communicate that their message needed to be toned down. HR and other communications systems failed to incent or encourage whistleblowers to criticize or speak out about questionable business practices. Only a single employees warning message (which happened to be at a vice presidential level) reached the top. A culture that castigates or stifles individuals who criticize management or questionable practices needs to be monitored and changed. If HR is to have an impact on business decision making practices, it must develop formal and informal feedback and communication mechanisms that ensure that the alterna220
tive perspective is always heard. HR must make it easy for employees to anonymously complain as well as proactively seek out employee opinions and concerns. HR must develop systems that encourage employees to identify and out employees and managers that take unacceptable risks and that violate our values. In another communications failure, HR allowed the wrong start date of the 401(k) stock selling freeze to be announced, so that even when employees were actually free to sell stock...they didnt know it. Training Clearly the training provided in the areas of acceptable risks, ethics, reporting and performance monitoring were either ineffective or the incentives to ignore the training were so strong, that they negated any impact it might have had. HR must ensure that training effectiveness is measured based on performance, results and an actual change in behavior Hiring and retention With its dramatic growth and large-scale hiring, Enrons hiring standards could not always be met while their assessment tools were inadequate (especially in the areas of ethics, risk-taking and honesty in communications). Clearly the new breed of traders that were hired differed significantly from the old oil drillers that previously dominated the company. HR hiring and retention systems that worked with the oil drillers became ineffective when the companys business model shifted into a riskier trading mode. The lesson to be learned by HR is that the people management systems that worked when the company was smaller and had a different mix of employees must evolve with the changing business model and employee population mix. Conclusion The many human resource failures that contributed to Enrons demise should send a powerful message that an opportunity for HR to become as prominent as other recently popularized business functions. Although the final determination of which factors contributed the most to Enrons failure might take years to resolve. But it is already clear that the human element in Enrons failure played the largest part. Numerous individuals made bad decisions that resulted in a catastrophic failure. All companies make bad decisions. But, those companies who have effective HR departments also tend to have performance management systems and metrics that catch errors early. HR must learn to become proactive and to develop smoke detectors which can help identify bad people and people processes long before they can have a major negative impact on their company. HR must also look more closely at the design of compensation systems to ensure that the incentive to speak out (about unreasonable risks and ethical concerns) is at least as high as the incentive to keep quiet. Its also clear now that the 64 page ethics manuals and crystal clear value statements (that include respect and integrity) are not enough to change everyones behavior from bad to good especially when huge egos are involved. Unfortunately, the cost for learning that lesson will be thousands of jobs, many ruined retirements and the loss of billions of dollars.
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Business is not unlike sports. When a team loses big you cant blame the equipment, the fans or the accounting department. Its the people on the team and the systems that manage them that cause failure (and success)! Any questions? If youre one of the many that initially viewed the Enron disaster as an accounting problem I hope this article has changed the way you evaluate future business events. May be you didnt buy all of the arguments but I hope it did make you think. And one last thought. Does you HR department currently have systems that would warn you if your own firm had the same problems occurring as Enron did? We all know that the answer in most cases is sadly...No!
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UNIT IV LESSON 36: INTRODUCTION TO TAX PLANNING
Learning Objective

Introduction Indian Income Tax law To know Tax Structure in Indian Environment To learn Components of Indian Tax Law To know how do we compute taxable income in India? To understand how do we file returns in India? To know what is Permanent Account Number?
wealth tax and interest tax. Whereas indirect taxes comprise of excise duty, sales tax, customs duty and value added tax. While direct taxes form 30 per cent of governments revenue indirect taxes contribute a larger chunk of 70 per cent. Gift tax and estate duty were part of the direct tax revenue. As an ongoing process of simplification and rationalisation of the direct tax structure in India, the government repealed the Gift Tax Act in 1998 and the Estate Duty Act in the late eighties.
Tax Structure in Indian Environment

Introduction The average age of citizens in the country has gone up substantially, since independence. In fact, it is improving with every passing year. Today, persons deriving income from pension and other related sources constitute a significant segment of population and consequently of taxpayers in the country. These people, who have either retired or are on the verge of retiring, require special attention. In the absence of an organized social security system in the country, the Government has felt compelled to address the special problems for this group of people. Their problems are variant. These senior citizens, who have lived comfortable lives, post-retirement, are usually constrained to depend upon fixed monthly incomes by way of pension. This, even as, they continue to discharge important responsibilities, such as acquiring a residential accommodation, marriage of children, education of grown-up children, looking after sick spouse, etc. In these circumstances, it is important for such persons to know how much money they will be left with each year after paying taxes to meet their varied needs. An attempt has been made here to illustrate to the senior tax payers what their rights are and their obligations under the Income-tax and Wealth Tax Acts. This will help them plan for their future in an organized manner and discharge their tax liability under the Direct Tax Laws correctly and in time without any hitches. The basic scheme of taxation under Income-tax Act, 1961 envisages a single annual tax on the total income of the previous year at the rates indicated in the relevant Finance Act for the assessment year in accordance with the law applicable to the latter. In the case of a resident, the scope of total income includes all incomes of the previous year earned by the tax payer, regardless of where these incomes accrued, arose or were received. On the other hand in the case of a non-resident, or a person who is resident but not ordinarily resident, only the following incomes earned by him are includible in his total income. A. Incomes which accrued or arose to him in India during the previous year or which are deemed to have so accrued or arisen or;
Income Tax: Legal Introduction Indian Income Tax law

The Indian Income Tax law is a highly complicated and confusing piece of document. For the common man the task of understanding the procedure and provisions of law is daunting, to say the least. Not only is the process of tax calculation very difficult, its practical implementation is tedious and cumbersome. However, under the law, the taxpayer is legitimately entitled to plan his taxes in such a manner that his tax liability is minimal. Tax Planning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and reduces the tax liability to minimal. As long as you are within the framework of law, you can plan your financial affairs. However, in the name of tax planning, you can not indulge in Tax Avoidance or Tax Evasion. And the line between Tax Planning and Tax Avoidance is very thin, so you need to tread carefully. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable Tax Avoidance and not Tax Planning. An attempt is made in the following pages to present a bird eyes view of the Indian Income Tax laws so that you can avoid making trips to your chartered accountant and by taking advantage of the available legal avenues for tax planning, reduce your tax liability. This material does not deal in procedural matters such as assessment, appeals and revisions. To begin with lets understand the structure of tax regime in the country. Taxes are the basic source of revenue to the government. Revenue so raised is utilised for meeting the expenses of government as well as to carry out developmental works. There are basically two types of taxes, Direct and Indirect taxes. Direct taxes are those, which are, collected by the government directly from the tax payer through levies such as income tax,
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B. Incomes which were received in India during the previous year or which are deemed to have been so received. C. Incomes which accrued or arose to him outside India if derived from a business controlled in, or a profession set up in India (applicable only in the case of a person who is resident but not ordinarily resident). Thus these concepts viz., residential status, previous year and assessment year are very relevant in determining the tax liability of a taxpayer including a pensioner. Analysis Taxes are the basic source of revenue to the government. Revenue so raised is utilized for meeting the expenses of government as well as to carry out developmental works. There are basically two types of taxes: Direct Taxes
whereas to amend the Income Tax Act, Amendment to the Bill has to be passed in the Parliament. However, in case of conflict between the Act and the Rules, the provisions of the Act shall prevail. Circulars Issued by the CBDT For the guidance of the Income Tax Officers and the general public, the CBDT issues circulars on certain taxation matters. These circulars are binding on the Income Tax Officers. However, circulars cannot change the provisions of law; they can merely clarify the law or relax certain provisions in favor of the taxpayers. In event of a dispute, the Courts are not bound by the circulars. Case Laws and Doctrine of Precedents Decisions of the tax tribunals and courts on disputes pertaining to aspects of the income tax law form case laws. Case laws result in formation of precedents in law. i.e. in case a similar dispute arising in future, the decision of the court on that point may be used to decide the current dispute. The decisions of the Supreme Court, however, are binding on all lower Courts and tax authorities in India. High Court decisions are binding only in the states, which are within the jurisdiction of that particular High Court. However, decision on one High Court has persuasive power over other High Courts when deciding similar issues. Basic Terms & Definitions in used in the Income Tax Act i. The term person under U/s 2(31) includes an individual, a Hindu Undivided Family, a Partnership Firm, a Company, an Association of Persons, a Body of Individual, a Local Authority and every other Artificial Juridical Entity.
Indirect Taxes
Direct Taxes are those, which are, collected by the government directly from the taxpayer through levies such as income tax, wealth tax and interest tax. Indirect Taxes comprise of excise duty, sales tax, customs duty and value added tax. In India direct taxes form 30 per cent of governments revenue while indirect taxes contribute a larger chunk of 70 per cent. Gift tax and estate duty were part of the direct tax revenue. As an ongoing process of simplification and rationalization of the direct tax structure in India, the government repealed the Gift Tax Act in 1998 and the Estate Duty Act in the late eighties. To understand Income Tax law in India, the first step is to identify what constitutes Income Tax law.
Components of Indian Tax Law

Income Tax Law in India consists of the following: The Income Tax Act, 1961 The Indian constitution has empowered only the Central Government to levy and collect Income Tax. The Income Tax Act was enacted in 1961. The Act come into force from the 1st of April 1962 and extends to the whole of India. It consists of over 400 sections and 12 schedules. The Income Tax Act determines which persons are liable to pay tax and in respect of which income. The various sections lay down the law of income tax and the schedules elucidate certain procedures and give certain lists, which are referred to, in the sections. However, the Act does not prescribe the rates of Income Tax. These rates are prescribed every year by the Finance Act (popularly known as The Budget) This is done mainly to give incentives for investment in priority sectors, to discourage tax evasion, to remove loopholes in the law and to synchronize the law with the existing economic situation. The Income Tax Rules, 1962 The Income Tax Act empowers the Central Board of Direct Taxes (CBDT) to formulate rules for implementing the provisions of the Act. Income Tax Rules have been kept separate from the Act as the rules can be amended more easily than the Act. Rules can be amended by merely publishing a notification in the Official Gazette of the Government of India
ii. The term assessee is a person by whom any tax or any other sum of money (for example interest, penalty, fine, etc) is payable under the Income Tax Act and includes: A person in whose respect proceedings for determining income has commenced by the Income Tax Department. Thus, a person may become assessee even if no amount is payable by him under the Income Tax Act. A Deemed assessee is a person who is himself not an assessee but is treated as an assessee for the purposes of the Income tax Act. For example the trustee of a trust is a deemed assessee in respect of the trust. The income earned is the income of the trust but is assessed in the hands of the trustee as his income. An assessee in default i.e. a person on whom certain obligations have been imposed under the Income Tax Act but who has failed to carry out those obligations. For example any person who employees another person has to deduct income tax at source from the taxable salary of the employee and pay the tax deducted at source to the government within the prescribed time as income tax paid on behalf of the employee. In case the employer fails to carry out these obligations, he becomes an assessee in default. iii. The term Assessment year (AY) means the period of 12 months commencing on the 1st day of April each year.
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iv. The term Previous year (PY) means the financial year immediately preceding the assessment year. In case of a business or profession that is newly started, the previous year commences from the date of commencement of the new business or profession up to the next 31st day of March, unless the person is an existing assessee. v. The term Assessment includes re-assessment. It is the process of determining the income of an assessee earned during any previous year and finding out the income tax, interest or other sum payable under the Act. vi. The term income as defined in the Income Tax Act is of an inclusive nature i.e. apart from the items listed below in the definition, any receipt that satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly. Income Includes Profits or Gains from business or profession including any benefit, amenity, perquisite obtained in the course of such business or profession. Salary Income including any benefit, allowance, amenity or perquisite obtained in addition to or in lieu of salary. Dividend Income Winnings from lotteries, crossword puzzles, races, games, gambling or betting Capital Gains on sale of capital assets. Amounts received under a KeyMan Insurance Policy i.e. a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. Voluntary contributions received by a religious or charitable trust or scientific research association or a sports promotion association. Between themselves, these heads of income exhaust all possible types of income that can accrue to or be received by taxpayers. Residential Status Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. An individual or HUF (Hindu Undivided Family) assessee who is resident in India may be further classified into Resident and ordinarily resident Resident but not ordinarily resident. Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident and lowest on a non-resident. Therefore, it is in the assesses advantage that he claims nonresident status if he satisfies the conditions for becoming a non-resident. Scope of Total Income and Incidence of Tax As already discussed, the incidence of income tax is highest in the case of ROR and lowest in case of NR. While the residential status of an assessee will determine the scope of his income the legal status (i.e. individual, HUF, firm, company, AOP, etc) will
determine the rate of income tax applicable to the assessee. The following chart indicates the tax incidence on income in different situations depending on the residential status of the assessee:Analysis of tax incidence in various cases
ROR Income received in India Income deemed to be received in India Income accruing or arising in India Income deemed to accrue or arise in India Yes Yes Yes Yes RNOR Yes Yes Yes Yes Yes No NR Yes Yes Yes Yes No No
Income received/ accrued outside India from a Yes business in India Income received/ accrued outside India from a Yes business controlled outside India
Income deemed to be received refers to income, which is not actually received in the hands of the assessee but is nevertheless his income and is to be treated as if it has been actually received by him. The following incomes are deemed to have been received in India: 1. Income Tax deducted at source from income received by the assessee 2. Annual accretions to the balance of an employee-assessee with a recognized Provident Fund to the extent such accretions are taxable. Any contribution by the employer in excess of 12 per cent of the employees salary to the PF and interest payable on the balance in excess of 12 per cent paid accordingly deemed to be received in India and taxed though there is no actual receipt. Income deemed to accrue refers to income, which has not actually accrued in the hands of the assessee but is nevertheless his income and is to be treated as if it has actually accrued in his favor. The following incomes are deemed to have been received in India: All income accruing or arising, whether directly or indirectly: Through or from any business connection in India Through or from any property in India Through / from an asset / source of income in India Through transfer of capital asset in India Salaries earned in India or for services rendered in India. Income payable for service rendered in India and for the rest period preceded and succeeded by services rendered in India and forming part of the service contract of employment shall be treated as income earned in India. Salaries payable by the government to an Indian citizen for service outside India. However any allowance or perquisite paid abroad is fully exempt from tax under section 10(7). Dividends paid by an Indian Company outside India. Interest/Royalty/Fees for Technical Services payable by:The government
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Any resident person, (unless the interest is payable on any debt for a business or profession carried on by him outside India or for earning any income from any source outside India), or Any non-resident person, when the interest is payable on any debt incurred or moneys borrowed and used for a business or profession carried on by him in India. For example: Mr. Nagpal has the following income during financial year 19992000. Compute his taxable income if he is (i) ROR (ii) RNOR (iii) NR for that year. Interest from Bank Deposit in UK (1/3 received in India) Rs6,000 Rent from property in UK received in India - Rs12,000 Pension from a former Indian employer received in UK Rs50,000 Income earned from a business set up in UK and controlled from UK - Rs.25,000 Income earned from a business set up in UK and controlled from India- Rs50,000 Taxable Income in India will be as follows:-
Net income range Rates of income-tax Assessment year 2000-2001 & 2001-2002 Up to Rs. 50,000 Nil: Rs. 50,000-Rs. 60,000 10 per cent of the amount by which the total income exceeds Rs. 50,000; Rs. 60,000- Rs.1,50,000 Rs. 1,000 plus 20 per cent of the amount by which the total income excees Rs. 60,000 Rs. 1,50,000 and above Rs. 19,000 plus 30 per cent of the amount by which the total income exceeds Rs. 1,50,000
Surcharge in Financial Year 2000-2001 (Assessment year 2001-2002) In respect of income of all categories of tax payer, the rates of income-tax have undergone little modification for the F.Y 20002001. The table below gives the income slabs and the proposed rates surcharge on tax payable that is applicable for the F.Y 20002001.
Income slab
Interest from Bank Deposit in UK Rent from property in UK Pension from Indian employer Income from business in UK and controlled from UK Income from business in UK but controlled from India Total income ROR 6000 12000 50000 25000 50000 143000 RNOR 2000 0 50000 0 50000 102000 NR 2000 0 50000 0 0 52000
Existing rate of surcharge (A.Y 20002001) NIL
Surchage for A.Y. (20012002)
Marginal relief for A.Y. (20012002) NIL
Total Income upto 60,000/Total Income exceeding Rs 60,000/- but not exceeding Rs 1,50,000/ -. Total Income exceeding Rs 1,50,000/ -
NIL
10%
10%
Note1
How do We Compute Taxable Income in India? Income is first to be computed in accordance with the provisions governing a particular head of income. The final figures of income or loss under each head of income, after allowing for stipulated deductions, allowances and other adjustments, are then aggregated to arrive at the gross total income. From the latter, further deductions are allowed in respect of certain kinds of income and expenditure under Chapter VI-A of the Act. The resultant figure is then, in terms of Section 288A, rounded off to the nearest ten rupees. Rates of Income Tax Individuals, HUF, Association of Persons & Body of Individuals. The tax rates applicable to indivuduals are also applicable to Hindu Undivided Family, an Association of Persons and Body of Individuals. Though certain specified incomes like long term capital gains, winnings from lottery etc. are taxable at the rate specified in the Income tax Act itself, the general tax rates applicable for the assessment year 2000-2001 and 2001-2002 are as follows :
10%
15%
Note 2
* Note1 :- If the net income exceeds Rs. 60,000 the total amount payable as Income Tax and Surcharge on such income shall not exceed the the total amount payable as income tax on the net income of Rs.60,000 (i.e Rs. 1,000) by more than the amount of income that exceeds Rs. 60,000. ** Note 2 :- If the net income exceeds Rs. 1,50,000 the total amount payable as Income Tax and Surcharge on such income shall not exceed the the total amount payable as income tax on the net income of Rs. 1,50,000 (i.e. Rs. 20,900) by more than the amount of income that exceeds Rs. 1,50,000. The surcharge is payable after calculating rebate u/s 88 and 88.B. However, no change is proposed in the rate structure. Surcharge on the excess of Income over Rs 60,000/- is limited to the amount by which the income is more than Rs 60,000/Surcharge on the excess of Income over Rs 150000/- is limited to the amount by which the income is more than Rs 150000/-. In the case of Cooperative societies surcharge at the rate of 10% of tax payable is proposed for F.Y 2000-2001.
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In the case of Resident Firms, surcharge at the rate of 10% of tax payable is proposed for F.Y 2000-2001. In the case of local authorities, surcharge at the rate of 10% on tax payable is proposed for F.Y 2000-2001. In the case of Companies, existing surcharge at the rate of 10% on tax payable is retained. No surcharge is payable in the case of Foreign Companies. Calculation of Taxable Income of Mr. Shrikant I can take an example for the previous year 1.4.2000 to 1.4.2001 corresponding to the assessment year 2001-2002. Mr. Shrikant, a pensioner had four sources of income viz. Salary (Rs. 6000), pension (Rs. 36000), dividend (Rs. 3000) and bank interest (Rs. 15000). The figure of total income under the Income-tax Act may not always coincide with the figure based on the popular conception of the term. The two computations below will indicate the difference between the concept of total income in popular sense and for tax purposes.
Name of the assessee Assessment year Previous year Computation of income in popular sense: Pension Salary Dividends Bank interest Total income Mr. Shrikant 2001-2002 2000-2001 Rs. 36,000 Rs. 6,000 Rs. 3,000 Rs. 15,000 Rs. 60,000
2nd Step
We will aggregate the income under each head to arrive at the gross total income
I II Income from Salaries Income from other sources Gross total income
3rd Step:
Rs. 28,000 Rs. 15,000 ________ Rs. 43,000
Then we will allow deductions from Gross total income under Chapter VI-A of Income Tax Act
Less: Deduction under section n 80L for bank interest Total income Rs. 12,000 _________ Rs. 31,000
Now if we suppose further that the assessee also owns a selfoccupied house in respect of which he has to pay interest of Rs. 30,000 p.a. on capital borrowed for the construction or purchase of the house (before 1.4.99). He will, in that event be allowed a deduction of Rs. 30,000 (the maximum admissible u/s 24(l)(vi) read with Section 24(2) for the assessment year 20012002. The gross total income will thus come down to Rs. 13,000 and taxable income to Rs. 1,000. Since this would be very much below the taxable limit for the year 2001-2002 of Rs. 50,000, no tax would be payable by this person. From the figures as given earlier, it would be seen that as against the receipts of Rs. 60,000, the taxable income is reduced to Rs. 1,000 only, because of benefits/ concessions available under the Income-tax Law. (Interest on borrowing can be claimed as deduction only by the person who has acquired or constructed the property with borrowed fund. It is not available to the successor to the property. If the successor has not utilized borrowed funds for acquisition or construction of property). In the context of benefit of interest concerning self-occupied residential property it needs to be mentioned that deduction regarding interest relating to borrowed funds for construction or acquisition of such property have been substantially liberalized as under: i. Where the property is acquired or constructed with capital borrowed on or after 1.4.1999 and such acquisition or construction is completed before 1st April 2003, the figure of Rs. 30,000 would get increased to Rs. 1,00,000 (maximum amount deductible).
Computation of Total Income for Tax Purposes

1st step
We will do the computation of income under each head separately.
Salaries: a) Pension b) Salaries
Rs. 36,000 Rs. 6,000 ________ Rs. 42,000
Less: Standard deduction u/s 16(i) Rs. 25000 or 33.33 % of income Rs. 14,000 whichever is lower 33.33 % being lower is deductible Rs. 14000 Income under the head 'Salaries' Rs. 28,000 II Other sources: Bank interest dividend from Indian Companies (NIL being exempt under section 10(33) presuming that it satisfies condition of section 115-O Income from other sources
Rs. 15,000 NIL Rs. 15,000
ii. With effect from 1.4.2002 i.e. for the assessment year 20022003, the figure of Rs. one lakh has been increased to Rs. One lakh fifty thousand, if the conditions mentioned at (i) are satisfied. Who has to File Return! Every person being a company and every other person who has taxable income during any previous year must furnish a return of income in the prescribed form and verified in the prescribed
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manner giving the prescribed details on or before the due date for such furnishing. Every person who satisfies any one of the following six criteria will also have to file a return of income:He is in occupation of an immovable property exceeding a specified floor area, whether by way or ownership, tenancy or otherwise He is the owner or the lessee of a motor vehicle (Owner of a two wheeler is not considered for this purpose) He is a subscriber to a telephone, including a mobile phone He has incurred expenditure for himself or any other person on travel to any foreign country other than neighbouring countries or to such places of pilgrimage as the CBDT notify (Pilgrimage to Nepal or Hajj) He is the holder of a credit card other than an add-on credit card issued by any bank or institution He is a member of a club where entrance fee charged is Rs 25,000 or more How do We File Returns in India? Due date for this purpose means:31 October of the relevant AY where the assessee is a company. Where the assessee is not a company and his accounts are required to be audited under the Income Tax Act or any other law for the time being in force or where an accountants report is required u/s 80 HHC or 80HHD or where the prescribed certificate is required to be furnished u/s 80 R or 80 RR or 80 RRA or where the assessee is a co-operative society or in case of a working partner of a firm whose accounts are required to be audited, 31 October of the relevant AY Also in the case of an assessee to whose return such audited accounts are to be attached. 31 July of the relevant AY in all other cases. What is Permanent Account Number? Permanent Account Number is a number by which the Assessing Officer can identify any person. Presently the Income Tax Department is allotting PAN under the New Series to all assessees, which consists of ten alphanumeric characters and is issued in the form of a laminated card. The PAN is ultimately meant to supplant the General Index Register Number, which is currently in use. The General Index Register Number is a number given an Assessing Officer to the assessees in the General Index Register maintained by him which also contains the designation and the particulars of the Assessing Officer. As per section 139A of the Act obtaining PAN is a must for the following persons: 1. Any person whose total income or the total income of any other person in respect of which he is assessable under the Act exceeds the maximum amount that is not chargeable to tax. 2. Any person who is carrying on any business or profession whose total sales, turnover or gross receipts are or is likely to exceed Rs. 5 lacs in any previous year. 3. Any person who is required to furnish a return of income under section 139(4) of the Act.
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The requirement for applying for allotment of PAN under the New Series has now been extended to the whole of India. PAN is required to be quoted in all the transactions mentioned below: In all returns and in all correspondence with the department. In all challans for payment of any tax or sum due to the department. In certain notified transaction. Findings The Indian Income Tax law is a highly complicated and confusing piece of document. For the common man the task of understanding the procedure and provisions of law is daunting, to say the least. Not only is the process of tax calculation very difficult, its practical implementation is tedious and cumbersome. However, under the law, the taxpayer is legitimately entitled to plan his taxes in such a manner that his tax liability is minimal. Tax Planning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and reduces the tax liability to minimal Conclusion As long as we are within the framework of law, we can plan our financial affairs. However, in the name of tax planning, we cannot indulge in Tax Avoidance or Tax Evasion. And the line between Tax Planning and Tax Avoidance is very thin, so we need to tread carefully. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable Tax Avoidance and not Tax Planning Recommendations The law should not be highly complicated and confusing. The common man should be able to understand the procedure and provisions of law The practical implementation and the process should be easily accessible to every citizen of the country.
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LESSON 37: COMPARATIVE INTERNATIONAL COMPENSATION

Latest Trends in Compensation Management often provided on site in which case there might be no local currency payment. A lump sum for the contract, agreed in advance, is then paid in the UK. Alternatively, or additionally, terms and conditions of employment may be determined by the type of assignment as in the following four examples: Commuter Assignments The commuter assignment has mainly developed in response to the growing unwillingness of employees to disrupt childrens education or the career of a spouse for the sake of full expatriate assignment. Such assignments are usually confined to European countries where it is relatively manageable to work in one country during the week and travel home at weekends. Although it is not unheard of for Eurocommuters to sustain this pattern of work indefinitely, it inevitably puts a strain on family life and can also make it difficult for the employee to feel truly integrated into the work environment. However, one of the main advantages for the employer is that it can be significantly cheaper than a full expatriate assignment. Small, serviced apartments can be rented instead of larger, more costly family homes and the added cost of moving children to international schools or boarding schools is avoided. Short-term Assignments The definition of a short-term assignment varies from company to company but often refers to a period which does not exceed six months. Some companies choose to make the break point at three months: others at the point where the employee becomes liable for tax in the host country. Managers from company headquarters frequently spend periods of approximately six months in the offices of an overseas subsidiary when it. is newly acquired or established and, in this capacity, are typical short-term assignees. If the assignment does not exceed three months or so, these employees are usually retained on their UK salary and given a daily rate (per diem allowance) in local currency calculated to incorporate the likely costs of hotels, meals, taxis and sundry items such as laundry. In cases where assignees rent serviced apartments instead of staying in a hotel, the per diem rate will be modified to reflect a different lifestyle. It is unusual for a short-term assignee to be accompanied by family in the host location and as a result it is normal for the employer to pay for a reasonable number of flights home which can be used either by the employee or family. Any additional tax liability arising from the assignment is usually met by the employer. Quite often short-term assignments develop into much longer assignments. For this reason it is recommended that the terms and conditions be compatible with any existing long-term
Learning Objective

To understand the Concept of International Remuneration To know Contract work To understand Human Resource Operation (HRO): IT in HR? Infotech To know Executive Compensation Review To study a Case Study of an Internation
Concept of International Remuneration

The continuing development of emerging markets and improved global communications have made it essential for UK companies to compete with an international market in order to survive. UK staff in many organizations will, therefore, find themselves sent abroad to further the development of their employers overseas interests. International companies will also increasingly expect senior employees to be mobile across geographical areas to gain international experience as part of their management development programme. Most employers remain wedded to the traditional home-based method of expatriate pay. This is despite a growing desire to inject a degree of innovation and alignment with business strategy into the complicated area of international reward. It is becoming more apparent that the one size fits all approach to expatriate remuneration is not necessarily the most effective. In recent years the rapid growth of emerging markets and the need to develop employees for management roles across global organizations has highlighted many of the shortcomings of adhering to remuneration methods with colonial roots. In short, managing an increasing number of nationalities, from both developed and developing countries, at different stages of their careers, highlights the difficulty of imposing a single remuneration system across the expatriate work-force. Terms and Conditions of Employment The terms and conditions of employment while abroad typically depend upon the nature of the work as in the following two examples: Feasibility Studies Where an employee or team of employees visits a territory to assess the potential market for their companys goods or services. These visits rarely last longer than a month and the method of payment is usually no more sophisticated than a reimbursement of expenses.
Contract Work
Construction or civil engineering companies typically recruit contract staff for specific projects. Food and accommodation is
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policy, so allowing one assignment effectively to dovetail into another and avoiding an administratively complex transition. Expatriate Status Employing local nationals is usually much cheaper and has distinct local political advantages (eg in the Middle East, where localization is a strong national imperative for many countries) by comparison with expatriation. but many multinational companies adhere to a policy of mixing the local work-force with at least some management from UK headquarters. These managers arc still usually employees of the parent company and may be kept on the UK payroll although it is increasingly common for expatriates to be transferred to the local payroll in developed countries. The length of an assignment is usually linked to the business purpose. Assignments intended for training purposes are usually of the shortest duration, typically lasting around one year. Assignees performing a management function. or who are on assignment to train and identify a local successor, usually last considerably longer. Such assignments can last from three to five years and are sometimes even longer in emerging markets where the time necessary to achieve business objectives is often underestimated. For example, in South-East Asian countries, it can take a long time to win the loyalty and trust of local management who take a dim view of what might be considered to be a too rapid turnover of expatriate staff. Secondment Secondment is frequently confused with expatriation and some companies do not distinguish between the two. However, it is generally accepted that the difference is contractual; for the duration of an assignment, a secondee is employed by the subsidiary company rather than the parent company and the source of remuneration is local.
once or twice a year for leave, or need to go to a holiday resort for rest and recuperation. Accommodation costs, relocation expenses, language training and UK boarding school fees are further financial burdens to be carried by the employer. Enter a new animal called human resources outsourcing, which promises to be just that. Fed with new software technology and attitude, its happily chewing away at the traditional HR department setup, paring it down to the bone. Youre posted in a new city. Youre harassed and distressed, and unable to find a house to stay in. Who do you call? The boss at headquarters? The human resources guys? You might as well call up your mother and pour your heart out. Wouldnt it be nice if there was someone, somewhere, whose sole business was to look after you, the (temporarily) hapless employee? Enter a new animal called human resources outsourcing, which promises to be just that. Fed with new software technology and attitude, its happily chewing away at the traditional HR department setup, paring it down to the bone. Starting from basic payroll administration, HRO firms in India are now nibbling at higher-end functions like recruitment, training, appraisals, counselling, compensation and career planning. Thereby setting a new agenda for HR professionals in the corporate sector. As Manish Sabarwal, managing director of the Rs 20 crore India Life Hewitt (ILH), pithily puts it: Were there to take care of the backroom. Company HR can now move to the boardroom. Ideally, corporate HR departments should consist of a few good men who will devote their time to organisation design, competency development, talent and motivation management, and all those other processes that form chapters of organisational behaviour texts in business schools. Are company HR departments ready to play? RPG group president (HR) Arvind Agarwal, who is also president of the National HRD Network, says human resources outsourcing could definitely give a boost to the profession. HR professionals will have to start adding value to the organisation. For too long theyve pretended to be busy doing utterly routine tasks, he says. Agarwal first initiated HRO at e-RPG, a company that didnt survive the dotcom shakeout. But the experiment convinced RPG of the benefits, and the group has now implemented it at one of its oldest companies, the Calcutta-based Phillip Carbon Black. Not every corporate house is as enamoured. The AV Birla group has brought in HR consultants for limited periods to design and implement compensation structuring and 360degree feedback systems, but Santrupt Misra, Director (HR), Birla Management Corporation, is wary about taking it too far. HRO is fashionable and I personally have nothing against it. But theres been no proper research into the cost benefits. For the time being, we dont plan to use it in a major away, he says.
HRO: IT in HR? - Infotech

And given their minimum salaries and establishment costs ... Anderson, which recently launched its international e-HR ... backup required to install the latest in HR How much expatriates are paid depends upon their job and status, personal commitments, the territory to which they are assigned and other variables. An expression commonly found in the policy documents of multinational companies runs approximately thus: the aim of the expatriate remuneration policy is to ensure that individuals are neither better nor worse off as a result of their overseas tour of duty. However, more and more companies are now increasingly unwilling to commit to such statements faced with the spiralling cost of expatriate assignments and an increased focus on the real cost value to the company of sending employees abroad. It is often only possible to maintain an expatriates home standard of living at significant cost to the company. The cost of sending an employee abroad far exceeds the salary outlay. In addition, the company must consider the air fares to and from the destination which are not insignificant when individuals are accompanied by their families and may return
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In all fairness, the original USP of human resources outsourcing as being a cost saver may not sway established manufacturing companies of the kind that make up the Birla group. They may also not be swayed by the argument that HRO can handle it better, but thats what HRO firms are currently hardselling. Says Ajit Kumar, partner at Accenture, which has estimated the current Indian BPO market at Rs 325 crore, and growing at 50 per cent annually: Business process outsourcing (BPO) is no longer cost-driven but value-driven. Whats a back-office cost for a corporate is transformed into front-office revenue for a BPO firm, which will naturally deliver better value. They would have better technology and better practices. HR outsourcing has best thrived in a scenario of change: startups, mergers and acquisitions, and voluntary retirement schemes. When the financial sector was opened up in the 90s, the transnationals that moved in had no inclination, time or office space for HR, a function they gladly outsourced to accountancy firms. Says Harish Chopra, whose firm Harish Chopra & Associates has garnered a large chunk of financial sector HRO over the years: An investment bank would prefer to recruit investment bankers rather than HR specialists. And given their minimum salaries and establishment costs, HR administration would cost them twice as much. Firms like ILH and HCA are trying to add depth to their services. For one, they now interact directly with employees of client organisations, considered taboo in the past. While Chopra has restricted the interaction to e-mail, ILH has set up a call centre hub in Bangalore where 2.8 lakh employees from 270 client companies can call with questions on tax, perks, provident funds, investments and loans. In an average organisation, these are actually the queries that keep most of the HR departments staff busy. A year ago, ILH took over benefits and payroll administration at Pfizer just after the company had implemented VRS. Similarly, Ma Foi Management Consultants took over the entire HR function at ICIs plant in Mumbai soon after Huntsman acquired its industrial chemicals business worldwide. CHENNAI-based Ma Foi began with recruitment, but is now pushing the envelope with a gamut of HR services. These include compensation management, psychometric evaluations, training, exit interviews and wholesale outsourcing of personnel, including sales teams and manual labour. The Rs 25 crore company employed the workers that laid cables for Bharti Telecom, has on its roles the secondary sales team for Monsanto, and has a long-term contract for recruiting graduates for HSBCs upcoming call centre in Hyderabad. Ma Foi managing director Pandia Rajan points out that in the USA, the number of HR professionals working in the corporate HR departments has shrunk by 16 per cent, which directly correlates to the growth of HR outsourcing. In India too, the perceptions of what can and cannot be outsourced have been changing rapidly. With new technologies
offering increased data security, companies are seriously looking at integrated HRO. Though individual companies can also install the latest in HR packages created by Oracle and SAP, its HRO thats been at the forefront - with good reason. These web-based systems allow employees to log in to get online answers to queries on most subjects, with the option of sending e-mail or calling the firm if there are any doubts. Says Shailesh Shah, managing director of HR consulting firm Watson Wyatt: The self-service model, where employees deal with HR issues online, on their own, is becoming the favoured option worldwide. Indian companies would do well to leapfrog into the self-service mode as well. Online HR packages can be seamlessly integrated with recruiting, appraisals and training. They can also empower individuals in fantastic ways. For example, if corporates spell out the requirements of a particular job in terms of minimum qualifications and experience, and place the information on the system, it would be possible for an employee to plan his career. Conversely, when the time comes to fill a certain position, the system would throw up the names of every individual within the company who fits the bill. This is an important advantage in large organisations, where the best candidate may be posted out of immediate sight in a distant location. Says Ganesh Shermon, Partner, Arthur Anderson, which recently launched its international e-HR package in India: The system brings objectivity and removes the whimsical element in HR decisions. Instead of raw power, companies will use data and knowledge in taking decisions about their employees lives. As the former HR chief at Arvind Mills, Shermon was responsible for one of the countrys pioneering experiments in the area, when the Ahmedabad-based company hived off its entire HR department into a subsidiary. The 20-member team was to handle the HR function of Arvind Mills as well as offer its services to other corporates. But the project ultimately failed, with the cash-strapped denim company unable to provide the financial backup required to install the latest in HR technology. Today, Shermon is convinced that corporate HR is a dinosaur. In the company of the future, the head of HR in the best organisations will be line managers from core functional areas. The HR professionals will all operate from without, as consultants, he says. A case in point in Hindustan Lever, where HR Chief Prem Kamath has spent most of his career in marketing. Says consultant TV Rao, formerly with the OB faculty at IIM Ahmedabad: Youve to distinguish between HRD as in human resource development and HRD as in human resource department, which has unfortunately become the principal meaning of the term. Line managers play a key role in HR development, since its business-driven and strategy-based. Consultants can be brought in on a part-time basis here, but it cannot be wholly outsourced.
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What does all this mean, if youre posted in a new town without a roof over your head? For one, if youre connected to the online e-HR system, you could log on and find companyempanelled brokers. If that doesnt work - and your HR department has long since perished - you could call that HRO number. If you cant understand what theyre saying, its probably because theyve moved their call centre to Ethiopia to save costs. As a last resort, you could try the line manager at headquarters, namely, your boss. If the insensitive chap bites your head off, theres always Mom.
2006. Employment in this sector has increased from 1,40000 in March 2003 to 2,00000 plus by 2004. In fact it has been reported that the industry hired 200 persons every working day over the last one year. This emergence of India as a major off-shoring destination for information technology enabled services for many of the fortune 500 companies is not surprising given its lowest cost per transaction in a call centre in the world. Personnel cost per full time employee in a call centre in India is $6179 and total operating cost inclusive of additional other then salary components like administration, telecom, property rental, and depreciation is $ 11857 par employee per year. A significant contribution to the low cost transaction could be attributed to the supply of 2 million gra duates who pass out every year from approximately 270 Indian Universities many of whom could converse in English language with fluency as they have had their schooling in English medium. So it is really hardly surprising that General Electric which was one of the pioneers that realized the potential in this area reported to have saved us$340 annually by shifting its back office work to India and by employing many of these graduates for their call centre. American Express, Standard Chartered Bank, Citi Bank, British Airways, Microsoft, AOL Time Warner, Dell Computers, Morgan Stanley, J P Morgan Chase, Hewlett Packard, Prudential Insurance, Marks and Spencer, to name a few, all followed lured by huge labour cost savings. In recent years many independent companies including Indian Information Technology firms such as Wipro, Satyam and Infosys have entered the market to reach $ one billion overall annual revenue mark. According to a recent study by an International Consultancy firm McKinsey, for every one dollar of job outsourced Offshore by U.S.A., creates over $ 1.49 of value and 78 percent of this value is retained in America only 22 percent goes to outsourcing destination like India. So far as the Call Centre workers in India are concerned, they have been hailed as the harbinger of a Brave New World holding quality jobs with munificent salaries and are linked to the global economy. However, some scholars have equated call centre workers with Cyber Coolies who are brain washed into thinking that they are not salves but masters of the new world of work. They sell everything from travel packages, settling credit card bills, warn customers about overdraft, answer statement queries, catalogue shopping, etc. Somebody said they live in India but work in America. Unlike in developed Countries like U.K., Germany and Australia, unfortunately there is very little published research work to-date by academics in this field so far in India. There are consultancy reports quoted in the news papers and magazines on the issues related to workers turnover, no-poaching agreements, and retention methods but the nature of work in a call centre as such is not been given much attention. Broad objective of this study is to examine and understand the profile of workers, work norms and work organization in a third party international call centre in Mumbai.
Executive Compensation Review

Graduate recruitment update. ... was slightly lower at 18,343, although the latest average rise ... a Research File and access to the online Salary Surveys Directory. ... Graduate Recruitment Update With thousands of newly qualified graduates about to enter the labour market in search of their first job, the IDS Management Pay Review takes a look at recent surveys on graduate employment and pay prospects. The surveys are from the Association of Graduate Recruiters (AGR), the Institute for Employment Studies (IES) and the Higher Education Careers Service Unit (CSU). Salary increases for new graduates continue to outstrip inflation, but the number of available jobs is shrinking, according to a new survey from the AGR. The AGR recorded a 4.1 per cent year-on-year increase in median salary to 20,300, but graduate vacancies fell by 3.4 per cent in 2003 compared with the previous 12 months. The median starting salary reported in the CSU survey was slightly lower at 18,343, although the latest average rise was 4.5 per cent higher than last year. As well as graduate salaries and vacancies, the article also looks at graduate retention rates. A survey from the IES found that the highest retention rates were in the public and not-for-profit sectors, while graduates regarded prospects for long-term development in their company as essential. The MPR also publishes an annual research report Pay and progression for graduates 2003. This provides an accessible guide to the state of the market and gives details of planned starting salaries for this years recruits.
Tutorial Activity 1.1 A Case Study of an Internation

In India dealing with 20 International Clients for ... from recruitment and training fee to initial salary ... Conclusion The results of our case study research show ...
Worker and Work

A Case Study of an International Call Centre in India By Ramesh C Datta
Introduction
The Indian Call Centre Industry has been growing at a mindboggling growth rate of around 60 percent annually over the last 3 years. The revenues from this sector have grown from around $565 million in 1999-2000 to more than $3 billion by March 2004 and are projected to increase beyond $ 10 billion by
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Methodology
The research findings reported in this paper are based on the fieldwork conducted by the author in three large call centers. Two of these are third party call centres and the third one is a captive one of a multinational firm. Only one of these call centers permitted us to interview a sample of their workers designated as customer service associates (CSA) and who are at the lowest rung in the hierarchy of organizational structure and form majority of the workforce employed by the firm. Within the time and resources we could get to interview 78 such associates-workers with the help of a questionnaire. All the interviews were conducted either during the work breaks or before/after their work, but at the workplace itself. In addition three operations managers, three human resource managers, and three team leaders were also interviewed in an informal manner. Each of the 78 interviews took around 40 minutes. The operation manager also organized a few visits to the floor-area for us to get experience of listening to a few live customer calls and response by the associates. The call centre in which we have conducted our fieldwork is a third party outsourcing centre that started functioning about three years back. It has been doing business with 3 international clients for their voice-based work and has employed more then 900 customer service associates working full time at its Mumbai site mostly for inbound calls. However, it has more then 4000 workforce working at its five sites in India dealing with 20 International Clients for 26 processes and has total revenue of more than $40 million. Some Observations On the basis of our first few visits to the call centre we could observe the following characteristics of the workplace and its workers. a. The workplace, located in a huge modern multistoried building, occupying two full floors space area, is centrally air -conditioned and it portray atypical metropolitan college type attractive bustling fun environment. b. A typical worker-customer service associate male or female, is an energetic youngster with a college studentlooks in trendy dress getting his/her backpack checked by security guard or swiping the identity card to open electronically locked big glass doors to enter the work area. c. In the reception area 8 to 10 anxious looking youngsters could be seen every day walking-in to get interviewed / screened for employment. d. The space inside in the work-area is divided in bays where individual associates are seen sitting in front of computers with their head-set on, punching keys while interacting in formally tutored clear English or scripts, with customers. e. The bays and individual workspace consoles are well decorated with bright coloured posters, captions and partying groups or presentations ceremony camera photos. The parties, picnics, movies, festival nights like Hawaiian night, Halloween night, ethnic night, rain dances etc. are the regular monthly features in most call centres. f. All the call centers visited have a modern 24 hour serving indoor cafeteria with a large television. There is a medical
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room with bunker beds and a reading lounge with free Internet surfing facility. Profile of the Respondents Age 18 20 21 24 25 30 31 + Sex Males Females Marital Status Married Unmarried Education Undergraduates Graduates Post graduates Extra educational Courses Recruitment Mode Placement Agency Walk-in (Direct) Employee Referral Salary per Month $ 220 - 265 61.50 % $ 270 340 38.50 % Our field survey of 78 associates reveals that over 50 percent of these are under 22 years of age and 59 percent of total are females. About 13 percent of the totals are married only 15 percent are above the age of 26 years. Around 32 percent of all are undergraduates, 60 percent have completed graduate studies and about 8 percent have done post-graduation. Approximately 30 percent of our sample have had done additionaldiploma or a certificate course related to computer work. Most of the respondents in our survey have been living in the suburbs of Mumbai and come from mixed family background varying from a lower middle class family of a peon mother, or daughter of a security guard or first woman working in the family to a private sector firms general managers daughter working mainly to earn a decent pocket money for herself. An associate earns approximately $220 per months as a starting gross salary. In addition some social security benefits like house rent allowance, conveyance allowance, medical/accident cover, provident fund contribution by the employer, etc. are included in the salary package of an associate. Recruitment and Training Recruitment in the call centre is carried out by various methods but the prominent ones are through 1) walk-in-interviews, 2) employee referral scheme and 3) placement agencies. The first 48.70 % 46.20 % 5.10 % 32.10 % 60.30 % 7.70 % 29.50 % 12.80 % 87.20 % 41.00 % 59.00 % 78 All Full time 21.80 % 50.00 % 24.40 % 3.80 %
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one of these is the preferred mode as this is also cost-wise cheapest. However, this method alone is not sufficient to fulfill the demand for manpower and therefore six placement agencies shortlisted by the firm to which orders of manpower requirements are placed by the firm. These agencies are also involved in final recruitment and sometime in preliminary training of the candidates. Typically these agencies charge a recruitment fee from the call centre which is equal one-month salary of the prospective employee. However, due to the increased competition among the placement agencies in the market this outsourcing firm is paying around $150 per hire which is about a $70 less then the starting salary of an associate. And this recruitment fee is paid only if the recruited candidate stays with the firm minimally for three months. On an average a associate stay with the firm for 8 months. Interestingly during this period all the investment made in the employee from recruitment and training fee to initial salary during the training period, the operation manager claims, is recouped by the firm. One of the major reasons for this could be that the training skills required to facilitate transforming a reasonably trainable English speaking graduate to become an effectively efficient associate, are too easy to acquire especially in a work where the range of tasks is very narrow with tasks itself being routine-repetitious. In fact during the field work interviews a significant number of associates mentioned that it takes them around one month after training to acquire proficiency. Typically the training is given for eight weeks. This includes two weeks training on voice and accent. And another two weeks is on customer service. The former is aimed at in developing neutral accent and the latter underline, through the teaching of so called behavioural soft skills, the great importance of emotional labour in the work of a typical call centre. This training of four weeks is conducted by the manpower placement-cum-training agencies or further outsourced by them for the firm. While the four weeks of process training is conducted in-house by the client with the help of associates who have acquired sufficient proficiency to be designated as process trainer and who by now have began to perceive themselves as cyber sahib. Sometime fast forward batches are also run with crash course of three weeks training. This is done purely at the behest of client. Work and Work Organisation A typical associate, in the call center firm that we have studied, works in shifts and five days a week. However, an associate could sacrifice his/her off day on the request of team leader for which an extra payment of around $20 is made to the associate. One could as well be requested to extend 9 hours shift work by another 3 to 4 hours for a reward of $6. The associates are put in different shifts by rotation, and shifts are typically of 9 hours of work including 7 hours of log-inhours, two update briefing periods of fifteen minutes each, and one hour of break from work which is further divided into three short periods of 15-30-15 minutes. Rescheduling of shifts and delayed breaks are not very uncommon especially
during festive seasons like X-mas when the call flow is very high. According to one of the associate, When the call flow is high one has to raise a BLUE flag to attract attention of team leader for break and sometimes one can not go to loo even. Another one told that, If one is too tired because of lack of sleep for example, permission is granted to sleep in the medical room but work break hour has to be given up There are various work-shifts timings which are largely as per the clients requirement. Some examples of these shift timings are: 12.00 noon 2.00 pm. 9.00 pm 11.00 pm 7.30 am 9.00 am 11.00 am
10.30 pm 12.00 mid night 2.00 am -
The last one is referred to as graveyard shift. Typically a shift allowance of around $25 is paid My work typically involves answering customer calls related to card activation and statement queries on interest etc. which requires opening call punching credit card member, getting all data on the screen, control-V, copy the number activated doing verification as per procedures, closing. My day starts as per my shift timing and it could be between 12 noon to 9 p.m. any time. It typically takes me about an hour to reach here by my motorbike. Sometime I make use of company pick-up. After a smoke I go to my work area and look for my TL (team leader) for any update (scripts) and then I login My work typically involve answering to customer calls from UK related to Card Activation and statement queries on interest etc. All this require opening call saying good words, punching credit card number, getting data on the screen, control-V, Copy and Card get activated. I need to do verification as per procedures and closing I must use the name of the customer certain number of times. That is a requirement in quality. I have been doing this for quite sometime. It is boring but alright. Otherwise tell me, sir, who will pay me 11000 ($240) On the basis of such responses which were quite normal in our survey, as far as we have been able to ascertain in our fieldwork interviews with the customer service associates, the call centre work is very repetitive requiring very little depth of knowledge or experience and also require dealing with difficult customers by suppressing ones feelings or emotions. During customer service training the associates is trained on how to react to irate customers by remaining focused on service mindedness. Customers reactions like, I want to talk to some who can speak English, or My call has gone to an Indian block, or You bloody Indian, are not very uncommon. The associates informed us during the interviews that they have been trained not to take these reactions at personal level. However, another associate told us that sometime the customers comments are very nice which keeps her motivated. She was referring to an old British lady customer who said, Very nice of you to remember any birthday. I am really touched. You know my last wish is
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to come to India and die there. Will you please call me up at home and do not worry Ill pay for the call. But this particular associate also mentioned that in such cases she ends up spending more time then expected average call handling time given to her and that has a negative impact on her performance appraisal.
Unfortunately it took me 4 months to pull myself out of the bucket. I already had been given by that time verbal and written warning. In the following table performance criteria and score attached to each are given. Team Working All the associates are working in teams. A typical team is comprised of 15 associate and a team leader. Each team is given a fixed name for associates to develop identity. It took us quite sometime to understand the purpose of working in a team in call centre wherein the nature of work involves a narrow range of routine repetitive largely script and technology controlled fragmented tasks which are hardly interdependent to require shared decision-making. It seems to us that basic function of a team here is that of a social support group where-in the members depend on each other to share and get relieved of tensions, frustration, stress, anxieties and boredom of work. In fact quite a few of them get themselves relieved of anger by socializing within teams especially after interacting with difficult customers. Team leader also play a very important role of almost a counselor in resolving emotional issues involving youngsters working as associates, apart from giving regularly script updates, motivating individuals through competition among teams based on criteria like highest number of calls attended, lowest average call handling time achieved, highest login hours, best call of the week etc. etc. However, there are some elements of interdependence of work within a team. For example, team leaders performance appraisal is partly dependent on teams average performance criteria like average quality score. We believe this kind of team working in call centre is expected to help in developing a work culture of fun aided by social support to encourage social group bonding that might reduce attrition.
Nature of Work
Approximately 86 percent of the associates interviewed in our fieldwork do deal with difficult customer who sometimes abuse and also mimic to increase the average call handling time. Almost all the associates in the sample indicate that they do not show their feelings to such customers reactions and do remain focused on service. Such regular suppression of feelings lead to high use of emotional labour which could inturn becomes a cause of stress. Although about 90 percent of the associates feel that their work does not require any in-depth knowledge or experience, still the continuous call flow through the automatic call distribution system creates enough pressure on the job to work fast. If customer has to repeat, it leads to my losing on my quality scores. But this may not be because of not having answered to customers query. It could be purely because of a faulty headset or sheer noise. More than 90 percent of the associates do face noisy work environment. A significant number of associates in our field interviews perceive that their work is organize d in such a way that they have very little discretion to set their own pace of work while doing largely routinized repetitive tasks and have very little say in determining the work breaks.72 Nature of Work Due to these very features of work and work organization some researchers in the field have compared call centres to factory assembly lines where in incoming calls are force -fed, to associates on an unstoppable telephonic conveyor -belt (Arkin 1997; Taylor and Bain 1999). A very high degree of surveillance is used through technology and management techniques to appraise the performance of associates. All incoming calls and associates responses are recorded electronically. Twelve of the calls - 6 by the client and 6 by the internal quality analyst, per month are randomly picked up to assess the quality of response and performance of the associate. Additionally assessment of quality by client through mystery calls or through live barge -in is also done. Internal quality analyst and sometime clients personnel also sit next to associate to assess associates performance to give feedback. Every associate got to adhere to the average call handling time given to them by the client in the service level agreement. Quality of the call is monitored on various 30 in one case, parameters many of which are subjective related to associates behaviour and manners.I must score 90 percent on quality. Once I, by mistake pressed a letter key instead of enter. That changed the name of customer. My score on quality became less then 90 percent. I got into bucket. To come out of the bucket I had to score more than 90 percent for the next two consecutive months.
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Nature of Work and Health

As most of the Call centre work performed by the CSA is repetitive in nature providing little opportunity for task variation with long duration of same working posture, and over and above significantly at atypical hours because of the time difference between India and the clients country, a very high risk is faced by the associates towards their health getting affected. Nature of Work and Health In fact work organization that provide little task variation and autonomy, and performance management techniques involving least consultation of workers in setting targets, and subject measurement, have been found as most significant causes of stress. Our study shows that about 22 percent of our respondents suffer from back-ache problem and about 37 percent get head-ache. Around 32 percent of these have been finding difficulty in concentrating at work and 33 percent find difficult to get normal sleep. Regular changes in shift work have also affected the appetite of the associates and could have been caused by acidity resulting from irregular-interrupted eating time. Around 14 percent of these have begun smoking cigarettes.
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Answer the Questions Below Based on the Above Case Study 1. What does the results of the case study research show? 2. Discuss the role of IT Industry in the call center Industry. 3. Discuss the impact of call center work on the employees health.
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LESSON 38: INTRODUCTION TO DOWNSIZING

Latest Trends in Compensation Management organization may contract out a function that was previously done by permanent employees. The elimination of the jobs of the employees constitutes downsizing.
Learning Objective

Introduction to the Concept of Downsizing To know The Paradox of Downsizing To understand Downsizing And Organizational Culture To know Downsizing with relation to Executive compensation To study Latest Updates on Downsizing
The Paradox of Downsizing

Information will be examined as a prime determinant in the value of a stock. 5 specifically, the choice of how many workers a firm JPil1 hire or fire may be interpreted as news that signals the health 0/ that firm. Downsizing will be defined in the context of a special case 0/ the labor input strategy of a firm. Questions relating to how downsizing functions as a signal of firm health will be raised, and the methods for answering those questions will be presented The economy was strong, inflation was falling, and real GNP was growing at a steady, confident pace. Corporate profits had reached historically high levels, and investors were on a buying spree in the stock market, pushing it from one record close to the next. Unemployment had fallen to a level that many economists felt was consistent with non-accelerating inflation. Expectations of inflation were abated, and the boom seemed to be poised to last for a long time, with no economic downturn in sight. At the same time, the major corporations in the US appeared to be firing workers by the hundreds of thousands, and job insecurity had risen to a surprisingly high level. Regardless of seniority, the companys profitability, or the surging demand for the firms outputs, the threat to an employee of finding a pink slip in the next pay envelope was real and widespread. No job seemed safe. The above statements, describing the US economy in the mid 1990s, seem inconsistent not only with a standard textbook characterization of an economic boom, but also with any historically observable relationship between the labor market and other economic arenas, such as the financial market or the goods market. Politicians and unions pointed to the greed of corporate America, and the insensitivity of management to the contributions and value of workers. Standard micro economies was at a complete loss to explain the phenomenon. If strong firms were anticipating a greater demand for their products during the economic boom, and labor costs were not rising excessively relative to productivity, why were firms firing workers? The term downsizing was coined to describe the action of dismissing a large portion of a firms workforce in a short period of time, particularly when the firm was highly profitable. In a standard downsizing story, a profitable firm well-poised for growth would announce that it was firing a large percentage of its workforce. The equity market would get excited, and initiate a buying frenzy of the firms stock. This goes counter to a standard micro-economic analysis, in which a weak firm anticipates a slump in the demand for its products, and lays off
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Introduction to the Concept of Downsizing

Like culture, downsizing is problematic in its usefulness. Because it is popularly associated with giving people the axe in organization. It is not a term that many management consultants go out of their way to use. On the other side of the spectrum, there are researchers who are concerned that downsizing has become too closely associated with the process of organisational decline and its naturally negative effects. Cameron, for example, defines downsizing as a positive and purposive strategy: a set of organizational activities undertaken on the part of management of an organization and designed to improve organizational efficiency, productivity, and/or competitiveness (Cameron, 1994:194). Downsizing thus defined falls into the category of management tools for achieving desired change, much like rightsizing and reengineering. Clearly, the Cameron definition is overly expansive. Downsizing may and very likely will impact or impinge on systemic change efforts such as the introduction of total quality management, reengineering, or reinventing initiative. They are not one and the same, however, as the Cameron definition would imply. This is significant, because Camerons connection of downsizing with a larger, purposive strategy allows him to conclude unabashedly that downsizing is a good and positive thing and that organizations should seek to do it on a regular and continuing basis (Cameron, 1994). This cheery conclusion flies in the face of Camerons own four year study of thirty firms in the automotive industry, data from which revealed that very few of the organizations in the study implemented downsizing in a way that improved their effectiveness. Most deteriorated in terms of pre-downsizing levels of quality, productivity, effectiveness, and the dirty dozen, e.g., conflict, low morale, loss of trust, rigidity, scapegoating) (Cameron, Freeman, and Mishra, 1993). Downsizing is defined in this effort simply as a reduction in the size of the work force. This definition provides some analytical clarity, because it does not imply a value, either positive or negative, and encompasses a wide range of possible approaches. Thus defined, downsizing does not necessarily imply a reduction in the assets of the organization; for example, an
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workers, while a strong firm foresees a jump in the demand for its products, and hires more workers to increase production. Investors care about downsizing, since it contains severe implications for the short-term profitability and even the longterm growth of a company. A dowrisizing is quite unlike a traditional layoff: in a layoff, a worker is asked to temporarily leave during periods of weak demand, but will be asked back when business picks up. In a downsizing, the separation between a worker and a firm is permanent. A downsizing is also not a dismissal for individual incompetence, but rather a decision on the part of management to reduce the overall work force. Through a downsizing, the management inadvertently (or perhaps deliberately) signals to investors what the future economic health of the firm is. In the 1980s, the largest layoffs were executed by weak companies, who were looking market share to foreign firms, or had large drops in demand for their products. Downsizing were clearly regrettable, but understandable, as they helped the firms to survive. Such a large amount of workers was certainly unnecessary for a firm doing a smaller volume of sales, so the workers were released in large numbers over short intervals of time. Investors noticed that major layoffs were taking place, and downgraded their expectations of the firms future profitability, so they dumped the stock. Yet, this perfectly logical explanation seems inconsistent with what was actually taking place in corporate boardrooms and on the trading floors of the New York Stock Exchange of the 1990s: companies ridding themselves of workers by the thousands were strong, and had bright economic futures ahead of them. Upon learning of downsizing, the alleged signals of firm weakness, investors went on a buying spree, and sent the companys stock price soaring. This paradox leads to the first two questions addressed in this thesis: 1. Why does the value of a firm increase when it announces a downswing, especially since downswing is supposedly a signal the rough economic times ahead? 2. Why do strong firms Lay off workers in a boom, but not in a recession? Another simultaneous-and possibly related-phenomenon in the 1990s is the popularity of a new form of compensation for executive management. Instead of being paid in cash, many are now compensated in stock options. If downsizing as a strategy increases equity value (investors buy the stock of downsizers), then it increases managements compensation, and appears all the more attractive. This leads to the next issue, which seriously questions an ideology which both academics and businessmen hold dear: that stock options improve firm value by aligning the interests of owners and managers. This thesis will show that stock options are not the cure-all that many claim them to be: 3. Did the proliferation of stock options in executive compensation contribute to the wave of downsizing,
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especially downswing that engendered short-term gains, but reduced long-term firm value? By re-aligning managements interests with stockholders, the managers care more about the perceived value of the firm, not the actual value of the firm. The stock price is based only on the perceived value-a function of the limited information which shareholders can obtain. Managers will undertake strategies that will improve the perceived value of the firm, and to the extent that the two are correlated, as a by-product, management mayor may not improve the actual value of the firm. This raises an ambiguity about the relationship between downsizing and the actual strength of a firm: 4. Is downswing a signal of the strength of a firm? If so, why do firms in similar situations in a given market follow markedly different employment policies? Lastly, downsizings mayor may not be surprising to the extent that they are anticipated or accompanied by other news pertaining to earnings or mergers. There may be a systematic under or over-reaction to a given news variable. The downsizing announcement is relevant if it changes the expectation of the future cash flows that a stock will generate: 5. Does the stock market under or over-react to a downsizing? if so, what should an investor do following the announcement of a downsizing?
Downsizing and Organizational Culture

A noted scholar recently assessed downsizing as probably the most pervasive yet understudied phenomenon in the business world (Cameron, 1994). While we have become numbed by the near daily accounts of new layoffs, a New York Times national survey finding is perhaps more telling: since 1980, a family member in one-third of all U.S. households has been laid off (New York Times, 1996). By some measures, downsizing has failed abjectly as a tool to achieve the main raison detre, reduced costs. According to a Wyatt Company survey covering the period between 1985 and 1990, 89 percent of organizations which engaged in downsizing reported expense reduction as their primary goal, while only 42 percent actually reduced expenses. Downsizing for the sake of cost reduction alone has been castigated intellectually as short-sighted and neglectful of what resources will needed to increase the revenue stream of the future (Hamel and Prahalad, 1994). A truer and fuller understanding of the forces shaping and thrusting downsizing forward today comes from an appreciation of increased global competition; changing technologies, which in turn are profoundly impacting the nature of work; increasing availability of a contingent work force (Fireman, 1994); and shifting balance of power among organizational constituents away from rank and file employees and in the direction of shareholders and the chief executives who serve as their proxy, W4en we conceptualize downsizing within these broader frameworks, it becomes clear that we are speaking of downsizing both as a response to and as a catalyst of organizational culture change.
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This article will later provided a formal definition of organizational culture. For the moment, it is suggested that culture is to an organisation what personality is to an individual. As with personality, change takes time and may be hard to discern, especially for persons inside the organisation. This article will argue that, ultimately, the most prominent effects of downsizing will be in relation to culture change not in relation to saved costs or short-term productivity gains. Key drivers of organizational culture will tend to shape an organizations approach to downsizing. For whose benefit does the organization exist? What are the basic assumptions among people who work in the organization? What are the basic assumptions the organization and the employee make in relation to each other? Establishing a direct link between downsizing and organizational culture is not an easy matter, however, as the following example will demonstrate. The Chief Executive Officer of Apple Computer recently bought himself more time with disgruntled shareholders by promising to take forceful action on a number of fronts, including downsizing. The executive cited five crises: lack of cash; declining quality; a failed operating system development project; Apples chaotic culture; and a fragmented strategy (Mark off, 1997). How do you connect downsizing, which is one of a number of actions being taken, with corporate culture, which is only one of a number of crises being solved in a manner and to a level that establishes a positive relationship? . Another reason that it is difficult to draw a specific link between downsizing and organizational culture is that there are many different variations and approaches to downsizing. A distinction has been made between proactive downsizing, which is planned in advance and usually integrated with a larger set of objectives, and reactive downsizing, which would be typified by cost-cutting as a last resort after a prolonged period of inattention to looming problems by management (Kozlowski et. al., 1991). Work force reductions can range from forceful in nature, i.e., involuntary reductions, to the milder approaches, such as resignation incentives and job sharing (Sutton and D Aunno, 1989). There are different ways of deciding who stays, who goes from the outwardly arbitrary to criterion-based (Brockner, 1992). There are different modes of planning, ranging from secretive sessions to open discussions and solicitation of ideas from employees. There are different standards of notice of terminations, including relatively harsh same day terminations as well as more generous 90 day or longer notices. There are even differences in internationality, Le, reductions can be planned to present employees with as little a break as possible from what they have known in the past or they can be designed to be deliberately disruptive to the status quo (Noer, 1993). Downsizing Impact on Culture For organizations, particularly the IBMs and Digital Equipments of the world which long resisted layoffs, it is hard to image that the organizations or their cultures have remained
anything close to intact. Getting back to the questions posed earlier:

1. For Whose Benefit does the Organization Exist?
It seems clear that organizations exist less today for the wellbeing of rank-and file employees than they once did. With the Dow shattering all records, it seems clear that the shareholders have the upper hand in making critical corporate decisions. They are partnered with CEOs who received an average pay raise in 1995 of23% (Washington Post, 3/5/96). Just look at who is prospering and who is not.
2. What are the Basic Assumptions Among People About Working Relationships in the Organization?
The basic assumptions about working relationships have changed, in ways that can not yet be well assessed. It appears, at least, that relationships tend to be less familial and more competitive than in the past. What is the worth of what have traditionally been termed commitment and loyalty? We just do not know? What is the impact of the feeling that the organization is a community even a family - with relatively stable long-term working relationships? And how will that play out in terms of cooperation given to others as opposed to backstabbing in the intense competition for scarce. resources? We can only be sure that things have changed, not how.
3. What are the Basic Assumptions the Organization and the Employee Make in Relation to Each Other?
The basic assumptions by employees and organizations about their employment relationship have changed from long-term and stable, with organizations expected to make accommodations to avoid laying people off to more short-term and contingent. Researchers such as Bridges and Noer forecast a more happy future for those who adapt to the changing times in the new scenario, but that is a difficult forecast to test. Organizations usually have some degree of flexibility about how they reduce personnel expenses. Decisions to inflict pain upon employees as part of the process may very well reflect an effort to bust the existing culture. Decisions to minimize pain may reflect an effort to reinforce the existing culture.
Downsizing Executive compensation

It Starts with the CEO Chief executive officers (CEOs) get paid lots of money for being the top employees in the company. Why do they get paid so much? Like athletes and actors, CEOs provide a level of talent that is required to produce the desired product - in this case, a strongly performing company. The skills and responsibilities that come with the job of CEO are extreme and the number of people who can fill these roles is limited. That is why the market has determined that people with these skills are worth a lot of money to their companies. Only about 20 percent of a CEOs pay is base salary; the rest is made up of incentives based on the companys performance. The rationale is that if the company is performing well and the shareholders are making money, then the CEO should share in that success.
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A CEOs compensation package affects everyone within a company. Often it can be considered the yardstick by which all other employee benefits and bonuses are measured and negotiated. Moreover, the CEOs compensation may be an indicator of how well the company is performing. This performance, in turn, could translate into a more generous compensation package for individual employees who are savvy negotiators. When companies establish pay structures, they define the compensation for the highest- and lowest-paying jobs before filling in the compensation for the jobs that fall in between in the traditional Chief Executive Officer Plans and directs all aspects of an organizations policies, objectives, and initiatives. May require a bachelors degree with at least 15 years of experience in the field. Relies on experience and judgment to plan and accomplish goals. May preside over board of directors. Source: Salary. Com the compensation for the jobs that fall in between. In the traditional internal equity method of establishing a pay structure, the CEOs compensation sets a ceiling for the company, and each level below is compensated at a comparably lower level. If you know how well the CEO is compensated, you can get a sense for how generous the company is likely to be toward other employees as well. CEOs make most of their money through incentives As a general rule, base salary accounts for just 20 percent of a CEOs pay. The other 80 percent comes from performancebased pay. Base pay for the core role and responsibilities of the day-to-day running of the organization. This amount is very often less than $1 million because the IRS has imposed tax restrictions on excessive compensation. Annual bonuses for meeting annual performance objectives. Long-term incentive payments for meeting performance objectives to be achieved for a two- to five-year period. These awards are sometimes described as performance shares, performance units, or long-term cash incentives. Restricted stock awards as an incentive to assure the executives are strongly aligned with the interests of shareholders. Because restricted stock awards have an actual cash value when they are granted, the proxy table shows these in dollars, not in shares. Stock options and stock appreciation rights (SARs) for increasing share price and increasing the shareholders returns. Options have very favorable accounting treatment for the company, which is why they are so common. Option grants are always shown as a number of shares underlying the option. In a subsequent table in the proxy is an estimation of the present value of each option grant assuming a 5 percent and a 10 percent increase per year in the stock price, or using a mathematical model (e.g., Black Scholes) to predict the value of the option. Total compensation for CEOs goes beyond cash and stock Although typically excluded from pay calculations, executive benefits and perquisites are disclosed in the summary compen-
sation table and the retirement plan section of the proxy. They include the following. Supplemental executive retirement plans (SERPs), which may keep the executive whole (that is, make up the difference) or better from a tax regulation that prevents the executive from receiving a pension benefit that exceeds ERISA limits ($135,000 per year or less based on the pension plan). For a CEO making $2 million a year, a $135,000 benefit may be inadequate for maintaining a comparable lifestyle. Executive insurance plans that provide a source of retirement income and a richer death benefit to the executives family. These plans are used to guarantee retirement benefits from bankruptcy. Unlike standard retirement plans that receive protection from bankruptcy by the federal government, SERP benefits can be lost in the event of bankruptcy. Miscellaneous executive perquisites and other compensation for various programs or negotiated deals that dont properly fit into the above categories, including perks such as country club dues and financial planning. These are often small numbers that disclose imputed income amounts for those additional special benefits, but can also include some very large amounts for items such as loan forgiveness, special insurance programs, relocation expenses, etc. At most companies, most of a CEOs pay comes from stock or stock option gains. At investment banks, most of it comes from annual bonuses. Companies that pay the lions share of compensation in the form of stock options may pay little or no retirement. You can tell by looking for a retirement table in the proxy statement. If the words SERP, ERISA-excess plan or Top Hat plan appear in the proxy, then retirement is an important part of the executives remuneration. If not, then the executives are expected to retire on their ability to make and save money on their cash and equity earnings. Pay philosophies often tie pay to company performance The companys Compensation Committee Report on Executive Compensation contains specifics about your companys compensation philosophy, which affects all employees. It covers the following. How well your company pays relative to its peers? Who the company sees as its peers? How the companys stock has performed relative to its peers and to the stock market as a whole? How the company prefers to reward its executives through its total pay practices, i.e., what proportion of an executives total pay comes from salary, bonus, stock options, and long-term cash plans? How the company measures its performance net income (NI), earnings per share (EPS), return on equity (ROE), return on assets (ROA), revenue growth, etc? What criteria are used for determining the size of bonus payments: corporate results, divisional results, individual goals; or whether payments are discretionary?
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The degree to which your company is a success may be answered in the annual and long-term incentive payout columns in the summary compensation table. If you see large bonus payments, then it is likely that your company is successful. Stock option grants and gains are also important to look at. This information can be gleaned from three tables in the proxy statement: the stock option grants table; the aggregate option exercises in the last fiscal year and fiscal year-end option value table; and the total return to shareholders table. If there are large gains from stock option exercises and substantial amounts in both vested and unvested stock options, it may be an indicator that the company is well managed in the opinion of shareholders. Good five-year shareholder returns in the total return to shareholders table would certainly validate this opinion. Nonprofit organizations typically offer compensation weighted heavily toward base salary. In response to competitive concerns, bonuses are becoming more prevalent as are special tax deferral programs that help executives save for retirement. Unlike comparable programs in for-profits, very few of these programs are broad-based. Participation is limited to a select few. Some watchdog organizations have been critical of the amounts paid to chief executives of nonprofit organizations. But these employers counter that they are competing for senior talent with for-profit organizations that can offer incentives such as stock options that are not available to them. Cash Compensation is the Norm in Nonprofits Nonprofit organizations typically offer compensation weighted heavily toward base salary. In response to competitive concerns, bonuses are becoming more prevalent as are special tax deferral programs that help executives save for retirement. Unlike comparable programs in for-profits, very few of these programs are broad-based. Participation is limited to a select few. Some watchdog organizations have been critical of the amounts paid to chief executives of nonprofit organizations. But these employers counter that they are competing for senior talent with for-profit organizations that can offer incentives such as stock options that are not available to them. Workers can Force Change Fortunately, CEO pay is an area in which workers can act directly through their union pension funds. Arguably, CEO pay is a direct deduction from corporate profits. This means that, insofar as CEOs receive excessively generous pay packages, the excess comes directly out of money that should be going to shareholders. In such a situation, the fiduciary responsibility that pension fund managers have to the fund not only allows them to try to rein in CEO pay, but also legally obligates them to make such an effort. Unless it can be shown that high CEO pay has somehow led to better corporate performance (the existing research indicates the opposite), pension fund managers are obligated to bring this pay under control to increase the returns to the fund. It is often argued that CEO pay cannot be controlled, because it comes mostly in the form of stock options. In some cases, stock prices go up enormously, and the CEO benefits along
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with all the other shareholders. In fact, it is a simple matter to cap the gains that a CEO can earn from rising stock prices. Contracts can be structured to Dean Baker and Archon Fung ensure that CEOs have plenty of incentive to work hard to raise stock prices but prevent them from gaining unlimited wealth if they happen to get lucky and the stock price escalates. For example, the total gains from stock options could be capped within the contract at $3 million per year, with any additional gains being returned to the firm. Proponents of the current system, in which CEOs can earn tens or hundreds of millions of dollars through stock options, often argue that these packages are necessary to tie the CEOs interests to those of the shareholders. They raise the concern that CEOs may otherwise attempt to further their own security as top managers rather than maximize the price of the companys stock. Although there is a legitimate concern here, no one has produced evidence that these sorts of packages are necessary for that purpose. Even if the potential gains were measured in the millions, instead of in the tens of millions, CEOs would still have enormous incentives to increase stock values. Furthermore, even if a CEO reached a cap on the value of options in an existing contract, he or she would still have incentive to perform well, because in most cases he or she would be in search of another contract, either from the CEOs current firm or from a new one. That firms have felt the need to evade standard accounting procedures (as determined by Financial Accounting Standards Board in their treatment of options) points to the fact that CEOs did not get their fat packages through the natural operation of the market. Union pension funds are large enough actors in the market that if they began to demand such caps, it would have a substantial impact. In principle, other investors could also gain from imposing such caps. Only the elite few who see the CEO as a friend rather than a cost will be bothered by this approach. If nothing else, union pension funds should be able to ensure that CEOs and other top executives are treated just like all other workers.
Latest Updates on Downsizing

99th report of Committee on HOME AFFAIRS The Institute of Training and Management provides induction as well as ... ii) Administration of. ... & extending the scope of new facilities for fringe benefits to the
Good Governance
34.0 Accountability has become the worst casualty because the officers who are to enforce accountability are being increasingly marginalized in the choice of appointing their subordinates to various posts, specially in the field which is the cutting edge visa-vis the people. Responsibility and rights are inseparable. There is need to restore the rights of the executive to enable it to discharge its responsibility regarding making itself accountable. 34.1 To a query posed by the Committee with regard to the specific areas/issues identified, the Government gave the reply that in order to bring about good governance, the areas/issues identified includes (i) review of administrative laws; (ii)
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formulation of Citizens charters by the Central Ministries/ Departments as also by State Governments; (iii) setting up of Information and Facilitation Counters in the Ministries/ Departments for easy and hassle free access of information by the citizen; (iv) strengthening the public Grievance Redress Mechanism which is in place in various Ministries/Departments of the Central Government; (v) implementation of a minimum agenda for promotion of e-governance for re-engineering of various processess with a view to ensure quicker delivery of public services; and (vi) documentation and dissemination of best practices in the area of administrative reforms. 35. The Committee is of the view that with the help of egovernance, computers, improvement of information technology, Freedom of Information and Citizens Charters, collection of basic data and information available with the Ministry will show a marked improvement if they are constantly updated. The Committee hopes that not only statistical information but the parameters of decision making also should in due course be made available to the people. Rightsizing of the Government 36.0 One of the main themes identified for good governance is rightsizing of Government. The size of Government machinery is critical for the success of any for efficiency and economy in Government. On being asked to elaborate on the policy paradigm of the Government in this regard, the Ministry in its written replies furnished the following replies: a. Imposition of 10% cut in the Ministries/Departments w.r.t. the sanctioned strength as on 1 January 1992. b. Restriction on creation of posts both in Plan and NonPlan. c. Restriction on filling up of posts lying vacant for more than one year. d. Setting up of Expenditure Reforms Commission to suggest a road map for reducing the functions, activities and administrative structure of the Central Government, rationalize the staff and cardres of different services, review the framework of the subsidies and also review the procedure for setting up of Government funded institutions. ERC has given in all ten reports covering 36 Ministries/Departments. The ERCs recommendations are at different stages of implementation. e. That direct recruitment would be limited to 1/3 direct recruitment vacancies arising in the year subject to further ceiling that this does not exceed 1% of the total strength of the Department. 36.1 In view of the above, the Committee wanted to know the total reduction of staff as on date to which the Government have informed that there has been total deduction of staff of 7.2 lakh from 1993 to 2001 as per explanation as given below:
(a) (b) (c) (d) (e)
(a) (b)
Reduction in staff The transfer of staff from 1 & B to Prasar Bharti The transfer of staff from Telecom to BSNL Reduction in staff in Railways Exclusion of non-Departmental agents of Department of Posts Reduction in staff in Department of Posts Total Increase in staff Ministry of Home Affairs Department of Revenue Total Net reduction : ( 8.45 lakh 1.30 lakh)
0.40 lakh 3.56 lakh 0.78 lakh 2.90 lakh 0.81 lakh 8.45 lakh 1.05 lakh 0.25 lakh 1.30 lakh 7.15 lakh
36.2 With regard to the number of Secretary and equivalent Officers at the time when the policy of downsizing was initiated and after five years as against the present position the Ministry furnished the following information as under:
Year (as on) 1.1.1992 1.1.1997 28.2.2003 Secretary & equivalent 125 119 129
36.3 A perusal of the above figures provided to the Committee mentioned in para 36.1 shows that the reduction is mainly because of the transfer from one area to another area except in the case of Railways and Department of Posts amounting to reduction of 4.49 lakh officials out of the total 8.45 lakh of staff. 36.4 To a question with regard to anticipated and actual impact on the exchequer on account of rightsizing, the Government informed the Committee that around 1,73,000 sanctioned strength as on 1.1.1992. Besides, about 13,000 posts have been abolished so far on the basis of the recommendations of ERC. The abolition of these 13,000 posts is likely to result in annual reduction of expenditure to the tune of Rs. 120 crores approximately. Further around 30,000 posts have been identified for abolition with reference to restriction on filling up of posts of direct recruitment upto 1/3 DR vacancies arising in the year subject to further ceiling that this does not exceed 1% of the total strength. 37 While appreciating the Governments policy of rightsizing and rationalizing of the Government machinery, it is of the opinion that the functions, activities and administrative structure of each Ministry/Department should be clearly chalked out so that overlapping between them do not take place. A review of the Ministries/Departments not covered by the Expenditure Reforms Commission may be made with a view to rightsizing and rationalising them. It will be highly desirable to carry out a manpower audit of each Department. Blanket abolition of certain percentage of posts can on the one hand cripple the functioning of one Department and another Department warranting even greater reduction will escape. A meaningful manpower audit of each Department alone can make this exercise truly rational.
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38. In this context, the Committee pointed out that in reply to information sought with regard to total strength of officials in Groups A, B, C and D for 1992, 1997 and 2003, the Ministry informed that information about group-wise strength in 1992 is not available. The Committee, therefore, recommends that downsizing should be followed up vigorously in its pursuit to improve administrative efficiency and effectiveness. 39. The Committee also wanted to know the details of staff rendered surplus consequent to the right sizing exercise of the Government. The Ministry informed that as on 1.3.2003, 272 staffs have been rendered surplus 5 from Group A, 24 from Group B, 241 from Group C and 2 from Group D. The detailed Department/Ministry-wise break-up is as given below: Table XIII
Name of Ministry Ministry of Agriculture Ministry of Civil Aviation Ministry of Small Scale Industries Ministry of Labour Ministry of Home Affairs Ministry of Shipping Ministry of Information and Broadcasting Ministry of Steel Ministry of Textiles Ministry of Tourism Ministry of Urban Development and Poverty Alleviation No. of Staff 7 4 15 17 2 1 119 4 101 1 1
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
40. The Committee is of the view that the Government cannot downsize its personnel meaningfully without enlisting the support of major political parties. Therefore, the Government should hold all party meeting to arrive at a consensus to execute the recommendations of the Fifth Pay Commission which recommended the downsizing of Government while recommending greatly enhanced pay scales. This is a matter of national interest and we cannot afford to delay it indefinitely. The result of manpower audits will be really helpful in getting the required consensus.
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LESSON 39: VOLUNTARY RETIREMENT SCHEME

Latest Trends in Compensation Management existing labour laws. The government, therefore, found a solution to the problem of surplus staff by allowing voluntary retirement both in public and private sectors. The human resources in the industrial sector have become surplus on account of (a) existing level of technology (b) will become surplus with adoption of newer technologies and technological up-gradation. If the textile industry adopts latest technology in manufacturing units, 15 million workers in the industry would be out of their jobs, around 2-4 million workers are found surplus in the various sick industrial units all over India. Similarly, millions have been found surplus in government undertakings.
Learning Objective
To know and understand the below mentioned points:

Voluntary Retirement Schemes (VRS)- Exit Policy- Its Effects Effects of Excess Manpower Reducing Excess Manpower - Problems, Legal Aspects and Solutions The Reasons for Proposing VRS Procedure for Voluntary Retirement Scheme The challenges in implementing employees exit Merits of voluntary retirement scheme Demerits of voluntary retirement scheme
Effects of Excess Manpower

1. Excess manpower results in high labour costs which increases the production cost and thus ending in high product or service costs. 2. It reduces the competitive ability of the enterprise. 3. Excess manpower in any business activity or industrial establishments reduces employee efficiency and labour productivity. 4. Surplus human resources pose threat for technology upgradation which is essential in the competitive market. 5. Surplus labour may result in poor industrial relations and unrest amongst labour.
Voluntary Retirement Schemes

Exit Policy- Its Effects The Government of India adopted a new economic policy whereby it relaxed and in certain cases removed restrictions on import and export. This resulted in significant changes in industrial and business sectors. One of the important aspects of the liberalised economic policy is the Exit Policy. Under this policy the government has allowed business and industrial establishment, to reduce their excess staff and employees. The reduction of excess staff is a result of restructuring of organisations due to modernising, applying new technology and new methods of operation, so that the industrial organisations could operate economically and withstand the competition with companies and organisations which have accepted foreign collaborations, innovative methods and technology upgradation, rendering some employees surplus. Since the procedure under Industrial Disputes Act 1947, for retrenching involves a lot of legal hurdles and complex procedures, the Government authorised schemes of voluntary retirement of employees after offering them suitable voluntary retirement benefits, and giving some tax relief on such payments to employees who are eligible to retire voluntarily under the guidelines issued by the Government and Income Tax authorities. In the Five Year Plans which were adopted and implemented by the Government it had established and developed public sector undertakings to create employment and also to augment the increased demands of industrial goods, fertilisers and other core industries. The encouragement given to public sector was so significant that .it created employment opportunities on a mass scale. Most of the public sector undertakings were not cost effective. The trade unions have been opposing retrenchment under the
Reducing Excess Manpower - Problems, Legal Aspects and Solutions

As already pointed out earlier the Industrial Disputes Act, 1947 as it is existing puts restrictions on employers in the matter of reducing excess staff by retrenchment, by closures of establishment. The unions strongly oppose any plans of retrenchment and reduction of staff and workforce. The Government had taken a decision to amend the Labour Laws, whereby the employers could trim its workforce legally after complying with the conditions of the labour laws. However, the unions in our country have been opposing such amendment of labour laws. For reasons, which include political reason, the Government has not implemented its decision to amend the Industrial Disputes Act, 1947. However, a way was found by allowing employers including those in the government undertakings, to offer voluntary retirement schemes to off-load the surplus manpower. The voluntary retirement schemes were not vehemently opposed by the Unions, because the very nature of its being voluntary and not using any compulsion. Exit Policy Voluntary Retirement Schemes - have been legally found to be giving no problem to employers, employees and their unions. The essence of the voluntary retirement scheme, which is
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approved by the Government - involves voluntary separation of employees who are above the age of 40 years or have served the company or establishment for minimum 10 years. The company, may offer different separation benefits to employees in different age groups subject to overall benefits which are tax exempted up to a limit of Rs. 51akh, Public sector undertakings, however, have to obtain prior approval of the government before offering and implementing the voluntary retirement schemes.
Steps to be Taken for Introducing and Implementing Voluntary Retirement Scheme 1. If the company is public sector undertaking obtain approval of the government. 2. Identify departments/employees to whom VRS is to be offered (Target group of employees -age above 40 years and employees with more than 10 years service in the company). 3. If there is a union of employees in the establishment involve the union by communicating to them the reasons, the target group and the benefits to be offered to those who opt for the scheme. 4. Formulate terms of V R S and benefits to be offered are to be mentioned in the circular or communication to employees and decide the period during which the scheme is to be kept open. 5. Motivate the managers through counseling. 6. Counselling employees is an essential part of implementing the scheme. The counselling should include what the retiring employee can do in future i.e. rehabilitation, how to manage the funds received under the scheme. 7. After receipt of applications for accepting \IRS, scrutinize, decide whose applications are to be accepted and those whose are not to be accepted. 8. For those whose application are to be accepted prepare a worksheet showing the benefits each will receive including other dues like Provident Fund, gratuity and earned leave wages for the balance un-availed earned leave, and tax incidence should the V R S amount exceed Rs. 5 lakhs.
The Reasons for Proposing VRS

1. Recession in business 2. Intense competition, which makes the establishment unviable unless downsizing is resorted to 3. Changes in technology, production process, innovation, new product line 4. Realignment of business - due to market conditions 5. Joint-ventures with foreign collaborations 6. Takeovers and mergers 7. Business re-engineering process 8. Product/Technology obsolencences.
Procedure for Voluntary Retirement Scheme

The employer has to issue a circular communicating his decision to offer voluntary retirement scheme - mentioning therein. a. The reasons for downsizing b. Eligibility i.e. who are eligible to apply for voluntary retirement c. The age limit and the minimum service period of employees who can apply (Employees who is 40 and above and those who have completed minimum 10 years of service in the establishment.) d. The benefits that are offered. It should be noted that employees who offer to retire voluntarily are entitled as per law and rules the benefits of Provident Fund, Gratuity and salary for balance of privilege leave up to the date of their retirement, besides the voluntary retirement benefits. e. The right of an employer to accept or reject any application for voluntary retirement. f. The date up to which the scheme is open and applications are received for consideration by the employer. g. The circular may indicate income tax incidence on any voluntary retirement benefits which are in excess of Rs. 5 lakhs, which is maximum tax free benefit under such schemes. h. It should also indicate that those employees who opt for voluntary retirement and accept the benefits under such scheme shall not be eligible in future for employment in the establishment.
The Challenges in Implementing Employees Exit

1. The reasons and need to introduce V R S should be discussed with all management staff including top management. 2. The effect of downsizing including on the work or activities of the establishment carried on is to be considered i.e. post reduction operations to be carried on should also be planned - post plan reduction employee deployment. 3. Ensure all concerned employees and managers participate in the decision making to down size. 4. The downsizing plan should match with the Strategic plans of the company. 5. Transparency should be seen and used in choice of persons to be retired. 6. Be prepared to manage the after effects of the down sizing both social and psychological. 7. Motivate employees who will stay with the company, remove their apprehensions and fears, if any. 8. Provide professional assistance to employees who agree to accept V R to plan their post retirement, activities and financial management including, out placement. 9. The VRS should be made attractive and no pressures should be used to ease out people.
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Merits of Voluntary Retirement Scheme

1. There is no legal obstacle in implementing VRS - as is predominantly encountered in retrenchment under the labour laws. 2. It offers to the employee an attractive financial compensation than what is permitted under retrenchment under the law. 3. Voluntary nature of the schemes precludes the need for enforcement, which may give rise to conflicts and disputes. 4. It allows flexibility and can be applied only to certain divisions, departments where there is excess manpower. 5. It allows overall savings in the employee costs thus lowering the overall costs.
the company. Care shall be exercised to ensure that highly skilled and qualified workers and staff are not given the option. As there shall be no recruitment against vacancies arising due to VRS, it is important that the organisation is not denuded of talent. The managements of the PSUs shall introduce the VRS with the approval of their Boards and the administrative departments. Under no circumstances shall grant of VRS be construed as a right. Definitions In this scheme, unless the context otherwise requires, a. Public Sector Undertaking (PSU) means an entity that is : i. Created under a Statute of the State Legislature; or ii. iii. Created under a statute of Parliament, in which case the management & control vests in Govt. of Punjab or Created under the Companies Act 1956 in which the Govt. of Punjab, holds equity share more than 50% of those issued or A Cooperative Society as defined under the Punjab Cooperative Societies Act, 1961, as amended from time to time including Apex Cooperative Institutions.
Demerits of VRS

To certain extent it creates fear, a sense of uncertainty among employees. Sometimes the severance costs are heavy and outweigh the possible gains. Trade unions generally protests the operation of such schemes and may cause disturbance in normal operations. Some of the good, capable and competent employees may also apply for separation which may cause embarrassment to the managements.
b. Scheme means Punjab State Public Sector Undertakings Voluntary Retirement Scheme (VRS) 2002. c. Employee means a person employed on permanent/ regular basis working against regular sanctioned graded post. VRS-scheme.doc-2d. Service means a period of permanent or regular employment against graded post as defined in the Service Bye Laws/ Regulations of the PSU. e. Year means a financial year commencing on 1st April and ending on the subsequent 31st March f. Salary means Basic Pay plus appropriate %age of DA as on the date of applying. g. Family means as defined under rule 2.17 of the Punjab Civil Services Rules, Vol. I h. Request for V.R. means application submitted for VR, as per specimen proforma annexed as Annexure-A. i. Competent Authority means the Chief Executive Officer/Managing Director of the Public Sector Undertaking concerned.
It is found in practice that organisations may have to repeat the scheme if there is no response or poor response to the scheme by the employees. However, there are instances when the managements have really made the schemes very attractive by making it Golden Hand Shake. It is incumbent on the establishments that they do not recruit similar staff immediately after the implementation of voluntary retirement scheme. Such recruitment, in spirit and essence is contrary to the principle of staff being excessive or surplus.
Tutorial Activity 1.1 Voluntary Retirement Scheme (VRS) for the employees of Public Sector Undertakings
Short Title i. This scheme may be called the Punjab State Public Sector Undertakings Voluntary Retirement Scheme (VRS) 2002.
ii. This scheme shall apply to all the Public Sector Undertakings (PSUs) including all Cooperative Institutions of the State of Punjab. This will apply to the Subsidiaries of the PSUs defined as entities in which PSUs and/or Govt. hold more than 50% equity. iii. This scheme shall come into force from the date of its notification. Objective i. To achieve optimum human resource utilization. ii. To optimize return on investment in PSU. iii. In implementing the VRS scheme, managements shall ensure that it is extended primarily to such employees whose services can be dispensed with without detriment to
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Operation of the Scheme The Scheme shall remain in operation for 6 (six) months from the date of issuance of notification to this effect. The Govt may extend it from time to time.
Within the Period of Operation
a. In the case of a PSU which does not require budgetary or any other external support to implement the scheme, it shall come into operation upon the approval by the Administrative Department of a resolution of the Board of Directors that the scheme be brought into effect with specified eligibility criteria b. In the case of a PSU, which requires budgetary or any other external support to implement the scheme, it shall come
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into operation only after the Department of Finance approves a proposal of the Administrative Department based on a resolution of the Board of Directors as in (a) above to this effect. VRS-scheme.doc-3Eligibility All persons employed on permanent/regular basis working against regular sanctioned graded post of Public Sector Undertakings will be eligible to seek Voluntary Retirement provided they have completed a minimum of 5 years of service and have at least 5 years of service remaining before their superannuation. However, the employees falling in the following categories as determined by the concerned PSU are not eligible to seek Voluntary Retirement under the scheme: a. Specialist employees who have executed service bonds and have not completed the period prescribed therein; b. Employees serving abroad under special arrangement/ bonds; d. Employees appointed on contract basis; e. Any other category of employees as may be specifically debarred by the Public Sector Undertaking from seeking retirement under this scheme. Note: In case disciplinary action is pending against an employee, who has sought Voluntary Retirement, the Disciplinary Authority shall, after considering all facts, convey to the Competent Authority whether the request of the employee should be accepted or not. In case the Disciplinary Authority decides that the request of such an employee for Voluntary Retirement be not accepted, the same shall be communicated to the employee in writing and he shall have a right to make an appeal as provided under section 9 (v). Amount of Ex-gratia An employee seeking Voluntary Retirement under the scheme will be entitled to the compensation consisting of salary of 35 days for every completed year of service and 25 days for every year of the balance of service left until superannuation. The compensation will be subject to a minimum of VRS-scheme.doc-4Rs.25,000/- or 250 days salary whichever is higher. However, this compensation shall not exceed 80% of the sum of the salary that the employee would draw at the prevailing level for the balance of the period left before superannuation. In case an employee is governed by a retiring/superannuation pension scheme the disbursement of pension shall commence from the month next to the date an employee would have retired in the ordinary course. Mode of Payment 100% of the amount of ex-gratia payable to an employee on opting for Voluntary Retirement under this Scheme would be paid in cash within 60 days from the date of his relieving. Other Benefits An employee whose offer for Voluntary Retirement under the Scheme is accepted will be eligible, apart from the ex-gratia defined above, to any benefit that would have been available to
him upon superannuation as per the policy extant in the PSU prior to the date of notification of this scheme. It is clarified, however, that an employee shall not be eligible for both retrenchment compensation and ex-gratia under this scheme but shall have to opt for one of the two. Procedure i. An eligible employee may submit request opting for Voluntary Retirement under the scheme to the Competent Authority through proper channel in a prescribed proforma (Annexure-A), which shall be available in the PSU.
VRS-scheme.doc-5ii. The Competent Authority may after considering the application and after giving an opportunity to the applicant of being heard, pass a speaking order within a period of 3 months, either accepting or rejecting the request. iii. In case the Competent Authority fails to pass an order rejecting the request by the due date as given at sub para (ii) above, the request would be deemed to have been accepted and the employee would be retired. iv. A copy of every order made under paragraph (iii) above shall be given to the employee. v. An employee who is aggrieved by an order of rejection may within thirty days from issuance of such orders file an appeal before the Administrative Secretary of the Department under which the concerned PSU falls, whose decision shall be final and binding. vi. The date of acceptance of VRS by the competent authority will be treated as date of voluntary retirement. General Conditions i. Arrears of wages due to general revision of pay scales etc. shall not be included in computing the eligible amount.
ii. Only completed years of service shall be reckoned for arriving at the minimum eligible service. iii. Fraction of service of 6 months and above shall be reckoned as one year for the purpose of calculating the exgratia. Fraction of service less than 6 months will be ignored for the purpose of calculating the ex-gratia. iv. The salary shall be calculated on the basis of last salary drawn by an employee/officer. v. No employee shall be allowed to withdraw the request made for voluntary retirement under the scheme after it has been accepted by the Competent Authority. vi. The Competent Authority shall have absolute discretion either to accept or reject the request of an employee seeking Voluntary Retirement under the scheme. The reasons for rejecting the request of any employee seeking Voluntary Retirement shall be recorded in writing by the Competent Authority. VRS-scheme.doc 6vii. All payments under the scheme and any other benefit payable to an employee shall be subject to the prior settlement/re-payment in full of loans, advances, returning
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of Govt.s property and any other outstanding due against him and payable by him to the PSU concerned. viii.All payments made under the scheme shall be subject to deduction of tax at source as per Income Tax Act 1961 wherever applicable. ix. An employee who seeks voluntary retirement under this scheme shall not be eligible for re-employment in Govt., any PSU or any of its subsidiaries. A complete data/record, on website of all those employees of the Public Sector Undertakings/Corporations, who have availed the VRS shall be retained. While making future recruitments no person out of these shall be retaken in service. x. In the event of the death of an employee, whose request for voluntary retirement under the scheme has been accepted, the compensation, which would have become due and payable to the deceased employee, shall be paid to the person nominated to receive such dues. xi. The benefits payable under this scheme shall be in full and final settlement of all claims of whatsoever nature, whether arising under the scheme or otherwise to the employee (or his nominee in case of death). An employee who voluntarily retires under this scheme will not have any claim against the PSU concerned of whatsoever nature and no demand or dispute or difference will be raised by him or on his behalf, whether for re-employment or compensation or back wages including employment of any of his relative on compassionate grounds in the service of the PSU or for any other benefits whatsoever. xii. The vacancy caused by Voluntary Retirement shall stand abolished. xiii.The Govt. reserves the right to withdraw this scheme at any time it thinks fit and its decision in this respect will be final. Enabling Rules i. The Public Sector Undertakings must consider the Voluntary Retirement Scheme (VRS) and pass an order adopting it.
ii. State Renewal Fund in its present form will cease to exist. VRS-scheme.doc-8-
Annexure A
Application to Seek Voluntary Retirement The Managing Director/Chief Executive Officer, ..Name of the PSU (Through Proper Channel) Subject: Voluntary Retirement. Sir/Madam, I hereby opt to seek Voluntary Retirement from the services of the .. (Name of the PSU) in accordance with the terms and conditions stipulated in the Punjab State Public Sector Undertaking Voluntary Retirement Scheme (VRS) 2002, circulated vide No. dated .., which I have carefully read and have understood the contents of the same. 2. I accept the terms and conditions stipulated in Punjab State Public Sector Undertaking Voluntary Retirement Scheme (VRS) 2002, unconditionally and irrevocably. 3. I furnish the required particulars in the APPENDIX enclosed for consideration of my offer to seek Voluntary Retirement from the services of the ( PSU) under the above scheme w.e.f. . Thanking you, Yours faithfully, Signature of the Employee Place:.. Designation:. Name:. Dated: VRS-scheme.doc-9-
Appendix
To be Filled in by the Employee Part-I S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. Particulars Name of the Employee/ Officer: Employee PF No.: Designation: Date of Birth: Age as on (Last date of the Scheme): Date of Joining the PSU (Excluding the temporary period, if any): No. of completed years of service as on (last date of the scheme): Date of attaining the age of Superannuation: Salary as on (last date of the scheme) - Basic Pay - D.A.
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ii. The scheme shall come into effect only after requisite approval as laid down in Para 4 is received. However, the PSU may circulate this scheme & obtain response of the employees, in order to determine the financial and other implications. VRS-scheme.doc-7iii. No PSU/Administrative Department may make any change to the scheme without seeking comments of the Finance Department and obtaining prior approval of the Council of Ministers to the proposed changes. Budgetary Support i. Budgetary support will be provided to the loss making enterprises or those making marginal profit and to the sick enterprises for implementing VRS only in case bank credit is not available. However, before seeking budgetary support in cases of unviable/sick PSUs other sources of funding should be fully explored such as asset securitisation and bank loan against government guarantee for funding VRS.
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Total: 10. 11. Has the employee executed any bond? Give details thereof.: Has the employee undergone any specialised intensive training within the organisation or outside? If so, give details thereof : Has the employee taken loans from the organisation? If yes, give details thereof head-wise, such as HBA/Vehicle Loan or any other. Give details of amount of loan sanctioned and the outstanding balance as on (last date of the scheme): Whether the employee has been imposed any Major or Minor Punishment during the preceding years. If yes, give details: Whether any disciplinary action is pending?: I hereby certify:
12.
VRS-scheme.doc-1013.
14. Part-II 15.
a. That the information given above is complete and true. b. That I hereby opt to seek Voluntary Retirement from the services of the. (Name of the PSU) in accordance with the terms and conditions stipulated in the Punjab State Public Sector Undertakings Voluntary Retirement Scheme (VRS) 2002, which I accept unconditionally and irrevocably as circulated vide No. , dated . c. That I hereby authorise the .(Name of the PSU) to recover and adjust all loans/dues etc. payable by me whatever kind or nature. d. That I agree that in case any of the aforesaid statements is found to be untrue, the payment made to me by the .. (Name of the PSU), under this Scheme, will be recoverable from me without prejudice to any other action that may be taken against me by the .. (Name of the PSU). Dated: Place: Signature of the Officer/Official Note -
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LESSON 40: PAY RESTRUCTURING IN MERGERS AND ACQUISITIONS

Merger and acquisition check-list

Executive Rewards 1. What is the composition of the executive remuneration package? Information on package structure and service contracts will be needed to assess: a. whether the gaps between practice in the two organizations is likely to prove problematic; b. c. whether the values underpinning executive rewards are significantly different; what the priorities are for the executives involved.
Learning Objective
To know and understand the below mentioned points:

Mergers and Acquisitions Merger and acquisition check-list Profit-sharing schemes Communication strategy Job Evaluations & Market Considerations Reconciling market & job evaluations
Interaction
Restructuring - a means of implementing strategic change aimed at improving performance by reducing the level of differentiation and integration and downsizing the number of employees to decrease operating costs.
Salary Structure 2. To what extent, if at all, should a common salary be introduced? To answer this question information will be needed, first, on the economics and strategy of each business unit to see how far they conform. Then, if the business case emerges, details will be needed on: a. existing salary structures; . b. organization structures, with salaries and grades for each job; c. the distribution of salaries within each grade; d. the method of job evaluation used; e. policies and procedures for grading or regarding jobs and for fixing salaries on appointment or promotion; f. any terms and conditions negotiated with trade unions or staff associations; g. the similarities and differences between the work carried out in each company and, therefore, the type of people employed. 3. What are the advantages and disadvantages of merging salary structures? The advantages seem obvious. A common basis is established throughout the group which facilitates movement and a consistent approach to salary administration. The disadvantage is the disturbance and potential cost of merging, bearing in mind the regarding and salary increases that might be necessary as well as the expense of job evaluation. Why go to all this trouble if the operations in the respective companies are dissimilar and they are located in entirely different parts of the country? It could even be damaging. 4. If salary structures have to be merged, how should this be done? The choice is between: a. a full job evaluation exercise involving rebenchmarking which may be disturbing, time consuming and expensive but may now have to be looked at in the light of recent equal values cases; or
Mergers and Acquisitions

The implications of a merger or acquisition on pay and conditions of employment do not seem to be considered seriously enough in most most take-over battles. Executives and employees are too often pawns in a game of chess played by remote grandmasters. However, acquisitions or mergers do not always live up to expectations and one of the principal reasons for failure is the demotivation of managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well as any existing imbalances between the reward strategies and remuneration levels of the organizations set to merge. This issue has assumed increasing significance as globalization leads to mega-mergers between organizations starting from very different places in the reward philosophy spectrum. The degree to which staff are affected by a merger or acquisition does. of course, vary, At one extreme the holding company adopts a completely hands-off approach, leaving the acquired company to run its own business, in its own way, and with its own terms and conditions of employment as long as it delivers the goods, At the other extreme, the acquisition is merged entirely into the parent company and all terms and conditions of employment are harmonized, The employees affected, however, might ha\c different views about the extent to which the process is harmonious. Between these two extremes there is a measure of choice, In some cases it is only the pension scheme that is merged. In others, it is the pension scheme and all the other benefits that are harmonized, leaving separate pay structures. In making decisions about what should be done and how, the points on the following check-list should be considered jointly and in advance by the parties concerned.
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b. the arbitrary slotting of jobs into the new structure using existing job descriptions (if any):- This could result in gross inequities unless full job descriptions are available or there is already a good fit between the two salary structures; or c. a compromise between (a) and (b), slotting in jobs without a full evaluation if the fit is obvious, but evaluating doubtful or marginal cases. Note that if pay is negotiated with a trade union or staff association they would have to be involved and they will obviously fight against any detrimental changes. d. using this as an opportunity to adopt a new structure based on job family models/generics and broader pay bands. 5. When the merger takes place, should action be limited to the creation of a common grade structure, defining benefit levels but allowing different salary scales to reflect regional or separately negotiated variations in rates? It is possible to have common grade structures with different salary levels as long as the differences can be justified by reference to market rates. 6. What should be done about staff whose grade or salary range is changed as a result of merging pay structures? To regrade people and adjust their salaries to higher levels could be prohibitively expensive. To reduce salaries could be impossible, especially if there are trade unions in existence who carry any weight at all. It might then be necessary to red circle staff affected by grade changes, that is, give them personal to job holder gradings and salary brackets which they retain as long as they are in the same job. General salary reviews 7. Should general salary reviews be centralized and take place simultaneously in all locations? The answer is clearly yes if a common salary structure exists or pay is negotiated centrally. If structures or pay levels vary or if site negotiations continue, then it may be best to maintain local arrangements. Performance Management and Performance Related Pay 8. Should performance management processes and linked salary rev-i1.o procedures be standardized? It is tempting to say that they should, in the interests of consistency and control and to facilitate career and salary planning for the new group as a whole. But there are strong arguments for maintaining the local scheme if it is operating effectively. Managers who are familiar with one system might resent change. They could be forced to accept: it but reluctant reviewers are bad at performance management, especially in a year of great uncertainty. Salary Administration Procedures 9. Should standardized procedures operate throughout the new group? A bureaucratic centralized approach is inevitable in some organizations, but if local arrangements work well, why change them for changes sake?
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Bonus- schemes 10. Should different arrangements for bonuses be allowed to continue? The answer to this question again depends on how close the links between establishments are. There is much to he said for retaining effective local bonus schemes which have an immediate link to performance as long as they do not conflict too much with group policies.
Profit-sharing Schemes
11. What should be done about profit sharing, assuming a scheme exists in one or other or both of the companies? Clearly, if there has been a complete take-over and the merged company loses its status as a separate profit center or can no longer issue shares under arrangements such as profit sharing share schemes, then the scheme in the company which has been taken over must be discontinued and employees moved into the take-over companys scheme. if one exists. If there is no scheme in that company, consideration would have to be given to some form of compensation which could be as high as three times the average of the last three years payments. Pension Schemes 12. Should the employees of the acquired firm be transferred into the acquirers pension fund? This is quite common and, obviously, there is no problem for staff if benefits are better. However, the back-funding of previous pension arrangements in order to pay for improvements can be very expensive, and it may be necessary to maintain separate schemes. When the pension scheme in the acquiring company is inferior, it may be possible for members to choose under which scheme they will retire in the unlikely event that both schemes can continue. This could be divisive when staff in the take-over company see that employees in the taken-over company are better off than themselves. However, many employees may leave the takenover company before retirement and there will only be a handful of genuine anomalies reaching retiring age. The government regulations on personal pensions and the development of portable pensions would also have to be taken into account. Employees in the acquired firm should be told about their rights and given advice on what is best for them to do in their own-interests. Other Benefits 13. To what extent should employee benefits be harmonized, for example: a. company cars; b. free petrol for company cars; c. life insurance; d. sick pay; e. private medical insurance; f. mortgage subsidy; g. season ticket and other staff loans;
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h. lunch arrangements, including luncheon vouchers; i. j. leave entitlements; discount facilities?
The degree to which benefits should be harmonized is, like other areas of reward management. a policy question, the answer to which depends first on the philosophy of the controlling company (the extent to which it believes in centralization and absolute consistency in the treatment of employees) and second, on the circumstances in each company (the degree to which their operations and their geographical locations are linked or adjacent). Considerable variations in benefit between employees in different parts of a group are undesirable, especially if there is any interaction or interchange between establishments. But a brutal approach to harmonization which significantly reduces the total remuneration of the affected employees will damage morale - will the take over company wants its acquisition to be operated by de motivated people? Trade Unions or Staff-associations 14. If a trade union or staff association has negotiating rights. how should they be involved? It is desirable in these circumstances to enter into discussions as soon as possible. The two companies should already have considered the approach they want to adopt and this will provide a basis for consultation and, were negotiated terms and conditions are affected, negotiation.
The, implications of a merger or acquisition on pay and conditions of employment do not seem to be considered seriously enough in most take-over battles. Executives and employees are too often pawns in a game of chess played by remote grandmasters. However, acquisitions or mergers do not always live up to expectations and one of the principal reasons for failure is the demotivation of managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well as any existing imbalances between the reward strategies and remuneration levels of the organizations set to merge. This issue has assumed increasing significance as globalization leads to mega-mergers between organizations starting from very different places in the reward philosophy spectrum. The degree to which staff are affected by a merger or acquisition does, of course, vary. At one extreme the holding company adopts a completely hands-off approach, leaving the acquired company to run its own business, in its own way, and with its own terms and conditions of employment, as long as it delivers the goods. At the other extreme, the acquisition is merged entirely into the parent company and all terms and conditions of employment are harmonized. The employees affected, however, might have different views about the extent to which the process is harmonious. Between these two extremes there is a measure of choice. In some cases it is only the pension scheme that is merged. In others, it is the pension scheme and all the other benefits that are harmonized, leaving separate pay structures. In making decisions about what should be done and how, the points on the following check-list should be considered jointly and in advance by the parties concerned.
Communication Strategy
Apart from any discussions with bodies representing staff, it is essential to have a communication strategy which ensures that staff in both companies know what is going to happen and how it is going to affect them. This strategy must be prepared in advance and this implies that the questions in the check-list will have been considered before the merger is announced.
Job Evaluations and Market Considerations

You can arrive at appropriate wages for positions on your farm on the basis of two main management tools: 1. job evaluations (based on compensable factors such as education, skill, experience, and responsibility), and 2. the going rate (or market value) of a job. Illegal Pay Differences It is illegal to base pay differences on such protected personal characteristics as sex, race, color and marital status. The term protected is used because employees are safeguarded by law against discriminatory practices based on these personal characteristics. Federal law, established in the Equal Pay Act of 1963, explicitly requires men and women performing the same work to be paid the samewith four key exceptions: [when] payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. Blatant cases of sex-based discrimination include instances where men and women hold the same jobs yet are paid differently with none of the defensible reasons applying. Somewhat veiled, but no less illegal, are cases where sex-
Restructuring
Restructuring covers events as a result of which the terms, as agreed by the reference entity or governmental authority and the holders of the relevant obligation, governing the relevant obligation have become less favourable to the holders that they would otherwise have been. These events include a reduction in the principal amount or interest payable under the obligation, a postponement of payment, a change in ranking in priority of payment or any other composition of payment. A default threshold amount can be specified. This approach purports to adopt an objective approach by identifying specific events that are typical elements of a restructuring of indebtedness. As restructuring events could be those undertaken by a reference entity that would result in the credit quality being improved or remaining the same, the Credit Event under the 1999 Definitions is specified not to occur in circumstances where the relevant event does not result from a deterioration in the creditworthiness or financial condition of the reference entity.
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segregated jobs are equal, except for their titles, and yet are paid differently.
Job Evaluation
A farmer such as Cecilia who pays different rates for different jobs usually first classifies the jobs on her ranch. Through a job evaluation she rates the jobs on the farm according to their relative importance. Each job might be given its own rate, or jobs of comparable importance may be grouped or banded into a single wage classification, or pay grade. Job evaluations compare positions in an organization with respect to such factors as education, responsibility, experience and physical effort. Figure 7-2 shows a sample job evaluation. In it, for instance, much more value is given to responsibility and education than to physical requirements. The supervisor in this example would earn about twice what an equipment operator would. Figure 7-2
If education is used as a compensable factor, a bachelors degree might be worth 200 points, a junior college degree 150, a high school diploma 100, and an elementary diploma 50 points. Some of the jobs in the ranch might require a high school diploma, thus earning 100 points in this category, while others might have no education requirement (0 points allotted) regardless of the educational qualifications of the person who may actually apply. Similar ratings of jobs would be made for responsibility and other factors worth compensating. You decide how much weight to allot various compensable factors and how to distribute points within each job. For the job evaluation to be useful, a detailed list of compensable factors needs to be articulated. (The job analysis created during the selection process can help.) You can test the job evaluation by comparing a few jobs you value differently. Does the tentative evaluation match your expectations? If not, are there any job factors missing or given too much or too little value? Workers may also participate in the process of evaluating jobs and can add valuable insight into the essential job attributes for various positions. Personnel involved in evaluating their own jobs, nevertheless, are likely to experience conflict of interest. Although supervisors will normally make more than those they supervise, this is not always the case. A very skillful welder or veterinarian will probably make more than her farm supervisor. Some workers harvesting at a piece rate often make more than the crew leaders supervising them. Supervisors may be offered additional pay during labor-intensive periods. Job evaluations, then, reflect the relative value or contribution of different jobs to an organization. Once a job evaluation has been completed, market comparisons for a few key jobs need to be used as anchors for market reality. In theory, other jobs in the job evaluation can be adjusted correspondingly.
Market Considerations
In practice, results of job evaluations are often compromised or even overshadowed by market considerations. Labor market supply and demand forces are strong influences in the setting of wages. No matter what your job evaluation results may indicate, it is unlikely you will be able to pay wages drastically lower or higher than the going rate. Supply and demand factors often control wages. When there are many more pickers than available jobs, for instance, the going wage decreases. If few good livestock nutrition specialists are available for hire, they become more expensive in a free market. The market may also influence the migratory patterns of farm workers, for example, whether a worker stays in Mexico or travels to Texas, Florida or Oregon. Figure 7-2 uses education as a compensable factor. You may prefer to think in terms of what combination of experience and education would qualify a person for the job. This is an important step for determining the value of the position to be filled. However, when it comes time to hire someone, you may not care what combination of education or experience an applicant has as long as he can do the job. Of course, the market is not totally free. Legal constraints affect wages (e.g., equal pay, minimum wage). Labor groups, in the form of unions, can combine forces to protect their earnings. They may prevent employers from taking advantage of a large supply of workers. At times wages are driven so high they disable corporations who cannot compete in a broader international market. Some professional groups can also impact the
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market. By limiting acceptance to universities, a limited supply of available professionals is set. To establish external equity, employers need information about what other employers pay in the same labor market. While some employers are content to lean over the fence and simply ask their neighbors what they pay, others conduct systematic wage and salary surveys. Wage surveys need to describe jobs accurately as positions may vary widely even for jobs with the same title. Surveys should seek information about benefits given employees (e.g., farm products, housing). Of course, there are other intangible benefits such as stability, the prestige of the position or the institution [and] the possibility of professional development. Surveys need to consider the number of workers per farm in a given classification. Wages on a farm employing many employees affect the going rate more than one with few. In some cases, farmers may compete for labor within a broader labor market. When compensating mechanics or welders, for instance, you may have to check what those in industry are paid. An important pay decision is whether one will pay the going market rate. Those who pay at or below the market may have difficulty attracting workers. Further, they may find themselves training people who leave for higher paid positions. Merely paying more than another farm enterprise, however, does not automatically result in higher performance and lower labor costs. Even when well paid, workers may not see the connection between wages and their performance. Farmers who pay too much may find it difficult to remain competitive. Furthermore, there are other factors valued by employees besides pay, such as working for an organization that values their ideas and allows them to grow on the job.
products and HRMS. (Kellogg used Oracle products for financials and Cyborg Systems Inc. for HRMS.) Kelloggs compensation department wasnt thrilled with the prospect of changing systems. It had been successfully managing salaries and bonuses using homegrown enterprise compensation management (ECM) software for two years. Its compensation planning system (CPS) achieved all its goalsautomating compensation planning in a decentralized, consistent procedure with a market-based approach with little burden on HR. Since the CPS implementation in 1999, we have tried to put more information in the hands of managers and empower them to make more of the compensation decisions, says Miles Meyer, Kelloggs vice president of global compensation. The compensation staff was happy with the CPS, so they resisted the change, Meyer recalls. We had a lot of positive comments on its ease of use. Managers liked it, too, although they were less attached. However, the IT staff pushed forward, informing the compensation department that it had one year to move off the CPS because IT would no longer support the system. Other departments also had to move off legacy systems and onto the SAP system. The compensation department could adopt either the SAP compensation features or a commercial product that had interfaces to SAP. SAPs features didnt come close to the CPS, says Meyer, so the compensation department decided to look elsewhere. Key to its decision would be a product that could achieve the same capabilities-or as close as possible-as the CPS with the ease of use managers and HR had grown accustomed to. Homegrown ECM Kellogg developed its CPS to support new compensation practices, according to Meyer and Catherine Hager, director of compensation. Hager was at Kellogg when this transition began, and Meyer, who reports to the executive vice president of HR, joined later that year. Before the CPS, the compensation department would send out spreadsheets with budgeted merit increases for each division. Three staffers in the compensation department would recommend a merit increase and a merit range for each of the nearly 3,000 salaried employees. In most cases, Hager says, managers accepted the recommended increase. The value of each job was based on a comparison to similar jobs at Kellogg. As competition in the job market increased, that way of evaluating jobs and connecting to pay didnt serve the business model very well, says Meyer. Kellogg decided to move to market pricing of jobs. The company benchmarks each job relative to comparable jobs in the marketplace, and this data is a key factor in determining merit raises. Kellogg also decided to push decision-making to managers, who could better determine the right pay increases for their direct reports. But managers had little understanding of market pricing and little experience in making pay decisions. They needed training and tools. Before the compensation department undertook
Reconciling Market and Job Evaluations

In wage setting, it is usually more beneficial to reconcile market information and job evaluation results than to singly rely on either. Unique jobs are more appropriately priced on the basis of job evaluations. You may depend more heavily on the job market for common jobs. In most cases, farmers have freedom to satisfy both job evaluation and the market. Where the market pays a job substantially less than a job evaluation does, however, you can either pay the higher wage, reconsider job evaluation factors, or pay the reduced wage. The farmer has fewer viable options when the market would pay a higher wage than the job evaluation. Compensation Restructing Acquisitions Concept Case of Kellog Acquisits Keebler Co. The compensation department at Kellogg, the Battle Creek, Mich-based packaged food company, faced a tough challenge in 2001. That year, Kellogg acquired the Keebler Co. of Elmhurst, Ill., and with the acquisition came different technology and HR management systems (HRMS). Standardizing onto one became a priority for the companys information technology (IT) department, which ultimately decided on the system Keebler used-from SAP AG of Walldorf, Germany, for financial
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training or development of tools, its staff interviewed managers and executives across the company to make sure that market pricing and involving managers would meet their needs. We spent quite a bit of time making sure we had buy-in to move forward, says Hager. Market pricing sounded good in theory, but it raised a mental hurdle for managers, she says. Before the inaugural use of the homegrown CPS in 1999, Kellogg gave all managers a day and a half of training, including a session to validate the market pricing of jobs within their departments. They later received a half-day of training on the CPS itself. The following year, everyone got another day of training on compensation practices and upgrades to the CPS. Managers also received about two hours of training before each compensation planning cycle; initial compensation training was included in a broader training program for new managers, Hager says. The second hurdle was to provide managers with the necessary tools. The compensation department, with help from an outside consultant, developed the CPS in Lotus Notes to help managers make decisions and to provide information on compensation planning and decision-making. Kellogg went merrily through three compensation-planning cycles with its CPS and had no intention of buying a commercial product, says Meyer.
CPS and to configure the new software to include some of the custom features that were developed for the CPS. Kadiri didnt have all the functionality of [the CPS], but we figured out how to do it with the knowledge manager, says Lori Stafford, the project team leader. We took three years of learning on our old system and loaded it [into TotalComp] in four months. One example of a feature that was migrated from the old system to the new: a decision-making tool from the CPS that walks managers through the process of making a merit decision-what an employee is paid, the workers performance, market pricing, and how hard he or she would be to replace. The tool sums up with a recommendation based on inputs from the manager, Stafford says. Kellogg had four people, including Stafford, working nearly full time along with a project manager from Kadiri who could tap any resources needed from the vendor. Because Stafford had quite a bit of self-taught IT knowledge, Kellogg did not rely heavily on its IT staff for this implementation, says Meyer. When the project was done, the customized TotalComp software had 85 percent of the CPS functionality. No managers complained; TotalComp looked a bit different on screen, but basically it did everything the CPS had done. We didnt experience any disruptions with the transition, and we got a lot of compliments, says Meyer.
The Decision
Of course, those intentions had to change with the Keebler acquisition, forcing the compensation department to look into commercial products that were supported by SAP. Meyer knew of a compensation product called TotalComp by Kadiri Inc. of Burlingame, Calif., because the company had made a presentation to Kellogg a couple of years earlier. At that time, however, TotalComp did not have all the features that Kelloggs CPS had, Meyer says. We were very biased. We felt our CPS was the better system of the two, he admits. With the one-year deadline looming, the company re-examined TotalComp in 2002 and found that the newer versions came closer to meeting Kelloggs needs. Kadiri offered about 70 percent of what [the] CPS had, Meyer says, and his staff could customize it to provide features that Kadiri didnt offer. TotalComp did offer a distinct advantage over the CPS: timely disparate impact analysis. With CPS, Kellogg executives had to wait until all annual merit increases were awarded before they could analyze companywide data to determine whether any minority groups-based on race, age, gender or job level-were treated unequally in performance ratings or merit raises. But TotalComp had the capability to perform disparate impact analysis before employees were informed of their performance ratings and merit increases, allowing for necessary adjustments. With those key features identified, Kellogg selected Kadiri in June 2002 with installation to be completed by Dec. 1. Programming began in August. The biggest challenge was to migrate the CPS features that were not offered by TotalComp. Fortunately, TotalComp had knowledge management technology that allowed the adopters to migrate information from the
The Process in Action

After the merger, Kellogg workers totaled 25,000 worldwide, including 11,000 salaried employees. The company uses TotalComp to plan for merit increases, performance bonuses and stock options for 6,000 of the salaried workers. Kellogg does not expect to use TotalComp for the other 19,000 employees because they work on commission, are international workers or have their wages governed by union contracts. Starting on Dec. 1 each year, managers access TotalComp from the corporate intranet and input performance ratings for each employee. In mid-December, Kellogg closes the system to managers so employee relations and legal staff can run a disparate impact analysis. Each manager can do a disparate impact analysis of his own group after inputting performance rankings, so problems can be dealt with before the company analysis. In January, the compensation department uses the software to create a bottoms-up budget for merit increases and bonuses as well as to determine the dollar pool for each manager. Heres a hypothetical example of the bottoms-up approach. If overall merit increases are budgeted at 4 percent, Aranked employees might be budgeted for an average increase of 5 percent, Bs at 4 percent and Cs at 3 percent. The managers total pool is based on those calculationsconducted by the software-but the manager can determine the actual amount that each direct report gets from the pool. With help from the software, including budget information feeds from the SAP system, the compensation department then figures the pools for merits, bonuses and stock options.
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Starting Feb. 1, managers access the software again and decide what merit increases, bonuses and stock option grants to give to each employee. Pay decisions are based on three factors, which the software helps automate-performance rating, pay relative to the market pricing, and how difficult it would be to replace the worker. The managers boss also can access the same information, and workflow applications allow them to interact and deliberate. The work in progress from across the company can be rolled into a single report to be viewed by the CFO or the CEO while the work is under way. Managers complete their work by mid-February. The system is closed to managers again while a disparate impact analysis is performed on merit raises, bonuses and stock options. Adjustments are made with each manager as needed. Then the proposed compensation is reviewed to make sure it meets budget. Around the first of March, the system is opened to managers, who begin to give employees the news about their merit raises, bonuses and stock options for the year. The system can print a compensation report and stock option certificates for each individual. In December, Kellogg will begin its second compensation planning cycle on TotalComp-its fifth automated compensation planning cycle since installing its own CPS. Kellogg has dramatically reduced the total time it spends on this process even while involving managers more than ever, Hager says. Another dividend is that managers are more knowledgeable about pay factors, Meyer says. Kellogg budgeted the Kadiri project at $300,000 but spent $400,000, Meyer says. Just under half the total was for customization. Meyer has not calculated return on investment, but he states emphatically: The direction we have gone is more supportive of our business model and the competitive environment we have to keep up with.
ECM is different from incentive management software, which calculates and tracks sales commissions; such payments are highly specific to individual business unit goals. Rather, ECM covers payments such as merit increases, performance bonuses and stock options, which tend to be consistent across a company. While compiling a buyers guide that includes ECM software, Weir encountered a company-using spreadsheets and e-mail for compensation planning-that routinely had a $ percent to 10 percent error rate, forcing the compensation department to act as fact checker. One year the errors were so numerous that the company ran millions of dollars over budget. Weir says. They had to e-mail everyone that they were reducing pay after already issuing a few of the higher checks. That company now uses software by Kadiri Inc. of Burlingame, Calif., he says. Other ECM software developers include Workscape Inc. of Framingham, Mass., and Advanced Information Management Inc. of Santa Barbara, Calif. All of them allow the adopter to integrate ECM software with the companys HR management system (HRMS) and provide web access for managers. Kadiri has a bit of an edge, says Symons. Theyve been at it longer and have a bit larger installed base. But all three are credible solutions. Kadiri has 40 TotalComp customers, says Kevin Dobbs, Kadiris vice president of marketing, including Dow Jones, The Gap and Wells Fargo Bank. Motorola Inc. of Schaumburg, III., is its biggest client, with 13,000 managers planning compensation for 100,000 employees in 60 countries. ECM software starts at around $250,000, but the value can be significant, says Weir. Motorola didnt calculate a financial return on investment (ROI) because the benefits were so obvious, says Craig Morgenroth, Motorolas director of global reward programs and services. Companies have not widely adopted ECM. In the economic downturn, corporations have reduced overall information technology (IT) spending and have spent even less on HR information systems (HRIS), Symons says. However, analysts expect adoption to pick up, especially among companies with 1,000 or more employees. HRMS vendors, including SAP AG of Walldorf, Germany, and PeopleSoft Inc. of Pleasanton, Calif., include some compensation planning features, but they tend to lag those from ECM developers. If youre looking for 60 percent of the functionality at 20 percent of the price, then PeopleSoft has it, and that may be enough for some users, says Weir. By Bill Roberts
An Article The ECM Experience

Enterprise compensation management (ECM) software helps companies get the most out of their compensation dollars, which for many is their biggest budget item. Good compensation management helps single out the better workers and reward them accordingly. Companies that practice good compensation hygiene will have better retention, says Craig Symons, an analyst at Forrester Research Inc. of Cambridge, Mass. Most companies understand their markets and customers better than they understand their compensation practices, analysts contend. These practices tend to be inefficient and dont always produce the biggest bang for the buck. Compensation is an enormous [budget] line item, but we dont have a good understanding of it, says Jay Weir, a senior researcher at HR.com, a web-based HR consulting and research company in Aurora, Ontario, Canada. Technology lets compensation managers, HR professionals and CFOs comprehend the process, he says.
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Compensation Management

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COMPENSATION MANAGEMENT

COMPENSATION MANAGEMENT (MBA)

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Unit : Compensation Management

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Outcomes and Assessment Criteria

2 Explain essential elements of a sound compensation structure

4 Analyse latest trends in compensation on national and international level

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COMPENSATION MANAGEMENT (MBA)

30 34 45 54 57 63 66 71 76 82 92 99 104 111 119 128 133

COMPENSATION MANAGEMENT (MBA)

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RAI UNIVERSITY RAI BUSINESS SCHOOL

Subject Title : Compensation Management

Lesson 2 Lesson 3 2 Lesson 4

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1.5 Personnel Management by CB Mamoria/ SVGankar Pg 432-458 -

Lesson 8 Lesson 9 4 Lesson 10 Lesson 11 Lesson 12

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Personnel Management by CB Mamoria SVGankar Pg 403-431

Personnel Management by CB Mamoria SVGankar Pg 459-489 -

Lesson 22 9 Lesson 23 Lesson 24 Lesson 25 10 Lesson 26 Lesson 27 Lesson 28 11 Lesson 29

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1.5 Course Pack

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1.5 Personnel Management by CB Mamoria/ SVGankar Pg 490-502 -

Lesson 34 13 Lesson 35 Lesson 36

Lesson 37 14 Lesson 38 Lesson 39 15 Lesson 40 Lesson 41

Handbook of Reward Management By Michael Armstrong & Helen Murlis Pg 520-524

Lesson 42 16 Lesson 43 Lesson 44 Lesson 45 17 Lesson 46 18 19 -L* = Lecture Hours

Tutorial Revision Revision Revision Preparatory Leave End term exams

1.5 1.5 1.5 1.5 1.5

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End Semester Examination

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LESSON 1: INTRODUCTION TO COMPENSATION AND REWARDS

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Tutorial Activity 1.5

Tutorial Activity 1.1

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Tutorial Activity 1.4

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LESSON 2: OBJECTIVES OF COMPENSATION AND REWARDS

Objectives of Compensation and Rewards Determinants of Incentives

Introduction to Objectives of Compensation and Rewards

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Front Range Solutions

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LESSON 3: INTRODUCTION TO FRAMEWORK OF COMPENSATION POLICY