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CONTENTS 4.0 4.1 4.2 Aims and Objectives Introduction Compensation or Wages 4.2.1 4.2.2 4.3 4.4 Traditional Theory of Wage Determination Theory of Negotiated Wages

Principles of Compensation/Wage Fixation/Determination Types of Wages 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.4.6 Minimum Rate of Wages Need-Based Minimum Wage Living Wage Fair Wage Wage Boards Wage Policy

4.5 4.6

Objectives of Compensation or Wages Principles of Wage or Compensation Formulation 4.6.1 4.6.2 4.6.3 Wage Determination through Job Evaluation Wage Determination through Wage Boards Intervention Wage Determination through Time Study Statutory Employee Benefits in India Discretionary Major Employee Benefits Dearness Allowance (DA) Overtime Wages Incentive Schemes Fringe Benefits


Job Employee Benefits Required by Laws 4.7.1 4.7.2


Employee Services 4.8.1 4.8.2 4.8.3 4.8.4


Health Care 4.9.1 4.9.2 4.9.3 Problems Galore Right Approach Health Plans


Performance Related Compensation Design 4.10.1 Compensation Management Issues in Performance Management Systems Contd…

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Compensation Design through Skill Based Programmes 4.11.1 4.11.2 Major Obstacles to Introduce Skill Based Pay Application of Skill Based Pay

4.12 4.13

Performance Guide Charts Designing Executive Compensation 4.13.1 4.13.2 4.13.3 4.13.4 4.13.5 4.13.6 Calibration of Executive Compensation to Performance Performance Measurement in Executive Incentive Programmes Concepts and Issues Components of Executive Compensation Different Theories of Executive Compensation Some other Theories of Executive Compensation


International Compensation 4.14.1 4.14.2 Fundamentals of International Compensation International Compensation Design

4.15 4.16 4.17 4.18 4.19

Let us Sum up Lesson End Activity Keywords Questions for Discussion Suggested Readings

After studying this lesson, you should be able to: Understand the issues and concerns in compensation strategies Know about the performance related inputs for compensation

Performance means the degree or extent with which an employee applies his skill, knowledge and efforts to a job, assigned to him and the result of that application. Performance Appraisal means analysis, review or evaluation of performance or behaviour analysis of an employee. It may be formal or informal, oral or documented, open or confidential. However in organizations we find formal appraisal system in documented form. It is therefore a formal process to evaluate the performance of the employees in terms of achieving organizational objectives. For all-important decisions concerning people, like transfer and promotion, remuneration, reward, training and development, so also for long-term manpower planning and organization development, performance appraisal is necessary. A welldocumented Performance Appraisal System helps in understanding the attributes and behaviours of employees. It is also necessary for motivation, communication, strengthening superior-subordinate relationship, target fixing (key performance areas/Key result areas), work planning and for improving the overall performance of the organisation.

Wages or compensation is any economic compensation paid by the employer to an employee for the services he/she renders. Although the term wages is all encompassing as it includes any form of financial support and benefits, in the narrower sense wages are the price paid for the services of labour. Broadly wage components are two – the base or basic wages 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 contract of employment for the work done. Allowances are paid in addition to the basic wage to ensure that the value of basic wages do not fall over a period of time. Some allowances are statutory while others are voluntary. Most of the organizations pay allowances like holiday pay, overtime pay, bonus and social security benefits. Theoretically these are not included in the definition of wages. In India, however, different Acts include different items under wages, though all the Acts include basic wage and dearness allowances. The Workmen’s Compensation Act, 1923, Section 2 (m), include in the term “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.” Without going into the theoretical debate on what constitutes wages, summing up the provisions of different Acts, we can exclude the following type of remuneration from the purview of wages. 1. Bonus or other payments under a profit-sharing scheme, which do not form a part of the contract of employment. 2. Value of any house accommodation, supply of light, water, medical attendance, travelling allowance; or payment in lieu thereof or any other concession. 3. Any sum paid to defray special expenses entailed by the nature of the employment of a workman. 4. Any contribution to pension, provident fund, or a scheme of social security and social insurance benefits. 5. 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.

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4.2.1 Traditional Theory of Wage Determination
This theory assumes that market forces, i.e., demand and supply determine the wages. For example, we have acute shortage of critical skills. For example, computer programmers are in short supply and they are able to command higher salary. In our country many organizations pay very high salary to entry level IT professionals and at times even more than senior managerial level employees. This is because of the supply gap.

4.2.2 Theory of Negotiated Wages
Unionised employees can negotiate salary. This is done through the collective bargaining process. Normally in any unionised organizations, unions periodically submit their memorandum to the management, urging for wage rise, to keep pace with market standards and organisational profitability. Then the wage is negotiated in a collective bargaining meet represented by the unions and the management nominees.

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However, in collective bargaining, much other employment related issues could be negotiated. For non-unionised employees wages can be negotiated through individual bargaining. In some cases even there may be regulatory intervention in wage determination. Good example is wage boards. The Wage Boards are tripartite in nature and represented by the workers, employers and the independent members. Wage Boards finalise the wage recommendations. All wage boards, however, are not statutory. Importance of wage board has now reduced because of the rising bargaining power of the workers. Check Your Progress 1 State whether the following statements are true or false: 1. Performance Appraisal means analysis, review or evaluation of performance or behaviour analysis of an employee. 2. A well-documented Performance Appraisal System understanding the attributes and behaviours of employees. helps in

3. Wages or compensation in any economic compensation paid by the employer to an employee for the services he/she renders. 4. Allowances are not paid in addition to the basic wage to ensure that the value of basic wages do not fall over a period of time. Some allowances are statutory while others are voluntary.

Wage determination, apart from statutory aspect, influenced by different theories. These theories can be summed up as under: 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 1. Subsistence Theory is the Iron Law of Wages. It was advocated by David Ricardo (1772-1832) and in his own language the labourers should be 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, 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. 2. Wages Fund Theory was developed by Adam Smith (1723-1790) with the assumption that the 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 labourers 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 owes its development to Karl Marx (18181883). 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. 4. Residual Claimant Theory advocated by Francis A. Walker (1840-1897), assumes that there are 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 assumes wages are based upon an entrepreneur’s 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. Consequently, workers are paid what they are economically worth. 6. The Bargaining Theory of Wages considers 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 on wages pioneered by several psychologists and sociologist like Marsh and Simon, Robert Dubin, Eliot Jacques, etc. Based on their various research studies, we can identify following areas of interest in behavioural theories on wages: (a) The Employee’s Acceptance of a Wage Level - Psychologically, people believe in employment stability and prefer to stay on with the same organization, pacing with their salary level. There are, however, several other factors like; size and prestige of the company, trade unions’ power of the organization, their level of knowledge and competencies, etc. (b) The Internal Wage Structure - The employees value internal pay equity. Moreover some jobs also command social status (like the job of a journalist) Organizations design wages for different cross-sections of employees keeping in view the ration of the maximum and minimum wage differentials, norms of span or control and demand for the specialised skill-sets. Balancing of wages with such internal equity also ensure increased level of motivation.
Practice Assignment

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As a new start-up, a manufacturing organisation has to recruit large number of workers, both skilled and un-skilled. This type of workers is available in huge numbers in the local market. Your company believes there is no need to pay wages beyond the level of minimum wages, as announced by the state government. However, you personally feel, since the company is capable to pay more (due to high profit margin and sound financial position), the wage should be fair one. Develop your argument accordingly.

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4.4.1 Minimum Rate of Wages
Any minimum rate of wages fixed or revised may consist of a basic rate of wages and a special allowance; or a basic rate of wages with or without cost of living allowance and the cash value of concessions in respect of supplies of essential commodities at concessional rates; or an all inclusive rate allowing for the basic rate, the cost of living allowance and the cash value of concessions, if any. Procedure for fixing and revising minimum wages The appropriate Government is required to appoint an Advisory Board for advising it, generally in the matter of fixing and revising minimum rates of wages. The Central Government appoints a Central Advisory Board for the purpose of advising the Central and State Governments in the matters of the fixation and revision of minimum rates of wages as well as for co-ordinating the work of Advisory Boards. The Central Advisory Board consists of persons to be nominated by the Central Government representing employers and employees in the scheduled employments, in equal number and independent persons not exceeding one third of its total number of members. One of such independent persons is to be appointed the Chairman of the Board by the Central Government. Wages in kind Minimum wages payable under this Act is to be paid in cash. However, the payment of minimum wages can be made wholly or partly in kind, by notifying in the official Gazette, where it is customary to pay wages either wholly or partly in kind. Payment of minimum rate of wages The employer is required to pay to every employee, engaged in a scheduled employment under him, wages at a rate not less than the minimum rate of wages notified for that class of employees without any deduction except as may be authorised. Fixing hours for normal working day In regard to any scheduled employment, minimum rates of wages in respect of which have been fixed under this Act, the appropriate Government may fix the number of hours of work which shall constitute a normal working day, inclusive of one or more specified intervals; provide for a day of rest in every period of seven days which shall be allowed to all employees or to any specified class of employees and for the payment of remuneration in respect of such days of rest; provide for payment for work on a day of rest at a rate not less than the overtime rate. Overtime: If any employee whose minimum rate of wages is fixed under the Act works on any day in excess of the number of hours constituting normal working day, the employer is required to pay him for excess hours at the overtime rate fixed under this Act or under any law of the appropriate Government for the time being in force, whichever is higher. Wages for two or more classes of work: If an employee does two or more classes of work, to each of which a different rate of wages is applicable, the employer is required to pay to such employee in respect of the time respectively occupied in each such class of work, wages at not less than the minimum rate in force in respect of each such class.

Maintenance of registers and records: Every employer is required to maintain registers and records giving particulars of employees, the work performed by them, the wages paid to them, the receipts given by them and any other required particulars. Inspections The appropriate Government may, by notification in the Official Gazette, appoint inspectors for the purpose of this Act and define the local limits for their functions. Claims The appropriate Government may, by notification in the Official Gazette, appoint Labour Commissioner or Commissioner for Workmen’s Compensation or any officer not below the rank of Labour Commissioner or any other officer with experience as a judge of a civil court or as a Stipendiary Magistrate, to hear and decide for any specified area, all claims arising out of the payment of less than the minimum rates of wages as well as payment for days of rest or for work done. Penalties for Offences Any employer who contravenes any provision of this Act shall be punishable with imprisonment for a term, which may extend to six months or with fine, which may extend to five hundred rupees or with both. Statistics collected under the Minimum Wages Act, 1948 All establishments covered under the Act are required to furnish to the concerned authority (Central or State) an annual return in prescribed form as per the rules framed under the Minimum Wages Act, 1948. The Centre / State Governments in turn send a consolidated return to the Labour Bureau which compiles an all India report based on the data contained in these returns. Besides, Quarterly returns sent by these agencies to the Bureau are also made use of in compiling information at all India level. Addition of New Employments The State Governments and the Union Territories review the Scheduled Employments under their jurisdiction from time to time and add new employments in respect of which it is of the opinion that minimum rates of wages should be fixed statutorily in addition to the existing ones.

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4.4.2 Need-Based Minimum Wage
The Indian Labour Conference, at its 15th session held in July 1957, suggested that minimum, wage fixation should be need based, 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: 1. 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; 2. 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; 3. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum, which would mean, for an average worker’s family of four, a total of 72 yards;

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4. 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 for low income groups; and 5. Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum wage. Subsistence wage meets only bare physical needs of worker and his/her family. Minimum wage provides not only for bare physical needs but also for preservation of efficiency of worker plus some measure or education, health and other things. This is the legal minimum wage of the Minimum Wage Act.

4.4.3 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/herself and his/her 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 neighbouring 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 neighbouring localities. Thus living wage maintains worker's health and decency, a measure of comfort and some insurance against the more important misfortunes of life. The Supreme Court has held the following principles for wage fixation: 1. There is minimum wage, which in any event must be paid, irrespective of the extent of profits, the financial condition of establishment or the availability of workmen at lower wages. 2. The wages must be fair, i.e. sufficiently high to provide a standard family with food, shelter, clothing, medical care and education of children appropriate to the workmen. 3. A fair wage lies between minimum wage and the living wage, which is the goal. 4. Wages must be paid on an industry-wise and region basis having due regard to the financial capacity of the unit. The Bombay High Court in the following two cases has held that while fixing wages, a broad and overall view of the financial position of the employer must be taken into account: Express Newspapers (P) Ltd. vs. Union of India, 1961 LLJ 339 (SC); AIR 1958 SC 678; (1958-59) 14 FJR 211; 1958 SCJ 1113; 1958 SCA 952.

Bombay Mothers & Children Society vs. General Labour Union (Regd.) 1991 Lab.IC 1653.

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4.4.4 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.” Between these two limits, the actual wages should depend on considerations of such factors as: 1. The productivity of labour; 2. The prevailing rates of wages in the same or neighbouring localities; 3. The level of the national income and its distribution; and 4. The place of industry in the economy of the country. Thus fair wages is an adjustable step, moves up according to the capacity of the industry to pay, and the prevailing rates of wages in the area or industry.

4.4.5 Wage Boards
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 Nonjournalist 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 non-statutory Wage Board has been set up after 1966, except for sugar industry, where such Wage Board was constituted in 1985. The trade unions, having grown in strength in these industries, are themselves capable to negotiate their wages with the management. This trend is likely to continue in future.

4.4.6 Wage Policy
A wage policy guides the organisations to take decisions on wage related matters. At the organization level, wage policies are framed, keeping in view various regulatory requirements and the organisational own strategies. Whatever wage policies are framed, it should consider the recommendations of the Committee on fair wages, 1948, which provides the basic approach for tribunals, Wage Boards and others to fix wages of workers, a large part of which has been accepted by the Supreme Court in the case of Express Newspapers (Pvt) Ltd. and others Vs. The Union of India, 1938. Confining within the boundaries of the fair wage concept, every organisation must strive to ensure fair growth in the remuneration to its workmen. First of all the current purchasing power of workers should be maintained against price rise by providing for adequate neutralization in respect of the rise in the cost of living so that there is no erosion in their total emoluments in terms of their purchasing power.

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Secondly, a reasonable growth in the real earnings of workers should be aimed at improving their living standards, commensurate with their level of productivity, firms’ profitability and other factors. Check Your Progress 2 Fill in the blanks: 1. Subsistence Theory is the ………….. 2. ……….………. represents the amount of value created in the production, which remains after payment has been made for all these factors of production. 3. …………. is required the employer to pay to every employee, engaged in a scheduled employment under him, wages at a rate not less than the minimum rate of wages notified for that class of employees without any deduction except as may be authorised. 4. A …………. the organisations to take decisions on wage related matters.

The objectives can be classified under four broad headings: 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. Other firms in the labour market pay external equity means paying workers what comparable workers. 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 labour in the labour 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 labour surplus or low wage area to a high wage area. They may acquire new skills to benefit form the higher wages paid for

skills. When an employer’s 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 grow industries, an efficient allocation of labour due to structural changes takes place. Other Objectives of Compensation are as follows: 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 labour 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 behaviours and act as an incentive for those behaviours to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviours. 4. 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. 5. Comply with legal regulations – a sound wage and salary system considers the legal challenges imposed by the government and ensures the employer’s compliance. Facilitate understanding- the compensation management system should be easily understood buy human resource specialists, operating managers and employees. 6. 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.

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The main factors affecting wage or compensation levels within an organization 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 individual’s performance to the organisation.

4.6.1 Wage Determination through Job Evaluation
It is the process of determining the worth of one job in relation to that of another without regard to the personalities. It analyses and assesses the content of jobs, to place them in some standard rank order. The end-result is used as the basis for a fair and logical remuneration system. A properly devised job evaluation scheme provides management with definite, systematic and reliable data for working out wage and salary scales. Thus logical wage negotiation reduces wage grievances and dissatisfaction with wage differentials and ensures fair treatment for each employee. It also provides a logical basis for promotion.

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Job Design Every work undergoes constant modification because of the impact of mechanization and automation. Some jobs become redundant while others are created and still others are altered in content. This necessitates different types of education, experience and other attributes. Also for effecting Job Design, the organisation needs to respect the unions, who otherwise may stall the move on one ground or the other. While designing a job, management must also be concerned with the practical considerations of quantity and quality of available personnel (both within the organisation and in the labour market). Personality conflict and friction, problem of human relations, boredom, obsessive thinking, etc., also need to be taken care of. Thus the factors, which are likely to affect Job Design, can be enumerated as follows: 1. Job Specialisation and repetitive operations; 2. Changing technology; 3. Labour-union policies; 4. Abilities of present personnel; 5. Adequate availability of potential personnel; 6. Inter-action among jobs with the system; 7. Psychological and social needs that can be met by the job. Job Assessment At this stage information about each job is made available to the assessors. Every job whether manual or not, is closely observed and inspected in actual operation by the assessors. If required, assessors question the operators and their supervisors to collect further details about the job to clear doubts, if any. To keep pace with the changing job content, due to technological changes, it is necessary to make periodic reassessment of the job keeping in view the old Job Description. Job Analysis This process helps to examine the facts about some specific job and determine the essential job factors. Therefore, the exercise helps to identify the qualities, like; skill, training experience, etc. required of the worker to perform his jobs satisfactorily. The analysis is primarily based on Job Description Sheet. However, to supplement the analysis further details may be obtained from personal observation and discussion. Job Description This process helps to give a title to a job, considering the conditions, tasks and responsibilities involved and qualities required for a job. Even though, the terms `Job Description’ and `Job Specification’ are used interchangeably, there is a distinction, like; Job Description process defines the job content, i.e., the conditions, tasks and responsibilities, while Job Specification denotes the job requirements, i.e., the qualities that are necessary in a worker, to satisfy the demands of the job. In the determination of wage differentials and wage structure, job evaluation as a tool has to be thought of with adequate caution. Other techniques, discussed above also to a great extent influences the wage determination process.

4.6.2 Wage Determination through Wage Boards Intervention
Wage Boards consist of an impartial Chairman, 2 other independent members and 2 or 3 representatives of workers and employers each. The recommendations of the Board

are first submitted to the Government for its acceptance. After acceptance, the Government requests the parties to implement them. The Board is required to take the following points in determining the wage structure: 1. Need-based minimum wage, 2. Industry’s capacity to pay, 3. Productivity of labour, 4. Prevailing rates of wages, 5. Level of national income and its distribution, 6. Place of industry in the economy of the country, 7. Need of its development, 8. Requirements of social justice, 9. Adjustment of wage differentials in such a manner as to provide incentives for skill formation. Collective bargaining is also another important method of wage determination and which is very successful in industries. We have discussed this technique in details in a separate chapter.

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Practice Assignment
Explain in the context of your understanding of an organizational practice, how job evaluation helped them in deciding the wage rates for various levels of employees.

4.6.3 Wage Determination through Time Study
Time Study technique is also used for wage determination. We have briefly introduced the concept here and then illustrated the method suitably designing a problem.

ILO defined Time Study “ a technique for determining as accurately as possible from a limited number of observations the time necessary to carry out a given activity at a defined standard of performance.” For carrying out a Time Study, equipments like; Stopwatch, Study Board, Pencils, Slide-rule, etc. are required. The stopwatches are of different types, like: 1. Stopwatch, which records one minute per revolution by intervals of 1/5 of a second with a small hand recording 30 minutes; 2. Stopwatch which records one minute per revolution, calibrated in 1/100th of a minute with a small hand recording 30 minutes; 3. Decimal-hour Stopwatch recording 1/100ths of an hour per revolution graduated in 1/1000ths of an hour and a small hand records up to one hour in 100 divisions.

Employee benefits typically refers to retirement plans, health life insurance, life insurance, disability insurance, vacation, employee stock ownership plans, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of benefits are changing rapidly to include, for example, flexible benefit plans. Employee benefits and (especially in British English) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries. Where an

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employee exchanges (cash) wages for some other form of benefit, this is generally referred to as a 'salary sacrifice' arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree. Benefits are forms of value, other than payment, that are provided to the employee in return for their contribution to the organization, that is, for doing their job. Some benefits, such as unemployment and worker's compensation, are federally required. (Worker's compensation is really a worker's right, rather than a benefit.) Prominent examples of benefits are insurance (medical, life, dental, disability, unemployment and worker's compensation), vacation pay, holiday pay, and maternity leave, contribution to retirement (pension pay), profit sharing, stock options, and bonuses. (Some people would consider profit sharing, stock options and bonuses as forms of compensation.) You might think of benefits as being tangible or intangible. The benefits listed previously are tangible benefits. Intangible benefits are less direct, for example, appreciation from a boss, likelihood for promotion, nice office, etc. People sometimes talk of fringe benefits, usually referring to tangible benefits, but sometimes meaning both kinds of benefits. You might also think of benefits as company-paid and employee-paid. While the company usually pays for most types of benefits (holiday pay, vacation pay, etc.), some benefits, such as medical insurance, are often paid, at least in part, by employees because of the high costs of medical insurance. Fringe benefits can include, but are not limited to: (employer-provided or employerpaid) housing, group insurance (health, dental, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), social security, profit sharing, funding of education, and other specialized benefits. The purpose of the benefits is to increase the economic security of employees. The term perqs or perks is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are company cars, hotel stays, free refreshments, leisure activities on work time (golf, etc.), stationery, allowances for lunch, and—when multiple choices exist—first choice of such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist. Compensation includes topics in regard to wage and/or salary programs and structures, for example, salary ranges for job descriptions, merit-based programs, bonus-based programs, commission-based programs, etc. An employee benefit is more a holistic term, comprising of both wage and non-wage component of total labour costs. Non-wage components are given more in the form of benefits in kind. Employee benefits are also called fringe benefits, perquisites, or perks. Wage component of employee benefits are paid in cash, hence it is more like a normal wages or salaries. Where employee benefits are given in cash, we call it salary sacrifice, as employees avail such benefits, per se in exchange of their cash salaries. Both the wage and non-wage component of employee benefits are taxable, barring a few strategically chosen one.

4.7.1 Statutory Employee Benefits in India
Indian Labour Laws require organizations to provide some statutory employee benefits, both monetary and non-monetary in nature. Here we are explaining some of the statutory employee benefits, which organizations, by and large need to provide:

1. Employee Security: Physical and job security to the employee promotes security to the employees and their family members. Organizations provide job security, confirming the employees in regular pay roll, after they complete the probationary period. Such confirmation creates a sense of job security in the minds of the employees. Ensuring regular payment of wages, in compliance with the relevant Labour Laws, further strengthens this. Adopting adequate safety measures, on the other hand, ensures physical security. It also includes accident prevention steps, pollution free workplace, etc. 2. Retrenchment Compensation: The Industrial Disputes Act, 1947 provides for the payment of compensation in case of lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to give one month’s notice or one month’s wages to all the workers who are retrenched after one year’s continuous service. The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation as stated above even in case of closing down of undertakings. 3. Lay-off Compensation: In case of lay-off, employees are entitled to lay-off compensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. Lay-off compensation can normally be paid up to 45 days in a year. 4. Safety and Health Provisions: Employee’s safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect worker’s capacity. In India, the Factories Act, 1948, stipulated certain requirements regarding working conditions with a view to provide safe working environment. These provisions relate to cleanliness, disposal of waste and effluents, ventilation and temperature, dust and fume, artificial humidification, over-crowding, lighting, drinking water, latrine, urinals, and spittoons. Provisions relating to safety measures include fencing of machinery, work on or near machinery in motion, employment of young persons on dangerous machines, striking gear and devices for cutting off power, self-acting machines, easing of new machinery, probation of employment of women and children near cotton openers, hoists and lifts, lifting machines, chains, ropes and lifting tackles, revolving machinery, pressure plant, floors, excessive weights, protection of eyes, precautions against dangerous fumes, explosive or inflammable dust, gas etc. Precautions in case of fire, power to require specifications of defective parts of test of stability, safety of buildings and machinery etc.

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4.7.2 Discretionary Major Employee Benefits
Drawing a tentative list of employee benefits, both with the wage and non-wage components, is difficult. However, from the industry practrices, we can categorise it to housing, group insurance, income protection (with optimisation of fixed and the variables), retirement benefits, tuition fees reimbursement, funding of children education, contribution to different social security schemes, club membership, international tours, different types of leave (other than the statutory one), like; vacation leave, sabbatical leave, etc. Most of the employee benefits are employer paid, while in some, like in social security schemes, employees may also be required to partly contribute. Both the statutory and voluntary employee benefits increase the economic security of the employees. Organizational practices on employee benefits vary widely.

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These services are those, which are provided by the organisations, in addition to the usual fringe benefits, either at no cost to the employee or at highly subsidised rate. Such services include: eating facilities, transportation facilities, childcare facilities, educational services, flexible working hours, etc. A good company provides the following employee services to ensure timely and accurate handling of employee queries: Database Management: Creating, managing and updating database for current and retired employees with the relevant fields. Employee Expense Claims: Validating employee claims against set parameters and limits and approving or declining a claim. This also involves collecting taxes. Employee Travel Support: Providing business travel support to employees. Travel support requires answering queries related to free passes, nominee detail modification, and calculation of fares and taxes. Training Support: Identifying and scheduling employees who need to undergo training, deploying trainers and managing logistics. This also involves maintaining training records and schedule maintenance. Payroll & Leave: Handling back-office administration work; e.g., health records, leave, airline incentive commission reports, manpower reports, personal details, and data quality and profit sharing forms.

4.8.1 Dearness Allowance (DA)
To give effect to price neutrialisation, D.A. is paid over and above the basic wages to ensure that real income of the workers is not falling short. There are several methods of computation of D.A., which can be enumerated as follows: 1. D.A. not linked to Consumer Price Index: (a) Flat D.A. (b) Graduated Scale of D.A. 2. Linked to Consumer Price Index: (a) D.A. computed according to changes in C.P.I. (b) D.A. linked to pay scales and to C.P.I. Supreme Court of India has laid down certain criteria for regulating payment of D.A. as under: 1. Capacity to Pay 2. Rates prevailing in comparable concerned in the region Extent of neutralisation of price rise. The views of the National Labour Commission are: 1. The basic wages in all cases should be adjusted to a common base year. 2. D.A. should be adjusted every time when there is a 5-point change in the C.P.I. 3. Neutralisation should be allowed at the rate of 95% in the non-scheduled employment. 4. Capacity to pay is irrelevant for payment of D.A. at the minimum level.

4.8.2 Overtime Wages
Overtime wages is calculated on the basis of the working hours prescribed to the several types of workmen. If 36 hours a week is prescribed as working hours, the company should pay extra wages to workmen if they are required to work beyond 36 hours. Usually the rate of wages for period beyond 36 hours should be at the ordinary rate, while the rate should be double if the workers are required to work more than 48 hours a week for the period beyond 48 hours. However, where wages are paid on a piece-rate basis, the State Government in consultation with the employer concerned and the representatives of the workers, shall fix the time-rate as nearly as possible, considering average rate of earnings of those workers and the rates so fixed shall be deemed to be the ordinary rate of wages of the workers and hence overtime rate should be decided following above principles.

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4.8.3 Incentive Schemes
Incentives are paid to the workmen over and above the normal wages to reward their good performance. In places, where piece-rate system of wages are existing, payment of incentives is relatively simple as for manufacturing additional units than the standard one, workers can be paid extra wages, which they are supposed to get for each additional unit. This incentive scheme is known as Straight Piece-Rate Scheme. In time-rate system, however, such incentives are computed following Standard Hour Systems. To illustrate, let us assume a given volume of job is given to a worker for standard 8 hours’ work. If the worker is able to complete the job within 6 hours, then for the hours saved, i.e., 2 hours, he should be given the incentives duly upgrading his hourly wage rate apportioning his 8 hours rate for 6 hours. Let us assume 8 hours are needed as standard time for completing a job and the rate per hour is Re.1/-. If the worker finishes the work in 6 hours, he will also get Rs. 8/-, which upgrades his hourly wage rate then from Re. 1/- to Rs. 1.33P. Yet in another way we can look into the nature of incentive schemes from the organisational practices. Different type of Bonus/Incentives Discretionary Bonus Performance-contingent Bonus Pre-determined allocation Bonus Target Plan Bonus Different Stock Incentive Options 1. ESOP at pre-determined price (Capital Gains). 2. Non-statutory ESOP at a discounted price (IT). 3. Restricted Stock at a discounted rate with minimum locks in period. Before lock in period price would remain the same (no appreciation). (Capital Gains) 4. Phantom Stock – hypothetical stock with option to convert only after minimum vesting period (Capital Gains). There are also several other Incentive Schemes too, which can be briefly stated as follows. However, these are more in the nature of incentive computation techniques rather than stand alone incentive systems. 1. Barth System - Under this system, there is no minimum guaranteed wage. The formula (considering hourly wage rate of Re. 1/- ) is as follows: Wage = Std. time 8 hrs x time taken (6 hrs) x hourly rate re. 1/- = Rs. 7/- (approx.)

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2. Bedaux System - This system is also called ‘units’ or ‘points’ System. It has a guaranteed basic rate like the Halsey and Rowan Systems. Under this system each minute of Standard Time is expressed in terms of units or points after a detailed time study. The guaranteed basic wage is paid upto 60 points per hour scored by the worker. Points earned above 60 are paid at 75 to 100 per cent of the basic wage rate (the standard daily rate for the job which is always higher than the minimum guaranteed wage). 3. Taylorian System - In this scheme there are two piece-rates - one lower and one higher plus a bonus paid as a per centage of the time rate. Obviously such a system would automatically discourage low production and would be installed where the average performance is well below expectations. 4. Merrick Differential Piece Rate System: Under this system there are three piece rates: a) Upto, say, 83% of Standard output - a piece-rate + 10% of time rate as bonus. b) Above 83% and upto 100% of standard output - same piece rate + 20% of time rate. c) Above 100% of Standard output - same piece rate but no bonus. 5. Gantt Task System: This has three stages of payment: a) Below the standard performance, only the minimum guaranteed wage is to be paid. b) At the standard performance, this wage + 20% of the time rate will be paid as bonus. c) When the standard is exceeded, higher piece-rate is paid but there is no bonus. The main objective of this scheme is to raise the performance up to the standard level which is the task set before the workers. 6. Emerson Empiric System: Under this system, standard time is established for each job. The efficiency of the worker is determined by dividing the time taken into the standard time. Upto 67% efficiency the worker is paid at this time rate and from this point to 100 per cent a bonus of 1 per cent is paid for every additional 1 per cent output. At 100 per cent efficiency, a bonus of 20 per cent is paid. 7. Accelerating Premium System: This provides for a guaranteed minimum wage for output below the standard. For low and average increase in output above the standard small increments in earnings are allowed. Increasingly large earnings are conceded for the above average output, the increment being different for each 1% increase in output. 8. Scanlon Plan: The Scanlon Plan was designed to involve the workers in making suggestions for reducing the cost of operation and improving the working methods and sharing in the gains of increased productivity. The Rucker Plan is similar to the Scanlon Plan, the only difference being that in the latter the incentive earnings are calculated on the basis of the `value added’ by the manufacturing process. The Kaiser Plan is also like these - a gains-sharing scheme. While the Rucker Plan excludes all the supply and material costs, the Kaiser Plan excludes all costs over which the workers have no control. 9 Halsey Premium Plan: It guarantees a fixed time wage to slow workers and, at the same time, offers extra pay to efficient workers. Extra pay in the form of bonus is given based on the amount of time saved by the worker, which is calculated @ 33-1/2 per cent of the time saved. Thus the cost of labour is reduced because of the per centage premium system.

10 Rowan Premium Plan: Under this plan, the time saved is expressed as a per centage of the time allowed, and the hourly rate of pay is increased by that per centage of the time allowed, and the hourly rate of pay is increased by that per centage so that total earnings of the worker are the total number of hours multiplied by the increased hourly wages.

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4.8.4 Fringe Benefits
The fringe benefits have often been described as ‘welfare expenses’, ‘wage supplements’, perquisites other than wages, ‘sub-wages’ and ‘social charges’. ILO 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 free part of the wage for expenditure or other 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 some times referred to as ‘fringe benefits.’ However, it is important to note that ‘benefits which have no relation to employment or wages should not be regarded as ‘fringe benefits,’ despite the fact it may constitute a significant part of workers’ total income. Fringe benefits account for the services rendered to workers and their families by an industrial enterprises for the purpose of raising their moral, material, social and cultural levels and to prepare them for a better life. Thus fringe benefits can broadly be classified under six main heads as under: (i) (ii) Extra payment for time worked (overtime, weekend holidays, shift premiums, etc.). Payment for time not worked (lunch period and rest time, medical care time, sick leave, maternity leave, death in family leave, grievance handling, voting time, paid holidays and vacations, severance pay and lay-off, etc.). Monetary prizes for special activities and performance anniversary award, quality bonus, waste reduction, safety awards, attendance bonus, suggestion plans award, etc. Bonus Payments Payment for personal security and financial protection - medical care, old-age pension, unemployment insurance, family allowance, compensation for disability and death, housing, room and board allowance, etc. Payment for the welfare facilities, like: maintaining dining room, cultural and recreational facilities, etc.


(iv) (v)


Benefits for medical and health care include: Accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits and sick leave are classified under this benefit category. A glance at various organisational websites and annual reports reveal that lack of a comprehensive health plan for the employees has resulted in indirect, recurring losses for companies. In a Canadian government study, the Canada Life Assurance Company experimental group realised a four per cent increase in productivity after starting an employee fitness program. Further, 47 per cent of programme participants reported that they felt more alert, had better rapport with their co-workers, and generally enjoyed their work more.

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Swedish investigators found that mental performance was significantly better in physically fit workers than in non-fit workers. Fit workers committed 27 per cent fewer errors on tasks involving concentration and short-term memory, as compared with the performance of non-fit workers. Studies by various US and UK-based medical research institutes have shown that 8090 per cent of people of any age, gender, physical fitness and profession who use a computer regularly are likely to suffer from vision and health problems. Another study conducted by Department of Human Factors Engineering, University of Occupational and Environmental Health, Japan, showed that visual strain occurred after 60 minutes of Video Display Terminal task. A close look at these only supports the fact that a sizeable portion of employees suffer from health problems that are mostly work generated and that well-planned, comprehensive health promotion programmes can help in reducing such ailments. This would in turn pave the way for rise in overall productivity. However, corporates have hardly realised the existence of this silent troublemaker, leave alone assessing the magnitude of the problem. Hence, they continue to extract more work hours, which results in a stressed life-style for employees. “While at first, corporations may appear to benefit from workers’ added effort during long, stress-filled days, rising health care premiums may show otherwise. One study based on the Multiple Risk Factor Intervention Trial, for instance, showed men who skipped their annual vacation were more likely to die from coronary heart disease than were couch potatoes or smokers who do get away for a little annual rest and relaxation,” wrote Wendy D Lynch in Business Health about the American work scenario. The scene back home is also not good. Taking cue from the workaholic West born companies, Indian corporate houses too can be seen flooded with over-stressed employees trying to attain strength from their cups of coffee and puffs of cigarettes. Many employees report for work on time and work for unlimited hours. That the company stands to earn more if employees put in additional work- hours is only a myth.

4.9.1 Problems Galore
Poor eyesight, spondylitis, discomfort, fatigue, tension, depression, irritability and obesity are only a few of the problems. Lack of care can lead to long-term ailments, wherein not only the person concerned, but also his entire family has to suffer. Another problem that has a direct implication on the employee’s psyche is lack of a feeling of belonging to his/her organisation. “There is much more an employee expects from his organisation, beyond a work-salary relationship. A sense of attachment to his company is very important,” opine employees by and large. Agrees Prof B M Hedge, Vice-Chancellor, Manipal Academy of Higher Education, “Japan has the lowest rate of heart attacks in the world. One of the reasons is the absence of differences between the boss and workers. So a sense of belonging helps!” Health education programmes improves overall productivity and quality of employees. “Companies might do a lot for the medical care of employees, but precious little for preventive healthcare,” says Dr Prathap Reddy, Chairman, Apollo Hospitals Group, stressing on the importance of preventive healthcare for diseases like cancer and heart attack.

4.9.2 Right Approach
“Most human resources managers and corporate directors intuitively understand that neither the sleep-deprived employee nor her caffeine-powered manager who hasn’t

taken a day off in three years is working at peak capacity. But what is “peak?” Lacking a definition, Americans have fallen into the “more is better” rut, with untold implications for their health,” says Lynch. So its high-time employers actually wake up and realise the fact that more work-hours need not necessarily mean more output. To maintain that, they need to adopt their employees’ well-being as a business strategy. “It is very important to allocate not only an appropriate budget for the company’s healthcare plan. With an appropriate budget for the company’s healthcare activities in place, it is also imperative that a professional set-up and approach be followed for the implementation of the same. In other words, the healthcare vision must be total —- promotive, preventive and curative,” says Captain Dr Rakesh Dullu, deputy manager health and medical services, Hero Honda. “At the same time, we must not lose sight of the fact that if we are able to take care of the families’ health too, we are actually reducing the stress of the employees and can expect better productivity and quality from them,” he adds. But according to the current scenario there are only countable organisations that have any health plans for their employees’ families. Out of a plethora of services that can or should be provided, most companies are happy providing medical reimbursement of a few hundred rupees to their employees. Ideally, the focus should be on prevention rather than cure. Small things like low-fat balanced meals in cafeterias and occasional serving of fresh fruits or juices can go a long way in helping the workers maintain a healthy mind and body. However, this is not the least a company can do. Considering the long working hours, die hard competition and mounting pressure, experts suggest a few “must haves” for any organisation:

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4.9.3 Health Plans
Even though health insurance has not established a foothold in India, companies must ensure that its employees get an insurance coverage. Hero Honda, for instance has an understanding with some Gurgaon-based hospitals where, depending on the availability of specialised doctors, employees are sent for treatment. All employees in the company are covered under the National Insurance scheme. “We have our own parameters for selecting a hospital and we are constantly in touch with the doctors there,” says Dr Dullu.

Employees are the cores of any organization. Effective performance management systems ensure quality of the employees. It systematically and objectively links the ability and contributions of employees, individually and in a team, to the overall performance of the organization. Employee compensation acts as a catalyst to the performance management systems. Hence effective design of employee compensation should also focus on performance management systems. Performance linked pay or compensation thus has a strategic significance, as it optimises the cost of compensation and at the same time rewards the good performers, who feel increasingly motivated and make the organization as their desired place to work with. This chapter first discusses about the basics of performance management systems, delineating it from our traditional percepts, i.e., performance appraisal. Then it focuses on linking performance management systems with the employee compensation designs. Performance appraisal systems in any organization formally analyses, reviews and evaluates performance of an employee in achieving the organization’s mandated objectives. Like any other function, performance appraisal is also an important human

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resource management activity. Performance management, on the other hand, is an integrated process. It sets objectives, appraises employees, translates objectives into individual Key Performance Areas (KPA), helps in compensation design, and in the process, benefits the organization to achieve its business goals and objectives. We call it a development tool, as it facilitates performance improvement, career development and training. Thus performance management involves thinking through various facets of performance, identifying critical dimensions of performance, planning, reviewing and developing and enhancing performance and related competencies. It is an ongoing communication process that involves both the managers and the employees: To identify and describe essential job functions and relating them to the mission and goals of the organization. To develop realistic and appropriate performance standards. To give and receive feedback about performance. To write and communicate constructive performance appraisals. To plan education and development opportunities to sustain improve or build on employees’ work performance. Performance appraisals are bundles of tools used to evaluate the effectiveness or otherwise of a performance management system. To sustain competitive advantage, organizations are not only required to recruit the best fit and systematically train and develop them but also monitor the performance of employees and focus on performance improvement through various HR interventions. Globally it is now well established through series of empirical research that performance management is the most important areas of an organization and perhaps now started getting the supreme priority.

4.10.1 Compensation Management Issues in Performance Management Systems
From compensation management point of view, performance management systems help in achieving following critical goals: It helps in recognising the efforts and contributions of employees objectively and thereby facilitates in effective job pricing, both through the cost optimisation and befitting rewarding of talented performers. It facilitates in suitable compensation design, rewarding employees based on the performance linkage. It supports employee motivation (which lead to increased performance), helping employees to receive their performance feedback, understanding their strengths and weaknesses. Employees can develop themselves through self-introspection and thereby feel intrinsically motivated. So also performance based pay helps in getting extrinsically motivated. Both the motivational constructs lead to improved performance. It facilitates employees to develop their core faculty of goal achievement. It retains good performers, through competitive compensation design, offering increased flexibility to earn more, based on performance level. It attracts good performers from competing organization. Operationally for many organizations, which follow structured pay scales, introduction of performance related pay is difficult. It is our experience that many senior level employees, in such organizations, stagnate at the last slab of their pay scales. As a consequence, these employees get de-motivated, decrease their performance levels and wait for the opportune moment to job-shift. This exactly what

the Steel Authority of India (SAIL) had experienced. SAIL lost many of their senior level employees, who took pre-matured retirement (under their earlier launched voluntary retirement scheme, commonly known as golden handshake programme). It benefited many steel plants under private ownership, as they could get instant quality manpower for their projects. Similar fate was for the State Bank of India. All these are squarely attributable to absence of performance linked pay or compensation systems. Another crude operational issue is designing incentives, aligning with the performance, without specifying any minimum performance requirement. It means every one become eligible for the incentives, as individual contributions is not factored in designing the compensation. While hundred percent factoring of individual performance is not desirable (as it culminates conflicts), total ignorance of it is also not desirable. Performance linked compensation in such cases provide for incentives for results that exceed the stated goals, combining individual, departmental and organizational goals. In order to reap the strategic benefits of pay for performance, many organizations limit the increase in the pay only to bare statutory minimum, while increases the amount of salary for those who are good performers. In both the cases compensation decisions are based on realistic assessment of performance. Thus in such cases, organizations do away with the traditional cost of living and seniority percepts for compensation design. However, such practices have both the advantages and disadvantages. Advantages are; it rewards the merit, improves the teamwork, provides job satisfaction, and finally achieves the desired results. Disadvantages are difficulty to institutionalise the systems and monitor it, difficulty in identifying appropriate performance evaluation tools, and dilution of loyalty of employees (as it ignores the seniority factor).

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Compensation design through skill based programmes rewards employees for attainment of additional skills and knowledge. A skill based pay system enables employees to enjoy addition payment of compensation for new learning, which correspondingly enhances their level of performance. Learned skills and knowledge of employees significantly improve their competencies. To introduce the skill based compensation programmes, organizations at the outset break the jobs or group of jobs into different components. Initial placement of employees is given at the base level jobs, assuming employees can autonomously be able to develop their individual proficiency in executing their job assignments. Organizations then encourage such employees to acquire additional skills. Wherever required, organizations also extend training support. These way employees can also acquire new set of competencies and raise their base pay level. Organizations, this process can develop multi-skill, to employees competent to execute different cross-section of jobs. Often skill-based pay is deliberately introduced by the organization to urge employees in new skill development. It is different from performance related pay, as enhanced compensation become payable to employees on attaining new skill, knowledge and competencies, recognised by the organizations. For examples, bank employees become eligible for additional increments after completion of CAIIB examination. Similarly, college lecturers become eligible for additional increments after getting award of Ph.D. Every organization, likewise adopt certain predetermined standards. Some of the important lessons on skill-based pay are unnecessary culmination of competition, more individualised. On the contrary, it focuses on individual skill development and benefits the organization to accomplish its goals.

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4.11.1 Major Obstacles to Introduce Skill Based Pay
Skill based pay although provides multiple benefits, to introduce it, organizations encounter serious problems. Some of the major obstacles to introduce the skill based pay, can be listed as under: Defining of skill sets: It is difficult to document skill sets of a job. Even though organizations can at the outset document skill sets for a well-defined job, it become quickly obsolete. Jobs are getting restructured every now and then with the changing technology and new product designs, rendering redundancy of earlier documented skills. Another problem encountered by the organization is to narrow down skill-sets, jobs being highly inter-related. We cannot identify the job-specific competency differences. Pricing skill sets: This is another major obstacles in introducing skill-based pay. Effective pricing of skill sets seemingly difficult for the organizations. Often we benchmark with the market pricing, but many organizations may require some unique skill-sets, for their typical nature of job. In such case price rationalisation become difficult, as we have to depend on the subjective assessment. Some of the skill price rationalisation criteria could be; competitive value of skill, amount and degree of effort required acquiring the skills, amount and degree of effort required to implement the learned skills in tasks and jobs, etc. Validation of skills: This is also difficult to validate some skill sets. For some jobs, we can use job trial or performance tests to validate the skills and competencies of employees, but for many others, we have to depend on our hunches and subjective assessment. Hence to achieve success in implementation of skill-based pay, it is necessary to introduce a credible skill validation process. Skill re-certification tests: For some skill sets, it is necessary to ensure that concerned employees are able to sustain their skill, through a periodic skill recertification programme. Skill obsolescence: Technology changes render change of necessary skill sets. This makes earlier learned skills obsolete, requiring organizations to renew the existing skills through sustained training and development initiatives. High cost of training: To introduce skill based pay, organizations need to focus on employees’ learning of new activities. Any training and learning initiatives enhance downtime, apart from usual cost of training. Often the benefits accrue fail to recoup the expenses, resulting failure of organizational initiatives. Such possible threat outweighs the benefit of skill-based pay. Increased payroll costs: Often skill based pay increases the overall payroll costs. This, however, depends on the nature of job. If the jobs are simple, employees can quickly learn the skill-sets required to perform the job and accordingly can maximise their earnings stepping up production, even when organizations may require curtailing the same. This problem would be more acute for those organizations whose production planning is market dependent. It would be difficult for such organizations to practice lean management or lean manufacturing. Regulatory bottlenecks: Skill based pay programme, among others, require organizations to increase the variables, which put the pay at risk. Thus reduced fixed or base pay at less than statutory minimum wages, may lead to legal complications for average or below average performers, who fail to earn the variables, for their inability to acquire new skill-sets.

4.11.2 Application of Skill Based Pay
Despite having major obstacles to introduce skill based pay, many organizations can make best use of it for all cross-sections of employees, including managerial levels. To successfully apply, organizations need to design it with technological considerations, so that identified skills do not get quickly redundant. Identified skill elements should be relevant and accepted both by the employees and the management; it should be consistent and implemented with integrity. A participative task force should be formed to look into various aspects, right from development to implementation of skill-based pay. The task force considers all the issues pointed out in the list of obstacles and then determine the relative value of skills. The task force implements the skill based pay in a phased manner.

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Organizations develop performance guide charts to introduce performance linked pay programme. Such chart is prepared after performance evaluation and it tentatively covers degree of performance, i.e., the performance rating, recommended rate of increase in different quarters (where organizations introduce quarterly review of performance), etc.
Table 4.1: Performance Guide Charts
Name of the Employees Mr. A Mr. B Mr. C Mr. D Performance Rating Outstanding (1) Exceeds (2) Expectations First Quarter 15% 13% 11% Token raise to boost the morale No increase Second Quarter 13% 11% 9% No Increase Third Quarter 11% 9% No increase No Increase No Increase Fourth Quarter 9% No increase No increase No Increase No Increase

Meets Expectations (3) Meets minimum expectations (4) Does not expectations (5) meet

Mr. E

No increase

Notice employees here have been ranked with a 5-point scale. Each employee’s present performance ranking has been mapped using this scale and the recommended quarterly raise in the compensation has been indicated. Notice employees do not get any raise, when they fail to meet the expectations.

Use of performance criteria to design executive compensation, account for measurable performance targets, behaviour, job requirements, and experience of the executives, job role, peer compensation, market considerations and the size of the organization. For better clarity in understanding in table below, these are explained
Table 4.2: Measurement of Performance Criteria
Criteria Performance Targets Parameters Key Result Areas (KRA), Key Performance Areas (KPA), Key Sales Objectives (KSO), or even some protocol bound performance specification. Performance impact Quality of actions in terms of job requirements, or fulfillment of a prescribed role Contd…

Behaviour Job Requirements

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Experience of the executives Job role Peer Compensation Market Considerations Size of the organization Nature of the organization

Experience, talent and skills Hierarchy and the role requirements Pay differences between the executives Benchmarked compensation information Large, medium or small. Public limited, closely held, family business

These criteria are then studied in the context of time span and the nature of measurement. Time span may be long or short-term compensation. The nature of measurement, on the other hand account for profitability vs. market-based measures, qualitative vs. quantitative measures, etc. (Gomez-Mejia & Balkin, 1992).

4.13.1 Calibration of Executive Compensation to Performance
The concept of calibrating pay to performance is the 'Market value measure'. On the 'X' axis we could include shareholder value, revenue growth or other suitable metrics of business performance. The key to the model is ensuring the measures being selected are pertinent, so that the right set of behaviours are being encouraged. To simply say that a particular executive is a high performer may not only be a sweeping generalisation, it may also be in reference to measures that are not currently important to the organization.
High Pay/ Low Performance High Pay/High Performance

Low Pay/Low Performance

Low Pay/High Performance

Figure 4.1: Pay Calibration

4.13.2 Performance Measurement in Executive Incentive Programmes
In most of the organizations, executives are rewarded independent of company performance. Such practices, in fact built the argument that executives get rich at the expense of shareholders. Because of such negative perception, linking executive compensation to organizational performance, shareholders’ value creation has become extremely important. Effective performance measures ensure that executive compensation is commensurate with performance. Regardless of the industry there are certain criteria that incentive performance measures should ideally meet. They should be: Aligned with shareholders’ interests Definable Measurable Controllable Easily communicated and understood Assessing potential performance objectives against these criteria can help to ensure the appropriateness of the measure or measures ultimately used.

As an indication of how certain measurement categories stack up, the table below briefly evaluates shareholder return based measures and company-specific measures against the criteria above. Total Shareholder Return (TSR) has become a popular performance measurement criterion, particularly for stock options plan. Some organizations, however, emphasise on other internal financial performance criteria like; ROE, EPS, and EVA. Against the above criteria, there is merit for both shareholder return based measures and company-specific measures.
Table 4.3: Shareholder return versus company-specific measures
Criteria Shareholder return based Company-specific financial measures measures (TSR, share price (ROE, EPS, etc.) growth) Directly aligned. Indirectly aligned. Proper measures may reinforce performance that drives value creation over long term. Typically definable, assuming adequate financial reporting standards.

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Aligned with shareholder interest




Easily measured. Relative TSR Easily measured. Progress can be presents issues related to choosing communicated quarterly. Harder to appropriate peer groups. measure relative performance in timely manner. Somewhat, unless economic and/or Typically more controllable than those market factors dominate price. subject to market volatility. Influence may be limited to top tier executive group. If properly designed.


Easily communicated If properly designed. and understood

The important point from the table above is that in some cases company-specific measures may be more appropriate than shareholder return measures, particularly in circumstances where executives have very little influence over the market valuation of their companies. A thorough process, as laid out in the next section, can ensure that the most effective and appropriate measures are used. To choose an effective method, organizations need to consider various external and internal considerations to identify the correct performance measures over time. Some of the external inputs for performance measures, could be: Market practices for short, medium and long-term incentives. Identify external value drivers to understand the state of the economy. Understand the relevance of any financial ratios, which are generally attributable to industry situation. Similarly, internal inputs for performance measures are: Understand the internal value drivers. Focus on key strategic objectives. Link the executive behaviour and its relation with the business performance. Both the internal and external value drivers significantly influence executive incentive payment decision in any organization.

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4.13.3 Concepts and Issues
Organization’s extent of payment of compensation to executives plays the most important role to motivate critical performance. Such critical performance achievement helps the company to achieve the results. It is important to understand that base salary is not the only component in executive’s compensation. Organizations have to make available various short-term and long-term incentives (STIs and LTIs). Such incentives need not always be in terms of cash, it also includes stock options, and various other innovative deferrals like loyalty bonus with the time-cap, golden parachute schemes, etc. Executive compensation package need to be designed in such a way, so that it can help executives to achieve the financial goals. Although increased executive compensation package acts as a great motivator and helps in retention, organizations need to optimise it following various innovative approaches, else it may adversely affect their profitability. Also organizations need to design tax efficient executive compensation.

4.13.4 Components of Executive Compensation
Components of executive compensation can be studied in three perspectives, i.e., variable pay (e.g., bonuses, commissions, profit sharing, etc.), base pay (e.g., salary and perquisites), and employment status (e.g., promotions and termination). Distinction in these perspectives focuses on the uncertainty of present and future wealth, and emanate from agency discussions of risk bearing. In particular, it is recognised that employment, fixed pay, and variable pay represent different aspects of executive wealth and carry different risks or threats to wealth. For example, employment consequences (in particular threats of termination) represent the most severe threat to wealth since they correspond to a complete loss of current income as well as a threat to prospects for future income, since they lower the market value of an executive (Agarwal & Walking, 1994; Fama, 1980). Base pay represents a more important but less severe, threat to wealth than employment since uncertainty in base pay generally concerns an erosion of buying power resulting from loss of market adjustments, cost of living adjustments, merit raises, and so forth. Finally, true variable pay represents the least threat to current wealth since this form of pay is not counted as part of wealth until it is actually awarded (cf. Thaler, 1990). Failure to receive a performance award does not affect one's standard of living, as would failure to receive one's salary or even failure to receive cost of living adjustments. It must be noted that some forms of pay generally counted as variable (e.g., some forms of bonuses and stock options) may not be truly variable and would, therefore, not be included in our category of variable pay. In cases where bonuses are regularly awarded, they become more like an entitlement and, thus, more like fixed pay. Thus effective executive compensation packages typically comprise the following components: Base Salary Annual Incentives Long-Term Capital Accumulation Deferred Compensation Arrangements Supplemental Benefits and Perquisites Special Severance and Retirement Arrangements Employment and Change of Control Agreements

4.13.5 Different Theories of Executive Compensation
To sustain the competitive advantage, organizations always focus on retention of executives, because of their inimitable skill and knowledge base. The neoclassical

economics consider profit maximization as the core objective of organization, which in turn maximize the gains of the owners or shareholders. In the era of corporatisation, executives enjoy the control to manage the organizations. Shareholders and owners repose their confidence on executives to manage the show. Therefore, executives may often take the undue advantage to pursue their own interest, over-riding owners’ or shareholders’ interest. Since goals of shareholders (principal) and executives (agent) are not congruent, executives may engage themselves in opportunistic behaviour for maximising their personal gains at the cost of the principal. This is the classical syndrome of agency theory. Executives can dissuade them from such pursuit, once they get higher than market level compensation. Organizations, however, cannot substitute their core objectives of profitability for the sake of increased level of executive compensation. Hence they design executive compensation innovatively primarily with three core components; cash (salary and bonus), various perquisites and supplementary benefits, and finally various long-term incentives. Most of the executive compensation theories center on the theories of firms. With profit maximization as the core objective, firms need to bend upon executives, as the power of controlling rest on them. This typical syndrome indulges executives to expect above normal compensation. Granting cash compensation, without considering the cost aspects adversely affect the interest of the firms. Although firms can always benchmark their compensation package with the market rate, even after payment of benchmarked salary rate, firms may not be able to make them good performers, and hence require to identify other compensation option, both to derive the benefit of performance satisfaction and increased executive retention. Perquisites and supplementary benefits represent a very small fraction of executive compensation, for obvious tax burden. Hence organizations need to design more tax efficient long-term incentive package. However, worth of long-term incentive package is difficult to determine. For example future value of stock options is uncertain. Even using different established models, we cannot predict its value. We consider four classes of variables like; corporate size, firm performance, industry characteristics, and human capital attributes, as determinants of stock value. Firms’ size is ascertained based on its sales, assets, and number of employees who are employed. Executives’ job in large organization is more complex than in small one, hence large firm pays higher compensation to executives. Another analogy for large firms to pay more to executives is that in a large firm we have more hierarchical levels, therefore organizations make pay differentials between the hierarchical levels, resulting more pay for the executives. Another analogy for higher level of executive compensation is sales maximisation hypothesis. In organizations, executives by increasing the sales achieve higher results, which make them natural claimant of higher compensation. With sales maximization, organizations achieve growth, which reduces the power of owners, rendering them to play the monitoring role. This makes it possible for the executives to pursue their own interests and accumulate wealth. Other important economic determinant of executive compensation is the performance of firm. Executives are accountable for the firm’s performance; hence their compensation is linked with the results of organizational performance. Although we lack adequate empirical evidence in this respect, changes in executive compensation can be indexed, aligning with the performance of the organization. A simple statistical model to explain influences of organizational performance on the growth of executive salary is: Base salary growth = a + b1revenue growth + b2 profit growth + e

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Here ‘a’ is the intercept term, b1and b2 are coefficients of revenue growth and profit growth, and e is a standard error. Type of industry is the third economic variable of executive compensation. For example, service industry’s compensation package is higher than the manufacturing industry. Again within the service industry, IT and ITES organizations pay higher compensation than transport service providers. All these cannot be explained in terms quality of manpower required. Typical occupational hazard, security and safety involved in a job could be a factor for compensation differences. For example a ground engineer of an Airline may get less salary than in-flight personnel. Another important economic variable is the difference in human capital. Variation in human capital make significant differences in performance and productivity on the job, and may be due to education, work experience and skill differences. The underlying analogy for increased level of executive compensation, therefore those who have invested more in enriching their value, should get more. Political and social factors also make differences in executive compensation. Because of their proximity with the authority, executives themselves can manipulate and come out with their increased compensation plan. This is what we attribute to power politics. Likewise, social norms also can make a significant difference in executive compensation.

4.13.6 Some other Theories of Executive Compensation
Based on the above discussions, some of the theories of executive compensation can be narrated as under: Agency Theory: Shareholders’ being agents of the company due to their ownership rights, they delegate control to top executives to represent their ownership interest by designing compensation, keeping in view the mutual interest. The theory therefore requires designing compensation in a way that serves the best mutual interest of shareholders and the virtual owners, i.e., the top executives of the organizations. Tournament Theory: As per this theory, compensation is viewed as the prize in a series of tournaments or contests among middle and top-level managers, who aspire to become CEO. Winners of the tournament at one level enter the next tournament. In other words, an executive’s promotion to a higher rank signifies a win, and more lucrative compensation represents the prize. Social Comparison Theory: This theory suggests designing of compensation by comparing with similar individuals. Balance Sheet Approach: This approach provides expatriates the standard of living they normally enjoy in their own country. Indian Software companies or other companies when depute their executives and employees abroad allow their current salary to accumulate and provide separate salary/compensation to accommodate their cost of living in countries where they are posted. Headquarters based pay: Compensation to all according to the rate used at the headquarters. Golden handcuffs: Compensation components earned over a period of time that assist in retaining an employee. Many organizations practice this approach to avoid attrition. Some organizations deliberately provide a designation and salary to newly recruited or relatively less experienced employees, disproportionate to their deserving level. Say, an MBA with 2 years experience, given a designation of Vice President with a compensation package much higher than the market benchmark. This dissuades the young executives to leave the job, as they know it well, they will not get a befitting salary and status in other organizations. In India also such practices is evident in many new generation companies. Another example of golden handcuffs may be giving

loyalty bonus points or phantom stock for every year of completed service, with a cap (qualifying services) of 5 or 10 years service. Which means to get the benefit, employees should remain with the company. Competency based pay: Pay related directly to the kinds and levels of competencies required in the performance of the work/job. Golden parachutes: Provide pay and benefits to executives after their termination resulting from a change in ownership, or corporate takeover. This is particularly for very senior level executives, who may dictate this condition in their terms of employment to protect their interests in the event of take over. However, in India some recent judgments of Supreme Court even, questioned the sanctity of such practices, leaving it to the discretion of the acquiring organization to alter or not to alter the service conditions of employees of the organization, which is being acquired. A Hay Group study in 2006 shows the French executives' golden parachutes are the highest, as they receive double of their salary and bonus in their golden parachute. An alternative to golden parachutes is the golden handshake plan. With the provision of gloden handshake in the terms of appointment of executives, they become eligible for significant severance package, when they get fired, or retired or even required to quit due to organisational restructuring. Cafeteria plan: For executives, options for different nature of benefits, is commonly termed as cafeteria plan. For example health insurance, group-term life insurance and flexible spending accounts, all represent medical benefits. Executives may select either of the alternative as compensation benefit. Cafeteria plan is also evident in some Indian organization, which gives the employee the flexibility to choose between the contributory provident fund and pension. Profit sharing plan: It provides direct or indirect payments, based on organization’s profitability, apart from regular compensation. Although employee stock options fit here as a good example, more applicable fit is Tata Group’s EVA plan.

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For organizations, globalization has exerted two influences; market globalization and the need for reducing the cost of production. A large number of companies now look for global market to sell their products and services. With the availability of latest state of the art communication technology, globalization has increased the demand from across the borders and people are now looking for best bargain for products and services, irrespective of the country where they are produced. To reduce the costs of production, organizations are now taking many initiatives, including relocating their production facilities to low labour cost countries. However, relocating the production and facilities to low labour costs countries may not always be feasible, as it may put the organizations in a relatively disadvantageous position for loosing the market proximity. These require the organizations to expand their plant and offices all around the world and man those recruiting people, both from the local markets and also deputing their own people as expatriates. Compensation design both for the Local Country Nationals (LCN) and for the expatriates is a biggest challenge. Expatriates are the Third Country Nationals (TCN). Both for LCN and TCN, organizations have to frame compensation strategically, so that the burnt of compensation cost, cannot defeat their business goals in global markets. Expatriates can be assigned international posting both for the short term (less than a year) and for the longer duration. In the United States, expatriates assignments may be for two to three years. In Japan such assignments are for longer duration, usually five years. However, we can generalise the period of assignment from such trends. For short-term assignments, we do not require any change in the compensation structure. Expatriates in such cases are given their usual salaries plus some living

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expenses to meet their additional expenses in international assignments. However, in case of long-term assignment, organizations need to design compensation.

4.14.1 Fundamentals of International Compensation
Globalization is now a reality for all organizations. Globalization do not have just economic ramification, it has also enhanced the level of awareness for free flow of information across the nation, influencing the market, the people. As a natural consequence, globalization also has bearings on compensation management. Internationally equitable compensation, across the nations, for companies having presence in the global market, is now common. International compensation management is a complex area, because of cross-cultural issues, difference in organizational practices, labour costs etc. Thus, particularly for organization, which works in a multi-national environment, it is important to understand the international compensation systems. Problems in international compensation become more serious when organizations send their employees on overseas assignments and subsequent return of such employees to their home countries. Before we clarify issues involved in international compensation, it is important to clarify certain terms. International compensation design for an expatriate (expat) is the most challenging task for the organizations. An expatriate is a citizen of the country, where his/her organization is headquartered. For example an Indian working for the subsidiary of his/her organizations in the U.S.A. is an expatriate. This is quite evident in IT and ITeS companies, to optimise the utilisation of expertise, or to restructure the manpower or even to develop the employees’ capability. In technology transfer cases; overseas assignments for training and development are more evident. Today’s workforces are mobile. For international assignments, workforces are classified as short-term transferees, permanent transferees, permanent transferees, expatriates, third country nationals, glopats, etc. Compensation systems largely depend on the nature of the assignments and the workforces. Firms send workers to international assignment with some definite goals and objectives, hence alignment of international compensation with defined goals and objectives is very important. Now we will explain the terms used for the international assignment. A short-term transferee is temporarily assignment to work abroad for a period of 2 – 12 months. An expatriate is usually transferred to an international assignment to work for a period of 3 – 5 years. They are also known as assignees. A glopat is a worker of international cadre, who is sent to one international assignment to another. These workers are also known as globetrotter. Third Country Nationals (TCNs) are those workers, who are neither from the country of the organization, where it exists, nor from the country where they are working. Their origin is from a different country. For example, Chinese workers working for Infosys’s software development projects in the U.S.A, represent TCNs.

4.14.2 International Compensation Design
In a global market place, strategic flexibility is more important than the national culture to determine compensation. Employment practices vary worldwide. Even after globalization, such practices hardly could change. For example lifetime employment in Japan and industry-wide bargaining in Germany are still in vogue. These have weakened the spate of globalization, and so also the issue of uniformity in international compensation design. What is therefore important for us is to look for design of international compensation, which keeps expatriates ‘economically whole’. International compensation design requires global mind-sets. With the right global mind sets, organization, in the era of globalization and market economies, can balance the corporate, business unit and functional priorities of a global scale. In the words of Jack Welch, the erstwhile CEO of General Electric, ‘the aim in a global business is to

get the best ideas from everyone, everywhere.’ To successfully compete in a global market, it is essential for the organizations to design their international compensation with a global mind set, to understand the economic, social and political changes in the countries where they operate. With a global mind-set, organization can become flexible to design compensation for the expatriates. For example, in China local labour costs for the State Owned Enterprises (SOEs) and for the private and foreign organizations are different, In SOEs compensation costs are quite high. In other organizations it is low. Most of the global organizations relocated their manufacturing units in China to reap the advantage of low labour cost. Similarly, in Japan employee compensation largely depends organizational size, degree of unionization, capitallabour ratio, degree of global competition and above all the profitability. Korean compensation considers labour market issues, customer-supplier relations, economic situation and technology level. In Hungary and in the U.S.A. political, economic and institutional forcers are more important in organizational compensation decisions. In India, however, the labour laws largely regulate employee compensation issues with little room for variation and flexibility, depending on the organizational needs. Similarly country-wise emphasis on fixed and variable pay varies. Check Your Progress 3 State whether the following statements are true or false: 1. The main functions and objectives of Performance Appraisal are to identify and define the specific job criteria. 2. Performance appraisal is to measure and compare the performance in terms of the defined job criteria. 3. KRAs and KPAs are designed so that it can help in measuring job performance in quantitative or qualitative terms. 4. Performance appraisal aims to develop and justify reward system, relating rewards to the employees’ performance. 5. The function of an HR manager is to identify the strengths and weaknesses of employees and to decide on proper placement and promotion.

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The purpose of performance related pay is to reward employees for factors other than the value of the job. This chapter discussed the methods of designing performance related pay, going beyond the traditional paradigm of compensation design, which considers cost of living, and other statutory wage provisions. However, the chapter also focused on the possible dangers of designing compensation, solely on performance criteria, as often it may ignore other vital issues of people management aspects. It may not be always possible or even desirable to introduce performance related pay in organizations. Many organizations embrace the system for their cost control, rather to derive the strategic benefits like employee motivation and retention. Hence introduction of performance related pay requires the organizations to understand the basics of performance management systems and its relations to other facets of human resource management issues. Rewarding employees on the basis of performance, requires correlating the position of employees on a performance scale and effect changes in the wage structure accordingly. Its perquisite is to introduce first a good performance evaluation system, emphasizing more on quantification of performance achievement. The chapter discusses about many performance evaluation tools also, but its selection highly depends on the nature of organization and its activities. Developing a performance

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standard for all types of job may be difficult, despite having advanced mechanisms like balanced score card, competency-based assessment, etc. Thus, though it is effective, it requires adequate pre-work and feasibility study before introduction. Performance Appraisal reinforces HRM in an organization. In this era of technological change and global competitiveness, organizations are constantly required to renew and update skill of their people or else they are likely to encounter the problem of manpower obsolescence, which among others, will call for frequent downsizing or rightsizing. While Performance Appraisal updates organizations to take a stock on their skill inventories, training helps to address the skill-gap. Wages and Salary administration is one of the major HR functions today. While compliance with procedures and regulations is one aspect, cost to the organisation and employees’ motivation are other aspects between which HR managers need to tradeoff. In per centage terms, salary and wages and bonus taken together are still major causal factors of industrial disputes in India. Hence determining wages based on certain defined methodologies should receive priority. Linking wages to performance is again a major issue. Suitable incentive schemes need to be identified to reward good performers. Fringe benefits again another major instrument for employee motivation. Organisations can be innovative in designing employee compensation considering various aspects. Compensation is a methodical approach to assigning a monetary value to employees in return for work performed. Compensation may include any or all of base pay, overtime pay, commissions, stock option plans, merit pay, profit sharing, bonuses, housing allowance, vacations and all benefits. Compensation is a term used to describe not only employee salaries but also all other benefits received. This is also referred to as remuneration. Compensation is a more holistic term. Traditional wages and salary administration has now started loosing ground, because we have to design compensation in a way, so that in employees’ hand it becomes more a reward than monthly salaries for the job done. Just complying with statutory norms and expecting employees to deliver results do not hold good in today’s competitive scenario. Organisations need to emulate best practices, continuously benchmarking their compensation designs and understand what holds good for them. Even decision on fixed and variable components of compensation, need to be taken, keeping pace with numerous factors, like; nature of job, company’s business goals, product life-cycle, performance management systems, etc. There are various short-term and long-term incentive schemes, available for the organisations. Taking into account human resource strategy, organisation has to choose among different alternatives, which is qualifying the test of cost-benefit. Choosing right incentive plans is again another important area.

Draw a wage policy for payment of wages to industrial workers.

Performance management system refers to the combination of performance goals and a pay for performance plan. Minimum Wages: Wages, which are need-based and statutorily decided both by the Central and the State Government. Payment of minimum wages is obligatory for the organisation. Fair Wages: It is the wage, which is above the minimum wage but below the living wage. Thus the lower limit of the fair wage is the minimum wage and the upper limit is set by the “capacity of the industry to pay.”

Job Evaluation: Process of measuring the relative worth of a job to decide the wage rate. Living Wages: Wage rate which not only provide 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. ESOP: Employee Stock Options, offered as incentives by the organisation to ensure increased level of motivation and retention of employees. Dearness Allowance: These allowances are paid to protect the fall of real wages of employees, keeping pace with the price rise. Time Study: Carried out to decide the standard time required performing a job and then basing the wage and incentives on the same standards. KRA: Key Result Areas to indicate the performance target of individual employees of an organization, aligning with the business goals. SMART: SMART goals are specific, measurable, attainable, realistic, and time bound. Behaviourally Anchored Rating Scales: It is used to measure underlying attitude in one or more performance attributes. Assessment Centres: One of the modern methods of performance appraisal. This method test candidates in a social situation by a number of assessors, using a variety of criteria. This method is useful in measuring inter-personal skills, organizing and planning ability, creativity, resistance to stress, work motivation, decision making power, etc.

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1. What are the important objectives of a Wage Policy? Distinguish between Fair Wages and Living Wages. 2. Describe some important techniques of Wage Determination. 3. To what extent Job Evaluation technique is useful for Wage Determination? What are the different types of Job Evaluation? Which type you consider better and why? 4. Describe the role of Time Study in Wage Determination 5. Describe various incentive schemes, which are incentive schemes you consider better for employee motivation. 6. What way fringe benefits help in employee motivation? 7. Traditional Performance Appraisal System emphasises on assessing the individual performance as an isolated factor. Briefly discuss the newer techniques of performance appraisal, mentioning how it can benefit an organization to design suitable compensation structure. 8. Discuss the effectiveness of MBO and BARS in designing performance related pay. Develop KRAs for a HR Manager of an organization and identify five important performance criteria for assessing the performance and its relation to your compensation design. 9. Explain the concept of competency. How competency development helps in compensation design.

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10. Write short notes on: a) Employee Services b) Factor Comparison Model c) Employee Stock Option d) Scanlon Plan

Check Your Progress: Model Answers
CYP 1 1. T, 2. T, 3. T, 4. F. CYP 2 1. Iron Law of Wages, 2. Wages, 3. Payment of minimum rate of wages, 4. Wage policy guides CYP 3 1. T, 2. F, 3. T, 4, T, 5. T.

Suri, Venkata Ratnam & Gupt (ed.), Performance Measurement and Management, Excel Books, New Delhi, 2004. R. K. Sahu, Performance Management System, Excel Books, New Delhi, 2006. Rao and Rao (ed.), 360-Degree Feedback and Performance Management System, Excel Books, New Delhi, 2000. B. D. Singh, Compensation and Reward Management, Excel Books, New Delhi, 2007.

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