TOPIC 1

Introduction to Performance Management System: Meaning, Uses, And Purpose Of Performance

Management

PERFORMANCE MANAGEMENT SYSTEM

Performance management system is tool which is used to communicate the organizational

goal to the employees individually, allot individual accountability towards that goal and
tracking of the progress in the achievement of the goals assigned and evaluating their
individual performance. Performance management system reflects the individual
performance or the accomplishment of an employee, which evaluates and keeps track of all
the employees of the organization.

Importance of Performance Management System

Performance Management System is the tool that helps the managers to manage their
resources and eventually result in the success of the organization. Performance
management system is a very broader and complicated function of HR. It includes activities
such as joint goal setting, frequent communications, continuous progress review, feedback
of the performance and rewarding the achievements.

Following are the actions included in performance management systems:

1. Providing career development support and promotional guidance to the employees.

2. Performance management system helps in giving regular feedback and coaching
during the period of delivery of performance.
3. By proper selection process, selecting the right set of people.
4. Making clear a job description and employee performance plan.
5. Arranging training and development programs based on the evaluations of the
performance of the employees.
6. Conducting the exit interviews in order to know the reason for the discontentment
and from the organization.

Advantages of Performance Management System

Several benefits of performance management systems, which can improve a company’s
performance are listed as below:

1. Performance based conversation- This enables the managers to talk about the
performance of the employees individually. They may help the employees in case he
is not performing well, on the other hand appreciate him in case he does good work.
2. Performance management system can also help to identify the employee
development opportunities, which could be the crucial part of the succession
planning process.
3. It rewards the employees who are good performers as employees deserving the
promotions can easily be identified.
4. The under performer can be identified and eliminated or helped improving his
performance with various training and development programs.
5. Proper maintenance of the past performance records of the employee in a
systematic order, which can be used for future references.
6. Employee himself can gauge his performance and work upon it accordingly.

Purposes of Performance Management System

Performance Management is often a misunderstood concept most people associate it with

concepts such as: Performance appraisal, Performance-related pay, Targets and
objectives, Motivation and discipline. But, performance management is much more than
this. Performance management is about getting results. It is concerned with getting the best
from people and helping them to achieve their potential. It is an approach to achieving a
shared vision of the purpose and aims of the organization. It is concerned with helping
individuals and teams achieve their potential and recognize their role in contributing to the
goals of the organization.

A performance management system consists of the processes used to identify, encourage,

measure, evaluate, improve, and reward employee performance at work. Employees’ job
performance is an important issue for all employers. However, satisfactory performance
does not happen automatically; therefore, it is more likely with a good performance
management system.

A performance management system serves two fold purpose:

(1) ​to improve employees work performance by helping them realize and use their full
potential in carrying out their firms missions

(2) to provide information to employees and managers for use in making work related
decisions. More specifically, performance management system serve the following
purposes:

1. Feedback Mechanism

Appraisals provide feedback to employees therefore serve as vehicles for personal and
career development. Performance appraisals must convey to employees how well they
have performed on established goals. It’s also desirable to have these goals and
performance measures mutually set between the employees and the supervisor. Without
proper two-way feedback about an employee’s effort and its effect on performance, we run
the risk of decreasing his or her motivation.

2. Development Concern

Once the development needs of employees are identified, appraisals can help establish
objectives for training programs. It refers to those areas in which an employee has a
deficiency or weakness, or an area simply could be better through effort to enhance
performance for example suppose a college professor demonstrates extensive knowledge
in his or her field and conveys this knowledge to students in an adequate way. Although this
individual’s performance may be satisfactory, his or her peers may indicate that some
improvements could be made. In this case, then, development may include exposure to
different teaching methods, such as bringing into the classroom more experimental
exercises, real world applications, internet applications, case analysis, and so forth.

3. Documentation Concern

A performance evaluation system would be remiss if it did not concern itself with the legal
aspects of employee performance. The job related measure must be performance
supported when an Human Resource Management (HRM) decision affects current
employees. For instance, suppose a supervisor has decided to terminate an employee.
Although the supervisor cites performance matters as the reason for the discharge, a review
of this employee’s recent performance appraisals indicates that performance was evaluated
as satisfactory for the past two review periods. Accordingly, unless this employee’s
performance significantly decreased (and assuming that proper methods to correct the
performance deficiency were performed), personnel records do not support the supervisor’s
decision. This critique by HRM is absolutely critical to ensure that employees are fairly
treated and that the organization is “protected”. Additionally in cases like sexual
harassment, there is a need for employees to keep copies of past performance appraisals.
If retaliation such as termination or poor job assignments occurs for refusing a supervisor’s
advances existing documentation can show that the personnel action inappropriate.

Because documentation issues are prevalent in today’s organizations, HRM must ensure
that the evaluation systems used support the legal needs of the organization.

4. Diagnoses of Organizational Problems

As a result of proper specifications of performance levels, appraisals can help diagnose

organizational problems. They do so by identifying training needs and the knowledge,
abilities, skills, and other characteristics to consider in hiring, and they also provide a basis
for distinguishing between effective and ineffective performers. Appraisal therefore
represents the beginning of a process, rather than an end product.
 5. Employment Decisions

Appraisals provide legal and formal organizational justification for employment decisions to
promote outstanding performers; to weed out marginal or low performers; to train, transfer,
or discipline others; to justify merit increases ( or no increases); and as one basis for
reducing the size of the workforce. In short, appraisals serve as a key input for
administering a formal organizational reward and punishment system.
TOPIC 2

Performance Management System Is Differ From Performance Appraisal

Performance Management Vs. Performance Appraisal

Performance Management is a continuous process that aims at planning, monitoring

and evaluating the objectives of an employee and his total contribution to the
organization. The basic purpose of performance management is to encourage and
improve employee’s efficiency and effectiveness.

In this process, both the employees and the managers participate in setting the
objectives, assessing the performance or progress, providing training and feedback to
the employees at regular intervals for improvement, implementing development
programs for employees and rewarding them for their achievements.

Performance Appraisal implies a rational assessment of the performance of an

individual, based on pre-determined standards. On the other hand, performance
management alludes to the management of performance of the manpower working in
an organization. While Performance Appraisal is a yearly system while if we talk about
Performance Management, it is a continuous process that does not occur eventually.

What kind of evaluation process is adopted by the organization is one of the biggest
questions, as the appreciation and development of employees rely on it? Some
employees work silently but does not show himself/herself, while there are also such
employees who put up a show but hardly performs. So, the performance appraisal and
management play a crucial role, as the success of the organization is combined effort of
all the employees and the entrepreneur.

With the help of this process, both the employee and the employer get a chance to set
the combined goals of the employee that relates to the ultimate goal of the organization
by considering the employee’s performance. In this way, the objectives of the parties
became clear that helps to achieve the overall objectives of the organization and the
growth & development of the employee as well.

Key Differences between Performance Appraisal and Performance Management

The following are the major differences between performance appraisal and
performance management:

1. An organized way of evaluating the performance and potential of employees for

their future growth and development is known as Performance Appraisal. The
complete process of managing the human resources of the organization is known
as Performance Management.
2. Performance Appraisal is a system while Performance Management is a
process.
3. Performance appraisal is inflexible, but performance management is flexible.
4. Performance Appraisal is an operational tool to improve the efficiency of
employees. However, performance management is a strategic tool.
5. Performance Appraisal is conducted by a human resource department of the
organization, whereas managers are held responsible for performance
management.
6. In performance appraisal, corrections are made retrospectively. In contrast to
performance management is forward looking.
7. Performance Appraisal has an individualistic approach which is just opposite in
the case of Performance Management.
8. Performance Appraisal is carried on eventually, but Performance Management is
an ongoing process.
 TOPIC 3

Performance Management and its Challenges in Current Scenario

Performance Management

Performance Management can be defined as a process which continuously identifies measures

and develops the performance of the workforce in the organization. And to do so, each individual’s
performance and objectives are connected with the overall mission and goals of the enterprise.
Hence, the two key elements of performance management are:

● Continuous process
● Link to mission and goals
● In performance management, the managers try to figure out, the existing
performance level of the employees and works on improving that level. It is a
systematic assessment of the performance of an employee and using the
assessment to better the performance over time.​ ​There are a number of
challenges that can prove to be an obstacle to effective performance
management. Obstacles can include but are not limited to:
● writing a poorly structured strategy,
● failure to communicate the strategy to stakeholders/staff,
● failure to achieve buy-in of the strategy,
● not measuring progress,
● not holding at least quarterly strategy review sessions,
● not taking the time to define success and celebrate it along the way,
● not adapting to changing circumstances,
● and not giving your team the necessary authority or tools to accomplish their
jobs.
● It’s vitally important to steer the strategic planning process effectively to avoid
those common pitfalls.
First of all, it’s important to pick the right objectives and goals that will drive the results
you seek. Defining those falls into the realm of creating an effective strategy. It’s
important to pick top priorities for your organization, and determine through goals and
actions how you will support them. The goals themselves should be set up using the
S.M.A.R.T. technique
TOPIC 4

Performance Management as a System and Process

In the modern economic environment performance management systems (PMSs), as

means of information support of corporate governance and strategic management,
become more and more important both for commercial companies and non-for-profit
organizations. At present many organizations try to develop and use different types of
analytical methods, business processes and applied information systems. However, up
to now any holistic, strategy oriented methodology for design, implementation and
utilization of PMSs is not available.

One of the first steps towards a comprehensive methodology of PMSs development is

an approach to conceptual modeling of such systems. In turn, this approach may be
applied for developing of a generic conceptual PMS model, representing general (i.e.
common for different entities and industries) features of performance management
systems. Such model may be considered as a reference model and may be useful for
developing of specific PMSs of individual organizations.

Performance Management Process

Performance management process is a systematic process of managing and monitoring

the employee’s performance against their key performance parameters or goals. It is
regarded as a process for driving the individual and organizational performance
management.

Preliminary, the process involved six steps which followed one after the. In short, it is
termed as continuous process in organization.
Stage 1: Pre- Requisitesal , then organization loose its objectivity . Therefore, it is
necessitate defining the purpose Cleary for existing and new employees/ staff,
departments in order to make integrate all teams to meet company’s target. There are
three primary stages where the company defines their long term and short term goals.
The first stage is at the organization level, where the management describes the holistic
view and defines overall objective of formulation of the company, what are their long
term vision, what are the values on which they stands for, and what is the mission the
company is chasing. The second stage perquisites at department level, where the
management assign targets to each department to achieve overall organization
objective. At this stage, the management strategizes the processes and allocate targets
to each department.

Stage 2: Performance Planning

There are three important attributes of performance planning:

1. Results
2. Behaviors
3. Development Plan

Results: the yardstick of performance management is used to measure employees and

department performance. It provides the information about the performance gaps and
achievements. Hence, it evaluates how well the individual employee has performance
against his assign targets

Behaviour: measuring the employees behaviours are one of the most challenging and
difficult task basis on performance standards. The human behaviour can only be
measured through observation and close monitoring by his supervisors or human
resources department.

It is difficult to qualify the behaviour against his performance standards. There are lot of
subjectivity involved in this category. However, there are lot of phycomateric tools which
supports to define and indicate individual behaviour and attitude, but research has
proven that they are only indicators and not provide absolute answer and authenticate
results. Hence, we can define the expected behaviour in employee’s performance
standards during the performance planning and its measurement but cannot quantify it
with data.

Development plan: ​development plan is the third stage of performance planning. At

this stage, we develop the plans to improve employees knowledge, skill and attitude (K,
S, A). It allows employee to take his professional standards to next level which the
support of development tools and plans

Stage 3: Performance Execution

Performance execution is considered as most important stage because the whole

exercise of creating performance management systems and building up standards
would rely on it. The primary responsibility and ownership of performance execution is
with employee, which is followed by department and then organization. Hence, it is
considered as a chain or process, in which the performance of individual employees
would result department performance.

Therefore, the role and responsibility of supervisor or manager also increases which
comprises with following focus areas: Provide resources , tools and equipment’s to
employees to make out better results Provide regular feedback to subordinate about
their performances and improvement areas Motivate team members through different
channels and tools Integrate individual development plans with department’s goal
Remain focus on development activities to enhance individual knowledge and skills.

Stage 4: Performance Assessment

Performance assessment is the next stage followed by performance execution. In this

phase, the employee and manager both are responsible to measure and assess the
performance of employee against his targets. The process should comprise to the
extent of individual targets, behaviours or attitude and special achievements during the
performance appraisal cycle.

Stage 5: Performance Review

The performance review stage is a platform where the subordinate and superior
exchange performance feedbacks and review performances against given targets or
goals to individual. To make the performance review successful, the involvement and
exchange of dialogue are equally essential between employee and his manager. Apart
from performance review, they also discuss about the development plans, trainings to
improve skills and knowledge, next year goals and targets and expectations of
employee and manager both. Hence, this stage is considered the base of next year
performance appraisal cycle as well.

Stage 6: Performance Renewal and Reconstructing

The performance management process is an ongoing continuous process. Once the

performance has been reviewed and end, then the cycle starts for the next performance
appraisal. It should be again align with next year organization mission, goals and
objective and integrated with departments goals In facts, it is a process which starts all
over again which needs to be discuss, design, develop , executed and review again.
This is necessitate because the external environment of company like market,
customers , competitors , suppliers etc. also revolved and all subsequent changes has
to prerequisites for performance planning and setting with strategic objectives of
organization.

Modeling Approach

Conceptual design of PMS should be based on a functional modeling approach. The

approach has some similarity with a well known IDEF methodology, but as opposite to
IDEF it represents a ‘high-level’ framework, taking into consideration only general
principles and characteristics of PMSs. The main elements of the conceptual model are:

● Functional blocks​ –​ sets of functions that are related with generic stages of
strategic management process;
● Functional modules​ –​ more detailed objects within functional blocks, which
provide one or several similar functions;
● Information flows​ –​ connectors (arrows) representing data movements between
different PMS functional modules (internal flows) and between PMS and external
sources and recipients of information (external flows).
TOPIC 5

Effective Appraisal System and Criteria (KRA, KSA, KPI)

Effective Performance appraisal is the process of reviewing an individual’s performance

and progress in a job and assessing his potential. It is a systematic method of obtaining,
analyzing a recording information about a person doing a specific job, rather than
assessing the job itself as in the case of job analysis.

Performance appraisal is the assessment of the real and relative worth of the
employees in a systematic and subjective way. The competence of the employee
should be measured with reference to the established standard of the task assigned.

Characteristics of Effective Performance Appraisal:

The characteristics of performance appraisal are given below:

1. The system must be bias-free:

The evaluator must be objective and the methods of appraisal must be fair and
equitable. The atmosphere must be that of confidence and trust.

2. It must be relevant:
It should only measure behaviour that are relevant to the successful job performance
and not any other personal traits.

3. It should be acceptable to all:

The performance standards as well as the appraisal methods should be developed by

joint participation and joint collaboration.

4. It should be reliable; dependable; stable and consistent:

High reliability is essential for correct decision-making and validation studies. It should
be sufficiently scientific, so that if an employee is evaluated by two different evaluators,
then the result should be significantly the same.

5. It must be able to objectively differentiate between a good employee and an

ineffective employee:

Rating an employee average does not adequately indicate the degree of effectiveness.
So the technique must be sufficiently sensitive to pick up the difference between an
effective and an ineffective employee.
 6. It must be practical, sound, clear and unambiguous so that all parties
concerned understand all its implications.

Key Result Areas (KRA)

Definition: Key result areas or KRAs refer to the general metrics or parameters which
the organization has fixed for a specific role. The term outlines the scope of the job
profile, and captures almost 80%-8% of a work role.

Description: Key result areas (KRAs) broadly define the job profile for the employee
and enable them to have better clarity of their role. KRAs should be well-defined,
quantifiable, and easy to measure. It also helps employees to align their role with that of
the organization.

KRAs are broad categories or topics on which the employee has to concentrate during
the year. For example, an employee who is working at a managerial level in a
manufacturing company would have a different KRA than somebody who is in a
technology firm.

A manager who is working in a manufacturing firm would have to focus on maintaining

the budget of the department, safety of the employees, coordination with different
departments, training, reporting as well as introducing new technologies to improve
productivity.
The next step is to define objectives and standards for each KRA which should be
easily quantifiable. The employee should have a clear understanding of his/her KRAs to
perform his/her tasks efficiently.

Key result areas are those areas in which you have to take complete ownership. The
first step is to list out daily activities which could be part of the KRAs. In some
organization even a team meeting everyday is part of a manager’s KRA.

So, KRAs could be vary from organization to organization and from one work profile to
another. There are no set rules to define KRAs, but broadly they sum up the job profile
as well as the key impact areas on which the employee is expected to deliver.

KNOWLEDGE, SKILL, ABILITIES (KSA)

Managing employee performance is a key concern for every employer. The measure of
success and method for harnessing employee performance to align with business
needs will vary from employer to employer as well as being dependant on industry
sector. Whilst employers will seek to tailor their performance management systems to
their own operations employers in KSA need to be mindful of the provisions in the
Ministry of Labour and Social Affairs’ Model Work Regulations regarding performance
management. The Model Work Regulations are available for employers to adopt
wholesale or to adopt with modifications provided any amendments receive prior
approval from the Ministry of Labour and Social Affairs. Extensive modification of the
standard model is unlikely to be approved for use by an employer. Broadly the Model
Work regulations provide for the following.

Every employee should be assessed formally and in writing at least once a year; with
the appraisal covering the following:

● The individual’s ability to perform work and their level of proficiency;

 ● The employee’s conduct, cooperation with colleagues, customers, and
managers; and
● The individual’s punctuality.

Each employee should be given a performance marketing or ranking based on five

performance gradings which are not specified but would include categories along the
lines of high performance, upper intermediate, intermediate, lower intermediate, and
poor.

Key Performance Indicator (KPI)

A Key Performance Indicator (KPI) is a measurable value that demonstrates how

effectively a company is achieving key business objectives. Organizations use key
performance indicators at multiple levels to evaluate their success at reaching targets.
High-level KPIs may focus on the overall performance of the enterprise, while low-level
KPIs may focus on processes or employees in departments such as sales, marketing or
a call center.

What makes a KPI effective?

Now that we know KPI stands for key performance indicator it is only as valuable as the
action it inspires. Too often, organizations blindly adopt industry-recognized KPIs and
then wonder why that KPI doesn’t reflect their own business and fails to affect any
positive change. One of the most important, but often overlooked, aspects of KPIs is
that they are a form of communication. As such, they abide by the same rules and
best-practices as any other form of communication. Succinct, clear and relevant
information is much more likely to be absorbed and acted upon. KPIs are an effective
tool to help build better performing teams.
In terms of developing a strategy for formulating KPIs, your team should start with the
basics and understand what your organizational objectives are, how you plan on
achieving them, and who can act on this information. This should be an iterative
process that involves feedback from analysts, department heads and managers. As this
fact finding mission unfolds, you will gain a better understanding of which business
processes need to be measured with a KPI dashboard and with whom that information
should be shared.
 ​
TOPIC 6

Reasons for Performance Appraisal

Formal performance appraisals can be of huge benefit to both the employer and the
employee. Unfortunately, however, they are increasingly undervalued and underutilized by
both parties.

Employers must recognize that formal appraisals have a huge impact on how satisfied,
motivated and productive their employees are. I have found that with the right preparation,
appraisals can be both stimulating and performance enhancing.

1. Make your people feel valued

To be fully satisfied and competent employees need to feel that they’re valued and are
producing good work. The formal appraisal is a great opportunity to give your employees
sincere feedback, spurring them on to work smarter and better.

Employees really value frequent praise and recognition, so letting them know you are aware
of the good work that they’re doing will help you to retain hard-working staff. Your team will
also value your expert advice on their personal brand, and what key areas they should be
focusing on strengthening.

2. Set new goals

The most productive employees are those that are constantly driven, and unrelenting in
their pursuit of goals. Setting achievable targets during the appraisal helps to motivate
employees, and empowers them to feel more confident when they hit them.

The appraisal is also a useful occasion to realign business objectives with changing market
conditions; making targets relevant and accurate. For instance, during a particularly
stagnant period of nationwide growth you may wish to reign in your forecasts to avoid
disappointment.

3. Resolve grievances

Often managers are too engrossed in the day-to-day to get an insight into an employee’s
frame of mind. The appraisal is a great time to address any concerns you or they may have.

4. Strengthen bonds

It’s important for team cohesion and overall productivity that managers have good
relationships with their team. Use this occasion to align priorities and discuss various
matters of interest to the business with your team members; almost like a brainstorming
session.

5. Refocusing your team

Appraisals can be used to help communicate your vision to team members. This is your
chance to clarify and articulate your vision, ensuring that everyone is singing from the same
hymn sheet.

It’s also an opportunity to manage employees’ promotion expectations. Those with an

inflated idea of their own abilities and role within the business will benefit from a realistic
assessment of their current worth.

6. Oversight on current projects

As a busy manager, it can be hard sometimes to adopt a helicopter view of on-going

projects. Formal appraisals are a good opportunity to step away from the hustle and bustle
of everyday work and reflect upon the overarching direction your team is heading in.

7. Assess the training needs of your team

Different people within your team will have different strengths. Use the appraisal to assess
your employees’ weaknesses, identifying areas which may require additional training and
support.

Letting your team know that you’re thinking about their development will help instil in them
an ethos of ambition, in turn driving the business on to be more productive and aspirational.
UNIT- II

TOPIC 1

Methods of Managing Performance of all the Levels of Management

Performance Appraisal For Employees at Different Levels

Therefore, the two things to be noted and evaluated for the purpose of appraisals are:

● Performance in accomplishing goals, and

● Performance as managers

(I) Performance in accomplishing goals

Managers are responsible for the performance of their teams as a whole. Performance
in accomplishing goals would mean to look at the completion or achievement of the
goals set for a team of employees which is being assigned to or working under a
particular manager. The best measuring criteria for a manager are hi goals, his plans of
course of action to achieve them and the extent of achievement of the goals.

(II) Performance as managers

The responsibilities of managers include a series of activities which are concerned with
planning, organizing, directing, leading, motivating and controlling. Managers can be
rated on the above parameters or characteristics

Criteria for measuring performance at different levels:

The criteria for measuring performance changes as the levels of the employees and
their roles and responsibilities change.

A few examples for each level are described below:

For top level management

● Degree of organizational growth and expansion

● Extent of achievement of organizational goals
● Contribution towards the society
● Profitability and return on capital employed
For middle level managers
● Performance of the departments or teams
● Co-ordination with other departments
● Optimal use of resources
● Costs Vs. revenues for a given period of time
● The communication with superiors and subordinates
TOPIC 2

360 Degree Performance Appraisals

An appraisal made by top management, immediate superior, peers, subordinates, self

and customers is called 360 Degree Appraisal. Here, the performance of the employee
or manager is evaluated by six parties, including himself. So, he gets a feedback of his
performance from everyone around him. This method is very reliable because
evaluation is done by many different parties. These parties are in the best position to
evaluate the employee or manager because they are continuously interacting and
working with him. This method is mostly used to evaluate the performance of the
employees. However, it is also used to evaluate other qualities such as talents,
behaviour, values, ethical standards, tempers, loyalty, etc.

360 degree appraisal was first developed by General Electric (GE), USA in 1992. Today
it is used by all major organizations. In India, it is used by Crompton Greaves, Wipro,
Infosys, Reliance Industries, etc.

Six Parties In 360 Degree Appraisal

The six parties involved in 360 degree appraisal are :

1. Top Management

The top management normally evaluates the middle level managers. However, in a
small organization, they also evaluate the performance of the lower level managers and
senior employees.
 2. Immediate Superior

The immediate superior is in a very good position to evaluate the performance of his
subordinates. This is because they have direct and accurate information about the work
performance of their subordinates.

3. Peers / Co-workers

Peer or colleagues also evaluate each other’s performance. They work continuously
with each other, and they know each other’s performance. Peer evaluation is used
mostly in cases where team work is important.

4. Subordinates

The Subordinates can also evaluate the performance of his superior. Now-a-days
students are asked to evaluate the performance of their teachers.

5. Self Appraisal
6. In the self-appraisal, a person evaluates his own performance. He should be
honest while evaluating himself. This results in self-development.
 Customers

Customers can also evaluate the performance of the employees who interacts with
them. This evaluation is best because it is objective. It is also given a lot of importance
because the customer is the most important person for the business. Organizations use
customer appraisals to improve the strengths and remove the weaknesses of their
employees.

In addition to these six parties, appraisal can also be done by an Appraisal Panel. This
panel consists of 5 to 6 different types of members. Outside Consultants are also used
for conducting appraisals. In some cases, Personnel Department also conducts an
appraisal of employees and managers.

360 Degree Appraisal is becoming more popular because many parties are available for
evaluation. Therefore, there is no “bias” or “halo effect”. Hence the evaluation will
become more realistic.
TOPIC 3

MBO and Performance Analysis for Individual and Organizational Development

MANAGEMENT BY OBJECTIVES (MBO) AND ROLE ANALYSIS

Management by objectives is a process by which management at different levels and

their subordinates work together in identifying goals and establishing objectives
consistent with the organizational goals and attaining them. Performance is measured
against objectives and deviations are discussed. Superiors and subordinates review the
existing objectives and establish the fresh objectives for the new time span after the
deviations are discussed.

MBO is essentially a method of self-evaluation. Goal-setting is a highly participative

process with self-established role prescriptions. Here job analysis would not cover all
the activities of tasks performed by the superior and subordinate under MBO. Role
analysis should be undertaken covering the task performed by employee under MBO
programs.

Role Analysis

Analysis should e extended to include various roles played by an employee in view of

the criticism leveled against job analysis. A role would consist of the total pattern of
expected behavior, interactions and sentiments for an individual holding an assigned
job. The concept of role is something more than the job. Generally, the job incumbent is
expected to play different roles while discharging his duties. An example of this is a
manager is expected to play the role of protector of the interests of his subordinates.
Similarly, the subordinates are expected to maximize the productivity/sales/profit.
Sometimes the employees are expected to play informal roles which would not be
included in job analysis.

A boundary spanning job is one whose incumbent is commissioned to deal with some
significant element of the outer environment. Role analysis of personnel holding
boundary spanning jobs provides a good example of potential value in the making of
personnel decisions. In his position the incumbent of credit officers at a job of a bank
has to deal with different types of borrowers with different backgrounds. Likewise the
incumbent of a personnel job has to deal with trade union leaders or regional and
central unions, government officials, police officers, managements of various
organizations and management associations. Such roles often need verbal skills,
sensitivity to the values of external people and personnel, public relations, counseling
and conciliation skills and extra ordinary inter-personal relations.

These different roles of the employee, conflict with each other and that conflict is called
role conflict. Employees have to play different roles, in addition to just performing their
duties, as listed in job description. Hence, it is felt, that job analysis covers all these
activities of the personnel. It should be extended to role analysis. The job designers
should take the emerging concept of role analysis into consideration in designing or
redesigning the jobs.

Organizational Development through Management by Objectives (MBO)

Management by Objectives (MBO) program begins with the top management providing
clear statement of organizational purpose or mission so that individual member can
align their goals with critical organizational objectives. This statement can then serve as
a guide for developing long range goals and strategic planning. Departmental and
individual goals can then be derived from organizational goals.
Organizational Development through MBO approach generally involve the following
stages:

1. Formulating Long Range Goals: Guided by the organization’s mission

statement, senior management defines critical long term objectives and
determine how available resources will be used to accomplish these goals. This
process then leads to strategic planning activities which describe how the
organization will cope with its changing environment.
2. Developing Specific Objectives: In this step, broad organizational objectives
are translated into specific measurable outcomes with clearly stated time-frames
Although organizational objectives may include areas such as profitability, market
share, and quality, all objectives must be stated in clear terms.
3. Developing Departmental Objectives: Once organizational objectives are
clearly specified, each division or department must develop a set of specific
goals that will enable the organization to achieve its objectives. Again, these
departmental goals must be clearly stated in terms of measurable outcomes.
4. Setting Group and Individual Goals: This step is focused on developing and
implementing group and individual level goals in a coordinated manner. This
process encourages vertical and horizontal communication in the organization
since individual’s must clarify their roles and take responsibility for specific
results. Individuals goal setting is done in a collaborative manner and will include
both, personal and professional development objectives. Research indicates that
individual goals produce the most positive results when they are challenging and
specific.
5. Formulating and Implementing Action Plans​: Although clearly stated goals
provide a precise description of desired outcome, action plans are needed to
provide a way of attaining goals. Action plans systematically identify the
methods, activities and resources required to accomplish objectives.
6. Reviewing Goal Progress: Finally, mangers must review progress towards
achieving the goal by meeting with subordinates in a group or individually. During
these meetings, managers and subordinates discuss problems and difficulties
involved in completing the goals and evaluated individual performance based on
degree to which targeted goals were actually achieved. These meetings may
also provide an opportunity to review and modify goals that have become
outdated or unobtainable. Once this assessment is complete, the focus shifts
from past performance to planning future goals and action plans. Together,
mangers and subordinates develop mutually agreed upon goals and formulated a
strategy to achieve them.
UNIT- III

Topic 1

Potential Appraisal

The potential appraisal refers to the evaluation i.e. understanding of the hidden talents
and skills of a person. The individual might or might not be aware of them. Potential
appraisal is a future – oriented appraisal whose main goal is to identify and evaluate the
potential of the employees to achieve higher positions and responsibilities in the
organizational hierarchy.

On the other words, Potential appraisal helps to determine what can happen in the
future so that it can be guided and directed towards the performance of individual and
organizational development and goals. Therefore, many organizations assess and
manage potential appraisal as a part of the performance appraisal processes.
Moreover, the role of potential appraisal is to determine the potential of a given workers
to occupy higher positions in the organizational hierarchy plus handle higher
responsibilities. Potential appraisals are required to:

● Inform employees about their future prospects;

● Help the company check out of a appropriate succession plan;
● Update training efforts from time to time;
● Advisee employees about what they must learn to develop their career
prospects.

Potential appraisal can perform the following purposes:

● To advise employees about their overall career development and future

prospects
● Help the company to chalk out succession plans
 ● Motivate the employees to further enhance their skills and competencies.
● To identify the training needs.

Techniques of potential appraisal:

● Self – appraisals
● Peer appraisals
● Superior appraisals
● Psychological and psychometric tests
● Management games like role playing
● Leadership exercises etc.

Introducing a enormous Potential Appraisal System

The following are some of the steps needed to be followed at the time introducing a
potential appraisal system:

Role Descriptions:

Organizational functions along with functions should be defined simply. To this end, job
descriptions should be prepared for each job.

Qualities required completing the functions:

Based on job descriptions, the functions to be played via individuals must be prepared
(i.e., technical, managerial jobs as well as behavioral dimensions).

Rating mechanisms:

Besides listing the functions along with qualities, the potential appraisal process must
provide mechanisms of judging the qualities of staffs as:

1. Rating through others: The potential of a candidate might be rated by the current
employer who is acquainted with the candidate’s work earlier, just his technical
abilities.
2. Tests: Managerial as well as behavioral dimensions can be measured via a
battery of psychological tests.
3. Games: Simulation games in addition to exercises (assessment centre, besides
business games, in-basket, along with role play, etc.) could be used to display
the potential of a nominated staff.
4. Records: Performance records along with ratings of a nominated staff for his
earlier jobs could be examined carefully on various dimensions such as
motivation, creativity, besides risk taking ability, etc., which may play a vital
concern in discharging his responsibilities in a new job.

Organizing the system:

After completing the earlier preliminaries, he should set up a way that will allow the
introduction of the time quietly giving answers to specific puzzling questions:

1. How much load time to assist in conditions of seniority in promotions?

2. How much weight age to each of the performance dimensions; such as technical,
besides managerial, in addition to behavioral qualities?
 3. What would be the mechanisms of assessing the body on different indicators of
his potential and via what reliability?

Feedback:

The system should provide an option for every employee to see the works of his
assessment. “He might be assisted to understand the qualities most needed for
performing the purpose for which he thinks he gets the potential, the mechanisms
utilized through the companies to evaluate his potential along with the results of such an
appraisal”.
Topic 2

Competency Mapping

Competency mapping ​identifies an individual’s strengths and weaknesses. The aim is to

enable the person to better understand himself or herself and to point out where career
development efforts need to be directed.

Competencies​ are derived from specific job families within the organization and are often
grouped around categories such as strategy, relationships, innovation, leadership,
risk-taking, decision-making, emotional intelligence, etc.

So far as the way to go about for competency mapping is concerned, the first step is job
analysis, where the company needs to list core competency requirements for the job
concerned. The next step should be development of a competency scale for the job on the
parameters previously identified.

The actual mapping of employees can be a self-done exercise or done by others like
superiors. It can also be done by using the 360-degree method where peers, first reports
and customers also rate the employee.

The steps involved in competency mapping with an end result of job evaluation include the
following:

(I) Conduct a job analysis by asking incumbents to complete a position information

questionnaire (PIQ). The PIQ can be provided for incumbents to complete, or you can
conduct one-on-one interviews using the PIQ as a guide. The primary goal is to gather from
incumbents what they feel are the key behaviors necessary to perform their respective jobs.
(II) Using the results of the job analysis, you are ready to develop a competency based job
description. This is developed by carefully analyzing the input from the represented group of
incumbents and converting it to standard competencies.

(III) ​With a competency based job description, you are on your way to begin mapping the
competencies throughout your HR processes. The competencies of the respective job
description become your factors for assessment on the performance evaluation. Using
competencies will help guide you to perform more objective evaluations based on displayed
or not displayed behaviors.

(IV) ​Taking the competency mapping one step further, you can use the results of your
evaluation to identify in what competencies individuals need additional development or
training. This will help you focus your training needs on the goals of the position and
company and help your employees develop toward the ultimate success of the organization.
Topic 4

Balanced Scorecard

What is a BSC for?

A BSC is a strategy execution tool that, at the most basic level, helps companies to:

Clarify strategy​ – articulate and communicate their business priorities and objectives

Monitor progress – measure to what extent the priorities and strategic objectives are
being delivered

Define and manage action plans – ensure activities and initiatives are in place to deliver
the priorities and strategic objectives.

Developed by Robert Kaplan and David Norton, the Balanced Scorecard is an

extremely influential management tool that remains enduringly popular with companies
around the world. At its most basic level, the Balanced Scorecard helps organisations to
clarify their strategy and communicate the business’s top strategic priorities and
objectives.

If you’ve ever seen the Balanced Scorecard in action, you’ll know it’s essentially a
strategic framework, divided into four areas (called “perspectives”) that are critical to
business success. In this article, we’ll look at each of the perspectives in more detail,
and see how these perspectives can be tailored and tweaked to suit your company’s
circumstances.
The Financial perspective

For most for-profit organisations, money comes up tops. (We’ll get to non-profits later in
the article.) Therefore, the very top perspective is all about financial objectives.

Essentially, any key objective that is related to the company’s financial health and
performance may be included in this perspective. Revenue and profit are obvious
objectives that most organisations list in this perspective. Other financial objectives
might include:
Cost savings and efficiencies ​(for example, a specific goal to reduce production costs
by 10% by 2020)

Profit Margins​ (increasing operating profit margins, for instance)

Revenue sources​ (for example, adding new revenue channels)

The Customer perspective

This perspective focuses on performance objectives that are related to customers and
the market. In other words, if you’re going to achieve your financial objectives, what
exactly do you need to deliver in terms of your customers and market(s)?

Included in this perspective you might find objectives for:

Customer service and satisfaction (increasing net promoter scores, or reducing call
centre waiting times, for example)

Market share​ (such as, growing market share in a certain segment or country)

Brand awareness​ ​(for example, increasing interactions on social media)

The Internal Process perspective

What processes do you need to put in place to deliver your customer- and
finance-related objectives? That’s the question this perspective aims to answer. Here
you would set out any internal operational goals and objectives – or, in other words,
what does the business need to have in place and what does the business need to do
well in order to drive performance?

Examples of internal process objectives might include:

Process improvements (for example, streamlining an internal approval process)

Quality optimisation​ (such as, reducing manufacturing waste)

Capacity utilisation​ (using technology to boost efficiency, for instance)

The Learning and Growth perspective

While the third perspective is about the concrete process side of things, this final
perspective considers the more intangible drivers of performance. Because it covers
such a broad spectrum, this perspective is often broken down into the following
components:

Human capital – skills, talent and knowledge (for example, skills assessments,
performance management scores, training effectiveness)
Information capital – databases, information systems, networks and technology
infrastructure (such as, safety systems, data protection systems, infrastructure
investments)

Organisational capital – culture, leadership, employee alignment, teamwork and

knowledge management (for example, staff engagement, employee net promoter score,
corporate culture audits)

7 BENEFITS OF BALANCE SCORECARD

1. Better Strategic Planning

The Balanced Scorecard provides a powerful framework for building and

communicating strategy. The business model is visualised in a ​Strategy Map which
helps managers to think about cause-and-effect relationships between the different
strategic objectives. The process of creating a Strategy Map ensures that consensus is
reached over a set of interrelated strategic objectives. It means that performance
outcomes as well as key enablers or drivers of future performance are identified to
create a complete picture of the strategy.

2. Improved Strategy Communication & Execution

Having a ​one-page picture of the strategy allows companies to easily communicate

strategy internally and externally. We have known for a long time that a picture is worth
a thousand words. This ‘plan on a page’ facilitates the understanding of the strategy and
helps to engage staff and external stakeholders in the delivery and review of the
strategy. The thing to remember is that it is difficult for people to help execute a strategy
which they don’t fully understand.

3. Better Alignment of Projects and Initiatives

The Balanced Scorecard help organisations map their projects and initiatives to the
different strategic objectives, which in turn ensures that the projects and initiatives are
tightly focused on delivering the most strategic objectives.

4. Better Management Information

The Balanced Scorecard approach helps organisations design key performance

indicators for their various strategic objectives. This ensures that companies are
measuring what actually matters. Research shows that companies with a BSC
approach tend to report higher quality management information and better
decision-making.

5. Improved Performance Reporting

The Balanced Scorecard can be used to guide the design of performance reports and
dashboards. This ensures that the management reporting focuses on the most
important strategic issues and helps companies monitor the execution of their plan.
 6. Better Organisational Alignment

The Balanced Scorecard enables companies to better align their organisational

structure with the strategic objectives. In order to execute a plan well, organisations
need to ensure that all business units and support functions are working towards the
same goals. Cascading the Balanced Scorecard into those units will help to achieve that
and link strategy to operations.

7. Better Process Alignment

Well implemented Balanced Scorecards also help to align organisational processes

such as budgeting, risk management and analytics with the strategic priorities. This will
help to create a truly strategy focused organisation.
UNIT-4
TOPIC 1

Compensation – Definition, function, significance

Compensation

According to the viewpoint of the economist, labour only sells its services to the
entrepreneur for productive purposes; does not sell itself.

As such, any payment made to this factor of production (i.e. labour) is only in the nature
of compensation for its services.

Moreover, the services provided by labour are invaluable, in the sense that without such
services, the productive machinery is like a body without any soul. Therefore, labour
could not be paid exactly for its services; any payment to it is only a mere compensation
of the value provided by it to the production mechanism.

Payment or compensation to labour for its services is popularly known as personnel

remuneration. This payment is variously called either wages or salaries. Though in
reality, the concept of wages and salaries are not much different so far as their
determination and significance are concerned; yet it would be an interesting academic
exercise to differentiate the two.

Wages are usually associated with a payment made to workmen who are actually
engaged in physical production of goods and services; and payment of wages being
made on both bases-time rate and piece rate systems.
Salaries, on the other hand, represent a payment made to office employees, managerial
personnel and technical personnel like engineers, cost accountants, etc.; and salaries
usually being paid only on a time-basis i.e. according to time-rate system of payment.

The term compensation is used to indicate the employee’s gross earnings in the form of
financial rewards and benefits.

Compensation can also be defined as follows:

1. A system of rewards that can motivate the employees to perform.

2. A tool that is used to foster values and culture.
3. An instrument that enables an organization to achieve its objectives.

The management should ensure that compensation structure is designed after taking
into account certain factors such as qualification, experience, attitude and prevailing
rates in the markets. Compensation means the reward that is received by an employee
for the work performed in an organization. It is an important function of human resource
management. Employees may receive finan​cial and non-financial compensations for the
work performed by them.

Financial compensation includes salary, bonus, and all the benefits and incentives,
whereas non-financial compensation includes awards, rewards, citation, praise,
recognition, which can motivate the employees towards highest productivity.

Compensation System:
Compensation is a tool used by management for safeguarding the existence of the
company. Compensa​tion can be of two types—direct and indirect.

(i) Direct Compensation:

1. Basic pay, dearness allowance, cash allowance

2. Incentive pay, bonus, commission, profit sharing, stock option.

(ii) Indirect Compensation

1. Legal requirement
● Provident fund
● Gravidity
● Pension
● Insurance
● Medical leave
● Accident benefits
● Maturity leave
2. Optional sick leave
3. Casual leave
4. Travelling allowance
5. Telephone bills
6. Canteen allowance
7. Club membership

The main characteristics of the compensation system are as follows:

 1. A hierarchy of pay levels
2. A hierarchy of jobs
3. A set of rules and procedures
4. Qualities required for movement from one level to other

An organization’s compensation system usually consists of three separate components.

Each element of the compensation package has a link with an individual need
hierarchy. All allowance are linked to basic pay. In order to motivate the employees
when they achieve objectives, rewards and incentives are incorporated along with basic
pay. To retain the employees and to get long-term commitments, stock option plan,
annual increments and promotion are provided.

Objectives of Compensation:

1. The compensation should be paid to each employee on the basis of their abilities
and training.
2. Compensation should be in the form of package.
3. It should motivate the employees towards increasing productivity.
4. It should be capable of taking care of employees for safety and security needs
also.
5. It should be flexible and clear.
6. It should not be excessive.
7. Compensation should be decided by the management as per the norms fixed by
the legislations in consultation with the union.

Significance of Employee Compensation (Or Personnel Remuneration):

The issue of personnel remuneration, whether in the form of wages or salaries, is highly
significant from the viewpoint of industrial relations, social peace and economic
implications. In fact, it is the centre from which the circle of industrial relations is drawn;
it being the crux of industrial conflicts.

Following are some of the points which highlight the significance of personnel
remuneration:

(i) Wages/ salaries constitute the primary source of income to employees. Their
adequacy or otherwise would very much determine their standard of living.

(ii) Adequate remuneration is a source of motivation to employees. It makes them

committed and loyal to the organization; and paves way for excellent industrial relations.

(iii) Through making adequate and timely payment of employee remuneration, an

employer can attract and retain good personnel to and in the organization. This helps to
ensure a stability of labour force – bringing several valuable advantages in the its wake
for the organization.

(iv) ​Specially, in labour-intensive industries, wages constitute a substantial part of the

cost of production. As such wage payments affects the cost and price-structures of an
industrial enterprise. Prices of goods and services, in turn, have social implications; as
these directly affect the purchasing power of money held by the society.
Topic 2 Job Evaluation

Concept of job evaluation:

In simple words, job evaluation is the rating of jobs in an organization. This is the
process of establishing the value or worth of jobs in a job hierarchy. It attempts to
compare the relative intrinsic value or worth of jobs within an organization. Thus, job
evaluation is a comparative process.

Below are given some important definitions of job evaluation:

According to the International Labour Office (ILO) “Job evaluation is an attempt to

determine and compare the demands which the normal performance of a particular job
makes on normal workers, without taking into account the individual abilities or
performance of the workers concerned”.

The British Institute of Management defines job evaluation as “the process of analysis
and assessment of jobs to ascertain reliably their negative worth using the assessment
as the basis for a balanced wage structure”. In the words of Kimball and Kimball “Job
evaluation is an effort to determine the relative value of every job in a plant to determine
what the fair basic wage for such a job should be”.

Wendell French defines job evaluation as “a process of determining the relative worth of
the various jobs within the organization, so that differential wages may be paid to jobs of
different worth. The relative worth of a job means relative value produced. The variables
which are assumed to be related to value produced are such factors as responsibility,
skill, effort and working conditions”.
Now, we may define job evaluation as a process used to establish the relative worth of
jobs in a job hierarchy. This is important to note that job evaluation is ranking of job, not
job holder. Job holders are rated through performance appraisal. Job evaluation
assumes normal performance of the job by a worker. Thus, the process ignores
individual abilities of the job holder.

Job evaluation provides basis for developing job hierarchy and fixing a pay structure. It
must be remembered that job evaluation is about relationships and not absolutes. That
is why job evaluation cannot be the sole determining factor for deciding pay structures.

External factors like labour market conditions, collective bargaining and individual
differences do also affect the levels of wages it, organizations. Nonetheless, job
evaluation can certainly provide an objective standard from which modifications can be
made in fixing wage structure.

The starting point to job evaluation is job analysis. No job can be evaluated unless and
until it is analyzed.

Objectives of job evaluation:

The main objective of job evaluation is to determine relative worth of different jobs in an
organization to serve as a basis for developing equitable salary structure. States an ILO
Report the aim of the majority of systems of job evaluation is to establish, on agreed
logical basis, the relative values of different jobs in a given plant or machinery i.e. it
aims at determining the relative worth of a job. The principle upon which all job
evaluation schemes are based is that of describing and assessing the value of all jobs
in the firms in terms of a number of factors, the relative importance of which varies from
job to job.
The objectives of job evaluation, to put in a more orderly manner are to:

1. Provide a standard procedure for determining the relative worth of each job in a
plant.
2. Determine equitable wage differentials between different jobs in the organization.
3. Eliminate wage inequalities.
4. Ensure that like wages are paid to all qualified employees for like work.
5. Form a basis for fixing incentives and different bonus plans.
6. Serve as a useful reference for setting individual grievances regarding wage
rates.
7. Provide information for work organisation, employees’ selection, placement,
training and numerous other similar problems.
8. Provide a benchmark for making career planning for the employees in the
organization.
Topic 3 Job Evaluation Method

Methods of Job Evaluation

There are many methods by which job evaluation is done.

1. Ranking / Grading Method:​ Under ranking method, jobs are organized in

descending order of importance with the help of job description and job
specification. The ranking of job is done by a committee of experts called raters.
The ranking is done at departmental level, for every department the job is ranked
in order of importance. The main benefits of this method are that it is simple,
easily understood by all concerned and easy to operate, inexpensive and can be
used conveniently in small establishments. The limitations include the degree of
differences in the jobs. Sometimes it is based on the rater’s general knowledge of
the jobs. It is inappropriate for big company with a complex organisational
structure.
2. Factor Comparison / Weight-in-Money Method:​ In this type of procedure, the
jobs are ranked in the following way: Common key elements of different jobs are
selected. These selected key elements are weighted and ranked. A monetary
value is assigned to each element of all jobs. Then these monetary values of
individual jobs are weighted. Then total value of each job is available. The major
benefits if this methods are that it is more accurate and systematic as compared
to simple ranking method. Different jobs also can be rated on the basis of
common factors. The drawbacks of this method comprise that it is complicated,
not easily explainable and expensive. Application of weight age and monetary
values may involve bias of rankers. It is difficult to install hence not used
extensively.
3. Point Rating Method:​ In this method, each job is appraised separately,
considering each of the job factors such as skill, effort, responsibility and working
conditions and combining them into a single point score for each job. Main
advantages are that it is analytical in its approach, it gives a quantitative value for
each job. Basis and guidelines of valuation are standardized and codified in a
user manual. Disadvantages include, manual used for rating the jobs needs
 periodical revision and update. It is difficult for application and unintelligible for
workers.

Procedure of job evaluation:

Though the common objective of job evaluation is to establish the relative worth of jobs
in a job hierarchy, there is no common procedure of job evaluation followed by all
organizations. As such, the procedure of job evaluation varies from organization to
organization. For example, a job e valuation procedure may consist of the eight stages
as delineated.

1. Preliminary Stage:

This is the stage setting for job evaluation programme. In this stage, the required
information’s obtained about present arrangements, decisions are made on the need for
a new programme or revision of an existing one and a clear cut choice is made of the
type of programme is to be used by the organization.
 2. Planning Stage:

In this stage, the evaluation programme is drawn up and the job holders to be affected
are informed. Due arrangements are made for setting up joint working parties and the
sample of jobs to be evaluated is selected.

3. Analysis Stage:

This is the stage when required information about the sample of jobs is collected. This
information serves as a basis for the internal and external evaluation of jobs.
 4. Internal Evaluation Stage:

Next to analysis stage is internal evaluation stage. In the internal evaluation stage, the
sample of bench-mark jobs are ranked by means of the chosen evaluation scheme as
drawn up at the planning stage. Jobs are then graded on the basis of data pending the
collection of market rate data. Relative worth of jobs is ascertained by comparing
grades between the jobs.

5. External Evaluation Stage:

In this stage, information is collected on market rates at that time.

6. Design Stage:

Having ascertained grades for jobs, salary structure is designed in this stage.

7. Grading Stage:
This is the stage in which different jobs are slotted into the salary structure as designed
in the preceding stage 6.

8. Developing and Maintaining Stage:

This is the final stage in a job evaluation programme. In this stage, procedures for
maintaining the salary structure are developed with a view to accommodate inflationary
pressures in the salary levels, grading new jobs into the structure and regarding the
existing jobs in the light of changes in their responsibilities and market rates.

In India, the Indian Institute of Personnel Management, Kolkata has suggested the
following five steps to be taken to develop a job evaluation programme:

1. Analyze and Prepare Job Description

2. Select and Prepare a Job Evaluation Programme/Plan
3. Classify Jobs
4. Install the Programme
5. Maintain the Programme

These steps are self-explanatory. Hence are not discussed in detail.

Advantages of job evaluation:

According to an ILO publication job evaluation offers the following advantages:

1. Job evaluation being a logical process and objective technique helps in

developing an equi​table and consistent wage and salary structure based on the
relative worth of jobs in an organization.
2. By eliminating wage differentials within the organization, job evaluation helps in
minimizing conflict between labour unions and management and, in turn, helps in
promoting harmoni​ous relations between them.
3. Job evaluation simplifies wage administration by establishing uniformity in wage
rates.
4. It provides a logical basis for wage negotiations and collective bargaining.
5. In the case of new jobs, job evaluation facilitates spotting them into the existing
wage and salary structure.
6. In the modem times of mechanization, performance depends much on the
machines than on the worker himself/herself. In such cases, job evaluation
provides the realistic basis for determination of wages.
7. The information generated by job evaluation may also be used for improvement
of selection, transfer and promotion procedures on the basis of comparative job
requirements.
8. Job evaluation rates the job, not the workers. Organizations have large number
of jobs with specializations. It is job evaluation here again which helps in rating all
these jobs and determining the wages and salary and also removing ambiguity in
them.

Drawbacks of job evaluation:

In spite of many advantages, job evaluation suffers from the following

drawbacks/limitations:

1. Job evaluation is susceptible because of human error and subjective judgment.

While there is no standard list of factors to be considered for job evaluation, there
are some factors that cannot be measured accurately.
2. There is a variation between wages fixed through job evaluation and market
forces. Say Kerr and Fisher, the jobs which tend to rate high as compared with
the market are those of junior, nurse and typist, while craft rates are relatively
low. Weaker groups are better served by an evaluation plan than by the market,
the former places the emphasis not on force but on equity”.
3. When job evaluation is applied for the first time in an organisation, it creates
doubts in the minds of workers whose jobs are evaluated and trade unions that it
may do away with collective bargaining for fixing wage rates.
4. Job evaluation methods being lacking in scientific basis are often looked upon as
suspicious about the efficacy of methods of job evaluation.
5. Job evaluation is a time-consuming process requiring specialized technical
personnel to undertake it and, thus, is likely to be costly also.
6. Job evaluation is not found suitable for establishing the relative worth of the
managerial jobs which are skill-oriented. But, these skills cannot be measured in
quantitative terms.
7. Given the changes in job contents and work conditions, frequent evaluation of
jobs is essential. This is not always so easy and simple.
8. Job evaluation leads to frequent and substantial changes in wage and salary
structures. This, in turn, creates financial burden on organization.
Topic 6 Significance of Wage
Differentials

Wage differential is a term used in labour economics to analyze the relation between
the wage rate and the unpleasantness, risk, or other undesirable attributes of a
particular job. A compensating differential, which is also called a compensating wage
differential or an equalizing difference, is defined as the additional amount of income
that a given worker must be offered in order to motivate them to accept a given
undesirable job, relative to other jobs that worker could perform. One can also speak of
the compensating differential for an especially desirable job, or one that provides
special benefits, but in this case the differential would be negative: that is, a given
worker would be willing to accept a lower wage for an especially desirable job, relative
to other jobs.

The idea of compensating differentials has been used to analyze issues such as the risk
of future unemployment, the risk of injury, the risk of unsafe intercourse, the monetary
value workers place on their own lives, and in explaining geographical wage
differentials.

Wage Differentials – Types and Implications

If we take various contingent factors into account, we find that there may be differences
in wage and salary structures. These differentials may be industrial and occupational,
regional, organisational and personal.

1. Industrial and Occupational Differentials:​ Industrial and occupational

differentials exist because of requirement of different skill set and imbalance in
demand and supply of personnel having such skills. Wages and salaries are
 usually fixed on the basis of skills required to perform a job. Thus, highly
specialized jobs requiring higher level of skills are linked with higher pay too.
Coupled with this, shortage of supply of such personnel also induces the
payment of higher pay.
2. Regional Differentials:​ Apart from industrial arid occupational differentials, there
may be differences in wages and salaries region-wise also within the same
industry and occupation group. Such differences are visible in different countries
of the world as well as different regions within a country. Such differences exist
because of the differences in cost of living pace of industrial development and
lack of adequate mobility of personnel from one region to another. For example,
wages and salaries are higher in metropolitan cities as compared to other cities;
higher in cities as compared to rural areas.
3. Organisational Differentials:​ Different organisations falling in the same industry
group and at the same location offer different wages and salaries to individuals
having similar background. The main reasons for organisational differentials are
organisations policy to recruit specific types of personnel and their capacity to
pay. For example, most of the multinational organisations operating in India offer
much higher salaries to their employees as compared to their counterparts of
Indian origin. Similarly, larger organisations offer much higher salaries as
compared to smaller organisations.
4. Personal Differentials​:​ Wage and salary differentials exist at personal level too.
Different persons having similar qualifications are offered different salaries in the
same organisations. This happens because they have acquired different skills in
spite of the fact that they may have similar educational background. This
happens more so when skill-based pay system is adopted as against job based
pay.

Implications of Wage Differentials

Wage differentials have a number of implications both at macro and micro levels.

At the macro level, these differentials determine the allocation of human resources and
non-human resources. This allocation determines the growth pattern in the economic
system. When a particular industry or occupation offers higher wages and salaries, the
economic resources are geared to develop such personnel. For example, in India,
educational activities have increased in the areas of management and information
technology because these areas offer higher salaries and better job opportunities.

At the micro level, wage differentials show that some organisations use proactive
strategy to attract better talents as compared to others. They become trend-setters
rather than play the role of followers. These trend-setters set pattern not only in relation
to recruitment of better personnel but in terms of other human resource management
practices too.
UNIT-5 TOPIC 1 Pay Structure:
basic Pay, DA, HRA, Gross Pay,
Take home Pay, etc

Pay Structures

The pay structure or salary structure defines the compensation given to the employees.
It shows the breakup of the salary into various components. Based on various criteria
such as the professional experience or employees, or grades or bands the employees
are categorized under, different pay structures may be defined in an organization. One
pay structure may be applicable to multiple bands or grades and one band or grade
may have multiple pay structures.

Pay structures offer a framework for wage progression and can help encourage
appropriate behaviours and performance, while pay progression describes how
employees are able to increase their pay within their salary grade or band.

Pay structures can be distinguished by two key characteristics: the number of grades,
levels or bands; and the width or span of each grade. For example:

Narrow-graded pay structures, often found in the public sector, typically comprise ten
or more grades, with jobs of broadly equivalent worth in each grade. Progression is by
service increments, although due to narrow grades employees can reach the top of the
pay range relatively quickly, potentially leading to ‘grade drift’ and jobs ranked more
highly than justified

Broad-graded ​structures have fewer grades, perhaps six to nine, and greater scope for
progression that can counter ‘grade drift’ problems

Broad-banding involves the use of an even smaller number of pay bands (four or five).
Designed to allow for greater pay flexibility, typical broad-banding would place no limits
on pay progression within each band, although some employers have introduced a
greater degree of structure

Job families group jobs within similar functions or occupations, with separate pay
structures for different ‘families’ (e.g. sales or IT staff). With around six to eight levels,
similar to broad-grading, job family structures allows for higher rates of pay for
sought-after specialist staff

Career families extend the metaphor with a common pay structure across all ‘job
families’ rather than separate pay structures for each family. Career families tend to
emphasise career paths and progression rather than the greater focus on pay of job
families.

Basic Pay

This is the core of salary, and many other components may be calculated based on this
amount. It usually depends on one’s grade within the company’s salary is a fixed part of
one’s compensation structure. Many allowances and deductions are described in terms
of percentage of the Basic Salary.
Basic salary is the base income of an individual. Basic salary is the amount paid to
employees before any reductions or increases due to overtime or bonus, allowances
(internet usage for those who work from home or communication allowance). Basic
salary is a fixed amount paid to employees by their employers in return for the work
performed or performance of professional duties by the former. Base salary, therefore,
does not include bonuses, benefits or any other compensation from employers. As the
name suggests, basic salary is the core of the salary of an employee. It is a fixed part of
the compensation structure of an employee and generally depends on her or her
designation. If the appointment of an employee is made on a pay scale, the basic salary
may increase every year. Else, it remains fixed.

According to experts, the basic salary differs according to the type of the industry. For
instance, employees in the information technology industry prefer take-home salary
(since the staff turnover is high) while employees in the manufacturing companies get
more fringe benefits.

DA (Dearness Allowance)

The Dearness Allowance (DA) is a cost of living adjustment to allowance. It is calculated

as a percentage of (Basic pay + grade pay). Dearness allowance is updated every
quarter of calendar year to compensate for inflation in consumer price index. It may
increase or decrease depending on inflation rate. (Decrease in DA is rare).

House Rent Allowance (HRA)

House Rent Allowance (HRA) is a common component of their salary structure.

Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject
to certain conditions, a part of HRA is exempted under Section 10 (13A) of the
Income-tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a
taxable income. This helps the employee to save tax. But do keep in mind that the HRA
received from your employer, is fully taxable i f an employee is living in his own house
or if he does not pay any rent.

Who can avail HRA?

The tax benefit is available only to a salaried individual who has the HRA component as
part of his salary structure and is staying in a rented accommodation. Self-employed
professionals cannot avail the deduction.

Gross Pay

Gross pay for an employee is the amount used to calculate that employees’ wages (for
an hourly employee) or salary (for a salaried employee. It is the total amount you as the
employer owe the employee for work during one pay period. Gross pay includes regular
hourly or salaried pay and it also includes any overtime paid to the employee during the
pay period.

For both salaried and hourly employees, the calculation is based on an agreed-upon
amount of gross pay. That is, both the employee and employer have agreed that this is
the pay rate. The pay rate should be in writing and signed by both the employee an
employer.

For hourly employees, that pay rate might be negotiated by a union contract. For
salaried employees, that rate might be in an employment contract or just a pay letter. In
each case, the gross pay rate should be agreed to and signed before the employee
begins working.
An example of gross pay calculation for a salaried employee:

A salaried employee has an annual salary of $47,000 a year. The salaried employees
at this company are paid on the 15th and 30th of each month (twice a month). The
$47,000 is divided by 24 to get $1958.33, which is the gross pay for each pay period.

Take-Home Pay

Take-home pay is the net amount of income received after the deduction of taxes,
benefits, and voluntary contributions from a paycheck. It is the difference between the
gross income less all deductions. Deductions include federal, state and local income
tax, Social Security and Medicare contributions, retirement account contributions, and
medical, dental and other insurance premiums. The net amount or take-home pay is
what the employee receives.

TOPIC 2 Methods of Payment – Time

and Piece Rate
​THESTREAK

12 DEC 2018

​3 COMMENTS
To select the best payment method, it can be helpful to think about it in terms of the
above risk ladder. The nature of the relationship with your buyer may also determine the
settlement method used.

Payment Method 1: Open account

This is probably the least secure payment method for you as the exporter. Your buyer
receives the goods and then pays for them, usually with a credit period attached (30, 60
or 90 days).

This payment method extends the period before which your business receives cash
–and your working capital position will be impacted further if a period of credit applies.

You might consider offering this option under the following circumstances:

● You have an established relationship with the buyer

● The buyer is a multinational business with strong buying power and strong buyer
credit rating
● Smaller value exports.

Payment method 2: Bank collection

This is a more secure option than an open account, whereby, as the name suggests,
your bank collects the money on your behalf. It is also known as a documentary
collection.
An instruction document is forwarded by your bank to your buyer’s bank for release
against either Payment (Documents against Payment) or Acceptance – of a Bill of
Exchange (Documents against Acceptance).

This can be a good way of “meeting in the middle” with your buyer, wherein the risk is
reduced (but not eliminated) for you both.

It is also not as time consuming or costly as a letter of credit, and doesn’t take up any
credit facilities.

Payment method 3: Letter of credit

A letter of credit is essentially a bank’s promise to another bank that you they know you
and (hold your overdraft facility) will act as a guarantor for your transaction. You need
both banks’ party to the transaction to agree to act in this way.

Once it is agreed, in the event that your buyer is unable to make payment, the bank will
cover and pay the outstanding amount, provided that certain delivery conditions have
been met.

One of the important things to note from a payment method perspective is that, if ever
you receive a letter of credit, ensure you give it your immediate attention and check it in
detail.

Remember, it is a document that should lead to your business being paid on time. Lack
of attention to detail could delay payment and cost you money.
Payment method 4: Advance payment

This is the most advantageous method for you as the exporter as, where the buyer has
to pay for the goods before they receive them. Consumers essentially do this every day
when purchasing online, being charged either at the time of order or when the goods
dispatch.

This method is advisable in the following circumstances:

● You have a new relationship with the buyer, where there is a ‘lack of trust’
between buyer and seller
● The buyer does not have a strong credit rating
● You sell a unique/rare product of high value.

So, once you have selected the appropriate method of payment, allow sufficient time to
get everything in place and make sure you ask questions – of your buyer, if need be,
and especially of your bank, who are there to help.

Time Rate System

Under this system, the amount of remuneration or the total wages outstanding to the
workers depends on the time for which he is employed. This is a simple and common
method of wage payment. In this method, the workman is paid an hourly, daily, monthly
or yearly rate of wages.
Thus, the worker is paid on the basis of time but not on his/her performance or unit of
output. A number of wages payable to a workman under this method is to be calculated
as follows:

Total wages = Actual time took x time rate

or, Total wages = Total hours worked x Wages rate per hour.

Advantages of Time Rate System

The following are the advantages of time rate system,

● Simplicity:​ ​It is really easy to understand and simple to calculate the earnings of
workers under this method.
● Guarantee of minimum wages:​ ​It guarantees minimum wages to the workers.
● Quality production:​ ​Since, a number of wages rate is not linked to the quantity
of output, this method ensures production of better quality due to the careful
attention of the workers.
● Unity among workers:​ ​Under this system, all workers falling under a particular
category are paid at an equal rate without any calculation of their quantity of
output. It encourages a feeling of equality among workers on account of which
this method is also favored by trade unions.
● Economical:​ ​It involves less critical work and detailed records are not
necessary. Since, the output is not the criteria for identification of wages, tool and
materials are handled carefully and wastages are also minimized.

Disadvantages of Time Rate System

This method has the following disadvantages:

● No incentive to the efficient workers: ​It lacks incentive to efficient workers

since all workers are paid equally and no distinction is made between efficient
and inefficient workers. So, effort and rewards are not correlated.
● Go-slow policy:​ ​The worker in order to earn more wages may try to perform the
work slowly which leads to increase in labor cost per unit.
● Dissatisfaction among the efficient workers:​ ​The efficient workers are paid
wages at the rate equal to those payable to inefficient workers, which creates
dissatisfaction among the efficient workers.
● Payment for idle time: ​Under this method, the idle time of the workers is also
paid that increases the cost of production.
● The high cost of supervision:​ ​Since, there is no direct link between the quantity
of output and wages, wastage of time on the part of the workers is common and
the negligence of which requires considerable supervision leading to increased
costs.

Piece Rate System

In this method, wages are paid to the employees after completion of work. Under it, a
worker is paid on the basis of output not the time taken by him. This is one of the
simplest and most commonly used systems of wage payment. In this system, the wage
rate is expressed in terms of per unit of output, per job or per work-order. A number of
wages payable to a workman under this method is to be calculated as follows:

Total wages = Total output x Rate per Unit of Output.

Advantages of Piece rate system

The advantages of piece rate system are given below:

● Simplicity:​ Just like time rate system, the piece rate system is also simple to
calculate and easy to understand. It does not involve tedious calculations.
● The incentive to workers:​ ​This system provides an incentive to the workers to
work hard as the wages are paid on the basis of the quantity of output, not on the
basis of time. So, efforts and rewards are correlated.
● Ascertainment of accurate labor cost: ​Piece rate system wages are paid on
the basis of output, the exact cost of labor per unit of output or job can be
ascertained.
● No payment for idle time:​ ​Under this rating system, no payment were made to
the worker for the idle time as a result of which the cost of supervision is not
considerable.
● Proper care and use of machines and tools:​ ​The workers take proper care of
their machines and tools since the breakdown of machines and tools means a
decrease in output resulting in less remuneration to them.

Disadvantages of Piece Rate System

● Less attention to quality:​ ​As the payment of wages is made on the basis of
output, the workers would try to produce more quantity of products and not focus
on the quality of products which results in production of less quality products.
● Inefficient use of machines and materials: ​Since, the wages are paid on the
basis of the quantity of output, an excessive wastage of materials and frequent
breakdown of machinery may be caused by the workers due to their efforts to
obtain maximum output.
● No guarantee of minimum wages: ​Since, there is a direct relationship between
quality of output and wages, the workers suffer if they fail to work efficiently.
There is no guarantee of minimum daily wages to workers.
● Dissatisfaction among inefficient workers: ​The inefficient workers, who work
slowly, become dissatisfied by reason of lower wages as compared to the wages
paid to their efficient counterparts.
 ● Adverse effect on worker’s health: ​The workers may try to work abnormally to
earn more which has an adverse effect on their health and efficiency. So, this
method is not accepted by a trade union.

Topic 3 Fringe Benefits

​THESTREAK

12 DEC 2018

​3 COMMENTS

Fringe Benefits

Fringe benefits are a type of compensation provided to an employee outside of his

normal wage or salary. Many years ago, employers began to understand that potential
employees give great consideration to the wage or salary offered. In an effort to tempt a
qualified individual to accept employment with the company, rather than going to a
competing company, many employers began offering non-wage compensation in
addition to the actual salary offered.

These fringe benefits, often in the form of employer-paid life and health insurance
policies, retirement benefits, and other things that might aid in the recruitment of top
quality, skilled workers. In fact, fringe benefits play a large role in keeping workers
motivated to do quality work and increase production. Some fringe benefits may be
classified as taxable income by the IRS.

Types of Fringe Benefit

Many employers offer employees an array of fringe benefits in addition to their salaries.
Also considered “job-perks,” these benefits cost employers, who pay for such perks,
and are therefore considered a portion of the employees’ salaries on their books, even if
the benefits are not in the form of money, such as bonuses. There are many types of
fringe benefit, and which types are offered often depends on the type of employer, and
value of the employee’s position.

1. Taxable Fringe Benefits

According to the IRS, any fringe benefit provided by an employer may be taxable,
unless it is specifically excluded from taxation. The IRS provides specific information
regarding fringe benefits, including which are considered taxable. Some of the fringe
benefits that may be taxable under certain situations often include payment of, or
reimbursement for, things in an excessive amount. These include:

● Excessive Moving Expenses​ –​ if an employer reimburses or pays for an

employee’s moving expenses, when the move was less than 50 miles from the
employee’s current residence, may be taxed.
● Excessive Mileage Reimbursement​ –​ employer reimbursement for
business-related driving of the employee’s private vehicle may be taxable if the
total exceeds the IRS’ standard mileage rate.
● Expense Reimbursement​ –​ expense amounts reimbursed to an employee with
the employee’s sufficient accounting, may be taxable.
 ● Clothing Reimbursement​ –​ employer reimbursement for clothing that is not
strictly for work on the job, but which is suitable for everyday street wear, is
taxable.
● Working Condition Benefits​ –​ any equipment or supplies purchased by an
employee that is used for work purposes exclusively, it is tax free. If the item is
used for any personal purpose at all, it is taxable.
● Excessive Education Expenses​ – ​Educational assistance for education that is
not job-related, or which the amount exceeds the IRS allowable amount is
taxable.
● Awards and Prizes​ –​ Employee awards and prizes that are given in cash, are
taxable, unless they are given to charity in the employee’s name. Valuable
non-cash awards may also be taxable, unless the value is minimal.

Non-Taxable Fringe Benefits

There are many types of non-taxable fringe benefits that may be offered to employees
without increasing their tax burden. Some of the most common tax-free types of fringe
benefit provided to employees by private and public businesses include:

● Insurance Coverage-​ Insurance coverage is perhaps the most common fringe

benefit provided to employees, though the structure of how insurance is paid for
has changed in recent years. Insurance coverage may include employer-paid life
insurance, health insurance, and short or long-term disability insurance. When an
insurance coverage fringe benefit is offered, the employer most commonly
shares the cost of premiums at a certain percentage, thus reducing the amount
for which the employee is responsible. Of course, insurance coverage may be
offered entirely at the employer’s expense. Some employers also offer health
savings accounts to their employees, often matching the employees’
contributions to the plan.
● Childcare Assistance-​ Childcare assistance is one fringe benefit that comes in
handy for many families, and may increase attendance at work, as well as
productivity. This is because parents have additional responsibilities in ensuring
their children are well cared-for while they are at work. Many large employers are
 offering on-site childcare, either free of charge, or at a discounted price. This
allows parents to concentrate on their work, knowing their children are close by,
and being cared for. Some smaller employers, while unable to maintain an
on-site daycare facility, offer a cost-share for daycare.
● Physical Fitness-​ Some employers make it a priority to ensure their employees
have access to gyms or fitness centers in order to promote a healthy lifestyle,
which in turn increases attendance and productivity. Some companies maintain
on-site fitness centers, where employees can work out on breaks or other off
times, while others offer paid gym memberships, or memberships at a discounted
price.
● Education Assistance- Education assistance in the form of tuition
reimbursement, or other assistance in adding to an employee’s education or skill
set, is one of the more popular types of fringe benefit offered by employers.
Helping an employee gain new job-related skills or knowledge helps the
company, as the employee is then able to work at a different level in his current
position, or may become able to advance into new areas of the business.
Topic 4 Allowances- overtime, city
compensatory, travelling, etc
​THESTREAK

12 DEC 2018

​2 COMMENTS

Allowance

An allowance is the financial benefit given to the employee by the employer over and
above the regular salary. These benefits are provided to cover expenses which may be
incurred to facilitate the discharge of service for example Conveyance Allowance is paid
to foot expenses incurred for commuting to workplace. Some of these allowances are
taxable under the head Salaries. A few of them again could be partly taxable and few
others are non-taxable or fully exempt from taxes.

Here’s a glance at allowances that are either taxable, partly taxable or non-taxable:

(1) Taxable Allowances:

● Dearness Allowance: ​Dearness Allowance (DA) is an allowance paid to
employees as a cost of living adjustment allowance paid to the employees to
cope with inflation. DA paid to employees is fully taxable with salary. The IT Act
mandates that tax liability for DA along with salary must be declared in the filed
return.
● Entertainment Allowance:​ ​Employees are allowed the lowest of the declared
amount –one-fifth of basic salary, actual amount received as allowance or Rs.
5,000. This is an allowance provided to employees to reimburse the expenses
incurred on the hospitality of customers. However, Government employees can
claim exemption in the manner provided in section 16 (ii). All other employees
have to pay tax on it.
● Overtime Allowance:​ ​Employers may provide an overtime allowance to
employees working over and above the regular work hours. This is called
overtime and any allowance received for this is fully taxable.
● City Compensatory Allowance: ​City Compensatory Allowance is paid to
employees in an urban centre which may be highly expensive and to cope with
the inflated living costs in the cities. This allowance is fully taxable.
● Interim Allowance:​ ​When an employer gives any Interim Allowance in lieu of
final allowance, this becomes fully taxable.
● Project Allowance:​ ​When an employer provides an allowance to employees to
meet project expenses, this is also fully taxable.
● Tiffin/Meals Allowance:​ ​Sometimes employers may provide Tiffin/Meals
Allowance to the employees. This is fully taxable.
● Cash Allowance:​ ​When the employer provides a cash allowance like marriage
allowance, bereavement allowance or holiday allowance, it becomes fully
taxable.
● Non-Practicing Allowance:​ ​When physicians are attached to Clinical Centers of
the various Laboratories/Institutes, any non-practicing allowance paid to them
become fully taxable.
● Warden Allowance:​ ​When an employer pays an allowance to an employee
working as a Warden i.e. Keeper in an educational Institute, the allowance
received is fully taxable.
● Servant Allowance: ​When an employer pays an employee to engage services
of a servant, such an allowance is taxable.
(2) Non-Taxable

Some of the allowances, usually paid to Government servants, judges and employees
of UNO are not taxable. These are:

● Allowances paid to Govt. servants abroad:​ ​When servants of Government of

India are paid an allowance while serving abroad, such income is fully exempt
from taxes.
● Sumptuary allowances:​ ​Sumptuary allowances paid to judges of HC and SC
are not taxed.
● Allowance paid by UNO: ​Allowances received by employees of UNO are fully
exempt from tax.
● Compensatory allowance paid to judges:​ ​When a judge receives
compensatory allowance, it is not taxable.

Topic 5 The Minimum Wages Act

1948
​THESTREAK

12 DEC 2018

​2 COMMENTS

In a labour surplus economy like India wages couldn’t be left to be determined entirely
by forces of demand and supply as it would lead to the fixation of wages at a very low
level resulting in exploitation of less privileged class. Keeping this in view, the
Government of India enacted the Minimum Wages Act, 1948. The purpose of the Act is
to provide that no employer shall pay to workers in certain categories of employments
wages at a rate less than the minimum wage prescribed by notification under the Act. In
fact the sole purpose of this act is to prevent exploitation of sweated and unorganized
labour, working in competitive market.

The Act provides for fixation / periodic revision of minimum wages in employments
where the labour is vulnerable to exploitation. Under the Act, the appropriate
Government, both Central and State can fix / revise the minimum wages in such
scheduled employments falling in their respective jurisdiction.

The term ‘Minimum Wage Fixation’ implies the fixation of the rate or rates of minimum
wages by a process or by invoking the authority of the State. Minimum wage consists of
a basic wage and an allowance linked to the cost of living index and is to be paid in
cash, though payment of wages fully in kind or partly in kind may be allowed in certain
cases. The statutory minimum wages has the force of law and it becomes obligatory on
the part of the employers not to pay below the prescribed minimum wage to its
employees. The obligation of the employer to pay the said wage is absolute. The
process helps the employees in getting fair and reasonable wages more particularly in
the unorganized sector and eliminates exploitation of labour to a large extent. This
ensures rapid growth and equitable distribution of the national income thereby ensuring
sound development of the national economy.

It has been the constant Endeavour of the Government to ensure minimum rates of
wages to the workers in the sweated industries and which has been sought to be
achieved through the fixation of minimum wages, which is to be the only solution to this
problem.

Essential Ingredient

● Wage should be by way of remuneration

 ● It should be capable of being expressed in terms of
● It should be payable to a person employed in respect of his employment or of
work done in such employment.
● It should be payable to a
● It should be payable if the terms of employment, express or implied, are fulfilled.
● It includes house rent allowance.
● It does not include house accommodation, supply of light, water, medical
attendance, traveling allowance, contribution of employer towards provident fund,
gratuity , any scheme of social insurance etc.

Classification of Wages

The Supreme Court has classified “Wages” into three categories. They are:

● The Living Wage ( highest standard of wage)

● The Fair Wage (between living and minimum wage)
● The Minimum Wage.( it is the lowest standard of wage)

Procedure for fixing and revising minimum wages (section 5)

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-coordinating 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.

Topic 6 Equal Remuneration Act,

1976
​THESTREAK

12 DEC 2018

​2 COMMENTS

The Equal Remuneration Act, 1976 provides for payment of equal remuneration to men
and women and help prevent gender discrimination. ​Article 39 of the Indian
Constitution envisages that the States will have a policy for securing equal pay for equal
work for both men and women. To give effect to this constitutional provisions, the ​Equal
Remuneration Act, 1976​ was introduced.
An Act to provide for the payment of equal remuneration to men and women workers
and for the prevention of discrimination, on the ground of sex, against women in the
matter of employment and for matters connected therewith or incidental thereto.

The purpose of the act is to make sure that employers do not discriminate on the basis
of gender, in matters of wage fixing, transfers, training and promotion. It provides for
payment of equal remuneration to men and women workers, for same work or work of
similar nature and for the prevention of discrimination against women in the matters of
employment.

The salient features of the Equal Remuneration Act, 1976

● The Act is a Central Legislation and applies to the whole of India.

● The objective of the Act is to provide for protection against discrimination of
women workers on the ground of sex, about the payment of equal remuneration
in the matter of employment.
● Restricting the employer to create terms and conditions in a contract of service or
work of labor contrary to equal pay for equal work doctrine and the provisions of
Equal Remuneration Act.
● The Act doesn’t make a distinction like employment or the period of employment
and applies to all workers even if engaged only for a day or few days.
● No overriding effect is given to any agreement, settlement or contract to the
provisions of the Equal Remuneration Act.
● Any settlement or any agreement with the employee that is detrimental to the
employee isn’t allowed.
● The Ministry of Labour and The Central Advisory Committee are responsible for
enforcing this Act.
● Meaning of equality of work: The equality of work is not based solely on the
designation or the nature of work but also on factors like qualifications,
responsibilities, reliabilities, experience, confidentiality, functional need and
requirements commensurate with the position in the hierarchy are equally
relevant.
 ● When the employer doesn’t comply with the provisions of the act, he will be liable
to pay fine, imprisonment, or both.

Topic 7 Regulatory Compliance

including Wage and Pay commission
​THESTREAK

12 DEC 2018

​3 COMMENTS

Pay Commission is set up by Government of India, and gives its recommendations

regarding changes in salary structure of its employees. Since India’s Independence,
seven pay commissions have been set up on a regular basis to review and make
recommendations on the work and pay structure of all civil and military divisions of the
Government of India. Headquartered in Delhi, the Commission is given 18 months from
date of its constitution to make its recommendations.

Objective of pay/Wage Board in The Private/Government etc. Organization

(i)​ To establish a fair and equitable compensation offering similar pay for similar work.
(ii)​ To attract competent and qualified personnel.

(iii) To retain the present employees by keeping wage levels in nine with competitive
units.

(iv) To keep labour and administrative costs in line with the ability of the organisation to
pay.

(v) ​To improve motivation and morale of employees and to improve union management
relations.

(vi) ​To project a good image of the company and to comply with legal needs relating to
wages and salaries.

(vii)​ ​To establish job sequences and lines of promotion wherever applicable.

(viii)​ ​To minimise chances of favouritism while assigning the wage rates.

The following principles should be observed in the wage and salary

administration:

1. Wage policy should be developed keeping in view the interests of all concerned
parties viz. employer, employees, the consumers and the society.
2. Wage and salary plans should be sufficiently flexible or responsive to changes in
internal and external conditions of the organisation.
3. Efforts should be made to ensure that differences in pay for jobs are based on
variations in job requirements such as skill, responsibility, efforts and mental and
physical requirements.
 4. Wage and salary administration plans must always be consistent with overall
organisational plans and programmes.
5. Wage and salary administration plans must be in conformity with the social and
economic objectives of the country like attainment of equality in income
distribution and controlling inflation etc.
6. These plans and programmes should be responsive to the changing local and
national conditions.
7. Wage and salary plans should expedite and simplify administrative process.
8. Workers should be associated, as far as possible, in formulation and
implementation of wage policy.
9. An adequate database and a proper organisational set up should be developed
for compensation determination and administration.
10. The general level of wages and salaries should be reasonably in line with that
prevailing in the labour market.
11. There should be a clearly established procedure for hearing and adjusting wage
complaints. This may be integrated with the regular grievance procedure, if it
exists.
12. The workers should receive a guaranteed minimum wage to protect them against
conditions beyond their control.
13. Prompt and correct payments to the employees should be ensured and arrears
of payment should not accumulate.
14. The wage and salary payments must fulfill a wide variety of human needs
including the need for self actualisation.
15. Wage policy and programme should be reviewed and revised periodically in
conformity with changing needs. For revision of wages, a wage committee should
always be preferred to the individual judgement, in order to prevent bias of a
manager.

Topic 8 Incentive Scheme-

Individual, Group
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12 DEC 2018

​3 COMMENTS

Incentive Scheme

HR: ​Employee motivational program designed to encourage commitment to increasing

productivity or in achieving some worthwhile objective such as reducing the number of
man-hours lost due to accidents.

Marketing: Customer motivational program designed to encourage them to buy more of

the firm’s products. Also called bonus scheme or incentive program.

​(I) Individual Incentive Plan

Reward systems tied to the performance of individual employees are known as

individual incentive plans. These plans depend on category of workers for which they
are designed. Under this plan mostly a certain pay rate is guaranteed and the rewards
represent additional compensation.

Under individual wage incentive plans three categories of personnel’s can be included.
They are Production workers or blue dollar workers, white collar workers such as
salesman, and managerial personnel’s. All these categories of employees have different
needs, they differ in qualification and type of work, and therefore separate plans are
designed for them.

Incentive Plans for Production Workers or Blue Collar Workers:

There are three categories of these plans:

(1) Incentive is proportional to extra output.

(2) Incentive is proportionately at lower rate than increase in output.

(3) Incentive is higher proportionately to rate of increase in output.

Under these plans, workers are rewarded individually when their performance exceeds
pre determined standard. Individual workers earn a bonus if they work more and
produce more. These plans are therefore known as premium plans. These plans are
either time based or production based.

A standard time is determined for doing a job. A standard time serves as the basis of
giving bonus to the workers if they meet or exceed the standard. The worker is said to
be efficient if he completes his job in less than the standard time. In order to reward him
for his efficiency, he may be given bonus under an appropriate incentive plan.

Advantages:
Incentive wage plan have following advantages:

(1) ​The standard output is determined on the basis of time and motion studies by the
specialists and the rates of wages are fixed for different jobs on the basis of job
evaluation. This stimulates workers to work more.

(2) Increase in output leads to lowering of per unit cost, hence a direct gain to the
employer.

(3) Less supervision is required as the workers are motivated to work more. This saves
supervisor’s time for supervision. He can utilize this time for other more important work.

(4) No conflict between employees and employers as the needs of both are satisfied
because employees are rewarded for their efficient work and employers are happy with
the increased output.

Disadvantages:

The wage incentive plan suffers from some of the demerits:

(1) Even though output is increasing the quality is at the receiving end. Employees give
more stress on increase in output neglecting the quality. Employees become quantity
conscious and not quality conscious.
(2) ​Employees oppose the introduction of advanced and modern techniques of
production because of the fear that they may lose extra payment for extra output
produced by them.

(3)​ There is an increase in cost of record keeper.

(4)​ ​Safety precautions are overlooked. May therefore lead to accidents.

(5) Slow workers become jealous of fast workers because comparatively their earnings
will be less than their counterparts.

(6) This system increases their earnings. They may therefore put a demand for
increased minimum wages.

(7) Management faces difficulties in determining the rate of bonus to be paid. Fewer
rates may aggrieve the workers and high rates may reduce their efficiency.

(II) Group Incentive Schemes:

It is observed that under individual incentive plans bonus is paid to the worker on the
basis of individual’s performance. This is in the case where the payment of bonus is not
affected by the performance of others. But there are certain situations where it is difficult
to measure individual contribution. Here the performance each worker is affected by
others. Under such situations group incentive bonus schemes are introduced.

Under group incentive plan, bonus is calculated on the collective production of a group
of interdependent workers and distributed among members of group on some agreed
terms and conditions. As far as possible the bonus so earned is distributed equally
among the members of the group.

The basis for distribution is on the following:

(1) Group bonus is distributed equally if all the members of the group possess similar
skills.

(2) If the base wage of members is different than bonus may be distributed in proportion
to the basic rates.

(3) Bonus may be paid to the members on a specified percentage depending on the
basis of skill, experience, basic rate of pay of each individual employee.

Following are the group incentive plans:

(1) Priestman’s Plan:

Under this, the starting point is productivity of the group. Standard output is laid for the
group. Minimum wage is assured to a group. The group members are entitled for a
bonus if their output exceeds the set standard. The payment of bonus is made in
proportion to the excess of actual output over the standard output. This plan
encourages the feelings of team spirit among the members of the group. The
employees behave as a group and work together to increase output. This scheme does
not consider the individual efficiency of worker. Thus the inefficient member of the group
also get bonus.
(2) Scanlon Plan:

This plan was devised by Joseph Scanlon in 1937, a trade union leader. Under this plan
workers are involved in decision making. They are encouraged to make suggestions
regarding cost reduction and increasing productivity.

They are involved in the various screening committees in the plant to find out ways and
means to judge the cost reduction suggestions. In this way employees work with their
supervisors, managers and other fellow employees on various screening committees.

If the suggestions are successfully implemented, employees get share in the savings.
To facilitate workers’ participation, there are departmental committees consisting of
representative of workers and management.

Periodical meetings of these committees are held to discuss the problems faced by the
workers. They recommend measures to increase production. It promotes healthy labour
relations, minimizes supervision, increases efficiency and sense of partnership among
workers.

This plan suffers from certain drawbacks such as the inefficient worker gets rewarded
because of better performance of the group. It is also true that the suggestions of the
employees are not given due consideration by the management.

(3) Profit Sharing:

Under the scheme of profit sharing a certain percentage of profit is distributed at fixed
ratio among some categories of employees annually. According to Henry R. Seager,
“profit sharing is an agreement freely entered into by which the employees receive a
share, fixed in advance, of the profits.”
The decision of sharing of profit to the employees is informed in advance. The basis of
profit sharing is decided on the length of service or the number of working days in a
year or the wages earned by a worker during a year.

It is direct incentive to a worker. The payment of profit can be made in cash or it can be
deposited in the account of provident fund of an employee. The advantage of this
scheme is that workers develop common concern for the development and progress of
the undertaking.

Profit sharing is of two types:

(a) Current Profit Sharing:

It is the one directly paid to the employee annually or six monthly.

(b) Deferred Profit Sharing:

It is the one which is not paid directly to the employee but credited in his provident fund
account or to pension account or sometimes paid in the form of bonus shares.

Merits:

(1) Creation of industrial peace because workers are satisfied as they are getting an
additional amount besides their wages.
(3) The bonus is paid only when the amount of profit exceeds the set target. It means
bonus is not part of cost of production.

(4) Profit sharing scheme is based on the basic pay of the employees.

(5) Workers have share in profit and not losses incurred by the employer.

(6) It represents a reward for group effort and group efficiency.

(7) It brings about team spirit among the employees. They developed a sense of
belonging to the organization, reduces training time.

(8) Profit sharing results into equitable distribution of the profit.

Demerits:

(1) Employees are entitled to bonus when company earns profit. They do not get bonus
when company recur losses.

(2) It is not possible for newly established company to pay bonus.

(3) There is no distinction between efficient and inefficient employees of the company
while distribution of bonus.
(4) Bonus is paid to the employee once in a year. This does not motivate them for better
performance.

Topic 9 Profit Sharing

​THESTREAK

12 DEC 2018

​2 COMMENTS

“An agreement freely entered into, by which the employees receive a share, fixed in
advance, of profits. In the discussions of this Co-operative Congress, profits were
further defined as being the actual net balance or gain realized by the final operations of
the undertaking in relation to which the scheme existed, and the sums paid to the
employees out of the profits were directly dependent upon the profits.”

Profit-sharing is the payment to employees in cash, stock, or future credits of some

amount over and above the normal remuneration that would otherwise be paid to these
employees in the given situation. The payments do not have to be derived from the
current period involved but may be taken from an earned surplus from prior periods of
operation. This definition does not require an agreement fixing the percentage in
advance.

Profit-sharing is an attractive supplement of a wage system. Under profit sharing an

employer undertakes to pay his employees a share in the annual net profits of the
enterprise. This share is in addition to regular wages and is neither based on time nor
on output. Profit-sharing is an agreement entered into between the employer and the
employees under which the employer agrees to pay to the employees the share in the
profit fixed in advance.

Profit-sharing is different from wage incentives which are directly connected with the
output of workers. But profit-sharing is related to the profits of the enterprise which
depend on productivity and several other factors. It is a major departure from the
traditional concept of profit where it is treated as the exclusive monopoly of the
employer. The workers are treated as co-partners in the productive process and profit is
treated as the outcome of the joint efforts of employer and workers.

According to I.L.O. ​“Profit-sharing is a method of industrial remuneration under

which an employer undertakes to pay to his employees, a share in the net profits
of the enterprise in addition to their regular wages”​. Profit-sharing arrangement
enhances social justice, strengthens the common interest of capital and labour and
increases the productive efficiency of the workers. It would be highly successful if the
parties’ viz., labour and employers take each other into mutual confidence.

The concept of profit-sharing is now accepted in the industrial world and also at the
government level. In western countries, profit- sharing is very popular among the
industrial workers. However, this concept is not popular in India. We have a system of
bonus payment which is compulsory even when there is no profit to a company.

In India, workers and trade unions are interested in bonus payment and they are not
interested in profit-sharing agreement. This is because bonus payment is compulsory
even when the workers are not co​operative and there is no profit to the industrial unit.
However, profit- sharing is possible only when workers give full co-operation to raise the
profits over and above a particular limit.

Features of Profit-Sharing:
(1) The payment to workers under profit-sharing is generally made on cash basis, but it
is also possible to make such payment in shares or transfer of money to provident fund
account of the employees.

(2) Workers share the profits only. They do not contribute to the losses incurred by the
firm.

(3) Profit-sharing denotes the extra payment given to workers in addition to annual
wages and allowances.

(4) It is paid out of the net profits and as per the agreement between the two parties,
i.e., employers and employees.

(5) The sharing of profits in a particular proportion is decided by an agreement between

the employer and the employees.

(6) The profit-sharing agreement is possible at the unit level or even at the industry
level. It is also possible to have such agreement on locality basis or
industry-cum-locality basis.

Types of Profit-Sharing:

In general there are two basic types of profit-sharing programmes:

(a) The current-distribution plan, in which the full amount of the employees profit share
is given him at the time of allocation, and

(b) The referred-distribution plan, in which the employee’s share of profits is given to
him at some future date such as at the end of 5 years, at retirement, disability, death, or
termination of employment.

Of course there could be a combination of these two methods on practically any basis,
such as 30 per cent of the employee’s share to be distributed currently and the 70 per
cent to be distributed on a deferred basis. The deferred profit-sharing plans may or may
not have an employee’s participating savings feature.

Plans calling for the employee’s saving in order to be eligible for his full share in profits
may have almost any ratio if allocation of profits in terms of participation. For instance, if
the plan be a combination of current payments in cash or stock and a deferred payment,
the deferred part may depend entirely upon the employee’s participation in the savings
plan. The combined current and deferred distribution of profits seems to be gaining in
popularity.

There is no doubt that such a plan has a stronger pull on the employee, particularly the
newer employee, to increase his efforts to add to the profit available for distribution.
Since the deferred plan builds up an estate for the employee more rapidly than any form
of current distribution, this deferred distribution is likely to be preferred by the
longer-service employees.

Profit-Sharing’s Relation to Wages:

Profit-sharing is that part of the employee’s remuneration over and above what he
would otherwise receive if he were paid the going rate in the community for the services
rendered. By this definition a man’s wage will not be lower because he shares in profits.

His share of profits may be in proportion to his wages, since this is a common method of
allocating profits. It is not unusual to consider length of service in the total allotment, but,
even when this is considered, it is usually tied to the employee’s wage as a basis of
computation.

In the case of ordinary workers, it is highly improbable that the regular wage is
materially lower under normal conditions than it would be if profits were not being
shared. The situation may be somewhat different in the case of some of the higher
executives. Since executives are usually in a better position to influence profits, it may
be reasonable to remunerate them in a greater degree through profit-sharing than the
regular workers.

Merits of Profit-Sharing:

(i) The workers are motivated and have a sense of belongingness to the firm. They
cooperate voluntarily because their prosperity depends upon the prosperity of the firm. If
the firm earns higher profit, the workers will get higher amount of bonus.

(ii) Profit-sharing brings about stability in the working of the enterprise. The rate of
labour turnover is reduced because the workers are connected with the management.

(iii) Profit-sharing results in equitable distribution of profit among the employer and the
employees of the enterprise.
(iv) Profit-sharing is a step towards industrial democracy as employees are treated not
only as wage earners but also as partners in the progress of the company.

(v) There is industrial peace in the enterprise. The workers are satisfied as they get an
additional amount over and above their wages. A healthy atmosphere prevails in the
enterprise. There is co-operation between labour and management as the objectives of
both are common, i.e., to increase productivity.

(vi) Profit-sharing acts as a driving force for higher production and productivity. The
workers take more interest and initiative leading to higher production.

(vii) The share of workers in the profits depends upon the efforts, initiative and hard
work of the employer and employees. This brings about a team spirit among the
workers and employers. The chances of conflict are reduced.

Limitations of Profit-Sharing:

(i) ​Profit-sharing gives equal benefit to all workers. Distinction is not made between
good and bad workers. As a result, sincere and efficient workers get less than what they
deserve while bad or inefficient workers get more than what they deserve.

(ii) Profit-sharing as a method of extra remuneration to workers is used during the

period of prosperity when profits are high. Profit sharing is not possible during the lean
years of depression.
(iii) Unscrupulous management may manipulate the accounts to the detriment of the
workers. The workers may, therefore, get nothing due to dishonesty of the
management. This will dampen the enthusiasm of the workers.

(iv) There is a high degree of uncertainty in profit-sharing. The share of profit will be
paid only when the profit exceeds a particular limit. The profit may not cross a particular
limit due to market forces and the workers will suffer. Thus, profit-sharing does not give
full guarantee of extra-payment to the workers.

(v) As the amount of profit is to be distributed after a specified period, there is no real
incentive to produce more. The incentive effect of the scheme is completely lost due to
remoteness of the reward.

(vi) The scheme of profit-sharing does not eliminate the need for negotiations between
the management and the labour regarding distribution of profits to the labour.

Sometimes, relations between labour and management are adversely affected on

profit-sharing agreement. This defeats the very purpose of profit-sharing.

Profit-Sharing in India:

In 1948, the Central Government appointed a committee to study the problem of

profit-sharing in industry. The committee suggested the introduction of profit-sharing as
an incentive to production as a method of securing industrial peace and as a step of
labour participation in management.

It however, did not give any exact formula of profit-sharing, but suggested that the share
of labour should be 50%. This scheme was not favoured by the employers and workers,
and so the progress of this scheme was limited. The trade unions preferred minimum
bonus to profit-sharing.

The progress of profit-sharing in India has been insignificant. This is partly due to
statutory provision of payment of minimum 8.33% bonus to workers under the Payment
of Bonus Act. However, in many industries, the concept of productivity linked bonus has
been introduced under which higher bonus is payable to workers where their
productivity is higher. The Government has also given encouragement to this scheme in
the recent years.

The reasons of failure of profit-sharing in India have been summed up as follows:

Some employers in India introduced profit-sharing schemes with a view to stimulating

interest among their workers in increasing production. There was, however, no change
in the outlook of these employers.

They did not treat the workers with justice and fairness and refused either to consult or
to inform them on matters of common interest in the working of the industry. Requests
for facilities for looking into the balance sheets of the companies were presented as
unwarranted interference in the sphere of management.

Topic 13 Gratuity and Maternity

Benefits
T
​ HESTREAK 
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4
​ COMMENTS 

Gratuity is a part of salary that is received by an employee from his/her employer

in gratitude for the services offered by the employee in the company.

Gratuity is given by the employer to his/her employee for the services rendered by him
during the period of employment. It is usually paid at the time of retirement but it can be
paid before provided certain conditions are met.

A person is eligible to receive gratuity only if he has completed minimum five years of
service with an organization. However, it can be paid before the completion of five years
at the death of an employee or if he has become disabled due to accident or disease.

There is no set percentage stipulated by law for the amount of gratuity an employee is
supposed to get – an employer can use a formula-based approach or even pay higher
than that. Gratuity payable depends on two factors: Last drawn salary and years of
service. To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972
has divided non-government employees into two categories:

(a) Employees covered under the Act

(b) Employees not covered under the Act

An employee will be covered under the Act if the organization employees at least 10
persons on a single day in a preceding 12 months. And once an organization comes
under the purview of the gratuity Act, then it will always remain covered even if the
number of employees is falls below 10.

Let us understand more about the eligibility, payment option and more on Gratuity Act in
India.

1. Eligibility

An individual who has completed 5 years of continuous service in an organization is

eligible for gratuity benefit. However, this is not applicable in the case where the
employment is terminated due to death or any disability. The amount will be paid to the
nominee or legal heir. An employee could leave his job for various reasons, after which
receiving his gratuity.

2. Calculation

Calculation depends on whether an employee is covered under the payment of Gratuity

Act, 1972 or it is a voluntary step on the part of a company etc. If an employee is
covered under the Act, then he is entitled to a gratuity amount of 15 days salary or
wages, multiplied by the number of years he has put in. Then in that case your
calculation would be as follows:

Gratuity = Last drawn basic salary x 15/26 x No. of years of

3. Taxation

When gratuity is received by the employee within the duration of his service then
gratuity is taxable and falls under the head of “salaries”. But when gratuity is received by
the employee at the time of his retirement, death or superannuation then tax exemption
rules for government employees differs from private employees to government
employees.

The gratuity amount is payable at the time of:

● On Superannuation or retirement
● On resignation
● On termination
● On death
● Disablement due to accident or disease
● On retrenchment
● On layoff
● Voluntary Retirement Scheme

The maternity benefit Act

The maternity benefit Act 1961 protects the employment of women during the
time of her maternity and entitles her of a ‘maternity benefit’ – i.e. full paid
absence from work – to take care for her child. The act is applicable to all
establishments employing 10 or more persons. The amendments will help 3 million
(approx.) women workforce in organized sector in India.

The Maternity Benefit Act, 1961 (MB Act) was amended by the Maternity Benefit
(Amendment) Act, 2016 (MB Amendment Act) which became effective on April 1st,
2017 (except for the provision that required a crèche facility to be provided by the
employer, which came into effect on July 1st, 2017).
Applicability of the Act

● Every factory, mine or plantation (including those belonging to Government),

● An establishment engaged in the exhibition of equestrian, acrobatic and other
performances, irrespective of the number of employees, and
● Every shop or establishment wherein 10 or more persons are employed or were
employed on any day of the preceding 12 months.

The amendments to Maternity Benefit Act, 1961 are as follows:-

● Increase Maternity Benefit from 12 weeks to 26 weeks for two surviving children
and 12 weeks for more than two children.
● 12 weeks Maternity Benefit to a ‘Commissioning mother’ and ‘ Adopting mother’.
● Facilitate ‘Work from home’.
● Mandatory provision of Creche in respect of establishment having 50 or more
employees.

Justification

● Maternal care to the Child during early childhood – crucial for growth and
development of the child.
● The 44th, 45th and 46th Indian Labour Conference recommended enhancement
of Maternity Benefits to 24 weeks.
● Ministry of Women & Child Development proposed to enhance Maternity Benefit
to 8 months.
● In Tripartite consultations, all stake holders, in general supported the amendment
proposal.